nep-pbe New Economics Papers
on Public Economics
Issue of 2021‒10‒04
twelve papers chosen by
Thomas Andrén

  1. A wealth tax at work By Thor O. Thoresen; Marius A. K. Ring; Odd E. Nygård; Jon Epland
  2. Are risk-based tax audit stretegies rewarded? An analysis of corporate tax avoidance By Eberhartinger, Eva; Safaei, Reyhaneh; Sureth, Caren; Wu, Yuchen
  3. Leisure as a complement of banking: Taxing financial services for reducing leisure time? By Peña, Guillermo
  4. Income Taxes and Redistribution in the Early Twentieth Century By Torrregrosa Hetland, Sara; Sabaté, Oriol
  5. The epidemiology of tax avoidance narratives By Lorenz, Johannes; Diller, Markus; Sureth, Caren
  6. Optimal Taxation in an Endogenous Fertility Model with Non-Cooperative Couples By Takuya Obara; Yoshitomo Ogawa
  7. Have European Banks left tax haven? Evidence from country-by-counry data By Giulia Aliprandi; Mona Baraké; Paul-Emmanuel Chouc
  8. Methodological Notes for “Income Taxes and Redistribution in the Early Twentieth Century” and “Income Tax Progressivity and Inflation during the World Wars” By Torrregrosa Hetland, Sara; Sabaté, Oriol
  9. Welfare effects of tax policy change when there are choice restrictions on labour supply By Zhiyang Jia; Thor O. Thoresen
  10. What we pay in the shadow: Labor tax evasion, minimum wage hike and employment By Nicolas Gavoille; Anna Zasova
  11. Intended and unintended effects of public incentives for innovation. Quasi-experimental evidence from Italy By Giovanni Mellace; Marco Ventura
  12. The informational value of environmental taxes By Stefan Ambec; Jessica Coria

  1. By: Thor O. Thoresen; Marius A. K. Ring; Odd E. Nygård; Jon Epland (Statistics Norway)
    Abstract: Over the past decade, the question of whether and how to tax household wealth has risen to the forefront of policy debates across the world. Norway belongs to only a handful of countries that (still) levy an annual net wealth tax. We exploit rich Norwegian administrative data to perform descriptive analyses that address questions at the focal point of the wealth tax debate. We discuss how the taxation of wealth fits in with the personal income tax. We further investigate the redistributional effects of wealth taxation and explore the extent to which wealth taxation may cause adverse liquidity effects for private firms. Finally, we consider the effects of wealth taxation on charitable giving. Taken together, we see the evidence presented here as not weakening the case for upholding the tax: we find favorable distributional effects and the efficiency losses appear to be limited.
    Keywords: Wealth tax; administrative data; distributional effects; efficiency loss
    JEL: H21 H23 H25 H31
    Date: 2021–08
  2. By: Eberhartinger, Eva; Safaei, Reyhaneh; Sureth, Caren; Wu, Yuchen
    Abstract: This study examines the relation between risk-based tax audit strategies and corporate tax avoidance. We exploit OECD data across 54 countries on risk profiling, predictive modeling, and internal intelligence functions in tax administrations from 2014 to 2017 to investigate whether risk-based tax audits have an incremental effect on tax avoidance beyond enforcement. Our results suggest that the use of risk-based tax audits is associated with lower tax avoidance when controlling for tax enforcement, firm-specific, and country-specific factors. Cross-sectional tests indicate that risk-based tax audit strategies are effective tools to curb tax avoidance across firms of all sizes. The results of additional cross-sectional analyses indicate that risk-based tax audits are more effective in countries with low governance quality, high GDP, and low trust in governments. In additional tests, we use country-level data on tax administration performance and find evidence that countries with a risk-based audit strategy have lower costs of tax enforcement and improve the performance of tax authorities. Overall, our findings indicate that risk-based tax audit strategies have an incremental effect on attenuating firms' tax avoidance and increasing tax revenue.
