nep-pbe New Economics Papers
on Public Economics
Issue of 2021‒07‒19
fourteen papers chosen by
Thomas Andrén

  1. Third-party Reporting and Tax Collections: Evidence from the Introduction of Withholding of the State Personal Income Tax By Sutirtha Bagchi; Libor Dušek
  2. Unemployment and tax design By Albert Jan Hummel
  3. Entrepreneurial Taxation with Endogenous Firm Entry and Unemployment By Holmberg, Johan
  4. Taxation under Direct Democracy By Stephan Geschwind; Felix Roesel
  5. Reforming the taxation of housing in Israel By Alastair Thomas
  6. Corporate Tax Avoidance of Malaysian Public Listed Companies: A Multi-Measure Analysis By Nirmala Devi Mohanadas
  7. The Impact of COVID-19 on Economic Activity: Evidence from Administrative Tax Registers By Angelov, Nikolay; Waldenström, Daniel
  8. Tax Revenue Forecast Errors: Wrong Predictions of the Tax Base or the Elasticity? By Marcell Göttert; Robert Lehmann
  9. Direct Taxes and Income Redistribution in Nigeria By EDO Onome Christopher
  10. The Pass-Through of Temporary VAT Rate Cuts: Evidence from German Supermarket Retail By Clemens Fuest; Florian Neumeier; Daniel Stöhlker
  11. Profit Shifting and Equilibrium Principles of International Taxation By Manon François
  12. The Effect of Beverage Taxes on Youth Consumption and BMI: Evidence from Mauritius By John Cawley; Michael R. Daly; Rebecca Thornton
  13. Public Pension Reform and the Equity-Efficiency Trade-off By Gustafsson, Johan
  14. The German "debt brake": Success factors and challenges By Feld, Lars P.; Reuter, Wolf Heinrich

  1. By: Sutirtha Bagchi (Department of Economics, Villanova School of Business, Villanova University); Libor Dušek (Charles University, Faculty of Law)
    Abstract: This paper examines the impact of introducing withholding of the personal income tax by state governments in the U.S. We exploit the staggered adoption of withholding by individual states over the period 1948–1987 to construct difference-in-differences style estimates. We obtain a robust finding: Introducing withholding led to an immediate and permanent increase in income tax revenues by about 22 percent, holding tax rates constant. The result is consistent with the crucial role of withholding and third-party reporting in improving tax compliance. We consider several alternative explanations such as changes to the tax base and increases in enforcement activity but these explanations lack support. There is some evidence that non-filing substantially decreased following the introduction of withholding.
    Keywords: Tax Easion; Third-Party Reporting; Withholding; Tax Base Changes; Difference-in-Differences
    JEL: H11 H21 H26 H71 N42
    Date: 2021–07
  2. By: Albert Jan Hummel (University of Amsterdam)
    Abstract: This paper studies optimal income taxation in an environment where matching frictions generate a trade-off for workers between high wages and low unemployment risk. A higher marginal tax rate shifts the trade-off in favor of low unemployment risk, whereas a higher tax burden or unemployment benefit has the opposite effect. Changes in unemployment generate fiscal externalities, which modify optimal tax formulas. I show that optimal employment subsidies (such as the EITC) phase in with income and that the provision of unemployment insurance justifies a positive marginal tax rate even without income heterogeneity. A calibration exercise to the US economy suggests that optimal transfers for low-income individuals are larger if unemployment risk is taken into account.
    Keywords: directed search, optimal taxation, unemployment insurance
    JEL: H21 J64 J65 J68
    Date: 2021–07–04
  3. By: Holmberg, Johan (Department of Economics, Umeå University)
    Abstract: This paper deals with optimal nonlinear taxation of labor and entrepreneurial income and extends the recent study of Scheuer (2014) to accommodate equilib- rium unemployment. We find that even if employment is endogenous, the govern- ment can achieve redistribution of income through taxation without distorting production efficiency. This is possible if the government taxes entrepreneurial and labor income separately. The results also show that including involuntary unem- ployment creates an incentive to tax entrepreneurial income at lower marginal rates and labor income at higher marginal rates than otherwise.
    Keywords: Optimal Taxation; Entrepreneurship; Occupational choice; Unemployment
    JEL: H21 H25 J24 J65 L26
    Date: 2021–06–30
  4. By: Stephan Geschwind; Felix Roesel
    Abstract: Do citizens legislate different tax policies than parliaments? We provide quasi-experimental evidence for causal effects of direct democracy. Town meetings (popular assemblies) replace local councils in small German municipalities below a specific population threshold. Difference-in-differences, RD and event study estimates consistently show that direct democracy comes with sizable but selective tax cuts. Property tax rates, which apply to all residents, decrease by some 10 to 15% under direct democracy. We do not find that business tax rates change. Direct democracy allows citizens to design tax policies more individually than voting for a high-tax or low-tax party in elections.
