nep-pbe New Economics Papers
on Public Economics
Issue of 2022‒01‒10
seventeen papers chosen by
Thomas Andrén

  1. Pareto-Improving Minimum Corporate Taxation By Mr. Shafik Hebous; Mr. Michael Keen
  2. The taxation of capital gains: principles, practice, and directions for reform By Advani, Arun
  3. Who Should Bear the Burden of Covid-19 Related Fiscal Pressure? An Optimal Income Taxation Perspective By Mehmet Ayaz; Lea Fricke; Clemens Fuest; Dominik Sachs
  4. Marketed Tax Avoidance Schemes: An Economic Analysis By Jiao Li; Duccio Gamannossi Degl'Innocenti; Matthew D. Rablen
  5. Efficiency-Inducing Tax Credits for Charitable Donations when Taxpayers Have Heterogeneous Behavioral Norms By Ngo Van Long
  6. C and S corporation banks: Did Trump's tax reform lead to differential effects? By Thi, Hoang Ha Nguyen; Weichenrieder, Alfons J.
  7. What Is the Substance-Based Carve-Out under Pillar 2? And How Will It Affect Tax Competition? By Michael P. Devereux; Martin Simmler; John Vella; Heydon Wardell-Burrus
  8. How Specifications of the Reference Tax System Affect CBO’s Estimates of Tax Expenditures By Congressional Budget Office
  9. Do soda taxes affect the consumption and health of school-aged children? Evidence from France and Hungary By Selina Gangl
  10. The tax-price elasticity of offshore tax avoidance: Evidence from Ecuadorian transaction data By Jakob Brounstein
  11. Larger transfers financed with more progressive taxes? On the optimal design of taxes and transfers By Axelle Ferriere; Philipp Grubener; Gaston Navarro; Oliko Vardishvili
  12. Income tax noncompliance in Germany, 2001-2014 By Fauser, Hannes; Godar, Sarah
  13. Measuring the Redistributive Capacity of Tax Policies By Juan Carlos Benitez; Charles Vellutini
  14. Tax reform, unemployment, and fertility By Minoru Watanabe
  15. Small Business Tax Compliance under Third-party Reporting By Bibek Adhikari; James Alm; Timothy F. Harris
  16. Cash on the Table? Imperfect Take-up of Tax Incentives and Firm Investment Behavior By Wei Cui; Jeffrey Hicks; Jing Xing
  17. Can today's and tomorrow's world uniformly gain from carbon taxation? By Laurence J. Kotlikoff; Felix Kubler; Andrey Polbin; Simon Scheidegger

  1. By: Mr. Shafik Hebous; Mr. Michael Keen
    Abstract: The recent international agreement on a minimum effective corporate tax rate marks a profound change in global tax arrangements. The appropriate level of that minimum, however, has been, and remains, extremely contentious. This paper explores the strategic responses to a minimum tax, which—the policy objective being to change the rules of tax competition game--—are critical for assessing the design and welfare impact of, and prospects for, this fundamental policy innovation. Analysis and calibration plausibly suggest sizable scope for minima that are Pareto-improving, benefiting low as well as high tax countries, over the uncoordinated equilibrium.
    Keywords: Tax Competition, Minimum Taxation, Corporate Tax Reform, International Taxation; competition game; policy objective; corporate tax reform; best response; country benefit; residence country; Corporate income tax; Competition; Tax avoidance; Global
    Date: 2021–10–22
  2. 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.
    Keywords: JEL Classification: R12, C18, C59
    Date: 2021
  3. By: Mehmet Ayaz; Lea Fricke; Clemens Fuest; Dominik Sachs
    Abstract: The COVID-19 pandemic has led to an increase in public debt in most countries. This will increase fiscal pressure in the future. We study how the shape of the optimal nonlinear income tax schedule is affected by this increase. We calibrate the workhorse optimal income tax model to five European countries: France, Germany, Italy, Spain and the UK. Applying an inverse-optimum approach to the pre COVID-19 economies we obtain the Pareto weights implicitly applied by the different countries. We then ask how the schedule of marginal and average tax rates should be optimally adjusted to the increase in fiscal pressure. For all countries, we find that the increase in fiscal pressure leads to a less progressive optimal tax schedule both in terms of marginal and average tax rates.
