nep-pbe New Economics Papers
on Public Economics
Issue of 2020‒11‒09
twelve papers chosen by
Thomas Andrén

  1. Optimal Income Taxation with Labor Supply Responses at Two Margins: When Is an Earned Income Tax Credit Optimal? By Emanuel Hansen
  2. Taxation of Household Capital in EU Member States Impact on Economic Efficiency, Revenue and Redistribution By Savina Princen; Athena Kalyva; Alexander Leodolter; Cécile Denis; Adriana Reut; Andreas Thiemann; Viginta Ivaskaite-Tamosiune
  3. How Should Tax Progressivity Respond to Rising Income Inequality? By Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
  4. Austerity and Distributional Policy By Matteo Alpino; Zareh Asatryan; Sebastian Blesse; Nils Wehrhöfer
  5. The EITC and Maternal Time Use: More Time Working and Less Time with Kids? By Jacob Bastian
  6. Replicator Evolution of Welfare Stigma: Welfare Fraud vs. Incomplete Take-Up By Jun-ichi Itaya; Kenichi Kurita
  7. Optimal fuel taxation with suboptimal health choices By Sulikova, Simona; van den Bijgaart, Inge; Klenert, David; Mattauch, Linus
  8. Estimating the Costs of Filing Tax Returns and the Potential Savings from Policies Aimed at Reducing These Costs By Youssef Benzarti
  9. Redistributive Capital Taxation Revisited By Özlem Kina; Ctirad Slavik; Hakki Yazici
  10. Age-Related Taxation of Bequests in the Presence of a Dependency Risk By Marie-Louise Leroux; Pierre Pestieau
  11. Corporate Effective Tax Rates for Research and Policy By Petr Jansky
  12. The Long-Run Effects of the Affordable Care Act: A Pre-Committed Research Design Over the COVID-19 Recession and Recovery By Jeffrey Clemens; Drew McNichols; Joseph J. Sabia

  1. By: Emanuel Hansen
    Abstract: This paper studies optimal non-linear income taxation in a model with labor supply responses at the intensive (hours, effort) and extensive (participation) margins. It shows that an Earned Income Tax Credit (EITC) with negative marginal taxes and negative participation taxes at the bottom is optimal if, first, semi-elasticities of participation are decreasing along the income distribution and, second, social concerns for redistribution from the poor to the very poor are sufficiently weak. This result is driven by a previously neglected trade-off between distortions at the intensive margin and distortions at the extensive margin, i.e., between two aspects of efficiency. Numerical simulations suggest that a strong expansion of the EITC for childless singles in the US could be welfare-increasing.
    Keywords: optimal income taxation, extensive margin, intensive margin, earned income tax credit
    JEL: H21 H23 D82
    Date: 2020
  2. By: Savina Princen; Athena Kalyva; Alexander Leodolter; Cécile Denis; Adriana Reut; Andreas Thiemann; Viginta Ivaskaite-Tamosiune
    Abstract: Taxation of capital, including the taxation of capital income and stocks, could play an important role in increasing revenue efficiency and making the tax system fairer. Recent international tax developments on automatic exchange of information and administrative co-operation have increased the capacity of Member States to raise taxes from mobile tax bases such as capital income. This paper first analyses the tax treatment of household capital income. It presents the theoretical features of the optimal taxation of capital income and describes the tax treatment of income from different capital assets in EU Member States. The paper then focusses on the taxation of owner-occupied housing and measures the impact of specific tax features on the cost of home ownership by using an indicator-based analysis. Then, it analyses specific issues in capital gains taxation and their macroeconomic effects. Finally, the paper explores the possibilities of increasing revenue efficiency through wealth transfer taxes, i.e. inheritance and gift taxes. It provides an up-to-date review of the theoretical arguments and the practical implementation of such taxes in EU Member States and tries to shed light on the reasons why these taxes contribute only little to raising revenues.
    JEL: D1 D2 D3 E6 H2 H21 J08 J2
    Date: 2020–08
  3. By: Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
    Abstract: We address this question in a heterogeneous-agent incomplete-markets model featuring exogenous idiosyncratic risk, endogenous skill investment, and flexible labor supply. The tax and transfer schedule is restricted to be log-linear in income, a good description of the US system. Rising inequality is modeled as a combination of skill-biased technical change and growth in residual wage dispersion. When facing shifts in the income distribution like those observed in the US, a utilitarian planner chooses higher progressivity in response to larger residual inequality but lower progressivity in response to widening skill price dispersion reflecting technical change. Overall, optimal progressivity is approximately unchanged between 1980 and 2016. We document that the progressivity of the actual US tax and transfer system has similarly changed little since 1980, in line with the model prescription.