    Keywords: direct democracy, town meeting, popular assembly, constitution, public finance, taxation
    JEL: D71 D72 H71 R51
    Date: 2021
  5. By: Alastair Thomas (OECD)
    Abstract: This paper examines the taxation of housing in Israel, and proposes a set of reforms to improve the efficiency and fairness of the current system. Israel’s housing tax system faces similar problems to those of many other OECD countries. In particular, a bias arises in favour of owner-occupied property relative to rented property due to the non-taxation of imputed rents and most capital gains. That said, unlike many OECD countries, Israel taxes some owner-occupied capital gains (above a generous threshold) and generally does not allow mortgage interest relief for owner-occupied properties, reducing the extent of the distortion more than in many countries. As with most OECD countries, Israel levies highly distortionary transaction taxes, although a zero-rate band significantly limits the number of owner-occupied house purchases subject to the tax. Additionally, Israel’s recurrent property tax (the Arnona) faces a number of design problems, while the tax rules for rental income are complex and subject to significant tax evasion. To address these concerns, a reform package is proposed that involves a gradual and broadly revenue-neutral shift away from transaction taxes towards recurrent taxation of residential property, via increases in both the recurrent property tax and rental income taxation. The redesign of the recurrent property tax from an area-based to a market value-based tax is also proposed, as are a number of more technical reforms.
    Date: 2021–07–16
  6. By: Nirmala Devi Mohanadas (Faculty of Business, Multimedia University, Malaysia Author-2-Name: Abdullah Sallehhuddin Abdullah Salim Author-2-Workplace-Name: Faculty of Management, Multimedia University, Persiaran Multimedia, 63100 Cyberjaya, Selangor, Malaysia Author-3-Name: Suganthi Ramasamy Author-3-Workplace-Name: Faculty of Business, Multimedia University, 75450 Air Keroh, Melaka, Malaysia Author-4-Name: Author-4-Workplace-Name: Author-5-Name: Author-5-Workplace-Name: Author-6-Name: Author-6-Workplace-Name: Author-7-Name: Author-7-Workplace-Name: Author-8-Name: Author-8-Workplace-Name:)
    Abstract: " Objective - Even with corporate tax avoidance being extensively studied, it is still lacking a single universal measurement. There is also a dearth of studies focusing on developing economies such as Malaysia. This study, therefore, analyses the correlations between effective tax rates (ETRs) and book-tax differences (BTDs), which are the most commonly used measures of corporate tax avoidance on Malaysian listed companies for ten years. Methodology/Technique - This study performs distribution, frequency, and correlation analyses on the ETRs and BTDs of the Top 300 companies listed in the Main Market of Bursa Malaysia based on market capitalization. The data used spans a ten-year period from 2010 to 2019. Findings - The results of the distribution, frequency, and correlation analyses show that both these measures are closely related gauges of corporate tax avoidance. Novelty - The results of this study provide further statistical proof that ETR and BTD measures of corporate tax avoidance are closely related. Its utilization of data from listed companies in Malaysia expands the current body of literature by addressing corporate tax avoidance practice in a developing economy. By concentrating on both ETR and BTD measures, this study's analysis is consistent with the broad continuum of corporate tax avoidance spectrum and significantly reduces the risk of warping its determination of tax avoidance level. Type of Paper - Empirical."
    Keywords: Cash ETR; corporate tax avoidance; GAAP ETR; permanent BDT; total BTD.
    JEL: G30 H25 H26 M40
    Date: 2021–07–30
  7. By: Angelov, Nikolay (Uppsala Center for Fiscal Studies); Waldenström, Daniel (Research Institute of Industrial Economics, Stockholm)
    Abstract: We use population-wide tax register data to document the impact of the COVID-19 pandemic on firm sales, tax revenues, and sick pay in Sweden. The pandemic impact is identified using within-year, between-year, and geographical variation, and our data allows us to run placebo tests. Our findings confirm the large negative effects of the pandemic, but shed new light on their magnitudes and sensitivity to COVID-19 morbidity rates. Specifically, we find that the impact on VAT and firm sales was larger than on commonly used industrial and service production indexes, larger than the effect on electricity for industrial use, but less than the effect on excise taxes on air travel. The pandemic's impact on short-term sick pay is large, but unlike tax payments, it does not vary with local infection rates, indicating behavioral responses to more generous rules for sickness insurance during the pandemic.