    Keywords: fiscal pressure, optimal taxation
    JEL: H21 H23
    Date: 2021
  4. By: Jiao Li; Duccio Gamannossi Degl'Innocenti; Matthew D. Rablen
    Abstract: Recent years have witnessed the growth of mass-marketed tax avoidance schemes aimed at the middle (not top) of the income distribution, with significant implications for tax revenue. We examine the consequences, for the structure of income tax, and for tax authority anti-avoidance efforts, of tax avoidance of this type. In a model that allows for both demand- and supply-side considerations, we find that (1) there is an endogenous threshold income below which taxpayers do not avoid, and above which they avoid maximally; (2) the per-dollar price of tax avoidance is decreasing in income under progressive taxation; (3) endogenous adjustments in the price of avoidance make supply less responsive to anti-avoidance activity than thought previously; and (4) that avoidance may drive a non-monotone (Laffer) relationship between tax rates and tax revenue. The findings suggest that new approaches to anti-avoidance, beyond legal enforcement, may be needed.
    Keywords: tax avoidance, marketed avoidance schemes, progressive taxation, anti-avoidance
    JEL: H26 D85 K42
    Date: 2021
  5. By: Ngo Van Long
    Abstract: We consider an economy in which some taxpayers behave in a Kantian way in their donation behavior while others are Nash players. A Kantian taxpayer holds the norm that any suggested deviation from a proposed equilibrium profile would be adopted by him only if when all members of their community adopted the same deviation, they would all achieve a higher level of welfare. In contrast, a Nash player follows the individual rationality criterion: He would deviate if, assuming all others do not deviate, he would improve his own payoff. We show that if all taxpayers are Nash players, then there is an efficiency-inducing tax credit scheme for charitable contributions. In contrast, if all taxpayers are Kantian, the optimal tax credit for charity is zero. If both types of taxpayers co-exist, and the government does not know who is of what type, then it is not possible for the government to induce the first-best outcome, but it must rely on a second-best tax-credit scheme.
    Keywords: categorical imperative, Kantian behaviour, Kantian equilibrium, Kant-Nash equilibrium, voluntary contributions to a public good, tax credits
    JEL: H21 H31 H41
    Date: 2021
  6. By: Thi, Hoang Ha Nguyen; Weichenrieder, Alfons J.
    Abstract: The US Tax Cuts and Jobs Act (TCJA) led to a drastic reduction in the corporate tax and improved the treatment of C corporations compared to S corporations. We study the differential effect of the TCJA on these types of corporations using key economic variables of US banks, such as the number of employees, average salaries and benefits, profit/loss before taxes, and net income. Our analysis suggests that the TCJA increased the net-of-tax profits of C corporation banks compared to S corporations and, to a lesser extent, their pre-tax profits. At the same time, the reform triggered no significantly differential effect on the employment and average wages.
    Keywords: Tax Cuts and Jobs Act,corporate taxation,S corporations,C corporations,banks
    JEL: H2 G2
    Date: 2021
  7. By: Michael P. Devereux; Martin Simmler; John Vella; Heydon Wardell-Burrus
    Abstract: Key messages: The success of the recently agreed international tax reform hinges on a technical issue in the design of the Pillar 2 global minimum tax Pillar 2 ensures the minimum taxation of ‘residual’ (e.g. non-routine) profts at 15%. ‘Routine’ proft is not subject to Pillar 2. The effects depend on which of two possible options is used: Option 1 removes the incentive to compete below a liability of 15% of residual profts and puts a floor to tax competition Option 2 still maintains an incentive for governments to compete by reducing their taxes – possibly all the way to zero. Consequences for tax competition depend on the technical details to be revealed. Announcement containing more details of the proposal are expected shortly.
