nep-pbe New Economics Papers
on Public Economics
Issue of 2020‒10‒12
fifteen papers chosen by
Thomas Andrén

  1. Should Capital Be Taxed? By Yunmin Chen; YiLi Chien; Yi Wen; C.C. Yang
  2. The Political Economy of Inequality, Mobility and Redistribution By Ignacio P. Campomanes
  3. Progressive Consumption Taxes By Costa, Carlos Eugênio da; Santos, Marcelo Rodrigues dos
  4. The Tax Elasticity of Financial Statement Income: Implications for Current Reform Proposals By Dhammika Dharmapala
  5. Tax Evasion, Market Adjustments, and Income Distribution By James Alm; Matthias Kasper
  6. Audits, Audit Effectiveness, and Post-audit Tax Compliance By Matthias Kasper; James Alm
  7. Identifying Behavioral Responses to Tax Reforms: New Insights and a New Approach By Katrine Marie Jakobsen; Jakob Egholt Søgaard
  8. 40 Years of Tax Evasion Games: A Meta-Analysis By James Alm; Antoine Malézieux
  9. Tax on Large Fortunes: recent international debates and the situation in Brazil By Pedro Carvalho Jr.; Luana Passos
  10. Who Responds? Disentangling the Effects of Audits on Individual Tax Compliance Behavior By James Alm; Ali Enami; Michael McKee
  11. Avoiding Taxes: Banks' Use of Internal Debt By Franz Reiter; Dominika Langenmayr; Svea Holtmann
  12. Taxing Mobile and Overconfident Top Earners By Andreas Haufler; Yukihiro Nishimura
  13. The distributive impact of income taxes in Brazil By Rodrigo Cardoso Fernandes; Bernardo Campolina; Fernando Gaiger Silveira
  14. Importing Inequality: Immigration and the Top 1 Percent By Advani, Arun; Koenig, Felix; Pessina, Lorenzo; Summers, Andy
  15. 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

  1. By: Yunmin Chen; YiLi Chien; Yi Wen; C.C. Yang
    Abstract: We design an infinite-horizon heterogeneous-agents and incomplete-markets model to demonstrate analytically that in the absence of any redistributional effects of government policies, optimal capital tax is zero despite capital overaccumulation under precautionary savings and borrowing constraints. Our result indicates that public debt is a better tool than capital taxation to restore aggregate productive efficiency.
    Keywords: Capital Taxation; Government Bonds; Heterogeneous Agents; Incomplete Markets; Modified Golden Rule; Ramsey Problem; Wealth Distribution.
    JEL: C61 E22 E62 H21 H30
    Date: 2020–09–26
  2. By: Ignacio P. Campomanes
    Abstract: How does the interaction between inequality and social mobility affect the choice of fiscal policy? I analyze this question in a model of democratic politics with imperfect tax enforcement, where the ability of individuals to evade taxes limits the amount of redistribution in the economy. Social mobility creates an insurance motive that increases voluntary compliance, favoring the tax enforcement process. In such an environment, redistributive pressures brought about by an increase in inequality are only implementable in highly mobile societies. On the contrary, when mobility is low, higher inequality reduces tax rates and does not translate into higher redistribution. I empirically analyze the predictions of the model for a sample of 72 countries during the period 1960-2015. Using cross-sectional as well as panel estimation techniques, the results point to a positive relation between market inequality and the level of redistribution only when social mobility is relatively high.
    Keywords: Inequality, Social Mobility, Fiscal Policy, Tax Evasion.
    JEL: E62 D31 J62 H26 P16
    Date: 2020–09
  3. By: Costa, Carlos Eugênio da; Santos, Marcelo Rodrigues dos
    Abstract: In a static setting, whether consumption or labor income is progressively taxed is irrelevant for household choices and welfare. In a dynamic setting, however, these two forms of progressivity have markedly di erent implications for how earnings vary along the life-cycle: in a stylized life-cycle model, progressive income tax act reducing Frisch elasticities of labor supply whereas progressive consumption taxes act reducing the elasticity of intertemporal substitution. After showing that the latter leads to less ine ciencies in the stylized model than the former, we explore the consequences of replacing the current U.S. tax system by one in which labor income are linear and consumption taxes are progressive. We nd welfare gains that exceed 10% in consumption equivalent variation terms for all possible speci cations in steady state comparisons. Welfare gains are attained in all our speci cations with either very small increases in the capital stock or even large declines.
