nep-pbe New Economics Papers
on Public Economics
Issue of 2021‒01‒25
fifteen papers chosen by
Thomas Andrén

  1. The earned income tax credit: targeting the poor but crowding out wealth By Froemel, Maren; Gottlieb, Charles
  2. Tax Evasion and Unions in a Cournot duopoly By Luciano Fanti; Domenico Buccella
  3. Are incomes and property taxes effective instruments for tax transition? By Kodjo Adandohoin; Jean-Francois Brun
  4. Family and Government Insurance: Wage, Earnings, and Income Risks in the Netherlands and the U.S. By Mariacristina De Nardi; Giulio Fella
  5. Investment housing tax concessions and welfare: Evidence from Australia By Yunho Cho; Shuyun May Li; Lawrence Uren
  6. Designing Fiscal Redistribution: The Role of Universal and Targeted Transfers By David Coady; Nghia-Piotr Le
  7. Stamping out stamp duty: Property or consumption taxes? By Yunho Cho; Shuyun May Li; Lawrence Uren
  8. Who Benefits from State Corporate Tax Cuts? A Local Labor Markets Approach with Heterogeneous Firms: Comment By Clément Malgouyres; Thierry Mayer; Clément Mazet-Sonilhac
  9. How well targeted are soda taxes? By Pierre Dubois; Rachel Griffith; Martin O'Connell
  10. Global Firms, National Corporate Taxes: An Evolution of Incompatibility By Shafik Hebous
  11. Consumption Tax Reform and the Real Economy: Evidence from India’s Adoption of a Value-Added Tax By Abhay Aneja; Nirupama Kulkarni; S.K. Ritadhi
  12. Public and Private Options in Practice: The Military Health System By Michael D. Frakes; Jonathan Gruber; Timothy Justicz
  13. Are Marriage-Related Taxes and Social Security Benefits Holding Back Female Labor Supply? By Margherita Borella; Mariacristina De Nardi; Fang Yang
  14. The Shifting of the Property Tax on Urban Renters: Evidence from New York State’s Homestead Tax Option By David J. Schwegman; John Yinger
  15. Unearned Income and Labor Supply: Evidence from Survivor Pensions in Austria By Böheim, René; Topf, Michael

  1. By: Froemel, Maren (Bank of England); Gottlieb, Charles (University of St Gallen)
    Abstract: This paper quantifies the individual, aggregate and welfare effects of the Earned Income Tax Credit (EITC) in the United States. In particular, we analyse the labour supply and saving responses to changes in tax credit generosity and their implications for prices and welfare. Our results show that the EITC is a subsidy on labour income and a tax on savings. An increase in EITC generosity raises labour force participation, reduces savings for many and provides insurance to working poor households. The EITC reduces earnings inequality but increases the skill premium and wealth inequality. A 10% increase in tax credit generosity increases welfare by 0.31% and benefits the majority of the population.
    Keywords: Heterogeneous agents; redistribution; welfare programs
    JEL: E60 E62 H23 H24 I38
    Date: 2021–01–15
  2. By: Luciano Fanti; Domenico Buccella
    Abstract: In a Cournot duopoly with indirect taxes evasion, this paper counter-intuitively shows that, in the presence of unions, a higher taxation may increase profits because taxes reduce wage claims. This result is likely to occur if the market size is adequately large and the detection probability is not too high. Moreover, unionisation 1) leaves unaltered the absolute while reduces the relative tax evasion; and 2) increases tax revenue. Since consumer and social welfare are unaffected by taxation, the policy implication is that higher taxes (which are always revenue-enhancing) ultimately lead to a redistribution from wages to profits.
