nep-pbe New Economics Papers
on Public Economics
Issue of 2020‒08‒17
twenty papers chosen by
Thomas Andrén

  1. Are Dutch Old-Age Pensions Taxed Fairly and Efficiently? By Bernd Genser; Robert Holzmann
  2. Optimal Taxation with Homeownership and Wealth Inequality By Borri, Nicola; Reichlin, Pietro
  3. Revenue Implications of Destination-Based Cash-Flow Taxation By Shafik Hebous; Alexander D Klemm; Saila Stausholm
  4. Implications of the Covid-19 Pandemic for State Government Tax Revenues By Jeffrey Clemens; Stan Veuger
  5. Consumption Insurance Against Wage Risk: Family Labor Supply and Optimal Progressive Income Taxation By Krueger, Dirk; Wu, Chunzan
  6. Does the Actuarial Adjustment for Pension Delay Affect Retirement and Claiming Decisions? By Devon Gorry; Kyung Min Lee; Sita Slavov
  7. Salience of Inherited Wealth and the Support for Inheritance Taxation By Spencer Bastani; Daniel Waldenström
  8. Income Inequality in Japan: What is the Appropriate Policy Response? (Japanese) By INOUE Seiichiro
  9. Taxation and the External Wealth of Nations: Evidence from Bilateral Portfolio Holdings By Huizinga, Harry; Todtenhaupt, Maximilian; Voget, Johannes; Wagner, Wolf
  10. How Much are the Poor Losing from Tax Competition: The Welfare Effects of Fiscal Dumping in Europe By Mathilde Munoz
  11. Macroeconomic Effects of Capital Tax Rate Changes By Saroj Bhattarai; Jae Won Lee; Woong Yong Park; Choongryul Yang
  12. Informality, Consumption Taxes, and Redistribution By Pierre Bachas; Lucie Gadenne; Anders Jensen
  13. The long-run redistributive power of the net wealth tax By José María Durán-Cabré; Alejandro Esteller-Moré
  14. Goods and Services Tax Efficiency across Indian States: Panel Stochastic Frontier Analysis. By Mukherjee, Sacchidananda
  15. The participation dividend of taxation: how citizens in Congo engage more with the state when it tries to tax them By Weigel, Jonathan
  16. Age-Specific Entrepreneurship and PAYG Public Pensions in Germany By Burkhard Heer; Mark Trede
  17. Do Temporary Business Tax Cuts Matter? A General Equilibrium Analysis By William Gbohoui
  18. Social Insurance, Information Revelation, and Lack of Commitment By Golosov, Mikhail; Iovino, Luigi
  19. Structural Transformation and Tax Efficiency By Serhan Cevik; Jan Gottschalk; Eric Hutton; Laura Jaramillo; Pooja Karnane; Moussé Sow
  20. Why Retirement, Social Security, and Age Discrimination Policies Need to Consider the Intersectional Experiences of Older Women By Ian Burn; Patrick Button; Theodore F. Figinski; Joanne Song McLaughlin

  1. By: Bernd Genser; Robert Holzmann
    Abstract: The Dutch pension system is internationally top-ranked as a well-designed three-pillar system. Moreover, almost all forms of pension benefits are expenditure taxed in line with the European Commission’s recommendations. Consequently, the Dutch pension policy approach could be regarded as a welcome blueprint for pension policy reform, currently on the agenda of all EU member countries. This paper focuses on the taxation of Dutch pensions and identifies two classes of problems that challenge the suitability of deferred pension taxation. First, cash flow taxation of pensions erodes the tax equity objectives of a progressive income tax. Second, deferred pension taxation generates a double fairness dilemma in a world with free cross-border migration and double taxation treaties in accordance with the OECD Model Tax Convention. The paper argues that these problems, as well as other minor problems in Dutch pension taxation, could be solved by replacing the Netherlands’ current system of deferred income taxation of pensions with a frontloaded expenditure tax system.
    Keywords: pension taxation, front-loaded expenditure taxation, progressivity erosion, international migration, OECD model tax convention
    JEL: H24 H55 H87 F22
    Date: 2020
  2. By: Borri, Nicola; Reichlin, Pietro
    Abstract: We consider optimal taxation in a model with wealth-poor and wealth-rich households, where wealth derives from business capital and homeownership, and investigate the consequences on these tax rates of a rising wealth inequality at steady state. The optimal tax structure includes some taxation of labor, zero taxation of financial and business capital, a housing wealth tax on the wealth-rich households and a housing subsidy on the wealth-poor households. When wealth inequality increases, the optimal balance between labor and housing wealth taxes depends on the source of the increasing wealth.
