nep-pbe New Economics Papers
on Public Economics
Issue of 2021‒03‒22
twelve papers chosen by
Thomas Andrén

  1. Welfare Effects of Property Taxation By Loeffler, Max; Siegloch, Sebastian
  2. Generalized Social Marginal Welfare Weights Imply Inconsistent Comparisons of Tax Policies By Itai Sher
  3. Optimal Taxation of Normal and Excess Returns to Risky Assets By Robin Boadway; Kevin Spiritus
  4. What will the OECD BEPS indicators indicate? By Heckemeyer, Jost H.; Nicolay, Katharina; Spengel, Christoph
  5. Taxes and firm investment By K. Peren Arin; Kevin Devereux; Mieszko Mazur
  6. the General Equilibrium Incidence of the Earned Income Tax Credit By Watson, C. Luke
  7. Demographic Transition and its Impacts on Fiscal Sustainability in East and Southeast Asia By Korwatanasakul, Upalat; Sirivunnabood, Pitchaya; Majoe, Adam
  8. Optimal Taxation of Capital in the Presence of Declining Labor Share By Orhan Erem Atesagaoglu; Hakki Yazici
  9. The Effects of Child Tax Benefits on Poverty and Labor Supply: Evidence from the Canada Child Benefit and Universal Child Care Benefit By Michael Baker; Derek Messacar; Mark Stabile
  10. Optimal Carbon Taxation and Horizontal Equity: A Welfare-Theoretic Approach with Application to German Household Data By Martin C. Hänsel; Max Franks; Matthias Kalkuhl; Ottmar Edenhofer
  11. Do tax loss restrictions distort venture capital funding of start-ups? By Bührle, Anna Theresa
  12. Lessons from Denmark about Inequality and Social Mobility By James J. Heckman; Rasmus Landersø

  1. By: Loeffler, Max (Maastricht University); Siegloch, Sebastian (University of Mannheim)
    Abstract: We analyze the welfare implications of property taxation. Using a sufficient statistics approach, we show that the tax incidence depends on how housing prices, labor and other types of incomes as well as public services respond to property tax changes. Empirically, we exploit the German institutional setting with 5,200 municipal tax reforms for identification. We find that higher taxes are fully passed on to rental prices after three years. The pass-through is lower when housing supply is inelastic. Combining reduced form estimates with our theoretical framework, we simulate the welfare effects of property taxes and show that they are regressive.
    Keywords: property taxation, welfare, tax incidence, local labor markets, rental housing
    JEL: H22 H41 H71 R13 R31 R38
    Date: 2021–03
  2. By: Itai Sher (University of Massachusetts Amherst)
    Abstract: This paper concerns Saez and Stantcheva’s (2016) generalized social marginal welfare weights (GSMWW), which are used to aggregate losses and gains due to the tax system, while incorporating non-utilitarian ethical considerations. That approach evaluates local changes in tax policy without appealing to a global social objective. However, I argue that local comparisons between different tax systems implicitly entail global comparisons. Moreover, whenever welfare weights are not of a utilitarian kind, these implied global comparisons are inconsistent. Part of the motivation for the GSMWW approach is that it provides a way to incorporate broader ethical judgements into the evaluation of the tax system while preserving the Pareto principle. I suggest that the problems with the approach ought to spark a reconsideration of Pareto if one wants to represent broader values in formal policy analysis.
    Keywords: welfare weights, optimal taxation, utilitarianism, Pareto principle
    JEL: D63 H21 H23
    Date: 2021–03
  3. By: Robin Boadway (Department of Economics, Queen's University); Kevin Spiritus (Department of Economics, Erasmus University Rotterdam)
    Abstract: We study the optimal taxation of risk-free and excess capital income with heterogeneous rates of return, alongside an optimal nonlinear earnings tax. Households can hold three assets: one risk-free, one risky but diversifiable, and one a private investment with idiosyncratic risk whose expected return differs among households. Contrary to expectations, the optimal tax on excess returns to risky assets is ineffective for redistribution, because its effects are annulled by a Domar-Musgrave effect. It assumes only an insurance role, and is positive. The optimal tax on risk-free returns does fulfill a redistributive role, insofar the risk-free returns reveal information about the investors' types beyond what is revealed by the earnings tax base. The optimal nonlinear earnings tax takes the standard Mirrleesian form amended to take account of the stochasticity of capital income tax revenue.
