nep-pbe New Economics Papers
on Public Economics
Issue of 2021‒08‒09
twelve papers chosen by
Thomas Andrén

  1. Why Minimum Corporate Income Taxation Can Make the High-Tax Countries Worse off: the Compliance Dilemma By Yukihiro NISHIMURA; Jean HINDRIKS
  2. Rewarding good taxpayers, an effective mechanism? By Pedro A. Cabra-Acela
  3. America’s Regressive Wealth Tax: State and Local Property Taxes By Arik Levinson
  4. Practical Optimal Income Taxation By Jonathan Heathcote; Hitoshi Tsujiyama
  5. Optimal Income Taxation: An Urban Economics Perspective By Mark Huggett; Wenlan Luo
  6. Taxation trends in the European Union: 2021 edition By European Commission
  7. A test run on the impact of wealth taxes on economic growth in South Africa: The way forward By Nemalili, Veronica; Robinson, Zurika
  8. Determinants of tax capacity and tax effort in Southern Africa: An empirical analysis By Chigome, Joyce; Robinson, Zurika
  9. Optimal Wealth Taxation in the Schumpeterian Growth Model with Unemployment By HIRAGUCHI Ryoji
  10. Corporate effective tax rates for R&D: The case of expenditure-based R&D tax incentives By Ana Cinta González Cabral; Silvia Appelt; Tibor Hanappi
  11. Higher Dividend Taxes, No Problem! Evidence from Taxing Entrepreneurs in France By Adrien Matray; Charles Boissel
  12. The Employment Tax Incentive Scheme in South Africa: An Impact Assessment By Haroon Bhorat; Robert Hill; Safia Khan; Kezia Lilenstein; Ben Stanwix

  1. By: Yukihiro NISHIMURA (Graduate School of Economics, Osaka University); Jean HINDRIKS
    Abstract: Minimum taxation means that if a multinational enterprise (MNE) declares its operations in a jurisdiction taxing less than the minimum tax, the countries where the real economic activity takes place would have the right to tax the difference. There is a revival of the minimum tax standard for two reasons. First, there is concern about the complexity of assigning taxing rights and the effectiveness of profit-splitting rules in eliminating profit shifting. Second, the minimum tax standard has the merit of tackling multinational tax avoidance at its root. However, this argument ignores the strategic interaction between minimum taxation and tax compliance. Building upon Hindriks and Nishimura (2021), we develop a framework in which effective international tax compliance requires enforcement coordination between countries (e.g. exchange of information). We show that under sufficient market asymmetry (translating into the tax differential), minimum taxation may induce the low-tax countries to withdraw from international tax compliance agreements. We then show that such a breakdown of cooperation can make the high-tax country worse off compared to the absence of minimum taxation.
    Keywords: Profit shifting; Tax competition; Tax enforcement;
    JEL: C72 F23 F68 H25 H87
    Date: 2021–07
  2. By: Pedro A. Cabra-Acela
    Abstract: In this paper, I examine the conditions under which rewarding honest taxpayers is an optimal mechanism to reduce tax evasion and improve collection. My theoretical model suggests that when it is expensive to audit contributors, and moral (or pecuniary) evasion cost is high enough, rewarding tax compliance is an effective strategy to increase collection. I provide empirical evidence from Argentina’s province variation of rewards policies and tax collection. Where the data suggests that theoretical conditions hold, I find a positive effect in real estate per capita tax collection between 0.4 and more than 2 standard deviations.
    Keywords: Tax evasion, good taxpayer, rewards, fiscal policy, Argentina.
    JEL: H21 H26 H30
    Date: 2021–07–09
  3. By: Arik Levinson (Department of Economics, Georgetown University)
    Abstract: Most taxes in the United States are levied on income flows, not capital stocks. One notable exception is state and local property taxes. This note documents their magnitude and regressivity. Property taxes account for more than 30 percent of state and local tax revenue, and amount to an effective wealth tax rate of 0.86 percent on the assets of the median US homeowner. The effective property-wealth tax rates are highest for younger, lower-income homeowners.
