nep-pbe New Economics Papers
on Public Economics
Issue of 2021‒12‒13
sixteen papers chosen by
Thomas Andrén

  1. How to Tax Different Incomes? By Jacquet, Laurence; Lehmann, Etienne
  2. Assessing the effects of VAT policies with an integrated CGE-microsimulation approach: evidence on Italy By Ali Bayar; Barbara Bratta; Silvia Carta; Paolo Di Caro; Marco Manzo; Carlo Orecchia
  3. Redistributive Effect and the Progressivity of Taxes and Benefits: Evidence for the UK, 1977–2018 By Jenkins, Stephen P.; Herault, Nicolas
  4. Taxing income or consumption: macroeconomic and distributional effects for Italy By D'ANDRIA Diego; DEBACKER Jason; EVANS Richard W.; PYCROFT Jonathan; ZACHLOD-JELEC Magdalena
  5. New Insights into the Relationship Between Taxation and International Trade By Branimir Jovanović
  6. Revenue Implications of GST Rates Restructuring in India: An Analysis. By Mukherjee, Sacchidananda
  7. Overconfident CEOs, Corporate Social Responsibility & Tax Avoidance: Evidence from China By Panagiotis Karavitis; Pantelis Kazakis; Tianyue Xu
  8. How do Corporate Taxes affect International Trade? By Mario Holzner; Branimir Jovanović; Goran Vukšić
  9. Income tax noncompliance in Germany, 2001-2014 By Hannes Fauser; Sarah Godar
  10. Automatic for the (tax) people: information sharing and cross-border investment in tax havens By Agustín Bénétrix; Lorenz Emter; Martin Schmitz
  11. Capital Investment and Labor Demand By E. Mark Curtis; Daniel G. Garrett; Eric C. Ohrn; Kevin A. Roberts; Juan Carlos Suárez Serrato
  12. Valuation for the purposes of a wealth tax By Daly, Stephen; Hughson, Helen; Loutzenhiser, Glen
  13. Fiscal rules’ compliance and Social Welfare. By Kea BARET
  14. Redistribution across Europe: How much and to whom? By Bernhard Hammer; Michael Christl; Silvia De Poli
  15. The Role of Market Structure and Timing in Determining VAT Pass-Through By Mr. Matthieu Bellon
  16. Financial Transaction Taxes and the Informational Efficiency of Financial Markets: A Structural Estimation By Marco Cipriani; Antonio Guarino; Andreas Uthemann

  1. By: Jacquet, Laurence (Norwegian School of Economics); Lehmann, Etienne (CRED, Université Panthéon Assas Paris 2)
    Abstract: We study the optimal tax system when taxpayers earn different kinds of income by supplying different inputs. Imperfect substitution between inputs allows for general equilibrium effects. We consider any type of cross-base responses to tax changes such as income-shifting. Formalizing the tax schedule as the sum of many one-dimensional schedules, we express optimal marginal tax rate on any kind of income in terms of sufficient statistics, including new ones for cross-base responses and general equilibrium effects. We also identify the conditions under which making the personal income tax marginally more schedular is socially desirable. The comprehensive and schedular (dual, in particular) income taxes being recurring proposals in the public debate, we derive sufficient conditions under which each form of tax is optimal. We stress how empirically restrictive these conditions are. Using a new algorithm on French tax return data, we characterize the optimal combination of a nonlinear tax schedule on personal income and a linear tax rate on capital income. We find that one should include, without any deduction, all income sources in the personal income base and subsidize the source of income which is more elastic. We find that crossbase responses have little effects on the personal nonlinear income tax schedule but increases by 5.9 to 6.9 percentage points the capital tax rate. General equilibrium effects also increases this tax rate by around 4.5 percentage points.
