nep-pbe New Economics Papers
on Public Economics
Issue of 2022‒01‒24
sixteen papers chosen by
Thomas Andrén

  1. The Global Minimum Tax By Niels Johannesen
  2. Consolidating the Covid Debt By Keuschnigg, Christian; Johs, Julian; Stevens, Jacob
  3. New Forms of Tax Competition in the European Union: an Empirical Investigation By Eloi Flamant; Sarah Godar; Gaspard Richard
  4. The Effects of Corporate Taxes on Small Firms By Jarkko Harju; Aliisa Koivisto; Tuomas Matikka
  5. A Fair Day's Pay for a Fair Day's Work: Optimal Tax Design as Redistributional Arbitrage By Hellwig, Christian; Werquin, Nicolas
  6. The long-run effects of corporate tax reforms By Isaac Baley; Andrés Blanco
  7. Tax Reform and Tax Compliance Behaviour of Companies in Nigeria By Okeke, Clement Ejiofor; Saluadeen, Yinka Mashood
  8. The Politics of Taxing Multinational Firms in a Digital Age By Hearson, Martin; Gelepithis, Margarita
  9. Sufficient Statistics for Nonlinear Tax Systems with Preference Heterogeneity By Antoine Ferey; Benjamin Lockwood; Dmitry Taubinsky
  10. Equilibrium Worker-Firm Allocations and the Deadweight Losses of Taxation By Bagger, Jesper; Moen, Espen R.; Vejlin, Rune Majlund
  11. The Design of R&D Tax Incentive Schemes and Firm Innovation By Koski, Heli; Fornaro, Paolo
  12. The effect of property taxes on house prices: Evidence from the 1993 and the 2012 reforms in Italy By Melisso Boschi; Valeria Bevilacqua; Carla Di Falco
  13. Taxation and income distribution in Myanmar: Application of a new computable general equilibrium (CGE) model By Henning Tarp Jensen; Marcus Keogh-Brown; Finn Tarp
  14. Fiscal capacity in non-democratic states: the origins and expansion of income tax By Per F. Andersson
  15. Welfare effects of R&D support policies By Takalo, Tuomas; Tanayama, Tanja; Toivanen, Otto
  16. The aftermath of debt surges By M. Ayhan Kose; Franziska Ohnsorge; Carmen Reinhart; Kenneth Rogoff

  1. By: Niels Johannesen (University of Copenhagen)
    Abstract: This paper studies how the global minimum tax shapes national tax policies and welfare in a formal model of international tax competition with heterogeneous countries. The net welfare effect is generally ambiguous from the perspective of non-havens. On the one hand, the global minimum tax raises their welfare by curbing profit shifting, which boosts government revenue. One the other hand, it lowers their welfare by increasing equilibrium tax rates in havens, which transfers real resources from non-haven firms to haven governments. The net welfare effect is unambiguously positive when the global minimum rate is so high that profit shifting ends.
    Keywords: profit shifting, international taxation, global minimum tax, tax avoidance, multinational firms
    JEL: H25 H26 H77
    Date: 2022–01–13
  2. By: Keuschnigg, Christian; Johs, Julian; Stevens, Jacob
    Abstract: One of the main functions of public debt is to smooth taxes and spending over time. In the Covid crisis, the Maastricht deficit restrictions were temporarily suspended to allow for large temporary deficits. As recovery sets in, countries are confronted with the task of consolidating the Covid debt. This paper explores a fiscal consolidation strategy combined with growth enhancing tax and expenditure reform. We quantitatively illustrate that this reform-based strategy, by reaping substantial efficiency gains and inducing strong growth, eliminates the Covid debt, protects per capita social entitlements and yet avoids increasing tax rates. With slow consolidation, marginal tax rates are reduced right from the beginning.
