nep-pbe New Economics Papers
on Public Economics
Issue of 2021‒10‒25
eleven papers chosen by
Thomas Andrén

  1. The Effects of Taxes on Innovation: Theory and Empirical Evidence By Stefanie Stantcheva
  2. Interest Limitation Rules and Business Cycles: Empirical Evidence By Ropponen, Olli
  3. An Examination of Taxpayers Attitude towards Income Tax: A Case of Bangladesh By Md. Shahbub Alam
  4. Estimating the Net Fiscal Cost of a Child Tax Credit Expansion By Jacob Goldin; Elaine Maag; Katherine Michelmore
  5. The Anti-Poverty, Targeting, and Labor Supply Effects of the Proposed Child Tax Credit Expansion By Kevin Corinth; Bruce D. Meyer; Matthew Stadnicki; Derek Wu
  6. In search of a solution to tax digital economy. By Tandon, Suranjali
  7. Legislative Tax Announcements and GDP: Evidence from the United States, Germany, and the United Kingdom By Bernd Hayo; Sascha Mierzwa
  8. Rural Migration and the Earned Income Tax Credit By McDonald, Tia M.; Durst, Ron L.
  9. Who pays for a Value Added Tax Hike at an International Border? Evidence from Mexico By Emmanuel Chavez; Cristobal Dominguez
  10. Regional Productivity Slowdown, Tax Havens and MNEs’ Intangibles: where is Measured Value Creation? By Jean-Charles Bricongne; Samuel Delpeuch; Margarita Lopez Forero
  11. What are the drivers of tax capacity in sub-Saharan Africa? By Abrams M.E. Tagem; Oliver Morrissey

  1. By: Stefanie Stantcheva
    Abstract: Income taxes are typically set to raise revenues and redistribute income at the lowest possible efficiency costs, which result from the distortions in individual behaviors that taxes entail. Individuals can respond along many margins, such as labor supply, tax avoidance and evasion, and geographic mobility. But one margin that taxes may affect — innovation — is less frequently considered. Conceptually, taxes reduce the expected net returns to innovation inputs and can reduce innovation. Much like other margins of responses to taxes, this efficiency cost must be taken into account. Innovation is done by a relatively small number of people, but it is nevertheless likely to have widespread benefits. While inventors may have divergent motivations, such as social recognition or the love of discovery, they also face an economic reality. How strongly innovation responds to taxes is an empirical question that has been the subject of a growing body of recent work. In this paper, I study how to account for innovation when setting personal income and capital taxation. I distinguish between two cases: one in which the government can set a differentiated tax on inventors and one in which the government is constrained to set the same tax on all agents. I provide a model that flexibly accounts for the spillovers generated by innovation and the non-pecuniary benefits inventors receive from innovation and derive tax formulas expressed in terms of estimable sufficient statistics. The second part of the paper discusses the empirical evidence on the effects of taxes on the quantity, quality, and location of innovation, as well as tax avoidance and income shifting done through innovation.
    JEL: H2 H23 H24 O3 O4
    Date: 2021–10
  2. By: Ropponen, Olli
    Abstract: Abstract This paper studies the performance of interest limitation rules during business cycles. It employs register data on Finnish affiliates of multinational enterprises (MNEs) to study both thin-capitalization rules (TCRs) and earnings-stripping rules (ESRs). Both types of rules are found to become tighter in economic downturns: TCRs due to higher debt-to-equity ratios and ESRs due to lower company profits. Among equally tight interest limitation rules, TCRs are found to provide less variation and less pro-cyclical outcomes by increasing the company tax burden less than ESRs in an economic downturn. While ESRs increase the tax burden of Finnish companies by 17.5%-19.3% following the 2008 global financial crisis, for TCRs the increase is less than 10%. Among the ESRs, we find that an EBIT rule induces tighter tax treatment in economic downturns than an EBITDA rule. However, the differences between ESRs remain very small.
