nep-pbe New Economics Papers
on Public Economics
Issue of 2020‒10‒26
twelve papers chosen by
Thomas Andrén

  1. Optimal income taxation with tax avoidance and endogenous labor supply By George Casamatta
  2. A Characterization for Marginal Income Tax Schedules By Oztek, Abdullah Selim
  3. Household Indebtedness and the Macroeconomic Effects of Tax Changes By Sangyup Choi; Junhyeok Shin
  4. An Assessment of Wealth Taxes in a Joint Income-Wealth Perspective By Kuypers, Sarah; Figari, Francesco; Verbist, Gerlinde
  5. The Effects of the Affordable Care Act on the Near-Elderly: Evidence for Health Insurance Coverage and Labor Market Outcomes By Mark Duggan; Gopi Shah Goda; Gina Li
  6. Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium By Dominik Sachs; Aleh Tsyvinski; Nicolas Werquin
  7. The Corporate Tax Haven Index: A New Geography of Profit Shifting By Petr Jansky; Markus Meinzer; Miroslav Palansky; Leyla Ates; Alex Cobham; Moran Harari; Lucas Millan-Narotzky
  8. Optimal bequests taxation in the steady state By George Casamatta
  9. Corporate Taxation and the Distribution of Income By James R. Hines Jr.
  10. Offshore Tax Evasion and Wealth Inequality: Evidence from a Tax Amnesty in the Netherlands By Arjan Lejour; Simon Rabaté; Maarten van 't Riet
  11. Promoting Education under Distortionary Taxation: Equality of Opportunity versus Welfarism By Pertti Haaparanta; Ravi Kanbur; Tuuli Paukkeri; Jukka Pirttilä; Matti Tuomala
  12. Who Benefits From the Child Tax Credit? By Jacob Goldin; Katherine Michelmore

  1. By: George Casamatta (Laboratoire Lieux, Identités, eSpaces et Activités (LISA))
    Abstract: We determine the optimal income tax schedule when individuals both determine endogenously their labor supply and have the possibility of avoiding paying taxes. Considering a convex concealment cost function, we propose a formula for the optimal marginal tax rate, that generalizes the standard Mirrlees formula to the case of tax avoidance. We also show that the results obtained by (2020) in the fixed income case hold true when labor supply is endogenous: with a low enough marginal cost of avoidance, part of the taxpayers, located in the interior of the skill distribution, optimally choose to avoid taxes.
    Keywords: tax avoidance, optimal income taxation
    JEL: H21 H26
    Date: 2020–06
  2. By: Oztek, Abdullah Selim
    Abstract: The paper studies the optimal income taxation with a finite number of types. It is shown that Rawlsian social welfare and maximax social welfare functions constitute upper and lower bounds for the second-best optimal marginal tax schedules. Therefore any marginal tax schedule with a higher tax rate than Rawlsian bound or with a lower tax rate than maximax bound would be inefficient. Moreover, it is shown that reasonable marginal tax schedules between these two benchmarks could be supported as a second-best tax schedule with appropriate social weights. These results are also valid when bunching is optimal. Additionally, some characterization for the total tax rates at the top and bottom of the income distribution are given.
    Keywords: Public Economics; Optimal Income Taxation
    JEL: H2 H21
    Date: 2019–09–02
  3. By: Sangyup Choi (Yonsei Univ); Junhyeok Shin (Yonsei Univ)
    Abstract: This study is an attempt to investigate whether household indebtedness influences the macroeconomic effects of the U.S. tax policy. We apply a state-dependent local projection method to the exogenous tax shock series by Romer and Romer (2010) and find that a tax cut strongly stimulates the output when households are highly indebted. The expansionary effect of a tax cut in the period of high household debt is particularly significant for (i) consumption than investment; (ii) a personal income tax than a corporate income tax; (iii) during bad times than good times. These findings support household indebtedness as a measure of liquidity constraint for wealthy hand-to-mouth households at the macro-level. In response to a tax cut, households increase (decrease) labor supply when they are highly indebted (not indebted). This lack of a neoclassical wealth effect further contributes to an increase in the output. The state-dependent effects of tax policy, which influence the disposable income of the household directly, are more notable than those of the government spending policy, lending further support to the role of the household liquidity constraint channel of tax policy.
