nep-pbe New Economics Papers
on Public Economics
Issue of 2020‒08‒31
seventeen 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. Optimal Taxation of Capital Income with Heterogeneous Rates of Return By Aart Gerritsen; Bas Jacobs; Alexandra Victoria Rusu; Kevin Spiritus
  3. Do European Top Earners React to Labour Taxation Through Migration ? By Mathilde Munoz
  4. Pareto-Improving Tax Reforms and the Earned Income Tax Credit By Felix Bierbrauer; Pierre C. Boyer; Emanuel Hansen
  5. The Impact of Taxes and Wasteful Government Spending on Giving By Sheremeta, Roman; Uler, Neslihan
  6. The distributional impact of recurrent immovable property taxation in Greece By Andriopoulou, Eirini; Kanavitsa, Eleni; Leventi, Chrysa; Tsakloglou, Panos
  7. Tax competition in EU and USA: A comparative analysis of the automotive and telecommunication industries By METAXAS, THEODORE; NIKOU, RANIA
  8. Doubts about the Model and Optimal Policy By Anastasios G. Karantounias
  9. Pareto-Improving Reforms of Tax Deductions By Sebastian Koehne; Dominik Sachs
  10. Consumption Taxes and Income Inequality. An International Perspective with Microsimulation By Julien Blasco; Elvire Guillaud; Michaël Zemmour
  11. Finland; Selected Issues By International Monetary Fund
  12. Taxation of Families and “Families of Taxation”? Inequality Modification Between Family Types Across Welfare States By Manuel Schechtl
  13. Corporate Profit Tax and Strategic Corporate Social Responsibility under Foreign Acquisition By Xu, Lili; Lee, Sang-Ho
  14. Salience of Inherited Wealth and the Support for Inheritance Taxation By Spencer Bastani; Daniel Waldenström
  15. Labor Market Effects of Tax Changes in Times of High and Low Unemployment: Working Paper 2020-05 By U. Devrim Demirel
  16. The Impact of Taxes and Transfers on Income Inequality, Poverty, and the Urban-Rural and Regional Income Gaps in China By Nora Lustig; Yang Wang
  17. Stigma model of welfare fraud and non-take-up: Theory and evidence from OECD panel data By Kurita, Kenichi; Hori, Nobuaki; Katafuchi, Yuya

  1. By: Victor Amoureux; Elvire Guillaud; Michaël Zemmour
    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.
    JEL: D31 H30 I38
    Date: 2019–10
  2. By: Aart Gerritsen; Bas Jacobs; Alexandra Victoria Rusu; Kevin Spiritus
    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
  3. By: Mathilde Munoz (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, 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: Felix Bierbrauer; Pierre C. Boyer; Emanuel Hansen
    Abstract: This paper provides necessary and sufficient conditions for the existence of Pareto-improving tax reforms. The conditions can be expressed as sufficient statistics and have a wide range of potential applications in public finance. We discuss one such application in detail: the introduction of the Earned Income Tax Credit (EITC) in the US. We find that the EITC can be viewed as a response to an in-efficiency in the tax and transfer system prevailing at the time. This adds a new perspective to the literature on why the EITC is a good idea, emphasizing Pareto improvements rather than equity-efficiency trade-offs.
    Keywords: tax reforms, non-linear income taxation, optimal taxation, earned income tax credits, pareto efficiency
    JEL: C72 D72 D82 H21
    Date: 2020
  5. By: Sheremeta, Roman; Uler, Neslihan
    Abstract: We examine how taxes impact charitable giving and how this relationship is affected by the degree of wasteful government spending. In our model, individuals make donations to charities knowing that the government collects a flat-rate tax on income (net of charitable donations) and redistributes part of the tax revenue. The rest of the tax revenue is wasted. The model predicts that a higher tax rate increases charitable donations. Surprisingly, the model shows that a higher degree of waste decreases donations (when the elasticity of marginal utility with respect to consumption is high enough). We test the model’s predictions using a laboratory experiment with actual donations to charities and find that the tax rate has an insignificant effect on giving. The degree of waste, however, has a large, negative and highly significant effect on giving.
