nep-pbe New Economics Papers
on Public Economics
Issue of 2020‒07‒20
fourteen papers chosen by
Thomas Andrén

  1. Optimal Taxation of Capital Income with Heterogeneous Rates of Return By Aart Gerritsen; Bas Jacobs; Alexandra V. Rusu; Kevin Spiritus
  2. Salience and Taxation with Imperfect Competition By Kory Kroft; Jean-William P. Laliberté; René Leal Vizcaíno; Matthew J. Notowidigdo
  3. Evaluating State and Local Business Tax Incentives By Cailin Slattery; Owen Zidar
  4. The Fiscal State-Dependent Effects of Capital Income Tax Cuts By Alexandra Fotiou; Wenyi Shen; Shu-Chun Susan Yang
  5. The Finance of Unemployment Compensation and its Consequence for the Labor Market By Guo, Audrey; Johnston, Andrew C.
  6. Subsidies, Merit Goods and the Fiscal Space for Reviving Growth: An Aspect of Public Expenditure in India By Sudipto Mundle; Satadru Sikdar
  7. Inequality Measurement and Tax/Transfer Policy By Apps, Patricia; Rees, Ray
  8. The Impact of CFC-Rules on Tax Competition By Nora Paulus
  9. Tax Policies in the European Union: 2020 Survey By European Commission
  10. Combining Microsimulation and Optimization to Identify Optimal Flexible Tax-Transfer Rules By Colombino, Ugo; Islam, Nizamul
  11. Workplace Choice, Commuting Costs, and Wage Taxation in Urban and Adjacent Rural Regions By Batabyal, Amitrajeet; Nijkamp, Peter
  12. Taxation, Social Welfare, and Labor Market Frictions By Brendan Epstein; Ryan Nunn; Musa Orak; Elena Patel
  13. Tax Elasticity Estimates for Capital Stocks in Canada By Jean-François Wen; Fatih Yilmaz; Danea Trejo
  14. Tec(h)tonic Shifts: Taxing the “Digital Economy” By Aqib Aslam; Alpa Shah

  1. By: Aart Gerritsen (Erasmus University Rotterdam); Bas Jacobs (Erasmus University Rotterdam); Alexandra V. Rusu (European Commission); Kevin Spiritus (Erasmus University Rotterdam)
    Abstract: There is increasing empirical evidence that people systematically differ in their rates of return on capital. We derive optimal non-linear taxes on labor and capital income in the presence of such return heterogeneity. We allow for two distinct reasons why returns are heterogeneous: because individuals with higher ability obtain higher returns on their savings, and because wealthier individuals achieve higher returns due to scale effects in wealth management. In both cases, a strictly positive tax on capital income is part of a Pareto-efficient dual income tax structure. We write optimal tax rates on capital income in terms of sufficient statistics and find that they are increasing in the degree of return heterogeneity. Numerical simulations for empirically plausible return heterogeneity suggest that optimal marginal tax rates on capital income are positive, substantial, and increasing in capital income.
    Keywords: Optimal taxation, capital taxation, heterogeneous returns
    JEL: H21 H24
    Date: 2020–06–29
  2. By: Kory Kroft; Jean-William P. Laliberté; René Leal Vizcaíno; Matthew J. Notowidigdo
    Abstract: This paper studies commodity taxation in a general model featuring imperfect competition and tax salience. We derive new formulas for the incidence and marginal excess burden of commodity taxation, and we estimate the necessary inputs to the formulas by combining Nielsen Retail Scanner data from grocery stores in the US with detailed sales tax data. We calibrate our new formulas and conclude that the incidence of sales taxes on consumers is increasing in tax salience, and the marginal excess burden of taxation is larger than standard formulas that ignore imperfect competition and tax salience.