    Keywords: Tax policy; Household debt; Liquidity constraints; Nonlinearity; Local projections
    JEL: E32 E62 H30
    Date: 2020–10
  4. By: Kuypers, Sarah; Figari, Francesco; Verbist, Gerlinde
    Abstract: Many researchers and policymakers have made strong arguments for broadening the taxes on wealth and its returns. Although the theoretical literature on (optimal) wealth taxation is growing, there exists a large void in empirical research. This paper addresses this void by analysing the redistributive and budgetary impact of wealth taxes in six European countries using the perspective of the joint distribution of income and wealth. We use data from the Eurosystem Household Finance and Consumption Survey (HFCS) and EUROMOD. We show that existing wealth taxes do not achieve any significant redistribution. Although they are in most cases strongly progressive, the low redistributive effect is mainly due to their small size. Moreover, there is a lack of neutrality in the tax system with regard to the source from which households draw their financial living standard: income or wealth. Hence, existing wealth taxes score badly on both vertical and horizontal equity grounds.
    Date: 2020–10–06
  5. By: Mark Duggan; Gopi Shah Goda; Gina Li
    Abstract: The Affordable Care Act (ACA) not only changed the landscape of health insurance coverage in the United States, but also affected the relationship between working decisions and health insurance. In this paper, we estimate the impact of the ACA on the near-elderly (ages 60-64) in the five years after the implementation of its key provisions in early 2014. We exploit variation across geographic areas in the pre-existing level of uninsurance and use 65-69 year olds, whose insurance coverage was unaffected by the ACA, as a within-region control group. Our findings indicate that the ACA increased health insurance coverage among the near elderly by approximately 4.5 percentage points and reduced their labor force participation rate by approximately 0.6 percentage points.
    JEL: H2 H31 H51 H75 I13 J14 J21 J26
    Date: 2020–10
  6. By: Dominik Sachs (University of Applied Sciences [Munich]); Aleh Tsyvinski (Yale University [New Haven]); Nicolas Werquin (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: We study the incidence of nonlinear labor income taxes in an economy with a continuum of endogenous wages. We derive in closed form the effects of reforming nonlinearly an arbitrary tax system, by showing that this problem can be formalized as an integral equation. Our tax incidence formulas are valid both when the underlying assignment of skills to tasks is fixed or endogenous. We show qualitatively and quantitatively that contrary to conventional wisdom, if the tax system is initially suboptimal and progressive, the general-equilibrium trickle-down forces may raise the benefits of increasing the marginal tax rates on high incomes. We finally derive a parsimonious characterization of optimal taxes.
    Keywords: Optimal income taxation,Nonlinear taxes,Tax incidence,Trickle-down effects,General equilibrium
    Date: 2020–03
  7. By: Petr Jansky (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic); Markus Meinzer (Tax Justice Network, London, United Kingdom); Miroslav Palansky (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic); Leyla Ates (Tax Justice Network, London, United Kingdom); Alex Cobham (Tax Justice Network, London, United Kingdom); Moran Harari (Tax Justice Network, London, United Kingdom); Lucas Millan-Narotzky (Tax Justice Network, London, United Kingdomuthor-Name:)
    Abstract: The geography of corporate profit shifting is often presented in public discourse in simplistic and inaccurate terms. Not only can this easily mislead audiences, but it shapes political responses to the problem in such a way as to undermine the prospects for genuine progress. In this paper, we set out a new approach to the geography of profit shifting, based on a range of objectively verifiable criteria. These are combined in the Corporate Tax Haven Index, published for the first time in 2019. We present the technical argument for the index as a meaningful representation of the global distribution of the risks of corporate tax abuse and explore the new geography that emerges. The key findings show the UK’s dominant responsibility for corporate tax avoidance risks and the colonial roots of many exploitative double tax treaties. We end by considering the index’s political implications for the immediate process of international tax reform, and for the longer-term prospects for global governance in this area. We conclude that greater clarity about the geography of profit shifting is likely to support growing demands for redistribution not only of taxing rights but also of decision-making power in the global architecture for tax governance.
    Keywords: Corporate tax, multinational corporations, tax, transparency, tax avoidance, tax havens, profit shifting
    JEL: F36 F63 F65 H26 O16
    Date: 2020–09
  8. By: George Casamatta (Laboratoire Lieux, Identités, eSpaces et Activités (LISA))
    Abstract: We consider an infinite-horizon economy populated by two types of individuals, some individuals being more productive than others. Individuals live one period and are altruistic toward their children. Assuming that the allocation received by a given individual depends only on his type and the one of his parent, we first determine the second-best steady state allocation and then study the optimal bequest and labor income tax functions, that are assumed to be separable. We first show that the second-best is not implementable with such tax schedules. We then demonstrate that it may be desirable to tax large bequests (and to subsidize low bequests), provided that individuals are sufficiently altruistic and the less productive individuals are sufficiently numerous. The taxation of large bequests is however not always part of the optimal solution. A numerical example suggests that no taxation of bequests is needed under moderate altruism, while large bequests should be subsidized when individuals are poorly altruistic.
