nep-pbe New Economics Papers
on Public Economics
Issue of 2022‒01‒17
thirteen papers chosen by
Thomas Andrén

  1. The Incidence of the Corporate Income Tax is Irrelevant for its (Benefit-Based) Justification By Simon M. Naitram; Matthew C. Weinzierl
  2. Measuring Effective Taxation of Housing: Building the foundations for policy reform By Bethany Millar-Powell; Bert Brys; Pierce O’Reilly; Yannic Rehm; Alastair Thomas
  3. Public support for tax policies in COVID-19 times: Evidence from Luxembourg By Javier Olivera; Philippe Van Kerm
  4. Social Exclusion and Optimal Redistribution By Thomas Aronsson; Spencer Bastani; Khayyam Tayibov
  5. Corporate Taxes and the Earnings Distribution: Effects of the Domestic Production Activities Deduction By Christine L. Dobridge; Paul Landefeld; Jacob Mortenson
  6. A General Model of International Tax Competition with Applications By Azacis, Helmuts; Collie, David R.
  7. Inequality as an Externality: Consequences for Tax Design By Morten Støstad; Frank Cowell
  8. Value-added Tax Reform and Services Exports: Evidence from China By Zhang, Yan; Bai, Zhuoran; Findaly, Christopher
  9. Distributional Effects of Carbon Pricing by Transport Fuel Taxation By Leif Jacobs; Lara Quack; Mario Mechtel
  10. Inequality, Taxation, and Sovereign Default Risk By Minjie Deng
  11. The EU’s Carbon Border Tax is Likely to do More Harm than Good By Uri Dadush
  12. No taxation without informational foundation: On the role of legibility in tax state development By Matthias vom Hau; José Peres-Cajías; Hillel David Soifer
  13. Towards Efforts to Enhance Tax Revenue Mobilisation in Africa: Exploring Synergies between Industrialisation and ICTs By Isaac K. Ofori; Pamela E. Ofori; Simplice A. Asongu

  1. By: Simon M. Naitram; Matthew C. Weinzierl
    Abstract: Robust support for corporate income taxation is a puzzle for standard tax theory because the tax’s incidence is uncertain and unreliable. We propose a resolution: if the corporate tax is seen as a benefit-based tax, its normative appeal depends on the correspondence between its incidence and that of the benefit which corporations derive from the state’s activities. We show that a simple mechanism makes this correspondence exact—and the net incidence of the tax zero—when the tax base matches what we call the benefit base. As a result, the appeal of the corporate income tax is independent of incidence as conventionally understood.
    JEL: H21 H25 H41
    Date: 2021–12
  2. By: Bethany Millar-Powell; Bert Brys; Pierce O’Reilly; Yannic Rehm; Alastair Thomas
    Abstract: This paper measures the effective taxation of housing investments in 40 OECD member and partner countries. The paper derives both Marginal Effective Tax Rates (METRs) and Average Effective Tax Rates (AETRs), which incorporate the stream of income and taxes over the life of the housing investment. The methodology is applied to owner-occupied and rented residential property for investments that are financed with debt or equity. The paper finds that the level and components of housing taxation depend greatly on the investment scenario. Effective tax rates vary substantially depending on the holding period, rate of return, tenure (owner-occupied or rented), financing scenario, and the inflation rate. Effective tax rates do not vary much with the taxpayer’s income and wealth or with the rate of return. The paper finds there is scope to reduce the tax differential between different investment scenarios and strengthen progressivity and horizontal equity.
    JEL: H2
    Date: 2022–01–12
  3. By: Javier Olivera (Luxembourg Institute of Socio-Economic Research (LISER)); Philippe Van Kerm (Luxembourg Institute of Socio-Economic Research, and University of Luxembourg)
    Abstract: We study attitudes towards the introduction of hypothetical new taxes to finance the cost of the COVID-19 pandemic. We rely on survey data collected in Luxembourg in 2020. The survey asks for the agreement of respondents over: a one-time net wealth tax, an inheritance tax, a temporary solidarity income tax, and a temporary increase in VAT. All questions include different and randomly assigned tax attributes (tax rates and exemption amounts). We find a clear divide with relatively high support for new wealth and inheritance taxes on the one hand and a low support for increases in VAT and income taxes on the other hand. While 58% of respondents agree or strongly agree with a one-time tax levied on net worth, only 24% are in favor of a small increase in VAT. Support for any tax is however negatively associated with the size of the tax as measured by the predicted revenues. Our results indicate that a one-time wealth tax could raise substantial revenues and still garner public support.