    Keywords: Tax Evasion, Sales Tax, Cournot duopoly, Unions
    JEL: H20 H25 H26 J5
    Date: 2020–12–01
  3. By: Kodjo Adandohoin (CERDI - Centre d'Études et de Recherches sur le Développement International - Clermont Auvergne - UCA - Université Clermont Auvergne - CNRS - Centre National de la Recherche Scientifique); Jean-Francois Brun (CERDI - Centre d'Études et de Recherches sur le Développement International - Clermont Auvergne - UCA - Université Clermont Auvergne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper investigates second wave tax transition (transfer of tax pressure from border taxation towards domestic taxation) concerns in developing countries. It essentially focuses on the compensation effects of incomes and property taxes over international trade tax revenue losses in developing countries. Using a generalized method of moment estimator, we come to the evidence that, incomes and property taxes are poor instruments to balance trade tax revenue losses of trade liberalization in these countries. However, a mediating effect of financial development in the compensation nexus driven by corporate income taxes was found. We explain this result by the fact that the use of financial sector generates paper trails to government in order to enforce and raise corporate income taxes. Financial development may progressively crowd‐out informal sector and leads to business formalization. Surprising, we do not find any mediating effect of financial development in the compensation patterns with personal income taxes. Nevertheless, some heterogeneities were discovered. Financial development mediates the compensation patterns of personal income taxes in Latin American countries, while the effect holds on corporate income taxes in African countries. We conclude the paper by highlighting the important role of financial development in second generation tax transition concerns over developing countries.
    Keywords: Income taxes,Property tax,Developing countries
    Date: 2020–12
  4. By: Mariacristina De Nardi; Giulio Fella
    Abstract: We document new facts about risk in male wages and earnings, household earnings, and pre- and post-tax income in the Netherlands and the United States. We find that, in both countries, earnings display important deviations from the typical assumptions of linearity and normality. Individual-level male wage and earnings risk is relatively high at the beginning and end of the working life, and for those in the lower and upper parts of the income distribution. Hours are the main driver of the negative skewness and, to a lesser extent, the high kurtosis of earnings changes. Even though we find no evidence of added-worker effects, the presence of spousal earnings reduces the variability of household income compared to that of male earnings. In the Netherlands, government transfers are a major source of insurance, substantially reducing the standard deviation, negative skewness, and kurtosis of income changes. In the U.S. the role of family insurance is much larger than in the Netherlands. Family and government insurance reduce, but do not eliminate nonlinearities in household disposable income by age and previous earnings in either country.
    Keywords: Self-insurance; Wage risk; Social insurance; Life cycle; Progressive taxation; Redistribution
    JEL: D31 E24 H31 J31
    Date: 2020–10–26
  5. By: Yunho Cho; Shuyun May Li; Lawrence Uren
    Abstract: We build a general equilibrium overlapping generations model with heterogeneous agents to study the welfare implications of housing investment tax concessions in the Australian housing market . Comparing stationary equilibria, we find that removing these concessions significantly reduces housing investment. This lowers house prices and raises rents and the home ownership rate. The steady state welfare analysis suggests that eliminating concessions leads to a welfare gain of 1.7 per cent, for which increased redistribution is a key mechanism. Along the transition, a majority of households are better off, but younger landlords and landlords with higher incomes benefit the least.
    Keywords: Housing investment, Home ownership, Taxation, OLG model, Heterogeneous Agents, Welfare
    JEL: D15 E21 R21 R38
    Date: 2021–01
  6. By: David Coady; Nghia-Piotr Le
    Abstract: There is a growing debate on the relative merits of universal and targeted social assistance transfers in achieving income redistribution objectives. While the benefits of targeting are clear, i.e., a larger poverty impact for a given transfer budget or lower fiscal cost for a given poverty impact, in practice targeting also comes with various costs, including incentive, administrative, social and political costs. The appropriate balance between targeted and universal transfers will therefore depend on how countries decide to trade-off these costs and benefits as well as on the potential for redistribution through taxes. This paper discusses the trade-offs that arise in different country contexts and the potential for strengthening fiscal redistribution in advanced and developing countries, including through expanding transfer coverage and progressive tax financing.
    Keywords: Personal income;Income tax systems;Fiscal redistribution;Income inequality;Poverty;WP,income,cost,earned income,taxation framework,consumption taxation,transfer program
    Date: 2020–06–26
  7. By: Yunho Cho; Shuyun May Li; Lawrence Uren
    Abstract: Property transaction taxes - also known as stamp duty - are widely viewed as an inefficient form of taxation. In this paper, we examine the welfare implications of removing stamp duty in a general equilibrium overlapping generation model with heterogeneous agents. Our model features an idiosyncratic shock to housing preferences which may create mismatch or induce household to move. When examining steady states we find that newborn households prefer entering an economy with a recurring property tax rather than one with stamp duty. In contrast, when examining transition dynamics we find that existing households prefer replacing stamp duty with a consumption tax.
