nep-pbe New Economics Papers
on Public Economics
Issue of 2022‒06‒27
fourteen papers chosen by
Thomas Andrén

  1. The Compliance Dilemma of the Global Minimum Tax By Hindriks, Jean; Nishimura, Yukihiro
  2. On the Political Economy of Nonlinear Income Taxation By Berliant, Marcus; Gouveia, Miguel
  3. Optimal threshold taxation: an empirical investigation for developing economies By Lucas Menescal; José Alves
  4. Taxation, Information Acquisition, and Trade in Decentralized Markets: Theory and Test By Tri Vi Dang; Xiaoxi Liu; Florian Morath
  5. Bunching and Adjustment Costs: Evidence from Cypriot Tax Reforms By Panos Mavrokonstantis; Arthur Seibold
  6. Optimal cooperative taxation in the global economy By Pedro Teles; V. V. Chari; Juan Pablo Nicolini
  7. Mandating Digital Tax Tools as a Response to Covid: Evidence from Eswatini By Santoro, Fabrizio; Amine, Razan; Magongo, Tanele
  8. Property Tax Reform: Implications for Housing Prices and Economic Productivity By Jason Nassios; James Giesecke
  9. Explaining the Decline in the US Labor Share: Taxation and Automation By Burkhard Heer; Andreas Irmen; Bernd Süssmuth
  10. Replacement Rates of Public Pensions in Canada: Heterogeneity across SocioEconomic Status By Nicholas-James Clavet; Mayssun El-Attar; Raquel Fonseca
  11. Bargaining over Taxes and Entitlements in the Era of Unequal Growth By Marina Azzimonti; Laura Karpuska; Gabriel Mihalache
  12. Safety Nets and Social Welfare Expenditures in World Economic History By Price V. Fishback
  13. Durable Consumption, Limited VAT Pass-Through and Stabilization Effects of Temporary VAT Changes By Marius Clemens; Werner Röger
  14. The Excess Profits during COVID-19 and Their Tax Revenue Potential By Evgeniya Dubinina; Javier Garcia-Bernardo; Petr Jansky

  1. By: Hindriks, Jean (Université catholique de Louvain, LIDAM/CORE, Belgium); Nishimura, Yukihiro (Osaka University)
    Abstract: To tackle profit shifting, the OECD/G20 Inclusive Framework proposes a Global Minimum Tax that requires that if a multinational en- terprise (MNE) declares its operations in a jurisdiction taxing less than the global minimum tax, the countries where the real economic activity takes place would have the right to tax the difference. The general presumption is that (unconstrained) high-tax countries will gain and low-tax countries will lose because the constrained taxes will reduce their inward profit shifting. The purpose of this paper is to show, by means of a formal model of international tax competition with heterogeneous countries, that the consequences of the global minimum tax can be just the opposite. The key feature of our analysis is that the minimum tax will change the dynamics of tax competition together with the enforcement incentives. We show that in this broader framework, the low-tax country always gain and that there exists a critical threshold for the minimum tax beyond which enforcement cooperation will break down making the high-tax country worse off with minimum tax. The minimum tax threshold is decreasing in the extent of the tax asymmetry. We call this new effect the compliance dilemma.
    Keywords: Profit shifting ; Tax competition ; Tax enforcement
    JEL: C72 F23 F68 H25 H87
    Date: 2022–03–03
  2. By: Berliant, Marcus; Gouveia, Miguel
    Abstract: The literatures dealing with voting, optimal income taxation, implementation, and pure public goods are drawn on here to address the problem of voting over income taxes and a public good. In contrast with previous articles, general nonlinear income taxes that affect the labor-leisure decisions of consumers who work and vote are allowed. Uncertainty plays an important role in that the government does not know the true realizations of the abilities of consumers drawn from a known distribution, but must meet the realization-dependent budget; the tax system must be robust. Even though the space of alternatives is infinite dimensional, conditions on primitives are found to assure existence of a majority rule equilibrium when agents vote over both a public good and income taxes to finance it.
