nep-pbe New Economics Papers
on Public Economics
Issue of 2021‒03‒08
sixteen papers chosen by
Thomas Andrén

  1. Permanent and Transitory Responses to Capital Gains Taxes: Evidence from a Lifetime Exemption in Canada By Adam M. Lavecchia; Alisa Tazhitdinova
  2. Optimal Tax Problems with Multidimensional Heterogeneity: A Mechanism Design Approach By Laurence Jacquet; Etienne Lehmann
  3. Re-allocating taxing rights and minimum tax rates in international profit taxation By Kempkes, Gerhard; Stähler, Nikolai
  4. Joint Retirement of Couples: Evidence from Discontinuities in Denmark By Esteban García-Miralles; Jonathan M. Leganza
  5. Structural Tax Reforms and Public Spending Efficiency By António Afonso; João Tovar Jalles; Ana Venâncio
  6. Quantifying the OECD BEPS indicators: An update to BEPS Action 11 By Klein, Daniel; Ludwig, Christopher A.; Nicolay, Katharina; Spengel, Christoph
  7. Assessing profit shifting using Country-by-Country Reports: a non-linear response to tax rate differentials By Barbara Bratta; Vera Santomartino; Paolo Acciari
  8. The long-run investment effect of taxation in OECD countries By Jakob B. Madsen; Antonio Minniti; Francesco Venturini
  9. Politicians Avoid Tax Increases Around Elections By Andrew C. Chang; Linda R. Cohen; Amihai Glazer; Urbashee Paul
  10. "Still Under-Taxing the Digital MNE? Assessing the Tax Principles of Pillar One in the BEPS Project" By Hikaru Ogawa
  11. Taxpayer responsiveness to taxation Evidence from bunching at kink points of the South African income tax schedule By Neryvia Pillay
  12. Sovereign default and imperfect tax enforcement By Francesco Pappadà; Yanos Zylberberg
  13. Fiscal Rules in Good Times and Bad By Christoph Peatz
  14. Offshore Tax Evasion and Wealth Inequality: Evidence from a Tax Amnesty in the Netherlands By Wouter Leenders; Arjan Lejour; Simon Rabaté; Maarten van’t Riet
  15. How Much Taxes Will Retirees Owe on Their Retirement Income? By Anqi Chen; Alicia H. Munnell
  16. Impact of Tax Reforms in Applied Models: Which Functional Forms Should Be Chosen for the Demand System? Theory and Application for Morocco By Touhami Abdelkhalek; Dorothée Boccanfuso

  1. By: Adam M. Lavecchia; Alisa Tazhitdinova
    Abstract: Using panel data on a 20% random sample of Canadian taxpayers, we study behavioral responses to the cancellation of a lifetime capital gains exemption that resulted in increased capital gains taxation for some individuals. The unique setting allows us to distinguish between short-term avoidance responses and permanent responses to capital gains taxes. We show that the exemption did not change the number of taxpayers reporting positive capital gains, and thus unlikely resulted in increased participation in capital markets. However, the exemption cancellation slightly increased capital gains realizations of the existing traders.
    Keywords: capital gains tax; real responses; avoidance; re-timing
    JEL: H24 H31 G51
    Date: 2021–02
  2. By: Laurence Jacquet; Etienne Lehmann
    Abstract: We propose a new method, that we call an allocation perturbation, to derive the optimal nonlinear income tax schedules with multidimensional individual characteristics on which taxes cannot be conditioned. It is well established that, when individuals differ in terms of preferences on top of their skills, optimal marginal tax rates can be negative. In contrast, we show that with heterogeneous behavioral responses and skills, one has optimal positive marginal tax rates, under utilitarian preferences and maximin.
    Keywords: optimal taxation, mechanism design, multidimensional screening problems, allocation perturbation
    Date: 2021
  3. By: Kempkes, Gerhard; Stähler, Nikolai
    Abstract: What are the macroeconomic implications of re-allocating taxing rights away from source countries (where goods are produced) to market countries (where goods are consumed) and introducing minimum rates in international profit taxation? We assess this question in a dynamic macroeconomic model that gives a meaningful role to profit taxation. We find that, in low tax economies, the average profit tax rate will rise. On the one hand, this reduces price competitiveness of firms located in these regions and, thereby, output. On the other hand, higher profit tax revenues help to reduce other taxes. Moreover, lower expected future output requires less capital in production in the long run. Firms hence invest less and (temporarily) augment dividend payments. This raises disposable income of households, who (at least temporarily) increase consumption. The opposite holds for high tax economies. When taxing rights are re-allocated, wealth transfers between regions mitigate these effects. In terms of welfare, low tax economies can benefit from an increase in profit taxation.
