nep-pbe New Economics Papers
on Public Economics
Issue of 2021‒06‒14
fifteen papers chosen by
Thomas Andrén

  1. Optimal taxes on capital in the OLG model with uninsurable idiosyncratic income risk By Krueger, Dirk; Ludwig, Alexander; Villalvazo, Sergio
  2. Welfare improving tax evasion By Canta, Chiara; Cremer, Helmuth; Gahvari, Firouz
  3. Monopsony power, income taxation and welfare By Albert Jan Hummel
  4. Global and digitalised economy, new labour demand scenarios and optimal tax-transfer reforms By Ugo Colombino; Nizamul Islam
  5. Pareto-improving reforms of tax deductions By Köhne, Sebastian; Sachs, Dominik
  6. Evaluating Japan's Corporate Income Tax Reform using Firm-specific Effective Tax Rates By Toshiyuki Uemura
  7. Economic Lessons for Tax Policy Advisers By Gemmell, Norman
  8. Tax Evasion, Efficiency, and Bunching in the Presence of Enforcement Notches By Daniel M. Hungerman
  9. Informality, Consumption Taxes and Redistribution By Bachas, Pierre; Gadenne, Lucie; Jensen, Anders
  10. Universal Basic Income: A Dynamic Assessment By Daruich, Diego; Fernández, Raquel
  11. Revisiting the Extent to Which Payroll Taxes Are Passed Through to Employees: Working Paper 2021-06 By Dorian Carloni
  12. How to Design a Regional Tax Treaty and Tax Treaty Policy Framework in a Developing Country By Kiyoshi Nakayama
  13. What is happening to tax policy in New Zealand and is it sensible? By Gemmell, Norman
  14. A Model of Anticipated Consumption Tax Changes By Masashi Hino
  15. How to Manage Value-Added Tax Refunds By Mario Pessoa; Andrew Okello; Artur Swistak; Virginia Alonso-Albarran; Muyangwa Muyangwa; Vincent de Paul Koukpaizan

  1. By: Krueger, Dirk; Ludwig, Alexander; Villalvazo, Sergio
    Abstract: We characterize the optimal linear tax on capital in an Overlapping Generations model with two period lived households facing uninsurable idiosyncratic labor income risk. The Ramsey government internalizes the general equilibrium effects of private precautionary saving on factor prices and taxes capital unless the weight on future generations in the social welfare function is sufficiently high. For logarithmic utility a complete analytical solution of the Ramsey problem exhibits an optimal aggregate saving rate that is independent of income risk, whereas the optimal time-invariant tax on capital implementing this saving rate is increasing in income risk. The optimal saving rate is constant along the transition and its sign depends on the magnitude of risk and on the Pareto weight of future generations. If the Ramsey tax rate that maximizes steady state utility is positive, then implementing this tax rate permanently induces a Pareto-improving transition even if the initial equilibrium capital stock is below the golden rule.
    Keywords: Idiosyncratic Risk,Taxation of Capital,Overlapping Generations,Precautionary Saving,Pecuniary Externalities
    JEL: H21 H31 E21
    Date: 2021
  2. By: Canta, Chiara; Cremer, Helmuth; Gahvari, Firouz
    Abstract: We study optimal income taxation in a framework where one's willingness to report his income truthfully is positively correlated with his type. We show that allowing low-productivity types to cheat leads to Pareto-superior outcomes as compared to deterring them, even if audits can be performed costlessly. When there is no cheating, redistribution takes place on first- and second-best frontiers and can never make low-ability types more well-off than high-ability types. Letting low-ability types cheat allows first-best redistribution up to a limit at which low-ability types are better off than high-ability types.
    Keywords: audits; optimal taxation; tax evasion; welfare-improving
    JEL: H20 H21 H26
    Date: 2020–07
  3. By: Albert Jan Hummel (University of Amsterdam)
    Abstract: This paper studies the implications of monopsony power for optimal income taxation and welfare. Firms observe workers' abilities while the government does not and monopsony power determines what share of the labor market surplus is translated into profits. Monopsony power increases the tax incidence that falls on firms. This makes labor income taxes less (more) effective in redistributing labor income (profits). The optimal tax schedule is less progressive. Monopsony power alleviates the equity-efficiency trade-off that occurs because the government does not observe ability, but at the expense of exacerbating capital income inequality. I illustrate these findings for the US economy.
