nep-pbe New Economics Papers
on Public Economics
Issue of 2020‒10‒05
eleven papers chosen by
Thomas Andrén

  1. Income Tax Evasion: Tax Elasticity, Welfare, and Revenue By Max Gillman
  2. Capital Income Taxation with Portfolio Choice By Ivo Bakota
  3. Redistribution and Insurance in Welfare States around the World By Bartels, Charlotte; Neumann, Dirk
  4. Generational Distribution of Fiscal Burdens: A Positive Analysis By Uchida, Yuki; Ono, Tetsuo
  5. Optimal Financial Transaction Taxes By Eduardo Dávila
  6. Bilateral Tax Competition and Regional Spillovers in Tax Treaty Formation By Kunka Petkova; Andrzej Leszek Stasio; Martin Zagler
  7. Is Neoliberalism Still Spreading? The Impact of International Cooperation on Capital Taxation By Hakelberg, Lukas; Rixen, Thomas
  8. My Taxes are Too Darn High: Tax Protests as Revealed Preferences for Redistribution By Brad C. Nathan; Ricardo Perez-Truglia; Alejandro Zentner
  9. Determinants of Property Tax Revenue : Lessons from Empirical Analysis By Awasthi,Rajul; Le,Tuan Minh; You,Chenli
  10. Taxation and Innovation: What Do We Know? By Ufuk Akcigit; Stefanie Stantcheva
  11. Effects of Tax-Benefit Policy Changes across the Income Distributions of the EU-28 countries: 2018-2019 By EUROMOD, EUROMOD

  1. By: Max Gillman (1 University Blvd; University of Missouri – St. Louis; St. Louis, MO 63121)
    Abstract: This paper provides a general equilibrium model of income tax evasion. As functions of the share of income reported, the paper contributes an analytic derivation of the tax elasticity of taxable income, the welfare cost of the tax, and government revenue as a percent of output. It shows how an increase in the tax rate causes the tax elasticity and welfare cost to increase in magnitude by more than with zero evasion. Keeping constant the ratio of income tax revenue to output, as shown to be consistent with certain US evidence, a rising productivity of the goods sector induces less evasion and thereby allows tax rate reduction. The paper derives conditions for a stable share of income tax revenue in output with dependence upon the tax elasticity of reporting income. Examples are provided with less and more productive economies in terms of the tax elasticity of reported income, the welfare cost of taxation and the tax revenue as a percent of output, with sensitivity analysis with respect to leisure preference and goods productivity. Discussion focuses on how the tax evasion analysis may help explain such fiscal tax policy as the postwar US income tax rate reductions with discussion of tax acts and government fiscal multipliers. Fiscal policy with tax evasion included shows how tax rate reduction induces less tax evasion, a lower welfare cost of taxation, and makes for a stable income tax share of output.
    Keywords: Optimal Evasion; Tax Law; Welfare; Tax Elasticity; Revenue; Productivity; Development.
    JEL: E13 H21 H26 H30 H68 K34 K42 O11
    Date: 2020–09
  2. By: Ivo Bakota
    Abstract: This paper analyzes redistributional and macroeconomic effects of differential taxation of financial assets with a different risk levels. The redistributive effect stems from the fact that various households hold portfolios with a starkly different risk levels. In particular, poor households primarily save in safe assets, while rich households often invest a substantially higher share of their wealth in (risky) equity. At the same time, equity and safe assets are often taxed at different rates in many tax codes. This is primarily because investments in equity (which are relatively riskier) are taxed both as corporate and personal income, unlike debt, which is tax deductible for corporations. This paper firstly builds a simple theoretical two-period model which shows that the optimal tax wedge between risky and safe assets is increasing in the underlying wealth inequality. Furthermore, I build a quantitative model with a continuum of heterogeneous agents, parsimonious life-cycle, borrowing constraint, aggregate shocks and uninsurable idiosyncratic shocks, in which the government raises revenue by using linear taxes on risky and safe assets. Simulations of quantitative models shows that elimination of differential asset taxation leads to a welfare loss equivalent to a 0.3% permanent reduction in consumption. I find that the optimal tax wedge between taxes on equity and debt is higher than the one in the U.S. tax code.
