nep-pbe New Economics Papers
on Public Economics
Issue of 2020‒10‒19
eleven papers chosen by
Thomas Andrén

  1. Tax Preferences and Optimal Income Taxation By Marcelo Arbex; Enlinson Mattos
  2. Tax misperception and its effects on decision making: A literature review By Blaufus, Kay; Chirvi, Malte; Huber, Hans-Peter; Maiterth, Ralf; Sureth-Slaone, Caren
  3. Reaction to ambiguity as a signal for tax reporting aggressiveness: Evidence from German income tax return data By Kühne, Daniela
  4. The impact of the Pillar One and Pillar Two proposals on MNE’s investment costs: An analysis using forward-looking effective tax rates By Tibor Hanappi; Ana Cinta González Cabral
  5. When do firms highlight their effective tax rate? By Flagmeier, Vanessa; Müller, Jens; Sureth, Caren
  6. Rethinking the Ability-to-Pay and Equal Sacrifice Principles of Taxation: An Alternative Rationale for a Progressive Income Tax By Harashima, Taiji
  7. Preferences for wealth taxation: Design, framing and the role of partisanship By Chirvi, Malte; Schneider, Cornelius
  8. Does the Wealth Tax Kill Jobs? By Bjørneby, Marie; Markussen, Simen; Røed, Knut
  9. Corporate taxation and investment of multinational firms: Evidence from firm-level data By Valentine Millot; Åsa Johansson; Stéphane Sorbe; Sebastien Turban
  10. An economic assessment of the evolution of the corporate tax system in Italy By Ernesto Zangari
  11. Policies to Achieve Near-Universal Health Insurance Coverage By Congressional Budget Office

  1. By: Marcelo Arbex (Department of Economics, University of Windsor); Enlinson Mattos (São Paulo School of Economics, Getulio Vargas Foundation)
    Abstract: We develop a two-agent model where agents have preferences over consumption, leisure, independent and interdependent tax preferences - personal (own tax payments) and interpersonal (average tax payments in the economy). We characterize the optimal labor income taxation under different assumptions regarding tax preferences (tax affinity, hostility, conformity and opposition). We find that tax preferences can either amplify or reduce the marginal tax increase of the low-ability type. When individuals can hide a fraction of their earnings at a resource cost, the link between consumption and tax payments is broken. Tax evasion affects the aggregate measure of taxes and what people take into account and care about when making their optimal decisions. We find that the trade-off associated with tax preferences and consumption have their effects intensified in the optimal low-ability income tax. With evasion, the marginal income tax of high-ability types is no longer zero - it is optimal to subsidize this type and avoid the mimicking of low-ability individuals.
    Keywords: Optimal taxation, Social preferences, Tax affinity, Pro-social behavior.
    JEL: D03 D60 H21 H23
    Date: 2020–10
  2. By: Blaufus, Kay; Chirvi, Malte; Huber, Hans-Peter; Maiterth, Ralf; Sureth-Slaone, Caren
    Abstract: Previous accounting research shows that taxes affect decision making by individuals and firms. Most studies assume that agents have accurate perception regarding their tax burden. However, there is a growing body of literature analyzing whether taxes are indeed perceived correctly. We review 124 studies on the measurement of tax misperception and its behavioral implications. The review reveals that many taxpayers have substantial tax misperceptions that lead to biased decision making. We develop a Behavioral Taxpayer Response Model on the impact of provided tax information on tax perception. Besides individual traits, characteristics of the tax information and the decision environment determine the extent of tax misperception. We discuss opportunities for future research and methodological limitations. While there is much evidence on tax misperception at the individual level, we hardly find any research at the firm level. Little is known about the real effects of managers' tax misperception and on how tax information is strategically managed to impact stakeholders. This research gap is surprising as a large part of the accounting literature analyzes decision making and disclosure of firms. We recommend a mixed-method approach combining experiments, surveys, and archival data analyses to improve the knowledge on tax misperception and its consequences.
    Keywords: Behavioral Taxation,Business Taxation,Misperception,Real Effects,Tax Perception,Tax Policy
    JEL: M41 H24 H25 D91
    Date: 2020
  3. By: Kühne, Daniela
    Abstract: This study introduces and tests the applicability of a signal for individual tax reporting aggressiveness using German income tax return data. Tax aggressiveness is often defined as dealing with uncertainty - or more precisely: ambiguity - in an exploitative manner. In other words, firms and individuals are considered tax aggressive if they interpret ambiguous regulations in their favor. It is empirically assessed whether the way individual taxpayers deal with ambiguity in the tax system may serve as a valid indicator for more or less aggressive reporting behavior using a specificity in the German income tax system leading to uncertainty about taxable income. The decision whether to exploit ambiguity or not is attributed to differences in an intrinsic motivation to comply. It is investigated whether and to what extent taxpayers interpreting ambiguity in their favor arrive at a lower tax burden. The results show that taxpayers exploiting ambiguity in the investigated field arrive at a significantly lower effective tax rate than comparable taxpayers not exploiting ambiguity. It is concluded that the former incur lower psychic costs when using tax positions with uncertain consequences and that exploiting ambiguity can serve as an indicator for more aggressive reporting behavior. More aggressive reporting behavior is analyzed as a dependent variable to study the factors shaping it.