    Date: 2021
  8. By: Congressional Budget Office
    Abstract: To measure tax expenditures, the normal tax structure—the reference tax system—in which they represent special treatment must be defined. This report outlines how the reference tax system used by CBO affects its estimates of tax expenditures.
    JEL: H20
    Date: 2021–12–15
  9. By: Selina Gangl
    Abstract: This paper examines the effect of two different soda taxes on consumption behaviour and health of school-aged children in Europe: Hungary imposed a Public Health Product Tax (PHPT) on several unhealthy products in 2011. France introduced solely a soda tax, containing sugar or artificial sweeteners, in 2012. In order to exploit spatial variation, I use a semi-parametric Difference-in-Differences (DID) approach. Since the policies differ in Hungary and France, I analyse the effects separately by using a neighbouring country without a soda tax as a control group. The results suggest a counter-intuitive positive effect of the tax on soda consumption in Hungary. The reason for this finding could be the substitution of other unhealthy beverages, which are taxed at a higher rate, by sodas. The effect of the soda tax in France is as expected negative, but insignificant which might be caused by a low tax rate. The body mass index (BMI) is not affected by the tax in any country. Consequently, policy makers should think carefully about the design and the tax rate before implementing a soda tax.
    Date: 2021–11
  10. By: Jakob Brounstein
    Abstract: This study leverages a unique data set on the universe of transactions exiting the Ecuadorian economy to estimate the tax-price elasticity of demand for tax-sheltering activities using offshore fiscal havens. I determine this elasticity quasi-experimentally by comparing the evolution in funds sent by individuals and corporations to tax havens for different purposes (e.g. dividend payments, bank account deposits) versus similar transactions with non-tax havens around changes to the Ecuadorian Impuesto a la Salida de Divisas , which effectuated an ad valorem tax on transfers to tax havens.
    Keywords: Tax evasion, Tax avoidance, Tax havens
    Date: 2021
  11. By: Axelle Ferriere (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); Philipp Grubener (Goethe-University - Goethe-Universität Frankfurt am Main); Gaston Navarro (Federal Reserve Board); Oliko Vardishvili (Yale University [New Haven])
    Abstract: We study the optimal joint design of targeted transfers and progressive income taxes. We develop a simple analytical model and demonstrate an optimally negative relation between transfers and income-tax progressivity, due to both efficiency and redistribution concerns. That is, higher transfers should be financed with lower income-tax progressivity. We next quantify the optimal fiscal plan in a rich dynamic model calibrated to the U.S. economy. Transfers should be generous and financed with moderate income-tax progressivity. To redistribute while preserving efficiency, average tax-and-transfer rates should be more progressive than marginal rates. Transfers, even if lump-sum, precisely allow to disentangle average from marginal rates. Targeted transfers further implement non-monotonic marginal rates, but generate only modest additional gains relative to a lump-sum transfer. Quantitatively, the left tail of the income distribution determines the optimal size of the transfer, while the right tail drives the optimal income-tax progressivity.
    Keywords: Fiscal Policy,Optimal Taxation,Redistribution,Heterogeneous Agents
    Date: 2021–12
  12. By: Fauser, Hannes; Godar, Sarah
    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
  13. By: Juan Carlos Benitez; Charles Vellutini
    Abstract: This paper presents a novel technique to measure and compare the redistributive capacity of observed tax (or transfer) policies. The technique is based on income distribution simulations and controls for differences in pre-tax income distributions. It assumes that the only information on the pre-tax distribution available in each country-year is the Gini coefficient and the mean (GDP per capita). We illustrate the technique with an application to the personal income tax, using a dataset of 108 countries over the 2007-2018 period.