    Keywords: Optimal taxation; Income distribution; Skill-biased technical change; Tax progressivity; Incomplete markets; Labor supply; Redistribution; Inequality
    JEL: J22 H20 E20 J24 I22 D30
    Date: 2020–10–19
  4. By: Matteo Alpino; Zareh Asatryan; Sebastian Blesse; Nils Wehrhöfer
    Abstract: What are the effects of austerity on distributional policy? We exploit the autonomy of Italian municipalities in setting non-linear income taxes and the exogenous introduction of a fiscal rule to show that austerity increases tax progressivity. Consistent with this evidence, we find that in a panel of countries austerity correlates with higher marginal tax rates on top, but not on average earners. The increase in progressivity in Italy is driven by mayors having college-degree or working in high-skill occupations, while less-educated or lower-skilled mayors raise taxes uniformly. In the first post-reform election, mayors of former type have higher reelection odds.
    Keywords: austerity, fiscal rules, non-linear income taxation, difference-in-discontinuity
    JEL: D78 H24 H70
    Date: 2020
  5. By: Jacob Bastian (Rutgers University)
    Abstract: Parents spend considerable time and resources investing in their children's development. Given evidence that the Earned Income Tax Credit (EITC) aects maternal labor supply, we investigate how the EITC affects a broad array of time-use activities, focusing on the amount and nature of time spent with children. Using 2003-2018 time-use data, we find that federal and state EITC expansions increase maternal work time, which reduces time devoted to home production, leisure, and time with children. However, for children of all ages, almost none of the reduction comes from time devoted to "investment" activities, such as active learning and development activities.
    Keywords: EITC, tax policy, time use, child investment, female labor supply
    JEL: D13 H24 H31 H53 I31 I38 J13 J22
    Date: 2020–10
  6. By: Jun-ichi Itaya; Kenichi Kurita
    Abstract: There are two important problems in welfare benefit programs: the prevalence of welfare fraud, in which ineligible people receive welfare benefits, and incomplete take-up, whereby eligible poor people are reluctant to claim welfare benefits. This study investigates both of these opposing phenomena using simple replicator models of statistical discrimination and the tax-payer resentment view welfare stigma suggested by Besley and Coate (1992). We find multiple stable equilibria in the long run, one of which entails low welfare fraud and 100% incomplete take-up and the other of which entails high welfare fraud and complete take-up in either model, and, moreover, that an interior stationary equilibrium that allows for the coexistence of welfare fraud and incomplete take-up is unstable in the model of statistical discrimination view welfare stigma, but it is stable in the model of the tax-payer resentment view welfare stigma. This difference arises from the different nature of stigma cost functions in these two models.
    Keywords: stigma, replicator dynamics, incomplete take-up, welfare fraud, non-take-up
    JEL: H31 H53 I38
    Date: 2020
  7. By: Sulikova, Simona (University of Oxford); van den Bijgaart, Inge (Department of Economics, School of Business, Economics and Law, Göteborg University); Klenert, David (Joint Research Centre, European Commission,); Mattauch, Linus (University of Oxford)
    Abstract: Transport has a large number of significant externalities including carbon emissions, air pollution, accidents, and congestion. Active travel such as cycling and walking can reduce these externalities. Moreover, public health research has identified additional social gains from active travel due to health benefits of increased physical exercise. In fact, on a per mile basis, these benefits dominate the external social costs from car use by two orders of magnitude. We introduce health benefits and active travel options into an optimal taxation model of transport externalities to study appropriate policy responses. We characterise the optimal second-best fuel tax analytically: when physical exercise is considered welfare-enhancing, the optimal fuel tax increases. Under central parameter assumptions it rises by 49% in the US and 36% in the UK. This is due to the low fuel price elasticity of active travel. We argue that fuel taxes should be implemented jointly with other policies aimed at increasing the uptake of active travel to reap its full health benefits.