    JEL: D12 H2 H25 H71
    Date: 2020–06
  3. By: Cailin Slattery (Columbia Business School); Owen Zidar (Princeton University and NBER)
    Abstract: This essay describes and evaluates state and local business tax incentives in the United States. In 2014, states spent between $5 and $216 per capita on incentives for firms in the form of firm-specific subsidies and general tax credits, which mostly target investment, job creation, and research and development. Collectively, these incentives amounted to nearly 40% of state corporate tax revenues for the typical state, but some states' incentive spending exceeded their corporate tax revenues. States with higher per capita incentives tend to have higher state corporate tax rates. Recipients of firm-specific incentives are usually large establishments in manufacturing, technology, and high-skilled service industries, and the average discretionary subsidy is $178M for 1,500 promised jobs. Firms tend to accept subsidy deals from places that are richer, larger, and more urban than the average county, and poor places provide larger incentives and spend more per job. Comparing "winning" and runner-up locations for each deal in a bigger and more recent sample than in prior work, we find that average employment within the 3-digit industry of the deal increases by roughly 1,500 jobs. While we find some evidence of direct employment gains from attracting a firm, we do not find strong evidence that firm-specific tax incentives increase broader economic growth at the state and local level. Although these incentives are often intended to attract and retain high-spillover firms, the evidence on spillovers and productivity effects of incentives appears mixed. As subsidy-giving has become more prevalent, subsidies are no longer as closely tied to firm investment. If subsidy deals do not lead to high spillovers, justifying these incentives requires substantial equity gains, which are also unclear empirically.
    JEL: H20 H25 H71 R11 R30 R50
    Date: 2020–01
  4. By: Alexandra Fotiou; Wenyi Shen; Shu-Chun Susan Yang
    Abstract: Using the post-WWII data of U.S. federal corporate income tax changes, within a Smooth Transition VAR, this paper finds that the output effect of capital income tax cuts is government debt-dependent: it is less expansionary when debt is high than when it is low. To explore the mechanisms that can drive this fiscal state-dependent tax effect, the paper uses a DSGE model with regime-switching fiscal policy and finds that a capital income tax cut is stimulative to the extent that it is unlikely to result in a future fiscal adjustment. As government debt increases to a sufficiently high level, the probability of future fiscal adjustments starts rising, and the expansionary effects of a capital income tax cut can diminish substantially, whether the expected adjustments are through a policy reversal or a consumption tax increase. Also, a capital income tax cut need not always have large revenue feedback effects as suggested in the literature.
    Date: 2020–05–29
  5. By: Guo, Audrey (Santa Clara University); Johnston, Andrew C. (University of California, Merced)
    Abstract: For every payment, there is an equal and opposite tax. In the study of unemployment insurance, economists have developed a substantial literature considering the impact of payments on labor supply. In contrast, they have usually left unexamined the influence on labor demand of the unique tax that finances it. Experience rating in unemployment insurance presents several fascinating questions for economists. This paper marks some of those questions and helps analysts engage them by explaining the unique institutions at play.
    Keywords: unemployment insurance, payrol taxation, experience rating
    JEL: D22 H22 H25 H71 J23 J32 J38 J65
    Date: 2020–06
  6. By: Sudipto Mundle; Satadru Sikdar (National Council of Applied Economic Research)
    Abstract: Budget subsidies have been defined as the unrecovered cost of economic and social services. The incidence of these implicit and explicit budget subsidies provided by the central and state governments has declined from about 12.9 % of GDP in 1987-88 to 10.3 % at present. The bulk of these subsidies is provided by the states and about half is spent on non-merit subsidies. The paper finds an inverse relationship between subsidy incidence and per capita income and also finds that subsidies are important determinant of the consumption of many public services though not all. There are large variations across states in the efficiency of subsidy use and the paper identifies the states which lie on the subsidy efficiency frontier for several key public services. The paper also argues that rationalisng non-merit subsidies is one of several deep fiscal reform measures that could together free up massive fiscal space, conservatively estimated at 6% of GDP, and outlines a proposal for using this fiscal space to finance an inclusive growth revival strategy that could simultaneously reduce the fiscal deficit even without raising any tax rates.
