nep-pbe New Economics Papers
on Public Economics
Issue of 2020‒09‒21
thirteen papers chosen by
Thomas Andrén

  1. The incidence of VAT reforms in electricity markets: Evidence from Belgium By HINDRIKS Jean,; SERSE Valerio,
  2. Distant and Unequal. Lockdown and Inequalities in Italy By Paolo Brunori; Maria Luisa Maitino; Letizia Ravagli; Nicola Sciclone
  3. Optimal Tax-Transfer Rules under Equilibrium and New Labour Demand Scenarios By Colombino, Ugo; Islam, Nizamul
  4. Business Incomes at the Top By Wojciech Kopczuk; Eric Zwick
  5. The effect of job search requirements on welfare receipt By Hérault, Nicolas; Vu, Ha; Wilkins, Roger
  6. Pension financing and individual retirement account By BAURIN Arno,; HINDRIKS Jean,
  7. Building an inclusive social protection system in South Africa By Falilou Fall; Andre Steenkamp
  8. Labor supply reaction to wage cuts and tax increases: A real-effort experiment By Tomoharu Mori; Hirofumi Kurokawa; Fumio Ohtake
  9. Investor Tax Credits and Entrepreneurship: Evidence from U.S. States By Matthew R. Denes; Sabrina T. Howell; Filippo Mezzanotti; Xinxin Wang; Ting Xu
  10. Are All Managed Care Plans Created Equal? Evidence from Random Plan Assignment in Medicaid By Michael Geruso; Timothy J. Layton; Jacob Wallace
  11. Royalty Taxation under Profit Shifting and Competition for FDI By Juranek, Steffen; Schindler, Dirk; Schneider, Andrea
  12. The Efficacy of Hiring Credits in Distressed Areas By Jorge Pérez Pérez; Michael Suher
  13. The Multiplier Effect of Education Expenditure By Maarten de Ridder; Simona Hannon; Damjan Pfajfar

  1. By: HINDRIKS Jean, (Université catholique de Louvain, CORE, Belgium); SERSE Valerio, (Université catholique de Louvain, CORE, Belgium)
    Abstract: In April 2014, the Belgian government reduced the VAT rate on the electricity price from 21% to 6%. In September 2015, however, this tax cut was repealed, and the VAT rate was reinstated to 21%. This paper investigates the impact of such temporary exogenous VAT reform on the Belgian electricity market. We study both the pass-through of the VAT reform to electricity prices and the effect of this (exogenous) price change on electricity consumption. We estimate the VAT pass-through by a difference-in-differences approach using business electricity prices (not subject to VAT) as a control group. To estimate the impact of the VAT change on demand, we perform an event study on the electricity flowed monthly over the grid at the network operator level. Our findings reveal that both the tax cut and the tax hike were entirely shifted to the electricity price (i.e., 100%). Exploiting different sources of price variation, our results reveal a price elasticity of residential demand for electricity between -0.09 and -0.17. Interestingly, we also find that consumption reacted quickly and symmetrically to the VAT cut and the subsequent VAT hike.
    Keywords: tax incidence, VAT reform, demand elasticity, electricity markets
    JEL: H21 H22 H23 Q41 Q48
    Date: 2020–02–11
  2. By: Paolo Brunori; Maria Luisa Maitino; Letizia Ravagli; Nicola Sciclone
    Abstract: We simulate the short-term effectof two months of lockdown on the Italian income distribution. With a static microsimulation model we show how poverty and inequality were effected by restrictions imposed during Coronavirus outbreak in March and April. We estimate a not negligible increasebothin poverty and inequality, effects to a large extent mitigated by stimulus measures implemented by the government. However, we show that adopting alternative social protection approaches would have guaranteed a more universal coverage in particular forhouseholds more vulnerable to economic shocks.
    Keywords: Lockdown, inequality, poverty, social protection.
    JEL: D63 H53
    Date: 2020
  3. By: Colombino, Ugo (University of Turin); Islam, Nizamul (LISER (CEPS/INSTEAD))
    Abstract: We present an extension of the numerical approach to empirical optimal taxation allowed by a peculiar structure of a microeconometric model of labour supply that includes a representation of the demand side. This makes it possible to identify optimal tax-transfer rules while accounting for equilibrium constraints and to evaluate the effects of exogenous labour demand shocks. We provide illustrative examples using the 2015 EU-SILC data set for Italy.
