nep-pbe New Economics Papers
on Public Economics
Issue of 2020‒07‒27
nineteen papers chosen by
Thomas Andrén

  1. Who benefits from tax incentives? The heterogeneous wage incidence of a tax credit By Clément Carbonnier; Clément Malgouyres; Loriane Py; Camille Urvoy
  2. Temptation in Consumption and Optimal Redistributive Taxation By Maria Arvaniti; Tomas Sjögren
  3. Do European Top Earners React to Labour Taxation Through Migration ? By Mathilde Munoz
  4. Welfare improving tax evasion By Canta, Chiara; Cremer, Helmuth; Gahvari, Firouz
  5. The Distributional Impact of Recurrent Immovable Property Taxation in Greece By Eirini Andriopoulou; Eleni Kanavitsa; Chrysa Leventi; Panos Tsakloglou
  6. Dynamic Taxation By Stantcheva, Stefanie
  7. Public Good Provision By Chowdhury Mohammad Sakib Anwar; Alexander Matros; Sonali Sen Gupta
  8. Toward a Comprehensive Tax Reform for Italy By Emile Cammeraat; Ernesto Crivelli
  9. Tax Reforms and Inter-temporal Shifting of Corporate Income: Evidence from Tax Records in Slovakia By Jaroslav Bukovina; Tomas Lichard; Jan Palguta; Branislav Zudel
  10. The Tax Cuts and Jobs Act: Which Firms Won? Which Lost? By Alexander F. Wagner; Richard J. Zeckhauser; Alexandre Ziegler
  11. Expected Effects of the US Tax Reform on Other Countries: Global and Local Survey Evidence By Dorine Boumans; Clemens Fuest; Carla Krolage; Klaus Wohlrabe
  12. How to Design Subnational Fiscal Rules; A Primer By Luc Eyraud; Andrew Hodge; John Ralyea; Julien Reynaud
  13. Multinational Corporations’ Effective Tax Rates: Evidence from Orbis By Javier Garcia-Bernardo; Petr Jansky; Thomas Torslov
  14. Tax Policy and Abnormal Investment Behavior By Qiping Xu; Eric Zwick
  15. How Much are the Poor Losing from Tax Competition: The Welfare Effects of Fiscal Dumping in Europe By Mathilde Munoz
  16. Taxes and Economic Growth in OECD Countries: A Meta-Analysis By Nazila Alinaghi; W. Robert Reed
  17. Sin Taxes and Self-Control By Renke Schmacker; Sinne Smed
  18. How to Design Tax Policy in Fragile States By Mario Mansour; Jean-Luc Schneider
  19. Fiscal Resilience Building: Insights from a New Tax Revenue Diversification Index By Rasmané Ouedraogo; Rene Tapsoba; Moussé Sow; Ali Compaoré

  1. By: Clément Carbonnier (THEMA - Théorie économique, modélisation et applications - UCP - Université de Cergy Pontoise - Université Paris-Seine - CNRS - Centre National de la Recherche Scientifique, LIEPP - Laboratoire interdisciplinaire d'évaluation des politiques publiques [Sciences Po] - Sciences Po - Sciences Po, Centre de recherche de la Banque de France - Banque de France); Clément Malgouyres (IPP - Institut des politiques publiques, PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Loriane Py (Centre de recherche de la Banque de France - Banque de France, IPP - Institut des politiques publiques); Camille Urvoy (LIEPP - Laboratoire interdisciplinaire d'évaluation des politiques publiques [Sciences Po] - Sciences Po - Sciences Po)
    Abstract: Do workers gain from lower business taxes, and why? We estimate how a large French corporate income tax credit is passed on to wages and explore the firm- and employee-level underlying mechanisms. The amount of tax credit firms get depends on their payroll share of workers paid less than a wage threshold. Exposure to the policy thus varies both across workers depending on their wage and across firms depending on their wage structure. Using exhaustive employer-employee data, we find that half of the surplus generated by the reform falls onto workers. Wage gains load on incumbents in high-skill occupations. The wage earnings of low-skill workers -- nearly all individually eligible -- do not change. This heterogeneous wage incidence is unlikely to be driven by scale effects or skill complementarities. We find that the groups of workers benefiting from wage gains are also more likely to continue working for the same firm. Further, we show that firms do not change their wage-setting behavior in response to the individual eligibility status of workers as there is no bunching in the distribution of entrants' wages. Overall, our results suggest that the wage incidence of firm taxation operates collectively through rent-sharing and benefits workers most costly to replace.