    Keywords: bequests, taxation, steady state
    JEL: H21 H24
    Date: 2020–05
  9. By: James R. Hines Jr.
    Abstract: Higher corporate taxes reduce corporate business operations, replacing them with operations by noncorporate businesses that are risky and have undiversified ownership. This shift contributes to income dispersion, with effects so large that higher corporate taxes can increase income inequality even when the corporate tax burden falls entirely on capital owned disproportionately by the rich. Estimates suggest that the riskiness of U.S. noncorporate business increases by 12.3% the aggregate income of the top one percent, and that income dispersion created by a higher U.S. corporate tax rate offsets more than half of the distributional effects of reducing average returns to capital.
    JEL: D31 H22 H25
    Date: 2020–10
  10. By: Arjan Lejour (CPB Netherlands Bureau for Economic Policy Analysis); Simon Rabaté (CPB Netherlands Bureau for Economic Policy Analysis); Maarten van 't Riet (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: As long as there have been taxes, people have tried to avoid and evade them. Interest in these phenomena has been fueled by the effects on public revenues, as well as on the distribution of wealth and income. One prominent example of tax evasion is the hiding of wealth and income in tax havens. According to estimates by Zucman (2013), 8% of global financial wealth, or $5.9 trillion, is held in tax havens. During the global financial crisis of the late 2000s, the G20 countries vowed to tackle offshore tax evasion and proclaimed the end of the “era of banking secrecy”. In recent years, leaks containing confidential information from financial institutions as well as academic research investigating leaks and tax amnesties have confirmed the popular narrative that tax evasion is concentrated among the wealthiest in society (Alstadsæter, Johannesen and Zucman, 2018, 2019). This does not only affect public revenues, but also the measurement of wealth and income inequality. We use unique microdata to study tax evasion in the Netherlands. We have received data on over 27,000 participants to the Dutch tax amnesty between the years 2002 and 2018. In addition, we have data on households who appeared in recent information requests to 4 different Swiss banks. We link these data to administrative data on income, wealth, and demographics covering the entire Dutch population.
    JEL: H26 H87 E21
    Date: 2020–10
  11. By: Pertti Haaparanta; Ravi Kanbur; Tuuli Paukkeri; Jukka Pirttilä; Matti Tuomala
    Abstract: A common claim in the policy discourse is that a government wishing to achieve equality of opportunity should use public provision of education for equalisation of opportunities rather than income taxation, which only equalizes incomes. We develop a framework in which the tax and education provision rules in the welfarist and non-welfarist/equality of opportunity cases can be transparently compared. We show that in addition to education policies, progressive taxation also plays a role in achieving equality of opportunity, and illustrate how its use may differ under the two objectives. We also show how the provision of public education depends on how private education choices respond, potentially differentially by higher- and lower-income families.
    Keywords: educational subsidies, equality of opportunity, income taxation, inequality, public good provision
    JEL: H21 H40 O12
    Date: 2020
  12. By: Jacob Goldin; Katherine Michelmore
    Abstract: The Child Tax Credit (CTC) provides a cash transfer of up to $2,000 per child under age 17 to millions of families in the United States. Using the Current Population Survey, we examine the aggregate effects and distributional implications of the rules governing children’s eligibility for the credit. While approximately 90% of all children qualify for at least a partial CTC, we document striking disparities in eligibility by income and race. The vast majority of children living in households in the bottom decile of the national AGI distribution are completely ineligible for the CTC and the majority of filers in the bottom thirty percent are eligible only for a partial credit. In contrast, virtually all children living in households in the top half of the income distribution qualify for the full credit amount. Approximately three-quarters of white and Asian children are eligible for the full CTC, compared to only about half of Black and Hispanic children. We use our results to estimate the distributional effects of a range of reforms to the CTC eligibility rules. Our results suggest that reforming the credit to include a larger share of children would more evenly distribute the credit’s benefits across children of different races and incomes.
    JEL: H2
    Date: 2020–10

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