    Keywords: Voting; Income taxation; Public good; Robustness
    JEL: D72 D82 H21 H41
    Date: 2022–05–20
  3. By: Lucas Menescal; José Alves
    Abstract: In this empirical study we assess both linear and nonlinear relationship between total taxation and several tax items with real per capita GDP growth rates for 43 developing countries between 1990 and 2019. We use panel data techniques to evaluate the effects of taxation on economic growth for both short and long run perspectives, and to find optimal tax threshold values. We obtain evidence of nonlinear relationships between all tax items, except for corporate income taxation, as well as an optimal value for total tax burden around 23,5% of GDP for the whole sample. When the sample is subdivided by countries’ income levels, we find threshold values for all tax items and an optimal tax burden around 23,6% of GDP for high income countries and 21,3% of GDP for low income. Our results provide support regarding the existence of nonlinearities and about policies focused on raising certain tax revenues, as a percentage of GDP, without hampering economic growth.
    Keywords: Economic Growth; Fiscal Policy; Optimal taxation; Tax thresholds
    JEL: E62 H21 O47
    Date: 2022–06
  4. By: Tri Vi Dang; Xiaoxi Liu; Florian Morath
    Abstract: This paper shows that a transaction tax makes trades in decentralized markets more information sensitive and enlarges the range of information costs for which the equilibrium exhibits private information acquisition and endogenous adverse selection. A transaction tax reduces the probability of trade. The opposite implications hold for a tax on capital gains. The theoretical implications of a transaction tax are tested using a tax policy change in one segment of Singapore’s housing market. Using various proxies for information sensitivity, the triple difference-in-difference analysis shows that a higher transaction tax reduces turnover more strongly when trades are more information sensitive.
    Keywords: Bargaining, information acquisition, taxation, transaction tax, capital gains tax, tax incidence, decentralized markets, housing markets, policy experiment, information sensitivity
    JEL: C78 D82 D83 G18 H20
    Date: 2022–08
  5. By: Panos Mavrokonstantis; Arthur Seibold
    Abstract: We study adjustment costs in behavioral responses to income taxes, exploiting tax reforms that create and subsequently eliminate income tax kinks in Cyprus. Reduced-form evidence reveals substantial adjustment frictions attenuating bunching and de-bunching responses. Combining the empirical bunching moments with a structural model of frictional earnings supply, adjustment costs are estimated between EUR 93 and EUR 238 for wage earners. Moreover, we uncover important asymmetries in adjustment frictions, where bunching at a kink is costlier than de-bunching away from the kink. Finally, we find that self-employed individuals face considerably lower adjustment costs than wage earners.
    Keywords: income taxation, taxable income responses, bunching, adjustment frictions
    JEL: H24 J22
    Date: 2022
  6. By: Pedro Teles; V. V. Chari; Juan Pablo Nicolini
    Abstract: How should countries cooperate in setting fiscal and trade policies when government expenditures must be financed with distorting taxes? We show that even if countries cannot make explicit transfers to each other, every point on the Pareto frontier is production efficient, so that international trade and capital flows should be effectively free. Trade agreements must be supplemented with fiscal policy agreements. Residence-based income tax systems have advantages over source-based systems. Taxing all household asset income at a countryspecific uniform rate and setting the corporate income tax to zero yield efficient outcomes. Value-added taxes should be adjusted at the border.
