nep-pbe New Economics Papers
on Public Economics
Issue of 2020‒11‒23
eleven papers chosen by
Thomas Andrén

  1. Redistributive Income Taxation with Directed Technical Change By Loebbing, Jonas
  2. The Inheritance and Gift Tax in Germany - Reform Potentials for Tax Revenue, Efficiency and Distribution By Beznoska, Martin; Hentze, Tobias; Stockhausen, Maximilian
  3. Tax preferences and optimal income taxation By Arbex, Marcelo Aarestru; Mattos, Enlinson
  4. The Incidence of VAT Evasion By Zareh Asatryan; David Gomtsyan
  5. The Structure of Business Taxation in China By Zhao Chen; Yuxuan He; Zhikuo Liu; Juan Carlos Suárez Serrato; Daniel Yi Xu
  6. Redistribution Through Tax Relief By Quitz\'e Valenzuela-Stookey
  7. Corruption, Tax reform and Fiscal space in Emerging and Developing Economies By Djedje Hermann Yohou
  8. Green Consumers, Emission Taxes, and Firm Relocation By Birg, Laura; Voßwinkel, Jan
  9. Taxation, Automation Capital, and the Functional Income Distribution By Süssmuth, Bernd; Irmen, Andreas; Heer, Burkhard
  10. Who Bears the Burden of Real Estate Transfer Taxes? Evidence from the German Housing Market By Dolls, Mathias; Fuest, Clemens; Krolage, Carla; Neumeier, Florian
  11. Housing Market Responses to Transfer Taxes: Evidence from a French Reform By Mathilde POULHES

  1. By: Loebbing, Jonas
    Abstract: This paper studies the implications of (endogenously) directed technical change for the design of non-linear labor income taxes in a Mirrleesian economy augmented to include endogenous technology development and adoption choices by firms. First, I identify conditions under which any progressive tax reform induces technical change that compresses the pre-tax wage distribution. The key intuition is that progressive tax reforms tend to increase labor supply of less skilled relative to more skilled workers, which induces firms to develop and use technologies that are more complementary to the less skilled. Second, I provide conditions under which the endogenous response of technology raises the welfare gains from progressive tax reforms. Third, I show that directed technical change effects make the optimal tax scheme more progressive, raising marginal tax rates at the right tail of the income distribution and lowering them (potentially below zero) at the left tail. For reasonable calibrations, the directed technical change effects of actual tax reforms on wage inequality appear to be small, but the impact of directed technical change on optimal taxes is considerable. Optimal marginal tax rates increase monotonically over the bulk of the income distribution instead of being U-shaped (as in most of the previous literature) and marginal tax rates on incomes below the median are reduced substantially
    Keywords: Optimal Taxation,Directed Technical Change,Endogenous Technical Change,Wage Inequality.
    JEL: H21 H23 H24 J31 O33
    Date: 2020
  2. By: Beznoska, Martin; Hentze, Tobias; Stockhausen, Maximilian
    Abstract: The inheritance tax is often seen as an effective tool to reduce wealth inequality, to raise public budgets if needed, and to increase incentives to work by lowering the tax burden on labour, which is especially high in Germany according to the OECD. The purpose of this paper is therefore to shed light on the question whether the inheritance tax is a promising tool for fighting wealth inequality without having distorting effects for the economy. For this purpose, the distributional effects of inheritances on the wealth distribution are evaluated for Germany first and are set into comparison with Austria and France using data from the Household Finance and Consumption Survey (HFCS). A change in the German inheritance tax law in 2009 is further used in a difference-in-difference analysis to identify the behavioural effects of the inheritance tax change on the volume of bequests, which are large and robust for different specifications. Second, the insight from part one is applied to design an inheritance tax reform for Germany. The potential tax revenue of the reform can be estimated by using the data from the inheritance and gift tax statistics for Germany. A revenue shift from income to inheritance tax could be used to increase work incentives by cutting the marginal tax rates for the working population. However, it turns out that taxing inheritances is accompanied by significant behavioural responses of donors via tax planning. Furthermore, the introduction of a flat tax model with a broad tax base would not generate large enough additional revenue to foster relevant employment effects.