    Keywords: portfolio choice; optimal taxation; redistribution;
    JEL: E62 G11 G32 H21 H23
    Date: 2020–09
  3. By: Bartels, Charlotte (DIW Berlin); Neumann, Dirk (Bundesministerium für Wirtschaft und Energie)
    Abstract: Redistribution across individuals in a one-year-period framework is an empirically intensely studied question. However, a substantial share of annual redistribution might turn out to serve individual insurance in a longer perspective, reducing the level of actual redistribution across individuals. This paper investigates to what extent long-run redistribution diverges from annual redistribution in welfare states of different types. Exploiting panel data from the Cross-National Equivalent File (CNEF) for Australia, Germany, South Korea, Switzerland, the United Kingdom, and the United States, we find that welfare states like Germany that are assumed to engage in a high level of redistribution actually achieve relatively less redistribution between individuals in the long run than the United Kingdom or the United States. Regression results show that a higher share of elderly in a country is associated with more annual redistribution, but with less long-run redistribution between individuals. The results suggest that, in welfare states with aging populations, we might expect growing annual redistribution that, to a substantial extent, is in fact income smoothing for the elderly.
    Keywords: welfare states, redistribution, insurance
    JEL: D31 D63 H53 H55 I38
    Date: 2020–09
  4. By: Uchida, Yuki; Ono, Tetsuo
    Abstract: This study presents a political economy model with overlapping generations to analyze the effects of population aging on fiscal policy formation and the resulting distribution of fiscal burden across generations. The analysis shows that increased political power of the old, arising from population aging, leads to (i) an increase in the ratio of labor income tax revenue to GDP and the ratio of debt to GDP, and (ii) an increase in the ratio of capital income tax revenue to GDP in countries with high degrees of preferences for public goods, but an initial decrease followed by an increase in this ratio in countries with low degrees of preferences for public goods.
    Keywords: Generational burden; Overlapping generations; Political economy; Population aging; Public debt
    JEL: D70 E24 E62 H60
    Date: 2020–09–09
  5. By: Eduardo Dávila
    Abstract: This paper characterizes the optimal transaction tax in an equilibrium model of competitive financial markets. As long as investors hold heterogeneous beliefs that are not related to their fundamental trading motives and the planner calculates welfare using any single belief, a strictly positive tax is optimal, regardless of the magnitude of fundamental trading. Under some conditions, the optimal tax is independent of the belief used by the planner to calculate welfare. The optimal tax can be implemented by adjusting its value until observed total volume equals fundamental volume. Knowledge of i) the share of non-fundamental trading volume and ii) the semi-elasticity of trading volume to tax changes is sufficient to quantify the optimal tax. A calibration of the model consistent with empirically estimated volume semi-elasticities to tax changes and that features a 30% share of non-fundamental trading volume is associated with a 37bps optimal tax.
    JEL: D61 G18 H21
    Date: 2020–09
  6. By: Kunka Petkova (Vienna University of Economics and Business); Andrzej Leszek Stasio (European Commission - JRC); Martin Zagler (Vienna University of Economics and Business)
    Abstract: Tax treaties are often seen as a means to mitigate fierce tax competition. We challenge this view by arguing that taxes on passive income reduce effective average tax rates, and induce neighbouring countries to react by reducing bilateral tax rates. As opposed to traditional tax competition, where every foreign investor would benefit from lower tax rates, we show that countries also engage in cutting tax rates for investors from a particular country, leaving taxes for everyone else unaffected. We call this bilateral tax competition, and we test these predictions empirically. We focus on the four treaty withholding tax rates on passive income - portfolio dividends, participation dividends, interest, and royalties - and collect these rates for 3,000 tax treaties and amending protocols signed between 1930 and 2012. We find a positive relationship in the negotiated withholding tax rates of a destination country's tax treaty and destination country competitors' past tax treaties with the same source country. This relationship is strongest for the tax rates on interest and royalties, and varies from an average elasticity between 0.19 and 0.36 with both source and destination country being an OECD member, and an average elasticity up to 0.64 when both countries are tax havens.