    JEL: E60 E61 E62
    Date: 2022
  7. By: Santoro, Fabrizio; Amine, Razan; Magongo, Tanele
    Abstract: Many tax authorities changed the mode of interacting with taxpayers from physical to online as a response to the Covid-19 pandemic, to diminish the spread of the virus. Eswatini, the country under study, mandated the use of online tax filing through the e-Tax system for all income tax payers, coupled with a zero-cash-handling policy for tax payment. By means of a difference-in-difference (DID) strategy, reinforced by a propensity score matching (PSM), this paper offers an impact evaluation of the mandate on taxpayer filing and payment behaviour. We present three sets of results. First, we describe which firms are most likely to register for e-Tax – mostly large firms and those in the primary and tertiary sectors. Second, we show that e-Tax uptake significantly improves filing behaviour, as well as payment behaviour. E-Tax registered taxpayers are less likely to file nil (by 60 per cent), declare more turnover and taxable income, and are 70 per cent more likely to pay conditional on filing. Third, we shed light on the mechanisms behind our main findings, showing that the technology improved accuracy and reduced compliance costs. E-Tax-registered treated taxpayers are more likely to file on time, file for VAT, report more accurately, and, on the payment side, to pay their liabilities in full.
    Keywords: Governance,
    Date: 2022
  8. By: Jason Nassios; James Giesecke
    Abstract: Australia has high housing prices by world standards. Australian state and local governments also have a high reliance on a variety of property taxes. This has generated calls for state tax reform. However, with property prices high, a concern of policy makers is that property tax reform might push house prices higher still. We investigate the effects of seventeen property tax reform options, with a particular focus on potential trade-offs between efficiency benefits and house price impacts.
    Keywords: CGE modelling, Immovable property tax, Recurrent property tax, Housing prices, Excess burden
    JEL: C68 E62 H2 H71 R38
    Date: 2022–06
  9. By: Burkhard Heer; Andreas Irmen; Bernd Süssmuth
    Abstract: This study provides evidence for the US that the secular decline in the labor share is not only explained by technical change or globalization, but also by the dynamics of factor taxation, automation capital (robots), and population growth. First, we empirically find indications of co-integration for the period from the last quarter of the 20th to the first decade of the 21st century. Permanent effects on factor shares emanate from relative factor taxation. The latter also have a lasting effect on the use of robots. Variance decompositions reveal that taxing contributes to changes in the two income shares and in automation capital. Second, we analyse and calibrate a neoclassical growth model extended to include factor taxation, automation capital, and capital adjustment costs. Labor and automation capital are perfect substitutes whereas labor and traditional capital are complements. The model replicates the dynamics of the observed functional income distribution in the US during the 1965-2015 period. Counterfactual experiments suggest that the fall in the labor share would have been significantly smaller if labor and capital income tax rates had remained at their respective level of the 1960s.
    Keywords: functional income distribution, labor income share, income taxes, automation capital, demography, growth
    JEL: D33 E62 O41 J11 J20
    Date: 2022
  10. 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.
    Keywords: Replacement rates, retirement, Canadian public pensions, LISA
    JEL: H55 J26
    Date: 2022
  11. By: Marina Azzimonti; Laura Karpuska; Gabriel Mihalache
    Abstract: Entitlement programs have become an increasing component of total government spending in the US over the last six decades. To some observers, this growth of the welfare state is excessive and unwarranted. To others, it is a welcome counter-acting force to the rapid increase in income inequality. Using a political-economy model where parties bargain over taxes and entitlements, we argue that such dynamics can be explained by two factors. The first one is that institutional features of policy determination, in particular budget rules, make the status quo levels of taxes and entitlements difficult to change. The second one is that the country experienced a process of “unequal growth,” where top earners became richer while the income levels of the bottom 50 percent remained stagnant. Richer agents would like the government to provide more public goods as the economy grows. Low-income earners are willing to support such policies only in exchange for an expansion of entitlement programs. Sustained bargaining power by a party that represents the latter, amid budget rules, results in a rising share of entitlements. We explain how parties can take advantage of budget rules to tilt the evolution of policy in their favor in a simple two-period model. We then calibrate an infinite horizon version of the model to the US, and show that it delivers dynamics consistent with the data. Through counter-factual experiments, we find that while entitlements programs are sub-optimally large, welfare outcomes are better than those under alternative budget rules and in scenarios without rules, making it explicit that the type of budget rule matters for both welfare and equity.