    Keywords: nonlinear income taxation, several income sources, cross-base responses, endogenous prices, dual income tax, comprehensive income tax
    JEL: H21 H22 H24
    Date: 2021–09
  2. By: Ali Bayar (EcoMode CESifo); Barbara Bratta (Department of Finance Italian Ministry of Economy and Finance); Silvia Carta (Department of Finance Italian Ministry of Economy and Finance); Paolo Di Caro (Department of Law University of Catania Italy - Tax Administration Research Centre University of Essex Business School United Kingdom); Marco Manzo (Department of Finance Italian Ministry of Economy and Finance); Carlo Orecchia (Department of Finance Italian Ministry of Economy and Finance)
    Abstract: Reforming the structure of the Value Added Tax (VAT) is an open issue in different countries, mostly for raising revenues and improving the efficiency of the tax system. However, most of the existing analyses do not combine micro- and macro-modelling tools for assessing the welfare and redistributive effects of VAT reforms. Aspects like tax evasion and erosion, moreover, are usually of secondary importance when studying VAT changes. The objective of this paper is twofold. First, we propose an integrated approach, based on the new dynamic multi-sector, multi-household tax computable general equilibrium (CGE) model (ITAXCGE) recently developed at the Italian Ministry of Economy and Finance, to study a uniform VAT rate reform in Italy. Our empirical approach has the merit of including new information when evaluating VAT reforms: tax evasion and erosion, irregular labour, different household groups, and a detailed structure of taxation. Second, we simulate the effects of a uniform VAT rate reform on welfare and redistribution, by taking into consideration the consequences of such reform on VAT gap changes. Our results suggest that the equity-efficiency trade-off deriving from the reform under investigation is reduced when including information on tax evasion in the analysis. The policy implications of our study are finally discussed
    Keywords: Microsimulation, CGE-Modelling, integrated approach, VAT, tax gap.
    JEL: H31 D58 J22
    Date: 2021–12
  3. By: Jenkins, Stephen P. (London School of Economics); Herault, Nicolas (Melbourne Institute of Applied Economic and Social Research)
    Abstract: We apply the Kakwani approach to decomposing redistributive effect into average rate, progressivity, and reranking components using yearly UK data covering 1977-2018. We examine cash and in-kind benefits, and direct and indirect taxes. In addition, we highlight an empirical implementation issue – the definition of the reference ('pre-fisc') distribution. Drawing on an innovative counterfactual approach, our empirical analysis shows that trends in the redistributive effect of cash benefits are largely associated with cyclical changes in average benefit rates. In contrast, trends in the redistributive effects of direct and indirect taxes are mostly associated with changes in progressivity. For in-kind benefits, changes in the average benefit rate and progressivity each played the major roles at different times.
    Keywords: Kakwani decomposition, inequality, redistributive effect, progressivity, reranking, benefits, taxes
    JEL: D31 H24 H50 I38
    Date: 2021–10
  4. By: D'ANDRIA Diego (European Commission - JRC); DEBACKER Jason; EVANS Richard W.; PYCROFT Jonathan (European Commission - JRC); ZACHLOD-JELEC Magdalena (European Commission - JRC)
    Abstract: We study a set of tax reforms introducing a budget-neutral tax shift in Italy, from labour income to consumption taxes. To this end we use a microsimulation model to provide the output with which to estimate the parameters of tax functions in an overlapping-generations computable general equilibrium model. In doing so we make marginal and average tax rates bivariate non-linear functions of capital income and labour income. The methodology allows for the representation of the non-linearities of the tax and social benefit system and interactions between capital and labour incomes. The linked macro model then simulates labour supply, consumption and savings in a dynamic setting, thus accounting for behavioural and general equilibrium effects within a life-cycle optimization framework. Our simulations show that a tax shift made by cutting personal income tax rates might bring significant efficiency gains in Italy, with limited regressive effects, notwithstanding the revenue-compensating increase in consumptions taxes.
