nep-pbe New Economics Papers
on Public Economics
Issue of 2021‒03‒15
eighteen papers chosen by
Thomas Andrén

  1. Do audits improve future tax compliance in the absence of penalties? Evidence from random Audits in Norway By Shafik Hebous; Zhiyang Jia; Knut Løyland; Thor O. Thoresen; Arnstein Øvrum
  2. The Tax Elasticity of Capital Gains and Revenue-Maximizing Rates By Ole Agersnap; Owen Zidar
  3. Permanent and Transitory Responses to Capital Gains Taxes: Evidence from a Lifetime Exemption in Canada By Adam M. Lavecchia; Alisa Tazhitdinova
  4. How Do Taxpayers Respond to Tax Subsidy for Long-Term Savings? Evidence from Thailand's Tax Return Data By Athiphat Muthitacharoen; Trongwut Burong; Athiphat Muthitacharoen
  5. The Cost of Public Funding with Direct and Indirect Taxation - a Revisit By Bjart J. Holtsmark; Katinka Kristine Holtsmark
  6. Taxes and business philanthropy in Armenia By Asatryan, Zareh; Joulfaian, David
  7. Assessing income tax perturbations By Vidar Christiansen; Zhiyang Jia; Thor O. Thoresen
  8. Reforming the individual income tax in Spain By Nezih Guner; Javier López-Segovia; Roberto Ramos
  9. Tax Refund Uncertainty: Evidence and Welfare Implications By Sydnee Caldwell; Scott Nelson; Daniel C. Waldinger
  10. Public Safety under Imperfect Taxation By Treich, Nicolas; Yang, Yuting
  11. Public Pensions and Private Savings By Esteban García-Miralles; Jonathan M. Leganza
  12. Who Truly Bears (Bank) Taxes? Evidence from Only Shifting Statutory Incidence By Gabriel Jiménez; David Martínez-Miera; José-Luis Peydró
  13. How can culture affect taxation? A postmaterialism value approach By Nicolae-Bogdan IANC; Thierry BAUDASSE
  14. Heterogeneous price and quantity effects of the real estate transfer tax in Germany By Christofzik, Désirée I.; Feld, Lars P.; Yeter, Mustafa
  15. Technology, labour market institutions and early retirement: evidence from Finland By Naomitsu Yashiro; Tomi Kyyrä; Hyunjeong Hwang; Juha Tuomala
  16. Collaborative tax evasion in the provision of services to consumers: A field experiment By Doerr, Annabelle; Necker, Sarah
  17. Whether, When and How to Extend Unemployment Benefits: Theory and Application to COVID-19 By Mitman, Kurt; Rabinovich, Stanislav
  18. The case of taxing multinational corporations in Uganda: Do multinational corporations face lower effective tax rates and is there evidence for profit shifting? By Aliisa Koivisto; Nicholas Musoke; Dorothy Nakyambadde; Caroline Schimanski

  1. By: Shafik Hebous; Zhiyang Jia (Statistics Norway); Knut Løyland; Thor O. Thoresen (Statistics Norway); Arnstein Øvrum
    Abstract: The Norwegian Tax Administration operated multi-year random audits of personal income tax returns. We exploit this exceptional randomized setup to estimate the effects of tax audits on future compliance explicitly distinguishing between dynamic responses of compliant and noncompliant audited taxpayers. A priori, the literature has suggested two competing effects: A post-audit deterrence effect—whereby audits prompt taxpayers to comply in subsequent years—or a “bombcrater” effect—whereby audits lower taxpayers’ subjective probability of detecting future evasion and hence weaken compliance. Our results show improved future compliance for five post-audit years by those that were found noncompliant in the audits, despite the absence of penalty, suggesting that it is not the monetary payment per se that carries a deterrence effect. Those that were found compliant, however, show no signs of behavioral adjustments. Although the findings are consistent with the deterrence effect, mainly stemming from being caught of wrongdoing rather than a penalty, we argue that there is also a “learning” effect with the important implication that better information for taxpayers critically complements tax audits.
    Keywords: Tax administration; tax evasion; tax compliance; tax audits; administrative data
    JEL: H26 C23
    Date: 2020–11
  2. By: Ole Agersnap (Princeton University); Owen Zidar (Princeton University, NBER)
    Abstract: This paper uses a direct-projections approach to estimate the effect of capital gains taxation on realizations at the state level, and then develops a framework for determining revenue-maximizing rates at the federal level. We find that the elasticity of revenues with respect to the tax rate over a ten-year period is-0.5 to -0.3, indicating that capital gains tax cuts do not pay for themselves, and that a 5 percentage point rate increase would yield$18 to$30 billion in annual federal tax revenue. Our long-run estimates yield revenue-maximizing capital gains tax rates of 38 to 47 percent.
