nep-pbe New Economics Papers
on Public Economics
Issue of 2020‒11‒02
ten papers chosen by
Thomas Andrén

  1. Behavioral Responses to Inheritance and Gift Taxation: Evidence from Germany By Ulrich Glogowsky
  2. International trade and tax-motivated transfer pricing By Quint, Ansgar F.; Rudsinske, Jonas F.
  3. Economic growth and income distribution implications of public spending and tax decisions By Darvas, Zsolt
  4. Why Is Corporate Tax Revenue Stable While Tax Rates Fall? Evidence from Firm-Level Data By Clemens Fuest; Felix Hugger; Susanne Wildgruber
  5. Are CEO Overconfidence and Audit Firm Size Related To Tax Avoidance? By Paulina Sutrisno
  6. Internal digitalization and tax-efficient decision making By Klein, Daniel; Ludwig, Christopher A.; Nicolay, Katharina
  7. Redistributive Capital Taxation Revisited By Ozlem Kina; Ctirad Slavik; Hakki Yazici
  8. Information Theory and an Entropic Approach to an Analysis of Fiscal Inequality By Vo, Duc
  9. How do taxes affect the trading behavior of private investors? Evidence from individual portfolio data By Buhlmann, Florian; Doerrenberg, Philipp; Voget, Johannes; Loos, Benjamin
  10. Informality, Consumption Taxes and Redistribution By Bachas, Pierre; Gadenne, Lucie; Jensen, Anders

  1. By: Ulrich Glogowsky
    Abstract: The desirability of inheritance and gift taxes depends on individuals’ tax responsiveness. This paper demonstrates how strongly, and in what way, the German inheritance and gift tax influences taxpayer behavior. To that end, it combines administrative data with cross-bracket tax variation: a convex kink in the tax liability precedes a concave kink. Extending the bunching approach to such double-kinked tax schedules, I document that individuals tailor their taxable wealth transfers to the schedules. One type of response dominates for inheritances: testators engage in testament planning. The magnitude of the testament-planning response is comparable to that of inter vivos gifts. However, neither the overall responses of gifts nor those of inheritances heavily interfere with tax revenue collection: the associated short-run net-of-tax elasticities of taxable wealth transfers lie below 0.1.
    Keywords: wealth-transfer tax, inheritance tax, gift tax, estate tax, real responses, tax avoidance, tax evasion, behavioral responses, bunching at kinks
    JEL: H20 H20 H21 H24 H26 H31
    Date: 2020
  2. By: Quint, Ansgar F.; Rudsinske, Jonas F.
    Abstract: We study the welfare and distribution effects of corporate taxation and transfer pricing in an asymmetric general oligopolistic equilibrium trade model. Without profit shifting, an increasing profit tax rate shifts welfare towards the taxing country, where it also decreases real wages, whereas real wages rise in the other country. Labor income increases relative to profit income in both countries. Transfer pricing generates an additional benefit from exporting, such that companies want to expand production. Caused by this supply channel, real wages will rise in both countries. Due to shifting tax incomes, a cross-country demand channel relocates consumption from the high- to the low-tax country. In the low-tax country, real profits decrease such that the labor share of income rises.
    Keywords: general oligopolistic equilibrium,international trade,labor share,profit shifting,tax evasion,transfer pricing
    JEL: E25 F10 H25 H26 L13
    Date: 2020
  3. By: Darvas, Zsolt
    Abstract: The level and composition of public expenditures and revenues both have implications for economic development, as shown by the ‘fiscal multiplier’ and the ‘quality of public finance’ literature. Public finance decisions also influence the distribution of income. Based on a review of the literature, I argue for a fair distribution of income as reflected in low-income inequality, not particularly because of the impact of income inequality on long-term growth (which is a controversial issue), but primarily because income inequality typically implies inequality of opportunity. European Union countries have very diverse public finance structures and different levels of effectiveness and there is room for improvement in the growth and equality impacts in all countries. A general guideline would be that the most effective approach comprises progressive taxes and inheritance taxes, spending on education, health and public infrastructure, and better government effectiveness. At the height of the 2008 global crisis and the subsequent European financial and economic crises, the fiscal consolidation strategies of EU countries largely relied on cutting public investment and social spending (except pensions), which is the opposite of what is suggested in the literature. Better fiscal rules and good fiscal institutions are needed to safeguard growth- and distribution-friendly expenditures in a crisis.
