nep-pbe New Economics Papers
on Public Economics
Issue of 2021‒04‒26
thirteen papers chosen by
Thomas Andrén

  1. Optimal Taxes and Transfers with Household Heterogeneity By Boris Chafwehé; François Courtoy
  2. Who Does the Earned Income Tax Credit Benefit? A Monopsony View By Aida Farmand; Owen Davis
  3. Optimal Taxation and Market Power By Jan Eeckhout; Chunyang Fu; Wenjian Li; Xi Weng
  4. Labor Demand Response to Labor Supply Incentives: Lessons from the German Mini-Job Reform By Galassi, Gabriela
  5. Redistribution of Return Inequality By Karl Schulz
  6. How Do Business Owners Respond to a Tax Cut? Examining the 199A Deduction for Pass-through Firms By Lucas Goodman; Katherine Lim; Bruce Sacerdote; Andrew Whitten
  7. The Welfare State in Spain: An Impact Assessment By Gonzalo Gomez Bengoechea
  8. Trade, Consumption Pollution and Tax By Cheng, Haitao
  9. Combining microsimulation and optimization to identify optimal flexible tax-transfer rule By Ugo Colombino; Nizamul Islam
  10. Tax-induced Investments in Tax Havens by Spanish Multinationals By Ángela Castillo-Murciego; Julio López-Laborda
  11. Age and Health Related Inheritance Taxation By Marie-Louise Leroux; Pierre Pestieau
  12. How Do Inheritances Shape Wealth Inequality? Theory and Evidence from Sweden By Arash Nekoei; David Seim
  13. Can Nudges Increase Take-up of the EITC?: Evidence from Multiple Field Experiments By Linos, Elizabeth; Prohofsky, Allen; Ramesh, Aparna; Rothstein, Jesse; Unrath, Matt

  1. By: Boris Chafwehé (European Commission (Joint Research Center)); François Courtoy (IRES/LIDAM, UCLouvain)
    Abstract: We investigate the properties of optimal fiscal policy in a framework where householdheterogeneity is accounted for. The Ramsey planner chooses (distortionary) labor taxes andtransfers to maximize aggregate welfare in a two-agent economy. We contrast the propertiesof optimal labor taxes in our model to the ones obtained in the representative agent counter-part. We first show that the presence of household heterogeneity introduces an additionalsource of fluctuations in the optimal tax rate, as varying taxes allows the planner to use trans-fers for redistributive purposes. We then show that, depending on the assumptions that aremade on how transfer receipts are distributed among households, and the type of shockshitting the economy, the structure of government bond markets becomes more or less im-portant in shaping the dynamics of the Ramsey allocation. In some cases, the presence oftransfers brings the incomplete markets allocation close to the one in which the planner hasaccess to state-contingent claims. We finally show that the presence of heterogeneity andoptimal transfers helps bring the behaviour of fiscal variables in the Ramsey model closer totheir counterpart in US data.
    Keywords: Fiscal policy, Household heterogeneity, Optimal taxation, Transfers
    JEL: E32 E62 H21 H23 H31
    Date: 2021–04–16
  2. By: Aida Farmand; Owen Davis (Schwartz Center for Economic Policy Analysis (SCEPA))
    Abstract: The Earned Income Tax Credit (EITC) targets refundable tax credits to low-income workers, incentivizing labor supply and raising the incomes of tens of millions of Americans. One possible consequence of subsidizing low-wage work, however, is to reduce wage growth. A monopsony model of the EITC is developed in order to analyze its impacts on labor market outcomes, which are identified by exploiting variation in state EITC supplements. A first set of results focused on the food service industry find that the EITC increases employment and reduces turnover among young women. Further results suggest that the EITC reduces wages for workers without college degrees. These findings prompt a reconsideration of the redistributive effects of the EITC, particularly for groups like older low-wage workers who face slower wage growth as a result of the policy but do not receive the same level of benefits on average
    Keywords: Retirement income, Social Security claiming, Older worker labor supply
    JEL: H55 J26 J32
    Date: 2021–03
  3. By: Jan Eeckhout; Chunyang Fu; Wenjian Li; Xi Weng
    Abstract: Should optimal income taxation change when firms have market power? The recent rise of market power has led to an increase in income inequality and a deterioration in efficiency and welfare. We analyze how the planner can optimally set taxes on labor income of workers and on the profits of entrepreneurs to induce a constrained efficient allocation. Our results show that optimal taxation in the presence of market power can substantially increase welfare, but it also highlights the severe constraints that the Planner faces to correct the negative externality from market power, using the income tax as a Pigouvian taxes. Pigouvian taxes compete with Mirrleesian incentive concerns, which generally leads to opposing forces. Overall, we find that due to incentive concerns, market power tends to lower marginal tax rates on workers, whereas it increases the marginal tax rate on entrepreneurs.