    Keywords: Transport Externalities; Congestion; Active travel; Fuel; Health Behaviour; Optimal Taxation
    JEL: H23 I12 Q58
    Date: 2020–10
  8. By: Youssef Benzarti
    Abstract: This paper estimates the cost of filing taxes and assesses several policy proposals aimed at reducing these costs. Using US tax returns, a quasi-experimental method and additional extrapolations based on survey evidence, I uncover three main findings. First, filing costs are large and have been steadily increasing over time. Second, part of this increase in filing costs can be attributed to an increase in the number of schedules filed per taxpayer. Third, pre-populating tax returns and offering free filing options can result in substantial cost savings for taxpayers.
    JEL: H0 H20
    Date: 2020–10
  9. By: Özlem 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. By: Marie-Louise Leroux; Pierre Pestieau
    Abstract: This paper studies the design of the optimal linear taxation of bequests when individuals differ in wage as well as in their risks of both mortality and old-age dependence. We assume that the government cannot distinguish between bequests motives, that is whether bequests resulted from precautionary reasons or from pure joy of giving reasons. Instead, we assume that it only observes the timing of bequests, that is whether they are made early in life or late in life. We show that, if the government is utilitarian, whether the taxation of early bequests should be given priority over the taxation of late bequests depends on the magnitude of insurance and redistributive concerns. While the efficiency concern unambiguously recommends taxation of early bequests, redistributive concerns yield ambiguous results. This indeterminacy comes from the fact that, in case of late death, the government cannot observe the health status of the deceased. Whether the taxation of early bequests should be given priority depends on the specific relationships between wages and both risks of early death and of old-age dependence, as well as on the concavity of the joy of giving utility function. If the government is Rawlsian, it is optimal to tax early bequests if the survival chances of the poorest agents are very low. If they survive, but their chances to remain autonomous are very low, it is then optimal to tax early bequests if the poorest agents contribute relatively less to the taxation of early bequests than to the taxation of late bequests or if the joy of giving utility is extremely concave.
    Keywords: bequest taxation, long term care, utilitarianism, Rawlsian welfare criterion, old-age dependency
    JEL: H21 H23 I14
    Date: 2020
  11. By: Petr Jansky (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic)
    Abstract: How much companies pay in corporate income taxes is often better captured by effective tax rates (ETRs) rather than by statutory ones. Economists further distinguish between those modelled using the law – forward-looking ETRs – and those estimated from actual data on companies’ profits and taxes – backward-looking ETRs. Moving beyond this binary distinction, I present a spectrum where backward-looking ETRs are further broken down by the type of data used to estimate them and where all ETRs may be located along with applicable statutory rates. Within that spectrum, I focus on backward-looking ETRs and, specifically, on those estimated using companies’ balance sheet databases. Based on my review of recent findings, I argue that backward-looking ETRs – of multinational corporations in particular – have become more frequently estimated thanks to advances in data availability while also becoming more relevant as a result of ongoing global corporate tax reform debates. Ultimately, I argue that the full range of various ETRs can play a useful role in both research and policy.
    Keywords: corporate income tax; effective tax rate; forward-looking effective tax rate; backward-looking effective tax rate; multinational corporation; profit shifting
    JEL: C81 F21 F23 H25 H26
    Date: 2020–10
  12. By: Jeffrey Clemens; Drew McNichols; Joseph J. Sabia
    Abstract: The long-run costs and benefits of social insurance expansions may not be realized until a program has been in place through a cycle of boom, bust, and recovery. In the case of the Affordable Care Act (ACA), the arrival of the program's inaugural bust and recovery have been hastened by the COVID-19 pandemic. In this context, our analysis begins by developing two facts. First, during the pre-pandemic boom, we show that the ACA's effects had largely stabilized by 2016. Second, we develop a new fact involving variations in the ACA's effects across industries. Specifically, we show that the ACA’s effects differed dramatically across industries with lower versus higher levels of pre-ACA insurance coverage, and that this difference cannot be explained by differences in workers’ incomes or other observable characteristics, nor by geographic differences in pre-ACA uninsured rates. Finally, we set the stage for pre-committed analyses of the ACA's effects over the remainder of the current cycle of boom, bust, and recovery. In so doing, we seek to advance the use of pre-committed research designs in observational settings.
    JEL: H51 H53 I13
    Date: 2020–10

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