    Keywords: Business cycles, Corporate income taxation, Anti-tax avoidance rules, Thin-Capitalization Rules (TCRs), Earnings Stripping Rules (ESRs)
    JEL: H25 H26 F44
    Date: 2021–10–13
  3. By: Md. Shahbub Alam (Dept. of Accounting and Information Systems, Islamic University, Bangladesh. Author-2-Name: Author-2-Workplace-Name: Author-3-Name: Author-3-Workplace-Name: 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 - Taxation is the government's primary source of revenue, but it is unable to raise this revenue from the general public. The major goals of this article are to determine the taxpayers' attitudes toward income tax in Bangladesh, as well as the factors influencing taxpayers' behavioral intentions regarding tax evasion and avoidance. Both qualitative and quantitative research methods were used in this study. Methodology/Technique - The respondents' primary data was acquired by a standardized written questionnaire and a face-to-face viva. To complete the job, the study used purposeful random sampling, which resulted in the selection of 150 individuals from various occupations. After gathering data, it was examined using several statistical methods. Findings - The study's findings reveal a significant negative relationship between taxpayer attitudes regarding tax evasion and tax compliance behavior, as well as the fact that taxpayer attitudes and conduct differ by occupation, resulting in diverse tax evasion and avoidance trends. Novelty - This study will aid the government authority and the National Bureau of Revenue in monitoring taxpayer attitudes and improving tax collection by reducing taxpayers' negative attitudes toward taxes and getting more people to file tax returns. Type of Paper - Empirical."
    Keywords: Taxpayers; Attitude; Income tax; Bangladesh.
    JEL: H21 H24 H26
    Date: 2021–09–30
  4. By: Jacob Goldin; Elaine Maag; Katherine Michelmore
    Abstract: Recent proposals to expand the Child Tax Credit (CTC) are at the center of current policy discussions in the United States. We study the fiscal cost of three such proposals that would expand refundability of the credit to low-income children, increase the maximum credit amount, and/or eliminate the income phase-out to make the credit universal. For each proposal, we use the Current Population Survey to estimate three components of the net fiscal cost: the direct cost (additional tax refunds or lower tax liability), revenue changes due to taxpayers’ labor supply responses, and long-term changes in tax revenue due to changes in children’s future earnings. We find that direct costs are by far the most important component but that long-term earning changes also play an important role, offsetting one-third or more of the direct costs, depending on the proposal and modeling assumptions. In contrast, labor supply responses only modestly contribute to the fiscal cost of CTC expansions.
    JEL: H2 H24
    Date: 2021–10
  5. By: Kevin Corinth; Bruce D. Meyer; Matthew Stadnicki; Derek Wu
    Abstract: The proposed change under the American Families Plan (AFP) to the Tax Cuts and Jobs Act (TCJA) Child Tax Credit (CTC) would increase maximum benefit amounts to $3,000 or $3,600 per child (up from $2,000 per child) and make the full credit available to all low and middle-income families regardless of earnings or income. We estimate the anti-poverty, targeting, and labor supply effects of the expansion by linking survey data with administrative tax and government program data which form part of the Comprehensive Income Dataset (CID). Initially ignoring any behavioral responses, we estimate that the expansion of the CTC would reduce child poverty by 34% and deep child poverty by 39%. The expansion of the CTC would have a larger anti-poverty effect on children than any existing government program, though at a higher cost per child raised above the poverty line than any other means-tested program. Relatedly, the CTC expansion would allocate a smaller share of its total dollars to families at the bottom of the income distribution—as well as families with the lowest levels of long-term income, education, or health—than any existing means-tested program with the exception of housing assistance. We then simulate anti-poverty effects accounting for labor supply responses. By replacing the TCJA CTC (which contained substantial work incentives akin to the Earned Income Tax Credit) with a universal basic income-type benefit, the CTC expansion reduces the return to working at all by at least $2,000 per child for most workers with children. Relying on elasticity estimates consistent with mainstream simulation models and the academic literature, we estimate that this change in policy would lead 1.5 million workers (constituting 2.6% of all working parents) to exit the labor force. The decline in employment and the consequent earnings loss would mean that child poverty would only fall by 22% and deep child poverty would not fall at all with the CTC expansion.
    JEL: C42 C81 H2 I32 I38 J2
    Date: 2021–10
  6. By: Tandon, Suranjali (National Institute of Public Finance and Policy)
    Abstract: At present the international tax system is in need of reform so as to ensure that digital corporation pay taxes in countries where they operate. The search for a global solution has resulted in divergence in approaches adopted by countries. This paper delineates the fundamental economic challenges that the tax reform seeks to address, the historical evolution of tax laws and the best possible solutions given the discord between source and residence countries. The paper finds that digital services tax, with foreign credits, can offer a final global solution amenable to developing countries.