    Keywords: Subsidies, Merit Subsidies, Non-merit Subsidies, Subsidy and Public Services, Subsidy Efficiency Frontier, Indian Economy, Public Expenditure Policy, Growth Revival Strategy, Income Support Policy
    JEL: H2 E6 H5 O2
    Date: 2019–11
  7. By: Apps, Patricia (University of Sydney); Rees, Ray (University of Munich)
    Abstract: We provide a critique of the standard methodology which bases welfare comparisons between households on deflating household income and consumption by an equivalence scale. We argue that this leads to support for tax/transfer policies that significantly disadvantage low to middle income households and women as second earners. We base the critique both on a theoretical model of the family household and a detailed analysis of Australian income and employment data.
    Keywords: inequality, equivalence scales, tax/transfer policy, families
    JEL: D13 D31 H21 H24 H31
    Date: 2020–06
  8. By: Nora Paulus (Department of Economics and Management, Université du Luxembourg)
    Abstract: On July 16th 2016 the Economic and Financial Council of the European Union adopted the Anti-Tax-Avoidance Directive (ATAD). The proposed controlled-foreign-company (CFC) rule in the ATAD requires a minimum tax rate in the host country of a multinational's controlled foreign subsidiary in order to avoid the reattribution of the subsidiary's income to the country of its parent company. The Directive allows member states to remain free to set the CFC threshold autonomously by laying down a minimum standard. Member states can thus either opt for a loose CFC rule by setting the minimum required control threshold (i.e. 50% of the country's own corporate income tax rate) or impose a tight CFC rule by applying a higher threshold. Against this background, the present paper analyzes the effect of CFC rules on tax competition for foreign direct investments. It appears that, although CFC rules are effective in curbing offshore profit shifting, they can induce non-havens to compete aggressively for mobile capital. In this context, CFC rules can exacerbate capital outflows from the large to the small country to a larger extent than in standard models of tax competition. Moreover, the paper highlights that governments choose between two extreme options when deciding on their CFC rule. Either they opt for the lowest or the highest possible control threshold.
    Keywords: Tax Competition, Controlled-Foreign-Company Rules.
    JEL: F21 H21 H26 H87
    Date: 2020
  9. By: European Commission
    Abstract: This report presents the main indicators used by the European Commission to analyse tax policies in the context of the European Semester and substantiates the tax policy priorities of the Commission’s Annual Sustainable Growth Strategy. It also includes an overview of recent tax reforms at both EU and Member State level.
    Keywords: European Union, taxation
    JEL: H23 H24 H25 H27 H71
    Date: 2019–12
  10. By: Colombino, Ugo (University of Turin); Islam, Nizamul (LISER (CEPS/INSTEAD))
    Abstract: We use a behavioural microsimulation model embedded in a numerical optimization procedure in order to identify optimal (social welfare maximizing) tax-transfer rules. We consider the class of tax-transfer rules consisting of a universal basic income and a tax defined by a 4th degree polynomial. The rule is applied to total taxable household income. A microeconometric model of household, which simulates household labour supply decisions, is embedded into a numerical routine in order to identify – within the class defined above – the tax-transfer rule that maximizes a social welfare function. We present the results for five European countries: France, Italy, Luxembourg, Spain and United Kingdom. For most values of the inequality aversion parameter, the optimized rules provide a higher social welfare than the current rule, with the exception of Luxembourg. In France, Italy and Luxembourg the optimized rules are significantly different from the current ones and are close to a Negative Income Tax or a Universal basic income with a flat tax rate. In Spain and the UK, the optimized rules are instead close to the current rule. With the exception of Spain, the optimal rules are slightly disequalizing and the social welfare gains are due to efficiency gains. Nonetheless, the poverty gap index tends to be lower under the optimized regime.
    Keywords: empirical optimal taxation, microsimulation, microeconometrics, evaluation of tax-transfer rules
    JEL: H21 C18
    Date: 2020–05
  11. By: Batabyal, Amitrajeet; Nijkamp, Peter
    Abstract: We analyze the impact of wage taxation on the workplace choices of and the commuting costs borne by individuals in an aggregate economy consisting of an urban and an adjacent rural region. This economy is inhabited by a continuum of individuals who are uniformly distributed with a total mass of one. These individuals choose whether to work in the urban or in the rural region. The wage is higher (lower) in the urban (rural) region. Our analysis leads to three findings. First, assuming that individuals work in the region in which their after-tax wage net of commuting costs is the highest, we compute the equilibrium number of workers in each region. Second, supposing that the rural region’s median voter works in the urban region, we determine the Nash equilibrium in taxes and ask whether either of the two regions ought to tax or to subsidize the wage. Finally, assuming that the rural region’s median voter works in the rural region, we solve for the Nash equilibrium in taxes and show that optimality calls for the urban and the rural governments to subsidize the two wages.