    Keywords: Housing; taxation; Wealth
    JEL: E21 E62 G1 H2 H21
    Date: 2019–11
  3. By: Shafik Hebous; Alexander D Klemm; Saila Stausholm
    Abstract: We estimate the revenue implications of a Destination Based Cash Flow Tax (DBCFT) for 80 countries. On a global average, DBCFT revenues under unchanged tax rates would remain similar to the existing corporate income tax (CIT) revenue, but with sizable redistribution of revenue across countries. Countries are more likely to gain revenue if they have trade deficits, are not reliant on the resource sector, and/or—perhaps surprisingly—are developing economies. DBCFT revenues tend to be more volatile than CIT revenues. Moreover, we consider the revenue losses resulting from spillovers in case of unilateral implementation of a DBCFT. Results suggest that these spillover effects are sizeable if the adopting country is large and globally integrated. These spillovers generate strong revenue-based incentives for many—but not all—other countries to follow the DBCFT adoption.
    Keywords: Tax revenue;Cash-flow taxes;Corporate taxation;Trade surpluses;Profits;Trade balances;Fiscal policy;Revenue measures;Balance of payments;Real effective exchange rates;Destination-Based Cash Flow Tax,Border Adjustment Tax,Business Taxes and Subsidies,International Fiscal Issues,trade balance,tax base,account data,border adjustment,revenue loss
    Date: 2019–01–15
  4. By: Jeffrey Clemens; Stan Veuger
    Abstract: We assess the Covid-19 pandemic’s implications for state government sales and income tax revenues. We estimate that the economic declines implied by recent forecasts from the Congressional Budget Office will lead to a shortfall of roughly $106 billion in states’ sales and income tax revenues for the 2021 fiscal year. This is equivalent to 0.5 percent of GDP and 11.5 percent of our pre-Covid sales and income tax projection. Additional tax shortfalls from the second quarter of 2020 may amount to roughly $42 billion. We discuss how these revenue declines fit into several pieces of the broader economic context. These include other revenues (e.g., university tuition and fees) that are also at risk, as well as assets (e.g., pension plan holdings) that are at risk. Further dimensions of context include support enacted through several pieces of federal legislation, as well as spending needs necessitated by the public health crisis itself.
    JEL: H10 H12 H71 H79
    Date: 2020–06
  5. By: Krueger, Dirk; Wu, Chunzan
    Abstract: We show that a calibrated life-cycle two-earner household model with endogenous labor supply can rationalize the extent of consumption insurance against shocks to male and female wages, as estimated empirically by Blundell, Pistaferri and Saporta-Eksten (2016) in U.S. data. In the model, 35% of male and 18% of female permanent wage shocks pass through to consumption, compared to the empirical estimates of 32% and 19%. Most of the consumption insurance against permanent male wage shocks is provided through the presence and labor supply response of the female earner. Abstracting from this private intra-household income insurance mechanism strongly biases upward the welfare losses from idiosyncratic wage risk as well as the desired extent of public insurance through progressive income taxation. Relative to the standard one-earner life cycle model, the optimal degree of tax progressivity is significantly lower and the welfare gains from implementing the optimal system are cut roughly in half.
    Date: 2019–11
  6. By: Devon Gorry; Kyung Min Lee; Sita Slavov
    Abstract: We investigate the impact of more generous terms for delaying state pensions on claiming and labor supply in the United Kingdom using a 2005 policy change. First, we find that the more generous delay terms reduced the fraction of males receiving pensions at the earliest eligibility age and shortly after. While there are also post-policy changes in women’s claiming behavior, further investigation reveals that these changes do not coincide with the start of the policy and are therefore less likely to be causal effects. Second, we find post-policy increases in labor supply around the earliest pension eligibility age, followed by post-policy decreases in labor supply at older ages. While these labor supply changes cannot easily be separated from longer-term trends, they are consistent with some individuals choosing to work longer to finance pension delay, followed by some individuals retiring earlier due to the income effect from more generous pension benefits. Finally, we find that among individuals who delayed pensions for up to 5 years, about 3 percent of individuals took their gains from delay as lump sums, an option made available under the policy changes.
