nep-pbe New Economics Papers
on Public Economics
Issue of 2020‒06‒15
eleven papers chosen by
Thomas Andrén

  1. The spirit of capitalism and optimal capital taxation By Li, Fanghui; Wang, Gaowang; Zou, Heng-fu
  2. Marginal Net Taxation of Americans’ Labor Supply By David Altig; Alan J. Auerbach; Laurence J. Kotlikoff; Elias Ilin; Victor Ye
  3. Inequality Aversion, Externalities, and Pareto-Efficient Income Taxation By Aronsson, Thomas; Johansson-Stenman, Olof
  4. Do we Need to Take Another Look at Income Support? Impacts on the Incentive to Work By David Boisclair; Raquel Fonseca; Pierre-Carl Michaud; Gäelle Simard-Duplain; Pierre-Yves Yanni
  5. The Effects of Unemployment Insurance Taxation on Multi-Establishment Firms By Guo, Audrey
  6. On the political economy of income taxation By Berliant, Marcus; Gouveia, Miguel
  7. Profit taxation and royalties: evidence from gold mines in Sub-Saharan Africa By Luisito Bertinelli; Arnaud Bourgain; Skerdilajda Zanaj
  8. Is a dynamic approach of tax games relevant? By Nora Paulus; Patrice Pierreti; Benteng Zou
  9. Fiscal policy in the US: Sustainable after all? By ​pierre Aldama; Jérôme Creel
  10. Capital Gains and UK Inequality By Advani, Arun; Summers, Andy
  11. The Impact of Country-by-Country Reporting on Corporate Tax Avoidance By Felix Hugger

  1. By: Li, Fanghui; Wang, Gaowang; Zou, Heng-fu
    Abstract: The paper reexamines the famous Chamley-Judd zero capital tax theorem in model economies where the agents are endowed with the spirit of capitalism. It is shown that the limiting capital income tax is not zero in general and depends on the utility specifications rather than the production technology. The similar formulas of optimal capital taxes are derived in more general settings with multiple physical capitals or heterogeneous agents (capitalists and workers).
    Keywords: the Spirit of Capitalism; Capital Income Taxation; Heterogeneous Agents
    JEL: E62 H21
    Date: 2020–05–20
  2. By: David Altig; Alan J. Auerbach; Laurence J. Kotlikoff; Elias Ilin; Victor Ye
    Abstract: The U.S. has a plethora of federal and state tax and benefit programs, each with its own work incentives and disincentives. This paper uses the Fiscal Analyzer (TFA) to assess how these policies, in unison, impact work incentives. TFA is a life-cycle, consumption-smoothing program that incorporates household borrowing constraints and all major federal and state fiscal policies. We use TFA in conjunction with the 2016 Federal Reserve Survey of Consumer Finances to calculate Americans’ remaining lifetime marginal net tax rates. Our findings are striking. One in four low-wage workers face marginal net tax rates above 70 percent, effectively locking them into poverty. Over half face remaining lifetime marginal net tax rates above 45 percent. The richest 1 percent also face a high median lifetime marginal tax rate – roughly 50 percent. Double taxation matters. The overall median lifetime marginal net tax rate is 43.2 percent compared with an overall current-year marginal net tax rate of 37.6 percent. We also find remarkable dispersion in both lifetime and current-year marginal net tax rates, particularly among the poor, and major differences in marginal and average net taxation across states, providing typical households a large incentive to relocate to another state.
    JEL: H2 H20 H21 H3 H31
    Date: 2020–05
  3. By: Aronsson, Thomas (Department of Economics, Umeå University); Johansson-Stenman, Olof
    Abstract: This paper analyzes Pareto-efficient marginal income taxation taking into account externalities induced through individual inequality aversion, meaning that people have preferences for equality. In doing so, we distinguish between four different and widely used models of inequality aversion. The results show that empirically and experimentally quantified degrees of inequality aversion have potentially very strong implications for Pareto-efficient marginal income taxation. It also turns out that the type of inequality aversion (self-centered vs. non-self-centered), and the specific measures of inequality used, matter a great deal. For example, based on simulation results mimicking the disposable income distribution in the U.S., the preferences suggested by Fehr and Schmidt (1999) imply monotonically increasing marginal income taxes, with large negative marginal tax rates for low-income individuals and large positive marginal tax rates for high-income ones. In contrast, the in many respects comparable model by Bolton and Ockenfels (2000) implies close to zero marginal income tax rates for all.