    Keywords: Property transaction taxes, OLG model, Heterogeneous agents, Welfare
    JEL: E21 H24 R13 R2
    Date: 2021–01
  8. By: Clément Malgouyres (PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, IPP - Institut des politiques publiques); Thierry Mayer (Institut d'Études Politiques [IEP] - Paris, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique, CEPR - Center for Economic Policy Research - CEPR); Clément Mazet-Sonilhac (Institut d'Études Politiques [IEP] - Paris, Banque de France - Banque de France - Banque de France)
    Abstract: Suárez Serrato and Zidar (2016) identify state corporate tax incidence in a spatial equilibrium model with imperfectly mobile firms. Their identification argument rests on comparative-statics omitting a channel implied by their model: the link between common determinants of a location's attractiveness and the average idiosyncratic productivity of firms choosing that location. This compositional margin causes the labor demand elasticity to be independent from the product demand elasticity, impeding the identification of incidence from reduced-form estimates. Assigning consensual values to the unidentified parameters, we find that the incidence share born by firm-owners is closer to 25% than the 40% initially reported. The null associated with the "conventional view" that the share on workers is 1 and that on firm owners is 0 is still rejected.
    Keywords: Incidence,Corporate income tax,Discrete/continuous choice
    Date: 2020–12
  9. By: Pierre Dubois (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Rachel Griffith (IFS - Laboratory of the Institute for Fiscal Studies - Institute for Fiscal Studies); Martin O'Connell (IFS - Laboratory of the Institute for Fiscal Studies - Institute for Fiscal Studies)
    Abstract: Soda taxes aim to reduce excessive sugar consumption. Policymakers highlight the young, particularly from poor backgrounds, and high sugar consumers as groups whose behavior they would most like to influence. There are also concerns about the policy being regressive. We assess who are most impacted by soda taxes. We estimate demand using micro longitudinal data covering on-the-go purchases, and exploit the panel dimension to estimate individual specific preferences. We relate these preferences and counterfactual predictions to individual characteristics and show that soda taxes are relatively effective at targeting the sugar intake of the young, are less successful at targeting the intake of those with high total dietary sugar, and are unlikely to be strongly regressive especially if consumers benefit from averted internalities.
    Keywords: Preference heterogeneity,Discrete choice demand,Pass-through,Soda tax
    Date: 2020–11
  10. By: Shafik Hebous
    Abstract: How did the rise of multinational enterprises (MNEs) put pressure on the prevailing international corporate tax framework? MNEs, and firms with market power, are not new phenomena, nor is the corporate income tax, which dates to the early 20th century. This prompts the question, what is distinctly new (about multinational enterprises)—if anything—that has triggered unprecedented recent concerns about vulnerabilities in international tax arrangements and the taxation of MNEs? This paper presents a set of empirical observations and a synthesis of strands of the literature to answer this question. A key message is that MNEs of the 21st century operate differently from prior periods and have evolved to become global firms—with important tax ramifications. The fragility of international tax arrangements was present at the outset of designing international tax rules, but the challenges have drastically intensified with the global integration of business, the increased trade in hard-to-price services and intangibles, and the rapid growth of the digital economy.
    Keywords: Corporate income tax;Foreign direct investment;Double taxation;Tax incentives;Trade in services;WP,company,multinational enterprise,conduit company,holding company,business organization
    Date: 2020–09–04
  11. By: Abhay Aneja (UC Berkeley School of Law); Nirupama Kulkarni (CAFRAL); S.K. Ritadhi (Ashoka University)
    Abstract: We study the impact of a consumption tax reform on firm capital and productivity by examining India’s replacement of the sales tax with a value-added tax (VAT). Unlike the sales tax, the VAT allowed firms to offset their tax liability with VAT paid on capital inputs, effectively reducing the tax-related cost of capital. Exploiting the staggered adoption of the tax reform across Indian states, we show that VAT adoption increased firm capital by 3%. The effects are driven by financially-constrained firms – an important source of heterogeneity in a developing country context. We also document a corresponding improvement in the productivity of financially constrained firms. Our findings thus suggest that beyond revenue generation, consumption tax reforms can have the additional effect of stimulating investment and productivity in resource constrained environments.
