nep-pbe New Economics Papers
on Public Economics
Issue of 2022‒03‒28
nine papers chosen by
Thomas Andrén

  1. Optimal taxation when the tax burden matters By Jessen, Robin; Metzing, Maria; Rostam-Afschar, Davud
  2. To Comply or not to Comply: Persistent Heterogeneity in Tax Compliance and Macroeconomic Dynamics By Leonardo Barros Torres; Jaylson Jair da Silveira, Gilberto Tadeu Lima
  3. Evolution of fiscal systems: Convergence or divergence? By Paloma Péligry; Xavier Ragot
  4. Inequality and Redistribution in the Netherlands By Céline van Essen; Arjan Lejour; Jan Möhlmann; Simon Rabaté; Arjan Bruil; Wouter Leenders
  5. Loss-Averse Tax Manipulation and Tax-Preferred Savings By Derek Messacar
  6. Public disclosure of tax information. Compliance tool or social network? By Daniel Reck; Joel Slemrod; Trine Vattø
  7. Market heterogeneity and the distributional incidence of soft-drink taxes: evidence from France By Fabrice Etilé; Sébastien Lecocq; Christine Boizot-Szantai
  8. Financial Transaction Tax, macroeconomic effects and tax competition issues: a two-country financial DSGE model By Olivier Damette; Karolina Sobczak; Thierry Betti
  9. The welfare-maximizing discount rate in a small open economy By Asplund, Disa

