nep-pbe New Economics Papers
on Public Economics
Issue of 2021‒09‒06
eight papers chosen by
Thomas Andrén

  1. Is tax competition necessarily a Race to the bottom? Optimal tax rate trajectories in the model of tax competition for different objective functions By Sokolovskyi, Dmytro
  2. Intensive and Extensive Margin Labor Supply Responses to Kinks in Disability Insurance Programs By Myhre, Andreas
  3. The Revenue Administration Gap Analysis Program: An Analytical Framework for Personal Income Tax Gap Estimation By International Monetary Fund
  4. The Lock-In Effect and the Corporate Payout Puzzle By Chris Mitchell
  5. Emerging Issues in GST Law and Procedures: An Assessment. By Mehta, Diva; Mukherjee, Sacchidananda
  6. Labour Taxes and International Trade: The Role of Domestic Labour Value Added By Amat Adarov; Mario Holzner; Branimir Jovanovic; Goran Vukšić
  7. Unilateral Tax Policy in the Open Economy By Miriam Kohl; Philipp M. Richter
  8. Minimizing the Minimum Tax? The Critical Effect of Substance Carve-Outs By Mona Baraké; Neef Theresa; Paul-Emmanuel Chouc; Gabriel Zucman

  1. By: Sokolovskyi, Dmytro
    Abstract: The work is devoted to research government tax behavior in tax competition conditions. In detail we study followed issues: is necessarily tax competition lead to Race to the bottom & is possible a simultaneous optimum of tax rate for both economies? This work is the continuation of research about, is it necessarily a Race to the bottom Prisoner’s dilemma. Available studies of tax competition generally focus on the analysis, which countries are inherent the trend to tax rate decrease, can this trend be considered a Race to the bottom, but if not, what are the reasons, that a Race to the bottom is not observed? The difference of the proposed work is that we do not consider additional, though important factors. The optimization model of tax competition for 2 economies evidence that even for one factor – the generalized tax burden, without the separation of income tax and “compensatory” taxes, such as taxes on consumption, labor, environment – a Race to the bottom is not necessarily. Under different conditions, the trend can be directed as to decrease as to increase of tax rate. So, it can be argued that tax competition not necessarily leads to Race to the bottom, as well as Race to the bottom is not necessarily modeled by Prisoner’s dilemma. The obtained results can help understand why some countries do not always follow the general trend to tax rate decrease. In addition, it explains not always the optimal tax behavior of some countries those in this way cause a change in the trend in competitors.
    Keywords: tax competition; race to the bottom; prisoner’s dilemma; tax rate trajectory; modelling
    JEL: C6 E62 H30
    Date: 2021–08–21
  2. By: Myhre, Andreas
    Abstract: While kinks are prevalent in tax and transfer systems, the fiscal revenue and behavioral responses are not fully understood. In disability insurance (DI) programs, for instance, kinks help balance the moral hazard effects from the induced entry with the provision of work incentives for recipients who regain their ability to work. Using quasi-random variation in kink points in the benefit schedule for Norwegian DI recipients, I identify intensive and extensive margin earnings responses to the implicit tax on earnings as DI benefits are phased out above the kink. To identify the intensive margin responses, I implement a non-parametric bunching design that does not require functional form assumptions or deciding an excluded region around the kink. Responses correspond to an earnings elasticity with respect to the implicit net-of-tax rate of about 0.18. Using a regression discontinuity design, I further show that the kink in the benefit schedule induces significant responses at the extensive margin. I use the estimated earnings responses to evaluate how the benefit offset affects program costs, and find that relaxing the benefit offset reduces public expenditures only if program entry is very inelastic. My findings speak to recent policy-proposals aiming to improve work incentives of DI recipients.
    Keywords: labor supply, disability insurance, policy evaluation, bunching
    JEL: H53 H55 I38 J21
    Date: 2021–06–09
  3. By: International Monetary Fund
    Abstract: It is generally difficult to measure revenue not collected due to noncompliance, but a growing number of countries now regularly produce and publish estimated revenue losses. Good tax gap analysis enables the detection of changes in taxpayer behavior by consistent estimates over time. This Technical Note sets out the theoretical concepts for personal income tax (PIT) gap estimation, the different measurement approaches available, and their implications for the scope and presentation of statistics. The note also focuses on the practical steps for measuring the PIT gap by establishing a random audit program to collect data, and how to scale findings from the sample to the population.
    Keywords: Tax Administration; Tax Compliance; Personal Income Tax; Tax Gap; Tax Avoidance; Tax Evasion; Random Audit Program; Shadow Economy; Non-Observed Economy; PIT gap; Personal Income Tax gap estimation; publication order; gap estimate; taxpayer registry data; Auditing; Revenue Administration Gap Analysis Program (RA-GAP)
    Date: 2021–08–27
  4. By: Chris Mitchell
    Abstract: Taxes on capital gains are deferred until realization, whereas dividends are taxed upon accrual. This often makes dividends tax-disadvantaged relative to share repurchases, which leads to the payout puzzle: why do firms pay dividends? This paper demonstrates that tax deferment can also provide a solution to the payout puzzle: if shareholders demand repurchase premiums when selling equity back to a firm - as compensation for accelerated realizations - then dividends can become tax-efficient. This mechanism is appealing because it explains dividend payments without appealing to asymmetric information, incomplete contracts, repurchase constraints, or shareholder irrationality.
    Date: 2019–12
  5. By: Mehta, Diva (Joint Commissioner, State Tax Department, Government of Rajasthan); Mukherjee, Sacchidananda (National Institute of Public Finance and Policy)