    Keywords: COVID-19, VAT, excise taxes, sick pay
    JEL: H24 H25 J22 J24
    Date: 2021–07
  8. By: Marcell Göttert; Robert Lehmann
    Abstract: In this paper, we disentangle tax revenue forecast errors into influences stemming from wrong macroeconomic assumptions and false predictions of the elasticities linking the tax base to its corresponding tax type. Across six tax types and the overall tax sum for Germany, we find a heterogeneous degree of relative importance of both sources. Whereas wrong macroeconomic assumptions matter most for profit-related taxes and the wage tax, false predictions of the elasticities mainly drive the forecast errors of the energy tax and the sales taxes. For the overall tax sum, more than two-third of the error can be attributed to wrong macroeconomic predictions and approximately one-third to false assumptions on the elasticity. Our results suggest that outsourcing the macroeconomic projections to an independent forecaster and methodological improvements can reduce tax revenue forecast errors.
    Keywords: tax revenue forecasting, tax elasticity, unbiasedness, forecast errors
    JEL: H29 H68 H69
    Date: 2021
  9. By: EDO Onome Christopher (Auburn University at Montgomery, Montgomery, Alabama Author-2-Name: EDO Onome Christopher Author-2-Workplace-Name: Department of Information Systems, College of Business, Auburn University at Montgomery, Montgomery, Alabama. Author-3-Name: AKHIGBODEMHE Emmanuel Justice Author-3-Workplace-Name: Department of Economics, Faculty of Social Sciences, University of Benin, Edo- State- Nigeria. Author-4-Name: EDEOGHON Innocent Osaremen Author-4-Workplace-Name: Author-5-Name: Author-5-Workplace-Name: Author-6-Name: Author-6-Workplace-Name: Author-7-Name: Author-7-Workplace-Name: Author-8-Name: Author-8-Workplace-Name:)
    Abstract: Introduction - Income redistribution is central to the development of any nation. However, the issue of generating income and its redistribution in Nigeria has been challenging overtime, with the nation depending largely on oil with little consideration on other sources of income. Also, insufficient tax resources, tax collectors' illicit activities and a lack of awareness of the value of paying tax by taxpayers are some of the problems facing the country in terms of tax revenue generation. Objective - Our study therefore investigated the impact of direct taxes on income redistribution in the context of Nigeria, using company income tax, personal income tax, petroleum profit tax and education tax as direct tax variables. Methodology/Technique - The study covered the period 1990 to 2019 using annualized data set from Federal Inland Revenue Service (FIRS) and Central Bank of Nigeria Statistical Bulletin. The study employed the Fully Modified Least Squares (FMOLS) to analyze the data. Research Findings - Empirical results of our study revealed that, company income tax and education tax had insignificant negative effects on income redistribution, while personal income tax and petroleum profit tax had significant positive effects on income redistribution, thus reducing income inequality in the context of Nigeria. Recommendations - We thus recommended "inter alia" that, revenue generated from taxes should be effectively used by government in providing quality infrastructures like schools, railway, healthcare facilities and other business outfits across various states for the general wellbeing of the citizens as this is hoped to close the income distribution gap between the rich and the less privileged in the country. Type of Paper - Empirical.
    Keywords: Income redistribution; direct taxes; government expenditure on infrastructural goods; Fully Modified Least Squares (FMOLS), Nigeria; Income Inequality.
    JEL: E21 E42 E62 O23
    Date: 2021–06–30
  10. By: Clemens Fuest; Florian Neumeier; Daniel Stöhlker
    Abstract: On 3 June 2020, the German government announced a temporary value added tax (VAT) rate reduction. VAT rates were reduced on 1 July 2020 and went back to their previous level on 1 January 2021. We study the price effects of the temporary VAT rate reduction using a web-scraped data set covering the daily prices of roughly 130,000 supermarket products. To identify the causal price effects, we compare the development of prices in Germany to those in Austria. Our findings indicate an asymmetric price response to the VAT rate cut and subsequent increase. The reduction of VAT rates led to a price decrease of roughly 1.3%, implying that about 70% of the tax cut were passed on to consumers. In contrast, the price effect of the VAT increase was only about half that size. We also study the link between tax incidence and the intensity of competition. Pass-through of the VAT reduction was higher in product groups with a large number of competing products. We rationalize this finding by analyzing consumption tax incidence in the ‘love of variety’ model of consumption.
