nep-pbe New Economics Papers
on Public Economics
Issue of 2022‒02‒14
eleven papers chosen by
Thomas Andrén

  1. Optimal Taxation with Multiple Incomes and Types By Spiritus, Kevin; Lehmann, Etienne; Renes, Sander; Zoutman, Floris T.
  2. The global minimum tax raises more revenues than you think, or much less By Janeba, Eckhard; Schjelderup, Guttorm
  3. Intertemporal income shifting and the taxation of business owner-managers By Helen Miller; Thomas Pope; Kate Smith
  4. How Accurate is the Kakwani Index in Predicting Whether a Tax or a Transfer is Equalizing? An Empirical Analysis By Ali Enami; Patricio Larroulet; Nora Lustig
  5. Optimal sin taxation and market power By Martin O'Connell; Kate Smith
  6. Rising Allowances, Rising Rates: A Tinbergen Rule for Capital Taxation By Marius Clemens; Werner Röger
  7. The role of reporting institutions and image motivation in tax evasion and incidence By Kaisa Kotakorpi; Satu Metsälampi; Topi Miettinen; Tuomas Nurminen
  8. A Ramsey theory of financial distortions By Marco Bassetto; Wei Cui
  9. Welfare Traps in Finland By Puonti, Päivi; Kauppi, Eija; Kotamäki, Mauri; Ropponen, Olli
  10. Using Accounting Information to Predict Aggressive Tax Placement Decisions by European Groups By Matteo Borrotti; Michele Rabasco; Alessandro Santoro
  11. How do transfers and universal basic income impact the labor market and inequality? By Rauh, C.; Santos, M. R.

  1. By: Spiritus, Kevin (Erasmus School of Economics, Erasmus University Rotterdam); Lehmann, Etienne (Université Panthéon-Assas Paris II, CRED); Renes, Sander (Dept. of Business Economics, Erasmus University Rotterdam); Zoutman, Floris T. (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: We analyze the optimal nonlinear income tax schedule when taxpayers earn multiple in comes and differ along many unobserved dimensions. We derive the necessary conditions for the government’s optimum using both a tax perturbation and a mechanism design approach, and show that both methods produce the same results. Our main contribution is to propose a numerical method to find the optimal tax schedule. Applied to the optimal taxation of couples, we find that optimal isotax curves are very close to linear and parallel. The slope of isotax curves is strongly affected by the relative tax-elasticity of male and female income. We make several additional contributions, including a test for Pareto efficiency and a condition on primitives that ensures the government’s necessary conditions are sufficient and the solution to the problem is unique.
    Keywords: Nonlinear Optimal Taxation; Multidimensional Screening; Household Income Taxation
    JEL: D82 H21 H23 H24
    Date: 2022–01–24
  2. By: Janeba, Eckhard (Dept. of Economics, University of Mannheim); Schjelderup, Guttorm (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: The OECD's proposal for a global minimum tax (GMT) of 15% aims for a reversal of a decades-long race to the bottom of corporate tax rates driven by competition over real investments and profit shifting to low-tax jurisdictions. We study the revenue effects of the GMT by focusing on the induced strategic tax setting effects. The direct effect of the GMT is a reduction in profit shifting, which has a positive effect on revenues in high-tax countries as their tax base grows, and makes higher taxes attractive. A secondary effect, however, is that the value of attracting real foreign investments increases, which intensifies tax competition. We argue that the revenue effects of the GMT depend on the instruments governments use to attract firms. With endogenous corporate tax rates, revenues in non-havens increase if initially tax competition among non-havens is fierce. By contrast, when governments compete via lump sum subsidies, the revenue gains from less profit shifting are exactly offset by higher subsidies.
    Keywords: Global Minimum Tax; Tax Competition; OECD BEPS; Pillar II
    JEL: F23 F55 H25 H73
    Date: 2022–02–07
  3. By: Helen Miller (Institute for Fiscal Studies and Institute for Fiscal Studies); Thomas Pope (Institute for Fiscal Studies and Institute for Fiscal Studies); Kate Smith (Institute for Fiscal Studies and Institute for Fiscal Studies)
    Abstract: We use newly linked tax records to show that the large responses of UK company owner-managers to personal taxes are due to intertemporal income shifting and not to reductions in real business activity. Around half of this shifting is short-term and helps prevent volatile incomes being taxed more heavily under progressive personal taxes. The remainder re?ects systemic pro?t retention over long periods to take advantage of lower tax rates, including preferential treatment of capital gains. We ?nd no evidence that this tax-induced retention increases business investment. It does, however, substantially reduce the tax revenue raised from high income business owners.