    Keywords: Re-Allocating Profit Taxing Rights,Minimum Taxation,InternationalMacro
    JEL: H25 L52 E20 E62 L10
    Date: 2021
  4. By: Esteban García-Miralles (CEBI, Department of Economics, University of Copenhagen); Jonathan M. Leganza (University of California, San Diego)
    Abstract: We study how social security influences joint retirement of couples. We exploit three decades of administrative data from Denmark to explore joint retirement in two complementary settings. In the first setting, we exploit the discontinuous increase in retirement observed when individuals become eligible for public pension benefits to identify the causal effects on their spouses. We find that spouses are more likely to retire right when their partners reach pension eligibility age, with a spillover effect across spouses of 7.5%. We further unpack this result by studying additional margins of adjustment such as benefit claiming and earnings, and by documenting meaningful response heterogeneity. We find age differences within couples to be a crucial determinant of joint retirement, which is primarily driven by older spouses who continue to work until their younger partners reach pension eligibility. Controlling for these age differences uncovers a gender gap where female spouses are more likely to adjust their behavior to retire jointly, and this gap remains after controlling for earnings shares within couples. In the second setting, we study to what extent couples adapt their behavior to retire jointly after a reform increases pension eligibility ages. We find spillover effects across spouses comparable to those from the first setting, in which eligibility ages were stable and known by couples well in advance. This suggests that spouses do not face adjustment costs limiting their capacity to retire together after the reform.
    Keywords: joint retirement, pension eligibility age, couples labor supply
    JEL: J14 J26 D10 H55
    Date: 2021–01–29
  5. By: António Afonso; João Tovar Jalles; Ana Venâncio
    Abstract: We evaluate the effects of structural tax reforms on government spending efficiency in a sample of OECD economies over the period 2007-2016. After calculating input spending efficiency scores, we assess the relevance for efficiency of narrative tax changes in a panel setup. We find that: i) input efficiency scores average around 0.6-07; ii) increases in the tax rates are reflected in falling public sector efficiency; iii) such negative effect is significant for PIT and VAT; iv) controlling for endogeneity, increases in tax rates are still associated with lower public sector efficiency, mainly in PIT; v) increasing tax bases for PIT and VAT improve public sector efficiency; vi) in economic expansion periods, increasing CIT base and reducing PIT rates, positively affect public sector efficiency; ix) in recessions, efficiency improves when PIT and VAT bases increase and CIT rate increases.
    Date: 2020
  6. By: Klein, Daniel; Ludwig, Christopher A.; Nicolay, Katharina; Spengel, Christoph
    Abstract: In its 2015 Final Report on 'Measuring and Monitoring BEPS, Action 11', the OECD introduced six indicators to quantify and evaluate base erosion and profit shifting (BEPS) activity over time. In this study, we revisit three selected indicators, provide a numerical update for recent periods using timely data and point out potential pitfalls when interpreting the indicator results. First, we transparently replicate Indicator 1, which intends to assess the disconnect between financial and real economic activities, and show a moderately decreasing trend of the indicator estimates. Second, replicating Indicator 4, which is based on a micro-data regression approach, we find that multinational firms have, on average, lower effective tax rates than domestic firms. We confirm this result using a state-of-the-art propensity score matching approach. Third, the replication of Indicator 5, which intends to capture profit shifting through intangibles, shows a stable trend of the annual indicator estimates that extends beyond the OECD's sample period. Yet, the simplistic design of all indicators comes at the price of making them vulnerable to a number of confounding factors and economic effects that go beyond profit shifting. Overall, we conclude that the proposed indicators in the Final Report on BEPS Action 11 provide only limited information on the extent of BEPS.
