nep-pbe New Economics Papers
on Public Economics
Issue of 2021‒05‒10
eleven papers chosen by
Thomas Andrén

  1. Technical Appendix: “Income Tax Evasion: Tax Elasticity, Welfare, and Revenue†By Max Gillman
  2. Welfare Effects of Property Taxation By Löffler, Max; Siegloch, Sebastian
  3. Who Bears the Burden of Local Taxes? By Brülhart, Marius; Danton, Jayson; Parchet, Raphaël; Schläpfer, Jörg
  4. Tax Evasion at the Top of the Income Distribution: Theory and Evidence By Guyton, John; Langetieg, Patrick; Reck, Daniel; Risch, Max; Zucman, Gabriel
  5. Tax Progressivity and Self-employment Dynamics By Wiji Arulampalam; Andrea Papini
  6. Land is back, it should be taxed, it can be taxed By Bonnet, Odran; Chapelle, Guillaume; Trannoy, Alain; Wasmer, Etienne
  7. Trying to make a good first impression: A natural field experiment to engage new entrants to the tax system By Dong, Sarah Xue; Sinning, Mathias
  8. Labor Market Institutions and the Incidence of Payroll Taxation By Kim, Jinyoung; Kim, Seonghoon; Koh, Kanghyock
  9. The Effects of Child Tax Benefits on Poverty and Labor Supply: Evidence from the Canada Child Benefit and Universal Child Care Benefit By Baker, Michael; Messacar, Derek; Stabile, Mark
  10. Tax Evasion and Market Efficiency: Evidence from the FATCA and Offshore Mutual Funds By Cheng, Si; Massa, Massimo; Zhang, Hong
  11. In-Kind Transfers as Insurance By Gadenne, Lucie; Norris, Sam; Singhal, Monica; Sukhtankar, Sandip

