nep-pbe New Economics Papers
on Public Economics
Issue of 2021‒06‒21
sixteen papers chosen by
Thomas Andrén

  1. Pareto-improving tax reforms and the Earned Income Tax Credit By Bierbrauer, Felix; Boyer, Pierre; Hansen, Emanuel
  2. Universal Basic Income Programs: How Much Would Taxes Need to Rise? Evidence for Brazil, Chile, India, Russia, and South Africa By Ali Enami; Ugo Gentilini; Patricio Larroulet; Nora Lustig; Emma Monsalve; Siyu Quan; Jamele Rigolini
  3. Monopsony Power, Income Taxation and Welfare By Albert Jan Hummel
  4. Nonlinear Taxation and International Mobility in General Equilibrium By Eckhard Janeba; Karl Schulz
  5. Do Corporate Tax Cuts Boost Economic Growth? By Sebastian Gechert; Philipp Heimberger
  6. The Tax Cuts and Jobs Act: Which Firms Won? Which Lost? By Wagner, Alexander F; Zeckhauser, Richard; Ziegler, Alexandre
  7. Do European Top Earners React to Labour Taxation Through Migration ? By Mathilde Muñoz
  8. Optimal Taxation of Assets By Nicolaus Tideman; Thomas Mecherikunnel
  9. Optimal Taxation of Capital in the Presence of Declining Labor Share By Orhan Erem Atesagaoglu; Hakki Yazici
  10. Effects of Preferential Tax Treatment on German Homeownership By Stefanie Braun
  11. Taxes Depress Corporate Borrowing: Evidence from Private Firms By Ivanov, Ivan T.; Pettit, Luke; Whited, Toni
  12. "Does E-Commerce Ease or Intensify Tax Competition? Destination Principle vs. Origin Principle" By Hiroshi Aiura; Hikaru Ogawa
  13. Static and Dynamic Mirrleesian Taxation with Non-separable Preferences: A Unified Approach By Hellwig, Christian
  14. Charity, Status, and Optimal Taxation: Welfarist and Non-Welfarist Approaches By Aronsson, Thomas; Johansson-Stenman, Olof; Wendner, Ronald
  15. Innovation for Tax Avoidance: Product Differentiation and the Arm's Length Principle By OKOSHI Hirofumi
  16. The effect of unemployment insurance benefits on (self-)employment: Two sides of the same coin? By Camarero Garcia, Sebastian; Hansch, Michelle

  1. By: Bierbrauer, Felix; Boyer, Pierre; Hansen, Emanuel
    Abstract: This paper provides necessary and suffcient conditions for the existence of Pareto-improving tax reforms. The conditions can be expressed as suffcient statistics and have a wide range of potential applications in public finance. We discuss one such application in detail: the introduction of the Earned Income Tax Credit (EITC) in the US. We find that the EITC can be viewed as a response to an inefficiency in the tax and transfer system prevailing at the time. This adds a new perspective to the literature on why the EITC is a good idea, emphasizing Pareto improvements rather than equity-efficiency trade-offs.
    Keywords: Earned Income Tax Credit; Non-linear income taxation; optimal taxation; Tax Reforms
    JEL: C72 D72 D82 H21
    Date: 2020–06
  2. By: Ali Enami (University of Akron); Ugo Gentilini (World Bank); Patricio Larroulet (Tulane University); Nora Lustig (Tulane University); Emma Monsalve (World Bank); Siyu Quan (Tulane University); Jamele Rigolini (World Bank)
    Abstract: Using microsimulations this paper analyzes the poverty and tax implications of replacing current transfers and subsidies by a budget-neutral (no change in the fiscal deficit) universal basic income program (UBI) in Brazil, Chile, India, Russia, and South Africa. We consider three UBI transfers with increasing levels of generosity and identify scenarios in which the poor are no worse off than in the baseline scenario of existing social transfers. We find that for poverty levels not to increase under a UBI reform, the level of spending must increase substantially with respect to the baseline. Accordingly, the required increase in tax burdens is high throughout. In our five countries and scenarios, the least increase in taxes required to avoid poverty to be higher than in the baseline is around 25% (Brazil and Chile). Even at this lower rate, political resistance and efficiency costscould limit the feasibility of a UBI reform.
    Keywords: Universal basic income, microsimulation, inequality, poverty, tax incidence
    JEL: H22 H31 H55 I32 D63
    Date: 2021–06
  3. By: Albert Jan Hummel
    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
  4. By: Eckhard Janeba; Karl Schulz
    Abstract: We study the nonlinear taxation of internationally mobile workers in general equilibrium. Contrary to conventional wisdom, in general equilibrium, migration lowers the bottom tax rate but raises the top tax rate, making the optimal tax system more progressive and moving tax rates closer to those in an economy with fixed wages. The intuition is that governments attract high-skilled workers by amplifying pre-tax wage inequality and partly offsetting trickle-down forces from production complementarities. This finding raises doubts about the importance of trickle-down for optimal taxation and offers a novel explanation for why globalization may increase tax progressivity and wage inequality.
