nep-pbe New Economics Papers
on Public Economics
Issue of 2022‒05‒02
thirteen papers chosen by
Thomas Andrén

  1. A SALT on Real Estate? Housing Market and Migration Responses to the Limit on the State and Local Tax Deduction By Donald Bruce; Lawrence M. Kessler
  2. The “Robot Economy†and optimal tax-transfer reforms By Ugo Colombino; Nizamul Islam; Gian Luca Tedeschi
  3. Pennies from Haven: Wages and Profit Shifting By Annette Alstadsæter; Julie Brun Bjørkheim; Ronald B. Davies; Johannes Scheuerer
  4. Firms behavior around tax thresholds in Albania during the 2015 anti-informality campaign - Bunching features, persistence and growth implications By Rrumbullaku, Oltion
  5. Organizational capacity and profit shifting By Bilicka, Katarzyna; Scur, Daniela
  6. Payroll Tax, Employment and Labor Market Concentration By Erick Baumgartner; Raphael Corbi, Renata Narita
  7. Measuring and taxing top incomes and wealth By Advani, Arun; Summers, Andy
  8. When Household Heterogeneity Matters Optimal Fiscal Policy in a Medium-Scale TANK Model By François Courtoy
  9. Tracking and Taxing the Super-Rich: Insights from Swiss Rich Lists By Enea Baselgia; Isabel Z. Martinez
  10. Measuring the Impact of Taxes and Public Services on Property Values: A Double Machine Learning Approach By Isaiah Hull; Anna Grodecka-Messi
  11. Making Norway’s housing more affordable and sustainable By Ben Conigrave; Philip Hemmings
  12. Testing the Presence of the January Effect in Developed Economies By Nisar, Sabahat; Asif, Rabia; Ali, Amjad
  13. Welfare Effects of Health Insurance Reform: The Role of Elastic Medical Demand By Reona Hagiwara

  1. By: Donald Bruce (Boyd Center for Business and Economic Research And Department of Economics, Haslam College of Business, University of Tennessee); Lawrence M. Kessler (Boyd Center for Business and Economic Research And Department of Economics, Haslam College of Business, University of Tennessee)
    Abstract: The Tax Cuts and Jobs Act of 2017 placed a $10,000 annual limit on the deductibility of state and local taxes (SALT) for federal individual income tax purposes. This policy change likely increased the cost of home ownership for some proportion of households living in high tax areas, and we examine whether these costs were capitalized into the local housing market through slower growth in housing prices. Motivated by the possibility that the SALT deduction cap caused some taxpayers to relocate to lower-tax environments or discouraged some taxpayers from moving to higher-tax environments, we also explore the extent to which the federal deductibility of state and local taxes influences migration patterns. We make use of a variety of housing market, tax policy, and migration information to explore this possibility with event studies and differences-in-difference estimation methods. We find that the SALT deduction cap led to a sizeable and statistically significant reduction in housing price growth for affected counties but had no discernable impact on state-level migration patterns. The extent to which these impacts represent a reduction in fairness depends critically upon one’s view of the degree of fairness in the pre-TCJA policy landscape.
    Keywords: State and Local Taxation, Housing, Real Estate, Migration
    JEL: H2 H3 H7 R2 R3
    Date: 2022–01
  2. By: Ugo Colombino; Nizamul Islam; Gian Luca Tedeschi
    Abstract: Globalization and automation might imply deep changes on the labour market. An important policy issue is whether and how the tax-transfer rules should be reformed to cope with those changes. While the prevailing response has consisted of more sophisticated designs of mean-testing and targeting, we also witness an increasing interest in policies inspired by simplicity and universality. In this paper we take the latter route. Using a combination of behavioural microsimulation and numerical optimization, we look for a social welfare optimal tax-transfer rule within a flexible class where total household disposable income is a 4th polynomial in total household taxable income. We use a model of household labour supply that makes it possible to account for equilibrium constraints and to evaluate the effects of exogenous labour demand shocks. We consider two stylized scenarios: the Jobless Economy (the robots take over 10% of jobs at every skill-level) and the Polarized Economy (the robots take over 10% of the unskilled jobs while skilled jobs increase by 10%). We compare the social welfare performance of the polynomial optimal rules and of the current rules under the Current Economy scenario and under the alternative Jobless Economy and the Polarized Economy scenarios. We present results using the 2015 EU-SILC data sets for France, Germany, Italy and Luxembourg. The polynomial optimal rules feature a universal basic income and an almost flat marginal tax rate profile and are social welfare-superior under the Current Economy scenario in all the countries and also under the alternative scenarios in France, Germany and Italy.
    Keywords: Empirical Optimal Taxation, Microsimulation, Microeconometrics, Evaluation of Tax-Transfer rules, Equilibrium, Robot Economy.
