nep-pbe New Economics Papers
on Public Economics
Issue of 2022‒06‒20
fifteen papers chosen by
Thomas Andrén

  1. Optimal Taxation of Risky Entrepreneurial Capital By Corina Boar; Matthew Knowles
  2. Till Taxes Keep Us Apart? The Impact of the Marriage Tax on the Marriage Rate By Nadia Myohl
  3. Earnings responses to even higher taxes By Miao, Dingquan; Selin, Håkan; Söderström, Martin
  4. Sovereign Spreads and Corporate Taxation By Hayley Pallan
  5. Top Income Inequality and Tax Policy By Isaac Delestre; Wojciech Kopczuk; Helen Miller; Kate Smith
  6. The Revenue Potential of Inheritance Taxation in Light of Ageing Societies By Alexander Krenek; Margit Schratzenstaller; Klaus Grünberger; Andreas Thiemann
  7. The 2003 Tax Reform and Corporate Payout Policy in the US By Danilo Stojanovic
  8. Organizational capacity and profit shifting By Katarzyna Bilicka; Daniela Scur
  9. Withholding Matters: The Impact of Act 32 on Compliance with the Earned Income Tax By Sutirtha Bagchi
  10. Income Tax Evasion Estimation in Hungary By Palma Filep-Mosberger; Adam Reiff
  11. Pension reform, incentives to retire and retirement behavior: empirical evidence from Swedish micro-data. By Laun, Lisa; Palme, Mårten
  12. Income Tax Policy in Europe between Two Crises: From the Great Recession to the COVID-19 Pandemic By Myck, Michal; Trzciński, Kajetan
  13. Bunching and Taxing Multidimensional Skills By Job Boerma; Aleh Tsyvinski; Alexander P. Zimin
  14. The fiscal consequences of immigration: a study of local governmentsâ expenditures By Matti Viren
  15. Replacement rates of public pensions in Canada: heterogeneity across socio-economic status By Nicholas-James Clavet; Mayssun El-Attar; Raquel Fonseca

  1. By: Corina Boar (New York University); Matthew Knowles (University of Cologne)
    Abstract: We study optimal taxation in a model with endogenous financial frictions, risky investment and occupational choice, where the distribution of wealth across entrepreneurs affects how efficiently capital is used. The planner chooses linear taxes on wealth, capital and labor income to maximize the steady state utility of a newborn agent. Most agents in the model are poor, leading to a redistributive motive for taxation. Optimal tax rates can be written as a closed-form function of the size of the tax bases and their elasticities with respect to tax rates. We find that it is optimal to tax capital income because financial frictions reduce the elasticity of capital income with respect to taxes and because capital income taxes prevent excessive entry into entrepreneurship. Optimal wealth taxes are positive but close to zero, since they strongly discourage capital accumulation.
    Keywords: Entrepreneurship; Financial Frictions; Taxation
    JEL: E2 E6 H2
    Date: 2022–05
  2. By: Nadia Myohl
    Abstract: Married couples often face a different tax burden than cohabitating couples with the same income. I study the effect of joint income taxation of married couples on the marriage rate in Switzerland, where tax differentials between married and cohabitating couples vary considerably across cantons. I construct a dataset containing sociodemographic and -economic variables on every individual living in Switzerland, and use household-level information to identify cohabitating couples. Using a simulated instrumental variable approach, I find a negative impact of joint income taxation on the marriage rate for couples married between 2012 and 2019. The effect is driven by households without children and from the lower end of the income distribution.
    Keywords: income taxation, marriage penalty, taxation of married couples
    JEL: H24 H31 J12
    Date: 2022
  3. By: Miao, Dingquan (Linnaeus University); Selin, Håkan (IFAU - Institute for Evaluation of Labour Market and Education Policy); Söderström, Martin (IFAU - Institute for Evaluation of Labour Market and Education Policy)
    Abstract: We exploit a recent Swedish tax reform, implying higher marginal tax rates for the top 5% of the earnings distribution, to learn about earnings responses in an economy where taxes already are high. Using a simple and graphical cross sectional method, we estimate earnings elasticities in the range 0.13-0.16. We interpret the response using a simulation model in which people face uncertain marginal tax rates due to earnings dynamics. The tax response is surprisingly sharp given the earnings variability at the top of the earnings distribution.