    Keywords: Covid debt, fiscal consolidation, tax and expenditure reform, growth
    JEL: E62 H24 H25 H55 H63
    Date: 2021–12
  3. By: Eloi Flamant (EU Tax - EU Tax Observatory); Sarah Godar (EU Tax - EU Tax Observatory); Gaspard Richard (EU Tax - EU Tax Observatory)
    Abstract: This report provides an empirical analysis of personal and corporate tax competition in the European Union. We find that tax competition increasingly takes the form of preferential or narrowly targeted tax regimes on top of general rate cuts. We provide a ranking of the most harmful regimes targeting foreign, primarily highincome or high-wealth individuals. We also discuss several options to address these trends. The evolution of tax competition in the European Union may be summarized as follows. While corporate tax rates are still on a downward trend, the decline of top statutory personal income tax rates has stopped since the financial crisis of 2008–2009. In the meantime, many new preferential regimes have been introduced into the personal income tax systems of member states. Many base-narrowing measures also contribute to lowering corporate tax burdens. By targeting the most mobile parts of the tax base - high-income earners and multinational enterprises - these tax incentives undermine effective revenue collection in the European Union and weaken the horizontal and vertical equity of tax systems. The most striking trend in EU tax competition is the increase in the number of personal income tax schemes targeting foreign individuals. The number of such regimes has increased from 5 in 1995 to 28 today. A tentative ranking suggests that the most harmful ones are the Italian and Greek high-net-worth individual regimes, Cyprus' high-income regime and the pension regimes of Cyprus, Greece and Portugal. These regimes exhibit long periods of duration, provide significant tax advantages, specifically target very high-income individuals or do not require any real economic activity in a given member state. At present, preferential regimes apply to over 200,000 beneficiaries. A lower-bound estimation suggests that the total fiscal costs for the European Union amount to EUR 4.5 billion per year. This sum is equivalent e.g. to the annual budget of the entire Erasmus programme. Member states also apply numerous base-narrowing measures which have the potential to significantly lower the effective tax rate of multinationals. Public financing of corporate research and development has increased in recent decades and has increasingly taken the form of tax incentives. A total of 14 intellectual property regimes in the EU are currently designed to tax income associated with patents, software and similar intangible assets at rates of 15% or less (10% or less in half of these cases). Six countries have adopted regimes of notional interest deduction; the Maltese and Cypriot regimes seem exceptionally generous. Approximately 1,348 unilateral tax rulings concerning multinationals' tax arrangements were in force in 2019. The implications of these rulings for revenue collection are still unknown to the public. The trends uncovered by this report may be addressed in several ways, e.g. by reforming the Code of Conduct and transforming it into a binding instrument – and extending its mandate to personal income taxation as well as to non-preferential corporate tax regimes that lead to generally low levels of taxation of multinationals. In the absence of a coordinated approach (which is always the ideal solution), member states might consider unilaterally taxing their expatriates, which, under some conditions, may mitigate the effects of preferential personal income tax regimes. A comprehensive implementation of the global corporate minimum tax agreed in October 2021, with minimal carveouts and limited deductions for research and development, could provide an effective floor for the EU's race to the bottom in corporate taxation.
    Date: 2021–12
  4. By: Jarkko Harju; Aliisa Koivisto; Tuomas Matikka
    Abstract: We study the impact of corporate taxes on firm-level investments and business activity by exploiting a 6 percentage-point reduction in the corporate tax rate during 2012–2014 in Finland. We use detailed administrative data and a difference-in-differences method comparing small corporations (tax rate cuts) to similar partnerships (no change in taxes). We find no significant average investment responses but do observe an average increase in annual sales and variable costs. These effects are driven by more cash-constrained firms and firms where the main owner actively works in the firm.
    JEL: G31 G38 H21 H25
    Date: 2022–01
  5. By: Hellwig, Christian; Werquin, Nicolas
    Abstract: We study optimal tax design based on the idea that policy-makers face trade-offs between multiple margins of redistribution. Within a Mirrleesian economy with earnings, consumption and retirement savings, we derive a novel formula for optimal income and savings distortions based on redistributional arbitrage. We establish a sufficient statistics representation of the labor income and capital tax rates on top income earners in dynamic environments, which relies on the observed distributions of both income and consumption. Because consumption has a thinner Pareto tail than income, our quantitative results suggest that it is optimal to shift a substantial fraction of the top earners' tax burden from income to savings.
    Date: 2022–01–10
  6. By: Isaac Baley; Andrés Blanco
    Abstract: We investigate the long-run effects of permanent corporate tax reforms on aggregate capital behavior. In an investment model with fixed adjustment costs and partial irreversibility, we show that corporate taxes and investment frictions jointly determine three interconnected macroeconomic outcomes: (i) capital allocation, (ii) capital valuation, and (iii) capital fluctuations around steady-state. Using corporate tax and firm-level investment data from Chile, we discover that a lower corporate income tax improves the allocation of capital, reduces capital valuation, and accelerates capital fluctuations.
    Keywords: corporate taxes, investment frictions, fixed adjustment costs, irreversibility, lumpiness, capital misallocation, Tobin’s q, transitional dynamics, inaction, propagation
    JEL: D30 D80 E20 E30
    Date: 2022–01
  7. By: Okeke, Clement Ejiofor; Saluadeen, Yinka Mashood
    Abstract: This paper evaluates the 2007 Company Income Tax (CIT) Reform with respect to improving the tax compliance behaviour of companies in Nigeria. Data for total annual company income tax paid and the total GDP for the respective years of the study were extracted from National Bureau of Statistics records. The study covers a period of twenty years (ten years, 1997-2006 before and ten years, 2008-2017 after the reform). The Wilcoxon Rank Sum Test was used as analysis tool. The study finds companies to be more complaint after the reform than before. The study recommends further reforms in terms of increase in the level of incentives to companies to enhance tax compliance.
