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

  1. Income Tax Credits for Consumer Services: A Tool for Tackling VAT Evasion? By Thiess Büttner; Boryana Madzharova; Orlando Zaddach
  2. Politics and Income Taxes: Progress and Progressivity By Marcus Berliant; Pierre C. Boyer
  3. Can ethics change? Enforcement and its effects on taxpayer compliance By James Alm; Matthias Kasper; Erich Kirchler
  4. No Taxation without Reallocation: The Distributional Effects of Tax Changes By Stephanie Ettmeier
  5. Declaring income versus declaring taxes in tax compliance experiments: Does the design of laboratory experiments affect the results? By Stephan Muehlbacher; Andre Hartmann; Erich Kirchler; James Alm
  6. Redistributive effects of 2017-2022 social spending and tax reforms for French households By Paul Dutronc-Postel; Brice Fabre; Chloé Lallemand; Nolwenn Loisel; Lukas Puschnig
  7. Profit Shifting Frictions and the Geography of Multinational Activity By Alessandro Ferrari; S\'ebastien Laffitte; Mathieu Parenti; Farid Toubal
  8. Too Complex to Digest? Federal Tax Bills and Their Processing in US Financial Markets By Hamza Bennani; Matthias Neuenkirch
  9. Fiscal policy and economic activity: New Causal Evidence By David M. Brasington; Marios Zachariadis
  10. Preferences for Sin Taxes By Tobias König; Renke Schmacker
  11. Using behavioural economics to understand tax compliance By James Alm; Matthias Kasper
  12. The Optimal Size and Progressivity of Old-Age Social Security By Francisco Cabezon
  13. Investment Tax Credits and the Response of Firms By Lerche, Adrian
  14. Firm Responses to State Hiring Subsidies: Regression Discontinuity Evidence from a Tax Credit Formula By Benjamin G. Hyman; Matthew Freedman; Shantanu Khanna; David Neumark
  15. Pension Reform Preferences in Germany: Does Information Matter? By Jana Schuetz; Silke Uebelmesser; Ronja Baginski; Carmela Aprea
  16. Tax and public expenditure trends Colombia: Lessons for the new administration of 2022-2026 By Sergio Clavijo
  17. Social security pension generosity and the effect on household saving By Elin Halvorsen; Zhiyang Jia; Herman Kruse; Trond C. Vigtel

  1. By: Thiess Büttner; Boryana Madzharova; Orlando Zaddach
    Abstract: This paper analyzes the effects of an income tax credit for hard-to-tax consumer services on evasion of the value-added-tax (VAT). Based on the individual tax files of the universe of VAT payers in Germany, our analysis shows that harnessing incentives for consumers through tax credits fosters firms’ compliance with VAT by bringing in an element of third-party reporting at the last VAT stage. Our results point at strong stimulating effects of the introduction of the tax credit on reported sales as well as on the ratio of reported sales to inputs. We find limited price effects. While two thirds of the revenue losses in the income tax are recovered by an increase in VAT revenues, up to half of the revenue gain is associated with a response at the VAT evasion margin. The policy thus fosters considerable formalization effects.
    Keywords: tax compliance, value-added tax, income tax credit, third-party reporting
    JEL: H26 H25 H24
    Date: 2022
  2. By: Marcus Berliant; Pierre C. Boyer
    Abstract: This paper begins with a survey of the literature on the political economy approaches to labor income taxation. We focus on recent progress made by examining in detail the specific properties of non-linear taxes derived in the context of voting. Next, we present new results on the existence of majority voting equilibrium that unify work in the standard framework. Finally, we discuss how recent theoretical results help us uncover empirical patterns from the last 50 years in the US tax system, namely a sharp decrease in top marginal tax rates, the rise of the Earned Income Tax Credit (EITC), and increased progressivity in the middle of the income distribution.