    Keywords: business taxation,tax incentives,wage incidence,rent sharing
    Date: 2020–03
  2. By: Maria Arvaniti (Center of Economic Research (CER-ETH), ETH Zurich, Switzerland); Tomas Sjögren (Department of Economics, USBE, Umeå University, Sweden)
    Abstract: The purpose of this article is to integrate the class of preferences developed by Gul and Pesendorfer into the theory of optimal redistributive taxation with heterogenous consumers and asymmetric information. The consumers are inclined to over-spend on a commodity for which they experience temptation (TP good). Resisting that temptation gives rise to a utility cost. This cost provides two novel motives for influencing the consumption and labor supply choices; improving the welfare (by reducing the utility cost of exercising self-control) and providing the government with a novel channel via which tax policy can be used to relax a binding self-selection constraint. The welfare motive implies a positive tax on the TP good, as well as a positive (negative) marginal labor income tax rate if the consumer´s marginal valuation of leisure exceeds (falls short of) the marginal valuation of leisure that arises if the consumer would succumb to the temptation. We use iso-elastic and logarithmic utility functional form specifications to exemplify when the self-selection channel may lead to higher/lower commodity and marginal labor income taxes.
    Keywords: Temptation, self-control, optimal taxation, redistribution, commodity taxation, income taxation
    JEL: D03 H21 H24 H31
    Date: 2020–07
  3. By: Mathilde Munoz (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - ENPC - École des Ponts ParisTech - EHESS - École des hautes études en sciences sociales - ENS Paris - École normale supérieure - Paris - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - INRA - Institut National de la Recherche Agronomique, WIL - World Inequality Lab)
    Abstract: This paper studies the effects of top earnings tax rates on the mobility of top ten percent employees within Europe. I use a novel detailed micro-level dataset on mobility built from the largest European survey (EU-LFS), representative of the entire population of 21 European countries. My estimation strategy exploits the differential effects of changes in top income tax rates on individuals of different propensities to be treated by these changes. I find that top ten percent workers' location choices are significantly affected by top income tax rates. I estimate a rather low but significant elasticity of the number of top earners with respect to net-of-tax rate that is between 0.1 and 0.3. The mobility response to taxes is especially strong for foreigners, with an estimated elasticity of the number of foreign top earners with respect to net-of-tax rate that is above one. Turning to tax policy implications, I uncover large heterogeneities within Europe, that translate into large differences in incentives to implement beggar-thy-neighbour policies across member states. These findings suggest that despite the overall moderate estimated mobility elasticity, tax competition entails substantial welfare costs.
    Keywords: Tax Competition,international taxation,migration elasticities,taxation rate,migration,Europe,Top Incomes,Labour Taxation,Migration
    Date: 2019
  4. By: Canta, Chiara; Cremer, Helmuth; Gahvari, Firouz
    Abstract: We study optimal income taxation in a framework where one's willingness to report his income truthfully is positively correlated with his type. We show that allowing low-productivity types to cheat leads to Pareto-superior outcomes as compared to deterring them, even if audits can be performed costlessly. When there is no cheating, redistribution takes place on first- and second-best frontiers and can never make low-ability types more well-off than high-ability types. Letting low-ability types cheat allows first-best redistribution up to a limit at which low-ability types are better off than high-ability types.
    Keywords: Optimal taxation, tax evasion, audits, welfare-improving.
