nep-pbe New Economics Papers
on Public Economics
Issue of 2022‒09‒12
thirteen papers chosen by
Thomas Andrén

  1. Estimating the Laffer Tax Rate on Capital Income: Cross-Base Responses Matter! By Marie-Noëlle Lefebvre; Etienne Lehmann; Michaël Sicsic
  2. Negative Tax Incidence with Multiproduct Firms By Anna D'Annunzio; Antonio Russo
  3. Preferences over Taxation of High-Income Individuals: Evidence from a Survey Experiment By Engelmann, Dirk; Janeba, Eckhard; Mechtenberg, Lydia; Wehrhafter, Nils
  4. Taxing Externalities: Revenue vs. Welfare Gains with an Application to U.S. Carbon Taxes By Matthew Kotchen
  5. Procyclical fiscal policy and asset market incompleteness By Andrés Fernández; Daniel Guzmán; Ruy E. Lama; Carlos A. Vegh
  6. Effects of Taxation on Social Innovation and Implications for Achieving Sustainable Development Goals in Developing Countries: A Literature Review By Jean C. Kouam; Simplice A. Asongu
  7. Recurrent property taxes and house price risks By O'Brien, Martin; Staunton, David; Wosser, Michael
  8. Small Firm Growth and the VAT Threshold : Evidence for the UK By Liu, Li; Lockwood, Ben; Tam. Eddy
  9. Financing Higher Education in England: The Fiscal Implications of Reform By Hantzsche, Arno; Young, Garry
  10. Funding the future: The impact of population ageing on revenues across levels of government By Sean Dougherty; Pietrangelo de Biase; Luca Lorenzoni
  11. Sustained Economic Growth and Physical Capital Taxation in a Creative Region By Batabyal, Amitrajeet; Beladi, Hamid
  12. Privatizing Disability Insurance By Arthur Seibold; Sebastian Seitz; Sebastian Siegloch
  13. Optimal Fiscal and Monetary Policy with Distorting Taxes By Christopher A. Sims

  1. By: Marie-Noëlle Lefebvre; Etienne Lehmann; Michaël Sicsic
    Abstract: We theoretically express the Laffer tax rate on capital income as a function of the elasticities of capital income (the “direct” elasticity) and of labor income (the “cross” elasticity) with respect to the net-of-tax rate on capital income. We estimate these elasticities using salient capital tax reforms that took place in France between 2008 and 2017. Graphical evidence and Instrumental variables (IV) estimates confirm the existence of significant responses of both capital and labor income to capital tax reforms. Both approaches lead to positive cross responses, in contrast to the prediction of income-shifting models but in line with the two-period “working and saving” model. Cross responses are, however, about ten times lower than direct ones. We obtain a direct elasticity around 0.5 which is robust across specifications. Ignoring the cross elasticity leads to a Laffer rate around 68%. However, since labor incomes are much larger than capital incomes, the Laffer tax rate is especially sensitive to the cross elasticity. Using our estimated positive cross elasticity dramatically reduces the Laffer tax rate on capital income to around 57%, taking only income tax on labor income into account, and down to 35% when we also take payroll taxes into account.
    Keywords: capital income taxation, optimal tax, Laffer tax rate, instrumental variables
    JEL: H21 H24 H31 C23 C26
    Date: 2022
  2. By: Anna D'Annunzio; Antonio Russo
    Abstract: A fundamental result in the theory of commodity taxation is that taxes increase consumer prices and reduce supply, aggravating the distortions caused by market power. This result hinges on the assumption that each firm provides a single product. We study the effects of commodity taxes in presence of multiproduct firms that have market power. We consider a monopolist providing two goods and obtain simple conditions such that an ad valorem tax reduces the prices and increases the supply of both goods, thereby increasing total surplus. We show that these conditions can hold in a variety of settings, including add-on pricing, multiproduct retailing with price advertising, intertemporal models with switching costs and two-sided markets.
    Keywords: commodity taxation, tax incidence, multi-product firms, monopoly
    JEL: D42 H21 H22
    Date: 2022
  3. By: Engelmann, Dirk (HU Berlin); Janeba, Eckhard (University of Mannheim); Mechtenberg, Lydia (University of Hamburg); Wehrhafter, Nils (Deutsche Bundesbank)
    Abstract: Mobility of high-income individuals across borders puts pressure on governments to lower taxes. A central tenet of the corresponding textbook argument is that mobile individuals react to tax differentials through migration, and in turn immobile individuals vote for lower taxes. We investigate to which extent this argument is complete. In particular, political ideology may influence voting on taxes. We vary mobility and foreign taxes in a survey experiment within the German Internet Panel (GIP), with more than 3,000 individuals participating. We find that while the treatment effects qualitatively confirm model predictions how voters take mobility of high-income earners into account when choosing domestic taxes, ideology matters: left-leaning high-income individuals choose higher taxes and emigrate less frequently than right-leaning ones. These findings are in line with the comparative- static predictions of a simple model of inequality aversion when the aversion parameters vary with ideology.