    Date: 2022
  3. By: Annette Alstadsæter; Julie Brun Bjørkheim; Ronald B. Davies; Johannes Scheuerer
    Abstract: Increasing attention has been given to the fact that some multinational enterprises shift income to tax haven countries, an activity that generates inequality in corporate taxation. Here, we examine how profit shifting relates to wage inequality. Using rich matched employer-employee data from Norway, we find that profit-shifting firms pay higher wages, particularly among service firms where the wage premium is approximately 2%. Furthermore, this average effect masks significant within-firm heterogeneity with high-skill occupations – and managers in particular – earning higher shifting wage premiums. CEOs particularly gain, with their wages rising nearly 10%. These results thus suggest that profit shifting by multinationals meaningfully contributes to wage inequality, both between and within firms. Finally, our back-of-the-envelope calculations suggest these higher wages would generate additional income tax revenues which would offset around 3% of the fall in Norway’s corporate tax revenues due to profit shifting.
    Keywords: profit shifting, tax haven, tax avoidance, multinational firms, wage distribution, inequality
    JEL: F23 H26 J31 J32 M12
    Date: 2022
  4. By: Rrumbullaku, Oltion
    Abstract: This article studies the effects of tax thresholds on the behavior of small firms using the tax administration data of the universe of the Albanian firms during and after the anti-informality campaign of the year 2015. The main comparisons are between the year 2014, 2015 and 2016. The features of the firms that did bunch in 2015 were evaluated through a Probit regression. The bunching did persist through the three years in discussion, so it is not a temporary behavior. At the end, the tax threshold does influence in the growth of the firms, especially those firms that have a turnover just under the first threshold.
    Keywords: VAT threshold, Value-added tax, bunching, small firms
    JEL: H21 H25 H26 H32
    Date: 2021–05–01
  5. By: Bilicka, Katarzyna; Scur, Daniela
    Abstract: This paper analyses the effect of a firm's organizational capacity on the reported profitability of multinational enterprises (MNEs). Better organizational practices improve productivity and the potential taxable profits of firms. However, higher adoption of these practices may also enable more efficient allocation of profits across tax jurisdictions, lowering actual taxable profits. We present new evidence that MNE subsidiaries with better such practices, when located in high-tax countries, report significantly lower profits and have a higher incidence of bunching around zero returns on assets. We show these results are driven by patterns consistent with profit-shifting behavior. Further, using an event study design, we find that firms with better practices are more responsive to corporate tax rate changes. Our results suggest organizational capacity, especially monitoring-related practices, enables firms to engage in shifting profits away from their high-tax subsidiaries.
    Keywords: profit shifting; organizational capacity; monitoring practices; multinationals
    JEL: H26 H32 M11 M20
    Date: 2021–09–07
  6. By: Erick Baumgartner; Raphael Corbi, Renata Narita
    Abstract: How much employment can be generated by decreasing payroll taxes? We examine this question by exploring the staggered rollout of a large payroll tax reform in Brazil. Using administrative matched employer-employee data, we find an increase of 5 percent on employment due to both firm growth and firm entry, no impact on wages and an increase of 59 percent in profits. Moreover, employment effects are driven by less concentrated labor markets, consistent with predictions from an oligopsony model.
    Keywords: Payroll Tax; Employment; Wages; Profits; Oligopsony
    JEL: H25 H32 J31 J6 J42
    Date: 2022–03–24
  7. By: Advani, Arun (University of Warwick and IFS); Summers, Andy (LSE and IFS)
    Abstract: Few topics attract such intense political debate as top tax rates : in the UK, this has led to two top income tax rate reforms since the financial crisis. Recently, the measurement of top incomes and wealth has also proved controversial, in both the UK and the US. The chapter by Delestre et al. (2022) examines both of these issues. It first studies the distribution of income in the UK, focusing on the income sources and demographics of those at the top, as well as non-taxable sources of income. It then describes the current taxation of top incomes, and suggests some directions for reform. Mirroring this structure, in this commentary we discuss first the measurement of financial inequalities, focusing on top income and wealth shares, and then the scope for policy reforms to tackle some of the issues raised, also focusing on the UK.
    Date: 2022
  8. By: François Courtoy (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: We investigate the role of household heterogeneity in terms of marginal propensity to consume and of labor income for the design of optimal fiscal policy over the business cycle. We estimate a two agent New-Keynesian (TANK) medium scale model introducing aggregate shocks as in Smets and Wouters (2007) and allowing idiosyncratic shocks to impact household behavior. We further ensure that the government can set lump sum transfers and distortionary taxes to redistribute across households and finance deficit fluctuations across the business cycle. Estimating the model with US data on household earnings shows limited influence on the estimated parameters of the model, however it identifies heterogeneity across household types as a key driving force of the business cycle. Using the estimated model we solve an optimal fiscal policy problem assuming that a benevolent government sets taxes and transfers under commitment. Under optimal policy, fiscal variables display considerable volatility and respond considerably to shocks to labor income at the low end of the distribution. These shocks are also important for the optimal policy model to match the properties of fiscal variables seen in the US data.
