nep-pbe New Economics Papers
on Public Economics
Issue of 2022‒07‒25
fourteen papers chosen by
Thomas Andrén

  1. Bearing the Burden - Implications of Tax Reporting Institutions and Image Concerns on Evasion and Incidence By Kaisa ⓡ, Nurminen, Tuomas ⓡ, Miettinen, Topi ⓡ, Metsälampi, Satu ⓡ Kotakorpi; Kaisa Kotakorpi
  2. The Impact of the Tax Cuts and Jobs Act on Foreign Investment in the United States By Mr. Alexander D Klemm; Ms. Thornton Matheson; Laura Power; Thomas Brosy
  3. Downward Revision of Investment Decisions after Corporate Tax Hikes By Sebastian Link; Manuel Menkhoff; Andreas Peichl; Paul Schüle; Lukas Menkhoff
  4. Tax Reforms and Political Feasibility By Felix Bierbrauer; Pierre Boyer; Andrew Lonsdale; Andreas Peichl
  5. Optimal Threshold Taxation: An Empirical Investigation for Developing Economies By Lucas Menescal; José Alves
  6. Globalization and Factor Income Taxation By Pierre Bachas; Matthew Fisher-Post; Anders Jensen; Gabriel Zucman
  7. Will the Remote Work Revolution Undermine Progressive State Income Taxes? By Agrawal, David R.; Stark, Kirk J.
  8. Underfunded Public Sector Pension Plans, Social Security Participation, and the Retirement Decisions of Public Employees By Leslie E. Papke
  9. Using Divide-and-Conquer to Improve Tax Collection: Evidence from the Field By Lucia Del Carpio; Samuel Kapon; Sylvain Chassang
  10. Is Our Fiscal System Discouraging Marriage? A New Look at the Marriage Tax By Elias Ilin; Laurence J. Kotlikoff; Melinda Pitts
  11. Optimal Taxation with Multiple Incomes and Types By Kevin Spiritus; Etienne Lehmann; Sander Renes; Floris T. Zoutman
  12. Redistributive effects of 2017-2022 social spending and tax reforms By Paul Dutronc-Postel; Brice Fabre; Chloé Lallemand; Nolwenn Loisel; Lukas Puschnig
  13. Wealth and Income Responses to Dividend Taxation : Evidence from France By Marie-Noëlle Lefebvre; Eddy Zanoutene
  14. Affirmative Action, Equal Opportunity, or just tax the rich? Development, efficiency, and the pursuit of equity By Gautam Bose; Arghya Ghosh

  1. By: Kaisa ⓡ, Nurminen, Tuomas ⓡ, Miettinen, Topi ⓡ, Metsälampi, Satu ⓡ Kotakorpi; Kaisa Kotakorpi
    Abstract: We investigate effects of tax reporting institutions on evasion and incidence using an experimental double auction market setting. We find that 28% of the sellers are truthful when only sellers report, but that 88% and 64% of them are truthful under costless and costly third-party reporting by buyers, respectively. Reporting behavior therefore responds to the intensity of deterrence. However, we find that prices do not fully reflect the lower taxes of the evaders. Thus, when only sellers report, tax incidence deviates from the prediction of the standard model, and there is deadweight loss even if tax revenue is low. Pricing, incidence, and reporting patterns in all treatments can be explained by a model of lying costs with image concerns that give rise to a motivation to appear honest.
    Keywords: tax evasion, tax incidence, third-party reporting, double auction, social image, experiment
    JEL: H21 H22 H26 D40 D44 D91
    Date: 2022
  2. By: Mr. Alexander D Klemm; Ms. Thornton Matheson; Laura Power; Thomas Brosy
    Abstract: The 2017 Tax Cuts and Jobs Act (TCJA) sharply reduced effective corporate income tax rates on equity-financed US investment. This paper examines the reform’s impact on US inbound foreign direct investment (FDI) and investment in property, plant and equipment (PPE) by foreign-owned US companies. We first model effective marginal and average tax rates (EMTRs and EATRs) by country, industry, and method of finance, and then use those tax rates to calculate the tax semi-elasticities of inbound FDI and PPE investment. We find that both PPE investment and FDI financed with retained earnings responded positively to the TCJA reform, but FDI financed with new equity or debt did not. In country-level PPE regressions, inclusion of macroeconomic controls renders tax rate coefficients insignificant, suggesting that the increase in PPE investment after TCJA was driven by general economic growth. In regressions of FDI financed with retained earnings, however, tax coefficients were robust to inclusion of macroeconomic controls. As the literature predicts, EATRs have a greater impact on cross-border investment than EMTRs. Country-by-industry regressions showed a larger effect of taxes on PPE investment than aggregate country-level regressions, but industry-level tax rates appear to have no effect on earnings retention.