    Keywords: value added tax, tax incidence, fiscal policy, price effects, competition
    JEL: E31 H22 H25
    Date: 2021
  11. By: Manon François (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: We study the choice between source-based and destination-based corporate taxes in a twocountry model, allowing multinational firms to use transfer pricing to allocate profits across tax jurisdictions. We show that source-based taxation is a Nash equilibrium for tax revenue maximizing jurisdictions if domestic and/or foreign firms generate large revenues. We also show that destination-based taxes are a Nash equilibrium when firms generate low revenues, which implies the presence of multiple equilibria. Both the source and the destination principle coexist in equilibrium when domestic and foreign corporate revenues are average. However, the source principle always Pareto-dominates the destination principle.
    Keywords: Corporate taxes,Multinational firms,Tax competition,Transfer pricing
    Date: 2021–06
  12. By: John Cawley; Michael R. Daly; Rebecca Thornton
    Abstract: Taxes on sugar-sweetened beverages (SSBs) are relatively new and there is little evidence about their impact on SSB consumption or body mass index (as opposed to prices, purchases, or sales), their impact on youth (as opposed to on adults), or their impact in non-Western nations. This paper adds to the evidence base on all of these dimensions by estimating the effect of an SSB tax on the consumption and BMI of youth in Mauritius, an island nation in the Indian Ocean, which we compare to Maldives, another island nation in the Indian Ocean which did not implement an SSB tax during the time of our data. Results of difference-in-differences models indicate that the tax in Mauritius had no detectable impact on the consumption of SSBs or the body mass index of the pooled sample of boys and girls. However, models estimated separately by sex indicate that the probability that boys consumed SSBs fell by 9.4 percentage points (11%). These are among the first estimates of the effect of SSB taxes on youth consumption, and contribute to the limited evidence base on the impact of SSB taxes on weight, or in non-Western countries.
    JEL: H2 H3 I12 I18 L66 O1
    Date: 2021–06
  13. By: Gustafsson, Johan (Department of Economics, Umeå University)
    Abstract: Alternative structures of public pension programs have distinct implications for the trade-offs that determine economic behavior over the life cycle. This paper studies these implications in terms of labor supply and economic inequality to characterize the equity–efficiency trade-off between a redistributive (Beveridgean) and an earnings-based (Bismarckian) benefit formula. The economy is modeled as a continuous-time overlapping generations model with endogenous labor supply, savings, and human capital formation. Individuals differ in ability, and they are free to choose how much to work at each period in time and when to enter and exit the labor market. Numerical simulations provide the qualitative insights that a redistributive pension system introduces opposite effects on the incentives to retire for high- and low-skilled individuals, which leads to an increased earnings inequality. This effect can, in turn, dominate the reduced pension inequality such that lifetime and population-wide income inequality increases. Ultimately, it appears that the equity–efficiency trade-off is difficult to characterize when accounting for endogenous labor supply on both the intensive and extensive margins.
    Keywords: Equity-Efficiency; Inequality; Public Pension Policy
    JEL: H55 I24 J22
    Date: 2021–06–29
  14. By: Feld, Lars P.; Reuter, Wolf Heinrich
    Abstract: Germany introduced a new fiscal rule, the 'debt brake', after the Global Financial Crisis and since then experienced a strong decline in its public debt to GDP ratio until the coronavirus pandemic struck. The past ten years and the reaction to the current crisis in Germany illustrate the intended effects of fiscal rules very well. Debt ratios are reduced during normal economic times, such that fiscal policy can forcefully counteract a severe crisis. Escape clauses are therefore an essential part of the design of fiscal rules. Much of the success of fiscal rules depends on the public and political acceptance of the fiscal rules and thus high political costs of not complying with them. Furthermore, the design and framework of the rules among others by restricting cyclically adjusted figures and a strong legal anchoring are important. It will be important for Germany and other economies to repeat the reduction in the debt to GDP ratio in order to be prepared for the next unexpected crisis. This also means improving the design and framework of fiscal rules, e.g., by making the cyclical adjustment less uncertain and susceptible to revisions, improving the transparency of fiscal policy and rule compliance, as well as discussing as to how fiscal rules can contribute to improving the quality of public finances. However, an abolishment of fiscal rules would hamper the ability of fiscal policy to cope with the long-term challenges and to prepare for unexpected short-term challenges.
    Keywords: Public Debt,Fiscal Policy,Fiscal Rules
    JEL: H62 H63 D78
    Date: 2021

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