    Keywords: monopsony, optimal taxation, tax incidence
    JEL: H21 H22 J42 J48
    Date: 2021–06–05
  4. By: Ugo Colombino; Nizamul Islam
    Abstract: Processes like globalisation, automation and digitalisation might imply important changes on the size and structure of labour demand. An important policy issue is whether and how the tax-transfer rules should be reformed to cope with those changes. We present an extension of the numerical approach to empirical optimal taxation, allowed by a peculiar structure of a microeconometric model of labour supply that includes a representation of the demand side. This makes it possible to identify optimal tax-transfer rules while accounting for equilibrium constraints and to evaluate the effects of exogenous labour demand shocks, such as those that might be caused by globalisation, automation and digitalisation. We consider a flexible class of rules where household disposable income is a 4th polynomial in household taxable income. We perform three exercises. First, we identify optimal polynomial tax transfer rules accounting for labour market equilibrium under the observed labour demand scenario. Second, we investigate how the current tax-transfer rules are able to cope with an exogenous shift of labour demand. Third, we identify the optimal polynomial tax-transfer rule given the new labour demand scenario. We present results using the 2015 EU-SILC data sets for Italy and Luxembourg. The optimal rules, under both the current scenario and the shifted labour demand scenario, feature a universal and unconditional basic income (or, equivalently, a Negative Income Tax) and an almost flat marginal tax rate profile. The welfare gains from the optimal rules critically depend on how elastic the labour demand is, which ultimately depends on the degree of competitiveness of the markets. Therefore, optimal polynomial rules seem to represent a promising direction for reforming the tax-transfer systems, especially if complemented by other reforms aimed at improving the competitiveness of the economy.
    Keywords: empirical optimal taxation, microsimulation, microeconometrics, evaluation of tax-transfer rules, equilibrium, labour demand shocks.
    Date: 2021
  5. By: Köhne, Sebastian; Sachs, Dominik
    Abstract: We analyze Pareto-eï¬?cient tax deduction rules for work-related expenses. Pareto efï¬ ciency dictates a strict rule for marginal deductions along the income distribution. An immediate implication is a recipe for designing Pareto-improving reforms. We apply our theory and simulate a Pareto-improving reform that introduces deductions for non-care household services (housekeeping, gardening, laundry) in the United States. The reform combines marginal deduction rates for household services between 55% and 85% with a slight increase in marginal tax rates.
    Keywords: optimal taxation; Pareto-Improving Tax Re; Tax Deduction
    JEL: D82 H21
    Date: 2020–07
  6. By: Toshiyuki Uemura (School of Economics, Kwansei Gakuin University)
    Abstract: This study evaluates Japan's corporate tax reforms in the 2010s by estimating the effective average tax rate (EATR) and effective marginal tax rate (EMTR), common methods for international comparisons, using data on Japanese firms. Japan lowered its statutory tax rate while it expanded the tax base. The estimated EATR and EMTR declined in Japan, though the EATR decreased less than the statutory tax rate. This was due to the depreciation method reform. This study analyzes the differing effects of the tax rate reduction and depreciation method reform by conducting simulations to represent the effects of each reform on the EATR and EMTR. Japan’s tax reform in the 2010s lowered the EATR via the lower tax rate, while it raised the EMTR via the depreciation method reform.
    Keywords: Corporate income tax, Firm-specific effective tax rates, Effective average tax rates, Effective marginal tax rates
    JEL: H25 H87
    Date: 2021–06
  7. By: Gemmell, Norman
    Abstract: This paper aims to provide tax policy advisers with some lessons from the general economics and public economics literatures relevant for the design of ‘good tax policy’ in relatively developed OECD economies such as New Zealand. It is aimed at those with limited or no background in economics (in general or in the economics of taxation in particular) who are tasked with understanding, devising or advising on, tax policy in practice. In addition to focusing on general lessons from the economics and tax theory literatures, it highlights some specific lessons for particular taxes, including personal income and indirect taxes. The paper is not intended as a guide for the design of specific tax policies, but rather provides some first-principles background, supported by examples, of how to think about setting tax policy in economically sensible ways (and avoid common pitfalls). More detailed background literature is also sign-posted.
