nep-pbe New Economics Papers
on Public Economics
Issue of 2020‒11‒16
fourteen papers chosen by
Thomas Andrén

  1. Labour Taxation in Romania: Revised, but not changed By Wojciech Balcerowicz; Anamaria Maftei; Janos Varga
  2. Labour Tax Shift in Slovenia: Effects on Growth, Equality and Labour Supply By Karolina Gralek; Silvia De Poli; Philipp Pfeiffer; Sara Riscado; Wouter van der Wielen
  3. Discrete earnings responses to tax incentives: Empirical evidence and implications By Tuomas Kosonen; Tuomas Matikka
  4. The Impact of Taxes and Wasteful Government Spending on Giving By Roman M. Sheremeta; Neslihan Uler
  5. The Effect of Relabeling and Incentives on Retirement: Evidence from the Finnish Pension Reform in 2005 By Ohto Kanninen; Terhi Ravaska; Jon Gruber; Satu Nivalainen; Roope Uusitalo
  6. Employment Effects of the Earned Income Tax Credit: Taking the Long View By Schanzenbach, Diane Whitmore; Strain, Michael R.
  7. Taxation trends in the European Union: 2018 edition By European Commission
  8. Labour Tax and Child Benefits Reform in Lithuania: For Better or Worse? By Aurelija Anciūtė; Viginta Ivaškaitė-Tamošiūnė; Anamaria Maftei; Janos Varga
  9. Designing Direct Tax Reforms: Alternative Approaches By Alinaghi, Nazila; Creedy, John; Gemmell, Norman
  10. Mortgage Tax Reforms in Sweden: Scope for a Double Dividend? By Isabelle Justo; Julien Hartley; Fidel Picos; Sara Riscado
  11. Is VAT also a corporate tax? Untangling tax burdens and benefits for companies By Roxan, Ian
  12. Pension Reform in Sweden: Sustainability and Adequacy of Public Pensions By Hanna Aspegren; Jorge Durán; Maarten Masselink
  13. Age-Related Taxation of Bequests in the Presence of a Dependency Risk By Marie-Louise Leroux; Pierre Pestieau
  14. Ownership Pattern of Public Debt in India: A Study By Kumar B, Pradeep; R, Ramya

  1. By: Wojciech Balcerowicz; Anamaria Maftei; Janos Varga
    Abstract: In 2018 the structure of labour taxation in Romania changed substantially: the social security contributions' (SSC) burden shifted almost entirely to employees, the flat personal income tax (PIT) rate was cut and the PIT-free allowance increased. These changes followed the Unified Wage Law (UWL) adopted in 2017, which significantly increased the wages in the public sector. The government also increased the gross minimum wage and encouraged the social partners to re-negotiate salaries in the private sector, so that net wages would not decrease following the shift of social contributions to the employee side. This economic brief analyses the redistributive and macroeconomic impact of all of these reforms using EUROMOD, the microsimulation model for the European Union Member States, with QUEST, the European Commission’s dynamic stochastic general equilibrium model. According to our simulation results, the cumulative impact of the reforms slightly increases both market and disposable income inequality. Low-income employees gain marginally from the higher minimum wage, while the self-employed would be better off only by opting not to pay the social contributions, i.e. renouncing national insurance protection. In the longer run, the reforms are likely to have a negative effect on GDP and employment due to the wage pressure from higher public sector salaries and increased minimum wages. The general government deficit increases, although by significantly less than the raise that would have happened if the UWL had not been accompanied by the SSC shift.
    Keywords: Romania, labour taxation reforms, tax shift, inequality, minimum wages, public sector wages, country focus, economic brief, Balcerowicz, Martei, Varga.