    Keywords: tax audits,tax avoidance,tax compliance,tax enforcement,tax risk
    JEL: H25 H26 M41 M42 M48
    Date: 2021
  3. By: Peña, Guillermo
    Abstract: Optimality of consumption taxes as VAT can be conditioned by the reduction of working time respect to leisure. Nonetheless, may we tax a good or service complementary to leisure? In this case, by applying the tax, the good itself would be discouraged, but also leisure at the same time. This paper theoretically discusses and analyzes the potential complementarity or neutrality of financial services regarding leisure time. A reduced general equilibrium model is developed, suggesting their complementarity. This is confirmed in the empirical section, where data from 30 OECD countries for 2018 is employed, obtaining that some financial indicators are usually complements of leisure, specifically for women, who are also sensitive in their leisure time to other fiscal and commercial variables. This show that the elimination of the exemption of financial services under VAT may discourage leisure hours, offsetting the discouragement of working hours by the general VAT.
    Keywords: Leisure time, financial services, complementarity, financial VAT, optimal taxation
    JEL: G21 H21 H25 J22
    Date: 2021–09–27
  4. By: Torrregrosa Hetland, Sara (Department of Economic History, Lund University); Sabaté, Oriol (Department of Economic History, University of Barcelona)
    Abstract: This paper studies the developments in the income taxes of Sweden, the United Kingdom, and the United States during the first half of the twentieth century. We present the evolution of marginal and average effective tax rates, number of taxpayers, and income tax due over the whole income distribution, and calculate the corresponding indices of progressivity and redistribution. Our results show that redistribution through the income tax increased during the period, but with varying intensity and mechanisms. During World War I this was a joint effect of increases in the amount of revenue collected (average effective tax rate) and progressivity, whereas during World War II revenue increased again but progressivity diminished, as the tax incorporated more low- and middle-income taxpayers. The income tax in the United Kingdom was always the most redistributive of the three, and after 1945 also the one that remained most progressive.
    Keywords: taxation; redistribution; progressivity; income tax; world wars
    JEL: H23 H24 N42 N44
    Date: 2021–06–30
  5. By: Lorenz, Johannes; Diller, Markus; Sureth, Caren
    Abstract: This study investigates the contagious nature of tax avoidance by examining how narratives affect tax avoiding behavior. We adapt the idea of narrative economics indicating that individuals' actions are stimulated by stories that spread within a society. We employ two types of infection models to theoretically investigate how tax avoidance schemes spread over time and vanish eventually consistent with patterns known from epidemiology. We find that general tax avoidance can persist even if its expected outcome is negative, while specific tax avoidance schemes might vanish even though their expected outcome is positive. We find empirical support for the predicted dissemination of narratives related to both general and specific tax avoidance schemes in google n-grams. Finally, we show that dissemination of specific tax avoidance schemes is attenuated by anti-narratives in (social) media. Our findings help to understand how tax avoidance spreads, under what conditions anti-avoidance measures can effectively curb tax avoidance and point towards the crucial role of transparency of enhanced enforcement by visible narratives.
    Keywords: tax avoidance,tax evasion,epidemiology,contagion,SIS-model,SIR-model,n-grams
    JEL: H26 C73 K34
    Date: 2021
  6. By: Takuya Obara; Yoshitomo Ogawa
    Abstract: This study examines the optimal tax structure in an endogenous fertility model with non-cooperative couples. In the model, both child quality and quantity are suboptimal due to the non-cooperative behavior of couples. Moreover, we consider the external effects of children on society and center-based childcare services. In such a unified model, we characterize the formulas for optimal income tax rates, child tax/subsidy rates, and tax/subsidy rates on center-based childcare services. We find that income taxation, not child subsidy, corrects the suboptimal low fertility level caused by the non-cooperative behavior of couples, and that a child tax can be optimal to alleviate the deadweight loss from income taxation. We also identify the condition under which a child subsidy is needed. The subsidy for external childcare services corrects the external effects of children on society, not the non-cooperative behavior of couples.