    Keywords: TCJA; Inbound Investment; Effective Tax Rates; PPE investment; investment in property, plant and equipment; PPE Investment; inbound foreign direct investment; tax coefficient; Effective tax rate; Foreign direct investment; Marginal effective tax rate; Average effective tax rate; Corporate income tax; Global
    Date: 2022–05–06
  3. By: Sebastian Link; Manuel Menkhoff; Andreas Peichl; Paul Schüle; Lukas Menkhoff
    Abstract: This paper estimates the causal effect of corporate tax hikes on firm investment based on more than 1,400 local tax changes. By observing planned and realized investment volumes in a representative sample of German manufacturing firms, we can study how tax hikes induce firms to revise their investment decisions. On average, the share of firms that invest less than previously planned increases by three percentage points after a tax hike. This effect is twice as large during recessions.
    Keywords: investment, corporate taxation, state dependence, business cycle
    JEL: G11 H25 H32 H71 O16
    Date: 2022
  4. By: Felix Bierbrauer (University of Cologne); Pierre Boyer (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique, IPP - Institut des politiques publiques); Andrew Lonsdale (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique); Andreas Peichl (LMU - Ludwig Maximilian University [Munich])
    Abstract: Questions linked to the design and implementation of redistributive tax policies have occupied a growing position on the public agenda over recent years. Moreover, the fiscal pressures brought upon by the current coronavirus crisis will ensure that these issues maintain considerable political significance for years to come. In light of this importance, we present novel research on reforms of income tax systems. Our approach shows that tax reforms wherein the changes in individual tax burdens are larger for taxpayers with higher incomes are of particular interest. We denote such reforms as "monotonic" and show that, under this condition, it is possible to determine the "winners" and "losers" of a given tax reform. One can then conclude whether the monotonic reform is politically feasible, depending on whether a majority of individuals will benefit financially from the policy. An empirical analysis of tax reforms with a focus on the United States and France reveals that past reforms have, by and large, been monotonic. Our approach therefore enables us to test whether a given tax system admits a politically feasible reform and has direct policy relevance for the common types of taxation reforms undertaken by government authorities.
    Date: 2021–09
  5. 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
  6. By: Pierre Bachas (The World Bank - The World Bank - The World Bank); Matthew Fisher-Post (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Anders Jensen (Harvard Kennedy School - Harvard Kennedy School, NBER - National Bureau of Economic Research [New York] - NBER - The National Bureau of Economic Research); Gabriel Zucman (University of California [Berkeley] - University of California, NBER - National Bureau of Economic Research [New York] - NBER - The National Bureau of Economic Research)
    Abstract: How has globalization affected the relative taxation of labor and capital, and why? To address this question we build and analyze a new database of effective macroeconomic tax rates covering 150 countries since 1965, constructed by combining national accounts data with government revenue statistics. We obtain four main findings: (1) The effective tax rates on labor and capital converged globally since the 1960s, due to a 10 percentage-point increase in labor taxation and a 5 percentage-point decline in capital taxation. (2) The decline in capital taxation is concentrated in high-income countries. By contrast, capital taxation increased in developing countries since the 1990s, albeit from a low base.(3) Consistently across a variety of research designs, we find that the rise in capital taxation in developing countries can be explained by a tax-capacity effect of international trade: Trade openness leads to a concentration of economic activity in formal corporate structures, where capital taxes are easier to impose. (4) At the same time, international economic integration reduces statutory tax rates, due to increased tax competition. In highincome countries, this negative tax competition effect of trade has dominated, while in developing countries the positive tax-capacity effect of international trade appears to have prevailed.
