nep-pbe New Economics Papers
on Public Economics
Issue of 2020‒09‒28
sixteen papers chosen by
Thomas Andrén

  1. Striking a Balance: Optimal Tax Policy with Labor Market Duality By Mbara, Gilbert; Tyrowicz, Joanna; Kokoszczynski, Ryszard
  2. The EITC and Maternal Time Use: More Time Working and Less Time with Kids? By Jacob Bastian; Lance Lochner
  3. The U.S. tax-transfer system and low-income households: Savings, labor supply, and household formation By Ortigueira, Salvador; Siassi, Nawid
  4. Do Countries Really Deviate from the Optimal Tax System? By Cristian F. Sepulveda
  5. Optimal fiscal and monetary policy in economies with capital By Wang, Gaowang; Zou, Heng-fu
  6. Using Taxes to Meet an Emission Target By Robert I. Harris; William A. Pizer
  7. Clearing the Bar: Improving Tax Compliance for Small Firms through Target Setting By Yazan Al-Karablieh; Evangelos Koumanakos; Stefanie Stantcheva
  8. Interregional Demand for Workers and the Effects of Labor Income Taxation By Batabyal, Amitrajeet; Beladi, Hamid
  9. The Equal-Sacrifice Social Welfare Function with an Application to Optimal Income Taxation By Kristoffer Berg; Paolo Giovanni Piacquadio
  10. Factor decomposition of changes in the tax base for income tax By Taro Ohno; Junpei Sakamaki; Daizo Kojima
  11. Nudging for Tax Compliance: A Meta-Analysis By Armenak Antinyan; Zareh Asatryan
  12. Cash Thresholds, Cash Expenditure and Tax Evasion By Francesco Flaviano Russo
  13. Profit Shifting by Japanese Multinational Corporations By Tomomi Sakurai
  14. Increasing Hours Worked: Moonlighting Responses to a Large Tax Reform By Alisa Tazhitdinova
  15. Revisiting corporate income tax determinants in Southern Africa By Robinson, Zurika; de Beer, Jesse
  16. Winners, Losers, and Near-Rationality: Heterogeneity in the MPC out of a Large Stimulus Tax Rebate By Cameron LAPOINT; UNAYAMA Takashi

  1. By: Mbara, Gilbert (University of Warsaw); Tyrowicz, Joanna (University of Warsaw); Kokoszczynski, Ryszard (University of Warsaw)
    Abstract: This paper develops a dynamic general equilibrium model where employers may avoid making social security contributions by offering some workers "secondary contracts". When calibrated using aggregate tax revenue data, the model delivers estimates of secondary "off the books" employment that are consistent with survey evidence for the EU14 and United States. We investigate the fiscal and welfare effects of varying the avoidable and unavoidable shares of labor income tax while keeping the total wedge constant, and find that increasing the employer component raises hours worked, output, and welfare. Partial labor tax evasion makes tax revenues more elastic, but full tax compliance need not be a welfare enhancing policy mix.
    Keywords: Laffer Curve, tax evasion, labor market duality
    JEL: H2 H26 H3 E13 E26 J81
    Date: 2020–08
  2. By: Jacob Bastian; Lance Lochner
    Abstract: Parents spend considerable sums investing in their children's development, with their own time among the most important forms of investment. Given well-documented effects of the Earned Income Tax Credit (EITC) on maternal labor supply, it is natural to ask how the EITC affects other time allocation decisions, especially time with children. We use the American Time Use Surveys to study the effects of EITC expansions since 2003 on time devoted to a broad array of activities, with considerable attention to the amount and nature of time spent with children. Our results confirm prior evidence that the EITC increases maternal work and reduces time devoted to home production and leisure. More novel, we show that the EITC also reduces time spent with children; however, almost none of the reduction comes from time devoted to ``investment'' activities. Effects are concentrated among socioeconomically disadvantaged mothers, especially those that are unmarried. Results are also most apparent for mothers of young children. Altogether, our results suggest that the increased work associated with EITC expansions over time has done little to reduce the time mothers devote to active learning and development activities with their children.