    JEL: C7 D6 E6 H2 H23 H3 H41 H53
    Date: 2022–05
  12. By: Price V. Fishback
    Abstract: The safety nets in high-income countries before 1900 and in low-income countries today were based on savings and aid from extended family, friends, charities, churches, and small amounts from local governments. Mutual societies and eventually insurance companies offered insurance against lost earnings from sickness, injury, death, and old age. Germany led the way in mandating that employers provide benefits. Since 1900 higher income nations have sharply increased public and private social welfare expenditures to well over 20 percent relative to GDP. A large share of this rise has come in increases in aid to the elderly and health care expenses, often in the form of contributory social insurance financed by payroll taxes on workers and employers. Meanwhile, noncontributory transfer programs for the poor have risen relatively little. In most countries, the employer’s share of payroll taxes are higher than the worker’s share. There are some major countries who have followed a path of reliance on private programs, which are largely financed by employers. Probably the most striking feature of social welfare programs world-wide is the very large variation in expenditures relative to GDP, in the categories of spending, and in the mix of taxation, private programs, and government programs.
    JEL: H53 H55 I38 N40
    Date: 2022–05
  13. By: Marius Clemens; Werner Röger
    Abstract: This paper revives the question of whether a temporary VAT change is an adequate instrument for crisis stabilization. In empirical assessments, we find that durable goods consumption fluctuates strongly over the business cycle and that VAT rate changes affect durable goods in particular. Therefore, we build a dynamic stochastic general equilibrium (DSGE) model that is capable of addressing this major channel through which temporary VAT changes affect the economy. Furthermore, we allow for an imperfect pass-through of VAT measures to consumer prices via VAT-specific price adjustment costs. We compare the general VAT policy in the crisis with alternative stabilization policies, such as interest rate cuts, spending policies and a VAT cut only for durable goods. First, we find that considering durable goods in the model generates sizeable stabilization effects of VAT changes on consumption over a broad set of parameter ranges. Second, we find that the VAT policy can mimic monetary policy with minor exceptions. Third, the VAT rate cut has the highest short-term multiplier compared with government spending policies, but not in the medium-term. Fourth, a VAT rate reduction only on durable goods will generate strong GDP effects and even be self-financing in the first year. In contrast, a VAT reduction only on non-durables has small effects on GDP and is not self-financing. In view of our results, we conclude that a temporary VAT cut, when applied to durable goods, is an effective stabilization instrument.
    Keywords: Value added tax, durable consumption, multiplier, business cycle, zero lower bound
    JEL: E62 E63 H21
    Date: 2022
  14. By: Evgeniya Dubinina (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Javier Garcia-Bernardo (Department of Methodology and Statistics, Utrecht University, Utrecht, Netherlands); Petr Jansky (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: The COVID-19 pandemic has affected most companies´ profits negatively, but other companies did exceptionally well, recording excess profits during the pandemic. In this paper we estimate the scale of these excess profits, their determinants, and the revenue potential of excess profits tax. To estimate excess profits, we develop a trend-adjusted average earnings methodology. We apply the methodology to the consolidated Orbis data to estimate that large multinational corporations (MNCs) with subsidiaries in the EU made excess profits of $447 billion in 2020 (41.7% of their total profits in 2020). We show that primary business activities is a key determinant of MNCs´ excess profits made during the COVID-19 pandemic. We show that manufacturing, information, and financial sectors are responsible for the majority of excess profits. With country-by-country reporting data we estimate the excess profits arising from each EU member state and find that EU member states could together raise $6 billion with an excess profits tax of 10%, an additional tax levied by governments on corporations’ excess profits. The research findings may be useful for policymakers in addressing the question of financing economic recovery from the COVID-19 pandemic.
    Keywords: excess profits; covid-19; multinational corporations; excess profits tax; european union
    JEL: H25 L11 L25
    Date: 2022–06

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