    Date: 2021–12–13
  4. By: Ali Enami (The University of Akron); Patricio Larroulet (Center for the Study of the State and Society (CEDES)); Nora Lustig (Tulane University)
    Abstract: The Kakwani index of progressivity is commonly used to establish whether the effect of a specific tax or transfer is equalizing. However, in the presence of reranking or the Lambert conundrum, a progressive tax could be unequalizing. While it is mathematically possible for counterintuitive results to occur, how common are they in actual fiscal systems? Using a novel dataset that includes fiscal incidence results for 39 countries, we find that the likelihood of the Kakwani index to be progressive (regressive) while the tax or transfer is unequalizing (equalizing) is minimal, except in the case of indirect taxes: in roughly 25 percent of our sample, regressive indirect taxes are equalizing (sign-inconsistent cases). Additionally, the likelihood that the index ranks the magnitude of the impact of a tax or a transfer wrongly exists but is also small. Finally, using regression analysis, we find that increasing the size or progressivity of a progressive tax (transfer) is equalizing and statistically robust for sign-consistent cases. For sign-inconsistent cases, the coefficient for the Kakwani index is not statistically significant. In sum, although the Kakwani index could yield interpretations that are inaccurate in actual fiscal systems, the risk seems small except for indirect taxes.
    Keywords: Kakwani index, fiscal redistribution, reranking, progressivity, marginal contribution, taxes, transfers, Lambert
    JEL: D31 D63 H22 H23
    Date: 2022–02
  5. By: Martin O'Connell (Institute for Fiscal Studies and University of Wisconsin); Kate Smith (Institute for Fiscal Studies and Institute for Fiscal Studies)
    Abstract: This paper studies the design of sin taxes when ?rms exercise market power. We outline an optimal tax framework that highlights how market power impacts the e?ciency and redistributive properties of sin taxation, and quantify these e?ects in an application to sugar-sweetened beverage taxation. We estimate a detailed model of demand and supply for the UK drinks market, which we embed in our tax design framework to solve for optimal sugar-sweetened beverage tax policy. Positive price-cost margins on drinks create allocative distortions, which act to lower the optimal rate compared with a perfectly competitive setting. However, since pro?ts accrue to the rich, this is partially mitigated under social preferences for equity. Overall, ignoring market power when setting the optimal sugar-sweetened beverage tax rate leads to welfare gains that are 40% below those at the optimum. We show that moving from a single tax rate on sugar-sweetened beverages to a multi-rate system can result in further substantial welfare gains, with much of these gains realized by instead taxing sugar content directly.
    Date: 2021–09–21
  6. By: Marius Clemens; Werner Röger
    Abstract: The system of capital taxation consists of two instruments, namely a tax on profits and a depreciation allowance on investment. We will show in this paper that by acting on both instruments simultaneously it is possible to achieve both a growth and a fiscal net revenue target even in cases when a trade off prevails when each instrument is used individually. This is an application of the Tinbergen rule (Tinbergen 1952) to capital taxation. In the current context a fundamental requirement for this rule to work is that the two tax instruments imply different trade offs. As will be shown in the paper, depreciation allowances have a more favorable trade off between growth and net revenue in the long run compared to statutory profit tax rates. Thus, by increasing depreciation allowances and the statutory tax rate at the same time it is possible to both increase growth and fiscal space. In a model simulation calibrated to the German economy and tax system an increase of the tax depreciation rate for all investments from 10% to 25% leads to more than 2 percent GDP increase and more than 6 percent higher private investments in total. Whereas GDP and investment rise steadily over time, the government budget becomes negative in the short run. In the long run the sign of the fiscal budget effect is determined by the assumption about indexation of government consumption to GDP. However, according to the Tinbergen rule for capital taxation slight adjustments of the capital tax rate could balance out these deficits and generate additional fiscal space.
    Keywords: Fiscal Policy, Capital Allowance, Capital Tax
    JEL: E61 E62 H25
    Date: 2021
  7. By: Kaisa Kotakorpi; Satu Metsälampi; Topi Miettinen; Tuomas Nurminen
    Abstract: We investigate effects of tax reporting mechanisms on evasion and incidence in experimental double auction markets where counterfactual reporting and market outcomes can be studied after convergence. There are two control conditions: (i) markets without taxes and (ii) markets where taxes are automatically levied. These are compared to (iii) markets with seller-reporting only and fines paid if low-probability audit discovers evasion, to (iv) markets with both seller- and buyer-reporting and a higher audit probability due to any gap in the numbers reported by the seller and her customers, and to (v) markets where, in addition, buyer-reporting is costly. The latter two mimic varying reporting incentives in the so called third-party reporting in tax enforcement. We find that 20% of the sellers are truthful when only sellers report, but that 80% and 66% of them are truthful under costless and costly third-party reporting, respectively. Pricing, incidence, and reporting patterns in all treatments can be explained by a model of lying costs with image concerns based on Gneezy et al. (2018).
    JEL: H21 H22 H26 D40 D44 D91
    Date: 2021–06
  8. By: Marco Bassetto (Institute for Fiscal Studies and Federal Reserve Bank of Minneapolis); Wei Cui (Institute for Fiscal Studies)
    Abstract: We study optimal taxation in an economy with financial frictions, in which the government cannot directly redistribute towards the agents in need of liquidity but otherwise has access to a complete set of linear tax instruments. We establish a stark result. Provided this is feasible, optimal policy calls for the government to increase its debt, up to the point at which it provides sufficient liquidity to avoid financial constraints. In this case, capital-income taxes are zero in the long run, and the returns on government debt and capital are equalized. However, if the fiscal space is insufficient, a wedge opens between the rates of return on government debt and capital. In this case, optimal long-run tax policy is driven by a trade-off between the desire to mitigate financial frictions by subsidizing capital and the incentive to exploit the quasi-rents accruing to producers of capital by taxing capital instead. This latter incentive magnifies the wedge between rates of return on government debt and capital. It also makes it optimal to distort downward the interest rate on government debt in periods of high government spending.