    Date: 2021–09
  7. By: Giulia Aliprandi (EU Tax - EU Tax Observatory, 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); Mona Baraké (EU Tax - EU Tax Observatory); Paul-Emmanuel Chouc (EU Tax - EU Tax Observatory)
    Abstract: This study documents the activity of European banks in tax havens and how this activity has evolved since 2014. The analysis covers 36 systemic European banks that have been required to publicly report country-by-country data on their activities since 2015. We study the level and evolution of the profits booked by these banks in tax havens over the 2014-2020 period. We also compute their effective tax rates and their tax deficit—defined as the difference between what these banks currently pay in taxes and what they would pay if they were subject to a minimum effective tax rate in each country. We start by creating a list of tax haven jurisdictions used by the banking sector. We combine two indicators to identify tax havens: the effective tax rate on bank profit and the amount of bank profit per employee. Overall, 17 jurisdictions feature in our list: Bahamas, Bermuda, the British Virgin Islands, Cayman Islands, Guernsey, Gibraltar, Hong Kong, Ireland, Isle of Man, Jersey, Kuwait, Luxembourg, Macao, Malta, Mauritius, Panama, and Qatar. Using this list, we show that European banks use tax havens significantly, with no trend during the 2014–2020 period. The main European banks book EUR 20 billion (or 14% of their total profits) in tax havens each year. This percentage has been stable since 2014 despite the introduction of mandatory information disclosure. Bank profitability in tax havens is abnormally high: EUR 238 000 per employee, as opposed to around EUR 65 000 in non-haven countries. This suggests that the profits booked in tax havens are primarily shifted out of other countries where service production occurs. Around 25% of the profits made by the European banks in our sample are booked in countries with an effective tax rate lower than 15%. The use of tax havens varies considerably from bank to bank. The mean percentage of profits booked in tax havens is about 20% and ranges from 0% for nine banks to a maximum of 58%. The mean effective tax rate paid by the banks in our sample is 20%, with a minimum of 10% and a maximum of 30%. Seven banks exhibit a particularly low effective tax rate, below or equal to 15%. To better understand this heterogeneity, we analyse the use of tax havens by three banks with a relatively high presence in tax havens: HSBC, Deutsche Bank, and Société Générale. We observe a diversity of situations: for HSBC, the bulk of haven profits come from just one haven (Hong Kong), while in other cases multiple tax havens are involved. We estimate the amount of revenues that could be collected by applying a minimum tax rate on the profits of banks. We simulate a tax similar to the G20/OECD minimum tax proposal ,which the majority of the Inclusive Framework jurisdictions supported in July 2021. In this proposal each parent country would collect the tax deficit of its own banks. For instance, if the internationally agreed minimum tax rate is 15% and a German multinational bank has an effective tax rate of 10% on the profits it books in Singapore, Germany would impose an additional tax of 5% on these profits to arrive at an effective rate of 15%. We consider three minimum tax rates—15%, 21%, and 25%—and in each case compute the extra tax owed per bank and tabulate results by headquarter country. Our findings show that a minimum tax has significant revenue potential. With a 25% minimum tax rate, our sample of European banks would have to pay EUR 10-13 billion in additional taxes annually. Lower tax rates reduce the gains to EUR 6-9 billion for the 21% tax rate and EUR 3-5 billion for the 15% tax rate. Banks with low effective tax rates—which tend to make use of tax havens to shift profits and lower their tax liability—would be particularly affected. Our findings illustrate the usefulness of country-by-country reporting, a vital piece of information to track profit shifting and corporate tax avoidance. They also suggest that despite the growing salience of these issues in the public debate and in the policy world, European banks have not significantly curtailed their use of tax havens since 2014. More ambitious initiatives—such as a global minimum tax with a 25% rate—may be necessary to curb the use of tax havens by the banking sector.
    Date: 2021–09
  8. By: Torrregrosa Hetland, Sara (Department of Economic History, Lund University); Sabaté, Oriol (Department of Economic History, University of Barcelona)
    Abstract: This document presents the methodological approach used in two papers about historical income taxes: “Income taxes and redistribution in the early twentieth century” (Torregrosa-Hetland and Sabaté, 2021) and “Income tax progressivity and inflation during the World Wars” (Torregrosa-Hetland and Sabaté, 2019). We first describe the general method and sources used to obtain synthetic distributions of income and calculate the effective income tax rates and the corresponding indices of progressivity and redistribution. Secondly, we discuss the most important country-specific issues that have been taken into account in our calculations. Finally, the third section looks at the accuracy of our synthetic income distributions and tax simulations by comparing them with the original series from the tax statistics. The two aforementioned papers summarize this same information in their methodological sections, but this note goes more in depth into some details that might be of interest to some readers.