    JEL: H10 H24 H25 H50 H60
    Date: 2019–09
  2. By: Karolina Gralek; Silvia De Poli; Philipp Pfeiffer; Sara Riscado; Wouter van der Wielen
    Abstract: The high tax burden on labour in Slovenia is likely to have an adverse effect on labour market outcomes and, in turn, potential GDP. This effect is particularly relevant in an ageing country whose active population is expected to shrink. International institutions have been recommending to Slovenia to rebalance its tax mix away from labour to more growth-friendly tax bases. In October 2019, the parliament adopted changes to the tax code to reduce labour taxes by lowering tax rates, raising tax brackets and increasing the general allowance. Against this background, this economic brief considers the potential effects of the reform, as proposed by the Ministry of Finance in summer 2019, on growth, income equality and labour supply, and weighs it against alternative scenarios. The aim is to highlight potential trade-offs and synergies. We use the European Commission macroeconomic QUEST model to show that the tax shift from labour to corporate income would be more distortive to growth than a shift to the recurrent tax on immovable property, which is currently relatively low in Slovenia. Based on the EUROMOD tax-benefit microsimulation model, we find that a lower tax burden on labour could reduce income inequality and increase labour supply. The effects depend on the design of the reform.
    Keywords: Slovenia, tax shift, tax burden on labour, personal income tax, corporate income tax, recurrent tax on immovable property, Labour tax shift in Slovenia: Effects on growth, equality and labour supply, Gralek, De Poli, Pfeiffer, Riscado, van der Wielen.
    JEL: H21 H24 H31 E62
    Date: 2020–09
  3. By: Tuomas Kosonen (Palkansaajien tutkimuslaitos); Tuomas Matikka
    Abstract: We study the consequences of discrete rather than continuous earnings choice sets on individual responses to income taxes. In our empirical application, we utilize an income notch created by the study subsidy system for higher education students in Finland and a reform that shifted out the location of this notch. We find that the reform, which changed the income tax schedule by increasing the location of the notch from 9,000 euros to 12,000 euros, affected the income distribution from earnings of about 2,000 euros onward. Because the tax schedule did not change around these lower incomes, the wide-ranging response to the reform constitutes a puzzle from a standard model point of view. We develop further results, theoretical arguments and a simulation model that all suggest that the shifting of the distribution can be explained with discrete earnings choices. Moreover, we discuss the welfare implications of discrete earnings choices, and find that welfare losses can be greater than empirically estimated if the underlying behavior is constrained by discrete earnings and they are thought to be represented by continuous earnings choices.
    Keywords: Tax incentives, optimization frictions, discrete earnings choices
    JEL: H21 H24 J22
    Date: 2019–01–17
  4. By: Roman M. Sheremeta (Weatherhead School of Management, Case Western Reserve University and Economic Science Institute, Chapman University); Neslihan Uler (Agricultural and Resource Economics, University of Maryland)
    Abstract: We examine how taxes impact charitable giving and how this relationship is affected by the degree of wasteful government spending. In our model, individuals make donations to charities knowing that the government collects a flat-rate tax on income (net of charitable donations) and redistributes part of the tax revenue. The rest of the tax revenue is wasted. The model predicts that a higher tax rate increases charitable donations. Surprisingly, the model shows that a higher degree of waste decreases donations (when the elasticity of marginal utility with respect to consumption is high enough). We test the model’s predictions using a laboratory experiment with actual donations to charities and find that the tax rate has an insignificant effect on giving. The degree of waste, however, has a large, negative and highly significant effect on giving.
    Keywords: charitable giving, tax, waste, redistribution, experiment, public goods provision, neutrality, income inequality
    JEL: C93 D64 H21
    Date: 2020
  5. By: Ohto Kanninen (Palkansaajien tutkimuslaitos); Terhi Ravaska; Jon Gruber; Satu Nivalainen; Roope Uusitalo
    Abstract: We exploit a reform in the Finnish public pension system in 2005 to study the effect of financial incentives (wealth effect and substitution effect) and relabeling of pensions on retirement decisions. These effects are distinguishable in the reform due to a heterogeneous, although correlated, impact of the reform on individuals. Relabeling in the reform means renaming the pension type from early retirement to full retirement based on age. Incentives were affected as a function of age and accrual-to-earnings ratio. Wefind that all three effects played a role. We show that the relabeling alone explains mostof the immediate behavioral impact of the reform.
