nep-pbe New Economics Papers
on Public Economics
Issue of 2020‒11‒30
twelve papers chosen by
Thomas Andrén

  1. Behavioral Responses to Inheritance and Gift Taxation: Evidence from Germany By Ulrich Glogowsky
  2. Income Tax Evasion: Tax Elasticity, Welfare, and Revenue By Max Gillman
  3. "Is It Time to Eliminate Federal Corporate Income Taxes?" By Edward Lane; L. Randall Wray
  4. Endogenous Longevity and Optimal Tax Progressivity By Burkhard Heer; Stefan Rohrbacher
  5. Limited Tax Capacity and the Optimal Taxation of Firms By Marcelo Arbex; Enlinson Mattos
  6. Taxation Systems in the EU: The Role of Economic Integration and Global Financial Crisis By Kazim Okan Erol
  7. Taxation of Consumption and Labor Income: a Quantitative Approach By Francesca Parodi
  8. Stock Market Reactions to Legislated Tax Changes: Evidence from the United States, Germany, and the United Kingdom By Bernd Hayo; Sascha Mierzwa
  9. Limited tax capacity and the optimal taxation of firms By Arbex, Marcelo Aarestru; Mattos, Enlinson
  10. Where Does Multinational Profit Go with Territorial Taxation? Evidence from the UK By Langenmayr, Dominika; Liu, Li
  11. Identifying Behavioral Responses to Tax Reforms: New Insights and a New Approach By Katrine Marie Jakobsen; Jakob Egholt Søgaard
  12. Employment Effects of the Earned Income Tax Credit: Taking the Long View By Diane Whitmore Schanzenbach; Michael R. Strain