    Keywords: taxation, public pending, economic growth, income inequality
    JEL: D63 H20 H50 O40
    Date: 2020
  4. By: Clemens Fuest; Felix Hugger; Susanne Wildgruber
    Abstract: While corporate tax rates in OECD countries declined over the last decades, revenues from corporate taxation relative to GDP remained remarkably stable. This paper uses a comprehensive firm-level dataset to provide an explanation for this rate-revenue puzzle in corporate taxation. Focusing on the period 1995-2016, we show that the reduction in corporate tax rates was counterbalanced by a pronounced increase in corporate profits before taxes. We decompose the rise in profits into changes in EBITDA, depreciation, and financial profits. On average, these three factors contributed almost equally to the tax base expansion, albeit differently across sectors, countries, and firm sizes.
    Keywords: corporate income taxation, corporate tax revenues, corporate profitability
    JEL: H25
    Date: 2020
  5. By: Paulina Sutrisno (Accounting Department, Trisakti School of Management, Indonesia Author-2-Name: Kashan Pirzada Author-2-Workplace-Name: Asian Research Institute for Corporate Governance (ARICG) and Tunku Puteri Intan Safinaz School of Accountancy, Universiti Utara Malaysia, Sintok, Malaysia Author-3-Name: Author-3-Workplace-Name: Author-4-Name: Author-4-Workplace-Name: Author-5-Name: Author-5-Workplace-Name: Author-6-Name: Author-6-Workplace-Name: Author-7-Name: Author-7-Workplace-Name: Author-8-Name: Author-8-Workplace-Name:)
    Abstract: Objective - This study aims to examine whether audit firm size mitigates the relationship between CEO overconfidence and tax avoidance. CEO overconfidence has the characteristics of a very high level of self-confidence which influences the pattern of thought and the way they make strategic decisions. CEO overconfidence has a tendency to avoid taxes. It aims to show competence in tax management and raise funds for investment. External party oversight, such as by audit firms, will mitigate the relationship between CEO overconfidence and tax avoidance through an attitude of independence, as well as competence and function as examiners of the company's financial reporting. Methodology/Technique - This study uses a sample of Indonesian non-financial companies in the period 2013-2017. This study analyses the data with statistical methods using linear multiple regression. Finding - The results of this study indicate that CEO overconfidence is positively related to tax avoidance, while audit firm size is negatively related to tax avoidance. However, this study has not been able to prove the influence of audit firm size on the relationship between CEO overconfidence and tax avoidance.
    Keywords: CEO overconfidence; Tax Avoidance; Audit Firm Size; Big 4; Book Tax Difference.
    JEL: M41 M49
    Date: 2020–09–30
  6. By: Klein, Daniel; Ludwig, Christopher A.; Nicolay, Katharina
    Abstract: Our study investigates firms' internal digitalizationas a crucial foundation for timely, data-driven decision making. We evaluate the association between digital infrastructure and improved decision making intax planning decisions to analyze if the benefits of digitalization expand beyond firms' core business functions. The novel use of a survey that identifies European firms' digital infrastructure over the period from 2005 to 2016 allows us to create an index of IT sophistication. Using this index, we extend prior approaches and observe the effectiveness of tax planning decisions in terms of a firm's ability to exploit income shifting incentives. Our empirical analysis confirms the prediction that digitalized firms respond more efficiently to income shifting incentives. Further, we provide evidence that firms with sophisticated IT are more reactive to shocks in the income shifting incentive than non-digital firms. Our results suggest that internal digitalization allows firms to efficiently monitor and manage internal processes and to strategically price internal transactions. With this work, we are the first to document the association of digitalization and the performance of firms' support functions.