    JEL: D31 H24 H25
    Date: 2020–12
  3. 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.
    JEL: G51 H24 H31
    Date: 2021–02
  4. By: Athiphat Muthitacharoen; Trongwut Burong; Athiphat Muthitacharoen
    Abstract: This paper uses a panel of personal income tax return data for the population of Thai tax filers to examine how individuals respond to tax subsidy for long-term savings. We utilize the 2013 tax reform that lowered the price subsidy for long-term savings in order to obtain causal identification. Our difference-in-difference analysis illustrates that there is a considerable heterogeneity in the individual responses to the subsidy cut—with middle-income taxpayers responding much greater than their high-income counterparts. Among the middle-income group, we also find that the subsidy reduction has larger effects on decisions of smaller contributors. Our findings shed light on the heterogeneity of individual responses which are crucial for policymakers who consider an incremental change in the existing tax incentive scheme.
    Keywords: personal income tax, tax subsidy, long-term savings, retirement savings, developing countries
    JEL: H24 H31
    Date: 2021
  5. By: Bjart J. Holtsmark; Katinka Kristine Holtsmark
    Abstract: The paper shows that the marginal cost of public funds (MCF) does not depend on whether public revenue is collected by taxation of consumer goods or income from factors supplied by households on the market. Atkinson and Stern (1974) concluded in their seminal paper that “[...] whether the Conventional Rule provides an under- or over-estimate depends on the choice of taxed good [....].” This conclusion has created confusion in the literature on the MCF and has been the basis for recent literature arguing that the standard measure of the MCF has weaknesses and should be replaced by alternative measures (Jacobs, 2018; Håkonsen, 1998). We show that the conclusion of Atkinson and Stern (1974) on this issue is not valid and is based on an error in their analysis.
    Keywords: marginal cost of public funds, taxation, Samuelson rule
    JEL: H20 H40 H50
    Date: 2021
  6. By: Asatryan, Zareh; Joulfaian, David
    Abstract: The majority of countries around the world provide tax incentives for business philanthropy. However, little is known about the responsiveness of businesses to this tax treatment. This paper expands on this scant literature by focusing on the Armenian tax system which provides incentives for business philanthropy. The support takes the form of a deduction capped at a fraction of business receipts. This generates a kink beyond which the marginal tax subsidy drops to zero. Using administrative panel data for the years 2007 through 2017, we find strong evidence of bunching by Armenian firms at the kink, with a sizeable tax elasticity of giving at the intensive margin. The evidence on bunching is robust to whether firms have been audited, and to whether any tax deficiencies are observed. This suggests that the observed response is likely to be real rather than being driven by reporting responses.
    Keywords: Business philanthropy,charitable giving,corporate income taxes,firm behavior,bunching,tax-price elasticity
    JEL: H25 H32 M14
    Date: 2021
  7. By: Vidar Christiansen; Zhiyang Jia; Thor O. Thoresen (Statistics Norway)
    Abstract: We present a scheme for analysing income tax perturbations, applied to a real Norwegian tax reform during 2016 - 2018. The framework decomposes the reform into a structural reform part and a tax level effect. The former consists of a distributional impact and a social e¢ ciency effect measured as the behavioural-induced change in tax revenue. Considering the overall welfare e¤ect conditional on inequality aversion, we back out the pivotal value of the decision makers’ inequality aversion, according to which unfavourable redistributional e¤ects exactly cancel out a social efficiency enhancement.
    Keywords: income tax; tax reform; tax perturbation; inequality aversion
    JEL: H2 H21 H24
    Date: 2020–12
  8. By: Nezih Guner (CEMFI); Javier López-Segovia (CEMFI); Roberto Ramos (Banco de España)
    Abstract: Can the Spanish government generate more tax revenue by making personal income taxes more progressive? To answer this question, we build a life-cycle economy with uninsurable labor productivity risk and endogenous labor supply. Individuals face progressive taxes on labor and capital incomes and proportional taxes that capture social security, corporate income, and consumption taxes. Our answer is yes, but not much. A reform that increases labor income taxes for individuals who earn more than the mean labor income and reduces taxes for those who earn less than the mean labor income generates a small additional revenue. The revenue from labor income taxes is maximized at an effective marginal tax rate of 51.6% (38.9%) for the richest 1% (5%) of individuals, versus 46.3% (34.7%) in the benchmark economy. The increase in revenue from labor income taxes is only 0.82%, while the total tax revenue declines by 1.55%. The higher progressivity is associated with lower aggregate labor supply and capital. As a result, the government collects higher taxes from a smaller economy. The total tax revenue is higher if marginal taxes are raised only for the top earners.The increase, however, must be substantial and cover a large segment of top earners. The rise in tax collection from a 3 percentage points increase on the top 1% is just 0.09%. A 10 percentage points increase on the top 10% of earners (those who earn more than €41,699) raises total tax revenue by 2.81%.