    JEL: H55 J26
    Date: 2020–07
  7. By: Spencer Bastani (Linnaeus University); Daniel Waldenström (PSE - Paris School of Economics, WIL - World Inequality Lab)
    Abstract: We study how attitudes to inheritance taxation are influenced by information about the role of inherited wealth in society. Using a randomized experiment in a register-linked Swedish survey, we find that informing individuals about the large aggregate importance of inherited wealth and its link to inequality of op- portunity significantly increases the support for inheritance taxation. The effect is almost uniform across socio-economic groups and survives a battery of robust- ness tests. Changes in the perceived economic importance of inherited wealth and altered views on whether luck matters most for economic success appear to be the main driving factors behind the treatment effect. Our findings suggest that the low salience of inherited wealth could be one explanation behind the relatively marginalized role of inheritance taxation in developed economies.
    Keywords: Wealth,wealth inequality,Taxation,Inheritance,Capital taxation,Tax attitudes,Equality of opportunity,Randomized experiment
    Date: 2019
  8. By: INOUE Seiichiro
    Abstract: The Japanese economy stagnated and caused a rapid increase in irregular workers during "the Lost Two Decades" which followed the burst of the bubble economy in the early 1990's. The mass media repeatedly reported that Japan's income inequality was widening partly because of an increase in irregular workers. Such reports seem to have been adopted as fact by most Japanese people. Yet, is it true? How has Japan's income inequality changed since the 1980s? This paper investigates the dynamics of income inequality in Japan by conducting a survey on preceding studies on income inequality. It also refers to the important literature on political philosophy, focusing on income redistribution. Based on this investigation and reference, the paper discusses what the appropriate policy responses to a change in income inequality should be. The conclusion has two main points: Firstly, the social security and tax system redistributes income effectively in Japan. The level of disposable income inequality in Japan as a whole increased to some extent from the 1980's and then it almost flattened after the 2000's. However, decomposing the level of disposable income inequality by age group shows different movements: The level of disposable income inequality within the young and middle-aged populations increased, while that within the elderly population decreased. Secondly, one of the policy responses required for addressing the trends in income inequality is to promote democratic debate on strengthening redistribution of income through the social security and tax systems. Based on the current situation where income inequality increased among young and middle-aged populations, it is important to urgently mitigate the inequality of market income before taxes and transfers by promoting human capital accumulation by irregular workers and job seekers in the young and middle aged populations. The Japanese government should innovate the system of recurrent education and other training programs in collaboration with industries and universities. In particular, it should consider the mandatory introduction of "Learning and Training leaves," which is a requirement that all firms allow both regular and irregular employees to take leave for recurrent education and other training programs.
    Date: 2020–06
  9. By: Huizinga, Harry; Todtenhaupt, Maximilian; Voget, Johannes; Wagner, Wolf
    Abstract: This paper examines the impact of capital income taxation on the composition of foreign portfolio investment. Studying bilateral portfolio positions among a sample of 37 countries over the period 2001-2015, we find that capital gains and dividend taxation reduce the share of equities in foreign investments, while interest taxation increases this share. The results suggest that domestic capital income taxation affects the worldwide asset allocation of domestic investors. The estimated tax sensitivities imply a significant increase in country's external wealth following a tax policy change that stimulates investors to hold higher-yielding equity investments.
    Keywords: asset allocation; Capital income taxation; Foreign portfolio investment
    JEL: G11 H24
    Date: 2019–11
  10. 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
  11. By: Saroj Bhattarai; Jae Won Lee; Woong Yong Park; Choongryul Yang
    Abstract: We study aggregate, distributional and welfare effects of a permanent reduction in the capital tax rate in a quantitative equilibrium model with capital-skill complementarity. Such a tax reform leads to expansionary long-run aggregate effects, but is coupled with an increase in wage and income inequality. Moreover, the expansionary aggregate effects are smaller when distortionary labor or consumption tax rates have to increase to finance the capital tax rate cut, driven by effects on labor supply decisions. An extension to a model with heterogeneous households shows that consumption inequality also increases in the long run, which leads to a further rise in wage inequality. We study transition dynamics and show that joint modeling of monetary and fiscal policy response is important for analyzing short-run effects. Finally, we contrast the long-term aggregate welfare gains with short-term losses, regardless of how the tax cut is financed. In the model with heterogeneous households, we additionally show that welfare gains for the skilled go together with welfare losses for the unskilled.