    JEL: D13 H24 H31 H53 I31 I38 J13 J22
    Date: 2020–08
  3. By: Ortigueira, Salvador; Siassi, Nawid
    Abstract: Eligibility and benefits for anti-poverty income transfers in the U.S. are based on both the means and the household characteristics of applicants, such as their filing status, living arrangement, and marital status. In this paper we develop a dynamic structural model to study the effects of the U.S. tax-transfer system on the decisions of non-college-educated workers with children. In our model workers face uninsurable idiosyncratic risks and make decisions on savings, labor supply, living arrangement, and marital status. We find that the U.S. anti-poverty policy distorts the cohabitation/marriage decision of single mothers, providing incentives to cohabit. We also find quantitatively important effects on savings, and on the labor supply of husbands and wives. Namely, the model yields a U-shaped relationship between the earnings of one spouse and the labor supply of the other spouse, a result that we also find in the data. We show that these U-shaped relationships stem in part from the current design of anti-poverty income programs, and that the introduction of an EITC deduction on the earnings of secondary earners-as proposed in the 21st Century Worker Tax Cut Act-would increase the employment rate of the spouses of workers earning between $15K and $35K, especially of female spouses.
    Keywords: anti-poverty income transfers,household decisions,cohabitation and marriage
    JEL: E21 H24 H31 J12
    Date: 2020
  4. By: Cristian F. Sepulveda (Department of Economics, Farmingdale State College, State University of New York, USA)
    Abstract: One of the main goals of the literature on optimal tax systems is to reduce the gap between the highly stylized theory of optimal taxation and the practice of fiscal policy reform. Unfortunately, however, we know little about the extent to which the international experience follows the policy prescriptions derived from economic theory or how those policy prescriptions would change with economic development. Based on the standard theory of optimal tax systems, this paper predicts the possible effects of economic development on the optimal level and composition of tax revenue and empirically tests these predictions with yearly data on three tax instruments from countries at different stages of development. On average, as countries develop they are shown to collect more tax revenue and switch from regressive tax instruments, like the value added tax, to more progressive taxes that become more productive with development, like personal and corporate income taxes.
    Date: 2020–09
  5. By: Wang, Gaowang; Zou, Heng-fu
    Abstract: We reexamine the optimal fiscal and monetary policy in combined shopping-time monetary models with capital accumulation. Four models are constructed to examine how the production cost of money and the utility from physical capital affect the toolbox of the fiscal and monetary policy. It is shown that the optimality of the Friedman rule hinges on the producing cost of money and capital-in-utility overturns the Chamley-Judd zero capital income taxation theorem. When the production cost of money approaches zero, the Friedman rule is optimal; and when the consumer cares about the utility from capital, the limiting capital income tax is not zero in general.
    Keywords: Transactions technology; Inflation tax; Capital income tax; Friedman rule; Capital in utility.
    JEL: E40 E52 H20 H21
    Date: 2020–09–04
  6. By: Robert I. Harris; William A. Pizer
    Abstract: A sizeable number of papers beginning with Roberts and Spence (1976) have studied the use of price floors and ceilings (or “collars”) to manage prices in tradable permit markets. In contrast, economists have only recently begun examining polices to manage quantities under a pollution tax. Importantly, it can be difficult to know how to evaluate these policies, as papers dating back to Pizer (2002) suggest welfare is maximized by not focusing on quantities in the first place. In this paper, we propose an objective function to evaluate these alternative “carbon tax policies to meet an emission target.” The objective function includes a discrete jump in marginal emission consequences at the target, where the discontinuity can be interpreted as a true benefit measure or a necessary political constraint. We parameterize these emission consequences using recent legislative proposals, coupling this function with mitigation cost estimates to define the complete objective. This objective identifies the first-best tax policy design, one that requires relatively complex adjustments to mimic a tradable permit system. Turning to simpler, practical rules, we find that such rules achieve much of the difference in expected net benefits between an ordinary, exogenous tax and the first-best tax policy design. However, the ranking among simple rules depends on the interpretation of the higher, above-target emission penalty as a political constraint or a true benefit measure. We find that making these views explicit could facilitate billions of dollars per year in welfare gains.
    JEL: H23 Q54 Q58
    Date: 2020–09
  7. By: Yazan Al-Karablieh; Evangelos Koumanakos; Stefanie Stantcheva
    Abstract: We use a new dataset consisting of the universe of Greek corporate tax returns matched to financial statements to study a voluntary tax compliance program for small firms. This “self-assessment” program prescribed target taxable profit margins for different types of activity. Firms that reported profit margins above these targets in a given year were exempt from audits in that year. We find that the firms that take-up the program report significantly larger taxable profits than non-eligible firms, with some evidence of longer-lasting effects on tax reporting. Taxable profits increase by up to 70% of their pre-program levels. We also find that firms can easily and substantially manipulate reported revenue (decreasing it by up to 40%) to help meet prescribed profit margins. Overall, the program increased tax revenues collected from small firms, but points to a very large level of baseline under-reporting of profits and the ease of manipulating reported revenues.