    Keywords: taxation; mobility; ideology; survey experiments;
    JEL: D72 F22 H21
    Date: 2021–10–17
  4. By: Matthew Kotchen
    Abstract: This paper asserts that reporting of the ratio of welfare gains to tax revenue should be standard protocol in economic analyses of externality correcting taxes. That this comparison might matter is somewhat of a “blind spot” in most economic analyses, for it plays virtually no role when economists recommend taxes to internalize externalities. A simple model illustrates how the ratio of welfare gains to tax revenue plays a central role in a political economy and efficiency framing of Pigouvian type taxes. The analysis also shows intuitive results about how the ratio is increasing in the marginal external costs and the equilibrium elasticity to a tax. The second part of the paper illustrates the wide range of potential results with application of carbon taxes to different fuels in the United States. For example, assuming a social cost of carbon (SCC) and a carbon tax equal to $50 per tonne, the central estimates imply ratios of 12.1 for coal, 0.36 for natural gas, and very close to zero for diesel and gasoline. When all four fuels are combined, the ratios indicate a more proportional balance between welfare gains and tax revenue, with overall estimates ranging between 0.7 and 2.8. The paper concludes with a general appeal for economists to pay more attention to the relative magnitudes of efficiency gains and tax revenue when analyzing and advocating for externality correcting taxes.
    JEL: H2 H21 H23 Q38 Q4
    Date: 2022–08
  5. By: Andrés Fernández; Daniel Guzmán; Ruy E. Lama; Carlos A. Vegh
    Abstract: To explain the fact that government spending and tax policy are procyclical in emerging and developing countries, we develop a model for the joint behavior of optimal tax rates and government spending over the business cycle. Our set-up relies on financial frictions, which have been shown to be critical features of emerging markets, captured by various degrees of asset market incompleteness as well as varying levels of debt-elastic interest rate spreads. We first uncover a novel theoretical result within a simple static framework: incomplete markets can account for procyclical government spending but not necessarily procyclical tax policy. Explaining procyclical tax policy also requires that the ratio of private to public consumption comoves positively with the business cycle, which leads to larger fluctuations in the tax base. We then show that the procyclicality of tax policy holds in a more realistic DSGE model calibrated to emerging markets. Finally, we illustrate how larger financial frictions which amplify the business cycle through more procyclical fiscal policies, have sizeable Lucas-type welfare costs.
    Date: 2021–09
  6. By: Jean C. Kouam (Yaoundé, Cameroon); Simplice A. Asongu (Yaoundé, Cameroon)
    Abstract: In developing countries, taxation is perceived as a brake on economic growth. Indeed, taxes in most of these countries are not sufficiently adapted to the specificity of the taxpayer and often do not consider the weak administrative capacity of the countries in the region. In this context, reforms have been initiated over the last decade to create tax environments that encourage savings, investment, entrepreneurship, and social innovation. This study provides an overview of research on the effects of taxation on social innovation and the corresponding implications for the achievement of Sustainable Development Goals (SDGs) in developing countries, taking three approaches: thematic, chronological, and methodological. Most studies agree that high taxes in business undermine social innovation and thus the achievement of SDGs, as social innovation is known to be a driver of most SDGs and business the vehicle. The majority of the selected studies used primary data collected from samples whose representativeness with respect to the population concerned (notably businesses) is still not explicitly justified.
    Keywords: Social innovation, SDGs, developing countries
    JEL: G20 I10 I20 I30 O10
    Date: 2022–01
  7. By: O'Brien, Martin (Central Bank of Ireland); Staunton, David (Central Bank of Ireland); Wosser, Michael (Central Bank of Ireland)
    Abstract: Recurrent property taxes form part of the tax system in most advanced economies. In this Letter we examine whether these taxes have broader benefits in terms of reducing down-side risk to house prices, and the volatility of potential house price outcomes overall. The results suggest that such benefits do exist. Combined with the steadiness of these tax revenues through the economic cycle, fiscal authorities could benefit from appropriately calibrated recurrent property taxes while also contributing to wider economic and financial stability.