  1. By: Jessen, Robin; Metzing, Maria; Rostam-Afschar, Davud
    Abstract: Survey evidence shows that the magnitude of the tax liability plays a role in value judgements about which groups deserve tax breaks. We demonstrate that the German tax-transfer system conflicts with a welfarist inequality averse social planner. It is consistent with a planner who is averse to both inequality and high tax liabilities. The tax-transfer schedule reflects non-welfarist value judgements of citizens or different aims of policy makers. We extend our analysis to several European countries and the USA and show that their redistributive systems can be rationalized with an inequality averse social planner for whom the tax burden matters.
    Keywords: Justness,optimal taxation,income redistribution,inequality,welfare criteria
    JEL: D63 D60 H21 H23 I38
    Date: 2022
  2. By: Leonardo Barros Torres; Jaylson Jair da Silveira, Gilberto Tadeu Lima
    Abstract: We set forth an overlapping generations model in which the microdynamics of tax compliance is coupled to the macrodynamics of the economy. We specify the proportion of individuals who do not comply with their tax obligations as endogenously time-varying using the discrete choice approach, which allows considering both deterministic components and idiosyncratically subjective motivations and proclivities (such as tax morale) as drivers of tax compliance. The model replicates (and hence provides an analytical framework for a potential interpretation of) some pieces of evidence on tax evasion. First, heterogeneity in tax compliance exhibits persistence and fluctuations over the long run. Second, the proportion of non-compliant taxpayers varies positively with the tax rate and negatively with the probability of detection of tax evaders. Third, the impact of a change in the proportion of non-compliant taxpayers on the per capita output over the long run is ambiguous.
    Keywords: Tax compliance; discrete choice modeling; tax morale; heterogeneous behavior; macrodynamics
    JEL: H62 H40 C02 C62 E13
    Date: 2022–03–22
  3. By: Paloma Péligry (CEPS - Centre d'Economie de l'ENS Paris-Saclay - Université Paris-Saclay - ENS Paris Saclay - Ecole Normale Supérieure Paris-Saclay); Xavier Ragot (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po, CNRS - Centre National de la Recherche Scientifique)
    Abstract: The purpose of this article is to analyze, more than ten years after the financial crisis of 2007, the convergence or divergence of the diversity of capitalism, focusing on the fiscal systems. Studying 29 countries, we first analyse the evolution of the taxation of households, firms, labour, consumption and capital. Then we use recent statistical method to indentify three types of fiscal systems: liberal, intermediate, and social-democratic, which can be ranked in ascending order of tax rates, confirming known typologies in the diversity of capitalism literature. The first result of this analysis is that only the tax rate on corporate profits shows signs of downward convergence over the period. The other tax rates, on labour or capital tax on households, show rather signs of divergence. Second, we show the divergence of the liberal and social-democratic group over the period. The European countries are converging towards the social-democratic model, with the exception of Great Britain, which is moving towards the liberal model over the period. Hence, the analysis shows that the divergence of fiscal systems is compatible with the convergence of certain taxes on the most mobile factors during a strong period of trade internationalization. Thus, the financial crisis does not seem to contribute to the convergence, but to the divergence of fiscal systems.
    Keywords: fiscal systems,globalization,capital taxation
    Date: 2022–02–03
  4. By: Céline van Essen (CPB Netherlands Bureau for Economic Policy Analysis); Arjan Lejour (CPB Netherlands Bureau for Economic Policy Analysis); Jan Möhlmann (CPB Netherlands Bureau for Economic Policy Analysis); Simon Rabaté (CPB Netherlands Bureau for Economic Policy Analysis); Arjan Bruil (CBS); Wouter Leenders (UC Berkeley)
    Abstract: How high is income inequality in the Netherlands? How progressive are taxes and how much income does government spending redistribute? This study presents the most exhaustive responses for the Netherlands to these questions to date. We combine detailed administrative records on the universe of the Dutch population with national accounts aggregates to provide a thorough description of income inequality before and after taxation and government spending. Overall, taxes and government spending reduce the top 10%'s income share from 31% to 26%. We decompose this difference between pre- and post- tax income and show two main results. First, the tax system is regressive due to high consumption taxes, flat social contributions and a low tax on capital income. Second, the entire reduction in inequality comes from government spending that is targeted at the bottom of the distribution. We finally provide a wide set of alternative scenarios to investigate the sensitivity of our results to different distributional assumptions. Our main conclusions are robust to this sensitivity analysis.
    JEL: D3 H2 H3 H5
    Date: 2022–03
  5. By: Derek Messacar
    Abstract: Using administrative data from Canada linked to a financial capability survey, I show that tax-deductible savings plans are often used to manipulate final balances owed to the central tax authority during tax season. This finding implies a strong avoidance motive for saving, where tax filers manipulate final balances rather than total tax liabilities, consistent with loss-aversion. The magnitude of this effect is economically significant. For example, each $100 owed increases the likelihood of contributing by about half a percentage point. There is evidence that the behavior is driven by tax filers with low financial literacy who make disproportionately large contributions in the last 60 days before the annual deadline.
    Keywords: Loss-aversion, tax avoidance, savings, regression kink design
    JEL: D14 D91 H26 H31
    Date: 2022
  6. By: Daniel Reck; Joel Slemrod; Trine Vattø (Statistics Norway)
    Abstract: We conduct the first-ever study of actual searches done in a public tax disclosure system, analyzing about one million searches done in 2014 and 2015 in Norway. We characterize the social network these searches comprise, including its degree of homophily and reciprocation, and the demographics of targets and searchers. About one-fourth of searches occur within identifiable household and employment networks. Most searchers target people similar to themselves—homophily in network parlance—but young, low-income searchers also target older, successful people and celebrities. A causal research design based on the timing of searches relative to tax filing uncovers no evidence that, upon discovering they were targeted, targets subsequently increase their reported income. The evidence suggests that social comparisons motivate the bulk of searches rather than tax compliance. However, public disclosure may deter evasion even when compliance-motivated searches are rare in equilibrium.
    Keywords: Public disclosure; social network; tax compliance
    JEL: H26 D83 D85
    Date: 2022–03
  7. By: Fabrice Etilé (INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Sébastien Lecocq (Université Paris-Saclay); Christine Boizot-Szantai (Université Paris-Saclay)
    Abstract: Market heterogeneity may affect the distributional incidence of nutritional taxes if households sort by income across markets with different characteristics. We use scanner data to analyse the distributional incidence of the 2012 French soda tax on Exact Price Indices that measure consumer welfare from the price and availability of softdrinks at a local level. While the average pass-through was small-about 45 per cent-, tax incidence was significantly higher in low-income and less-competitive markets. Market heterogeneity ultimately has substantial distributional effects: it accounts for at least 33 per cent of the difference in welfare variation between low-and high-income consumers.
    Keywords: consumer price index,market structure,inequality,tax incidence,soft-drink tax,France
    Date: 2021
  8. By: Olivier Damette; Karolina Sobczak; Thierry Betti
    Abstract: We document how introducing a financial transaction tax affects real and financial activity in a general equilibrium framework. Our model replicates some interesting stylised facts about financial markets. Informed, or rational, traders follow the standard rational expectations, while exogenous disturbances, such as optimism or pessimism shocks, affect the expectations of noise traders. An entry cost is introduced to endogenise the entry of noise traders in the financial markets. In contrast to the previous literature, financial contagion and international spillovers are considered in a two-country financial DSGE model. A welfare analysis is performed and we show that the effects of the financial transaction tax on welfare are non-linear and mainly depend on the composition of the financial market. In addition, introducing a financial transaction tax allows volatility to be reduced in both the real and financial sectors, and this result is robust to several model specifications. In a context where only one country implements the tax, we identify some externalities, as the country with the tax is likely to export stability or instability through the flows of traders. Like in the Heckscher-Ohlin-Samuelson (HOS) model in which capital and labor move internationally when countries trade, we assume that there are trader flows when traders invest abroad. As a consequence, noise traders can implicitly move to the foreign country to escape the tax, and this means that countries have conflicting interests. When markets are liquid with a large proportion of noise traders, countries do not internalise that they export noise traders and then some instability to the other market and so they set a tax rate that is higher than the optimal. At the opposite end of the scale, when markets are less liquid and the proportion of noise traders is small, some positive externalities (like financial stability) are overlooked, and so the tax rate is set too low and is sub-optimal. A cooperative situation where countries set a common tax rate is the best solution ans is welfare-enhancing. These results have important policy implications, since the existence of the tax competition issues revealed by our two-country framework might explain why the European Commission proposal initially discussed in 2011 is so contested and has been rejected by several countries.
    Keywords: Financial Transaction Tax, DSGE, Welfare, Noise Traders, Tax coordination, EU tax project.
    JEL: E22 E44 E62
    Date: 2022–03–24
  9. By: Asplund, Disa (Swedish National Road & Transport Research Institute (VTI))
    Abstract: The controversy about what approach is best for calculating the social discount rate for public investments is both long standing and heated. Two main approaches are the social time preference and the social opportunity cost approaches. Complicating issues are tax wedges, the question of whether public investments crowd out current private consumption or private saving, and the possibility of myopic behavior among individuals. This study uses a model that takes these issues into account to derive the discount rate that optimizes welfare in a small open economy. The result is that even if individuals have behavioral preferences differing from the normative preferences of the social planner and even if tax wedges exist, the optimal discount rate is the pre-tax market return on capital, as long as individuals are forward looking and consistent in their behavioral preferences, and their choices are not constrained by, for example, liquidity restrictions.
    Keywords: Discounting; Tax wedge; Social time preference; Social opportunity cost
    JEL: E21 F41 H43
    Date: 2022–03–18

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