    Keywords: tax competition, international taxation, double taxation treaties, withholding taxes, tax treaty formation
    JEL: F50 F53 F68 H29 H39
    Date: 2020–09
  7. By: Hakelberg, Lukas; Rixen, Thomas (Freie Universität Berlin)
    Abstract: The downward trend in capital taxes since the 1980s has recently reversed for personal capital income. At the same time, it continued for corporate profits. Why have these tax rates di-verged after a long period of parallel decline? We argue that the answer lies in different levels of change in the fights against tax evasion and tax avoidance. The fight against evasion by households progressed significantly since 2009, culminating in the multilateral adoption of automatic exchange of information (AEI). In contrast, international efforts against base ero-sion and profit shifting (BEPS) failed to curb tax avoidance by corporations. We theorize that international cooperation is an intervening variable, countering the negative impact of tax competition on capital taxation by reducing the risk of capital flight. Under such conditions, domestic political pressures in favor of higher capital taxes can unfold. We confirm our argu-ment in a difference-in-difference analysis and through additional tests with data for up to 35 OECD countries from 2000-2017. Our central estimate suggests that the average tax rate on dividends in 2017 is 4.5 percentage points higher than it would have been absent international tax cooperation.
    Date: 2020–04–25
  8. By: Brad C. Nathan; Ricardo Perez-Truglia; Alejandro Zentner
    Abstract: In all U.S. states, individuals can file a protest with the goal of legally reducing their property taxes. This choice provides a unique opportunity to study preferences for redistribution via revealed preference. We study the motives driving tax protests through two sources of causal identification: a quasi-experiment and a pre-registered large-scale natural field experiment. We show that, consistent with selfish motives, households are highly elastic to their private benefits and private costs from protesting. We also find that social preferences are a significant motive: consistent with conditional cooperation, households are willing to pay higher tax rates if they perceive that others pay high tax rates too. Lastly, we document significant differences between the motivations of Democrats and Republicans.
    JEL: C93 H2 H26 Z13
    Date: 2020–09
  9. By: Awasthi,Rajul; Le,Tuan Minh; You,Chenli
    Abstract: Many developing countries have struggled with realizing sufficient revenues from property tax. However, as developing countries experience economic growth, they are also seeing property values rising, providing a bigger tax base from which to realize revenues. Technology has made tax administration easier and more effective and developing country governments have been improving their quality of governance and considering introducing or enhancing property tax revenue collection to diversify their tax and fiscal revenues. This paper explores the determinants of property tax revenue using data from the United States, Canada, Australia, Chile, and the Organisation for Economic Co-operation and Development for 2006 to 2016, using a fixed effects model. The results show that increases in gross domestic product and population lead to increases in property tax revenue and an increase in federal transfers decreases it. The outcomes of the empirical analysis highlight the statistically significant impacts on property tax collection of a country's state of development and its demographic, fiscal, and property tax?specific characteristics. A critical question for further research is whether and how the empirical methodologies and specifications as applied to the set of developed economies would be replicated in the context of developing countries.
    Keywords: Taxation&Subsidies,Public Finance Decentralization and Poverty Reduction,Macro-Fiscal Policy,Public Sector Economics,Economic Adjustment and Lending,Financial Sector Policy,Economic Theory&Research,Economic Growth,Industrial Economics,International Trade and Trade Rules
    Date: 2020–09–15
  10. By: Ufuk Akcigit (University of Chicago, CEPR and NBER); Stefanie Stantcheva (Harvard University, CEPR and NBER)
    Abstract: Tax policies are a wide array of tools, commonly used by governments to influence the economy. In this paper, we review the many margins through which tax policies can affect innovation, the main driver of economic growth in the long-run. These margins include the impact of tax policy on i) the quantity and quality of innovation; ii) the geographic mobility of innovation and inventors across U.S. states and countries; iii) the declining business dynamism in the U.S., firm entry, and productivity; iv) the quality composition of firms, inventors, and teams; and v) the direction of research effort, e.g., toward applied versus basic research, or toward dirty versus clean technologies. We give ideas drawn from research on how the design of policy can allow policy makers to foster the most productive firms without wasting public funds on less productive ones.
    Date: 2020
    Date: 2020–09–24

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