    Keywords: Tax policy, Economics, Tax policy advisory,
    Date: 2021
  8. By: Daniel M. Hungerman
    Abstract: A recent literature has studied bunching at notches in tax systems; but work on the implications of bunching for welfare has been limited. We consider a setting where there are discrete changes in the enforcement of tax compliance at certain levels of reported income, creating notches that can lead to bunching. We find that greater levels of bunching can be associated with greater tax efficiency. A simulation exercise demonstrates that notches with greater bunching can be associated with higher welfare than notches with less bunching, and that a tax system with bunching at a notch can generate higher overall social welfare than a revenue-equivalent no-evasion linear tax.
    JEL: H21 H26
    Date: 2021–05
  9. By: Bachas, Pierre; Gadenne, Lucie; Jensen, Anders
    Abstract: Can consumption taxes reduce inequality in developing countries? We combine household expenditure data from 31 countries with theory to shed new light on the redistributive potential and optimal design of consumption taxes. We use the type of store in which purchases occur to proxy for informal (untaxed) consumption. This enables us to characterize the informality Engel curve: we find that the budget share spent in the informal sector steeply declines with income, in all countries. The informal sector thus makes consumption taxes progressive: households in the richest quintile face an effective tax rate that is twice that of the poorest quintile. We extend the standard optimal commodity tax model to allow for informal consumption and calibrate it to the data to study the effects of different tax policies on inequality. Contrary to consensus, we show that consumption taxes are redistributive, lowering inequality by as much as personal income taxes. Once informality is taken into account, commonly used redistributive policies, such as reduced tax rates on necessities, have a limited impact on inequality. In particular, subsidizing food cannot be justified on equity or efficiency grounds in several poor countries.
    Keywords: Household Budget Surveys; inequality; Informality; redistribution; taxes
    JEL: E26 H21 H23 O23
    Date: 2020–06
  10. By: Daruich, Diego; Fernández, Raquel
    Abstract: The idea of universal basic income (UBI)---a set income that is given to all without any conditions---is making an important comeback but there is no real evidence regarding its long-term consequences. This paper provides a very inexpensive evaluation of such a policy by studying its dynamic consequences in a general equilibrium model with imperfect capital markets and labor market shocks, in which households make decisions about education, savings, labor supply, and with intergenerational linkages via skill formation. The steady state of the model is estimated to match US household data. We find that a UBI policy that gives all households a yearly income equivalent to the poverty line level has very different welfare implications for those alive when the policy is introduced relative to future generations. While a majority of adults (primarily older non-college workers) would vote in favor of introducing UBI, all future generations (operating behind the veil of ignorance) would prefer to live in an economy without UBI. The expense of the latter leads to lower skill formation and education, requiring even higher tax rates over time. Modeling automation as an increased probability of being hit by an ``out-of-work'' shock, the model is also used to provide insights on how the benefits of UBI change as the environment becomes riskier. The results suggest that UBI may be a useful transitional policy to help current individuals whose skills are more likely to become obsolete and are unprepared for the increased risk, while, simultaneously, education policies may be implemented to increase the likelihood that future cohorts remain productive and employed.
