nep-pbe New Economics Papers
on Public Economics
Issue of 2020‒06‒22
sixteen papers chosen by
Thomas Andrén

  1. It Takes Two to Tango Income and Payroll Taxes in Progressive Tax Systems By Victor Amoureux; Elvire Guillaud; Michaël Zemmour
  2. Redistribution with Performance Pay By Doligalski, Pawel; Ndiaye, Abdoulaye; Werquin, Nicolas
  3. Social Security, Labor Supply and Health of Older Workers: Quasi-Experimental Evidence from a Large Reform By Saporta-Eksten, Itay; Shurtz, Ity; Weisburd, Sarit
  4. Fiscal Consolidations and Informality in Latin America and the Caribbean By Thibault Lemaire
  5. Fiscal Policy Innovations In Advanced Economies By Ackon, Kwabena Meneabe
  6. Avoiding Taxes: Banks' Use of Internal Debt By Franz Reiter; Dominika Langenmayr; Svea Holtmann
  7. Macroeconometric Approach: Optimal Taxation Policies for Economic Growth in Emerging Asia By Jayasooriya, Sujith
  8. Taxpayer responsiveness to taxation: Evidence from bunching at kink points of the South African income tax schedule By Neryvia Pillay Bell
  9. Did the 2017 Tax Reform Discriminate against Blue State Voters? By David Altig; Alan Auerbach; Patrick Higgins; Darryl Koehler; Laurence Kotlikoff; Ellyn Terry; Victor Ye
  10. How Sticky is Retirement Behavior in the U.S.? Responses to Changes in the Full Retirement Age By Manasi Deshpande; Itzik Fadlon; Colin Gray
  11. Integrating Social Insurance and Social Assistance Programs for the Future World of Labor By Palacios, Robert; Robalino, David A.
  12. Consumption Taxes and Income InequalityAn International Perspective with Microsimulation By Julien Blasco; Elvire Guillaud; Michaël Zemmour
  13. An analysis of the distributional impact of excise duty in Uganda using a tax-benefit microsimulation model By Susan Namirembe Kavuma; Christine Byaruhanga; Nicholas Musoke; Patrick Loke; Michael Noble; Gemma Wright
  14. Informality, Consumption Taxes and Redistribution By Bachas,Pierre Jean; Gadenne,Lucie; Jensen,Anders
  15. The relationship of the territoriality of corporate taxation and the economy By Jean-Marie Monnier
  16. Employment effects of payroll tax subsidies By Matthias Collischon; Kamila Cygan-Rehm; Regina T. Riphahn

  1. By: Victor Amoureux (Institut national de la statistique et des études économiques (INSEE)); Elvire Guillaud (CES - Centre d'économie de la Sorbonne - CNRS - Centre National de la Recherche Scientifique - UP1 - Université Panthéon-Sorbonne, LIEPP - Laboratoire interdisciplinaire d'évaluation des politiques publiques [Sciences Po] - Sciences Po - Sciences Po); Michaël Zemmour (CES - Centre d'économie de la Sorbonne - CNRS - Centre National de la Recherche Scientifique - UP1 - Université Panthéon-Sorbonne, LIEPP - Laboratoire interdisciplinaire d'évaluation des politiques publiques [Sciences Po] - Sciences Po - Sciences Po)
    Abstract: The literature on tax systems generally considers each type of tax in a self-contained way, with its own distributive characteristics. While the income tax is considered as a progressive tax, social insurance contributions are seen as being regressive, namely because of ceilings. Using a database of comparative micro-data at the household level (LIS data, 22 OECD countries, 1999-2016 period), supplemented with OECD data on employer contributions, we measure effective tax rates over the entire income distribution. Our results jeopardize the conventional economic wisdom on the role of income and payroll taxes in tax progressivity, and on their respective impact on inequality reduction. We show that, in all countries of our sample, the progressivity of income tax increases as soon as the progressivity of social insurance contributions decreases. This implies that income and payroll tax schedules are not independent. Even more, they act in a complementary way. While payroll tax heavily compress inequalities at the bottom of the income distribution, income tax reduces inequalities at the top.