    Keywords: optimal capital taxation, Rate-of-Return Allowance, risk, excess returns
    JEL: H21 H23 H24
    Date: 2021–03–18
  4. By: Heckemeyer, Jost H.; Nicolay, Katharina; Spengel, Christoph
    Abstract: As part of its action plan against base erosion and profit shifting (BEPS), the OECD (2015) has proposed six indicators to measure profit shifting activity. These indicators add to past and ongoing efforts in academic tax research to empirically identify the scale and tax sensitivity of international profit shifting. In this paper, they discuss whether the proposed OECD indicators indeed represent methodological advances and critically assess their informative value. While a certain need for "easy-access" indicators to measure the relevance of the base erosion problem seems justified, their discussion reveals that the indicators come up with certain shortcomings, many of them acknowledged by the OECD (2015) itself, that prevent them from reliably tracing profit shifting activity in available international data. With one notable exception, the OECD's indicators lack consistent counterfactuals and comparison groups which are essential benchmarks for the observed data. Even the most promising approaches require representative and timely data that covers firms' global activity, including tax haven operations. With better access to such high-quality micro-level data, it will be more promising to empirically isolate the effects of profit shifting from relocations of real economic activity and value creation.
    Keywords: Tax policy,International Taxation,BEPS,OECD,Base Erosion and Profit Shifting
    JEL: H20 H25 H26
    Date: 2021
  5. By: K. Peren Arin; Kevin Devereux; Mieszko Mazur
    Abstract: We investigate the firm level investment responses to narrative shocks to average personal and corporate tax rates using a universal micro dataset of publicly traded U.S firms for the post-1962 period. By allowing for heterogeneous effects over the business cycle and accompanying monetary policy regime, as well as over firm-level characteristics, we show that : (i) corporate tax multipliers are negative overall, but this result is driven by smaller firms who face larger borrowing constraints, especially during high-unemployment periods or when the accompanying monetary policy is contractionary; (ii) while the magnitude and the significance of personal income tax multipliers are smaller on the aggregate, there is some evidence of positive personal tax multipliers in high unemployment state by large (dividend-paying) firms, which is consistent with the recent literature.
    Date: 2021–01
  6. By: Watson, C. Luke
    Abstract: The Earned Income Tax Credit is a $67 billion tax expenditure that subsidizes 20% of all workers. Yet all prior analysis uses partial equilibrium assumptions on gross wages. I derive the general equilibrium incidence of wage subsidies and quantify the importance of EITC spillovers in three ways. I calculate the GE incidence of the 1993 and 2009 EITC expansions using new elasticity estimates. I contrast the incidence of counterfactual EITC and Welfare expansions. I quantify the effect of equalizing the EITC for workers with and without children. In all cases, I find spillovers are economically meaningful.
    Date: 2021–02–02
  7. By: Korwatanasakul, Upalat (Asian Development Bank Institute); Sirivunnabood, Pitchaya (Asian Development Bank Institute); Majoe, Adam (Asian Development Bank Institute)
    Abstract: Many economies in East and Southeast Asia are progressing toward becoming aging or aged societies. The impacts of this demographic transition are multifaceted and far-reaching and include declining tax revenues, leading to fiscal imbalances, and possible increases in government expenditures for coping with care expenses and pension schemes. We provide insights into ways to balance fiscal revenue against costly pension and social security systems and increasing healthcare expenditures. Using panel data for 178 countries across 18 years to capture the state of fiscal balance and data on demographic transition, we estimate three models to analyze the relationships between (i) demographic transition and government balance, (ii) demographic transition and government health expenditure, and (iii) demographic transition and government debt. The results first establish that health expenditure is negatively associated with the government balance. Then, for the relationship between demographic transition and health expenditure, old-age dependency and the share of the population aged over 64 shows a significant positive relationship with health expenditure. We find that demographic transition does not have a direct effect on the government balance, but instead has an indirect effect through higher government expenditure. This can be explained by the high costs of treating health conditions related to old age, including chronic illnesses. Our findings provide important implications for fiscal sustainability and necessitate comprehensive reviews of public health spending; healthcare reforms that prioritize accessibility for all and efficiency in healthcare services; and cost-sharing measures to mitigate the age-related fiscal burden. These measures will be particularly important in dealing with the impacts of the coronavirus disease (COVID-19) pandemic, to which the elderly are particularly vulnerable.
