nep-pbe New Economics Papers
on Public Economics
Issue of 2021‒05‒03
nine papers chosen by
Thomas Andrén

  1. Politically Feasible Reforms of Non-Linear Tax Systems By Bierbrauer, Felix J.; Boyer, Pierre C.; Peichl, Andreas
  2. Insurance, Redistribution, and the Inequality of Lifetime Income By Haan, Peter; Kemptner, Daniel; Prowse, Victoria
  3. Labor market effects of early retirement reforms By Regina T. Riphahn; Rebecca Schrader
  4. Taxation and strategic reaction: A comparison of Cournot, Stackelberg and collusion By Todorova, Tamara; Vatoci, Besar
  5. The Double Dividend of a Joint Tariff and VAT Reform: Evidence from Iran By Yousefi, Kowsar; Vesal, Mohammad
  6. Sin Taxes and Self-Control By Schmacker, Renke; Smed, Sinne
  7. Can Payroll Tax Cuts Help Firms During Recessions? By Youssef Benzarti; Jarkko Harju
  8. Patent Boxes and the Success Rate of Applications By Ronald B. Davies; Ryan M. Hynes; Dieter Franz Kogler
  9. Age and health related inheritance taxation By Leroux, Marie-Louise; Pestieau, Pierre

  1. By: Bierbrauer, Felix J. (University of Cologne); Boyer, Pierre C. (École Polytechnique); Peichl, Andreas (LMU Munich & ifo Institute)
    Abstract: We study reforms of non-linear income tax systems from a political economy perspective. We present a median voter theorem for monotonic tax reforms, reforms so that the change in the tax burden is a monotonic function of income. We also provide an empirical analysis of tax reforms, with a focus on the US. We show that past reforms have, by and large, been monotonic. We also show that support by the median voter was aligned with majority support in the population. Finally, we develop sufficient statistics that enable to test whether a given tax system admits a politically feasible reform.
    Keywords: non-linear income taxation; tax reforms; political economy; optimal taxation;
    JEL: C72 D72 D82 H21
    Date: 2020–04–15
  2. By: Haan, Peter (DIW Berlin); Kemptner, Daniel (DIW Berlin); Prowse, Victoria (Purdue University)
    Abstract: Individuals vary considerably in how much they earn during their lifetimes. We study how the tax-and-transfer system offsets inequalities in lifetime earnings, which would otherwise translate into differences in living standards. Based on a life-cycle model, we find that redistribution by taxes and transfers offsets 54% of the inequality in lifetime earnings that is due to heterogeneous skill endowments. Meanwhile, taxes and transfers insure 45% of lifetime earnings risk. Taxes would provide more insurance if based on lifetime instead of annual earnings. Requiring wealthy individuals to repay social assistance received when younger would strengthen the insurance and redistributive functions of social assistance.
    Keywords: lifetime earnings; lifetime income; tax-and-transfer system; taxation; unemployment insurance; disability benefits; social assistance; inequality; redistribution; insurance; endowments; risk; dynamic life-cycle models;
    JEL: D63 H23 I24 I38 J22 J31
    Date: 2019–09–30
  3. By: Regina T. Riphahn; Rebecca Schrader
    Abstract: We study causal effects of two early retirement reforms. Reform 1 (NRA) increased normal retirement age stepwise from 60 to 63. Simultaneously, it became possible to use early retirement with benefit discounts. Reform 2 (ERA) increased the age of early retirement stepwise from 60 to 63. We investigate behavioral responses to the reforms using administrative data and difference-in-differences strategies. We find strong and significant causal effects of both reforms. Individuals postponed retirement, stayed employed longer, postponed unemployment, and shifted to alternative pathways into retirement. The overall use of the retirement system declined by about 1.5 and 2 months per person after each of the two reforms. Individuals with low pension wealth and those who were affected immediately by the reform responded more strongly.
    Keywords: early retirement, program substitution, labor force participation, causal effects, difference-in-differences, effect heterogeneity
    JEL: H55 J26 C21
    Date: 2020–11
  4. By: Todorova, Tamara; Vatoci, Besar
    Abstract: We study the effect of distortionary taxes on three types of market structure: Cournot duopoly, Stackelberg duopoly, and a monopoly under a collusive agreement between the two rival firms in the industry. We investigate different tax regimes such as a per unit tax, an ad valorem tax and a tax on total revenue. A unit tax rate reduces optimal output and profits for firms while market price rises with the imposition of the tax. Interestingly, the optimal tax rate is the same for all three market structures. The ad valorem tax is imposed on the value of the product and is mostly borne by the Stackelberg follower who ends up producing a greater output than what he would produce in the absence of a tax. The ad valorem tax increases firm output and reduces market price. The total revenue decreases output and increases industry price like the unit tax.
    Keywords: Cournot duopoly, Stackelberg game, optimal tax rate, Lerner index
    JEL: D42 D43 H21 L12 L13
    Date: 2020–06–01
  5. By: Yousefi, Kowsar; Vesal, Mohammad