    Keywords: computable general equilibrium, overlapping generations, taxation, microsimulation, Italy, tax shift
    Date: 2021–12
  5. By: Branimir Jovanović (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: This policy note summarises the main findings of our recent research on the effects of labour and corporate taxation on international trade, and discusses their policy implications. The first major finding is that labour taxes do not seem to affect imports, while their effect on exports is likely to depend on how much domestic labour contributes to total value added. If the contribution of domestic labour is low, as has often been the case recently, changes in labour taxes are unlikely to have a major impact on exports. This is an important finding, because it challenges the established view in the literature and policy making, that by lowering labour taxes, authorities can improve the trade balance. The second major finding is that the effect of corporate tax on exports and imports depends on the stock of FDI. Corporate taxes are unlikely to affect international trade in general, but only when the stock of FDI is large. This means that corporate taxes affect international trade through multinational enterprises, which reduce their activity in countries with higher taxes and increase it in countries with lower taxes. Both labour and corporate taxes have seen a downward trend in recent decades, but we find that the contribution of this to the expansion of international trade has been small.
    Keywords: abour taxes, corporate taxes, international trade, exports, imports
    JEL: F14 F16 F23 H24 H25 J32
    Date: 2021–11
  6. By: Mukherjee, Sacchidananda (National Institute of Public Finance and Policy)
    Abstract: Keeping in mind the revenue needs of the governments, we assess the revenue implications of restructuring GST rates. The study builds six alternative scenarios based on various assumptions about the tax rate-wise distribution of taxable value and tax liabilities. Unlike previous studies on RNRs, the present study relies on aggregate tax information as captured through GSTR-1. In line with data available from the GSTN database, the study considers only domestic component of GST collection (i.e., CGST, SGST and IGST- domestic component). Our study estimates merger of 12 and 18 per cent tax slabs into 15 per cent and estimates tax rates required to achieve revenue neutrality. The results show that merging 12 per cent and 18 per cent tax rates into any tax rate lower than 18 per cent may result in revenue loss. Based on various estimates, the study proposes that to compensate the revenue loss, the GST council may consider three rate structure of GST by adopting 8 per cent, 15 per cent and 30 per cent and it may help achieve revenue neutrality. In all scenarios, we assume that status quo in special rates will be maintained.
    Keywords: Goods and Services Tax ; Tax Base ; Revenue Neutral Rates (RNRs) ; GST Rate Structure ; Tax Buoyancy
    JEL: H20 E62 H26
    Date: 2021–11
  7. By: Panagiotis Karavitis; Pantelis Kazakis; Tianyue Xu
    Abstract: CEO overconfidence is a significant factor in corporate decisions. We investigate whether CEO overconfidence affects the relationship between corporate social responsibility (CSR) and tax avoidance using a dataset of Chinese listed companies. We find that firms with higher CSR scores avoid paying more taxes. This relationship is moderated, however, by CEO overconfidence. While firms with higher CSR scores avoid more taxes on average, those led by overconfident CEOs avoid less. We contend that overconfident CEOs are less likely to use CSR strategically to mitigate risk. Our conclusion stands up to a battery of sensitivity tests, including the use of CSR subdimensions.
    Keywords: Corporate social responsibility; Tax avoidance; CEO overconfidence
    JEL: G30 H26
    Date: 2021–11
  8. By: Mario Holzner (The Vienna Institute for International Economic Studies, wiiw); Branimir Jovanović (The Vienna Institute for International Economic Studies, wiiw); Goran Vukšić
    Abstract: This paper investigates how corporate income taxes affect international trade, and identifies the underlying channel. Using data on 33 NACE sectors, for 34 EU and OECD economies, over the period 2005-2014, we find that corporate income taxes reduce exports and imports only when the stock of foreign direct investment (FDI) is high. The effect is present primarily in the service sector and in countries with low corporate taxes. We interpret these findings as evidence that multinational enterprises reduce their operations in countries that raise their corporate taxes. The effect has been found to be small on aggregate, implying that the expected increase in corporate taxes in the future, arising from the global minimum tax, is unlikely to hurt international trade.