    Keywords: optimal taxation, general equilibrium, trickle-down effects, migration, tax/subsidy competition
    JEL: H21 H24 H73 F22 R13
    Date: 2021
  5. By: Sebastian Gechert; Philipp Heimberger (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: The empirical literature on the impact of corporate taxes on economic growth reaches ambiguous conclusions corporate tax cuts increase, reduce, or do not significantly affect growth. We apply meta-regression methods to a novel dataset with 441 estimates from 42 primary studies. There is evidence for publication selectivity in favour of reporting growth-enhancing effects of corporate tax cuts. Correcting for this bias, we cannot reject the hypothesis of a zero effect of corporate taxes on growth. Several factors influence reported estimates, including researcher choices concerning the measurement of growth and corporate taxes, and controlling for other budgetary components.
    Keywords: Corporate income taxes; economic growth; meta-analysis
    JEL: E60 H25 O40
    Date: 2021–06
  6. By: Wagner, Alexander F; Zeckhauser, Richard; Ziegler, Alexandre
    Abstract: The Tax Cut and Jobs Act (TCJA) slashed corporations' median effective tax rates from 31.7% to 20.8%. Nevertheless, 15% of firms experienced an increase. One fifth of firms recorded nonrecurring tax costs or benefits exceeding 3% of total assets. Proxies that existing studies employ to assess the TCJA's impacts account for just half of actual impacts. Stock prices impounded those proxies during the legislative process. Total impacts were impounded the following year, once firms published their financials. These results indicate that investors find it hard to predict even large and immediate changes to company cash flows due to unfamiliar events.
    Keywords: corporate taxes; event study; Market Efficiency; Tax Cuts and Jobs Act; tax reform
    JEL: G12 G14 H25 O24
    Date: 2020–06
  7. By: Mathilde Muñoz (PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: This paper studies the effects of top income tax rates on top earners' migration, using a novel individual dataset on mobility representative of the entire population of 21 European countries. I exploit the differential effects of changes in top tax rates on individuals at different earnings levels. Top earners' location choices are significantly affected by top income tax rates. The elasticity of the number of top earners with respect to the net-of-tax rate is between 0.1 and 0.3; it is above one for foreigners. Migration elasticities differ widely across member states, leading to different incentives to implement beggar-thy-neighbour tax policies within Europe.
    Date: 2021–06
  8. By: Nicolaus Tideman; Thomas Mecherikunnel
    Abstract: The optimal taxation of assets requires attention to two concerns: 1) the elasticity of the supply of assets and 2) the impact of taxing assets on distributional objectives. The most efficient way to attend to these two concerns is to tax assets of different types separately, rather than having one tax on all assets. When assets are created by specialized effort rather than by saving, as with innovations, discoveries of mineral deposits and development of unregulated natural monopolies, it is interesting to consider a regime in which the government awards a prize for the creation of the asset and then collects the remaining value of the asset in taxes. Analytically, the prize is like a wage after taxes. In this perspective, prizes are awarded based on a variation on optimal taxation theory, while assets of different types are taxed in divergent ways, depending on their characteristics. Some categories of assets are abolished.
    Date: 2021–06
  9. By: Orhan Erem Atesagaoglu; Hakki Yazici
    Abstract: We analyze the implications of the decline in labor’s share in national income for optimal Ramsey taxation. It is optimal to accompany the decline in labor share by raising capital taxes only if the labor share is falling because of a decline in competition or other mechanisms that raise the share of pure profits. This result holds under various alternative institutional arrangements that are relevant for optimal taxation of capital income. A quantitative application to the U.S. economy shows that soaring profit shares since the 1980's can justify a significantly increasing path of capital income taxes.
    Keywords: capital income tax, labor share, profit share, market power
    JEL: E60 E61 E62
    Date: 2021
  10. By: Stefanie Braun
    Abstract: The paper analyzes the effects of mortgage interest deductibility and untaxed imputed rental income on the German homeownership. I use a general equilibrium life-cycle framework, where a minimum down-payment constraint on purchases of housing capital is the critical element of the model framework. I find that both tax policies would increase Germany's low homeownership rate. However, these tax policies would entail substantial welfare losses for individuals of all income quintiles in the long run. Finally, wealth e ects are relatively small and the welfare analysis shows that individuals would prefer to live in an economy without preferential tax treatment of housing.