    JEL: H20 H21 H26
    Date: 2020–07
  5. By: Eirini Andriopoulou (Hellenic Competition Commission); Eleni Kanavitsa (Athens University of Economics and Business); Chrysa Leventi (Athens University of Economics & Business); Panos Tsakloglou (Athens University of Economics and Business)
    Abstract: During the last decade, Greece faced one of the most severe debt crises among developed countries, leading to Economic Adjustment Programs in order to avoid a disorderly default. Public expenditure was cut, tax rates were increased and new taxes were introduced aiming at restoring public finances. Prominent among the latter were recurrent property taxes that were playing a very minor role before the crisis. These taxes helped boosting public revenues but were hugely unpopular. The paper examines in detail their distributional impact and finds that they led to increases in inequality and (relative) poverty. The result is stronger in the case of inequality indices that are relatively more sensitive to changes close to the bottom of the distribution and poverty indices that are sensitive to the distribution of income among the poor.
    Keywords: Property taxation, inequality, poverty, progressivity, Greece
    JEL: D31 H22
    Date: 2020–07–16
  6. By: Stantcheva, Stefanie
    Abstract: This paper reviews recent advances in the study of dynamic taxation, considering three main approaches: the dynamic Mirrlees, the parametric Ramsey, and the sufficient statistics approaches. In the first approach, agents' heterogeneous abilities to earn income are private information and evolve stochastically over time. Dynamic taxes are not ex ante restricted and are set for redistribution and insurance considerations. Capital is taxed only in order to improve incentives to work. Human capital is optimally subsidized if it reduces post-tax inequality and risk on balance. The Ramsey approach specifies ex ante restricted tax instruments and adopts quantitative methods, which allows it to consider more complex and realistic economies. Capital taxes are optimal when age-dependent labor income taxes are not possible. The newer and tractable sufficient statistics approach derives robust tax formulas that depend on estimable elasticities and features of the income distributions. It simplifies the transitional dynamics thanks to a newly defined criterion, the ``utility-based steady state approach" that prevents the government from exploiting sluggish responses in the short-run. Capital taxes are here based on the standard equity-efficiency trade-off.
    Date: 2020–01
  7. By: Chowdhury Mohammad Sakib Anwar; Alexander Matros; Sonali Sen Gupta
    Abstract: We develop a model that links tax evasion, corruption, and public good provision. In our model, citizens pay or evade taxes into the public fund, which a corrupt governor redistributes. Each citizen forms expectations about the amount of public goods the governor should provide. After observing the actual level of public goods, a citizen punishes the governor if this level is below his expectations. We describe three types of equilibria: tax evasion, efficient public good provision, and symmetric mixed-strategy. We show that the highest expectations can lead to no free riding (tax evasion) and the efficient level of public good provision even with the corrupt governor and without punishment for tax evasion.
    Keywords: Tax evasion, Audits, Embezzlement, Corruption, Sanctions, Public goods
    JEL: H40 D83 D73
    Date: 2020
  8. By: Emile Cammeraat; Ernesto Crivelli
    Abstract: This paper evaluates elements of a comprehensive reform of the Italian tax system. Reform options are guided by the principles of reducing complexity, broadening the tax base, and lowering marginal tax rates, especially the tax burden on labor income. The revenue and distributional implications of personal income and property tax reforms are assessed with EUROMOD, while a microsimulation model is developed to evaluate VAT reform options. Simulations suggest that a substantial reduction in the tax burden on labor income can be obtained with a revenue-neutral base-broadening reform that streamlines tax expenditures and updates the property valuation system. In addition, a comprehensive reform would benefit low- and middle-income households the most, by lowering significantly their overall current tax liability, which results in increased progressivity of the tax system.