    Keywords: Inheritance taxation,wealth distribution,redistribution,inequality,labour supply
    JEL: D31 H20
    Date: 2020
  3. By: Arbex, Marcelo Aarestru; Mattos, Enlinson
    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.
    Date: 2020–11
  4. By: Zareh Asatryan; David Gomtsyan
    Abstract: Who benefits from the evasion of value added taxes (VAT)? Using a reform that enforced VAT on previously non-compliant large retailers in Armenia, we estimate a one-third passthrough of the tax burden on prices. This suggests that pre-enforcement evasion rents were broadly shared with consumers through lower prices. Our theoretical and empirical results explain this low passthrough rate by the supply-chain effects and second-order compliance responses of firms to VAT enforcement. Our distributional analysis shows that households at the bottom of the income distribution benefit more from the rents of evasion.
    Keywords: value added tax, incidence, passthrough, evasion, enforcement, distributional effects
    JEL: D11 H22 H26
    Date: 2020
  5. By: Zhao Chen; Yuxuan He; Zhikuo Liu; Juan Carlos Suárez Serrato; Daniel Yi Xu
    Abstract: This paper documents facts about the structure of business taxation in China using administrative tax data from 2007 to 2011 from the State Taxation Administration. We first document the importance of different business taxes across industries. While corporate income taxes play an important role for manufacturing firms, these firms also remit a large share of their tax payments through the value-added tax system, through the excise tax system and through payroll taxes. Gross receipts taxes play an important role for firms in other industries, leading to spillovers that may affect the overall economy. Second, we evaluate whether the structure of China’s tax revenue matches its stage of development. A cross-country comparison of sources of government revenue shows that China collects a high share of tax revenue from taxes on goods and services and a high share of income tax on corporations. Finally, we study whether firm-level differences in effective tax rates can be an important source of allocative inefficiencies. Decomposing the variation in effective tax rates across firms, we find that government policies, including loss carry-forward provisions and preferential policies for regional, foreign, small, and high-tech firms, have significant explanatory power. Nonetheless, while effective tax rates vary along a number of dimensions, tax policy does not explain the large dispersion in the returns to factors of production across firms.
    JEL: E22 H25
    Date: 2020–11
  6. By: Quitz\'e Valenzuela-Stookey
    Abstract: This paper studies politically feasible policy solutions to inequities in local public goods provision. I focus in particular on the entwined issues of high property taxes, geographic income disparities, and inequalities in public education prevalent in the United States. It has long been recognized that with a mobile population, local administration and funding of schools leads to competition between districts. By accounting for heterogeneity in incomes and home qualities, I am able to shed new light on this phenomenon, and make novel policy recommendations. I characterize the equilibrium in a dynamic general equilibrium model of location choice and education investment with a competitive housing market, heterogeneous wealth levels and home qualities, and strategic district governments. When all homes are owner-occupied, I show that competition between strategic districts leads to over-taxation in an attempt to attract wealthier residents. A simple class of policies that cap and/or tax the expenditure of richer districts are Pareto improving, and thus politically feasible. These policies reduce inequality in access to education while increasing expenditure for under-funded schools. Gains are driven by mitigation of the negative externalities generated by excessive spending among wealthier districts. I also discuss the policy implications of the degree of homeownership. The model sheds new light on observed patterns of homeownership, location choice, and income. Finally, I test the assumptions and implications empirically using a regression discontinuity design and data on property tax referenda in Massachusetts.
    Date: 2020–11
  7. By: Djedje Hermann Yohou (International Monetary Fund (IMF))
    Abstract: Several studies have demonstrated that corruption hinders efforts in enhancing public revenue and fiscal space through different channels. This paper assesses the effect of tax reform on fiscal space conditional on corruption control for a large panel of developing and emerging economies over 1990-2016. Using a threshold approach, our findings indicate that tax reform effect on fiscal space is not monotonic and depends on corruption control. Tax reform enhances fiscal space and tax revenue when corruption control is better. The results also suggest that heterogeneity across countries and time does matter. Individual estimates of elasticity of fiscal space to tax reform support evidence that countries that benefit most from tax reform are those that prove enough ability to control corruption.