    Keywords: Income distribution, redistribution, progressivity, personal income tax; novel technique; PIT redistribution; TRANSPLANT-AND-COMPARE method; PIT Progressive; market income Gini Coefficients; Income distribution; Income; Personal income tax; Progressive taxation; Income inequality; Global
    Date: 2021–10–22
  14. By: Minoru Watanabe (Research Fellow, Graduate School of Economics, Kobe University/Hokusei Gakuen University)
    Abstract: This breif article describes the development of a simple overlapping generations model with unemployment and endogenous fertility to analyze the impact of increasing capital income tax. We find that higher capital income tax promotes employment and fertility.
    Date: 2021–12
  15. By: Bibek Adhikari (Illinois State University); James Alm (Tulane University); Timothy F. Harris (Illinois State University)
    Abstract: How does third-party income reporting affect tax compliance? We use confidential administrative data from tax returns and information reports to estimate the impact of third-party income reporting on small business tax compliance. Since 2011, payment settlement entities (e.g., American Express) were required to report payment card transactions to both the firm and the Internal Revenue Service using Form 1099-K. This requirement made businesses’ receipts from payment cards—but not their cash receipts—third-party reported. Consequently, businesses located in higher payment card use areas experienced greater levels of third-party reporting than businesses located in lower credit card use areas. We construct an index of payment card use at the commuting zone level and we use this variation to identify the effect of Form 1099-K on reported receipts and deductions by small businesses. Overall, we find that the legislation modestly increased reported receipts without significantly increasing deductions. We also find substantial heterogeneity, with smaller firms, firms in business-to-consumer industries, and partnerships reporting a relatively large increase in receipts and a partially offsetting increase in deductions, implying a modest increase in tax compliance.
    Keywords: Tax enforcement, Information reporting, Tax evasion, Small businesses, Administrative data
    JEL: H25 H26 H32
    Date: 2021–12
  16. By: Wei Cui; Jeffrey Hicks; Jing Xing
    Abstract: We investigate whether investment incentives work in less developed countries by exploiting the introduction of accelerated depreciation (AD) for fixed asset investment in China as a natural experiment. In contrast to the large positive impact of similar tax incentives in the U.S. and U.K. found in recent studies, we document that AD was ineffective in stimulating Chinese firms' investment. Further, using confidential corporate tax returns from a large province, we find that firms fail to claim the AD benefit on over 80% of eligible investments. Firms’ take-up is significantly influenced by their taxable positions and tax sophistication. Moreover, resources of local tax authorities help improve awareness of the policy. Our study contributes to the understanding of conditions under which tax incentives for investment can be effective.
    Keywords: tax incentives, investment, take-up, tax administration
    JEL: H20 H30
    Date: 2021
  17. By: Laurence J. Kotlikoff; Felix Kubler; Andrey Polbin; Simon Scheidegger
    Abstract: Climate change will impact current and future generations in different regions very differently. This paper develops a large-scale, annually calibrated, multi-region, overlapping generations model of climate change to study its heterogeneous effects across space and time. We model the relationship between carbon emissions and the global average temperature based on the latest climate science. Predicated average global temperature is used to determine, via pattern-scaling, region-specific temperatures and damages. Our main focus is determining the carbon policy that delivers present and future mankind the highest uniform percentage welfare gains – arguably the policy with the highest chance of global adoption. Damages from climate change are positive for all regions apart from Russia and Canada, with India and South Asia Pacific suffering the most. The optimal policy is implemented via a time-varying global carbon tax plus region-and generation-specific net transfers. Uniform welfare improving carbon policy can materially limit global emissions, dramatically shorten the use of fossil fuels, and raise the welfare of all current and future agents by over four percent. Unfortunately, the pursuit of carbon policy by individual regions, even large ones, makes only a limited difference. However, coalitions of regions, particularly ones including China, can materially limit carbon emissions.
    Keywords: none
    JEL: H23 O44
    Date: 2021–09

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