    Keywords: Digital Transformation,Digitalization,Firm Performance,Decision Making,Multinational Corporations,Business Taxation,Information Technology,Profit Shifting
    JEL: O33 L25 H25 H26 K34
    Date: 2020
  7. By: Ozlem Kina; Ctirad Slavik; Hakki Yazici
    Abstract: This paper shows that capital-skill complementarity provides a quantitatively significant rationale to tax capital for redistributive governments. The optimal capital income tax rate is 60%, which is significantly higher than the optimal rate of 48% in an identically calibrated model without capital-skill complementarity. The skill premium falls from 1.9 to 1.67 along the transition following the optimal reform in the capital-skill complementarity model, implying substantial indirect redistribution from skilled to unskilled workers. These results show that a government that cares about redistribution should take into account capital-skill complementarity in production when setting the tax rate on capital income.
    Keywords: capital taxation; capital-skill complementarity; inequality; redistribution;
    JEL: E25 J31
    Date: 2020–10
  8. By: Vo, Duc
    Abstract: In his influential study, Theil (1967) developed the notion of entropy on the basis of information theory. He then advocated the use of entropy-based measure for the analysis of income inequality. In this paper, the first of its kind, we apply Theil’s notion of entropy to public finances in multi-tiered governments, in particular for a measurement of fiscal decentralisation, which is currently very crude in terms of the ratio between local government revenue and total revenue. It is the claim of this paper that such an approach of measuring fiscal decentralisation completely ignores important distributional aspects of fiscal arrangements. Findings from this paper indicate that studies on measuring various aspects of fiscal activities—such as fiscal decentralisation—should carefully take into account the dispersion of revenue (and expenditure) across regions. On that basis, the entropic approach developed in this paper is able to accommodate these dispersions across subnational governments. As an illustration for the case of Vietnam, the true degree of fiscal decentralization has e�ectively been decreased in comparison with estimates from other simple measurements due to the presence of substantial dispersions of revenue and expenditure from the subnational governments across 63 provinces in Vietnam
    Keywords: entropy; dispersion; entropic approach; fiscal decentralisation; measurement
    JEL: C02 H11 H27 H50 H77
    Date: 2019–06–28
  9. By: Buhlmann, Florian; Doerrenberg, Philipp; Voget, Johannes; Loos, Benjamin
    Abstract: We exploit a large reform of capital-gains taxation in Germany combined with portfolio-level daily panel data to study the causal effect of taxes on individual stock-trading behavior and the disposition effect. We find substantial spikes in selling probabilities around an intertemporal tax discontinuity, and no such spikes after the abolishment of the discontinuity. Using difference-in-bunching methods, non-parametric regressions and effective tax rates, we quantify the tax effect and identify interesting patterns of heterogeneity. We further find evidence that the well-established disposition effect is strongly affected by the tax discontinuity through tax motivated selling of both gains and losses.
    Keywords: Taxation,Capital-gains,Private investors,Trading Behavior,Disposition Effect
    JEL: H20 C41 D14 G11
    Date: 2020
  10. By: Bachas, Pierre (World Bank Research); Gadenne, Lucie (University of Warwick, Institute for Fiscal Studies and CEPR); Jensen, Anders (Harvard Kennedy School and NBER)
    Abstract: Can consumption taxes reduce inequality in developing countries? We combine household expenditure data from 31 countries with theory to shed new light on the redistributive potential and optimal design of consumption taxes. We use the type of store in which purchases occur to proxy for informal (untaxed) consumption. This enables us to characterize the informality Engel curve: we find that the budget share spent in the informal sector steeply declines with income, in all countries. The informal sector thus makes consumption taxes progressive: households in the richest quintile face an effective tax rate that is twice that of the poorest quintile. We extend the standard optimal commodity tax model to allow for informal consumption and calibrate it to the data to study the effects of different tax policies on inequality. Contrary to consensus, we show that consumption taxes are redistributive, lowering inequality by as much as personal income taxes. Once informality is taken into account, commonly used redistributive policies, such as reduced tax rates on necessities, have a limited impact on inequality. In particular, subsidizing food cannot be justified on equity or efficiency grounds in several poor countries.
    Keywords: Household Budget Surveys, Inequality, Informality, Redistribution, Taxes JEL Classification: E26, H21, H23, 023
    Date: 2020

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