    Keywords: taxation, progressivity, top earners, labor supply, Laffer curve
    JEL: E21 E6 H2 J2
    Date: 2020–12
  9. By: Sydnee Caldwell (University of California, Berkeley - Haas School of Business; University of California, Berkeley - Department of Economics); Scott Nelson (University of Chicago - Booth School of Business); Daniel C. Waldinger (New York University (NYU) - Furman Center for Real Estate and Urban Policy)
    Abstract: Transfers paid through annual tax refunds are a large but uncertain source of income for poor households. We document that low-income tax-filers have substantial subjective uncertainty about these refunds. We investigate the determinants and consequences of refund uncertainty by linking survey, tax, and credit bureau data. On average, filers’ expectations track realized refunds. More uncertain filers have larger differences between expected and realized refunds. Filers borrow in anticipation of their refunds, but more uncertain filers borrow less, consistent with precautionary behavior. A simple consumption-savings model suggests that refund uncertainty reduces the welfare benefits of the EITC by about 10 percent.
    Date: 2021
  10. By: Treich, Nicolas; Yang, Yuting
    Abstract: Standard benefit-cost analysis often ignores distortions caused by taxation and the heterogeneity of taxpayers. In this paper, we theoretically and numerically explore the effect of imperfect taxation on the public provision of mortality risk reductions (or public safety). We show that this effect critically depends on the source of imperfection as well as on the individual utility and survival probability functions. Our simulations based on the calibration of distributional weights and applied to the COVID-19 example suggest that the value per statistical life, and in turn the optimal level of public safety, should be adjusted downwards because of imperfect taxation. However, we also identify circumstances under which this result is reversed, so that imperfect taxation cannot generically justify less public safety.
    Keywords: Public safety; Environmental health; Imperfect taxation; Value per statistical life; Distortionary taxation; Wealth inequality; Risk aversion
    JEL: D61 H21 H41 I18 Q51
    Date: 2021–02–07
  11. By: Esteban García-Miralles (University of Copenhagen); Jonathan M. Leganza (University of California, San Diego)
    Abstract: How does the provision of public pension benefits impact private savings? We answer this question in the context of a reform in Denmark that altered old-age benefit payouts through a discontinuous increase in pension eligibility ages contingent on birthdate. Using detailed administrative data and a regression discontinuity design, we identify the causal effects of the policy, leveraging our setting to study essentially the entire financial portfolio. We document responses over two distinct time horizons. First, we show a lack of responses after the reform was announced but before it was implemented, inconsistent with the notion that future differences in pension eligibility impact savings. Second, we show large savings responses after implementation, when delayed benefit eligibility induces individuals to extend employment. Specifically, we find increased contributions to both employer-sponsored and personal retirement accounts, whereas we find no evidence of adjustments to other savings vehicles, such as bank or stock market accounts. Additional analyses point to inertia as a leading explanatory channel. The increased savings in personal retirement plans is entirely driven by those who made consistent contributions in the past. Moreover, the increased savings in employer-sponsored plans is largely explained by continuing to contribute at employer default rates, highlighting a role for firm policies in mediating responses to social security reform.
    Keywords: social security, private savings, pension reform
    JEL: H55 D14 J26
    Date: 2021–03–04
  12. By: Gabriel Jiménez (Banco de España); David Martínez-Miera (Universidad Carlos III de Madrid and CEPR); José-Luis Peydró (Imperial College London, ICREA, Universitat Pompeu Fabra, CREI, Barcelona GSE, and CEPR)
    Abstract: We show strong overall and heterogeneous economic incidence effects, as well as distortionary effects, of only shifting statutory incidence (i.e., the agent on which taxes are levied), without any tax rate change. For identification, we exploit a tax change and administrative data from the credit market: (i) a policy change in 2018 in Spain shifting an existing mortgage tax from being levied on borrowers to being levied on banks; (ii) some areas, for historical reasons, were exempt from paying this tax (or have different tax rates); and (iii) an exhaustive matched credit register. We find the following robust results: First, after the policy change, the average mortgage rate increases consistently with a strong – but not complete – tax pass-through. Second, there is a large heterogeneity in such pass-through: larger for borrowers with lower income, a smaller number of lending relationships, not working for the lender, or facing less banks in their zip-code, thereby suggesting a bargaining power mechanism at work. Third, despite no variation in the tax rate, and consistent with the non-full tax pass-through, the tax shift increases banks’ risk-taking. More affected banks reduce costly mortgage insurance in case of loan default (especially so if banks have weaker ex-ante balance sheets) and expand into non-affected but (much) ex-ante riskier consumer lending, experiencing even higher ex-post defaults within consumer loans.
