nep-pbe New Economics Papers
on Public Economics
Issue of 2021‒11‒22
fifteen papers chosen by
Thomas Andrén

  1. The taxation of capital gains : principles, practice, and directions for reform By Advani, Arun
  2. Tax evasion, behavioral microsimulation models and flat-rate tax reforms. Analysis for Italy By Andrea Albarea; Michele Bernasconi; Anna Marenzi; Dino Rizzi
  3. Ways of taxing wealth: alternatives and interactions By Summers, Andrew
  4. Budget-neutral capital tax cuts By Frédéric Dufourt; Lisa Kerdelhué; Océane Piétri
  5. Taxes, corporate takeovers, and step transactions By Kazuki Onji; Roger H. Gordon
  6. Are incentive effects from fiscal equalization underestimated? Evidence from a Swiss reform By Nicola Mauri
  7. Can tax payments complement high environmental, social, and governance reputational risk? By Okuyama, Akihiro; TSUGAWA, Shuichi; Matsunaga, Chiaki; Managi, Shunsuke
  8. Who should pay a wealth tax? Some design issues By Chamberlain, Emma
  9. Windfalls? Costs and Benefits of Investment Tax Incentives due to Financial Constraints By ORIHARA Masanori; SUZUKI Takafumi
  10. Tax compliance in post-transition: You and your friends matter, not the government By Natalia Levenko; Karsten Staehr
  11. Brazil: Tax Expenditure Rationalization Within Broader Tax Reform By Maria Delgado Coelho
  12. An assessment of presumptive tax in Uganda: Evaluating the 2020 reform and four alternative reform scenarios using UGAMOD, a tax-benefit microsimulation model for Uganda By Ronald Waiswa; Jesse Lastunen; Gemma Wright; Michael Noble; Joseph Okello Ayo; Milly Isingoma Nalukwago; Tina Kaidu Barugahara; Susan Kavuma; Isaac Arinaitwe; Martin Mwesigye; Wilson Asiimwe; Pia Rattenhuber
  13. A Temporary VAT Cut as Unconventional Fiscal Policy By Ruediger Bachmann; Benjamin Born; Olga Goldfayn-Frank; Georgi Kocharkov; Ralph Luetticke; Michael Weber; Michael Weber
  14. Who Cares? Attitudes Towards Redistribution and Fiscal Austerity By Sarah Brown; Alexandros Kontonikas; Alberto Montagnoli; Mirko Moro; Dafni Papoutsaki; Willem Sas
  15. Taxing the Residual Profit of Multinational Enterprises: A Critique of Formulaic Apportionment and a Proposal By Wolfram F. Richter

  1. By: Advani, Arun (University of Warwick, CAGE Research Centre, the Institute for Fiscal Studies, and the LSE International Inequalities Institute)
    Abstract: Capital gains are particularly complex to tax given their infrequency, the different ways in which they are generated, and worries about harming productivity. There are theoretical arguments in support of everything from zero rates to high rates of tax on capital. In this paper, I first discuss the impact of capital gains on inequality, which often motivates discussions about how gains should be taxed. I then set out the principles that determine how gains should be taxed, in particular how the tax rate should relate to income tax rates. I propose that capital gains tax rates be equalized with income tax rates, subject to provisions to allow gains to be ‘smoothed’ over time and to remove inflation from the tax base. I highlight key transitional issues in moving to such a tax structure. Finally, I discuss the specific lessons for Canada.
    Date: 2021
  2. By: Andrea Albarea (Department of Economics, University Of Venice CÃ Foscari); Michele Bernasconi (Department of Economics, University Of Venice CÃ Foscari); Anna Marenzi (Department of Economics, University Of Venice CÃ Foscari); Dino Rizzi (Department of Economics, University Of Venice CÃ Foscari)
    Abstract: It is sometimes argued that a flat-rate tax reform can reduce tax noncompliance. The argument is, however, inconsistent with the so-called Yitzhaki’ s puzzle of the classical expected utility (EU) model. The latter predicts an increase, rather than a reduction, in tax evasion following a cut in the tax rates resulting from a flat-rate reform. We study the impact of a flat-rate tax in a microsimulation tax-benefit model of Italy which allows us to analyse various hypotheses of tax evasion behavior. In addition to the EU model, we analyse expected utility with rank dependent probabilities (EURDP) and the model of reference dependent (RD) preference, the most favourable to overturn Yitzhaki’ s puzzle. Our simulations show that a flat-rate tax would barely reduce overall evasion in Italy in all models considered. Redistributive effects are in all cases large.