    Date: 2022–07
  8. By: Liu, Li (International Monetary Fund); Lockwood, Ben (University of Warwick); Tam. Eddy (King's College london)
    Abstract: This paper studies the effect of the VAT threshold on firm growth in the UK, using exogenous variation over time in the threshold, combined with turnover bin fixed effects, for identification. We find robust evidence that annual growth in turnover slows by about 1 percentage point when firm turnover gets close to the threshold, and weaker evidence of higher growth when the threshold is passed. Growth in firm costs shows a similar pattern, indicating that the response to the threshold is likely to be a real response rather than an evasion response. Firms that habitually register even when their turnover is below the VAT threshold (voluntary registered firms) have growth that is unaffected by the threshold, whereas firms that select into the Flat-Rate Scheme have a less pronounced slowdown response than other firms. Similar patterns of turnover and cost growth around the threshold are also observed for non-incorporated businesses. Finally, simulation results clarify the relative contribution of "noncrossers" ( firms who eventually register for VAT) and "non-crossers" (those who permanently stay below the threshold) in explaining our empirical findings. JEL Classification: H22 ; H25 ; H26
    Keywords: VAT ; size-based threshold ; firm growth
    Date: 2022
  9. By: Hantzsche, Arno; Young, Garry
    Abstract: Undergraduate teaching in England is paid for mainly by tuition fees levied on students. Students in turn mainly pay for their tuition fees and living costs by taking out income-contingent student loans, underwritten by the government. New graduates typically leave university with student debt of around £50,000, though only around 30 per cent of graduates are expected to repay their loans in full. This paper assesses the fiscal implications of some recent proposals to reform the financing of higher education in England, including the recommendations of the 2019 Augar Review to amend the current system, a National Learning Entitlement, and more radical proposals to finance higher education out of general taxation or with an all-age graduate tax.
    Keywords: higher education, student loans, graduate tax, Augar Review
    JEL: H2 H52 I22
    Date: 2022–08
  10. By: Sean Dougherty; Pietrangelo de Biase; Luca Lorenzoni
    Abstract: Government revenues may be affected by economic growth and changes in demographics over time. The effect of economic growth can be captured by long-run buoyancy – responsiveness of government revenues to GDP growth – while the demographic effect can be captured by changes in labour income, asset income and consumption patterns over the life cycle, as well as population growth. This paper attempts to quantify the effect of population ageing on OECD tax revenues across different levels of government, by estimating error correction models of revenue buoyancies over the 1990 to 2018 period, by type of revenue, country and level of government. Multiple scenarios are used for the projections to 2040, which are combined with scenarios for the evolution of revenue bases using newly harmonized EU and UN National Transfer Accounts data as well as OECD Population Projections.
    Keywords: demographics, fiscal federalism, intergovernmental relations, revenue buoyancy, tax policy
    JEL: H20 H71 J11
    Date: 2022–08–30
  11. By: Batabyal, Amitrajeet; Beladi, Hamid
    Abstract: We study the properties of economic growth in a region that is driven by the activities of the so-called creative class. On the consumption side of our regional economy, we focus on an infinitely lived creative class household and on the production side of this same economy, we concentrate on a final good that is produced using creative and physical capital. In this setting, we first define and then characterize a competitive equilibrium for our regional economy. Second, we show that this competitive equilibrium is Pareto optimal. Third, we demonstrate that sustained growth in this regional economy is impossible when the value of a key parameter of the production function is less than or equal to unity. Fourth, we specify the conditions in our model that need to hold for there to be sustained economic growth. Fifth, we study what happens to the share of physical capital in our region’s total income. Finally, we analyze what happens to the asymptotic growth rate of physical capital and consumption when a regional authority taxes the returns from physical capital.
    Keywords: Capital Tax, Creative Class, Economic Growth, Pareto Optimality, Sustained Growth
    JEL: H22 O40 R11
    Date: 2022–06–15
  12. By: Arthur Seibold (University of Mannheim and CEPR); Sebastian Seitz (University of Manchester); Sebastian Siegloch (University of Cologne, ZEW and CEPR)
    Abstract: Public disability insurance (DI) programs in many countries face pressure to reduce their generosity in order to remain sustainable. In this paper, we investigate the welfare effects of giving a larger role to private insurance markets in the face of public DI cuts. Exploiting a unique reform that abolished one part of the German public DI system for younger workers, we find that despite significant crowding-in effects, overall private DI take-up remains modest. We do not find any evidence of adverse selection on unpriced risk. On the contrary, private DI tends to be concentrated among high-income, high-education and low-risk individuals. Using a revealed preferences approach, we estimate individual DI valuations, a key input for welfare calculations. We find that observed willingness-to-pay of many individuals is low, such that providing DI partly via a private insurance market with choice improves welfare. However, we show that distributional concerns as well as individual risk misperceptions can provide grounds for justifying a full public DI mandate.
    Keywords: disability insurance, social insurance, mandate, privatization, risk-based selection, welfare
    JEL: H55 G22 G52
    Date: 2022–08
  13. By: Christopher A. Sims (Princeton University)
    Abstract: When the interest rate on government debt is low enough, it becomes possible to roll it over indefinitely, never taxing to retire it, without producing a growing debt to GDP ratio. This has been called a situation with zero "fiscal cost" to debt. But when low interest on debt arises from its providing liquidity services, zero fiscal cost is equivalent to finance through seigniorage. Some finance through seigniorage is generally optimal, however, despite results in the literature seeming to show that this is not so.
    Keywords: monetary policy, fiscal policy
    JEL: E52 E62
    Date: 2022–02

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