    Keywords: Corruption,Tax reform,Fiscal space,Threshold,Developing countries
    Date: 2020–11–03
  8. By: Birg, Laura; Voßwinkel, Jan
    Abstract: This paper studies the interaction of environmental policy and green preferences under potential firm relocation. A green firm and a brown firm choose the environ- mental quality of their products. Both an emission tax and consumers'willingness to pay for green products encourage investment in environmental quality. Firms may relocate to avoid taxation or abstain from investment in environmental quality to produce at lower cost. If the green firm does not relocate, both the green firm and the brown firm provide higher quality levels. Compared to first-best taxation, the equilibrium emission tax is lower (higher) if only the brown (green) firm relocates.
    Keywords: environmental policy,emission tax,green consumers,relocation
    JEL: H23 F18 L13 Q58
    Date: 2020
  9. By: Süssmuth, Bernd; Irmen, Andreas; Heer, Burkhard
    Abstract: The functional income distribution in the US and most OECD countries has been characterized by an increasing capital income share and a declining wage share over the last decades. We present new evidence for the US economy that this fact is not only explained by technical change and globalization, but also by the dynamics of capital and labor income taxation, automation capital, and population growth. In the empirical analysis, we find indications for cointegrating equations for the 1974-2008 period. Permanent effects on factor shares emanate from labor (relative to capital) tax shocks. Changes in relative factor taxation also permanently affect the use of robots. Variance decompositions reveal that taxing accounts for up to 22% and up to 35% of observed changes in the two income shares and in automation capital, respectively. In a second step, we present a standard neoclassical growth model augmented by automation capital and capital adjustment costs that is able to replicate the dynamics of the observed functional income distribution in the US during the 1965-2015 period. In particular, we demonstrate that the fall in the wage share would have been significantly smaller if labor and capital income tax rates had remained at their respective level of the 1960s.
    Keywords: Functional income distribution,labor income share,income taxes,automation capital,demography,growth
    JEL: D33 E62 O41 J11 J20
    Date: 2020
  10. By: Dolls, Mathias; Fuest, Clemens; Krolage, Carla; Neumeier, Florian
    Abstract: This paper examines the effects of real estate transfer taxes (RETT) on house prices using a rich micro dataset on German properties covering the period from 2005 to 2018. We exploit a 2006 constitutional reform that allowed states to set their own RETT rates, leading to frequent increases in states' tax rates in subsequent years. Our monthly event study estimates indicate a price response that strongly exceeds the change in the tax burden for single transactions. I.e., twelve months after a reform, a one percentage point increase in the tax rate reduces property prices by on average 3.5%. Effects are stronger for apartments and apartment buildings than for singlefamily houses. We interpret these results in the context of a theoretical model that accounts for the effects of RETT on a property's resale value. If a property is expected to be traded more frequently in the future, the decline in its price can exceed the increase in the tax burden. Moreover, larger price effects can be explained by higher bargaining power of sellers.
    Keywords: Real estate transfer taxes,property taxes,housing market
    JEL: H22 H71 R32 R38
    Date: 2020
  11. By: Mathilde POULHES (CREST, SDES (Ministry of Housing), Insee and SciencesPo (Paris))
    Abstract: This paper estimates the impact of the rise in the housing transfer tax (the régime de droit commun) in France in 2014. It exploits both time and geographical discontinuities in the implementation of this reform that gave the right to local authorities to raise their housing transfer tax, an entitlement that most départements have chosen to exercise. In the short term, I provide evidence that buyers anticipated the reform to avoid the additional tax burden. I then use an event-study design to examine whether there was any lock-in effect in the volume of dwelling sales. I show there is evidence of a long-term negative effect of the tax increase on the number of transactions, but only in markets where supply was high relative to demand. Finally, I find no effect on pre-tax sale prices, meaning that the burden of the transfer tax rests now on the buyer. My findings highlight the price rigidity of the French housing market and suggest that lowering housing transfer taxes could be used as a fiscal stimulus in the short term.
    Date: 2020–10–30

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