    Keywords: Recurrent taxes on immovable property;Tax revenue;Tax reforms;Tax evasion;Tax rates;Italy,personal income tax,VAT,property tax,microsimulations,EUROMOD,WP,tax expenditure,decile,revenue-neutral,reduced rate,revenue loss
    Date: 2020–02–21
  9. By: Jaroslav Bukovina; Tomas Lichard; Jan Palguta; Branislav Zudel
    Abstract: We use administrative tax return data for all corporations in Slovakia to demonstrate how policies facilitating inter-temporal income shifting result in elevated corporate income tax (CIT) elasticity estimates. Our strategy exploits kinks in the statutory tax schedules and policy reforms of tax carry-forwards. If inter-temporal shifting is neglected, our bunching estimates imply CIT elasticity of up to 0.65, suggesting a highly sensitive tax base with respect to the marginal tax rate. However, we show that CIT elasticity drops at least 21.2-49.1% when we remove the inter-temporal shifting component. This correction significantly reduces the estimated marginal excess burden of corporate taxation.
    Keywords: corporate income tax; elasticity; inter-temporal profit shifting; bunching; tax carry-forwards;
    JEL: G32 H25 H26 L25
    Date: 2020–07
  10. By: Alexander F. Wagner (University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swiss Finance Institute); Richard J. Zeckhauser (Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)); Alexandre Ziegler (University of Zurich - Department of Banking and Finance)
    Abstract: The Tax Cut and Jobs Act (TCJA) slashed corporations’ median effective tax rates from 31.7% to 20.8%. Nevertheless, 15% of firms experienced an increase. One fifth of firms recorded nonrecurring tax costs or benefits exceeding 3% of total assets. Proxies that existing studies employ to assess the TCJA’s impacts account for just half of actual impacts. Stock prices impounded those proxies during the legislative process. Total impacts were impounded the following year, once firms published their financials. These results indicate that investors find it hard to predict even large and immediate changes to company cash flows due to unfamiliar events.
    Keywords: Corporate Taxes, Tax Cut And Jobs Act, Event Study, Market Efficiency, Tax Reform
    JEL: G12 G14 H25 O24
    Date: 2020–06
  11. By: Dorine Boumans; Clemens Fuest; Carla Krolage; Klaus Wohlrabe
    Abstract: The Tax Cuts and Jobs Act constitutes the largest change to the US tax system since the 1980s and thoroughly alters the way in which multinational companies are taxed. Current assessments on the reform’s international impact vary widely. This article sheds light on the tax reform’s expected effects on other countries. We first use representative German business survey data to analyze the impact of the reform on German firms. Many firms with substantial US revenues or capacities in the US intend to expand US investment in response to the reform, in particular large firms and manufacturing companies. The effects on investment in Germany are ambiguous: While some firms substitute between investment locations, others expand in both countries. We subsequently extend our analysis to a global level using worldwide survey data. The results suggest a negative impact on tax revenues and investment in countries with close economic ties to the US.
    Keywords: US tax reform, Tax Cuts and Jobs Act, corporate tax, firm responses, survey, Germany
    JEL: H25 H32 D22 F23 E62
    Date: 2020
  12. By: Luc Eyraud; Andrew Hodge; John Ralyea; Julien Reynaud
    Abstract: This note discusses how to design subnational fiscal rules, including how to select them and calibrate them. It expands on the guidance provided at the national level on rule selection and calibration in IMF (2018a) and IMF (2018b). Thinking on subnational fiscal rules is still evolving, including their effectiveness (for example, Heinemann, Moessinger, and Yeter 2018; Kotia and Lledó 2016; Foremny 2014), and this note only provides a first analysis based on international experiences and the technical assistance provided by the IMF. Main findings are summarized in Box 1. The note is divided into five sections. The first section defines fiscal rules. The second section discusses the rationale for subnational rules. The third section provides some guidance on how to select the appropriate rule(s) and whether they should differ across individual jurisdictions. The fourth section explores the issue of flexibility by looking at how rules should adjust to shocks. Finally, the last section focuses on the “calibration” of the rules.