    Keywords: Human Capital; Labor Supply; taxation; universal basic income
    JEL: H24 H31 I38 J24
    Date: 2020–06
  11. By: Dorian Carloni
    Abstract: Empirical evidence on the incidence of payroll tax changes in the United States is limited and does not generally apply to changes in U.S. federal payroll taxes. Economic models can help inform the effects of such changes on households’ well-being—that is, their welfare effects. In this paper, I rely on partial equilibrium and general equilibrium models to quantify the welfare effects of payroll tax changes. First, I develop a partial equilibrium model of tax incidence and evaluate the short-run incidence of payroll tax changes on employees in the
    JEL: H00 H22 H24
    Date: 2021–06–02
  12. By: Kiyoshi Nakayama
    Abstract: A well-designed regional tax treaty to which developing countries are signatories will include provisions securing minimum withholding taxes on investment income and technical service fees, a taxing right in respect of capital gains from indirect offshore transfers, and guarding against-treaty shopping. A tax treaty policy framework—national or regional—that specifies the main policy outcomes to be achieved before negotiations commence would enable developing countries with more limited expertise and lower capacity for tax treaty negotiations to avoid concluding problematic tax treaties. This note provides guidance for members of regional economic communities in the developing world on what should and should not be included in a regional tax treaty and how to design on a common tax treaty policy framework for use in negotiations of bilateral tax treaties with nonmembers.
    Keywords: value-added tax; corporate tax; regional tax; regional tax policy; regional tax treaty; developing countries; tax treaty; group treaty negotiations; tax treaty position; treaty negotiations; treaty shopping; Double taxation; Withholding tax; Payroll tax; Corporate income tax; Dividend tax; Caribbean; West Africa
    Date: 2021–05–04
  13. By: Gemmell, Norman
    Abstract: This paper reviews two recent changes to tax policy settings in New Zealand: an increase in the top income tax rate and a ‘housing package’. It argues that both represent ad hoc responses without a coherent strategy. Further, government officials’ policy assessments confirm these were progressed unduly rapidly, based on limited analysis, and against official advice on the most suitable option to deliver on the government’s own objectives. This is likely to result in policy outcomes falling well short of objectives, and potentially serious unintended consequences. Coherence of the tax system in particular is at risk.
    Keywords: Housing package, Tax policy, Top tax rate, Policy space,
    Date: 2021
  14. By: Masashi Hino
    Abstract: This paper studies household spending responses to anticipated changes in the consumption tax. To do so, I construct a life-cycle heterogeneous-agent general equilibrium model with durables. The model features a wedge in durable transactions that reflects the actual consumption tax system: households pay the tax when buying the durables but do not receive the tax when selling them. There are three main findings. First, the baseline model reproduces an empirically consistent dynamic pattern of tax elasticity of the taxable spendings. Second, I find that life-cycle is a key component to match the level of tax elasticity of durable spending. Third, the baseline model generates smaller stockpiling of durables based on realistic motive than a model without the wedge. I then use the model for two counter-factual experiments.The first counter-factual experiment finds that the effect of a consumption tax cut is not symmetric to the tax hike. The second counter-factual experiment which compares a one-time tax hike and a multiple-times tax hike shows the multiple-times tax hike scheme generates smaller welfare cost than one-time tax hike.
    Date: 2021–01
  15. By: Mario Pessoa; Andrew Okello; Artur Swistak; Virginia Alonso-Albarran; Muyangwa Muyangwa; Vincent de Paul Koukpaizan
    Abstract: The value-added tax (VAT) has the potential to generate significant government revenue. Despite its intrinsic self-enforcement capacity, many tax administrations find it challenging to refund excess input credits, which is critical to a well-functioning VAT system. Improperly functioning VAT refund practices can have profound implications for fiscal policy and management, including inaccurate deficit measurement, spending overruns, poor budget credibility, impaired treasury operations, and arrears accumulation.This note addresses the following issues: (1) What are VAT refunds and why should they be managed properly? (2) What practices should be put in place (in tax policy, tax administration, budget and treasury management, debt, and fiscal statistics) to help manage key aspects of VAT refunds? For a refund mechanism to be credible, the tax administration must ensure that it is equipped with the strategies, processes, and abilities needed to identify VAT refund fraud. It must also be prepared to act quickly to combat such fraud/schemes.
    Keywords: value-added tax; refunds; VAT; management framework; VAT refund; Georgia revenue service; VAT system; Tax refunds; Tax administration core functions; Credit; Income; Global; Africa;Currencies
    Date: 2021–05–10

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