    Keywords: Capital tax rate; Capital-skill complementarity; Inequality; Transition dynamics; Welfare implications
    JEL: E62 E63 E52 E58 E31
    Date: 2020–06–26
  12. By: Pierre Bachas; Lucie Gadenne; Anders Jensen
    Abstract: Can consumption taxes reduce inequality in developing countries? We combine household expenditure data from 31 countries with theory to shed new light on the redistributive potential and optimal design of consumption taxes. We use the type of store in which purchases occur to proxy for informal (untaxed) consumption. This enables us to characterize the informality Engel curve: we find 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. We extend the standard optimal commodity tax model to allow for informal consumption and calibrate it to the data to study the effects of different tax policies on inequality. Contrary to consensus, we show that consumption taxes are redistributive, lowering inequality by as much as personal income taxes. Once informality is taken 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.
    JEL: E26 H21 H23 O12 O23
    Date: 2020–06
  13. By: José María Durán-Cabré (Universitat de Barcelona & IEB); Alejandro Esteller-Moré (Universitat de Barcelona & IEB)
    Abstract: There is growing debate, both social and academic, about the possibility of levying an annual wealth tax. Until a few years ago, such a proposal appeared difficult to both implement and control, but recent technological innovations, which could greatly facilitate the periodic valuation of wealth, combined with improvements in international tax information sharing could make a “modern wealth tax” possible. Nonetheless, a number of challenges regarding its design still need to be addressed. In this paper, taking advantage of the Spanish experience – the only EU country to levy a wealth tax – we simulate the tax’s redistributive impact in the long run. This impact could well be substantial if all wealth were to be valued at market prices and compliance were high. Our results show that the family business exemption and the common income and wealth tax ceilings are highly regressive. We develop a tax simulator (SIMPA) that helps assess the effectiveness of alternative reforms with more comprehensive tax bases.
    Keywords: Wealth tax, wealth distribution, tax reform
    JEL: H24 H23 D31
    Date: 2019
  14. By: Mukherjee, Sacchidananda (National Institute of Public Finance and Policy)
    Abstract: In public finance, estimation of tax potential of a government - either federal or provincial - has immense importance to understand future streams of tax revenue. Tax potential depends on tax capacity and tax effort (TE) and therefore joint estimation of both the functions is desirable. There are several frameworks to estimate tax capacity and tax efficiency (tax effort); in the present paper time variant truncated panel sochastic Frontier Approach (SFA) is adopted to estimate the functions jointly for the period 2012-13 to 2019-20. The findings of the study could be useful for policy and especially for the sitting Fifteen Finance Commission. The results of the study show that GST capacity of states depends on size and structural composition of the economy. Introduction of GST has reduced states' GSTcapacity and the impact is restricted to scale only. The study has used data from GST Network (GSTN) database for the post-GST period and given all other factors at their levels, GSTN data shows lower GST capacity for high income states and higher capacity for low income states. The relationship between per capita income (PCI) of states and tax efficiency is non-linear and as PCI rises TE falls and thereafter it rises. Minor states (special category states and UTs with legislative assembly) have lower tax efficiency. Delhi and Goa have the highest GST gap and on average major states could increase their GST collection by 0.52 percent of GSVA and minor states by 1.15 percent if they increase their tax efforts.
    Keywords: Tax capacity ; Tax efficiency ; Goods and Services Tax (GST) ; Value Added Tax (VAT) ; Stochastic Frontier Approach ; Panel Data Analysis ; States of India
    JEL: H21 H71 H77
    Date: 2020–07
  15. By: Weigel, Jonathan
    Abstract: This paper provides evidence from a fragile state that citizens demand more of a voice in the government when it tries to tax them. I examine a field experiment randomizing property tax collection across 356 neighborhoods of a large Congolese city. The tax campaign was the first time most citizens had been registered by the state or asked to pay formal taxes. It raised property tax compliance from 0.1% in control to 11.5% in treatment. It also increased political participation by about 5 percentage points (31%): citizens in taxed neighborhoods were more likely to attend townhall meetings hosted by the government or to submit evaluations of its performance. To participate in these ways, the average citizen incurred costs equal to their daily household income, and treated citizens spent 43% more than control. Treated citizens also positively updated about the provincial government, perceiving more revenue, less leakage, and a greater responsibility to provide public goods. The results suggest that broadening the tax base has a ‘participation dividend,’ a key idea in historical accounts of the emergence of inclusive governance in early modern Europe and a common justification for donor support of tax programs in weak states.