    Keywords: Tax,Tax policy,International Taxation,BEPS,OECD,Base Erosion and Profit Shifting,Business Taxation,Corporate Tax Regulations
    JEL: H20 H25 H26 L25
    Date: 2021
  7. By: Barbara Bratta (Ministry of Economy and Finance of Italy); Vera Santomartino (Ministry of Economy and Finance of Italy); Paolo Acciari (Ministry of Economy and Finance of Italy)
    Abstract: We analyze profit-shifting behavior of Multinational Enterprises (MNEs) using a novel and unique dataset composed of Country-by-Country Reports (CbCRs) for year 2017 compiled worldwide by all MNEs having at least a subsidiary in Italy. By accessing CbCRs we are able to estimate BEPS - base erosion and profit shifting - using a firm-level data with a better representativeness than commonly used dataset. In fact, many studies are based on available large financial accounts databases that under-represent specific subset of firms and locations such as activities carried out in investment hubs. We provide evidence of this under-representativeness in this work. Our paper, apart from providing an estimation of BEPS as a response to CIT rates by applying the standard linearity assumption, follows recent work into analysing the existence of nonlinear responses to taxation. We go beyond preceding work by exploring non-linearity in a dataset composed of MNEs of all nationalities - thus providing evidence of the existence of a strong non-linear response in a more diversified dataset - and by focussing on the non-linear response of profit shifting to tax rate differentials and not only to CIT rates. We find that profit allocation in a country is non-linearly dependant to the differences in tax rate with respect to the average CIT rate faced by the MNEs in the rest of the world. We further investigate non-linearity pointing out that quadratic estimation presents some issues in countries with high CIT rate. We therefore provide a higher degree, cubic, estimation as a solution to these caveats. We find that the effect of changes in CIT rate differential over profit allocation is statistically and economically significant when allowing for an inverse U shaped semi-elasticity. Finally, we estimate profit shifting and revenue losses. We find that in 2017 a total of � 887 billion of profits was shifted due to differences in tax rates with a global revenue loss of � 245 billion. The distribution of shifted profits is found to be highly concentrated in few countries and this result may have relevant policies implications, suggesting that international tax reforms aimed at guaranteeing a minimum level of taxation may be very effective in reducing the incentive for MNEs to locate profits in these jurisdictions only based on tax reasons, thus may be a very efficient way to reduce BEPS.
    Keywords: BEPS, Profit shifting, International taxation, corporate income tax, multinationals
    JEL: H25 H26 H32 F23
    Date: 2021–02
  8. By: Jakob B. Madsen; Antonio Minniti; Francesco Venturini
    Abstract: The gradually changing nature of production and the move away from tangible investment towards intangible investment over the past century suggests that the effects of the tax structure on investment need to be reassessed. To address this issue, we establish an endogenous growth model in which investment in tangible assets, R&D and education are influenced by different types of taxes. We test the long-run implications of the model using annual data for 21 OECD countries over the period 1890-2015. We find that corporate taxes reduce investment in tangible assets and R&D. However, while personal income taxes reduce investment in tertiary education, they enhance the investment in R&D. Thus, a revenue-neutral switch from corporate to personal income taxes is growth enhancing.
    Keywords: taxation, innovation, Tangible and Intangible Capital, economic growth
    JEL: E10 E62 O38 O40
    Date: 2021–02
  9. By: Andrew C. Chang; Linda R. Cohen; Amihai Glazer; Urbashee Paul
    Abstract: We use new annual data on gasoline taxes and corporate income taxes from U.S. states to analyze whether politicians avoid tax increases in election years. These data contain 3 useful attributes: (1) when state politicians enact tax laws, (2) when state politicians implement tax laws on consumers and firms, and (3) the size of tax changes. Using a pre-analysis research plan that includes regressions of tax rate changes and tax enactment years on time-to-gubernatorial election year indicators, we find that elections decrease the probability of politicians enacting increases in taxes and reduce the size of implemented tax changes relative to non-election years. We find some evidence that politicians are most likely to enact tax increases right after an election. These election effects are stronger for gasoline taxes than for corporate income taxes and depend on no other political, demographic, or macroeconomic conditions. Supplemental analysis supports political salience over legislative e ort in generating this difference in electoral effects.
    Keywords: Corporate Income Taxes; Electoral Cycle; Gasoline Taxes; Pre-analysis Plan; Tax Salience
    JEL: D72 D78 H24 H71 K34 P16
    Date: 2021–01–29
  10. By: Hikaru Ogawa (Faculty of Economics, The University of Tokyo)
    Abstract: A new principle of international taxation that gives taxing rights on the profits of digital multinational firms (MNEs) has been proposed in Pillar One of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project. This note delineates this tax principle in a simple model and points out that while the new framework allows taxation of MNEs profits that could not be taxed before, it includes incentives for excessive reductions in the corporate tax rate.
    Date: 2021–02
  11. By: Neryvia Pillay
    Abstract: Taxpayer responsiveness to taxation: Evidence from bunching at kink points of the South African income tax schedule
    Date: 2021–02–05
  12. By: Francesco Pappadà (PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 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, Banque de France - Banque de France - Banque de France); Yanos Zylberberg (University of Bristol [Bristol], CEPR - Center for Economic Policy Research - CEPR)
    Abstract: The effect of fiscal policy on default risk is mitigated by the response of tax compliance. To explore the consequences of this stylized fact, we build a model of sovereign debt with limited commitment and imperfect tax enforcement. Fiscal policy persistently affects the size of the informal economy, which impacts future fiscal revenues and default risk. The interaction of imperfect tax enforcement and limited commitment strongly constrains the dynamics of optimal fiscal policy and leads to costly uctuations in consumption.