    Keywords: Fiscal reforms, tax evasion, reference dependent preferences
    JEL: H20 H26 H30
    Date: 2021
  3. By: Summers, Andrew
    Abstract: In this paper, I examine the role of a wealth tax in the context of the UK's existing taxes on wealth. First, I discuss several ways in which the UK could be said to tax wealth already, and I set out two possible directions for reforming these taxes, highlighting policies that are merited under either approach. Second, I consider whether and under what circumstances a broad-based tax on the ownership of wealth – a ‘wealth tax’ – could be justified instead of or in addition to these reforms. Third, I address how a wealth tax should interact with other taxes, focusing on concerns regarding ‘double taxation’ and (conversely) proposals for an alternative minimum tax based on wealth. I conclude that there is a large degree of consensus amongst existing proposals to reform our current taxes on wealth, and that most of these reforms would be required whether or not a wealth tax is introduced as well.
    Keywords: capital gains tax; comprehensive income tax; income tax; inheritance tax; Mirrlees review; wealth tax; ES/L011719/1; International Inequalities Institute AFSEE COVID‐19 fund; Wiley deal
    JEL: H20 H24 H26 K34
    Date: 2021–10–25
  4. By: Frédéric Dufourt (Aix-Marseille Univ, CNRS, AMSE, Marseille, France.); Lisa Kerdelhué; Océane Piétri
    Abstract: We revisit the canonical policy of eliminating capital taxation by increasing labor taxation in a endogenous-labor, heterogeneous-agent model with income and wealth heterogeneity, when the government is subject to a strict (per-period) balancedbudget constraint. By contrast with its non-budget neutral equivalent-associated with a constant tax rate over time and a permanent increase in the level of public debt-we show that the obtained endogenous path for the labor tax rate is sharply increasing in the initial period and decreasing over time. The policy then generates a deeper recession in the short-run and a greater expansion in the long-run, as well as a smaller decline in wealth inequality associated with a reduced incentive to save for precautionary motives. Overall, the policy still generates significant losses in average welfare.
    Keywords: fiscal policy, capital tax cut, tax composition, heterogeneous agents, wealth redistribution
    JEL: E21 E6 D31 H23
    Date: 2021–11
  5. By: Kazuki Onji (Graduate School of Economics, Osaka University); Roger H. Gordon
    Abstract: Taxes affect the size of a corporate takeover market in theory; the extant empirical studies from the US data offer limited such evidence. We consider Japan after 2001, which offers an alternative setting in which a tax system implicitly subsidizes mergers that follow a particular sequence of steps ("step transactions"). We construct a novel dataset on step transactions from a list of takeover deals from 1996 through 2013 and examine their utilization rates before and after Japan's tax reform of 2001. We find a statistically and economically significant discontinuity across the two regimes. We also examine tax payments using a panel dataset of firms from 1997 through 2013 and find a strong association between unexplained falls in tax payments and step transactions. The Japanese tax system provided subsidies to marginal as well as infra-marginal mergers among domestic corporations: we estimate tax expenditure to be \172.3 billion.
    Keywords: Tax Avoidance, M&A, Corporate Restructuring
    JEL: H25 H26 G34 H32
    Date: 2021–11
  6. By: Nicola Mauri
    Abstract: This paper investigates incentive effects of fiscal equalization on local tax rates. I propose three refinements to current empirical estimations of these incentive effects. I show that local policy-makers may conceive changes in equalization transfers as stemming from discrete rather than marginal changes in the tax base, thus considering "supramarginal" equalization rates. Second, I study "effective" equalization rates which condition on the current tax rate. Third, I control for redistribution effects. I investigate the reform of an inter-municipal equalization scheme in Switzerland. My baseline estimate from supramarginal equalization rates is 2-3 times larger than found in previous studies.