    Keywords: permanent establishment ; digital tax ; user participation ; treaties, developing countries
    Date: 2021–10
  7. By: Bernd Hayo (Philipps-Universitaet Marburg); Sascha Mierzwa (Philipps-Universitaet Marburg)
    Abstract: We study the announcement effect of legislated tax changes on GDP in the US, Germany, and the UK. Using, as the shock of interest, narratively identified information (Romer & Romer, 2009) about future tax changes at the quarter of their introduction to the legislative body, we analyse the dynamic results of Local Projections (Jordà , 2005). We find heterogeneous effects across the three countries: economic activity declines (increases) in the US (the UK), but remains unaffected in Germany. When allowing the responses to vary over the business cycle, we find evidence that US GDP drops regardless of the business cycle, whereas UK GDP rises only during non-recessionary times. We find significant effects for German GDP too: it rises (drops) during recessionary (non-recessionary) times. In general, consumption, investment, and employment follow in the path of GDP.
    Keywords: Fiscal policy, tax policy, legislated tax changes, announcement effect, state dependence, United States, Germany, United Kingdom, local projections, narrative approach
    JEL: E62 E63 H20 H30 K34
    Date: 2021
  8. By: McDonald, Tia M.; Durst, Ron L.
    Keywords: Community/Rural/Urban Development, Consumer/Household Economics, Agricultural and Food Policy
    Date: 2021–08
  9. By: Emmanuel Chavez (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); Cristobal Dominguez (Comision Nacional Bancaria y de Valores)
    Abstract: This research studies the effects of a value added tax (VAT) reform at Mexico's international frontiers. The reform raised the VAT rate from 11 to 16 percent at localities close to the international borders. We use the traditional "static" difference-in-differences methodology as well as dynamic difference-in-differences. The treatment group is composed of municipalities in the area where the VAT increased, and the control group is composed of municipalities close to the treatment group. We nd that the VAT hike had a positive effect on prices of around half the size of the full pass-through conter-factual. In addition, the reform had a negative effect on workers' wages and no effect on employment. The negative e ect on workers' real incomes is not smoothed out with credits. We nd evidence of a negative effect on consumption at Mexico's northern border due to the reform. However, we nd no evidence of an increase in shopping at the United States side of the border.
    Keywords: Worker purchasing power,Value Added Tax,Taxation,Border Crossing
    Date: 2021–09
  10. By: Jean-Charles Bricongne; Samuel Delpeuch; Margarita Lopez Forero
    Abstract: Based on French firm-level data over around 15 years we evaluate the contribution of the micro-level profit shifting –through tax haven foreign direct investments to the aggregate productivity slowdown measured in France. We show that firm measured productivity in France declines over the immediate years following the establishment in a tax haven, with an average estimated drop by 3.5% in labor apparent productivity. We argue that this productivity decline, following a presence in a tax haven, is most likely explained by multinationals’ tax optimization, where domestic productivity is underestimated as profits are not recorded anymore in the home country. The fall in productivity is especially strong for firms that are intensive in intangible capital and is equivalent to 4.1% (versus 2.7% for low intangible intensive firms), reflecting the fact that these types of assets are more easily shifted across countries and facilitate tax planning. Our results additionally suggest that the mismeasurement has strong dynamic effects, as the decline becomes more important the longer the firm remains in a tax haven. Finally, given these firms’ weight in the economy, our results imply an 8% loss at the aggregate in terms of the level of the labor productivity throughout the whole sample period, which is equivalent to an annual loss of 9.7% in terms of the aggregate annual labor productivity growth.
    Keywords: Tax Havens, Profit shifting FDI, Productivity slowdown, Productivity mismeasurement, Intangible capital
    JEL: D33 F23 H26 H87 O47
    Date: 2021
  11. By: Abrams M.E. Tagem; Oliver Morrissey
    Abstract: There is limited research on the underlying institutional framework of tax policy and capacity: how tax collection efficiency changes over time and the importance of institutional factors in this process. This paper fills this gap by devising a measure of tax capacity distinct from commonly used measures of tax effort based on residuals from a tax performance (tax/gross domestic product ratio) regression. The paper uses annual data on 44 sub-Saharan African countries covering the period from 1980 to 2018.
    Keywords: Fiscal capacity, General-to-specific, Tax policy, Institutional performance, Institutions
    Date: 2021

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