    Keywords: Earnings supply; Income taxation
    JEL: H24 J22
    Date: 2022–05–30
  4. By: Hayley Pallan (IHEID, Graduate Institute of International and Development Studies, Geneva)
    Abstract: Do sovereign bond investors care about taxation in the countries where they invest? In this paper, I examine the response of sovereign spreads to changes in tax revenues, bases and rates. In simple OLS regressions there is a negligible relationship between sovereign spreads and taxation. However, there are stronger relationships in emerging markets, specifically for corporate taxation. There is a particularly important role of corporate tax base changes in emerging markets for sovereign spreads - this contemporaneous relationship holds using both annual and daily datasets. Additionally, an assessment of how sovereign spreads respond to tax changes under various fiscal environments highlights the role of initial fiscal space in how sovereign spreads respond to aspects of corporate taxation. Finally, I estimate local projections in order to assess the dynamic response of sovereign spreads to corporate taxation. These results are consistent with the finding that corporate tax base expansion (rather than corporate tax rate hikes) are associated with lower borrowing costs for governments in fiscal precarity - most strongly for countries with low levels of fiscal space in the medium term.
    Keywords: Sovereign Spreads, Fiscal Space, Corporate Tax Reform
    JEL: E62 H87 H63
    Date: 2022–06–11
  5. By: Isaac Delestre; Wojciech Kopczuk; Helen Miller; Kate Smith
    Abstract: The share of pre-tax income flowing to the top of the UK income distribution increased continually and substantially in the three decades leading up to the financial crisis, but has changed little since 2013. Using microdata sampled from UK tax records, we describe the nature of top incomes in the UK and how they are taxed. We show that wage income is the dominant source of pre-tax income, even for highest-income 0.1% of UK adults. But, ‘active’ business income – derived from self-employment or closely-held incorporated businesses – is considerably more important for the top 1% than for those with lower incomes. High-income wage earners work disproportionately in financial services. The high-income self-employed are predominately working in partnerships in professions such as accountancy and legal services. Overall, UK income taxes are progressive: average tax rates rise with income. Taxes on top incomes have been increased since 2010, with the result that the post-tax share of income flowing to the top has fallen. But average tax rates vary significantly within the top and depend on how income is received. Incomes from business ownership and investment are taxed at lower rates than employment income. We discuss options for reforming the taxation of top incomes.
    JEL: D31 H2 H24 H25
    Date: 2022–05
  6. By: Alexander Krenek (Vienna University of Economics and Business Administration); Margit Schratzenstaller; Klaus Grünberger; Andreas Thiemann (European Commission, Joint Research Centre, Seville)
    Abstract: Based on the most recent data from the ECB's Household Finance and Consumption Survey, the project models the future household-level wealth distribution in five selected EU member countries (Finland, France, Germany, Ireland, and Italy) to derive inheritances based on different demographic and wealth projection scenarios. On this basis, various inheritance tax scenarios are simulated to estimate potential inheritance tax revenues for a projection period of 30 years. Our results indicate that multiple factors coincide in favouring a growing revenue potential for inheritance taxation in the medium-term. Wealth accumulation and appreciation lead to higher average wealth levels. The shift of the baby boomer generation out of the labour force results in an increase of the older population both in absolute and relative terms. Eventually, this will lead to a rise in the number of deaths and the number of inheritances. Additionally, low fertility rates lead to a reduction of the average number of successors and thereby decrease the importance of exemption thresholds, as individual inheritances become larger. Overall, our simulations show that the future revenue potential of inheritance taxes may be substantial. In practice, it can be expected that the theoretical revenue potential demonstrated by our simulations will be reduced by tax avoidance, real responses, and general equilibrium effects on other taxes. A review of the empirical evidence shows that behavioural responses to inheritance taxes are less pronounced compared to a net wealth tax.
    Keywords: TP_Europa, inheritance taxation, wealth taxation, ageing, HFCS, behavioural effects
    Date: 2022–05–17
  7. By: Danilo Stojanovic
    Abstract: This study explores the hypothesis that the 2003 tax cuts on dividends and capital gains generated an increase in aggregate dividends and aggregate share repurchases in the US after 2003. I find that the 2003 tax reform leads to a rise in both types of payouts in the General Equilibrium setting with sticky wages after incorporating two financial frictions, including the adjustment costs on dividends and endogenous constraint on repurchases. Two motives lie behind the results. First, the 2003 tax reform generates a tax motive for dividends due to higher tax cuts on dividends than tax cuts on capital gains. Second, the 2003 tax reform activates a flexibility motive for repurchases because paying dividends in the current period induces a commitment of firms to future dividend payments. Since any deviation from such a commitment might be costly for firms, those with low excess cash prefer to choose repurchases as a buffer to protect against extra penalties related to higher dividend volatility. Sticky wages in the General Equilibrium aim to provide firms with excess cash.