    Date: 2021–02–23
  9. By: Puonti, Päivi; Kauppi, Eija; Kotamäki, Mauri; Ropponen, Olli
    Abstract: Abstract We analyze the impact of the Finnish tax-benefit system on the financial incentives to take up a job and to work more. The analysis is conducted with the Finnish microsimulation model SISU in 2015–2021. We analyze the presence of unemployment traps in the population and characterize the population subgroups associated with low work incentives. According to our results, the median participation tax rate in Finland is 69 percent, meaning that for half of working-age Finns the disposable income when in work increases by at most one third of the wage when employed. On average, the financial incentives to work of individuals receiving earnings-related unemployment benefits are lower than of those receiving flat-rate unemployment benefits, and the incentives of individuals receiving child home care allowance are better than the incentives of unemployed. Most of the individuals in unemployment trap receiving flat-rate unemployment benefits are beneficiaries of social assistance. In year 2021, 136,500 Finns found themselves in an unemployment trap defined as a situation in which disposable income increases at most 20 percent of gross income when employed. The amount of people in unemployment trap amounts to more than 300,000 when 25 percent is used as the relevant limit. Financial incentives to work have slightly improved since 2015. More than half a million Finns lose more than 50% of extra income due to tax increase and benefit withdrawal. The earnings disregard for basic social assistance improved the financial incentives to work of individuals in the lowest income group.
    Keywords: Participation tax rates, Incentives to work, Microsimulation, Tax-benefit system
    JEL: J22 H20
    Date: 2022–02–10
  10. By: Matteo Borrotti; Michele Rabasco; Alessandro Santoro
    Abstract: Aggressive tax planning (ATP) consists in taxpayers’ reducing their tax liability through arrangements that may be legal but are in contradiction with the intent of the law. In particular, ATP by multinational groups (MNE) is a source of major concern. In this paper we consider the MNE’s decision to locate or to maintain a company in a tax haven as a relevant symptom of ATP. The research question we want to address is whether this decision can be predicted using publicly available accounting information. We use ORBIS database and we focus on European MNEs. We observe that, in 2021, slightly less than 40% of European MNEs have a company located in a tax haven. Thus, for a tax authority it would be difficult, without a specific analysis, to identify riskier MNEs. We find that a random forest model that uses accounting information for years between 2015 and 2019 predicts reasonably well the decision to locate (or maintain) a company in a tax haven in 2021. Using this model in 2019, a tax authority could have identified almost 80% of European MNEs that were going to locate or maintain a company in a tax haven in 2021. We observe that the most important variables for prediction are those associated to the size of the group, to its positive profitability and to its financial structure, while individual time-invariant features are less relevant. We also find that the predictive performance of the model is maximized when the information is taken from the time subset 2017-2019 and that most important predictors for the risk of using tax havens are also good predictors for the level of intensity of such a use, as measured by the share of subsidiaries located in tax havens. The main policy implication of these results is that (European) non-tax havens could effectively anticipate (and prevent) the decision to locate (or maintain) companies in tax havens, and shape their policies accordingly, with particular reference to cooperative compliance schemes. These policies are more credible in the context of renewed international cooperation in the design of corporate tax rules, and in particular, of the implementation of Pillar Two within the European Union.
    Keywords: Tax Planning, European Multinationals, Machine Learning
    Date: 2022–02
  11. By: Rauh, C.; Santos, M. R.
    Abstract: This paper studies the impact of existing and universal transfer programs on vacancy creation, wages, and welfare using a search-and-matching model with heterogeneous agents and on-the-job human capital accumulation. We calibrate the general equilibrium model to match key moments concerning unemployment, wage and wealth distributions, as well as the distribution of EITC and transfers. In addition, unemployment insurance benefits are related to pre-unemployment earnings and subject to exhaustion, after which agents can only rely on transfers and savings. First, we show that existing transfers hamper economic activity but provide sizeable welfare gains. Next, we show that a universal basic income of nearly $12,500 to each household per year, which replaces all existing transfer programs and unemployment benefits, can lead to small aggregate welfare gains. These welfare gains mostly accrue to less skilled individuals despite their sizable fall in wages, and the overall rise in skill premia and wage inequality. Albeit the extra burden of higher taxes to finance UBI, we show that the increased action in hiring is a key channel though which outcomes for low education groups improve with the reform. However, if we keep the UI benefits in place, the positive effects on job creation vanish and UBI does not improve upon the current system.
    Keywords: Transfer programs, EITC, Means-tested transfers, Welfare programs, Labor supply, On-the-job human capital accumulation, Life cycle, Inequality, Universal basic income, UBI, Unemployment, General equilibrium
    Date: 2022–01–31

This nep-pbe issue is ©2022 by Thomas Andrén. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.