  1. By: Max Gillman (Department of Economics, University of Missouri-St. Louis)
    Abstract: A technical appendix for “Income Tax Evasion: Tax Elasticity, Welfare, and Revenue.†This paper provides a general equilibrium model of income tax evasion. As functions of the share of income reported, the paper contributes an analytic derivation of the tax elasticity of taxable income, the welfare cost of the tax, and government revenue as a percent of output. It shows how an increase in the tax rate causes the tax elasticity and welfare cost to increase in magnitude by more than with zero evasion. Keeping constant the ratio of income tax revenue to output, as shown to be consistent with certain US evidence, a rising productivity of the goods sector induces less evasion and thereby allows tax rate reduction. The paper derives conditions for a stable share of income tax revenue in output with dependence upon the tax elasticity of reporting income. Examples are provided with less and more productive economies in terms of tax elasticity of reported income, the welfare cost of taxation and the tax revenue as a percent of output, with sensitivity analysis with respect to leisure preference and goods productivity. Discussion focuses on how the tax evasion analysis may help explain such fiscal tax policy as the postwar US income tax rate reductions with discussion of tax acts and government fiscal multipliers. Fiscal policy with tax evasion included shows how tax rate reduction induces less tax evasion, a lower welfare cost of taxation, and makes for a stable income tax share of output.
    Keywords: income tax evasion, tax elasticity, welfare, tax revenue
    JEL: E13 H21 H26 H30 H68 K34 K42 O11
    Date: 2020–09
  2. By: Löffler, Max; Siegloch, Sebastian
    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: Local Labor Markets; property taxation; rental housing; Tax Incidence; welfare
    JEL: H22 H41 H71 R13 R31 R38
    Date: 2021–03
  3. By: Brülhart, Marius; Danton, Jayson; Parchet, Raphaël; Schläpfer, Jörg
    Abstract: We study the incidence of local taxes on the welfare of heterogeneous residents. A structural model of imperfectly mobile households who differ in terms of income and family status allows us to back out preferences for local public goods and mobility parameters that vary by family status. We calibrate the model with plausibly causal tax-base and housing-price elasticity estimates. Based on municipality-level data for Switzerland, we find that households with children have stronger preferences for locally provided public services and are less mobile than households without children. This in turn implies that the burden of local taxes is mainly borne - linearity of taxes and capitalization into lower housing notwithstanding - by above-median income households without children.
    Keywords: heterogeneous households; household mobility; housing prices; Local taxation; public-good preferences; Tax Incidence
    JEL: H24 H71 R21 R31
    Date: 2021–02
  4. By: Guyton, John; Langetieg, Patrick; Reck, Daniel; Risch, Max; Zucman, Gabriel
    Abstract: This paper studies tax evasion at the top of the U.S. income distribution using IRS micro-data from (i) random audits, (ii) targeted enforcement activities, and (iii) operational audits. Drawing on this unique combination of data, we demonstrate empirically that random audits underestimate tax evasion at the top of the income distribution. Specifically, random audits do not capture most tax evasion through offshore accounts and pass-through businesses, both of which are quantitatively important at the top. We provide a theoretical explanation for this phenomenon, and we construct new estimates of the size and distribution of tax noncompliance in the United States. In our model, individuals can adopt a technology that would better conceal evasion at some fixed cost. Risk preferences and relatively high audit rates at the top drive the adoption of such sophisticated evasion technologies by high-income individuals. Consequently, random audits, which do not detect most sophisticated evasion, underestimate top tax evasion. After correcting for this bias, we find that unreported income as a fraction of true income rises from 7% in the bottom 50% to more than 20% in the top 1%, of which 6 percentage points correspond to undetected sophisticated evasion. Accounting for tax evasion increases the top 1% fiscal income share significantly.
    Keywords: inequality; tax evasion; tax gap
    JEL: D63 H26
    Date: 2021–02
  5. By: Wiji Arulampalam; Andrea Papini (European Commission - JRC)
    Abstract: Analysis of the relationship between taxes and self-employment should account for the interplay between responses in self-employment and wage employment. To this end, we estimate a two-state multi-spell duration model which accounts for both observed and unobserved heterogeneity using a large longitudinal administrative dataset for Norway for 1993 to 2011. Our findings confirm theoretical predictions, and are robust to various changes to definitions and sample selections. A policy experiment simulating a flatter tax schedule in the year 2000 is found to encourage self-employment, delivering a net increase of predicted inflow into self-employment from 2.8% to 5.3%.
    Keywords: Tax progressivity; Income tax; Self-employment; Duration analysis.
    JEL: H24 H25 J24 C41
    Date: 2021–05
  6. By: Bonnet, Odran; Chapelle, Guillaume; Trannoy, Alain; Wasmer, Etienne
    Abstract: Land is back. The increase in wealth in the second half of 20th century arose from housing and land. It should be taxed. We introduce land and housing structures in Judd's standard setup: first best optimal taxation is achieved with a property tax on land and requires no tax on capital. With positive taxes on housing rents, a first best is still possible but with subsidies to rental housing investments, and either with differential land tax rates or with a tax on imputed rents. It can be taxed. Even absent land taxes, one can tax it indirectly and reach a Ramsey-second best still with no tax on capital and positive housing rent taxes in the steady-state. This result extends to the dynamics under restrictions on parameters.
    Keywords: Capital; First best; housing; land; Optimal tax; Second best; wealth
    JEL: D63 R14
    Date: 2021–02
  7. By: Dong, Sarah Xue; Sinning, Mathias
    Abstract: Very little is known about the compliance behavior of first-time taxpayers although their tax paying habits may affect the long-run functioning of a tax system. This paper studies the compliance behavior of new entrants to the tax system using data from a large-scale natural field experiment that was implemented in collaboration with the Australian Taxation Office (ATO). We examine the effectiveness of a welcome letter from the tax authority that aims to nudge first-time taxpayers to lodge their first income tax return. We compare this letter to a standard letter that emphasizes the possibility of penalties and interest charges. We find that both letters have surprisingly similar effects on tax compliance, suggesting that the main channel through which the letters affect individual behavior is by providing information. By contrast, the type of messaging and the way in which information is presented to first-time taxpayers appear to be relatively unimportant. Our analysis of heterogeneous treatment effects indicates that both letters are most effective for young entrants to the tax system and, within this group, more effective for Australian citizens than for visa holders.
    Keywords: Tax compliance,natural field experiment,behavioral insights
    JEL: C93 H25 H26
    Date: 2021
  8. By: Kim, Jinyoung (Korea University); Kim, Seonghoon (Singapore Management University); Koh, Kanghyock (Korea University)
    Abstract: Despite unambiguous predictions of the canonical model of a competitive labor market, empirical studies on the labor market effects of payroll taxation provide conflicting evidence. Our meta-analysis shows that varying degrees of labor market competitiveness across places and time could be one explanation for the mixed results. We then estimate the labor market impacts of payroll taxation in Singapore, the country with most competitive and flexible labor market among the countries investigated in the literature. By exploiting the sharp reduction in payroll tax rate when workers turn 60, we find that the payroll tax cut in Singapore has a large effect on wages without changes in employment. We provide novel evidence corroborating the canonical model prediction that the welfare costs of social insurance programs financed by payroll taxes can be minimized in a competitive labor market.
    Keywords: payroll tax, labor market outcomes, incidence, regression discontinuity design, meta-analysis, labor market competitiveness
    JEL: H24 I31 J22
    Date: 2021–04
  9. By: Baker, Michael; Messacar, Derek; Stabile, Mark
    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: Cheng, Si; Massa, Massimo; Zhang, Hong
    Abstract: Using the Foreign Account Tax Compliance Act (FATCA) as an exogenous shock that reduces the tax advantages of offshore funds sold to U.S. investors, we document that affected funds significantly enhance their performance as a response. This effect is stronger for funds domiciled in tax havens and for skilled funds with low flow volatility. Moreover, in generating additional performance, FATCA-affected funds also increase the price efficiency of their invested stocks. Our analysis has important normative implications in showing that curbing offshore tax evasion could help improve efficiency in both the global asset management industry and the security market
    Keywords: FATCA; Market Efficiency; Mutual funds; skills; tax evasion
    JEL: F36 G15 G23 H26
    Date: 2021–02
  11. By: Gadenne, Lucie; Norris, Sam; Singhal, Monica; Sukhtankar, Sandip
    Abstract: Recent debates about the optimal form of social protection programs have highlighted the potential for cash as the preferred form of transfer to low income households. However, in-kind transfers remain prevalent throughout the world. We argue that beneficiaries themselves may prefer in-kind transfers because these transfers can provide insurance against price risk. Households in developing countries often face substantial price variation as a result of poorly integrated markets. We develop a model demonstrating that in-kind transfers are welfare improving relative to cash if the covariance between the marginal utility of income and price is positive. Using calorie shortfalls as a proxy for marginal utility, we find that in-kind transfers improve welfare relative to cash for Indian households, an effect driven entirely by poor households. We further show that expansions in the generosity of the Public Distribution System (PDS) - India's in-kind food transfer program - result not only in increased caloric intake but also reduced sensitivity of calories to prices.
    Keywords: cash transfers; in-kind transfers; India; price risk; Public Distribution System
    JEL: H42 H53 I38 O12 Q18
    Date: 2021–02

This nep-pbe issue is ©2021 by Thomas Andrén. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.