    Date: 2022–04
  7. By: Agrawal, David R.; Stark, Kirk J.
    Abstract: The remote work revolution raises the possibility that a much larger segment of the population will be able to sever the geographic linkage between home and work. This new development implicates several foundational questions in the law and economics of U.S. fiscal federalism. What are the taxing rights of states as to nonresident remote workers employed by firms within the state? May a state impose income taxes on nonresident employees only to the extent they are physically working within the state? Does state taxing power extend to all income derived from in-state firms, including wages paid to those who never set foot in the state? How these legal questions are resolved has important implications for the future of state income taxes. Standard sourcing rules attribute wage income to the employee's physical location. In the presence of remote work, however, rigid ad-herence to this physical presence rule could intensify the progressivity-limiting dynamics of federalism by re-ducing the costs to households of exploiting labor income tax differentials across jurisdictions. In this article, we document the rise of remote work, the status of state-level income tax progressivity as well as its evolution over time, and the correlation between work from home trends and progressivity. We consider how alternative legal rules for the sourcing of income can affect telework-induced mobility, but conclude that, regardless of which sourcing regime prevails in coming legal battles, the rise of remote work is likely to limit redistribution via state income taxes. While some sourcing rules may better preserve progressivity in the short term than others, the more fundamental threat to progressive state tax regimes derives from remote work's long-term erosion of the benefits of urban spatial clustering. To the extent that the nation's productive cities lose their allure as centers of agglomeration and the wages of high-skilled workers in these cities fall, the ability of their host states to pursue redistributive tax policies will likely be constrained. Significantly, these deglomeration effects will arise regard-less of how state taxing rights are adapted for the remote work era, and therefore may carry with them implica-tions for income tax progressivity at the federal level as well.
    Keywords: income tax,remote work,sourcing rules,progressivity
    JEL: H2 H7 J6 K3 R5
    Date: 2022
  8. By: Leslie E. Papke (Michigan State University)
    Abstract: I analyze the effects of public pension parameters, Social Security coverage, and state pension fund sustainability on the retirement of public employees. I use data from the Health and Retirement Study, including personal early and normal retirement eligibility and state of residence. I develop a state-level measure of effective public pension plan sustainability that reflects both the degree of public plan underfunding and a state\rquote s ability to fund the plan with its own resources. Using the Public Plans Database and the Treasury Department\rquote s estimate of Total Taxable Resources, I calculate the state tax rate that, applied to a state\rquote s total taxable resources, could fund the state\rquote s unfunded actuarial accrued liability. This effective tax rate varies by Social Security status of the plan. I model retirement probability as a function of public pension eligibility, Social Security coverage in the public sector job, and effective underfunding. I find that becoming eligible for early or normal retirement, or receiving an early-out offer, significantly increases the probability of retiring beginning at age 50. Having Social Security coverage approximately doubles this probability. Public sector workers without Social Security coverage are estimated to have a lower probability of retirement at key eligibility ages. I find that the probability of retirement falls with the degree of underfunding or effective plan risk, but this effect is small compared to the response to plan features. These findings suggest that state legislative action to affect retirement decisions would be most effective operating through plan eligibility rules.
    Date: 2021–06
  9. By: Lucia Del Carpio (INSEAD); Samuel Kapon (Princeton University); Sylvain Chassang (Princeton University)
    Abstract: In the context of collecting property taxes from 13432 households in a district of Lima (Peru), we investigate whether prioritized enforcement can improve the effective use of limited enforcement capacity. We randomly assign households to two treatment arms: one replicating the city’s usual collection policy, and one implementing a prioritized enforcement rule in which households are ordered according to a suitable rank and sequentially issued clear short-term promises of collection if they fail to make minimum tax payments. Raw findings show that prioritized enforcement improved tax collection by increasing tax revenue, and decreasing the number of costly collection actions taken. We identify an important friction ignored by existing theory: tax-payers’ response to incentives is slow, which changes the optimal management of collection promises. Finally, we estimate a model of tax-payer behavior and use it to produce counterfactual treatment estimates for other collection policies of interest. In particular, we estimate that, keeping the number of collection actions fixed, prioritized enforcement would increase tax revenue over 5 months by 11.3%.