    Keywords: income tax,social insurance contributions,inequality reduction,progressivity
    Date: 2019–10
  2. By: Doligalski, Pawel; Ndiaye, Abdoulaye; Werquin, Nicolas
    Abstract: Half of the jobs in the U.S. feature pay-for-performance. We study nonlinear income taxation in a model where such contracts arise in private labor markets that are constrained by moral hazard frictions. We derive novel formulas for the incidence of arbitrarily nonlinear reforms of a given tax code on both the mean of earnings and their sensitivity to performance. We show theoretically and quantitatively that, following an increase in tax progressivity, the higher performance-sensitivity caused by the crowding-out of insurance provided by firms is almost fully offset by a countervailing "performance-pay effect" driven by labor supply responses. As a result, earnings risk is hardly affected by policy. We then turn to the normative analysis of a government that levies taxes and transfers to redistribute income across workers with different levels of uninsurable productivity. We find that setting taxes without accounting for the endogeneity of private insurance is close to optimal. Thus, the common concern that standard models of taxation underestimate the cost of redistribution is, in the context of performance-based compensation, overblown.
    Keywords: moral hazard; optimal taxation; Performance pay; Tax Incidence
    JEL: D61 D82 D86 H21 H22
    Date: 2020–04
  3. By: Saporta-Eksten, Itay; Shurtz, Ity; Weisburd, Sarit
    Abstract: We study the effects of public pension systems on the retirement timing of older workers and, in turn, the health consequences of delaying retirement by those workers. Causal inference relies on a social security reform in Israel that shifted payments from husbands to their (non-working) wives, thereby substantially reducing the implied tax on the husband's employment while keeping overall household wealth constant. Using administrative social security data, we estimate extensive-margin labor supply elasticities w.r.t. the average net-of-tax rate of about 0.43 for men over 65. Using the reform to instrument for employment, we find that working an additional full year at old age decreases longevity. This mortality effect occurs after age 75 and is driven by workers holding blue-collar jobs. Finally, we evaluate the effect of the reform on earnings. The results imply a small value for an additional year of life, suggesting that workers underestimate the health cost of employment at older ages.
    Keywords: health; Labor Supply; Mortality; Social Security; tax reform
    JEL: H31 J10 J22 J26
    Date: 2020–05
  4. By: Thibault Lemaire
    Abstract: The transmission mechanisms of fiscal policy are significantly affected by informality in the labour market. Extending a narrative database of fiscal consolidations in 14 countries from Latin America and the Caribbean between 1989 and 2016 in order to account for heterogeneity in terms of commitment to the reforms, this paper shows that tax-based and spending-based multipliers are both recessionary and do not significantly differ one from another in this region. Furthermore, these multipliers decline in absolute value as the level of labour informality increases in the economy, although evidences are less robust for spending-based consolidations. An analysis of the effects of tax-based consolidations on private demand suggests that labour market informality constitutes a short-term social buffer that attenuates the contractionary effects of this type of policy by increasing investment opportunities through tax evasion and entrepreneurial alternatives to unemployment for dismissed workers.
    Keywords: Fiscal consolidation, taxation, informality, emerging market economies.
    JEL: E62 E26 E32 H5 H6
    Date: 2020
  5. By: Ackon, Kwabena Meneabe
    Abstract: Unprecedented is a word that best describes the current state of advanced economies. Interest rates are low in many advanced countries and negative in a few others suggesting that monetary policy has lost its effectiveness. The economic policy tool that has not been implemented yet by many advanced economies is fiscal policy. This thesis studies the effect of fiscal policy in USA, UK and Germany and find positive effects of extra government purchases on output, inflation, private consumption, business investment and wages. As a contribution to the academic literature on fiscal policy, this thesis estimates the impact of automatic stabilisers on economic activity and finds it holds predictive content for the path of output and inflation with both showing a positive response. Furthermore, this thesis adds to the literature on state-dependence fiscal policy by using a novel econometric approach to study the effect of expansionary fiscal policy during recessions.