    Keywords: tax aggressiveness,nonbusiness tax
    JEL: H24 H26 D91
    Date: 2020
  4. By: Tibor Hanappi; Ana Cinta González Cabral
    Abstract: This working paper presents the analytical framework used by the Secretariat to estimate the direct effects of the Pillar One and Pillar Two proposals on MNE’s investment costs. The analysis builds on the standard ETR framework and extends it in two important respects. First, ETRs are calculated for an investment performed by an entity belonging to an MNE group and account for the possibility that MNEs use their organisational structure to shift profits to low tax jurisdictions. Second, the model incorporates a stylised version of the tax provisions introduced under Pillar One and Pillar Two. The results, covering over 70 jurisdictions, account for differences in tax bases and rates, and are empirically calibrated to map MNE activities, i.e., the location of their profits, turnover and assets as well as the impact of the proposals. Overall, the results suggest that the Pillar One and Pillar Two proposals would lead to modest increases on global weighted ETRs. This paper feeds into the broader analysis of the investment impacts of the Pillar One and Pillar Two proposals.
    JEL: H32 F21 H25
    Date: 2020–10–12
  5. By: Flagmeier, Vanessa; Müller, Jens; Sureth, Caren
    Abstract: This study examines the visibility of the GAAP effective tax rate (ETR) in firms' financial statements as a distinct disclosure choice. Applying a game-theory disclosure model for voluntary disclosure strategies of firms to a tax setting, we argue that firms face a trade-off in their ETR disclosure decisions. On the one hand, firms have an incentive to enhance their ETR disclosure when the ratio offers shareholders "favourable conditions", for example in terms of higher expected after-tax cash-flows. On the other hand, the disclosure of a favourable low ETR could attract the attention of tax auditors and the public and ultimately result in disclosure costs. We empirically test disclosure behaviour by examining the relation between disclosure visibility and different ETR conditions that reflect different stakeholder-specific costs and benefits. While we find that unfavourable ETR conditions are not highlighted, we observe higher disclosure visibility for favourable ETRs (smooth, close to the industry average, decreasing). Additional analyses reveal that this high visibility is characteristic of firm-years with only moderately decreasing ETRs at usual ETR levels, while extreme ETRs are not highlighted. Interestingly and in contrast to our main results, a subsample of family firms do not seem to highlight favourable ETRs.
    Keywords: Effective tax rate,Cost-benefit trade-off,Disclosure decision,Reputational costs,Tax disclosure
    Date: 2020
  6. By: Harashima, Taiji
    Abstract: Progressive income taxes have usually been justified on the basis of the ability-to-pay (ATP) and equal sacrifice principles, but how ATP and sacrifice should be measured remains unsettled. In this paper, I present an alternative rationale for progressive taxes on the basis of the concept of sustainable heterogeneity (SH). I conclude that income taxes have to be progressive for SH to be achieved, and therefore, progressive income taxes can be justified without relying on the ATP and equal sacrifice principles. In addition, for SH to be achieved, households should also be burdened with taxes to cover expenses for achieving policy objectives other than SH in proportion to their incomes, that is, roughly in relation to their consumption, such as the case with a value-added tax.
    Keywords: Ability-to-pay principle; Benefit principle; Equal sacrifice principle; Progressive tax; Social welfare; Sustainable heterogeneity
    JEL: D63 H21 H24
    Date: 2020–09–16
  7. By: Chirvi, Malte; Schneider, Cornelius
    Abstract: Empirical literature on preferences for wealth taxation almost exclusively focuses on either the emotionally loaded estate tax or rather general concepts of redistributive preferences. Yet, it remains unclear whether the exceptional opposition towards the estate tax is applicable to other instruments of net wealth taxation. This study presents, to our knowledge, the first investigation of how individuals want to tax wealth - across a variety of tangible wealth tax instruments. In doing so, we particularly test for the presence of framing effects, incidence concentration and the role of wealth characteristics within the different tax configurations. For this, we conducted a factorial vignette survey experiment with over 3,200 respondents on Amazon's Mechanical Turk (MTurk). Each respondent was randomized into one of four burden-equivalent wealth tax instruments: an estate tax, a one-time wealth tax, a decennial wealth tax or a yearly wealth tax. Subsequently we asked each respondent to state her preferred overall lifetime tax burden for a set of hypothetical individuals. Our findings yield several interesting insights. First, we find that the exceptional opposition towards the estate tax is not applicable to other instruments of wealth taxation and is only valid for certain subgroups. In general, our empirical findings provide preferred tax rates between 12.8 to 14.9 percent of overall lifetime tax burden. Second, we document an exceptional opposition towards the mere name "estate tax" in relation to equivalent wealth tax instruments for certain subgroups. Republicans particularly reject the estate tax with a lower proposed effective tax rate of around 3.1 percentage points compared to all other wealth taxes - even the perfectly congruent one-time wealth tax. Third, we uncover the influence of normative preferences for specific design features on the support for a wealth tax. Proposed effective tax rates of the estate tax and the one-time wealth tax show a significant progressivity, whereas no progressivity can be observed for both periodical taxes. The presence of children has an especially significant negative effect in one-off wealth taxes at the end of the lifetime.