    Keywords: divide-and-conquer, tax-collection, prioritized enforcement, limited government capacity
    JEL: H20 H29
    Date: 2022–06
  10. By: Elias Ilin; Laurence J. Kotlikoff; Melinda Pitts
    Abstract: We develop, apply, and test a new measure of the marriage tax – the reduction in future spending from getting married – using SCF and ACS data. Our measure incorporates all major and most minor U.S. tax and benefit programs. And it assumes clone marriage – marrying oneself – to ensure the living-standard loss from marrying is unaffected by spousal choice. Our calculated high and highly variable marriage taxes materially reduce the probability of marriage particularly for low-income females with children.
    JEL: H2 H31 J12 J18
    Date: 2022–06
  11. By: Kevin Spiritus; Etienne Lehmann; Sander Renes; Floris T. Zoutman
    Date: 2022
  12. By: Paul Dutronc-Postel (IPP - Institut des politiques publiques); Brice Fabre (IPP - Institut des politiques publiques); Chloé Lallemand (IPP - Institut des politiques publiques); Nolwenn Loisel (IPP - Institut des politiques publiques); Lukas Puschnig (IPP - Institut des politiques publiques)
    Abstract: Numerous social spending and tax reforms were decided during the 2017–2022 French presidential term. On average, these measures improved households' standard of living by 1.9%, essentially due to reductions in compulsory levies. However, this average effect masks strong heterogeneity according to the level of household income. Although these reforms led to an average increase in disposable income for all households classified by standard-of-living percentile, the gains were only 0.8% for the poorest 5%, compared with 3.3% for the wealthiest 1%. In line with the government's objectives of encouraging work, the employed experienced an average gain of 2.6%, compared with 0.6% for pensioners and a loss of 1.1% for the unemployed. These effects are due to the switch of social security contributions to the CSG (contribution sociale généralisée), revaluation of the employment bonus (prime d'activité) and the reform of unemployment insurance. The larger gains for the highest incomes can be explained both by the transformation of the wealth tax (impôt de solidarité sur la fortune, ISF) into the tax on real estate assets (impôt sur la fortune immobilière, IFI) and by the introduction of the single flat-rate levy (prélèvement forfaitaire unique, PFU) on capital income. Within each standard-of-living percentile, there is a significant share of losers – 24% on average – despite positive average gains. The combination of increases in indirect taxation (tobacco and energy) with certain reductions in social benefits (housing) or their revaluation below inflation (especially for retirement pensions) has had a negative impact on the disposable income of certain households which have not necessarily benefited from the reductions in compulsory levies.
    Date: 2022–03
  13. By: Marie-Noëlle Lefebvre; Eddy Zanoutene
    Date: 2022
  14. By: Gautam Bose (School of Economics); Arghya Ghosh (UNSW School of Economics)
    Abstract: Tension between efficiency and equity is fundamental to every economy. Historical differences between groups translate into inequality in skills and hence earnings. Measures to correct inequalities affect incentives and misallocate talent, therefore compromising efficiency. This paper examines the efficiency properties of the three most common classes of equity policies: affirmative action, equal opportunity and tax-transfer. Our focus is to examine how the effectiveness of policies vary with the level of development and technology and the political maturity of the state. We argue that the optimal policy is likely to be different for different countries, and indeed for the same country at different stages of development. The intuition driving our approach is that the products produced in a less-developed economy are less complex and require lower embodied skills. Here, preferentially placing less prepared individuals in higher skill jobs does not compromise efficiency to too large an extent. In high-technology production processes, however, skills are more critical and productivities are interdependent, so it makes more economic sense to adequately train the inductees even at a relatively high cost. The most efficient outcomes are yielded by competitive markets accompanied by appropriate tax-transfer schemes. However, such schemes can effectively be used only by economies with the highest levels of socialisation and state capacity. We find that, in a low-complexity economy, reservation fares better than both training and tax transfer. As complexity of the production process increases training becomes more attractive and is in turn superseded by tax-transfers in the most complex and politically mature economies. These findings provide a step towards more informed and robust policy. We discuss several omissions and directions for further development.
    Date: 2022–06

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