    Date: 2020–09–29
  4. By: Dhammika Dharmapala
    Abstract: Current reform proposals in international and corporate tax (most notably the OECD’s GloBE proposal) envisage taxing financial statement income. This paper develops a conceptual framework – based on the literature on the elasticity of taxable income – for the welfare analysis of such proposals, and discusses the available evidence on the tax elasticity of financial statement income. The central conclusion is that the most relevant evidence suggests a large responsiveness of financial statement income to taxes (and hence, albeit with significant limitations and caveats, arguably a large deadweight loss). The paper also highlights the need for more evidence on this question.
    Keywords: international taxation, multinational firms, financial statement income, book-tax conformity
    JEL: H25 M41
    Date: 2020
  5. By: James Alm (Tulane Economics); Matthias Kasper (Tulane University and University of Vienna)
    Abstract: Market adjustments to tax evasion alter factor and product prices, which determine the true impacts and beneficiaries of tax evasion.
    Keywords: Tax evasion, Tax incidence, General equilibrium.
    JEL: H26 H30
    Date: 2020–08
  6. By: Matthias Kasper (Tulane Economics and University of Vienna); James Alm (Tulane Economics)
    Abstract: This study uses a laboratory experiment to investigate the effect of tax audits on post-audit tax compliance. An important feature of our experimental design is the addition of audit ”effectiveness” to our audit mechanism, where effectiveness is defined as the share of undeclared income that the tax agency detects in an audit. This addition allows us to examine the effects of audit effectiveness on post-audit compliance. We also study whether tax audits have differential effects on different types of taxpayers, as distinguished by their prior reporting behavior. Contrary to theoretical predictions, we find that tax audits have differential effects on post-audit compliance and that the effectiveness of audits determines these responses; that is, while effective audits increase post-audit tax compliance, ineffective audits have the opposite effect. We also find that tax audits (whether effective or not) increase subsequent compliance of noncompliant taxpayers while they reduce compliance among individuals who have been found to report their income correctly. Finally, we find no evidence that tax audits crowd out the intrinsic motivation to comply of honest individuals. Our findings suggest that the specific deterrent effect of tax audits is more ambiguous than much previous analysis suggests, with these effects dependent on the effectiveness of the audit process and on the taxpayer’s prior reporting behavior.
    Keywords: Tax compliance; Audit effectiveness; Specific deterrence; General deterrence; Laboratory experiments.
    JEL: C9 H26 H83
    Date: 2020–09
  7. By: Katrine Marie Jakobsen (CEBI, Department of Economics, University of Copenhagen); Jakob Egholt Søgaard (CEBI, Department of Economics, University of Copenhagen)
    Abstract: We revisit the identification of behavioral responses to tax reforms and develop a new approach that allows for graphical validation of identifying assumptions and representation of treatment effects. Considering typical tax reforms, such as a reduction in the top income tax, we show that the state-of-the-art estimation strategy relies on an assumption that trend differences in income across the income distribution remain constant in the absence of reforms. Similar to the pre-trend validation of differencesin-differences studies, this identifying assumption of constant trend differentials can be validated by comparing the evolution of income in untreated parts of the income distribution over time. We illustrate the importance of our new validation approach by studying a number of tax reforms in Denmark, and we show how violations of the identifying assumption may drive the estimates obtained from the state-of-the-art strategy.
    Keywords: Tax Reforms, Behavioral Responses, Identification, Validation
    JEL: C14 H30 J22
    Date: 2020–09–21
  8. By: James Alm (Tulane Economics); Antoine Malézieux (Burgundy School of Business)
    Abstract: We collect individual participant data from 70 papers that use laboratory experiments to examine individual tax evasion behavior (or "Tax Evasion Games"), in order to use meta-analysis to estimate the impacts of different public policy, experimental design and individual level variables on tax evasion choices. Our results show that standard enforcement variables like audits (including audit rules) and fines perform differently on the extensive and intensive margins. We find that other fiscal variables like a flat tax system, tax rates, and tax amnesties have unambiguous negative impacts on tax compliance, and that specific features of the experimental setting, such as how subjects are directed to report income, or whether taxes are redistributed to the participants or to a real life public good, have significant impacts on tax compliance. Our results also indicate that the demographic characteristics of the subjects (e.g., gender, experimental income, occupation, risk attitude) affect compliance.
    Keywords: Tax evasion, Tax compliance, Meta-Analysis.
    JEL: C9 H0 H3
    Date: 2020–08
  9. By: Pedro Carvalho Jr. (IPC-IG); Luana Passos (IPC-IG)
    Abstract: "Many discussions have taken place in Brazil about legislation pertaining to subparagraph VII of article 153 of the 1988 Federal Constitution—the regulation, through a Complementary Law, of the Tax on Large Fortunes (Imposto sobre Grandes Fortunas—IGF). In the current scenario, with the country facing a second consecutive annual decrease in tax revenue, the subject of the implementation of the IGF is gaining traction, with its proponents vehemently arguing that it can represent a balancing mechanism for a possible increase in the tax burden, so that this increased burden would not fall exclusively on the poorest population through indirect taxes". (...)