  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: H2 H20 H21 H24 H26 H31
    Date: 2020–10
  2. By: Max Gillman
    Abstract: This paper provides a general equilibrium model of income tax evasion. As functions of the share of income reported, the paper contributes an analytic derivation of the tax elasticity of taxable income, the welfare cost of the tax, and government revenue as a percent of output. It shows how an increase in the tax rate causes the tax elasticity and welfare cost to increase in magnitude by more than with zero evasion. Keeping constant the ratio of income tax revenue to output, as shown to be consistent with certain US evidence, a rising productivity of the goods sector induces less evasion and thereby allows tax rate reduction. The paper derives conditions for a stable share of income tax revenue in output with dependence upon the tax elasticity of reporting income. Examples are provided with less and more productive economies in terms of the tax elasticity of reported income, the welfare cost of taxation and the tax revenue as a percent of output, with sensitivity analysis with respect to leisure preference and goods productivity. Discussion focuses on how the tax evasion analysis may help explain such Öscal tax policy as the postwar US income tax rate reductions with discussion of tax acts and government Öscal multipliers. Fiscal policy with tax evasion included shows how tax rate reduction induces less tax evasion, a lower welfare cost of taxation, and makes for a stable income tax share of output.
    Keywords: optimal evasion; tax law; welfare; tax elasticity; revenue; productivity; development;
    JEL: E13 H21 H26 H30 H68 K34 K42 O11
    Date: 2020–10
  3. By: Edward Lane; L. Randall Wray
    Abstract: As the nation is experiencing the need for ever-increasing government expenditures to address COVID-19 disruptions, rebuild the nation's infrastructure, and many other worthy causes, conventional thinking calls for restoring at least a portion corporate taxes eliminated by the 2017 Tax Cuts and Jobs Act, especially from progressive circles. In this working paper, Edward Lane and L. Randall Wray examine who really pays the corporate income tax and argue that it does not serve the purposes most people believe. The authors provide an overview of the true purposes and incidence of corporate taxation and argue that it is inefficient and largely borne by consumers and employees, not shareholders. While the authors would prefer the elimination of the corporate profits tax, they understand the conventional thinking that taxes are necessary to help finance government expenditures--even if they disagree. Accordingly, the authors present alternatives to the corporate tax that shift the burden from consumers and employees to those who benefit the most from corporate success.
    Keywords: Corporate Taxes; Tax Incidence; Modern Money Theory (MMT); Richard and Peggy Musgrave; Beardsley Ruml; Tax Reform
    JEL: B52 E12 E6 E62 G30 H20 H25
    Date: 2020–11
  4. By: Burkhard Heer; Stefan Rohrbacher
    Abstract: We study the impact of endogenous longevity on optimal tax progressivity and inequality in an overlapping generations model with skill heterogeneity. Higher tax progressivity decreases both the longevity gap and net income inequality, but at the expense of lower average lifetime and lower aggregate labor supply and income. We find that the welfare-maximizing income tax is less progressive than in the case of exogenous longevity and that the present US income tax should redistribute less. Our result is robust to the empirically observed range of labor supply elasticity and the assumptions of both missing annuity markets and tax deductibility of private health expenditures.
    Keywords: health and inequality, demography, second-best, optimal taxation, personal income distribution, overlapping generations
    JEL: I14 J10 H21 H51 D31
    Date: 2020
  5. By: Marcelo Arbex (Department of Economics, University of Windsor); Enlinson Mattos (São Paulo School of Economics, Getulio Vargas Foundation)
    Abstract: Limited tax capacity creates evasion opportunities that weakens the production efficiency argument. Motivated by the SIMPLES tax reform in Brazil that led to heterogeneous responses on revenues and production costs of upstream versus downstream informal firms, we characterize the optimal taxation of firms in a limited tax capacity economy to compare with the optimal value-added and turnover taxes. We show that the elasticities of misreported sales and purchase gaps to policy instruments are behavioral statistics that complement the traditional Diamond and Mirrlees (1971)’s mechanical effect of taxation. Numerical results suggest turnover taxes can be welfare enhancing vis-a-vis a value-added system.
    Keywords: Optimal firms taxation, limited tax capacity, tax reform.
    JEL: H21 H25 H26 D60
    Date: 2020–11
  6. By: Kazim Okan Erol
    Abstract: This study aims to scrutinize the change of public revenue systems of the EU-15 between 1980 and 2016. The share of consumption taxes in total tax revenues increases and this process have triggered higher tax burden on labor in most of the EU countries via indirect taxation. In this study I use panel data analysis, in order to analyze the impact of global financial crisis on depreciated tax revenues in most of the member states. Political integration and global financial crisis reduce national tax revenues and this revenue loss differs due to tax system asymmetries among member states. Although indirect taxation is an easy way of compensating revenue loss for indebted countries, this type of public finance damages stability of tax revenues in long run.
    Keywords: taxation, panel data models, economic integration, fiscal policy
    JEL: F15 H20 H30 H71 C23
    Date: 2020
  7. By: Francesca Parodi
    Abstract: I quantitatively characterize optimal consumption and labor income taxes in a general framework that allows for partially irreversible durable goods, preference heterogeneity, and horizontal equity goals of the social planner. To do so, I develop and estimate a structural life-cycle model of household consumption, saving, and employment choices. I nd that durables should be subsidized in presence of adjustment costs and that heterogeneity in risk aversion leads to non-uniform consumption taxes. Allowing for government's equity concerns, I show that the model rationalizes the tax practice and that di erentiated consumption taxes serve a redistributive purpose jointly with progressive labor income taxes.
    Keywords: Intertemporal Household Choice, Consumption, Durable goods, Saving, Labor Supply, Efficiency, Optimal Taxation, Inequality, Welfare
    JEL: D10 D30 D63 E20 H20 H31 J22
    Date: 2020
  8. By: Bernd Hayo (Philipps University Marburg); Sascha Mierzwa (Philipps University Marburg)
    Abstract: We study the effect of tax policy on stock market returns in the United States, Germany, and the United Kingdom using GARCH models and a unique daily dataset of legislative tax changes during the period 1 December 1978 to 31 January 2018. We find that days of discretionary tax legislation during all stages of the process often matter for returns, both in terms of statistical significance as well as economic relevance. Further disaggregating the tax shocks shows that news about personal income tax cuts affects stock market returns positively, whereas business tax legislation is rarely influential. We find evidence of stock market spillovers, mainly from US tax changes to European stock markets, but, albeit less pronounced, also the other way round. In several cases, we measure significant effects of changes in tax legislation on the days the changes are implemented. The US House Committee Report appears to be the most influential legislative stage in our sample. During the financial crisis, stock markets were more responsive to tax legislation. Finally, S&P500 returns tend to react at earlier legislative stages than do DAX returns, whereas FT30 returns barely react on days of domestic legislative action.
    Keywords: Fiscal policy, legislative tax changes, stock markets, income tax, business tax, indirect tax, Germany, United Kingdom, United States
    JEL: E62 F65 G18 H24 H25
    Date: 2020
  9. By: Arbex, Marcelo Aarestru; Mattos, Enlinson
    Abstract: Limited tax capacity creates evasion opportunities that weakens the production efficiency argument. Motivated by the SIMPLES tax reform in Brazil that led to heterogeneous responses on revenues and production costs of upstream versus downstream informal firms, we characterize the optimal taxation of firms in a limited tax capacity economy to compare with the optimal value-added and turnover taxes. We show that the elasticities of misreported sales and purchase gaps to policy instruments are behavioral statistics that complement the traditional Diamond and Mirrlees (1971a)’s mechanical effect of taxation. Numerical results suggest turnover taxes can be welfare enhancing vis-`a-vis a value-added system.
    Date: 2020–11
  10. By: Langenmayr, Dominika; Liu, Li
    Abstract: In 2009, the United Kingdom abolished the taxation of profits earned abroad and introduced a territorial tax system. Under the territorial system, firms have strong incentives to shift profits abroad. Using a difference-in-differences research design, we show that profits of UK subsidiaries in low-tax countries increased after the reform compared to subsidiaries of non-UK multinationals in the same countries, by an average of 2.1 percentage points. The increase in profit shifting also leads to increases in measured productivity of the foreign affiliates of UK multinationals of between 5 and 9 percent.
    Keywords: profit shifting,territorial tax system,multinational firms
    JEL: H25 H87 F23
    Date: 2020
  11. By: Katrine Marie Jakobsen; Jakob Egholt Søgaard
    Abstract: We revisit the identification of behavioral responses to tax reforms and develop a new approach that allows for graphical validation of identifying assumptions and representation of treatment effects. Considering typical tax reforms, such as a reduction in the top income tax, we show that the state-of-the-art estimation strategy relies on an assumption that trend differences in income across the income distribution remain constant in the absence of reforms. Similar to the pre-trend validation of differences-in-differences studies, this identifying assumption of constant trend differentials can be validated by comparing the evolution of income in untreated parts of the income distribution over time. We illustrate the importance of our new validation approach by studying a number of tax reforms in Denmark, and we show how violations of the identifying assumption may drive the estimates obtained from the state-of-the-art strategy.
    Keywords: tax reforms, behavioural responses, identification validation
    JEL: C14 H30 J22
    Date: 2020
  12. By: Diane Whitmore Schanzenbach; Michael R. Strain
    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.
    JEL: H2 J08 J2
    Date: 2020–10

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