    Keywords: fiscal equalization, tax competition, local public, finance, fiscal federalism, regional science
    JEL: H71 H77 R51
    Date: 2021–11
  7. By: Okuyama, Akihiro; TSUGAWA, Shuichi; Matsunaga, Chiaki; Managi, Shunsuke
    Abstract: [Purpose] This study aims to investigate firms’ tax payment motivation from the point of corporate social responsibility by dissecting samples into firms with high, low, and no environmental, social, and governance (ESG)-related reputational risk. [Design/methodology/approach] This paper is an empirical study using 3,981 firm-year observations from 31 countries from OECD countries through 2017 to 2019. We construct panel data and use the fixed-effects model to control unobserved firm heterogeneity. To capture legal tax avoidance, we use two types of tax avoidance measurements. [Findings] We find that paying taxes can complement the high reputational risk of ESGs. However, if ESG-related reputational risk is not large, tax payments do not affect ESG risk. Our results indicate that tax payment is a matter of firms’ ESG-related reputational risk. This paper contributes to providing evidence to show that the relationship between ESG and tax avoidance is different depending on an individual firm’s level of ESG-related reputational risk. [Originality] We create a reputation-based ESG risk data set that addresses the endogeneity associated with the manager’s decision and simultaneity bias to determine the relationship between ESG and tax avoidance. Also, this is one of few studies that examine the relationship between CSR and tax avoidance internationally.
    Keywords: Corporate social responsibility, ESG, Sustainable investment, Tax avoidance, International evidence, Reputational risk exposure
    JEL: M14
    Date: 2021–02
  8. By: Chamberlain, Emma
    Abstract: Any wealth tax design needs to resolve the question of who should pay it it How wide should the net be cast? Setting high or low exempt thresholds affects avoidance behaviour and may influence whether one should tax by reference to the household (and if so how that should be defined) or simply on each individual who owns wealth over a certain threshold. Typically, wealth taxes in other countries have not been imposed on non-residents except in relation to real property but questions remain over whether any exempt period should be given to new arrivals, not least for administrative convenience. A one-off wealth tax would require a different design in a number of respects from an annual wealth tax. For example, a one off tax t would need to be designed to catch those who have recently left the UK and contain modifications for recent arrivals. Trusts, foundations and similar vehicles pose particular problems in the design of a wealth tax and the author suggests some possible solutions and connecting factors that could be considered.
    Keywords: avoidance; one-off tax; tax design; wealth tax; household; trusts; ES/LO11719/1; Wiley deal
    JEL: D31 H24
    Date: 2021–10–25
  9. By: ORIHARA Masanori; SUZUKI Takafumi
    Abstract: We find that financially unconstrained firms claimed temporary investment tax incentives more often than their constrained counterparts. The former, however, did not necessarily increase their investments. We consider a 2014 tax reform in Japan which introduced both an investment tax credit and bonus depreciation, using confidential tax return survey data. Our data show low adoption rates, only 25%, in line with the recent literature. Many of them claimed the tax credit, which brings direct monetary benefits. Our finding is most prominent for a comparison between public and private firms among various constrained measures: the former claimed the tax credit more often and the bonus depreciation less often than the latter. Older firms claimed tax benefits. This might suggest that prior experience with claiming tax credits plays a role. Inconsistent with currently accepted theories, investment opportunities did not lead to more applications. Tax incentives encouraged investment mostly by financially constrained firms, such as private firms, small firms, and non-bond issuers. Our findings demonstrate a novel cost associated with investment tax incentives: encouraging financially constrained firms’ investment through tax incentives has the side effect of unintended tax benefits for unconstrained firms.