    Keywords: Compliance Behaviour, Tax Reform, Political Support, Fiscal Contract Enforcement
    JEL: G38 H3 K34
    Date: 2021–10–22
  8. By: Hearson, Martin; Gelepithis, Margarita
    Abstract: Taxing multinationals is politically difficult because of the structural power of mobile firms within the global economy, and this structural power is expected to increase in the digital age. Recently however there has been a breakdown in the international corporate tax consensus that structured tax competition over the past century. A new norm of international taxation has emerged whereby states claim the right to tax corporate income based on presence in consumer markets. Our paper explains this unexpected reassertion of state power. Building on previous accounts of large-scale change in policy norms, we show how the emergence of digital business models led to a new tax consensus by setting in train a process of policy contestation that allowed countries to levy taxes on multinationals unilaterally, without fear of capital flight.
    Keywords: Governance,
    Date: 2021
  9. By: Antoine Ferey; Benjamin Lockwood; Dmitry Taubinsky
    Abstract: This paper provides general and empirically implementable sufficient statistics formulas for optimal nonlinear tax systems in the presence of preference heterogeneity. We study unrestricted tax systems on income and savings (or other commodities) that implement the optimal direct-revelation mechanism, as well as simpler tax systems that impose common restrictions like separability between earnings and savings taxes. We characterize the optimum using familiar elasticity concepts and a sufficient statistic for across-income preference heterogeneity: the difference between the cross-sectional variation of savings with income, and the causal effect of income on savings. The Atkinson-Stiglitz Theorem is a knife-edge case corresponding to zero difference, and a number of other key results in optimal tax theory are subsumed as special cases. Our formulas also apply to other sources of across-income heterogeneity, including heterogeneity in rates of return on savings, inheritances, and the ability to shift income between tax bases. We provide tractable extensions of these results that include multidimensional heterogeneity, additional efficiency rationales for taxing heterogeneous returns, and corrective motives to encourage more saving. Applying these formulas in a calibrated model of the U.S. economy, we find that the optimal savings tax is positive and progressive.
    JEL: D61 H21 H24
    Date: 2021–12
  10. By: Bagger, Jesper (Royal Holloway, University of London); Moen, Espen R. (Norwegian Business School (BI)); Vejlin, Rune Majlund (Aarhus University)
    Abstract: We analyse the deadweight losses of tax-induced labor misallocation in an equilibrium model of the labour market where workers search to climb a job ladder and firms post vacancies. Workers differ in abilities. Jobs differ in productivities and amenities. A planner uses affine tax functions to finance lump-sum transfers to all workers and unemployment benefits. The competitive search equilibrium maximizes after-tax utility subject to resource constraints and the tax policy. A higher tax rate distorts search effort, job ranking and vacancy creation. Distortions vary on the job ladder, but always result in deadweight losses. We calibrate the model using matched employer-employee data from Denmark. The marginal deadweight loss is 33 percent of the tax base, and primarily arise from distorted search effort and vacancy creation. Steeply rising deadweight losses from distorted vacancy creation imply that the deadweight loss in the calibrated economy exceeds those incurred by very inequality averse social planners.
    Keywords: vacancy creation, job ranking, job search, labour allocation, redistribution, optimal taxation, deadweight loss, amenities, matched employer-employee data
    JEL: H21 H30 J63 J64
    Date: 2021–11
  11. By: Koski, Heli; Fornaro, Paolo
    Abstract: Abstract Research and development (R&D) tax credits are widely employed among the OECD countries to promote business sector investments in innovation. The implementation of R&D tax credit schemes, however, varies across countries. The empirical research on the effectiveness of R&D tax incentives suggests that the strength of company responses (in R&D expenditures) to more generous tax incentives substantially differ across countries. We use data from 25 OECD countries, collected from 2010 to 2018, to explore the relationship between a set of R&D tax scheme features and innovation performance. Our estimation results show that the business sector R&D expenditure is higher among those countries that have implemented either an R&D tax credit scheme with an incremental deduction basis or a hybrid scheme with both volume-based and incremental tax relief components. The input additionality is highest when the R&D tax incentives are based on the incremental deduction. Further, the hybrid tax credit scheme positively relates to innovation output. The business sector R&D investment are higher in the countries with an R&D tax credit scheme that provides favorable treatment for SMEs or option to carry forward unclaimed R&D tax credits.