    Keywords: demographic transition; population aging; fiscal balance; fiscal sustainability
    JEL: H30 H51 H55 J11 J14 J18
    Date: 2021–03–03
  8. By: Orhan Erem Atesagaoglu; Hakki Yazici
    Abstract: Numerous recent studies have documented that the labor's share in national income, which has been quite stable until the early 1980's, has been declining at a considerable rate since then. In this paper, we analyze the implications of this decline on the optimal capital and labor income taxation from the perspective of a government that needs to finance spending. Our main qualitative finding is that the optimal tax implications of the decline in the labor share depend on the mechanism responsible for it. In particular, if the labor share is declining because of rising market power or other mechanisms that raise the share of profits in national income, then this decline should optimally be accompanied with a rise in capital income taxes. If, on the other hand, the labor share is declining because of a rise in capital share, then it has no bearing on optimal capital income taxation. The quantitative significance of the decline in labor share for optimal capital taxes depends on the institutional details regarding the taxation of profits: in the baseline scenario, the optimal tax rate on capital income for the U.S. economy starts around zero in early 1980's and rises to about 25% by 2021 in response to the decline in labor share during the same period.
    Date: 2021–03–11
  9. By: Michael Baker; Derek Messacar; Mark Stabile
    Abstract: We investigate whether child tax benefits reduce child poverty and labor force participation among single mothers within the context of the 2015 expansion of the Canadian Universal Child Care Benefit (UCCB) and the 2016 introduction of the Canada Child Benefit (CCB). We compare single mothers to single childless women as single mothers have historically had the highest poverty rates. Our analysis indicates that both reforms reduced child poverty, although the Canada Child Benefit had the greater effect. We find no evidence of a labor supply response to either of the program reforms on either the extensive or intensive margins.
    JEL: H27 J13 J21 J30
    Date: 2021–03
  10. By: Martin C. Hänsel; Max Franks; Matthias Kalkuhl; Ottmar Edenhofer
    Abstract: We develop a model of optimal carbon taxation and redistribution taking into account horizontal equity concerns by considering heterogeneous energy efficiencies. By deriving first- and second-best rules for policy instruments including carbon taxes, transfers and energy subsidies, we then investigate analytically how horizontal equity is considered in the social welfare maximizing tax structure. We calibrate the model to German household data and a 30 percent emission reduction goal. Our results show that energy-intensive households should receive more redistributive resources than energy-efficient households if and only if social inequality aversion is sufficiently high. We further find that redistribution of carbon tax revenue via household-specific transfers is the first-best policy. Equal per-capita transfers do not suffer from informational problems, but increase mitigation costs by around 15 percent compared to the first-best for unity inequality aversion. Adding renewable energy subsidies or non-linear energy subsidies, reduces mitigation costs further without relying on observability of households’ energy efficiency.
    Keywords: carbon price, horizontal equity, redistribution, renewable energy subsidies, climate policy, just transition
    JEL: H21 H23 Q52 Q54
    Date: 2021
  11. By: Bührle, Anna Theresa
    Abstract: Anti-tax loss trafficking rules disallow the use of loss carryforwards after a change in ownership or activity (such as significant changes in turnover, employment, or the product portfolio). This restriction could threaten accumulated loss carryforwards of start-ups. Accounting for the increased risk and reduced return on their investment, VC investors could reduce their funding. I analyze whether the venture capital (VC) funding of start-ups in Europe is affected by these regulations. I base my empirical analysis on several case studies and a panel analysis covering VC- funded companies in the EU28 Member States from 1999 to 2014. My findings suggest that strict anti-tax loss trafficking rules indeed impair VC funding. Especially more mature companies and companies in high-tech industries are affected.
    Keywords: Venture capital,taxes,loss carryforward,start-ups,anti-tax loss trafficking
    JEL: M13 G24 H25
    Date: 2021
  12. By: James J. Heckman; Rasmus Landersø
    Abstract: Many American policy analysts point to Denmark as a model welfare state with low levels of income inequality and high levels of income mobility across generations. It has in place many social policies now advocated for adoption in the U.S. Despite generous Danish social policies, family influence on important child outcomes in Denmark is about as strong as it is in the United States. More advantaged families are better able to access, utilize, and influence universally available programs. Purposive sorting by levels of family advantage create neighborhood effects. Powerful forces not easily mitigated by Danish-style welfare state programs operate in both countries.
    JEL: H24 H44 J12 J18
    Date: 2021–03

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