    Keywords: Inequality, wealth tax, property tax
    JEL: H2 H7
    Date: 2021–07–12
  4. By: Jonathan Heathcote; Hitoshi Tsujiyama
    Abstract: We review methods used to numerically compute optimal Mirrleesian tax and transfer schedules in heterogeneous agent economies. We show that the coarseness of the productivity grid, while a technical detail in terms of theory, is critical for delivering quantitative policy prescriptions. Existing methods are reliable only when a very fine grid is used. The problem is acute for computational approaches that use a version of the Diamond-Saez implicit optimal tax formula. If using a very fine grid for productivity is impractical, then optimizing within a flexible parametric class is preferable to the non-parametric Mirrleesian approach.
    Keywords: Ramsey taxation; Optimal income taxation; Mirrlees taxation
    JEL: H24 H21
    Date: 2021–07–30
  5. By: Mark Huggett; Wenlan Luo
    Abstract: We derive an optimal labor income tax rate formula for urban models in which tax rates are determined by traditional forces plus a new term arising from urban forces: house price, migration and agglomeration effects. Based on the earnings distributions and housing costs in large and small US cities, we find that in a benchmark model (i) optimal income tax rates are U-shaped, (ii) urban forces serve to raise optimal tax rates at all income levels and (iii) adopting an optimal tax system induces agents with low skills to leave large, productive cities. While agglomeration effects enter the optimal tax formula, they play almost no quantitative role in shaping optimal labor income tax rates.
    Keywords: Housing; Income inequality; Urban economics; Optimal taxation
    JEL: R20 J10 H20
    Date: 2021–07–23
  6. By: European Commission
    Abstract: This report contains a detailed statistical and economic analysis of the tax systems of the Member States of the European Union, plus Iceland and Norway, which are Members of the European Economic Area. The data are presented within a unified statistical framework (the ESA2010 harmonised system of national and regional accounts), which makes it possible to assess the heterogeneous national tax systems on a fully comparable basis.
    Keywords: European Union, taxation
    JEL: H23 H24 H25 H27 H71
    Date: 2021–07
  7. By: Nemalili, Veronica; Robinson, Zurika
    Abstract: This paper investigates the effects of wealth taxes on the South African economy by analysing the relationship between wealth taxes and the gross domestic product (GDP). It considers the Engle and Granger cointegration technique on annual tax data of the current forms of wealth being taxed (donations tax, transfer duty and estate duty), to determine the empirical relationship between wealth taxes and GDP. The study suggests that wealth tax increases GDP in the long run, with no impact in the short run. If the government introduces additional forms of wealth tax, this change may negatively affect short-run changes in GDP. The proposed wealth tax is a continuous annual tax and will therefore cause individuals to make changes to their economic activities. The paper contends that the introduction of a comprehensive wealth tax in South Africa by the government would not yield favourable results and is thus not recommended.
    Keywords: Wealth taxes, economic growth, South Africa
    Date: 2021–08
  8. By: Chigome, Joyce; Robinson, Zurika
    Abstract: Literature posits that numerous economic and institutional factors limit the amount of taxes that a country can raise. Against this background, the substantive aim of this study was to assess the determinants of tax capacity and tax effort in the SADC. A multi-step procedure was followed to estimate determinants of tax capacity and tax effort using stochastic tax function and unbalanced panel data for 13 SADC countries1. The study disentangled the error term to estimate the random effects separately from tax effort to capture the time-invariant country-specific effects. Further, tax effort was classified as persistent (long-run) and transient (short-run). The findings of the quantitative analysisindicate that financial deepening, economic development and trade openness influence tax capacity, while corruption and inflation influence tax effort. The SADC region has low persistent tax effort, implying that improving tax administration has superseded tax policy reforms. This result is augmented by the fact that tax legislation efforts were largely successful in tax administration but rather limited given tax policy. Tax policy designers should be informed by conditions of a country and policy considerations confirmed.