    Keywords: Fiscal Policy, Econometrics, Investment, Economic Growth, Interest Rates, Inflation
    JEL: E0 E00 E02 E03 E1 E12 E17 E4 E43 E44 E6 E62 F0 H1 H11 H2 H23 H3 H31 H32 H5 H51 H52 H53 H54 H55
    Date: 2020–02–01
  6. By: Franz Reiter; Dominika Langenmayr; Svea Holtmann
    Abstract: This paper investigates how multinational banks use internal debt to shift pro?ts to low-taxed a?liates. Using regulatory data on multinational banks headquartered in Germany, we show that banks use this tax avoidance channel more aggressively than non-?nancial multinationals do. We ?nd that a ten percentage points higher corporate tax rate increases the internal net debt ratio by 5.7 percentage points, corresponding to a 20% increase at the mean. Our study also takes into account the existence of conduit entities, which simply pass through ?nancial ?ows. If conduit entities are systematically located in low-tax countries, previous studies may have underestimated the extent of debt shifting
    Keywords: Pro?t Shifting, Internal Debt, Multinational Banks, Taxation
    JEL: H25 G21 F23
  7. By: Jayasooriya, Sujith
    Abstract: Innovative and evidence-based public economic policies are vital for the provision of efficient public services in emerging economies. Many developing countries require privation of optimal taxation system to promote economic growth. The research question intends to identify the optimal taxation policies and impact of taxation on economic growth in emerging Asia. Rationale for the research is to provide pragmatic evidences to build up tax systems that generate optimal tax revenues in an equitable manner and facilitation of taxation for economic growth. Macroeconometric approach is used to (i) estimate the Laffer curve for Asia with Generalized Method of Moments (GMM) in factors affecting optimal taxation. (ii) Fully Modified OLS (FMOLS), Dynamic OLS (DOLS) and Conical Cointegration Regression (CCR) are used to estimate the cointegration equation for the impact of taxation on economic growth using the World Bank data from 1990 to 2015. The empirical results indicate, across estimation methods and specifications, that the determinants of optimal taxation over estimation of Laffer curve are tax-rate, tax-rate2 and debt negatively significant, while tax-rate*debt, unemployment rate, foreign direct investment, and openness are positively significant. Further, comparative empirical evidences show that the positive economic growth promoting factors is tax revenue, trade openness and foreign direct investment, whereas negatively significant factors are tax-rate, unemployment rate and debt. The implications of the study are to deliberate on the macroeconomic determinants of the optimal taxation for reform the tax systems in emerging Asia. Finally, the paper guides policymakers to reform tax systems with empirical evidences on impacts of public economic policies to improve optimal taxation for the economic growth in Asia.
    Keywords: Optimal taxation, Economic Growth, Generalized Methods of Moments estimation
    JEL: B23 C51 E60 F43 H2 H21 O47
    Date: 2020–05–29
  8. By: Neryvia Pillay Bell
    Abstract: The author applies the bunching methodology to South African administrative tax data over the period from 2011 to 2017 to investigate the responsiveness of individual taxpayers to changes in marginal personal income tax rates. She finds significant evidence of bunching among the self-employed but no evidence of bunching among wage earners. Among the self-employed, bunching is greatest at the highest kink in the income tax schedule and smallest at the lowest kink. Female self-employed exhibit greater bunching behaviour than male self-employed, and responsiveness appears to decrease with age.
    Keywords: bunching, elasticity of taxable income, personal income tax, South Africa
    Date: 2020
  9. By: David Altig (Federal Reserve Bank of Atlanta); Alan Auerbach (University of California at Berkeley); Patrick Higgins (Federal Reserve Bank of Atlanta); Darryl Koehler (Economic Security Planning Inc.); Laurence Kotlikoff (Boston University); Ellyn Terry (Federal Reserve Bank of Atlanta); Victor Ye (Boston University)
    Abstract: The Tax Cut and Jobs Act of 2017 (TCJA) made significant changes to corporate and personal federal income taxation, including limiting the SALT (state and local property, income and sales taxes) deductibility to $10,000. States with high SALT tend to vote Democratic. This paper estimates the differential effect of the TCJA on red- and blue-state taxpayers and investigates the importance of the SALT limitation to this differential. We calculate the effect of permanent implementation of the TCJA on households using The Fiscal Analyzer: a life-cycle, consumption-smoothing program incorporating all major federal and state fiscal policies. We find that the average percentage increase in remaining lifetime spending under the TCJA is 1.6 percent in red states versus 1.3 percent in blue states. Among the richest 10 percent of households, this differential is larger. Rich households in red states enjoyed a 2.0 percent increase compared to a 1.2 percent increase among the rich in blue-state households. This gap is driven almost entirely by the limitation on the SALT deduction. Excluding the SALT limitation from the TCJA results in a spending gain of 2.6 percent for rich red-state households compared to 2.7 percent for rich blue-state households.
    Keywords: fiscal policy, elections, Tax Cuts and Jobs Act, resource distribution, federal tax reform, state and local taxes, life cycle model
    JEL: D31 D72 E62 H20 H22 H71
    Date: 2019–04
  10. By: Manasi Deshpande; Itzik Fadlon; Colin Gray
    Abstract: We study how increases in the Social Security full retirement age (FRA) affect benefit claiming and retirement behavior, and specifically the interaction between these two choices. Using Social Security administrative data, we implement complementary research designs of a traditional cohort analysis and a regression-discontinuity design. We find that while increases in the FRA strongly and immediately shift claiming ages, retirement ages exhibit persistent "stickiness" at the old FRA of 65. We use several strategies to explore the likely mechanisms behind the stickiness in retirement, and we find suggestive evidence of a role for employers in individuals' responses to the FRA.