    Keywords: Retirement, substitution effect, wealth effect, relabeling, pension reform
    JEL: D9 H55 H75 J14 J26
    Date: 2019–06–06
  6. By: Schanzenbach, Diane Whitmore (Northwestern University); Strain, Michael R. (American Enterprise Institute for Public Policy Research)
    Abstract: The Earned Income Tax Credit (EITC) is the cornerstone U.S. anti-poverty program, typically lifting over 5 million children out of poverty each year. Targeted to low-income households with children, and only available to those who work, the EITC contains strong incentives for non-workers to become employed. Most of the existing economics literature focuses on federal EITC expansions in the 1980s and 1990s. This paper takes a longer view, studying all federal expansions since the program's inception in 1975. We find robust evidence that EITC expansions increase the extensive margin of labor supply.
    Keywords: earned income tax credit, EITC, labor supply
    JEL: J22 J28 H31 I38
    Date: 2020–10
  7. By: European Commission
    Abstract: This report contains a detailed statistical and economic analysis of the tax systems of the Member States of the European Union, plus Iceland and Norway, which are Members of the European Economic Area. The data are presented within a unified statistical framework (the ESA2010 harmonised system of national and regional accounts), which makes it possible to assess the heterogeneous national tax systems on a fully comparable basis.
    Keywords: European Union, taxation
    JEL: H23 H24 H25 H27 H71
    Date: 2020–07
  8. By: Aurelija Anciūtė; Viginta Ivaškaitė-Tamošiūnė; Anamaria Maftei; Janos Varga
    Abstract: In 2019, Lithuania overhauled the country’s labour taxation. Social insurance contributions paid by employers and employees were consolidated, and were accompanied by adjustments in gross wages and personal income tax rates, and increases in the minimum gross wage and the tax-free allowance. Simultaneously, the government increased the universal child benefit. Simulations based on the EUROMOD and QUEST models are used to assess the fiscal, redistributive, equity and macroeconomic impact of these reforms. Overall, the set of simulated changes marginally decreases the tax wedge, poverty and income inequality. The labour taxation reform is estimated to be costly, with a small stimulating effect on the economy.
    Keywords: Lithuania, labour taxation, child benefits, social insurance contributions, minimum wage, tax wedge, disposable income, income inequality, poverty, growth, Anciūtė, Ivaškaitė-Tamošiūnė, Maftei, Varga.
    JEL: D04 D31 D63 E62 H23
    Date: 2020–09
  9. By: Alinaghi, Nazila; Creedy, John; Gemmell, Norman
    Abstract: How high should the top personal income tax rate be? Is there an `optimal' structure of tax rates and thresholds? Despite numerous value judgements being required to answer such questions, this paper suggests that 'rational policy analysis' principles can nevertheless be applied to support policy advice on these and other direct tax design questions. It is argued that the economic models thought suitable as the basis for tax analysis vary according to the precise ways in which the policy question is formulated; the underlying behavioural responses to taxation expected across the taxpaying population; the precise definitions of key variables such as income inequality; and the specification of policy objectives such as redistribution, revenue-raising or tax efficiency.
    Keywords: Tax policy, Tax reform, Tax rates,
    Date: 2020
  10. By: Isabelle Justo; Julien Hartley; Fidel Picos; Sara Riscado
    Abstract: Since the inception of the macroeconomic imbalance procedure in 2011, Sweden has been identified as having an imbalance related to increasing house prices and private indebtedness. Tax incentives for property ownership and mortgage debt are widely seen as important structural drivers behind household debt growth and overvalued house prices. Against this backdrop, the Council of the EU has asked Sweden to limit mortgage interest deductibility (MID). At the same time, despite a strong labour market with the highest employment rate in the EU, not all groups have benefited from job opportunities to the same extent. In particular, low-skilled workers have lower participation and employment rates, while their unemployment rate was, with 18.5% in 2017, well above the overall unemployment rate of 6.7%. Against this background, this economic brief considers shifting taxes from labour to property as a way to tackle macroeconomic vulnerabilities in the housing sector and labour market challenges in Sweden. We use the EUROMOD tax-benefit microsimulation model and the European Commission QUEST model to show that eliminating the MID, and using the additional tax revenues (around 0.3% of GDP) created to reduce, in a targeted way, labour taxes for vulnerable groups, could support their employment, while removing a structural driver of household debt growth.