    Keywords: charitable giving, tax, waste, redistribution, experiment, public goods provision, neutrality, income inequality
    JEL: C93 D64 H21
    Date: 2020–07–22
  6. By: Andriopoulou, Eirini; Kanavitsa, Eleni; Leventi, Chrysa; Tsakloglou, Panos
    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
    Abstract: The aim of this article is to define the meaning of tax competition. More specifically, it carries out a comparative analysis between the European Union and the United States of America studying two key sectors of their economies, the motor industry and telecommunications with the aim of featuring which of these is more tax competitive. The comparison criteria are VAT and sales tax, excise duties, corporate income tax, wage costs and in particular the tax burden on labor, taxing savings and duties on trade. In some cases, the EU seems to be more competitive, and in other cases, the USA does so. With regard to motor industry and telecommunications, it seems that in most of the criteria featured, they are affected according to the rest areas of economy. We conclude that the issue of tax competition, and in particular the comparison between the EU and the USA, needs further investigation. Finally, substantial tax reforms as a means of promoting healthy tax competition, seems to be desiderata by both parties.
    Keywords: Tax competition; EU; USA; Automotive Industry; Telecommunications
    JEL: H25 L62 L86
    Date: 2020
  8. By: Anastasios G. Karantounias
    Abstract: This paper analyzes optimal policy in setups where both the leader and the follower have doubts about the probability model of uncertainty. I illustrate the methodology in two environments: a) an industry populated with a large firm and many small firms in a competitive fringe, where both types of firms doubt the probability model of demand shocks, and b) a general equilibrium economy, where a policymaker taxes linearly the labor income of a representative household in order to finance an exogenous stream of stochastic spending shocks. The policymaker can distrust the probability model of spending shocks more, the same, or less than the household. Whenever there are doubts about the model, cautious agents form endogenous worst-case beliefs by assigning high probability on low profitability or low-utility events. There are two forces that shape optimal policy results: the manipulation of the endogenous beliefs of the follower to the benefit of the leader, and the discrepancy (if any) in the pessimistic beliefs between the leader and the follower. Depending on the application, the leader may amplify or mitigate the worst-case beliefs of the follower.
    Keywords: model uncertainty; ambiguity aversion; multiplier preferences; misspecification; robustness; martingale; monopolist; competitive fringe; demand uncertainty; Ramsey taxation
    JEL: D80 E62 H21 H63
    Date: 2020–07–31
  9. By: Sebastian Koehne; Dominik Sachs
    Abstract: We analyze Pareto-efficient tax deduction rules for work-related expenses. Pareto efficiency dictates a strict rule for marginal deductions along the income distribution. An immediate implication is a recipe for designing Pareto-improving reforms. We apply our theory and simulate a Pareto-improving reform that introduces deductions for non-care household services (housekeeping, gardening, laundry) in the United States. The reform combines marginal deduction rates for household services between 55% and 85% with a slight increase in marginal tax rates.
    Keywords: optimal taxation, tax deduction, Pareto-improving tax reform
    JEL: D82 H21
    Date: 2020
  10. By: Julien Blasco; Elvire Guillaud; Michaël Zemmour
    Abstract: Consumption taxes are often considered as the most anti-redistributive component of the tax system. Yet, very few estimates, and fewer international comparisons of the redistributive impact of consumption taxes exist in the literature, due to scarce data on household expenditures. We use household budget surveys and microsimulation to provide consistent estimates of the regressivity of consumption taxes for a large panel of countries and years. We propose a new method for imputing consumption expenditure across countries, using widely available data on income and socio-demographic characteristics of households. We show that including the distribution of housing rents, when data is available, to impute households' consumption greatly improves the prediction of the model. Our results are threefold. First, there is a 1 to 2 ratio between the propensity to consume of the top decile (around 50% of their income) and that of the bottom decile (100% of income). Second, consumption taxes entail a signifficant rise in the Gini coeficient of income (between 0.01 and 0.04 point), yet of much smaller magnitude than the positive redistribution operated by direct taxes and transfers. Third, cross-country differences in the distributive effect of consumption taxes are mainly explained by variations in the tax rate (from 7 to 24% in our sample), rather than variations in the distribution of consumption, since everywhere the propensity to consume declines sharply with income.
    Date: 2020–02
  11. By: International Monetary Fund
    Abstract: This Selected Issues paper investigates impact of promoting labor supply through tax and benefit reform in Finland. A comprehensive reform of the tax-benefit system could support the government’s objective of increasing employment. The equity-efficiency trade-off of the proposed reform scenarios improves social welfare when using Finland-specific preferences. The Finnish tax and benefit system has served the country well, having supported high income levels alongside low inequality. The model is characterized by strong institutions, high taxes and public service provision, a highly skilled labor force and a generous social safety net. The microsimulation analysis shows that, despite strong redistribution and high-income levels, Finland could improve its tax and benefit system. Even for revenue-neutral reforms, economic gains in terms of labor supply and earnings could be substantial. The reform proposals consider Finland’s strong preferences for equity, while seeking to correct potential inconsistencies in how the tax burden is distributed.