    JEL: H20 H25 H26
    Date: 2020–09
  8. By: Batabyal, Amitrajeet; Beladi, Hamid
    Abstract: We study the short-run impacts of labor income taxation in an aggregate economy of N>2 regions. The distinct regions demand workers. Each region is endowed with one unit of immobile capital. The aggregate economy also has one unit of labor that is mobile across the regions. All regions produce a final good with identical Cobb-Douglas production functions. The price of output is normalized to unity. We perform five tasks. First, we focus on the benchmark case in which no region taxes either capital or labor. We find the equilibrium wage, the allocation of workers across the regions, and the total income of labor and capital. Second, we study the impact of a tax τ on labor income in region 1 when the other N-1 regions do not tax labor income. We ascertain the after-tax return to labor in region 1, the equilibrium wage, and the allocation of labor across the regions. Third, we compute the total income of capital and labor and the tax revenue in region 1. Fourth, we discuss whether workers in region 1 are better off with a tax on labor income. Finally, we comment on the policy implications of our research.
    Keywords: Capital, Labor, Interregional Demand, Labor Income Taxation, Factor Mobility
    JEL: H71 R12
    Date: 2020–04–07
  9. By: Kristoffer Berg; Paolo Giovanni Piacquadio
    Abstract: We propose and axiomatically characterize a family of welfare criteria that prioritize individuals making larger sacrifices. By combining efficiency with a concern for equality of sacrifice, our criteria avoid serious shortcomings of utilitarianism. We illustrate our results within the Mirrleesian optimal taxation framework. Our simulated equal-sacrifice optimal tax schedule for the US has marginal tax rates in line with the US tax system and about 20 percentage points lower than the utilitarian recommendation.
    Keywords: equal-sacrifice principle, optimal income taxation, welfare criterion
    JEL: D63 H21 I31
    Date: 2020
  10. By: Taro Ohno (Associate Professor, Research Center for Social Systems, Shinshu University); Junpei Sakamaki (Researcher, Policy Research Institute, Ministry of Finance); Daizo Kojima (Associate Professor, Graduate School of Agricultural and Life Sciences, The University of Tokyo)
    Abstract: Following generous tax deductions, Japan's income tax base is facing shrinkage. However, this trend has evolved not only due to changes to the system, but also due to changes to the income distribution and population composition. In this study we use household micro data from the National Survey of Family Income and Expenditure (NSFIE, 1994-2014) to explicate the state of deductions and trends in household distribution over a 20-year period while considering each factor fs contribution to changes in the tax base, through their decomposition. Using a micro-simulation analysis, we also assess the effects of recent changes to the tax system on the tax base. Based on a long-term perspective, while the tax base has been eroded mainly due to the effects of falling incomes and an aging population, the contribution of system changes in response to such pressures has been limited. The inclusion of both the expansion and contraction periods in the deduction system also has an effect. Based on a short-term perspective, changes to the system have had a certain impact because, particularly in the 2000s, the tax base was expanded by reducing deductions. However, this effect has eventually been offset by the changes in income distribution and population composition. Following the ongoing effects of change such as falling incomes and population aging, it is necessary to fundamentally reform the income tax system so that it can have a greater effect, including restoring its fiscal funding and income redistribution functions, as well as the ideal form of the tax base.
    Keywords: Income tax, tax deduction, tax base, National Survey of Family Income and Expenditure
    JEL: C15 H24
    Date: 2020–08
  11. By: Armenak Antinyan; Zareh Asatryan
    Abstract: Tax compliance nudges are used increasingly by governments because of their perceived cost-effectiveness in raising tax revenue. We collect about a thousand treatment effect estimates from 45 randomized controlled trials, and synthesize this rapidly growing literature using meta-analytical methods. We show that interventions pointing to elements of individual tax morale are on average ineffective in curbing tax evasion (when evaluated against a control group of taxpayers receiving neutral communication). In contrast, deterrence nudges - interventions emphasizing traditional determinants of compliance such as audit probabilities and penalty rates - increase compliance. However, their effects are modest in magnitude increasing the probability of compliance by 1.5-2.5 percentage points more than non-deterrence nudges. Our additional results suggest that nudges i) work better on sub-samples of late payers and when delivered in-person, ii) are less effective in the long-run and in lower-income countries, and iii) are somewhat inflated by selective reporting of results.