    Keywords: imbalance, mortgage interest deductibility, tax shift, Mortgage Tax Reforms in Sweden: Scope for a Double Dividend?, Isabelle Justo, Julien Hartley, Fidel Picos, Sara Riscado.
    JEL: H30 J68
    Date: 2019–09
  11. By: Roxan, Ian
    Abstract: The Great Financial Crisis has increased concerns about whether corporations are paying a ‘fair’ amount of tax in different countries. This begs the question of what a ‘fair’ amount of tax is. The question is complicated by the continuing lack of clarity about the economic incidence of corporate income tax. Recently, it has been argued that the location of the sales revenue (turnover) of a corporation is relevant in determining the fair allocation. Of course, in many countries there is already a tax based on sales, value-added tax (VAT), also called goods and services tax (GST). This paper explores an illustration, arising from a series of cases before the European Court of Justice, of how VAT can impose a burden on corporations. The illustration raises issues of principle for VAT, but also offers lessons about how we tax corporations, particularly given proposals such as for digital sales taxes in the EU and the idea of a destination-based cash-flow tax included in legislative proposals in the US in 2016. This article explores the puzzles raised by the illustration and shows how it can throw light not only on the nature of VAT but also on the incidence of corporate income tax.
    Keywords: value added tax; corporate income tax; holding companies; economic incidence of tax; globalisation and tax
    JEL: E6 R14 J01
    Date: 2020–03
  12. By: Hanna Aspegren; Jorge Durán; Maarten Masselink
    Abstract: The Swedish pension system was among the first to shift to a system of notional accounts. The aim was to render it fair, transparent, and sustainable and the reform enjoyed a broad consensus across the political spectrum. The reform was radical and complemented the public pension with an occupational pension. In addition, while the public pension remained pay-as-you-go, it became a defined-contribution scheme: contributions are fixed and benefits are later computed as a function of these contributions and life expectancy. This paper takes stock 20 years after the reform. It argues that the reform has rendered the system fiscally sustainable and politically stable but raises concerns about benefits' adequacy because the cost of ageing is shifted onto pensioners. Substandard pensions may lead to ad hoc interventions that go against the aim of automatism/transparency. These adjustments may be seen as hidden costs that could ultimately put pressure on the very sustainability the new scheme is supposed to guarantee.
    Keywords: Pension reform, Adequacy, Public pension, Occupational pension, Aspegren, Durán, Masselink.
    JEL: H55 J32
    Date: 2019–07
  13. 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 dependance. 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 recom-mends 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: 2020–11–02
  14. By: Kumar B, Pradeep; R, Ramya
    Abstract: To bridge the inevitable gap between the expenditure and revenue of governments, public debt has been resorted to increasingly by the government all over the world. In India, too, public debt has been reckoned as a device though which governments attempt to garner enough resources for both developmental and non-developmental activities. The present paper looks into the change and pattern in the ownership of public debt in India in recent years. In recent times, there has been a slight decline in the State government securities issued in India. Provident Funds have become dominant and permanent owners of state government securities in Indi, especially in recent times. Commercial banks in India are the main owners of GOI dated securities. Half of the T-Bills have been held by the Commercial Banks in the country. Mutual Funds also have been buying the Treasury Bills on a large scale. Provident Funds (PFs) do not seem to be interested in engaging in Treasury Bills operations in the country.
    Keywords: Public Debt, Ownership of PD, Commercial Banks (CBs), Insurance Companies (ICs), Mutual Funds (MFs), Provident Funds (PFs), GOI Dated Securities, Treasury Bills (TBs)
    JEL: H20
    Date: 2020–03–20

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