    Keywords: empirical optimal taxation, microsimulation, microeconometrics, evaluation of tax-transfer rules, equilibrium, labour demand shocks
    JEL: H21 C18
    Date: 2020–07
  4. By: Wojciech Kopczuk; Eric Zwick
    Abstract: Business income constitutes a large and increasing share of income and wealth at the top of the distribution. We discuss how tax policy treats and shapes how businesses are organized and how they distribute economic gains to owners, with the focus on closely-held and pass-through firms. These considerations influence whether and how labor and capital income is observed in economic data and feed into research controversies regarding the measurement of inequality and the progressivity of the tax code. We discuss the importance of these issues in the US, and highlight that limited evidence from other countries suggests that they are likely to be important elsewhere.
    JEL: D31 D33 E25 H24 H25 H32
    Date: 2020–08
  5. By: Hérault, Nicolas; Vu, Ha; Wilkins, Roger
    Abstract: Many countries impose job search requirements as a condition of unemployment benefit receipt, but there is relatively little evidence on the efficacy of these requirements. Australian reforms in 1995 and 2003 saw groups of welfare recipients newly subjected to job search requirements, providing an opportunity to identify their effects on welfare receipt. Using this quasi-experimental design and administrative data, we find negative effects on welfare receipt for the mature-age partnered women targeted by the reforms. We also find large negative effects on welfare receipt of their partners, suggesting family labour supply decisions were considerably affected.
    Keywords: welfare receipt,unemployment benefit,job search requirements
    JEL: H31 D10 J65
    Date: 2020
  6. By: BAURIN Arno, (Université catholique de Louvain); HINDRIKS Jean, (Université catholique de Louvain, CORE, Belgium; Université catholique de Louvain, CORE, Belgium)
    Abstract: In this article, we analyze the Belgium pension financing in retrospect for the period 1995-2017 and then we provide a prospective analysis based on the demographic and economic projections of the Federal Plan Bureau. In the retrospective part, we point out the growing importance of alternative financing relative to the social security contributions. The decomposition of the public pension growth over the last decade between the average pension and the number of retirees shows that three quarters of the growth is due to the increase of the average pension. In the prospective part, we simulate the contributions and pension benefits required to balance the budget, based on different rules: Defined Contribution, Defined Benefit and the Musgrave rule (keeping constant the ratio of pension benefit to wage net of contributions). We then simulate pension adjustment via the «individual retirement account» (IRA) as proposed in Devolder (2019) and Devolder & Hindriks (2019). Under the IRA, the adjustment variables are the accrual rate (which determines the new pension claims) and the indexation rate (which determines the past pension claims). Combining those adjustment variables, our simulations show that it is possible to protect past pension claims and ensure budget balance on a yearly basis. We propose a rule of adjustment so as to equate, year by year, the replacement rate across retirees of different ages.
    Keywords: social security, pension, retirement, ageing
    JEL: H55 J11 J14 J26
    Date: 2020–01–20
  7. By: Falilou Fall; Andre Steenkamp
    Abstract: South Africa has an incomplete social protection system without a mandatory pension savings scheme. Designing a universal insurance pension system would allow to reduce the important government funded pension grant system and ensure that the old-age population has decent income. Only 40% of employees are contributing to a form of saving-retirement scheme, with often a low pension. Moreover, South Africa has a dual, public and private, health care system. Half of the country’s health-care spending goes to the private sector, which covers only 16% of the population. Moreover, the health care system fails to deliver affordable quality services. The COVID-19 pandemic has highlighted the unequal distribution of health care services between public and private health providers. Around 70% of critical care beds available were in the private health care sector. Finally, the sizeable unconditional cash transfer system though reaching a large share of the population fail to lift many children in the poorest families above the poverty line.
    Keywords: Health, Pension, Social Protection, Unemployment Insurance
    JEL: H51 H55 I13 I18 I38 J32 J65
    Date: 2020–09–18
  8. By: Tomoharu Mori; Hirofumi Kurokawa; Fumio Ohtake
    Abstract: We investigate the labor supply reaction to wage cuts and tax increases using a real-effort experiment. First, subjects perform a task and receive a reward with taxes deducted. Second, the wage cut treatment reduces the wage rate and the tax increase treatment increases the tax; wage and tax remain unchanged for the control group. The real wage is equal for both treatments, and both treatments had significantly smaller increases in effort levels than the control group. The effort level change did not differ between the treatments. Therefore, the net wage illusion and tax aversion identified in previous studies are absent.