    Keywords: taxation; redistribution; progressivity; income tax; world wars
    JEL: H23 H24 N42 N44
    Date: 2021–06–30
  9. By: Zhiyang Jia; Thor O. Thoresen (Statistics Norway)
    Abstract: Information about individual choices of heterogeneous agents. Results can for example be used to describe the distributional effects of tax policy change, such as the effects on changes in money metric utility – distributions of equivalent and compensating variation (EV or CV). This type of “revealed preference” methodology relies on using models with sufficient realism. In this paper we argue that the so-called “job choice model” represents a way forward in practical work, as it has a richer representation of choice constraints than conventional labour supply models. This model is also particularly suitable given an increased focus on distinguishing between preferences and constraints in applied welfare analysis. We demonstrate the empirical content of the framework by describing the effects of the Norwegian tax reform 2013–2019 on the distribution of compensating variation (CV).
    Keywords: labour supply; money metric utility; distributional effects; tax reform
    JEL: H31 I31 J22 C25
    Date: 2021–08
  10. By: Nicolas Gavoille; Anna Zasova
    Abstract: The interactions between minimum wage policy and tax evasion remain largely unknown. We study firm-level employment effects of a large and biting minimum wage increase in Latvia conditional on labor tax compliance. The Latvian labor market is characterized by the prevalence of envelope wages, i.e. unreported cash-in-hand complements to the official wage. We apply machine learning to classify firms between compliant and tax-evading using a unique combination of administrative and survey data. We then show that firms engaged in labor tax evasion are insensitive to the minimum wage shock. Our results suggest that these firms use wage underreporting as an adjustment margin, converting (part of) the envelope into legal wage. Increasing minimum wage contributes to tax rule enforcement, but this comes at the cost of negative employment consequences for compliant firms.
    Keywords: Minimum wage; Employment; Tax evasion
    JEL: J08 H26 E26
    Date: 2021–09–21
  11. By: Giovanni Mellace; Marco Ventura
    Abstract: Italy introduced a policy to incentivize young innovative start-up firms in 2012. Using a regression discontinuity design (RDD) we estimate its causal effects on the firms' share of intangible assets, turnover, number of employees, and number of partners. Our results indicate that after two years the policy was effective in increasing the number of partners, but we do not find any significant effects on innovation, at least in the short run. We provide strong evidence that the new investors might have been attracted by the tax benefit but had little interest in innovation.
    Keywords: Policy evaluation; Regression discontinuity design; Incentives to innovations
    JEL: H32 L52 C21 O31
    Date: 2021–09
  12. By: Stefan Ambec (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Jessica Coria (Unknown)
    Abstract: We propose informational spillovers as a new rationale for the use of multiple policy instruments to mitigate a single externality. We investigate the design of a pollution standard when the firms' abatement costs are unknown and emissions are taxed. A firm might abate pollution beyond what is required by the standard by equalizing its marginal abatement costs to the tax rate, thereby revealing information about its abatement cost. We analyze how a regulator can take advantage of this information to design the standard. In a dynamic setting,the regulator relaxes the initial standard in order to induce more information revelation, which would allow her to set a standard closer to the first best in the future. Updating standards, though, generates a ratchet effect since a lowcost firm might strategically hide its cost by abating no more than required by the standard. We characterize the optimal standard and its update across time depending on the firm's abatement strategy. We illustrate our theoretical results with the case of NOx regulation in Sweden. We find evidence that the firms that pay the NOx tax experience more frequent standard updates and more stringent revisions than those who are exempted.
    Keywords: Policy overlap,Multi-governance,Ratchet effect,Asymmetric information,Tax,Environmental policy,Pollution
    Date: 2021–07

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