    Keywords: Pareto-efficient taxation; Inequality aversion; Self-centered inequality aversion; Non-self-centered inequality aversion; Fehr and Schmidt preferences; Bolton and Ockenfels preferences; GINI coefficient; Coefficient of variation
    JEL: D03 D62 H23
    Date: 2020–05–18
  4. By: David Boisclair; Raquel Fonseca; Pierre-Carl Michaud; Gäelle Simard-Duplain; Pierre-Yves Yanni
    Abstract: Any effort to provide income support must come to terms with an impossible trinity: It cannot simultaneously be generous to those with the greatest need (without employment income), be affordable for public finances, and incentivize work. It is impossible to achieve all these goals at once, so a difficult balancing act is required. For example, a study by Godbout and St-Cerny reveals that the measures undertaken in response to the pandemic have had the impact of increasing theeffective income floor in Quebec for low earners. They point out potentially detrimental impacts on the incentive to work. In recent years the idea of a guaranteed minimum income has received considerable attention, and the response to the pandemic has, in effect, amounted to something like a guaranteed minimum income, especially the Canada Emergency Response Benefit (CERB) and its student edition, the Canada Emergency Student Benefit (CESB). For example, CERB benefits for those without employment income are quite generous, but since they are only available to workers earning less that $1000 / month they may create a disincentiv to resuming work or to increasing the number of hours worked to a level that would raise earnings above $1000 per month. On top of these benefits there are enhancements to the GST Credit and the Canada Child Benefit, as well as measures like Quebec’s Incentive Program to Retain Essential Workers (IPREW). While several indices suggest that these supplements to the social safety net could create a disincentive to work, our team wanted to conduct an analysis that integrated these programs into the income taxes paid by Quebeckers (both provincial and federal), so as to compute measures of incentivization having broad recognition among economists, the effective marginal tax rate (EMTR) and its little brother, the participation tax rate (PTR). Also, it is worth looking at the ramifications of these new programs for the cost of existing programs. In this note we present an illustrative case study to tide us over pending more detailed analyses currently underway.
    Keywords: COVID-19,
    Date: 2020–05–29
  5. By: Guo, Audrey
    Abstract: This paper investigates whether and to what extent state-level differences in business taxes influence the location decisions and labor demand of multi-establishment firms. In the United States each state administers its own unemployment insurance (UI) program, and cross-state variation leads to significant differences in the potential UI tax costs faced by employers in different states. Using US Census data on the locations of multi-state manufacturing firms for identification, I find that high tax plants were more likely to exit during economic downturns, and less likely to hire during the recovery. Moving a given plant's outside option from a high tax state to a low tax state would increase its likelihood of exit by 20% during the Great Recession. These findings suggest that decentralized administration of UI taxes may contribute to jobless recoveries and additional misallocation in the economy.
    Keywords: Unemployment Insurance; Taxation; Labor Demand; Firm Behavior
    JEL: D22 H25 H71 J23 J65 J68
    Date: 2020–04–06
  6. By: Berliant, Marcus; Gouveia, Miguel
    Abstract: The literatures dealing with voting, optimal income taxation, implementation, and pure public goods are integrated here to address the problem of voting over income taxes and public goods. In contrast with previous articles, general nonlinear income taxes that affect the labor-leisure decisions of consumers who work and vote are allowed. Uncertainty plays an important role in that the government does not know the true realizations of the abilities of consumers drawn from a known distribution, but must meet the realization-dependent budget. Even though the space of alternatives is infinite dimensional, conditions on primitives are found to assure existence of a majority rule equilibrium when agents vote over both a public good and income taxes to finance it.
    Keywords: Voting; Income taxation; Public good
    JEL: D72 D82 H21 H41
    Date: 2020–05–31
  7. By: Luisito Bertinelli (CREA, Université du Luxembourg); Arnaud Bourgain (CREA, Université du Luxembourg); Skerdilajda Zanaj (CREA, Université du Luxembourg)
    Abstract: In this paper, we analyze theoretically and empirically the effects of tax changes on firms’ profits in extractive industries. In the theoretical part, we assume a country that levies a profit tax and a royalty on the profits of extractive firms to maximize its tax revenues. The mining companies may reduce their taxable income by cost manipulation. By analyzing the optimal choice of the government and of the firms, we first establish the optimal tax policy and then we investigate the impact of the optimal fiscal policy on firms’ profits. In the empirical part of the paper, we estimate the effect of the profit tax and royalty on the extracting firms’ profit in African countries during the period spanning from 2007 to 2018. We use the Mining Intelligence database to constitute a panel of annual individual data on 363 gold mines located in 21 Sub-Saharan countries. We obtain an inverse relationship between the tax rate change of the two tax instruments and the profit of the firms.