    Keywords: payout flexibility; capital reallocation; tax reform; heterogeneous firms;
    JEL: D21 E62 G35 H25 H32
    Date: 2022–04
  8. By: Katarzyna Bilicka; Daniela Scur
    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
    Date: 2021–09–07
  9. By: Sutirtha Bagchi (Department of Economics, Villanova School of Business, Villanova University)
    Abstract: This paper examines Act 32 of the Pennsylvania state legislature which mandated the introduction of withholding for the local earned income tax (EIT) for all employees and the consolidation of a fragmented collection system to one collector per county effective January 1, 2012. The estimates I obtain suggest that the act resulted in increased compliance with the EIT of about 13 percent. A falsification exercise examining compliance with the property tax for the identical municipalities confirms that Act 32 did not impact the property tax. Both findings are robust to the inclusion of municipality fixed effects or municipality-specific time trends.
    Keywords: Earned income tax; Tax compliance; Withholding; Event Study
    JEL: H26 H71 R51
    Date: 2022–05
  10. By: Palma Filep-Mosberger (Magyar Nemzeti Bank (Central Bank of Hungary)); Adam Reiff (Magyar Nemzeti Bank (Central Bank of Hungary))
    Abstract: This paper studies labour market tax avoidance in the 2010s in Hungary, following major labour market tax reforms in the beginning of the decade. First we show that aggregate time series are broadly consistent with a †whitening†process, in which a higher fraction of incomes are declared. However, as aggregate developments are driven by several, often unobservable factors, we cannot conclude that the observed phenomena are indeed caused by a whitening process in the labor market. Therefore in the second part of the paper we use several micro datasets to shed light on the nature of the whitening process. By comparing the consumption pattern of entrepreneurs (who might have undeclared incomes) and state sector employees (who are unlikely to have undeclared income), we show that income underreporting of entrepreneurs did decline in the 2010s. On the other hand, we find that the number of illegal employees – e.g. of those who work without any work contract – only temporarily declined in the aftermath of the financial crisis and seems to follow a procyclical pattern.
    Keywords: labour market tax avoidance, illegal employment, income underreporting.
    JEL: H26 J21 J31
    Date: 2022
  11. By: Laun, Lisa (IFAU - Institute for Evaluation of Labour Market and Education Policy); Palme, Mårten (Department of Economics, Stockholm University)
    Abstract: This paper investigates to what extent the 1998 reform of Sweden’s public old-age pension system contributed to the increase in extensive margin labor supply among older workers seen in the country in recent decades. We use a large data set containing all males and females born in Sweden between 1927 and 1950 and observe their retirement behavior during 1991–2012. The data show that the reform changed the incentives to remain in the labor force ambiguously: although it induced an income effect towards later retirement through lower replacement levels,it also implied a lower price on leaving the labor market under some assumptions. We use an econometric model in which the economic incentives to stay in the labor market are measured by Social Security Wealth, defined at each hypothetical retirement age, and a variable measuring the implicit tax, imposed by the income security system, on staying in the labor force. The point estimates from our econometric model, which should be interpreted with caution, suggest that at most a small part of the increase in labor force participation of the elderly can be attributed to the pension reform.
    Keywords: retirement; pension; reform; incentives to retire
    JEL: H30 J10 J20
    Date: 2022–04–28
  12. By: Myck, Michal (Centre for Economic Analysis, CenEA); Trzciński, Kajetan (Centre for Economic Analysis, CenEA)
    Abstract: We examine the revenue and redistributive effects of tax policy reforms in twelve European countries over the decade between the financial crisis and the outbreak of the COVID-19 pandemic, setting them against the implications of a hypothetical system reflecting the extent of fiscal drag resulting from nominal wage increases. We show that the combination of wage growth and progressivity of the tax system determined the fiscal leeway which governments could use to reduce income inequality. Despite significantly faster wage growth in the examined post-communist countries of Central and Eastern Europe, their much lower degree of progressivity implied limited additional scope for fiscal changes. While decisions taken in most of the examined countries in the CEE region led to increases in tax progressivity, their income tax systems continue to be far less redistributive in comparison with such countries as Ireland, the Netherlands, or Portugal. This not only has direct implications for income inequality but also translates into limitations of automatic fiscal drag effects on government revenues, which could offer additional resources, in particular at a time of high inflation.
    Keywords: income tax, tax reforms, fiscal drag
    JEL: H24 D31
    Date: 2022–05
  13. By: Job Boerma; Aleh Tsyvinski; Alexander P. Zimin
    Abstract: We characterize optimal policies in a multidimensional nonlinear taxation model with bunching. We develop an empirically relevant model with cognitive and manual skills, firm heterogeneity, and labor market sorting. The analysis of optimal policy is based on two main results. We first derive an optimality condition − a general ABC formula − that states that the entire schedule of benefits of taxes second order stochastically dominates the entire schedule of tax distortions. Second, we use Legendre transforms to represent our problem as a linear program. This linearization allows us to solve the model quantitatively and to precisely characterize the regions and patterns of bunching. At an optimum, 9.8 percent of workers is bunched both locally and nonlocally. We introduce two notions of bunching – blunt bunching and targeted bunching. Blunt bunching constitutes 30 percent of all bunching, occurs at the lowest regions of cognitive and manual skills, and lumps the allocations of these workers resulting in a significant distortion. Targeted bunching constitutes 70 percent of all bunching and recognizes the workers’ comparative advantage. The planner separates workers on their dominant skill and bunches them on their weaker skill, thus mitigating distortions along the dominant skill dimension. Tax wedges are particularly high for low skilled workers who are bluntly bunched and are also high along the dimension of comparative disadvantage for somewhat more skilled workers who are targetedly bunched.