    Keywords: optimal taxation, optimal profit tax, market power, market structure, markups
    JEL: D3 D4 J41
    Date: 2021–04
  4. By: Galassi, Gabriela (Bank of Canada)
    Abstract: This paper analyzes how firms respond to changes in tax benefits for low-earning workers and how such policies also affect high-earning workers. I explore establishment outcomes around Germany's 2003 Mini-Job Reform, which expanded tax benefits for low-earning workers. I document that highly exposed establishments–high proportion of low-earning workers–increase their employees relative to non-exposed establishments–low proportion of such workers. This relative expansion is tilted towards high-earning workers, not targeted by the tax benefits. Nonexposed establishments substitute employment towards low-earning workers without expanding at the same pace. My findings are consistent with a model in which employment growth the policy intended is accompanied by a reallocation of employment and production between highly exposed firms and non-exposed firms, resulting in an efficiency loss.
    Keywords: tax benefits, firm decisions, spillovers
    JEL: H20 H24 H32 E24 E64 I38 J23 J38
    Date: 2021–04
  5. By: Karl Schulz
    Abstract: Wealthier households obtain higher returns on their investments than poorer ones. How should the tax system account for this return inequality? I study capital taxation in an economy in which return rates endogenously correlate with wealth. The leading example is a financial market, where the rich acquire more financial information than the poor. Contrary to conventional wisdom, rather than calling for more redistribution, the presence of this scale dependence provides a rationale for lower marginal tax rates. The endogeneity of returns generates an inequality multiplier effect between wealth and its returns. Therefore, standard elasticity measures that determine the responsiveness of capital to taxes must be revised upwards. At an aggregate level, a rise in redistribution induces a compression effect on the distribution of pre-tax returns. In the financial market, I identify general equilibrium trickle-up externalities that provide a force for more redistribution relative to the partial equilibrium. Finally, I estimate partial and general equilibrium responses and demonstrate the quantitative importance of scale dependence for tax policy.
    Keywords: optimal taxation, capital taxation, heterogeneous returns, wealth inequality, general equilibrium, asset pricing, private information, financial literacy
    JEL: H21 H23 H24 D31 G11 G12 G14 G53
    Date: 2021
  6. By: Lucas Goodman; Katherine Lim; Bruce Sacerdote; Andrew Whitten
    Abstract: We consider the short-run responses of businesses and their owners to the introduction of Section 199A, a deduction implemented in 2018 that reduced the effective tax rate on pass-through business income. We study the deduction using several datasets derived from de-identified tax records of individuals and businesses. Overall, we do not find an increase in 2018 in business income likely to be eligible for the deduction, either in the time series or among firms with greater exposure to the deduction due to plausibly exogenous characteristics. We additionally examine specific hypothesized margins of adjustment. We find that partnerships (one type of pass-through business) reduce compensation paid to owners, in line with the incentives created by 199A, but that S corporations (another type of pass-through business) mostly do not. Additionally, we do not find that workers – whether new hires or current employees – switch from employee to contractor status to claim the new deduction. Finally, we find no evidence of changes in real economic activity as measured by physical investment, wages to non-owners, or employment of nonowners, though this analysis is underpowered in the short-run.
    JEL: H0 H2 H25 H3
    Date: 2021–04
  7. By: Gonzalo Gomez Bengoechea (Comillas, ICADE Univestity)
    Abstract: We use the methodology developed by Lustig (2016) to analyze fiscal incidence in Spain in the year 2016. Data from the Survey on Life Conditions (ECV) is used to assess the effects of government taxation and public spending on income distribution, inequality and poverty. Our results show that Spain’s redistribution system is more efficient in reducing inequality than the most of the other countries analyzed under this methodological approach. When compared with OECD countries, inequality is higher and redistribution lower, according to the available metrics.
    Keywords: Fiscal Incidence, Inequality, Poverty, Taxes, Social Spending, Regions, Spain
    JEL: H22 I3
    Date: 2020–06
  8. By: Cheng, Haitao
    Abstract: Consumption is an important source of greenhouse gas (GHG) emissions. This study theoretically analyzes how trade liberalization and consumption tax affect firm locations across countries and GHG emissions originating from consumption. Introducing consumption-originated emissions in a standard footloose capital model, we find several novel results that extend previous analyses of production-originated GHG emissions. First, trade liberalization has a non-monotonic effect on global emissions; that is, as trade costs decline, global emissions initially decrease and then increase. Second, consumption taxes cause carbon leakage; that is, the tax on one country reduces emissions in that country, while increasing it in the rest of the world. Third, optimal consumption taxes that maximize global welfare must be neutral about firm location decisions. In particular, even if firms are asymmetrically distributed across countries in the absence of a consumption tax, the optimal tax level must be identical across countries.