    Keywords: Fiscal rules;Fiscal rules and institutions;Economic stabilization;Public financial management;Economic policy;Regional economics;Economic cooperation;subnational,debt service,public borrowing,how to,institutional arrangements,investments,local taxation,tax policy,rainy day fund,local government,public debt,public expenditure,golden rule,market discipline,direct controls,cooperative arrangements,transfers,countercyclical policy,macroeconomic stabilization,debt anchor,fiscal balance,borrowing limits,FADHTN,subnational level,Subnational government,escape clause
    Date: 2020–02–25
  13. By: Javier Garcia-Bernardo (University of Amsterdam, Faculty of Social and Behavioural Sciences, Spui 21, 1012 WX Amsterdam, The Netherlands); Petr Jansky (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic); Thomas Torslov (Faculty of Social Sciences, Oster Farimagsgade 5, DK-1353 Copenhagen K, Denmark)
    Abstract: Effective tax rates (ETRs) estimated from the balance sheet data of multinational corporations (MNCs) are useful for comparing MNCs’ corporate income taxation across countries. In this paper we propose a new methodological approach to estimate ETRs as reliably and as for as many countries as possible using Orbis’ unconsolidated data for the 2011–2015 period. We focus on countries with at least 50 available companies, which results in a sample of 50, mostly European, countries. We estimate the ETR of a country as the ratio of corporate income tax to gross income for all affiliates of MNCs in that country, weighted by gross income. We propose four ETR estimations, including lower and upper bounds, which differ by gross income calculation. We find that ETRs substantially differ from statutory rates for some countries. For example, we show that despite similar statutory rates of 28% and 29%, MNCs in Luxembourg paid as little as 1–8% of gross income in taxes while those in Norway paid as much as 45–66%. Despite being the best available, existing data is still imperfect, and we therefore call for better data in the form of MNCs’ unconsolidated, public country-by-country reporting data.
    Keywords: Effective tax rate, multinational corporation, foreign direct investment, profit shifting, tax haven, tax competition
    JEL: C81 F21 F23 H25 H26
    Date: 2020–06
  14. By: Qiping Xu; Eric Zwick
    Abstract: This paper documents tax-minimizing investment, in which firms tilt capital purchases toward fiscal year-end to reduce taxes. Between 1984 and 2013, average investment in fiscal Q4 exceeds the average of fiscal Q1 through Q3 by 37%. Q4 spikes occur in the U.S. and internationally. Research designs using variation in firm tax positions and the 1986 Tax Reform Act show that tax minimization causes spikes. Spikes increase when firms face financial constraints or higher option values of waiting until fiscal year-end. We develop an investment model with tax asymmetries to rationalize these patterns. Models without purchase-year, tax-minimization motives are unlikely to fit the data.
    JEL: D21 D22 D92 G31 H25 H32
    Date: 2020–06
  15. By: Mathilde Munoz (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - ENPC - École des Ponts ParisTech - EHESS - École des hautes études en sciences sociales - ENS Paris - École normale supérieure - Paris - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - INRA - Institut National de la Recherche Agronomique, WIL - World Inequality Lab)
    Abstract: This paper quantifies the welfare effects of tax competition in an union where individuals can respond to taxation through migration. I derive the optimal linear and non-linear tax and transfer schedules in a free mobility union composed by symmetric countries that can either compete or set a federal tax rate. I show how in the competition union, the mobility-responses to taxation affect the redistributive capacity of governments through several mechanisms. I then use empirical earnings' distribution and estimated migration elasticities to implement numerical calibrations and simulations. I use my formulas to quantify the welfare gains and losses of being in a tax competition union instead of a federal union, and show how these welfare effects vary along the earnings distribution. I show that the bottom fifty percent always loses from tax competition, and that being in a competition union rather than in a federal union could decrease poorer individuals welfare up to -20 percent.