    Keywords: COVID-19, wealth tax, inheritance tax, income tax, VAT, preference for redistribution
    JEL: H2 D31 E62 I38
    Date: 2022–01
  4. By: Thomas Aronsson; Spencer Bastani; Khayyam Tayibov
    Abstract: We integrate social exclusion, operationalized in terms of long-term unemployment, into the theory of optimal redistributive taxation. Our results show how an optimal mix of education policy, public employment, and support to the unemployed, in conjunction with optimal income taxation, contributes to redistribution and reduced long-term unemployment. The second-best optimum most likely implies overprovision of education relative to a policy rule that balances the direct marginal benefit and marginal cost, whereas public employment and unemployment benefits are underprovided. Our calibration shows how the policy mix varies with the government’s preferences for redistribution and the characteristics of those risking long-term unemployment.
    Keywords: long-term unemployment, education, optimal income taxation, public sector employment
    JEL: H21 J24 J45 I21
    Date: 2021
  5. By: Christine L. Dobridge; Paul Landefeld; Jacob Mortenson
    Abstract: This paper investigates how corporate tax changes affect workers’ earnings. We use a dataset of U.S. worker-level W-2 filings matched with corporate tax returns and study the implementation of the Domestic Production Activities Deduction (DPAD). We find the DPAD tax rate reduction has a substantial effect on the distribution of annual wage earnings within a firm. Earnings of workers at the top of their firm’s earnings distribution rise relative to those at the bottom of the distribution. We estimate a semi-elasticity of average earnings of 1.1 with respect to the DPAD marginal tax rate reduction, while the semi-elasticity of median earnings is notably smaller—0.5. Furthermore, we estimate a semi-elasticity of 1.3 at the 95th percentile of workers’ earnings and 2.7 at the 99th percentile. This trend of larger semi-elasticities at the top of the earnings distribution is especially pronounced for small firms. Looking at overall employment effects, we see no change overall, but the number of employees rises at small firms and declines at large firms. In contrast, we find that capital investment rises for large firms, suggesting that the DPAD also resulted in domestic capitallabor substitution for large corporations. Our paper has significant implications for assessing the progressivity of the U.S. tax code and for analyzing the effect of corporate tax policy changes on the U.S. income distribution.
    Keywords: Corporate taxation; Earnings distribution; Employment; Investment
    JEL: D31 H22 H25 J31
    Date: 2021–12–17
  6. By: Azacis, Helmuts (Cardiff Business School); Collie, David R. (Cardiff Business School)
    Abstract: A general version of the ZMW model of international tax competition is presented that confirms and extends the results of the existing literature about the choice of tax policy instruments in the symmetric case when the tax externality is positive for both countries. In the asymmetric case when the tax externality is positive for one country and negative for the other country, it is shown that the results are reversed. This demonstrates the importance of the sign of the tax externality in models of international tax competition. This general model is then used to analyse a couple of policy-relevant applications: depreciation allowances and interest payment deductibility.
    Keywords: Tax Competition; Proportional Taxes; Per-Unit Taxes; Capital Taxes.
    JEL: H21 H25 H77 F21 F23 F53 C72
    Date: 2021–12
  7. By: Morten Støstad (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); Frank Cowell (LSE - London School of Economics and Political Science)
    Abstract: This paper proposes to treat income inequality as an economic externality in order to in troduce the societal effects of inequality into welfarist models. We introduce such effects in a simple and generalizable welfarist framework and show that they can have sizeable optimal policy consequences that cannot be captured by standard risk aversion or social welfare weights. Novel policy implications are illustrated through the classical optimal non-linear income taxation model, where the social planner must face a trade-off between collecting revenue and changing income inequality levels. Resulting policy consequences are disproportionately located at the top, where optimal marginal tax rates are strongly and robustly dependent on the magnitude of the inequality externality. We use several real-world examples to show that tax policy previ ously unsupported by optimal taxation theory can be explained in our framework. The findings indicate that the magnitude of the inequality externality could be considered a crucial economic variable.
    Date: 2021–12
  8. By: Zhang, Yan; Bai, Zhuoran; Findaly, Christopher
    Abstract: In 2012, a sales tax was replaced in China by a value-added tax (VAT). The effect of this change on services exports is evaluated in this paper. VAT reform was introduced across provinces and service sectors at different times, so we can identify the impacts of VAT reform on firms’ export behavior by utilizing a difference-in-difference-in-difference (DDD) estimation methodology. We find that VAT reform significantly increases service exports, in both intensive and extensive margins. The export enhancing effects are larger for non-state-owned enterprises, and for firms of larger scale and higher productivity levels. VAT reform alleviates tax magnification and double taxation, and effectively promotes the competitiveness of China’s services exports.