    Keywords: Asymmetric market sizes, Consumption pollution, Consumption tax harmonization, Footloose capital model, Trade liberalization
    JEL: F18 Q54 Q58
    Date: 2021–04
  9. By: Ugo Colombino; Nizamul Islam
    Abstract: We use a behavioural microsimulation model embedded in a numerical optimization procedure in order to identify optimal (social welfare maximizing) tax-transfer rules. We consider the class of tax-transfer rules consisting of a universal basic income and a tax defined by a 4th degree polynomial. The rule is applied to total taxable household income. A microeconometric model of household, which simulates household labour supply decisions, is embedded into a numerical routine in order to identify – within the class defined above – the tax-transfer rule that maximizes a social welfare function. We present the results for five European countries: France, Italy, Luxembourg, Spain and United Kingdom. For most values of the inequality aversion parameter, the optimized rules provide a higher social welfare than the current rule, with the exception of Luxembourg. In France, Italy and Luxembourg the optimized rules are significantly different from the current ones and are close to a Negative Income Tax or a Universal basic income with a flat tax rate. In Spain and the UK, the optimized rules are instead close to the current rule. With the exception of Spain, the optimal rules are slightly disequalizing and the social welfare gains are due to efficiency gains. Nonetheless, the poverty gap index tends to be lower under the optimized regime.
    Keywords: empirical optimal taxation, microsimulation, microeconometrics, evaluation of tax-transfer rules.
    Date: 2020
  10. By: Ángela Castillo-Murciego (Departamento de Economía y Empresa, Universidad de La Rioja); Julio López-Laborda (Departamento de Estructura e Historia Económica y Economía Pública, Universidad de Zaragoza)
    Abstract: Tax havens may play a key role in the profit-shifting activity of multinational companies (MNCs), since, among other characteristics, they are the territories with the most beneficial taxes for foreign investors. This paper shows that Spanish MNCs with higher average foreign non-haven tax rates are more likely to invest in tax havens. This outcome is robust to at least two different tax haven lists and various definitions of the average non-haven tax rate. The size of the foreign and domestic activity of the Spanish MNCs, as well as their use of intangible assets and the fact of belonging to the Ibex 35 index, also positively affect the probability of investing in tax havens. By economic sectors, once the endogeneity problem is controlled for, the incentive of third countries’ high taxes on investments in tax havens is greater for manufacturers than for service firms, but this effect is especially high for financial firms. Moreover, within the Ibex 35 index of companies, only the financial firms exert a positive effect on the likelihood of investing in these low-tax territories. Additionally, it seems that while foreign non-haven taxes positively influence the number of different tax havens used by Spanish firms, they have no effect on the number of affiliates located within them. The paper also estimates that Spanish MNCs have been able to save about 4 billion euros per year in corporate income tax in the period 2013-2018 as a result of these practices.
    Date: 2021–04
  11. By: Marie-Louise Leroux; Pierre Pestieau
    Abstract: This paper studies the design of an optimal non linear inheritance taxation when individuals differ in wage as well as in their risks of both mortality and old-age dependance. We assume that the government cannot distinguish between bequests motives, that is whether bequests result from precautionary reasons or from pure joy of giving reasons. Instead, we assume that it only observes whether bequests are made early in life or late in life, and in the latter case, whether the donor is autonomous or not. The main result is that, under asymmetric information, in addition to labour income taxation, early bequests of the low-productivity agent should be distorted downward, that is, they should be taxed so as to relax incentive constraints.
    Keywords: bequest taxation, long term care, utilitarianism, old-age dependency, non linear taxation
    JEL: H21 H23 I14
    Date: 2021
  12. By: Arash Nekoei; David Seim
    Abstract: We use a quasi-experimental design and Swedish administrative data to document that the average heir depletes her inheritance within a decade while the inheritances of wealthy heirs remain intact. These different depletion rates are not due to different consumption or labor supply responses but due to different rates of return on inherited wealth. Upon their receipt, inheritances reduce relative measures of wealth inequality, such as top shares or percentile ratios. Theoretically, this reduction in inequality could be due to either a com-pressed inheritance distribution or similar chances of having wealthy parents (high inter-generational mobility). Empirically, the first force is more significant in Sweden. Within a decade, however, the effect is reversed: inheritances increase wealth inequality since the different depletion rates widen the inequality in inherited wealth over time. This implies that inheritance taxation can reduce long-run wealth inequality only through the taxation of wealthy heirs.
    Date: 2021
  13. By: Linos, Elizabeth; Prohofsky, Allen; Ramesh, Aparna; Rothstein, Jesse; Unrath, Matt
    Keywords: Social and Behavioral Sciences
    Date: 2020–01–01

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