    Keywords: taxes, incidence, banks, inequality, risk-taking, mortgages
    JEL: E51 G21 G28 G51 H22
    Date: 2020–12
  13. By: Nicolae-Bogdan IANC; Thierry BAUDASSE
    Keywords: , culture, social capital, taxation
    Date: 2021
  14. By: Christofzik, Désirée I.; Feld, Lars P.; Yeter, Mustafa
    Abstract: Using quarterly data for German counties, we study how housing prices and offers respond to higher transaction costs induced by tax increases. Since 2006, states can set their own tax rates on real estate transfers. Several and substantial tax hikes generate variation across time and states which we exploit in our empirical analysis using an event study design. Our results indicate that prices and offers decrease significantly by 3% and 6% already in the quarter in which the tax increase is announced in press but rise subsequently. Furthermore, we find heterogeneous responses when distinguishing between different types of counties. Housing prices decrease persistently in shrinking counties, while this is at most temporarily the case in growing, central and peripheral counties. This implies that the economic incidence of this tax varies across transactions.
    Keywords: Real estate transfer tax,real estate prices,housing market,tax incidence,anticipation effects
    JEL: H20 H22 H71 R32 R38
    Date: 2020
  15. By: Naomitsu Yashiro; Tomi Kyyrä; Hyunjeong Hwang; Juha Tuomala
    Abstract: Among various barriers to increasing employment of older workers, this paper focuses on two notable ones that are relevant for the future of work. First, older workers engaged in codifiable, routine tasks are particularly prone to the risk of being displaced by computers and robots. Second, several countries have in place various labour market institutions that encourage early retirement, such as exceptional entitlements or looser criteria for unemployment and disability benefits applied to older individuals. This paper presents evidence that these two factors reinforce each other to push older workers out of employment. It is found that older workers who are more exposed to digital technologies are more likely to leave employment, and that this effect is significantly magnified when they are eligible to an extension of unemployment benefits until they start drawing old age pension. Furthermore, a simple simulation based on the empirical findings illustrates that a reform that tightens the eligibility for the benefit extension would increase mostly the employment of older workers that are more exposed to digital technologies.
    Keywords: early retirement, technological change, unemployment benefits
    JEL: H55 J26 J65 O33
    Date: 2021–03–05
  16. By: Doerr, Annabelle; Necker, Sarah
    Abstract: We conduct a field experiment with sellers of home-improvement services on two German online markets. We take the role of consumers and vary whether we request an invoice for the delivery of the service. In a market which allows anyone to sell anonymously, a willingness to evade is prevalent. In a market that keeps track of credentials, sellers are only willing to evade when a willingness to collude is signaled. The evasion discount is in most estimates not larger than the tax subsidy for legal demand. Evasion is unlikely to be beneficial for many consumers in our setting.
    Keywords: Collaborative tax evasion,evasion discount,undeclared work,third-party reporting,field experiment
    JEL: H26 C93 E26 J22 O17
    Date: 2021
  17. By: Mitman, Kurt (Stockholm University); Rabinovich, Stanislav (University of North Carolina, Chapel Hill)
    Abstract: We investigate the optimal response of unemployment insurance to economic shocks, both with and without commitment. The optimal policy with commitment follows a modified Baily-Chetty formula that accounts for job search responses to future UI benefit changes. As a result, the optimal policy with commitment tends to front-load UI, unlike the optimal discretionary policy. In response to shocks intended to mimic those that induced the COVID-19 recession, we find that a large and transitory increase in UI is optimal; and that a policy rule contingent on the change in unemployment, rather than its level, is a good approximation to the optimal policy.
    Keywords: unemployment insurance, unemployment, optimal policy, COVID-19
    JEL: J65 E6 H1
    Date: 2021–01
  18. By: Aliisa Koivisto; Nicholas Musoke; Dorothy Nakyambadde; Caroline Schimanski
    Abstract: We study how large domestic firms and multinational corporations compare in their effective tax rates and whether there is evidence of profit shifting out of Uganda. Using administrative data from the Uganda Revenue Authority and regression analysis, we find that multinational corporations lower their corporate tax burden through two channels: lower effective tax rates and profit shifting. Multinational corporations pay lower effective tax rates, by approximately 20 percentage points, on their reported profits than large domestic corporations because of tax treaties and other benefits.
    Keywords: Multinational firms, Profit shifting, Corporations
    Date: 2021

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