    Keywords: Tax capacity, tax effort, SADC
    Date: 2021–08
  9. By: HIRAGUCHI Ryoji
    Abstract: In this paper, we construct a Schumpeterian endogenous growth model, taking into account unemployment, and study the effect of wealth tax policy on the employment and the growth rate. In our model, the final good firms use labor and intermediate goods as input. The firms search and match with workers in a frictional labor market. The wage rate is determined by Nash bargaining. We first show that there may be one or two balanced growth paths in the model. We next show that when the equilibrium path is uniquely determined, the reduction of the bargaining power of the worker reduces the balanced growth rate and raises unemployment. We finally show that the wealth tax can enhance innovation, reduce unemployment and raise the economic growth rate. The welfare-maximizing wealth tax rate is generally non-zero, and for some plausible parameter values, the rate is strictly positive.
    Date: 2021–07
  10. By: Ana Cinta González Cabral; Silvia Appelt; Tibor Hanappi
    Abstract: R&D tax incentives have become a widely used policy tool to promote business R&D. How do they shape firms’ incentives to invest in R&D? This paper contributes a methodology to construct forward-looking effective tax rates for an R&D investment that reflect the value of expenditure-based R&D tax incentives. The new OECD estimates cover 48 countries and consider the case of large profitable firms, accounting for the bulk of R&D in most economies. The results provide new insights into the generosity of R&D tax incentives from the perspective of firms that decide on whether or where to invest in R&D (extensive margin) and the level (intensive margin) of R&D investment. The generosity of the favourable tax treatment of R&D is shown to vary at the intensive and extensive margins, highlighting differences in countries’ strategies to support R&D through the tax system.
    JEL: H25 H2 O3 H
    Date: 2021–07–29
  11. By: Adrien Matray (Princeton University); Charles Boissel (HEC-Paris)
    Abstract: This paper investigates how the 2013 three-fold increase in the dividend tax rate in France affected firms’ investment and performance. Using administrative data covering the universe of firms over 2008–2017 and a quasi-experimental setting, we find that firms swiftly cut dividend payments. Firms use this tax-induced increase in liquidity to invest more, particularly when facing high demand and return on capital. For every euro of undistributed dividends, firms increase their investment by 0.3 euro, leading to higher sales growth. Heterogeneity analyses show that no group of firms cut their investment, thereby rejecting models in which higher dividend taxes increase the cost of capital. Overall, our results show that the tax-induced increase in liquidity relaxes credit constraints and can reduce capital misallocation.
    Keywords: France; Financing Policy; Business Taxes; Capital and Ownership Structure
    JEL: G11 G32 H25 O16
    Date: 2020–09
  12. By: Haroon Bhorat; Robert Hill; Safia Khan; Kezia Lilenstein; Ben Stanwix (Development Policy Research Unit, University of Cape Town)
    Abstract: The Employment Tax Incentive (ETI) is a South African wage subsidy programme introduced in 2014 as a form of tax relief for firms hiring workers between the ages of 16 and 29, who earn less than R6 000 per month. Designed as a tool to combat high levels of youth unemployment, the results of studies estimating the effect of the ETI using survey data have shown little to no effect of the subsidy. This paper makes use of the administrative tax data made available through National Treasury in collaboration with the South African Revenue Service (SARS) to accurately identify and estimate the impact of the ETI using individual and firm-level tax returns for the period 2013 to 2016 using a Difference-in-Differences methodology combined with propensity score matching. The impact of the ETI is found to be statistically significant but small in magnitude: During a time when employment levels were decreasing, it is estimated that for every 1 job lost in a non-ETI claiming firm, ETI firms only lost between 0.51 and 0.66 jobs on average. This translates to a total of 35 333 jobs saved between 2014 and 2016 as a result of the ETI. Small firms of fewer than 10 employees have experienced the most benefit from the ETI, with growth of between 0.888 and 0.928 percentage points greater than comparable non-ETI firms, again illustrating a small, but statistically significant, effect of the policy. Furthermore, the effect of the ETI seems to be declining over time, with growth of ETI firms relative to non-ETI firms slowing down in 2015/16 relative to 2014/15, although this is not generalisable to all firm sizes. The ETI does not appear to have negatively impacted employment for workers who are thought to have been most at-risk of displacement due to the subsidy, and has not had any measurable impact on the non-wage benefits of those employed as a result of the subsidy.
    Keywords: Employment Tax Incentive (ETI), South Africa, wage subsidy programme, firms
    Date: 2020–08

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