    Date: 2020–09
  9. By: Matthew R. Denes; Sabrina T. Howell; Filippo Mezzanotti; Xinxin Wang; Ting Xu
    Abstract: Angel investor tax credits are used globally to spur high-growth entrepreneurship. Exploiting the staggered implementation of these tax credits in 31 U.S. states, we find that while they increase angel investment, they have no significant effect on entrepreneurial activity. Tax credits induce entry by inexperienced, local investors and are often used by insiders. A survey of 1,411 angel investors suggests that a “home run” investing approach alongside coordination and information frictions explain low take-up among experienced investors. The results contrast with evidence that direct subsidies to firms have large positive effects, raising concerns about using investor subsidies to promote entrepreneurship.
    JEL: G0 G14 G28 H0 H25 O3
    Date: 2020–08
  10. By: Michael Geruso; Timothy J. Layton; Jacob Wallace
    Abstract: Exploiting random assignment of Medicaid beneficiaries to managed care plans, we identify plan-specific effects on healthcare utilization. Auto-assignment to the lowest-spending plan generates 30% lower spending than if the same enrollee were assigned to the highest-spending plan, despite identical cost-sharing. Effects via quantities, rather than differences in negotiated prices, explain these patterns. Rather than reducing “wasteful” spending, low-spending plans cause broad reductions in the use of medical services—including low-cost, high-value care—and worsen beneficiary satisfaction and health. Supply side tools circumvent the classic trade-off between financial risk protection and moral hazard, but give rise instead to a cost/quality trade-off.
    JEL: H75 I11 I13
    Date: 2020–08
  11. By: Juranek, Steffen (Dept. of Business and Management Science, Norwegian School of Economics); Schindler, Dirk (Erasmus School of Economics, Erasmus University Rotterdam); Schneider, Andrea (Jönköping International Business School)
    Abstract: Multinational corporations increasingly use royalty payments for intellectual property rights to shift profits globally. This threatens not only the tax base of countries worldwide, it also affects the nature of competition for foreign direct investment (FDI). Against this background, our theoretical analysis suggests a surprising solution to the problem of curbing profit shifting without suffering major FDI losses: A strictly positive withholding tax on royalty payments is both the Pareto-efficient solution under international coordination and the optimal unilateral response. If internal debt is sufficiently responsive, governments can even implement Paretooptimal targeting. Then, the royalty tax closes the profit-shifting channel, while all competition for FDI is relegated to internal-debt regulation. Our results question the ban of royalty taxes in double tax treaties and the EU Interest and Royalty Directive.
    Keywords: Source tax on royalties; foreign direct investment; multinationals; profit shifting; internal debt; EU Interest and Royalty Directive
    JEL: F23 H25 O23
    Date: 2020–09–09
  12. By: Jorge Pérez Pérez; Michael Suher
    Abstract: We analyze the efficacy of hiring tax credits, particularly in distressed labor markets. These types of programs have proven hard to assess as their introduction at the state level tends to be endogenous to local conditions and future prospects. We conduct an empirical study of a hiring tax credit program implemented in North Carolina in the mid 1990s, which has a quasi-experimental design. Specifically, the 100 counties in the state are ranked each year by a formula trying to capture their economic distress level. The generosity of the tax credits jumps discontinuously at various ranking thresholds allowing for the use of regression discontinuity methods. Our estimates show fairly sizable and robust impacts on unemployment - a $9,000 credit leads to a nearly 0.5 percentage points reduction in the unemployment rate in the counties where the credit was made available. The attendant increase in employment levels appears to be around 3%.
    Keywords: Hiring tax credits, employment, local labor markets
    JEL: J2 R14
    Date: 2020–06
  13. By: Maarten de Ridder; Simona Hannon; Damjan Pfajfar
    Abstract: This paper examines the short-run effects of federal education expenditures on local income. We exploit city-level variation in exposure to national changes in the $30-billion Federal Pell Grant Program, which is the largest program to help low-income students attend college in the U.S., to calculate fiscal multipliers of education expenditures. An increase in Pell grants by 1 percent of a city's income raises local income by 2.4 percent over the next two years. This multiplier effect is larger than estimates for military spending (1.5 on average). Multipliers are higher when grants are awarded to students at non-profit colleges, as for-profit colleges absorb most of the grant increases with raises in tuition. Multipliers are also higher during recessions than in expansions: Pell grants can be an effective tool for countercyclical policy that adds to already established benefits, such as, increasing the affordability of college and fostering long-run economic growth.
    Keywords: Fiscal expenditure; Pell grants; Education policy; Fiscal multipliers
    JEL: H52 H62
    Date: 2020–08–07

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