    Keywords: Optimal taxation, marginal propensity to consume, DSGE models, Bayesian estimation, Household Heterogeneity
    JEL: E32 E62 H21 H23 H31
    Date: 2022–04–05
  9. By: Enea Baselgia (University of St.Gallen, SIAW Institute); Isabel Z. Martinez (ETH Zurich, Switzerland)
    Abstract: We collect, digitize, and supplement the Swiss rich list for the years 1989–2020 published in the “BILANZ†business magazine to gain new insights on the structure and dynamics of top wealth in Switzerland. Using this data allows us study the the super-rich in Switzerland in ways that were not possible in previous research based largely on tax data. In addition to making this valuable data source accessible for future research, and also discussing its limitations, we make three distinctive contributions to the literature. First, we present a number of new facts on the wealth elite in Switzerland. We show that about 60% of the super-rich are heirs–a much larger fraction than in the United States where many of the super-rich are self-made–and that five in ten super-rich residing in Switzerland are foreignborn. Second, we estimate the sensitivity of the location-decision of super-rich foreigners to a preferential tax scheme that offers wealthy foreigners to be taxed on their expenses rather than on their true income and wealth. We are the first to evaluate this policy–similar to “non-dom†taxation that exists in other countries like the UK or Italy–and show that when some of the Swiss cantons abolished this practice, they lost about 30% of their stock of super-rich taxpayers. Third, we use the wealth series compiled in our BILANZ dataset to estimate the wealth shares of the top 0.01% in Switzerland and show how they compare to earlier estimates by Föllmi and Martínez (2017) based on wealth tax data. We find that top wealth concentration is higher than previously assumed, an conclude that top wealth shares based on tax data constitute a lower bound, while the estimates based on our BILANZ data are upper bounds.
    Keywords: super-rich; wealth inequality; wealth distribution; wealth mobility; top wealth shares
    JEL: D31 H24 C81
    Date: 2022–02
  10. By: Isaiah Hull; Anna Grodecka-Messi
    Abstract: How do property prices respond to changes in local taxes and local public services? Attempts to measure this, starting with Oates (1969), have suffered from a lack of local public service controls. Recent work attempts to overcome such data limitations through the use of quasi-experimental methods. We revisit this fundamental problem, but adopt a different empirical strategy that pairs the double machine learning estimator of Chernozhukov et al. (2018) with a novel dataset of 947 time-varying local characteristic and public service controls for all municipalities in Sweden over the 2010-2016 period. We find that properly controlling for local public service and characteristic controls more than doubles the estimated impact of local income taxes on house prices. We also exploit the unique features of our dataset to demonstrate that tax capitalization is stronger in areas with greater municipal competition, providing support for a core implication of the Tiebout hypothesis. Finally, we measure the impact of public services, education, and crime on house prices and the effect of local taxes on migration.
    Date: 2022–03
  11. By: Ben Conigrave; Philip Hemmings
    Abstract: Norway, like a number of other countries, saw steep growth in house prices during the pandemic. This added to past years of strong price increases and has brought renewed concern for housing affordability. Tax advantages to buying homes inflate house prices, contribute to wealth inequality and divert resources from more productive investments. An underdeveloped rental market is an additional consequence of Norway’s pro-homeownership policies. Beyond tax reform and targeted support for low-income households, including renters, lasting improvements in affordability will require measures to enhance the responsiveness of residential construction to increased demand. However, creating room for new housing supply can involve difficult trade‑offs with environmental and other policy objectives.
    Keywords: house prices, housing affordability, housing market, land-use regulations, Norway, personal income tax, social housing, sustainable housing
    JEL: R21 R31 R38 H20 H24 Q58
    Date: 2022–04–19
  12. By: Nisar, Sabahat; Asif, Rabia; Ali, Amjad
    Abstract: The purpose of the current research is to test the efficient market hypothesis keeping in view the January effect for developed economies, namely the United Kingdom. By incorporating daily return data from 2009 till 2020, the robust econometric modeling discloses the presence of anomalous patterns in UK stock returns around the year. Key results confirm the presence of seasonal effects predominantly the January effect for the sample country. Stronger evidence (in terms of statistical significance) for April, July, August, September, and November are obtained. The obtained results also propose confirmation in favor of the tax-loss selling hypothesis. Further, the presence of the January effect anomaly perceived in this research was unlikely to provide lucrative arbitrage because abnormal returns were not found to be large enough to offset the associated transactions costs.
    Keywords: Efficient Markets, Tax Selling Hypothesis, January Effects, Stock Returns
    JEL: H2 H54
    Date: 2021–10
  13. By: Reona Hagiwara (Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: Some medical demand is inelastic to price changes, but not all. In assessing the effects of public health insurance reform on welfare, I examine the role of medical demand elasticity by developing a computational general equilibrium life-cycle model of the Japanese economy. The model features individual heterogeneity in health, income, and wealth. If all medical demand is inelastic, reforming public health insurance by increasing copayments reduces welfare for all current generations. However, if some medical demand is elastic, as is empirically observed, such a reform would improve welfare for current young generations, including those with poor health and low income. Furthermore, future generations benefit from the reform and their welfare increases significantly.
    Keywords: Copayment Increase, Price Elasticity of Medical Demand, Welfare Effects, Overlapping Generations
    JEL: E21 H51 I13 I31
    Date: 2022–04

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