    Abstract: Abstract A rich theoretical literature discusses whether replacing tariffs with value added tax (VAT) improves efficiency. We provide empirical evidence on a novel complementarity between VAT and trade taxes. Downstream domestic firms require VAT receipts from importers to claim purchases VAT increasing incentives for honest reporting of imports. We use the trade gap, the difference between mirror and domestic trade reports in Iran at 6-digit HS disaggregation, to measure this complementarity. Iran introduced VAT in 2008 and increased its rate from 3 to 9 percent since then. Difference-in-differences estimations show that a 1 percentage point increase in the VAT rate reduces the trade gap by 6.7 percent. Consistent with the compliance mechanisms of VAT, we observe a smaller effect for the consumer products that have a shorter value chain. Our results suggest that replacing tariffs with VAT results in a double dividend. Tax revenue could increase due to better tariff compliance and a broader VAT base.
    Keywords: Value Added Tax; Trade Liberalization; Tariffs; Chains Effect; Tax Compliance;
    JEL: F13 F14 H25
    Date: 2021–04–16
  6. By: Schmacker, Renke (DIW Berlin); Smed, Sinne (University of Copenhagen)
    Abstract: "Sin taxes" are high on the political agenda in the global fight against obesity. According to theory, they are welfare improving if consumers with low self-control are at least as price responsive as consumers with high self-control, even in the absence of externalities. In this paper, we investigate if consumers with low and high self-control react differently to sin tax variation. For identification, we exploit two sets of sin tax reforms in Denmark: first, the increase of the soft drink tax in 2012 and its repeal in 2014 and, second, the fat tax introduction in 2011 and its repeal in 2013. We assess the purchase response empirically using a detailed homescan household panel. Our unique dataset comprises a survey measure of self-control linked to the panelists, which we use to divide the sample into consumers with low and high levels of self-control. We find that consumers with low self-control reduce purchases less strongly than consumers with high self-control when taxes go up, but increase purchases to a similar extent when taxes go down. Hence, we document an asymmetry in the responsiveness to increasing and decreasing prices. We find empirical and theoretical support that habit formation shapes the differential response by self-control. The results suggest that price instruments are not an effective tool for targeting self-control problems.
    Keywords: self-control; soft drink tax; fat tax; sin tax; internality ;
    JEL: H20 D12 I18
    Date: 2020–07–10
  7. By: Youssef Benzarti; Jarkko Harju
    Abstract: This paper estimates the effect of payroll tax cuts on ï¬ rm-level employment and balance-sheet outcomes during economic downturns. We use two regional payroll tax cuts in Finland as well as the onset of the Great Recession to estimate the effect of the recession on ï¬ rms treated by the payroll tax cuts compared to a similar control group. When implemented, prior to the Great Recession, we estimate that the payroll tax cuts had limited effects on employment and balance-sheet outcomes of ï¬ rms located in the treated regions. However, when the recession starts, some of its negative effects were substantially hampered by the previously enacted payroll tax cuts in treated ï¬ rms. These employment effects are exacerbated for men and low-skilled employees. We also ï¬ nd that sales and proï¬ ts in treated ï¬ rms respond differently in treated ï¬ rms during the recession. We provide some evidence showing that ï¬ rms that are liquidity con- strained are the ones that exhibit the strongest response. This shows that payroll tax cuts can make ï¬ rms more resilient during downturns, possibly by relaxing liquidity constraints.
    JEL: H20 H22 H23
    Date: 2021–03
  8. By: Ronald B. Davies; Ryan M. Hynes; Dieter Franz Kogler
    Abstract: Patent boxes significantly reduce the corporate tax rate applied to income earned from a patent. This incentivizes firms to increase the likelihood of a patent application being granted by creating more novel research and using more successful legal representation when filing the application. Conversely, it supports submitting applications for marginally novel innovations that otherwise would not have been submitted, lowering the probability of success. We use data from applications to the European Patent Office from 1978 to 2019 and find that the introduction of a patent box increases the average success rate of applications from large, corporate innovators by 6.9 percentage points. This impact only materializes two years after a patent box takes effect, suggesting that improved research effort is the dominant response by firms. Therefore patent boxes may help to increase innovation novelty and improve the overall quality of research.
    Keywords: Patent Box; Patents; Application Success; Corporate Taxation
    JEL: H25 O31 O32
    Date: 2021–04
  9. By: Leroux, Marie-Louise (Université catholique de Louvain, LIDAM/CORE, Belgium); Pestieau, Pierre (Université catholique de Louvain, LIDAM/CORE, Belgium)
    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: 2021–04–05

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