    Keywords: taxation, profits, international trade, exports, imports, FDI
    JEL: F14 F23 H25
    Date: 2021–11
  9. By: Hannes Fauser (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Sarah Godar (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: This paper estimates income tax underreporting for the case of Germany, by income category and along the income distribution. Comparing weighted samples of survey and tax data, we find patterns that are in line with the literature: Average income from self-employment and from rent and lease in the survey is higher than in the tax data, increasing in upper quintiles. Income underreporting to the tax authorities may be one of several possible explanations for these descriptive findings. We therefore expand our analysis with the Pissarides & Weber (1989) approach that has been applied to a range of countries and data sources before. We use the German Socioeconomic Panel and the Taxpayer Panel, estimating food, housing cost and donation regressions. Results indicate that self-employment is associated with higher housing cost but not with higher food expenditure in the SOEP. In the TPP we find more robust indication of underreporting as self-employment and business incomes are significantly associated with higher donations and even more so for the top-income decile. We use our results to derive tentative estimates of aggregate tax revenue losses due to underreporting of self-employment and other non-wage incomes.
    Keywords: tax evasion, income misreporting, personal income tax, self-employment, distributional effects
    JEL: D12 D31 H24 H26
    Date: 2021–12
  10. By: Agustín Bénétrix (IMTCD, Department of Economics, Trinity College Dublin); Lorenz Emter (IMTCD, Department of Economics, Trinity College Dublin and Central Bank of Ireland); Martin Schmitz (European Central Bank)
    Abstract: This paper examines the impact of international automatic exchange of information (AEOI) treaties on cross-border investments in tax havens. Using a restricted version of the BIS Locational Banking Statistics we find that AEOIs significantly reduced cross-border deposits. A sectoral breakdown assessment reveals that households were the key driving force behind this contraction. Analysing other forms of cross-border investment, we observe that tax havens' portfolio and direct investment assets in non-haven countries fell significantly after AEOI introduction, indicating a reduction of round-tripping investments. However, we also document evidence of households' deposits shifting to non-AEOI haven countries. Moreover, we observe larger FDI positions and deposits by non-bank financial institutions between tax haven countries, suggesting an increased use of shell corporation networks since AEOI introduction.
    Keywords: cross-border banking, tax havens, international tax treaties, tax evasion
    JEL: G21 G28 H26 H87 K34
    Date: 2021–11
  11. By: E. Mark Curtis; Daniel G. Garrett; Eric C. Ohrn; Kevin A. Roberts; Juan Carlos Suárez Serrato
    Abstract: We study how tax policies that lower the cost of capital impact investment and labor demand. Difference-in-differences estimates using confidential US Census Data on manufacturing establishments show that tax policies increased both investment and employment, but did not lead to wage or productivity gains. Using a structural model, we show that the primary effect of the policy was to increase the use of all inputs by lowering overall costs of production. The policy further stimulated production employment due to the complementarity of production labor and capital. Supporting this conclusion, we find that investment is greater in plants with lower labor costs. Our results show that recent tax policies that incentivize capital investment do not lead manufacturing plants to replace workers with machines.
    JEL: D22 H25 H32 J23
    Date: 2021–11
  12. By: Daly, Stephen; Hughson, Helen; Loutzenhiser, Glen
    Abstract: This paper considers the scale and prevalence of valuation issues under a wealth tax. Valuation issues are frequently cited in the literature as the most difficult aspect of wealth taxes. We examine some of the most problematic asset types from a valuation perspective. We also consider a range of solutions to manage these concerns, drawing on international experience and the approaches already taken for other taxes within the UK system. We conclude that satisfactory options for arriving at a value for wealth tax purposes are available even for the most problematic assets. We also estimate that the absolute number of taxpayers likely to pay substantial valuation fees is small, and that, in aggregate, valuation costs could be contained to around 0.1 per cent or less of total chargeable assets, even if they are substantial for some individual taxpayers.