    JEL: H31 H55 J26
    Date: 2020–05
  11. By: Palacios, Robert (World Bank); Robalino, David A. (World Bank)
    Abstract: Given the prevalence of informal labor, most countries have combined contributory social insurance programs (pensions, unemployment benefits, and health insurance), with non-contributory insurance programs and several types of "safety nets." All of these programs involve different types of subsidies and taxes, sometimes implicit. Because of design problems and the lack of coordination/integration between programs, these subsidies/taxes tend to cause four problems: 1) they can reduce incentives to contribute to mandatory insurance programs and to create formal jobs; 2) they can be regressive since redistribution often benefits middle/high income workers more than low income workers 3) they do not provide continuous protection as workers change occupations and constrain rather than facilitate, labor mobility; and 4) coverage tends to exclude many informal sector workers in the middle of the income distribution. As such, existing programs are not well prepared to deal with a world of labor characterized by persistent low productivity jobs, more frequent labor market transitions including across sectors and geographic regions and higher equilibrium unemployment rates for some groups of workers. This paper develops a policy framework to integrate, in a transparent way, the insurance function (actuarially-fair risk pooling or savings) and the redistributive function (transfers) of the social protection system in order to expand coverage, improve equity, and reduce labor market distortions. We illustrate this type of integration with the case of old-age pensions which is typically the most important intervention, at least from a fiscal perspective.
    Keywords: social insurance, social assistance, universal basic income, jobs, pensions, future of work, COVID-19
    JEL: H24 J26 J46 J65 J32 I13 H53 H55
    Date: 2020–05
  12. By: Julien Blasco (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université, Institut national de la statistique et des études économiques (INSEE), LIEPP - Laboratoire interdisciplinaire d'évaluation des politiques publiques [Sciences Po] - Sciences Po - Sciences Po); Elvire Guillaud (CES - Centre d'économie de la Sorbonne - CNRS - Centre National de la Recherche Scientifique - UP1 - Université Panthéon-Sorbonne, LIEPP - Laboratoire interdisciplinaire d'évaluation des politiques publiques [Sciences Po] - Sciences Po - Sciences Po); Michaël Zemmour (CES - Centre d'économie de la Sorbonne - CNRS - Centre National de la Recherche Scientifique - UP1 - Université Panthéon-Sorbonne, LIEPP - Laboratoire interdisciplinaire d'évaluation des politiques publiques [Sciences Po] - Sciences Po - Sciences Po)
    Abstract: Consumption taxes are often considered as the most anti-redistributive componentof the tax system. Yet, very few estimates, and fewer international comparisons of theredistributive impact of consumption taxes exist in the literature, due to scarce dataon household expenditures. We use household budget surveys and microsimulation toprovide consistent estimates of the regressivity of consumption taxes for a large panelof countries and years. We propose a new method for imputing consumption expen-diture across countries, using widely available data on income and socio-demographiccharacteristics of households. We show that including the distribution of housing rents,when data is available, to impute households' consumption greatly improves the pre-diction of the model. Our results are threefold. First, there is a 1 to 2 ratio betweenthe propensity to consume of the top decile (around 50% of their income) and thatof the bottom decile (100% of income). Second, consumption taxes entail a signifi-cant rise in the Gini coefficient of income (between 0.01 and 0.04 point), yet of muchsmaller magnitude than the positive redistribution operated by direct taxes and trans-fers. Third, cross-country differences in the distributive effect of consumption taxes aremainly explained by variations in the tax rate (from 7 to 24% in our sample), ratherthan variations in the distribution of consumption, since everywhere the propensity toconsume declines sharply with income.
    Keywords: Indirect taxes,Redistributive Effect,Consumption,Income,Microsimulation,Luxembourg Income Study
    Date: 2020–02
  13. By: Susan Namirembe Kavuma; Christine Byaruhanga; Nicholas Musoke; Patrick Loke; Michael Noble; Gemma Wright
    Abstract: The distributional analysis of consumption taxes is useful for establishing the welfare impact of tax policy. This paper uses the UGAMOD microsimulation model to establish the tax incidence and welfare impact of excise duty in Uganda. The results reveal that households in the top deciles pay more in excise duty as a percentage of their consumption than households in the bottom deciles. Post-fiscal consumption is almost the same as pre-fiscal consumption for the first seven deciles, but there is a sharp reduction in post-fiscal consumption in the tenth decile.