    Keywords: Commuting Cost, Rural Region, Urban Region, Wage Taxation, Workplace Choice
    JEL: H30 R12 R49
    Date: 2019–09–06
  12. By: Brendan Epstein; Ryan Nunn; Musa Orak; Elena Patel
    Abstract: Taking inefficiencies from taxation as given, a well-known public finance literature shows that the elasticity of taxable income (ETI) is a sufficient statistic for assessing the deadweight loss (DWL) from taxing labor income in a static neoclassical framework. Using a theoretical approach, we revisit this result from the vantage point of a general equilibrium macroeconomic model with labor search frictions. We show that, in this context, and against the backdrop of inefficient taxation, DWL can be up to 38 percent higher than the ETI under a range of reasonable parametric assumptions. Externalities arising from market participants not taking into account the impact of changes in their search- and vacancy-posting activities on other market participants can amplify this divergence substantially. However, with theoretical precision, we show how the wedge between the ETI and DWL can be controlled for, using readily observable variables.
    Keywords: Social welfare; Deadweight loss from taxation; Search frictions; Elasticity of taxable income; Endogenous amenities
    JEL: H20 J32
    Date: 2020–06–17
  13. By: Jean-François Wen; Fatih Yilmaz; Danea Trejo
    Abstract: The paper provides estimates of the long-run, tax-adjusted, user cost elasticity of capital (UCE) in a small open economy, exploiting three sources of variation in Canadian tax policy: across provinces, industries, and years. Estimates of the UCE with Canadian data are less prone to the endogeneity problems arising from the effects of tax policy changes on the interest rate or on the price of capital equipment. Reductions in the federal corporate income tax rate during the early 2000s for service industries but not for manufacturing, which already benefited from a preferential tax rate, contribute to the identification of the UCE. To capture the long-run relationship between the capital stock and the user cost of capital, an error correction model (ECM) is estimated. Supplementary results are obtained from a distributed lag model in first differences (DLM). With the ECM, our baseline UCE for machinery and equipment (M&E) is -1.312. The corresponding semi-elasticity of the stock of M&E with respect to the METR is about -0.2, suggesting, for example, that a 5 percentage point reduction in the METR, say from 15 to 10 percent, would in the long run generate an increase of 1.0 percent in the stock of M&E. The UCE for non-residential construction is statistically insignificantly different from zero.
    Date: 2020–05–29
  14. By: Aqib Aslam; Alpa Shah
    Abstract: The ever-increasing digitalization of businesses has accelerated the need to address the many shortcomings and unresolved issues within the international corporate income tax system. In particular, the customer or “user”—through their online activities—is now considered by many as being a critical driving force behind the value of digital services. Furthermore, the rapid growth of digital service providers over the last decade has made them an increasingly popular target for special taxes—similar to wealth and solidarity taxes—which can also help mobilize much-needed revenues in the wake of a crisis. This paper argues that a plausible conceptual case can be made to tax the value generated by users under the corporate income tax. However, a number of issues need to be tackled for user-based tax measures to become a reality, which include agreement among countries on whether user value justifies a reallocation of taxing rights, establishing the legal right to tax income derived from user value, as well as an appropriate metric for valuing user-generated data if it is ever to be used as a tax base. Furthermore, attempting to tax only certain types of business is ill-advised, especially as user data is now being exploited widely enough for it to be recognized as an input for almost all businesses. Several options present themselves for consideration—from a modified permanent establishment definition combined with taxation by formulary apportionment, to user-based royalty-type taxes—each with their own merits and misdemeanors.
    Date: 2020–05–29

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