    Date: 2021–10
  10. By: Natalia Levenko; Karsten Staehr
    Abstract: This paper contributes to the literature that seeks to assess the importance of various theories on tax evasion by individuals. The various theories can be distinguished in detail using a very fine-grained survey of Estonian residents that was collected in three rounds from 2018 to 2020. Principal component analysis shows that the survey replies are mutually consistent and form distinct clusters that match key theories on tax evasion. Logit estimations of tax compliance use the principal components and various control variables as covariates. Theories of individual rational choice do not gain support. Factors associated with personal norms and with social norms and customs are important for tax compliance. Importantly, theories of reciprocity that depict a positive relation between approval of the government and tax compliance receive no support, possibly reflecting the wide spread of views on the role of government in post-transition Estonia. Sample splits reveal that the results apply broadly across various subsets of taxpayers. The results of the principal component regressions are corroborated by logit estimations where the survey variables enter individually
    Keywords: tax evasion, monetary and non-monetary motives, auditing, behavioural choice, norms and customs, reciprocity
    JEL: H26 H83
    Date: 2021–11–10
  11. By: Maria Delgado Coelho
    Abstract: The excessive complexity and burden of the Brazilian tax system, riddled by cumulative indirect taxes and heavy payroll contributions, have led to an accumulation of fiscal incentives aimed at reducing its burden on taxpayers and productive activities. Federal and subnational tax expenditures currently stand at over 5 percent of GDP. Rationalizing them can only be comprehensively feasible in the context of a broader sequenced tax reform, and could reduce resource misallocation and income inequality, as well as provide new revenues.
    Date: 2021–09–24
  12. By: Ronald Waiswa; Jesse Lastunen; Gemma Wright; Michael Noble; Joseph Okello Ayo; Milly Isingoma Nalukwago; Tina Kaidu Barugahara; Susan Kavuma; Isaac Arinaitwe; Martin Mwesigye; Wilson Asiimwe; Pia Rattenhuber
    Abstract: Presumptive tax, a final tax on business income, was introduced in Uganda in 1997. The latest reform to the regime in July 2020 sought to make the system more progressive, simpler, and fairer to small firms. In this work, we evaluate the reform, focusing on its revenue implications based on simulations using UGAMOD, a tax-benefit microsimulation model for Uganda. Our findings suggest that, assuming full compliance, the reform reduces tax revenue potential by between 48-72 per cent from the previous rules.
    Keywords: presumptive tax, Tax administration, Small business, Tax compliance, Impact evaluation, Microsimulation modelling
    Date: 2021
  13. By: Ruediger Bachmann; Benjamin Born; Olga Goldfayn-Frank; Georgi Kocharkov; Ralph Luetticke; Michael Weber; Michael Weber
    Abstract: We exploit the unexpected announcement of an immediate, temporary VAT cut in Germany in the second half of 2020 as a natural experiment to study the spending response to unconventional fiscal policy. We use survey and scanner data on households’ consumption expenditures and their perceived pass-through of the tax change into prices to quantify its effects. The temporary VAT cut led to a substantial relative increase in durable spending of 36% for individuals with a high perceived pass-through. Semi- and non-durable spending also increased. According to our preferred estimates, the VAT policy increased aggregate consumption spending by 34 billion Euros.
    Keywords: unconventional fiscal policy, value added tax, survey data, expectations, consumption, household data
    JEL: D12 E20 E21 E62 E65 H31
    Date: 2021
  14. By: Sarah Brown; Alexandros Kontonikas; Alberto Montagnoli; Mirko Moro; Dafni Papoutsaki; Willem Sas
    Abstract: We present new evidence showing that fiscal austerity strengthens support for redistribution, especially for the relatively well-off. Our theoretical model proposes two mechanisms to explain this heterogeneity in support for redistribution: ‘altruism’ and ‘appreciation’. We test our theoretical model’s predictions by matching attitudes reported in the British Social Attitudes Survey with local area-level spending cuts in England over the period 2010 to 2015. We exploit the spatial and temporal variation in spending cuts at the Local Authority level to compute a plausibly exogenous measure of the austerity shock. We find evidence for these two channels.
    Keywords: austerity, fiscal consolidation, fiscal policy, redistribution, political attitudes, altruism, appreciation
    JEL: D30 D64 E62 H20 H30 H60
    Date: 2021
  15. By: Wolfram F. Richter
    Abstract: According to plans put forward by the OECD/G20 Inclusive Framework on BEPS, a share of residual profit earned by eligible MNEs is to be taxed by market jurisdictions. For this purpose, revenue-based formulaic apportionment of residual profit is proposed. This note argues against the use of a rule requiring the multilateral assessment of MNEs’ worldwide profit and recommends an alternative method of sharing taxing rights with market jurisdictions. The proposed method relies on unilateral profit splitting and is suggested by the application of Shapley value theory to the fair and equitable division of taxing rights between cooperating jurisdictions.
    Date: 2021

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