    Keywords: Wealth taxation,Preferences for taxation,Misinformation,Randomized experiment
    JEL: C90 D31 D72 H2
    Date: 2020
  8. By: Bjørneby, Marie (The Norwegian University of Life Sciences); Markussen, Simen (Ragnar Frisch Centre for Economic Research); Røed, Knut (Ragnar Frisch Centre for Economic Research)
    Abstract: Fueled by increasing inequality and rising fiscal deficits, the interest in wealth taxation has increased over the last years, both in the public debate and in academia. Yet, knowledge about the behavioral effects of a wealth tax is limited. We utilize rich Norwegian register data and a series of tax reforms implemented between 2007 and 2017 to study how a net wealth tax imposed on owners of small and medium sized businesses affects their firms' investment and employment decisions. Identification of causal effects is based on a generalized difference-in-differences strategy. We find no empirical support for the claim that a moderate wealth tax adversely affects investments and employment in firms controlled by the taxpayers. To the contrary, our results indicate a positive causal relationship between the level of a household's wealth tax and subsequent employment growth in the firm it controls. The rationale behind this result appears to be that the tax value of a given wealth can be reduced by being invested in a non-traded firm, and that this incentive becomes stronger the higher is the wealth tax.
    Keywords: wealth tax, capital taxation, labor demand, investment
    JEL: H21 J23 G11
    Date: 2020–10
  9. By: Valentine Millot; Åsa Johansson; Stéphane Sorbe; Sebastien Turban
    Abstract: This paper explores the effect of corporate taxes on the investment of multinational enterprises (MNEs), and whether this effect differs across MNE groups depending on their profitability rate. Firm-level analysis conducted on a cross-country panel of MNE entities confirms the earlier finding that MNE investment in a jurisdiction is negatively affected by effective corporate tax rate increases in that jurisdiction. The analysis also suggests that the tax sensitivity of MNE investment differs across entities belonging to different MNE groups, with a U-shape relationship between tax sensitivity and MNE group profitability. Entities belonging to groups with negative profitability or relatively high profitability rates are found to be relatively less sensitive than those belonging to groups with lower but positive profitability rates. For example, the estimated tax sensitivity of firms in MNE groups with a profitability rate above 10% is found to be nearly half the sensitivity of a firm in an MNE group with a profitability rate between 0% and 10%. This has implications with regard to the tax reform proposals currently under discussion by the OECD/G20 Inclusive Framework on BEPS, as this suggests that highly profitable MNE groups, which are more likely to be impacted by the proposals, may be less sensitive to taxes in their investment behaviour than the typical MNE.
    Date: 2020–10–12
  10. By: Ernesto Zangari (Bank of Italy)
    Abstract: This paper provides an assessment of the evolution of the Italian corporate tax system over the last decade through the computations of new and updated effective tax rates. The analysis takes into account the specificities of Italy’s Allowance for Corporate Equity (ACE) and looks at the evolution of market interest rates to evaluate the effects. It relies on a new method to measure the effect of the limits to the deductibility of the cost of debt. Over the period 2010-2020, the legislative changes led to effective taxation becoming highly volatile. This dynamic was mostly driven by the evolution of the ACE regime. Since 2016, the temporary tax incentives for purchasing machinery greatly reduced the cost of capital. However, since 2019 the provision that phased out the incentives at higher-levels of investment may have lowered their effectiveness for larger firms. The analysis also shows that ACE has better economic properties than the Mini-Ires regime that replaced it temporarily in 2019, in terms of incentive to invest and to increase equity funding.
    Keywords: taxation, effective tax rates, corporate taxation, EMTR, allowance for corporate equity
    JEL: H25 H32 H71
    Date: 2020–09
  11. By: Congressional Budget Office
    Abstract: CBO examines policy approaches that could achieve near-universal health insurance coverage. As defined by CBO, a proposal would achieve near-universal coverage if close to 99 percent of citizens and noncitizens who are lawfully present in this country were insured either by enrolling in comprehensive major medical coverage or by receiving automatic coverage through a default plan.
    JEL: H30 I13 I18
    Date: 2020–10–01

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