    Keywords: tax compliance, randomized control trials, nudging, tax morale, meta-analysis
    JEL: C93 D91 H26
    Date: 2020
  12. By: Francesco Flaviano Russo (Università di Napoli Federico II and CSEF)
    Abstract: I investigate whether cash thresholds that forbid cash payments on big transactions are effective at reducing tax evasion. I find that the 1000 euros threshold implemented in Italy in 2011 induced a bigger cash expenditure reduction for the households with self employed members, and the more so in case they work in cash intensive sectors. With the help of a simple model, I show that this empirical evidence suggests a tax evasion reduction, and I compute the tax revenue increase implied by the empirical estimates. Calibrating the model, I also perform a counterfactual exercise to quantify the potential effects of lower thresholds.
    Keywords: Self-employed, Transactions, Payments
    JEL: H26 E42
    Date: 2020–09–18
  13. By: Tomomi Sakurai (Visiting researcher at the Policy Research Institute, Ministry of Finance)
    Abstract: The recent integrated economy has left behind the legal framework for international taxation. The circumvention of laws enables multinational corporations to shift their profits to jurisdictions with lower tax rates, eroding the tax base of nations with higher tax rates where the multinationals substantially operate. To properly regulate such practices, tax agencies should first identify the magnitude of profit shifting. Therefore, this paper examines the extent of profit shifting by Japanese- owned foreign subsidiaries. The results can be summarized into three parts: First, if a foreign jurisdiction lowers its tax rate by 1 percentage point, a subsidiary there increases the pre-tax profits by 2%; Second, the relationship between profit shifting and a tax rate is non-linear. The sensitivity of the reported profits to a tax rate is larger in lower-tax jurisdictions; Third, tax rates for the other subsidiaries in the same multinational groups are also influential for the profit shifting of each subsidiary. Those findings give one clue for tax agencies to know the current practice of profit shifting by Japanese multinational corporations.
    Keywords: Tax, Profit Shifting, BEPS, Multinational Corporations
    JEL: H26 F23
    Date: 2020–09
  14. By: Alisa Tazhitdinova
    Abstract: Moonlighting is increasingly popular in OECD countries, with 5 to 10% of workers holding two or more jobs. However, little is known about the responsiveness of moonlighting to financial incentives due to the lack of identifying variation. This paper studies a unique reform in Germany that allowed workers to hold small secondary jobs tax-free, decreasing the marginal tax rate by between 19.5 to 66pp. I show that the reform resulted in a dramatic increase in moonlighting that was not offset by reductions in primary earnings, and that hours constraints is the key determinant of moonlighting.
    JEL: H2 J01
    Date: 2020–08
  15. By: Robinson, Zurika; de Beer, Jesse
    Abstract: The corporate income tax (CIT) systems in place in developing countries can potentially be contributors or impediments to their economic development. This is especially relevant in the SADC region that has a set agenda regarding regional integration goals (SADC, 2019). As part of economic integration, tax harmonisation benefiting all members through tax reform efforts is the central idea. Despite the importance of the topic, empirical literature remains scant, with Robinson (2005) being one of the few papers that directly models the determinants of CIT within SADC. This current paper is an attempt to revisit CIT determinants in the SADC region. With a larger data base at the disposal of the authors, existing empirical literature could be suitably updated. The sample period includes varying fortunes for developing countries in general and SADC specifically, namely, commodity booms and slumps following the global financial crises. Furthermore, given lower economic growth together with variable commodity prices since 2008, there is a concern that corporate tax revenue may continue to erode. A cross-section panel is utilised to find those factors that may best explain changes in corporate taxes in Southern Africa over time from 1980 to 2017.
    Keywords: Corporate income tax, Southern Africa JEL code: H25, H32
    Date: 2020–09
  16. By: Cameron LAPOINT; UNAYAMA Takashi
    Abstract: This paper documents heterogeneity in consumption responses to a large stimulus tax rebate based on household exposure to a housing price cycle. Linking geocoded household expenditure and financial transactions data to local housing price indices in Japan, we estimate a U-shaped pattern in the marginal propensity to consume with respect to housing price growth. Recipients living in areas with the smallest housing price gains during the 1980s spent 44% of the 1994 rebate within three months of payment, compared to 23% among recipients in areas which experienced the largest housing price gains. While we find limited heterogeneity in marginal propensities to consume among households in less-affected areas, MPCs are higher for younger, renter households with no debt residing in more-affected areas. These findings are consistent with near-rational households for which the pricing shock was small relative to permanent income spending a larger fraction of the tax rebate. Our analysis suggests fiscal stimulus payments primarily induce spending among "winner" households who face minimal exposure to housing price cycles.
    Date: 2020–08

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