    Keywords: agricultural property; artwork; banding; business assets; net wealth tax; open market value; pension assets; residential property; tax policy; valuation; ES/L011719/1; ES/V012657/1; International Inequalities Institute AFSEE COVID‐19 fund
    JEL: E6 J1
    Date: 2021–10–25
  13. By: Kea BARET
    Abstract: This paper studies the side-effects of fiscal rules’ compliance on social welfare. It considers national Budget Balance Rules’ (BBR) compliance effects on macroeconomic indicators and social welfare proxy indicators in OECD countries between 2004 and 2015. Instead of fiscal rules strength or fiscal rules presence effectiveness, we focus on fiscal rules’ compliance to assess the impact of fiscal rules’ performance on social welfare. The paper shows that governments seem to operate a reallocation of their spending to ensure both BBR’s compliance and economic objectives. Nevertheless, governments choices regarding their public spending composition seem leading to an increase in social inequalities suggesting that governments finally face a trade-off between fiscal rules’ compliance and social objectives. The analysis constitutes the first use of a causal Machine Mearning approach, namely the Double/Debiased Machine Learning recently developed by Chernozhukov et al. [2018], applied to fiscal rules’ performance assessment issues. This method allows us to highlight the key determinants of national BBR’s compliance as well as assessing the compliance’s effect on different macroeconomic and social indicators. We take care of voter preferences by computing a new proxy variable through Latent Factor Analysis approach and show that voter preferences appear as a key determinant for BBR’s compliance, giving an empirical proof that Wyplosz [2012]’s bias may matter when assessing fiscal rules’ performance.
    Keywords: Fiscal rules’ compliance; Social Welfare; Fiscal Surveillance; Machine learning.
    JEL: E61 H11 H50 H61 H62
    Date: 2021
  14. By: Bernhard Hammer (TU Wien and Wittgenstein Centre); Michael Christl (European Commission - JRC); Silvia De Poli (European Commission - JRC)
    Abstract: Governments face a potential trade-off between provision for the growing population in retirement and the support of working-age households with low income. Using EUROMOD-based microdata from 28 countries, we (a) quantify the redistribution to the pensioner and non-pensioner populations, (b) study the position of net beneficiaries in the overall income distribution and (c) analyse how taxes and benefits affect the working-age population with low income. Our results provide novel insights into the distributive role of tax-benefit systems across Europe. Interestingly, a strong overall redistribution between households is associated with generous pensions for a portion of the retirees but negatively related to support for low-income households.
    Keywords: Redistribution, Welfare state, Inequality, Microsimulation, EUROMOD
    JEL: H11 H23
    Date: 2021–11
  15. By: Mr. Matthieu Bellon
    Abstract: We examine the role of market characteristics and timing in explaining observed heterogeneity in VAT pass-through. We first extend existing theory to characterize the roles of imperfect competition and product differentiation, then investigate these relationships empirically using a panel of 14 Eurozone countries between 1999 and 2013. We find important roles for product market regulation and product quality, and little impact of advance announcement of reforms. Our findings have important implications for policy-makers considering VAT rate adjustments, by illuminating which of the consumers or the producers would experience the brunt of a reform across different settings.
    Keywords: Value added tax; Price effect; Pass through; Competition; Product Differentiation; pass-through heterogeneity; VAT pass-through; pass-through effect; baseline pass-through; elasticity coefficient; imperfect competition; pass-through adjustment; Value-added tax; Consumption; Commodity markets; Consumer prices; Europe
    Date: 2021–03–05
  16. By: Marco Cipriani; Antonio Guarino; Andreas Uthemann
    Abstract: We develop a new methodology to estimate the impact of a financial transaction tax (FTT) on financial market outcomes. In our sequential trading model, there are price-elastic noise and informed traders. We estimate the model through maximum likelihood for a sample of sixty New York Stock Exchange (NYSE) stocks in 2017. We quantify the effect of introducing an FTT given the parameter estimates. An FTT increases the proportion of informed trading, improves information aggregation, but lowers trading volume and welfare. For some less-liquid stocks, however, an FTT blocks private information aggregation.
    Keywords: financial transaction tax; market microstructure; structural estimation
    JEL: G14 D82 C13
    Date: 2021–12–01

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