    Keywords: VAT, Service exports, Export tax rebate
    JEL: F14 H25 L80
    Date: 2021–12
  9. By: Leif Jacobs (Fraunhofer Institute for Applied Information Technology); Lara Quack (Fraunhofer Institute for Applied Information Technology); Mario Mechtel (Leuphana University of Lüneburg, Institute of Economics)
    Abstract: We introduce a new microsimulation model built on household transport data to study the distributional effects of carbon-based fuel taxation of private road transport in Germany. Our data includes annual mileage at the car-level, the distinction between fuel types, as well as car-specific fuel consumption, allowing for a very detailed analysis. The model allows focusing on different types of households as well as identifying effect heterogeneity across the income distribution. We compare the recent fuel tax scheme with three policy reform scenarios to empirically test several hypotheses regarding distributional effects of carbon pricing. We find that the legal status quo of the fuel tax has overall regressive effects, with the tax on petrol acting regressive and the tax on diesel acting progressive. A transformation of the current tax into a revenue-neutral carbon-harmonised fuel tax yields a progressive distributional effect, while an introduction of a new carbon tax on transport fuels is neither learly regressive nor progressive. Combining both tax schemes also has non-regressive effects. Our results suggest that policy makers face various options for pricing road transport greenhouse gas emissions without causing an overall disproportionate tax burden on low-income households.
    Keywords: carbon pricing, fuel tax, distributional effects, road transport, microsimulation, exante impact assessment
    JEL: H22 H23 Q48 Q58 R48
    Date: 2021–12
  10. By: Minjie Deng (Simon Fraser University)
    Abstract: Income inequality and worker migration significantly affect sovereign default risk. Governments often impose progressive taxes to reduce inequality, which redistribute income but discourage labor supply and induce emigration. Reduced labor supply and a smaller high-income workforce erode the current and future tax base, reducing the government’s ability to repay debt. I develop a sovereign default model with endogenous non-linear taxation and heterogeneous labor to quantify this effect. In the model, the government chooses the optimal combination of taxation and debt, considering its impact on workers’ labor and migration decisions. With the estimated model, I find that income inequality and its interactions with migration explain one-third of the average U.S. state government spread.
    Date: 2021–12
  11. By: Uri Dadush
    Abstract: The EU's proposed carbon border tax is well intentioned. It is motivated by climate concerns, not by protectionism. However, the tax is based on the false premise of carbon leakage, and its implementation is rife with practical difficulties. Moreover, the tax, as proposed, departs from the Paris agreement principle of differentiated responsibilities, and will be challenged by developing countries. The United States is not ready to adopt carbon taxes, either. The WTO, already in a fragile state, may be dealt another body blow by the proposed tax. Better alternatives are available.
    Date: 2021–06
  12. By: Matthias vom Hau; José Peres-Cajías; Hillel David Soifer
    Abstract: This paper combines cross-national statistical analysis and in-depth historical case studies of Argentina and Chile to explore the relationship between two crucial dimensions of state capacity. We show that information capacity contributes to the development of fiscal capacity. States require accurate information about their subject populations, territories, and economies in order to effectively mobilize revenues. In developing this argument this paper makes three broader contributions.
    Keywords: State capacity, Information, Fiscal capacity, Taxation, Statebuilding, Mixed methods, Latin America
    Date: 2021
  13. By: Isaac K. Ofori (University of Insubria, Varese, Italy); Pamela E. Ofori (University of Insubria, Varese, Italy); Simplice A. Asongu (Yaoundé, Cameroon)
    Abstract: Motivated by the momentous rise in ICT diffusion, the implementation of the African Continental Free Trade Area agreement, and the expected rebound of foreign direct investment inflow to Africa from 2022, this study examines the joint effects of industrialisation and ICT diffusion on resource mobilisation in Africa. To this end, we use data on 42 African countries for the period 1996 – 2020 for the analysis. First, we provide evidence robust to several specifications from the dynamic system GMM to show that although unconditionally both industrialisation and ICT diffusion enhance (i) goods and services tax (GST), and (ii) profits, corporate and income tax (PCIT) mobilisation efforts in Africa, the effects of the former are rather remarkable in the presence of the latter. Particularly, the results show that, while ICTs amplify the effect of industrialisation on GST, only ICT usage and ICT skills matter for PCIT. Second, the study unveils ICT thresholds for complementary policies. Accordingly, industrialisation and ICTs are necessary and sufficient conditions for tax revenue mobilisation only below some ICT thresholds. Above these ICT thresholds, complementary policies are needed to maintain the overall positive incidence on tax revenue mobilisation. Policy recommendations are provided in the end.
    Keywords: AfCFTA; Africa; ICT access; ICT diffusion; Industrialisation; Tax; Revenue
    JEL: C33 F6 H2 H71 O33 O55
    Date: 2021–09

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