    Keywords: Value-added taxes; financial constraints; consumption tax reform; capital misallocation
    Date: 2021–01
  12. By: Michael D. Frakes; Jonathan Gruber; Timothy Justicz
    Abstract: Recent debates over health care reform, including in the context of the Military Health System (MHS) and Veterans Health Administration, highlight the dispute between public and private provision of health care services. Using novel data on childbirth claims from the MHS and drawing on the combination of plausibly exogenous patient moves and heterogeneity across bases in the availability of base hospitals, we identify the impact of receiving obstetrical care on versus off military bases. We find evidence that off-base care is associated with slightly greater resource intensity, but also notably better outcomes, suggesting marginal efficiency gains from care privatization.
    JEL: H1 H51 I18
    Date: 2020–12
  13. By: Margherita Borella; Mariacristina De Nardi; Fang Yang
    Abstract: In the United States, both taxes and old age Social Security benefits depend on one's marital status and tend to discourage the labor supply of the secondary earner. To what extent are these provisions holding back female labor supply? We estimate a rich life cycle model of labor supply and savings for couples and singles using the method of simulated moments (MSM) on the 1945 and 1955 birth-year cohorts and use it to evaluate what would happen without these provisions. Our model matches well the life cycle profiles of labor market participation, hours, and savings for married and single people and generates plausible elasticities of labor supply. Eliminating marriage-related provisions drastically increases the participation of married women over their entire life cycle, reduces the participation of married men after age 60, and increases the savings of couples in both cohorts, including the later one, which has similar participation to that of more recent generations. If the resulting government surplus were used to lower income taxation, there would be large welfare gains for the vast majority of the population.
    JEL: E21 H20 J22 J31
    Date: 2020–10–23
  14. By: David J. Schwegman; John Yinger
    Abstract: In 1981, New York State enabled their cities to adopt the Homestead Tax Option (HTO), which created a multi-tiered property tax system for rental properties in New York City, Buffalo, and Rochester. The HTO enabled these municipalities to impose a higher property tax rate on rental units in buildings with four or more units, compared to rental units in buildings with three or fewer units. Using restricted-use American Housing Survey data and historical property tax rates from each of these cities, we exploit within-unit across-time variation in property tax rates and rents to estimate the degree to which property taxes are shifted onto renters in the form of higher rents. We find that property owners shift approximately 14 percent of an increase in taxes onto renters. This study is the first to use within-unit across time variation in property taxes and rents to identify this shifting effect. Our estimated effect is measurably smaller than most previous studies, which often found shifting effects of over 60 percent.
    Date: 2020–12
  15. By: Böheim, René (University of Linz); Topf, Michael (Federal Ministry of Social Affairs, Health, Care and Consumer Protection, Austria)
    Abstract: We study the effect of lower unearned income on labor supply. To identify the causal effect of an unexpected reduction in unearned income, we exploit a policy reform that lowered survivor pensions in Austria. Men widowed after the survivor pension reform received an approximately 34% lower survivor pension than men widowed before the reform. We follow the employment history of both groups for 150 months and estimate the reform's effect on labor supply using a regression discontinuity design. The effect of the lower pension is evident immediately after the death of their spouse, is persistent over time, becomes more pronounced over time, and is robust across model specifications. Our baseline result suggests a 3.5 to 5.4 percentage point higher employment rate for survivors in the low pension regime in the long run. The estimated effect corresponds to a labor supply elasticity at the extensive margin with respect to the changes in total income of about -0.9 to -1.3.
    Keywords: labor supply, unearned income, regression discontinuity design
    JEL: I38 J22 J48
    Date: 2020–12

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