    Keywords: Resource countries, Resource taxation, Royalties, Cost misreporting, Extractive industries.
    JEL: H25 H32 O13
    Date: 2019
  8. By: Nora Paulus (CREA, Université du Luxembourg); Patrice Pierreti (CREA, Université du Luxembourg); Benteng Zou (CREA, Université du Luxembourg)
    Abstract: In this paper we argue that static models provide an incomplete analysis of interjurisdictional tax competition. According to Wilson (1987) a static tax competition model might predict the long-run outcomes of government decision making in a dynamic setting. We show that this conjecture is only true when policymakers commit to a tax path at the start of the game without future updates (open-loop behavior), with the proviso that they are time-indifferent and/or capital is perfectly mobile. Static models however never predict future outcomes when policymarkers continuously update their tax rates (Markovian behavior). In particular, we address the following aspects. How do long-run outcomes in a dynamic setting change relative to static games? How does social welfare change accordingly? If policymakers have the choice, which strategical behavior (Markovian or open-loop) should they adopt? In light of this, which one confers the highest social advantage?
    Keywords: Dynamic Tax Competition, Differential Games, Markovian Nash Equilibrium, Open-loop Strategy
    JEL: C73 F21 H21 H87
    Date: 2019
  9. By: ​pierre Aldama (Observatoire français des conjonctures économiques); Jérôme Creel (Observatoire français des conjonctures économiques)
    Abstract: The sustainability of US public debt has been widely discussed since the Great Recession. Using annual data since 1940, we estimate and compare different specifications of fiscal rules. Estimates of constant-parameter fiscal rules show no evidence of sustainability. This may be due to the instability of government's behaviour over time. Thus, we estimate a Markov-switching fiscal rule in order to identify periods of unsustainable and sustainable fiscal policies. First, we show that the government stabilizes public debt only periodically. Second, during these periods, the government's reaction is sufficiently tight to stabilize public debt over the entire horizon. We conclude that a relatively short-lived but tight fiscal contraction can be sufficient to ensure long-run US debt sustainability.
    Keywords: Fiscal rules; Fiscal regimes; Fiscal sustainability; Public debt; Markov-switching; Model-based sustainability
    JEL: E6 H6
    Date: 2019–09
  10. By: Advani, Arun (University of Warwick, CAGE, the Institute for Fiscal Studies (IFS), and the LSE International Inequalities Institute (III)); Summers, Andy (London School of Economics, International Inequalities Institute (III), and CAGE)
    Abstract: Aggregate taxable capital gains in UK have tripled in past decade. Using confidential administrative data on the universe of UK taxpayers, we show that including gains changes the picture of UK inequality over the past two decades. These taxable gains are largely repackaged income, so their exclusion biases the picture of inequality. Including them changes who is at the top of the distribution, adding more business owners and older people. The share of income plus gains (both pre- and post-tax) going to the top 1% is 3pp higher than for income only, and this gap has been steadily rising.
    Keywords: inequality ; capital gains ; income shifting ; top shares JEL codes: D31 ; E01 ; H2
    Date: 2020
  11. By: Felix Hugger
    Abstract: Within the framework of the OECD BEPS initiative many countries introduced nonpublic country-by-country reporting for MNEs above a revenue threshold. The reports provide tax authorities with information on the global activities of multinationals at a country level. This paper investigates the responses of companies to country-bycountry reporting and tests whether the goal of a reduction in tax avoidance is achieved. Difference-in-difference estimations show an increase in consolidated effective tax rates of about one percentage point in the treatment group and provide evidence for a reduction in profit shifting at the subsidiary level. Responses are more pronounced for companies experiencing a stronger increase in detection probability. At the same time, total tax payments do not rise, which may be explained by a decrease in economic activity of companies in scope. The second part of the paper investigates avoidance of the disclosure obligation and documents substantial excess mass just below the revenue threshold in the post-reform years. This effect is stronger for company types with higher costs of CbCR and lower costs of adjusting revenues.
    Keywords: Corporate tax avoidance, multinational firms, country-by-country reporting, disclosure regulation
    JEL: F23 H26 K34 M48
    Date: 2019

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