    JEL: E0 H0 H2 H21
    Date: 2022–05
  14. By: Matti Viren (University of Turku, Finland.)
    Abstract: In this paper we examine how Finnish municipalitiesâ expenditures depend on the share of citizens with foreign background out of the total population. Empirical analyses make use of Finnish panel data from 295 municipalities and 202 migrant nationalities for the period 1987-2018. It turns out that the share of foreign population tends to increase per capita expenditures up to the point where the respective semi-elasticity is about one. The result seems robust in terms of different control variables, subsamples of the data and estimation techniques. Sizeable differences between different nationalities could, however, be detected. Thus, we cannot assume that the use of public services is neutral in terms of demographic changes and that should be considered when making assessments on overall fiscal effects of migration.
    Keywords: government expenditures, migration, local government
    JEL: H24 H31 H42 H71 J15 J61
    Date: 2022–05
  15. By: Nicholas-James Clavet; Mayssun El-Attar; Raquel Fonseca
    Abstract: When individuals decide to retire from the labour force, different sources of income can help to maintain consumption and welfare. One of those is public pensions. Their importance as an income source varies greatly according to socio-economic status (SES). This paper analyzes how replacement rates (RR) of public pensions (OAS and GIS) and mandatory public pension benefits (C/QPP) vary across SES by using the Longitudinal and International Study of Adults dataset (LISA). Using the longitudinal nature of this survey, we compute and compare average RRs by SES. We specifically consider the role of education and health, and we study how living arrangements can explain RRs variations. To give an idea the average RR of public pensions for individuals in bad health is 32%, while it is 21% for those who report being in good health. Including public pensions and C/QPP benefits, these numbers become 54% for those in bad health and 41% for those in good health. When estimating a multivariate regression model and controlling for past income, we find for couples, that past income does not eliminate differences in replacement ratio by individuals’ characteristics. We argue that assortative mating plays a role in explaining the variation of replacement rates across individuals’ characteristics. To quote this document Clavet N-J., El-Attar M. and Fonseca R. (2022). Replacement rates of public pensions in Canada: heterogeneity across socio-economic status (2022s-11, CIRANO). Lorsque les individus décident de se retirer de la vie active, différentes sources de revenus peuvent contribuer à maintenir la consommation et le bien-être. L'une d'entre elles sont les pensions publiques. Leur importance en tant que source de revenu varie grandement en fonction du statut socio-économique (SSE). Cet article analyse comment les taux de remplacement (TR) des pensions publiques (SV et SRG) et des prestations de retraite publiques obligatoires (RPC/RRQ) varient selon le SSE en utilisant l'ensemble de données de l'Étude longitudinale et internationale des adultes (LISA). Grâce à la nature longitudinale de cette enquête, nous calculons et comparons les TR moyens selon le SSE. Nous considérons spécifiquement le rôle de l'éducation et de la santé, et nous étudions comment les conditions de vie peuvent expliquer les variations des TR. Pour donner une idée, le TR moyen des pensions publiques pour les individus en mauvaise santé est de 32%, alors qu'il est de 21% pour ceux qui déclarent être en bonne santé. Si l'on inclut les pensions publiques et les prestations du RPC/RRQ, ces chiffres deviennent 54 % pour les personnes en mauvaise santé et 41 % pour celles en bonne santé. En estimant un modèle de régression multivarié et en contrôlant le revenu antérieur, nous constatons pour les couples, que le revenu antérieur n'élimine pas les différences de ratio de remplacement selon les caractéristiques des individus. Nous soutenons que le choix d’un conjoint avec des caractéristiques similaires joue un rôle dans l'explication de la variation des taux de remplacement selon les caractéristiques des individus. Pour citer ce document Clavet N-J., El-Attar M. and Fonseca R. (2022). Replacement rates of public pensions in Canada: heterogeneity across socio-economic status (2022s-11, CIRANO).
    Keywords: Replacement rates,retirement,Canadian public pensions,LISA, Taux de remplacement,retraite,pensions publiques canadiennes,LISA
    JEL: H55 J26
    Date: 2022–05–17

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