    Keywords: Tax Competition,Fiscal Dumping,Europe,taxation rate,migration,migration elasticities,international taxation
    Date: 2019
  16. By: Nazila Alinaghi; W. Robert Reed (University of Canterbury)
    Abstract: This study performs a meta-analysis of the effect of taxes on economic growth in OECD countries. A challenge with synthesizing tax estimates is that they measure different things. This follows because studies differ in the government budget constraints implied by their regression specifications. To address this problem, we use a taxonomy from Gemmell, Kneller, and Sanz (2009) that predicts the growth effects from various tax-spending-deficit combinations. We apply this taxonomy to 979 estimates from 49 studies of tax effects in OECD countries. Our headline result is that a 10% increase in taxes is associated with a decrease in annual GDP growth of approximately -0.2% when bundled as part of a TaxNegative taxspending- deficit combination. The same tax increase is associated with an increase in annual GDP growth of approximately 0.2% when part of a TaxPositive fiscal policy package. All of our data, output, and programming code is publicly available at
    Keywords: Meta-analysis, Taxes, Economic growth, OECD
    JEL: H2 H5 H6 O47 O50
    Date: 2020–07–01
  17. By: Renke Schmacker; Sinne Smed
    Abstract: “Sin taxes” are high on the political agenda in the global fight against obesity. Ac- cording to theory, they are welfare improving if consumers with low self-control are at least as price responsive as consumers with high self-control, even in the absence of ex- ternalities. In this paper, we investigate if consumers with low and high self-control react differently to sin tax variation. For identification, we exploit two sets of sin tax reforms in Denmark: first, the increase of the soft drink tax in 2012 and its repeal in 2014 and, second, the fat tax introduction in 2011 and its repeal in 2013. We assess the purchase response empirically using a detailed homescan household panel. Our unique dataset com- prises a survey measure of self-control linked to the panelists, which we use to divide the sample into consumers with low and high levels of self-control. We find that consumers with low self-control reduce purchases less strongly than consumers with high self-control when taxes go up, but increase purchases to a similar extent when taxes go down. Hence, we document an asymmetry in the responsiveness to increasing and decreasing prices. We find empirical and theoretical support that habit formation shapes the differential response by self-control. The results suggest that price instruments are not an effective tool for targeting self-control problems.
    Keywords: self-control, soft drink tax, fat tax, sin tax, internality
    JEL: H20 D12 I18
    Date: 2020
  18. By: Mario Mansour; Jean-Luc Schneider
    Abstract: The purpose of this note is to provide a framework for improving tax policy design in fragile and conflict-affected states, which face political and institutional constraints. This note begins with an overview of experiences in revenue mobilization in fragile states, including relative to other country groups—in particular, nonfragile states and formerly fragile states; that is, countries that exited fragility during the period under study. A discussion follows of how the principles of tax policy design should be applied in fragile states, particularly the relative importance of the revenue objective vis-à-vis other objectives, such as equity and efficiency. The two sections that follow provide guidance on tax policy design in the emergency and consolidation phases, respectively, and discuss how governments can use tax policy to transition from one phase to another, eventually overcoming fragility. The note concludes with key lessons and a set of guiding principles for tax reform in fragile states.
    Keywords: Tax policy;Revenue mobilization;Efficiency of public spending;Equity and social spending;Tax revenue;Tax evasion;Tax reforms;Tax systems;Equity and social spending,FADHTN,fragile state,fragility,tax system,resource revenue,vat
    Date: 2019–09–20
  19. By: Rasmané Ouedraogo; Rene Tapsoba; Moussé Sow; Ali Compaoré
    Abstract: Does the reliance on diversified tax structure enhance resilience to fiscal risks? This paper gives an answer to this question by proposing a new cross-country tax revenue diversification index (RDI). The RDI builds on the Theil index, and unlike the few existing tax diversification indices, which are constructed only at the state level for the US, is computed at the national level, covering a broad panel of 127 countries over the period 2000-15. We find suggestive evidence that tax revenue diversification reduces tax revenue volatility, thus bringing to the data long-held views about the prominence of tax revenue diversification for fiscal resilience strengthening. While exploring the drivers of the RDI, we find that tax revenue diversification is not just a reflection of economic diversification, but also an outcome of macroeconomic, political and institutional factors. Interestingly, a non-monotone relationship is also at play between the RDI and economic development, with countries’ portfolio of tax sources getting more diversified as their economy develops, until a tipping point, where richer countries start finding it harder to diversify further their tax revenue sources.
    Date: 2020–06–12

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