    Keywords: German homeownership rate; Housing taxation; Imputed rents; Mortgage deductibility; Capital accumulation
    JEL: E62 H3
    Date: 2021–06
  11. By: Ivanov, Ivan T. (Federal Reserve Board, Washington); Pettit, Luke (United States Senate, Washington); Whited, Toni (University of Michigan and NBER)
    Abstract: We re-examine the relation between taxes and corporate leverage, using variation in state corporate income tax rates. In contrast with prior research, we document that corporate leverage increases following tax cuts for both privately held and publicly listed firms. We use an estimated dynamic equilibrium model to show that tax cuts result in lower default spreads and more distant default thresholds. These effects outweigh the loss of benefits from the interest tax deduction and lead to higher leverage, especially for privately held firms. Overall, debt tax shields appear to be a secondary capital structure consideration.
    Date: 2021–03
  12. By: Hiroshi Aiura (Department of Economics, Nanzan University); Hikaru Ogawa (Faculty of Economics, The University of Tokyo)
    Abstract: By constructing a commodity tax competition model with product differentiation, this paperstudies the relationship between the development of e-commerce and the intensity of tax competitionunder two different tax principles to be applied to e-commerce: the destination principle and the originprinciple. Our main ndings are as follows: (i) tax competition between two symmetric countriesunder the destination principle is more intense than tax competition under the origin principle, and(ii) the development of e-commerce raises the tax rate under the origin principle, but lowers it underthe destination principle. An analysis of tax competition among asymmetric countries was alsoconducted. The nding was that in some cases, the development of e-commerce has changed the taxrate set by large and small countries in opposite directions.
    Date: 2021–05
  13. By: Hellwig, Christian
    Abstract: I analyze dynamic Mirrlees taxation with preferences that are non-separable between con- sumption, leisure and type, which determines both ability and consumption needs. I show how to account for non-separable preferences through a simple change in probability measures. I ge- neralize the existing Inverse Euler Equation and optimal static labor tax formulae and provide a unied intuition based on a set of perturbations around the optimal allocations that preserve expected utility and incentive compatibility. Non-separability in preferences gives rise to a new tradeo between current and future redistribution that is internalized by the planner's solution but not by private savings decisions. This leads to a novel rationale to subsidize (tax) savings and make labor taxes more (less) persistent, when more productive agents also have higher (lower) consumption needs.
    Date: 2021–06
  14. By: Aronsson, Thomas (Dept of Economics, Umeå School of Business, Umeå University, Sweden); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, Göteborg University); Wendner, Ronald (Dept of Economics, University of Graz, Austria)
    Abstract: This paper analyzes optimal taxation of charitable giving to a public good in a Mirrleesian framework with social comparisons. Leisure separability together with zero transaction costs of giving imply that charitable giving should be subsidized to such an extent that governmental contributions are completely crowded out, regardless of whether the government acknowledges warm glows of giving. Stronger concerns for relative charitable giving and larger transaction costs support lower marginal subsidies, whereas relative consumption concerns work in the other direction. A dual screening approach, where charitable giving constitutes an indicator of wealth, is also presents. Numerical simulations supplement the theoretical results.
    Keywords: Conspicuous consumption; conspicuous charitable giving; optimal taxation; public good provision; warm glow; multiple screening
    JEL: D03 D62 H21 H23
    Date: 2021–06
  15. By: OKOSHI Hirofumi
    Abstract: Product differentiation both enhances consumer utility and firm profits but at the same time makes it difficult for tax authorities to audit MNE tax avoidance strategies, as the arm's length principle is difficult to apply. This paper incorporates these positive and negative aspects of product differentiation and studies the interrelation between profit shifting and product differentiation. The model shows that MNEs engage in more investment in product differentiation in the presence of profit shifting opportunities, and that globalization accelerates the investment. The model also shows that globalization can improve welfare in a non-tax haven.
    Date: 2021–05
  16. By: Camarero Garcia, Sebastian; Hansch, Michelle
    Abstract: Although a meaningful percentage of firms are created out of unemployment and current active labor market policies in Europe often subsidize unemployed individuals to start their own businesses, little is known about the role of unemployment insurance (UI) generosity for selfemployment. By using Spanish administrative data including previously unavailable information on self-employment, we exploit a reform-driven exogenous cut in UI benefits to identify its causal effect on general employment and decompose it into the effects on self-employment and re-employment. Exploiting a discontinuity in the UI benefit schedule which changed as a result of the 2012 Spanish labor market reform, we estimate the causal reform effects on the extensive margin of (self-)employment and on unemployment duration. We find heterogeneous effects on the extensive margin: while the job-finding rate increases, the startup rate decreases. Over different time horizons, the negative effect on self-employment (35-50%) outweighs the positive effect on employment (5-33%). Our UI benefit duration elasticity estimates indicate that reduced UI benefits extend unemployment duration for individuals transitioning into self-employment but shorten unemployment for individuals finding re-employment. Due to the reform's unintended consequences for self-employment, its general employment effect is much smaller than claimed by analyses that focus only on employment.
    Keywords: Social Insurance,Self-Employment,Spain,Unemployment Insurance
    JEL: H75 J64 J65 J68 L26
    Date: 2021

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