    Keywords: R&D tax incentives, R&D investments, Innovation policy, Patents
    JEL: K34 L5 O3 O31
    Date: 2022–01–19
  12. By: Melisso Boschi; Valeria Bevilacqua; Carla Di Falco
    Abstract: We quantify the effect of property tax reforms implemented in Italy in 1993 and 2012 on property prices. We focus on the Italian house prices index using the Interrupted Time Series Analysis (ITSA), a statistical approach that proves to be useful when a counterfactual scenario for policy evaluation is difficult to create due to the universality of intervention. The hypothesis under test is that the two reforms caused a statistically significant discontinuity in the house prices index dynamics. We estimate two alternative versions of the ITSA model ─ one including only Italy, and another one including also similar European countries as control terms (France, Germany, Spain, and the UK). Property tax changes effects are reform-specific. As for the 1993 reform effect on real house prices, we estimate a 13-14 percent decrease of the mean level and a 1 percentage points (p.p.) increase of the rate of growth. As for the 2012 reform, depending on the model chosen, we estimate a 3-5 percent decrease, or a 4 percent increase, in level, as well as a 3-4 p.p. decrease, or a 2 p.p. increase, of the rate of growth.
    Keywords: Policy effect evaluation, Property tax, House prices, Property tax capitalization, Tax reforms, Interrupted Time Series Analysis
    JEL: C32 H20 R21 R31
    Date: 2021–09
  13. By: Henning Tarp Jensen; Marcus Keogh-Brown; Finn Tarp
    Abstract: Despite major public finance reform efforts over the last decade, Myanmarese public finances continue to be characterized by relative weakness in revenue collection, budget execution, and long-term sustainability. Myanmar is therefore in need of comprehensive public finance reform. Two top priorities of the Myanmar Sustainable Development Plan are to establish a fair and efficient tax system to increase government revenues, and to ensure effective public financial management.
    Keywords: Myanmar, Tax reform, Economic efficiency, Household income, Income distribution
    Date: 2021
  14. By: Per F. Andersson
    Abstract: The origins of fiscal capacity have traditionally been linked to warfare and democratization. However, non-democratic states also invest in fiscal capacity, even in times of peace. In fact, the majority of income taxes—a cornerstone of government finance—were introduced by non-democratic states in peacetime. This paper is concerned with how autocratic politics shape fiscal capacity. Political institutions in non-democratic states help overcome a commitment problem related to investments in taxation.
    Keywords: Fiscal capacity, Autocracy, Income tax
    Date: 2021
  15. By: Takalo, Tuomas; Tanayama, Tanja; Toivanen, Otto
    Abstract: We construct a model of innovation incorporating R&D externalities, R&D participation, financial market imperfections, and application and allocation of R&D subsidies, estimate it using Finnish R&D project level data and conduct a welfare analysis. The intensive, not the extensive R&D margin is important. Financial market imperfections are small.Tax credits and subsidies do not reach first best R&D but increase R&D 29-47% compared to laissez-faire. Welfare effects are small: Tax credits increase welfare 1%; subsidies reduce welfare once application costs are taken into accout. In terms of fiscal cost, tax credits are 90% more expensive than R&D subsidies.
    Date: 2022–01–18
  16. By: M. Ayhan Kose; Franziska Ohnsorge; Carmen Reinhart; Kenneth Rogoff
    Abstract: Debt in emerging market and developing economies (EMDEs) is at its highest level in half a century. In about nine out of 10 EMDEs, debt is higher now than it was in 2010 and, in half of the EMDEs, debt is more than 30 percentage points of gross domestic product higher. Historically, elevated debt levels increased the incidence of debt distress, particularly in EMDEs and particularly when financial market conditions turned less benign. This paper reviews an encompassing menu of options that have, in the past, helped lower debt burdens. Specifically, it examines orthodox options (enhancing growth, fiscal consolidation, privatization, and wealth taxation) and heterodox options (inflation, financial repression, debt default and restructuring). The mix of feasible options depends on country characteristics and the type of debt. However, none of these options comes without political, economic, and social costs. Some options may ultimately be ineffective unless vigorously implemented. Policy reversals in difficult times have been common. The challenges associated with debt reduction raise questions of global governance, including to what extent advanced economies can cast their net wider to cushion prospective shocks to EMDEs.
    Keywords: Debt restructuring, growth, inflation, fiscal consolidation, financial repression, wealth taxes
    JEL: F62 F34 F44 E32 E63 H6 H63
    Date: 2021–09

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