    Abstract: Adopted in 2017, the Goods and Service Tax (GST) marked the beginning of a new era in the history of indirect taxation of India - an era aspiring to realize the dream of `One Nation, One Tax' for one of the biggest federal democracies in the world. In line with the fiscal federalism prevalent in India, GST has not only branched into IGST, CGST and SGST with different tax rates, but also has a provision for Centre-to-State compensations to make up for the losses incurred by the States during the transition phase of GST. For such an elaborate taxation arrangement to face bottlenecks, both at the time of roll-out and its subsequent expansion, is not unusual. A range of tailbacks are observed, ranging from the difficulties of transitioning from the earlier regimes, difficulties in the understanding the GST law(s), various technical, procedural and administrative glitches, and above all the complexity of Centre-State relationships. On the fourth year of the adoption of GST in India, we revisit the big Indian dream of national integration via a single-spine tax system. We explore the issues in the existing GST systems to suggest probable solutions that can smoothen the way forward.
    Keywords: Goods and Services Tax (GST) ; Value Added Tax (VAT) ; Input Tax Credit (ITC) ; Reverse Charge Mechanism (RCM) ; Input Service Distributor (ISD)
    JEL: H20 H71 H73 H77
    Date: 2021–08
  6. By: Amat Adarov (The Vienna Institute for International Economic Studies, wiiw); Mario Holzner (The Vienna Institute for International Economic Studies, wiiw); Branimir Jovanovic (The Vienna Institute for International Economic Studies, wiiw); Goran Vukšić
    Abstract: This paper revisits the relationship between labour taxation and international trade, focusing on the role of domestic labour value added. Using sectoral data from 41 EU and OECD economies over the period 2005-2014, we assess how labour taxes affect exports and imports and how domestic labour value added shapes this relationship. We find that higher labour taxes reduce exports but that the effect depends to a large extent on the share of domestic labour value added, which differs by industries, countries and time periods. Imports do not seem to be affected. This implies that changes in labour taxes will not affect all sectors and countries in the same way and that policy makers should be aware of this when deciding on labour taxes. We also calculate the contribution of labour tax changes to the export dynamics in the analysed period and sample of countries, finding that in general the contribution is small.
    Keywords: taxation, labour, international trade, exports, imports, labour share
    JEL: F14 F16 H24 J32
    Date: 2021–08
  7. By: Miriam Kohl (Johannes Gutenberg University Mainz); Philipp M. Richter (TU Dresden)
    Abstract: This paper examines the effects of a unilateral reform of the redistribution policy in an economy open to international trade. We set up a general equilibrium trade model with heterogeneous agents allowing for country asymmetries. We show that under international trade compared to autarky, a unilateral tax increase leads to a less pronounced decline in aggregate real income in the reforming country, while income inequality is reduced to a larger extent for sufficiently small initial tax rates. We highlight as a key mechanism a tax-induced reduction in the market size of the reforming country relative to its trading partner, resulting in a firm selection effect towards exporting. From the perspective of a non-reforming trading partner, the unilateral redistribution policy reform resembles a unilateral increase in trade costs leading to a deterioration of terms-of-trade and a decline in both aggregate real income and inequality.
    Keywords: Income inequality, Redistribution, International trade, Heterogeneous firms
    JEL: D31 F12 F16 H24
    Date: 2021–08–26
  8. By: Mona Baraké (EU Tax - EU Tax Observatory); Neef Theresa (EU Tax - EU Tax Observatory); Paul-Emmanuel Chouc (EU Tax - EU Tax Observatory); Gabriel Zucman (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, EU Tax - EU Tax Observatory)
    Abstract: In July 2021, 132 countries agreed to a minimum tax rate of at least 15% on their multinationals' profits. However, the joint statement includes a provision that could substantially reduce the effectiveness of this policy. Specifically, the proposed agreement allows multinationals to reduce profits subject to the minimum tax by an amount equal to 5% of the value of their assets and payroll in each country. This carve-out would allow companies to escape taxation as long as they have sufficient operations (assets and employees) in tax havens. In this note, we model how this carve-out would affect the revenues of a global minimum tax. We also discuss the economic issues raised by this type of exemption. We find that a carve-out would reduce tax revenues by 15% to 30% in the European Union relative to a minimum tax without carve-out (depending on the rate of the carve-out and the rate of the minimum tax). Moreover, this policy would exacerbate tax competition by giving firms incentives to move real activity to tax havens. More precisely, in the European Union, a 5% carve-out would reduce revenues of a 25% minimum tax by 21% from €168 billion to €132 billion; it would reduce revenues of a 15% minimum tax by 15% from €48 billion to about €41 billion. A 7.5% carve-out (which is envisioned during the first 5 years of the international agreement) would reduce revenues by 31% for a 25% minimum tax, and by 23% for a 15% minimum tax. Our analysis is based on the data sources and methodology used in the inaugural report of the EU Tax Observatory, "Collecting the Tax deficit of Multinational Companies: Simulations for the European Union" (Baraké et al., 2021). To estimate the cost of substance-based carve-outs, we additionally draw on the OECD's country-by-country data for the value of tangible assets and the number employees, and on data published by the International Labour Organization on monthly earnings.
    Date: 2021–07

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