    Keywords: excise duty, microsimulation, Poverty, Uganda
    Date: 2020
  14. By: Bachas,Pierre Jean; Gadenne,Lucie; Jensen,Anders
    Abstract: Can consumption taxes reduce inequality in developing countries? This paper combines household expenditure data from 31 countries with theory to shed new light on the redistributive potential and optimal design of consumption taxes. It uses the place of purchase of each expenditure to proxy for informal (untaxed) consumption which enables characterizing the informality Engel curve. The analysis finds that the budget share spent in the informal sector steeply declines with income, in all countries. The informal sector thus makes consumption taxes progressive: households in the richest quintile face an effective tax rate that is twice that of the poorest quintile. The paper extends the standard optimal commodity tax model to allow for informal consumption and calibrates it to the data to study the effects of different tax policies on inequality. Contrary to consensus, the findings show that consumption taxes are redistributive, lowering inequality by as much as personal income taxes. These effects are primarily driven by the shape of the informality Engel curve. Taking informality into account, commonly used redistributive policies, such as reduced tax rates on necessities, have a limited impact on inequality. In particular, subsidizing food cannot be justified on equity or efficiency grounds in several poor countries.
    Keywords: Labor Markets,Tax Administration,Tax Law,Economic Adjustment and Lending,Macro-Fiscal Policy,Taxation&Subsidies,Public Finance Decentralization and Poverty Reduction,Public Sector Economics,Tax Policy,Rural Labor Markets,Gender and Development
    Date: 2020–06–01
  15. By: Jean-Marie Monnier (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The consequence of the revolution of internet and digital is the erosion of taxe bases. The creation of value has shift from the production of tangibles to intangibles. This resulted in the disparition of tax bases. But the recognition of this phenomenon does not imply to radically question the relevance of tax instruments inherited from the fordist period. It may simply lead to the proposition of new rules or new taxes aiming to compensate revenue losses. The first part of the paper is devoted to a review of the economic approaches of the taxation of digital for which the mobility of activities and the erosion of tax bases are essential issues. This immediately puts the tax issue on an international level and raises the question of the taxation of rents massively captured by digital companies. In the second part, and after a brief presentation of the main characteristics of the tax system inherited from the Fordist period, we study the main developments that took place during this period. Finally, we emphasize the main lines of the changes affecting capitalism. They cause the present lack of adjustment between the economic bases of capitalism and the tax system. This new capitalism works by deterritorializing the tax bases.
    Abstract: La révolution de l'internet et du numérique provoque l'érosion des bases taxables. Le déplacement de la création de valeur des biens tangibles vers des productions intangibles ou immatérielles aboutit à la disparition de l'assiette de l'impôt. Mais l'identification de ce phénomène ne débouche pas nécessairement sur une mise en cause radicale de la pertinence des instruments fiscaux hérités de la période fordiste. Elle peut aussi conduire simplement à la proposition de règles nouvelles ou de prélèvements nouveaux compensant les pertes de recettes. La première partie de l'article est consacrée à une revue des approches économiques de la fiscalité du numérique pour lesquelles la mobilité des activités et l'érosion des bases taxables sont un enjeu essentiel. Cela place immédiatement la question fiscale à un niveau international et interpelle sur la taxation des rentes massivement captées par les entreprises du numérique. Dans une seconde partie et après une rapide présentation des caractéristiques de l'architecture des prélèvements obligatoires héritées de la période fordiste, on étudie les principales évolutions intervenues au cours de cette période. Enfin on distingue les caractéristiques majeures de la mutation du capitalisme en cours qui contribuent à l'actuel défaut d'ajustement entre les nouvelles bases économiques du capitalisme et le système fiscal. Ce nouveau capitalisme fonctionne par déterritorialisation des bases taxables.
    Keywords: Digital economy,Corporate taxation,Global taxes,Taxable bases,New capitalism,Economie numérique,Impôt sur les sociétés,Taxes globales,Assiette taxable,Nouveau capitalisme
    Date: 2019–05–01
  16. By: Matthias Collischon; Kamila Cygan-Rehm; Regina T. Riphahn
    Abstract: This paper exploits several reforms of wage subsidies in the framework of the German Minijob program to investigate substitution and complementarity relationships between subsidized and non-subsidized labor demand. We apply an instrumental variables approach and use administrative data on German establishments for the period 1999-2014. Particularly in small establishments (0-9 employees), subsidized Minijob employment comprises large shares of the work force, on average over 40 percent. For these establishments, robust evidence shows that increasing the subsidization of Minijob employment crowds out non-subsidized employment. Our results imply that Minijob employment in 2014 may have eliminated more than 0.5 million unsubsidized employment relationships just in small establishments. This represents an unintended and harmful consequence of the Minijob subsidy.
    Keywords: wage subsidy, Minijob, labor demand, substitution effect, crowding out effect, displacement effect, employment, payroll tax
    JEL: J21 J23 J38 C26
    Date: 2020–03

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