    JEL: D73 H20 P48
    Date: 2020–05–21
  16. By: Burkhard Heer; Mark Trede
    Abstract: We present new empirical evidence on the distribution of earnings, income and wealth among entrepreneurs in Germany. We document that both earnings and income are more concentrated among entrepreneurs than among workers and describe a large-scale overlapping-generations model that can replicate these findings. As an application, we compute the equilibrium effects of a reform of the German pay-as-you-go pension system in which entrepreneurs must also contribute and receive a pension. We show that in the presence of mobility between workers and entrepreneurs, the expected lifetime utility of all newborn households unanimously declines due to the general equilibrium effects of lower aggregate savings, and welfare losses amount to approximately 5% of total consumption. In addition, the integration of self-employed workers into the social security system in Germany does not help to improve its fiscal sustainability, and only an increase in the retirement age to 70 years will help to finance pensions at the present level beyond the year 2050.
    Keywords: entrepreneurship, aging, income distribution, overlapping generations, social security, fiscal sustainability
    JEL: H55 D31 D91 J11 L26 C68
    Date: 2020
  17. By: William Gbohoui
    Abstract: This paper develops a dynamic general equilibrium model to assess the effects of temporary business tax cuts. First, the analysis extends the Ricardian equivalence result to an environment with production and establishes that a temporary tax cut financed by a future tax-increase has no real effect if the tax is lump-sum and capital markets are perfect. Second, it shows that in the presence of financing frictions which raise the cost of investment, the policy temporarily relaxes the financing constraint thereby reducing the marginal cost of investment. This direct effect implies positive marginal propensities to invest out of tax cuts. Third, when the tax is distortionary, the expectation of high future tax rates reduces the expected marginal return on investment mitigating the direct stimulative effects.
    Keywords: Tax revenue;Tax incentives;Tax increases;Return on investment;Tax changes;Ricardian Equivalence,Corporate Tax Policy,Financing Friction,General Equilibrium.,lump-sum,new equity,external finance,marginal cost,proportional tax
    Date: 2019–02–15
  18. By: Golosov, Mikhail; Iovino, Luigi
    Abstract: We consider optimal public provision of unemployment insurance when government's ability to commit is imperfect. Unemployed persons privately observe arrivals of job opportunities and choose probabilities of communicating this information to the government. Imperfect commitment implies that full information revelation is generally suboptimal. We define a notion of the social value of information and show that, due to the incentive constraints, it is a convex function of the information revealed. In the optimum each person is provided with an incentive to either reveal his private information fully or not reveal any of it, but the allocation of these incentives may be stochastic. In dynamic economies unemployed persons who enter a period with higher continuation utilities reveal their private information with lower probabilities. The optimal contract can be decentralized by a joint system of unemployment and disability benefits in a way that resembles how these systems are used in practice in developed countries.
    Date: 2019–11
  19. By: Serhan Cevik; Jan Gottschalk; Eric Hutton; Laura Jaramillo; Pooja Karnane; Moussé Sow
    Abstract: Structural transformation has resulted in an increasing share of services in aggregate value-added in advanced and developing countries across the world. We analyze the impact of this shift into services on countries’ efficiency in collecting the value-added tax (VAT). The analysis is based on two alternative measures of VAT efficiency: (1) the VAT C-efficiency, using a broad panel of 134 countries over the period 1970-2014; and (2) the VAT gap using a more granular, proprietary dataset that draws on the results of IMF’s Revenue Administraion-Gap Analysis Program covering 24 countries over the period 2004-2016. We find that a higher share of services in aggregate value-added reduces the VAT efficiency, and that this adverse effect is mainly a result of a rise of non-tradable services, which in turn contributes to a narrowing of the VAT base.
    Keywords: Tax revenue;Financial statistics;Consumption taxes;Revenue measures;Economic growth;Structural transformation,tax efficiency,value-added tax,C-efficiency ratio,tax gap,non-tradable,vat rate,vat,government effectiveness
    Date: 2019–02–15
  20. By: Ian Burn; Patrick Button; Theodore F. Figinski; Joanne Song McLaughlin
    Abstract: We provide an overview of research that indicates that older women face unique challenges and opportunities with respect to work, retirement, Social Security, and age discrimination law. We present estimates of poverty by age and sex, showing that poverty increases with age for women due to older women often outliving their spouses and becoming widowed. We discuss research that shows that women benefit more than men from working longer. We then note that older women face intersectional discrimination that can unfortunately be a barrier to older women working longer. We detail how older women often “fall between the cracks” of the Age Discrimination in Employment Act and Title VII of the Civil Rights Act and are thus not well protected against this intersectional discrimination. As a final example of how women face different circumstances, we summarize research on how older women were differentially negatively impacted by the elimination of Social Security’s Retirement Earnings.
    JEL: H55 J14 J16 J7 K31
    Date: 2020–06

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