    Keywords: Tax, Large Fortunes, recent, international, debates, situation, Brazil
    Date: 2019–10
  10. By: James Alm (Tulane Economics); Ali Enami (The University of Akron); Michael McKee (Appalachian State University)
    Abstract: How does individual tax compliance respond to a change in the audit rate? Most all empirical evidence suggests that an increase in the audit rate increases the compliance rate, a result that is also consistent with standard theoretical analysis of the individual compliance decision. However, this empirical evidence is typically based on estimating an average response across all taxpayers, and an average response may conceal much heterogeneity in individual responses. This paper collects individual- level data from identical laboratory experiments across five separate studies with a total of 278 student subjects that generated 8340 individual observations, in which only audit rates are varied, in order to disentangle individual responses to audit rate changes. As with most previous empirical work, our results indicate that the average response across all taxpayers is to increase (decrease) compliance when audit rates increase (decrease). However, this average response conceals enormous heterogeneity in individual responses. When the individual responses are examined in more detail, our data show that many individuals do in fact respond to higher (lower) audit rates by increasing (decreasing) their compliance. However, these individuals represent only about 2/3 of all subjects. In fact, our data also show that many individuals do not respond at all to audit rate changes. Surprisingly, our data further show that some individuals actually decrease their compliance when audit rates increase, and vice versa. All of these different individual responses indicate that government policy interventions must consider the “full house” of individual behaviors when devising appropriate policies.
    Keywords: Tax evasion, Tax compliance, Behavioral economics, Experimental economics.
    JEL: H26 C91
    Date: 2020–09
  11. By: Franz Reiter; Dominika Langenmayr; Svea Holtmann
    Abstract: This paper investigates how multinational banks use internal debt to shift profits to low-taxed affiliates. Using regulatory data on multinational banks headquartered in Germany, we show that banks use this tax avoidance channel more aggressively than non-financial multinationals do. We find that a ten percentage points higher corporate tax rate increases the internal net debt ratio by 5.7 percentage points, corresponding to a 20% increase at the mean. Our study also takes into account the existence of conduit entities, which simply pass through financial flows. If conduit entities are systematically located in low-tax countries, previous studies may have underestimated the extent of debt shifting.
    Keywords: profit shifting, internal debt, multinational banks, taxation
    JEL: H25 G21 F23
    Date: 2020
  12. By: Andreas Haufler; Yukihiro Nishimura
    Abstract: We set up a simple model of tax competition for mobile, highly-skilled and overconfident managers. Firms endogenously choose the compensation scheme for managers, which consists of a fixed wage and a bonus payment in the high state. Managers are overconfident about the probability of the high state and hence of receiving the bonus, whereas firms and governments are not. In this setting we show that overconfidence (i) unambiguously increases the bonus component in the managers’ compensation package and (ii) it reduces the bonus tax rate that governments set in the non-cooperative tax equilibrium. Hence overconfidence can contribute to explaining both the increasing role of bonus contracts and the fall in marginal tax rates for high-income earners.
    Keywords: overconfidence, bonus taxes, tax competition, migration
    JEL: H20 H87 G28
    Date: 2020
  13. By: Rodrigo Cardoso Fernandes (IPC-IG); Bernardo Campolina (IPC-IG); Fernando Gaiger Silveira (IPC-IG)
    Abstract: "Income inequality has been one of Brazil's most significant socioeconomic characteristics throughout its history. Although there has been a significant reduction since the end of the 1990s, its persistence and magnitude are still internationally notorious". (...)
    Keywords: distributive, impact, income, taxes, Brazil
    Date: 2019–09
  14. By: Advani, Arun (Institute for Fiscal Studies, London); Koenig, Felix (Carnegie Mellon University); Pessina, Lorenzo (Columbia University); Summers, Andy (London School of Economics)
    Abstract: In this paper we study the contribution of migrants to the rise in UK top incomes. Using administrative data on the universe of UK taxpayers we show migrants are over-represented at the top of the income distribution, with migrants twice as prevalent in the top 0.1% as anywhere in the bottom 97%. These high incomes are predominantly from labour, rather than capital, and migrants are concentrated in only a handful of industries, predominantly finance. Almost all (85%) of the growth in the UK top 1% income share over the past 20 years can be attributed to migration.
    Keywords: income inequality, migration, top income shares
    JEL: H2 J3 J6
    Date: 2020–09
  15. By: Nora Lustig (Tulane Economics); 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: 2020–07

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