    Keywords: Sovereign default,Imperfect tax enforcement,Fiscal policy
    Date: 2021–02
  13. By: Christoph Peatz (Macroeconomic Policy Institute (IMK))
    Abstract: I estimate fiscal reaction functions to analyze the cyclical behavior of discretionary measures in the euro area and the potential impact of changes in the fiscal framework. The core is to analyze whether fiscal rules have an asymmetric impact on discretionary measures over the cycle. First, results confirm the general perception that overall discretionary fiscal policy in the EMU is marginally procyclical. Procyclicality is, however, characterized by strong fiscal tightening in contractions while reactions in upturns are neutral. Second, fiscal rules marginally increase countercyclical policy responses in upturns, but strongly reinforce destabilizing procyclical polices in downturns. Interestingly, expenditure rules perform comparably better with regard to the stabilization objective than budget or debt rules.
    Keywords: Fiscal rules, fiscal reaction, fiscal cyclicality, debt sustainability, EMU
    JEL: E6 H11 H6
    Date: 2020
  14. By: Wouter Leenders; Arjan Lejour; Simon Rabaté; Maarten van’t Riet
    Abstract: Exploiting unique datasets covering over 28,000 tax evaders in the Netherlands, we investigate the distribution of tax evasion and its implications for the measurement of wealth inequality. In contrast to Alstadsæter, Johannesen and Zucman (2019), the correction for offshore wealth has only a modest effect on top wealth shares. We show that the distributional pattern of tax evasion depends on the type of tax evasion, e.g. it depends on the offshore country of choice. We explore a number of explanations to account for the differences in results and caution against projecting distributional patterns of detected tax evasion onto still undetected evasion. We also study the dynamic compliance behaviour of tax amnesty participants and document large and sustained increases in reported wealth of around 60% following amnesty participation.Combined with evidence of only a modest increase in the adoption of tax avoidance strategies, this suggests that amnesty participation can lead to substantial public revenue gains.
    Date: 2020
  15. By: Anqi Chen; Alicia H. Munnell
    Abstract: To evaluate their retirement resources, households approaching retirement will examine their Social Security statements, defined benefit pensions, defined contribution balances, and other financial assets. However, many households may forget that not all of these resources belong to them; they will need to pay some portion to federal and state government in taxes. It is unclear, however, just how large the tax burden is for the typical retired household and for households with different income levels. This project aims to shed light on the tax burdens that retirees face by estimating lifetime taxes for a group of recently retired households. The project uses data from the Health and Retirement Study (HRS) linked to administrative earnings to determine Social Security benefits and administrative records on state of residence to estimate state tax liabilities. Income is then projected over the expected retirement of each household. Federal and state taxes, are estimated with TAXSIM, for each household on its reported and projected income. The paper found that: ¥ These estimates show that households in the aggregate will have to pay about 6 percent of their income in federal and state income taxes. ¥ But this liability rests primarily with the top quintile of the income distribution. ¥ For the lowest four quintiles, taxes are negligible Ð ranging from 0 percent to 1.9 percent. ¥ In contrast, the average liability is 11.3 percent for the top quintile, 16.4 percent for the top 5 percent, and 22.7 percent for the top 1 percent. The policy implications of the findings are: ¥ Taxes are meaningful for the top quintile, who are mostly married couples with average combined Social Security benefits of $50,900, 401(k)/IRA balances of $325,400 and financial wealth of $441,400. ¥ If these retirement and financial assets were fully annuitized, the amount a household would receive is equivalent to about $3,000 a month, and these households face tax liabilities of about 11 percent. ¥ Thus, for many households reliant on 401(k)/IRA or financial assets for security in retirement, taxes are an important consideration.
    Date: 2020–11
  16. By: Touhami Abdelkhalek; Dorothée Boccanfuso
    Abstract: When researchers and policymakers conduct impact analyses of economic reforms, especially fiscal reforms, the specification of the household demand system becomes crucial. There is a trade-off between using demand systems simple to manipulate but less realistic and other systems that are more realistic but often more complex and difficult to estimate or calibrate. In this paper, we compare the results from two different demand systems: a simple one, the Cobb-Douglas (CD), and a more complex one, the Constant Difference Elasticity (CDE). We develop an hybrid method of estimation - calibration based on the estimation of the parameters and elasticities of a QUAIDS system and on the calibration of those of the CDE system using a cross-entropy approach. The estimates obtained are introduced into a micro-simulated partial equilibrium model to approximate the impact of the VAT reform on poverty measures in Morocco. We show that when the simulated shocks are moderate, the gain of using a CDE system instead of a CD system is marginal but, when these shocks are stronger, the differences become significant and increase. Then the use of these models can lead to different results when evaluating public policies and their impacts on poverty measures.
    Keywords: Demand Systems,Estimation-Calibration,Tax Reform,Morocco,
    JEL: C51 D12 I32 H31
    Date: 2021–02–26

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