    Keywords: Marginal effective tax rate;Tax rates;Tax reforms;Effective tax rate;Income distribution;ISCR,CR,out-of-work,benefit system,employment rate,part-time worker,tax rate
    Date: 2020–01–16
  12. By: Manuel Schechtl
    Abstract: Previous sociological research has overlooked the fact that a welfare state’s tax system does not solely redistribute from rich to poor (vertical) but also between family types (horizontal). Different types of families are treated differently due to (de-)familialization policies in the tax code, such as joint filing for spouses or single-parent relief. In this study I aim to examine the tax system’s modification of horizontal income inequality between the six most prevalent family types of non-retiree households. To answer my research aim I draw on harmonized data from 30 countries provided by the Luxembourg Income Study (LIS). I estimate pre- and post-fiscal income inequality measured as between-family-type Theil indices. Using linear regression, I examine the association of the percentage change in inequality and the prevalence of family type-related tax characteristics. I apply hierarchical cluster analysis to evaluate the congruence of welfare state classification and family tax policy. The results show that welfare states with familialization tax policies reduce less horizontal income inequality compared to welfare states without familialization tax policies. Nevertheless, the prevalence and outcomes of familialization policies in the tax code do not correspond to welfare state classifications.
    JEL: H23 H24 I38
    Date: 2020–08
  13. By: Xu, Lili; Lee, Sang-Ho
    Abstract: This study investigates government public policies facing competing firms’ strategic corporate social responsibility (CSR) activities and finds that the choice of CSR crucially depends on corporate profit tax. We demonstrate that strategic CSR decreases while social welfare increases with corporate tax. When the government grants uniform output subsidies, we show that bilateral CSR leads to a lower CSR level than under unilateral CSR but bilateral CSR is always beneficial to society. However, when the government grants discriminatory output subsidies which yield different levels of unilateral CSR, we show that domestic CSR leads to a lower CSR level than under foreign CSR. In an endogenous CSR choice game, domestic CSR (no CSR) is a Nash equilibrium when corporate tax is low (high) under the uniform subsidy, while foreign CSR could be a Nash equilibrium when corporate tax is low under the discriminatory subsidy.
    Keywords: corporate profit tax; corporate social responsibility; endogenous CSR choice game
    JEL: D43 H21 L21
    Date: 2020–08
  14. 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
  15. By: U. Devrim Demirel
    Abstract: This paper examines how the effects of legislated tax changes on labor market outcomes vary with the amount of slack in the economy, as measured by the rate of unemployment. I find that effects on hours worked, employment, and the unemployment rate become smaller in times of higher unemployment. I then develop a theoretical model in which changes in taxes on labor income directly affect the demand for labor by changing the costs that firms incur for employing workers. In the model, tax changes have smaller effects in times of higher unemployment because overall employee
    JEL: E20 E60 H20
    Date: 2020–08–27
  16. By: Nora Lustig (Tulane University); Yang Wang (Nanjing Audit University)
    Abstract: China is characterized by high prefiscal overall, urban-rural and regional inequality. Applying standard fiscal incidence analysis, we estimate the redistributive effect of taxes and social spending on income distribution and poverty. In particular, we estimate the effect of direct and indirect taxes, direct cash transfers, contributory pensions, indirect subsidies, and in-kind transfers (education and health) on overall inequality and poverty, the urban-rural income gap, and income inequality between regions. The results show that the fiscal system is inequality-reducing overall and between regions. However, the urban-rural gap rises and the postfiscal headcount ratio is higher than prefiscal poverty in rural areas. Both are undesirable outcomes given that rural residents are poorer. They are largely explained by the considerably lower contributory pensions received by rural residents.
    Keywords: Poverty and Inequality in China, Urban-Rural Gap, Regional Disparity, Taxes, Transfers, Incidence Analysis
    JEL: D31 H22 I38
    Date: 2020–08
  17. By: Kurita, Kenichi; Hori, Nobuaki; Katafuchi, Yuya
    Abstract: This paper attempts to challenge two puzzles in the welfare program. The first puzzle is `non-take-up welfare,' which occurs when needy people do not take up welfare. Second, in some countries, the benefit level is high, but the recipient ratio is low; while the other nations have lower benefit levels but higher recipient ratios. We present a model of welfare stigma in which both non-take-up and welfare fraud exist within the equilibrium. This shows the possibility for the recipient ratio to decrease as the benefit level increases in the comparative statics. Our empirical results are consistent with our theoretical results.
    Keywords: Stigma, Non-take-up, Minimum income guarantee, OECD panel data, Poverty
    JEL: H31 H53 I38
    Date: 2020–07–23

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