    Keywords: non-linear income taxation, tax reform, political economy, optimal taxation, EITC
    JEL: C72 D72 D82 H21
    Date: 2022
  3. By: James Alm (Tulane University); Matthias Kasper (University of Vienna); Erich Kirchler (University of Vienna)
    Abstract: ‘How does tax enforcement affect taxpayer compliance, especially via its effects on tax morale and taxpayer ethics? In this paper we discuss the role of ethics and tax morale in compliance decisions and the effect of enforcement on these notions. We first discuss the factors that shape tax morale and ethics, using these terms as interchangeable concepts. We then summarize prior research that investigates how enforcement affects tax compliance. Subsequently, we discuss how tax morale and ethics shape behavioral responses to enforcement. Finally, we present administrative strategies to mitigate the negative effects of enforcement on compliance via its effects on tax morale and ethics.
    Keywords: Tax compliance; general deterrence; specific deterrence; tax morale; ethics
    JEL: C9 H26 H83
    Date: 2022–11
  4. By: Stephanie Ettmeier
    Abstract: This paper investigates the dynamic effects of tax changes on the cross-sectional distribution of disposable income in the United States using a narrative identification approach. I distinguish between changes in personal and corporate income taxes and quantify the distributional effects on families and business owners. I document that tax changes affect incomes along the distribution differently and that the family status and the source of income matters. Tax reductions benefit high incomes and disadvantage lower incomes. Entrepreneurs and families benefit more from tax cuts than individuals without business income and non-families.
    Keywords: Income Distribution, functional vector Autoregressions, tax policy shocks
    JEL: C11 C32 E32 E62
    Date: 2022
  5. By: Stephan Muehlbacher (Karl Landsteiner University of Health Sciences); Andre Hartmann (University of Vienna); Erich Kirchler (University of Vienna); James Alm (Tulane University)
    Abstract: Laboratory experiments are frequently criticised, in part because of the sensitivity of the results to specific features of the design. This paper addresses an important question regarding the key aspect of the experimental environment: How should the dependent variable – participants’ choices – be operationalised? For the specific context of laboratory research on income tax compliance, we compare the effects of the two most common operationalisation types: the declaration of gross income versus the declaration of tax payment. It is found that compliance is higher when participants indicate their tax payment than when they declare their income. It is also discovered that the effects of the three policy parameters of the economic model (tax rate, audit probability, and fine rate) are stronger when participants declare their taxes than when they declare their income. These results are relevant for interpreting prior and future experimental evidence on tax compliance and can explain some contradictory previous findings. More broadly, this study suggests that the results of laboratory experiments may depend on specific features of the experimental design, which proposes a strong need for more systematic methodological research.
    Keywords: Laboratory experiments; experimental design; tax compliance; tax rate; audit probability; fine rate
    JEL: B41 C90 C91 H26
    Date: 2022–11
  6. 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: 2022–11–08
  7. By: Alessandro Ferrari; S\'ebastien Laffitte; Mathieu Parenti; Farid Toubal
    Abstract: We develop a quantitative general equilibrium model of multinational activity embedding corporate taxation and profit shifting. In addition to trade and investment frictions, our model shows that profit-shifting frictions shape the geography of multinational production. Key to our model is the distinction between the corporate tax elasticity of real activity and profit shifting. The quantification of our model requires estimates of shifted profits flows. We provide a new, model-consistent methodology to calibrate bilateral profit-shifting frictions based on accounting identities. We simulate various tax reforms aimed at curbing tax-dodging practices of multinationals and their impact on a range of outcomes, including tax revenues and production. Our results show that the effects of the international relocation of firms across countries are of comparable magnitude as the direct gains in taxable income.
    Date: 2022–11
  8. By: Hamza Bennani; Matthias Neuenkirch
    Abstract: In this paper, we analyze whether the complexity of tax bills affects financial markets. Based on the Flesch-Kincaid grade level of the 32 tax bills identified by Romer and Romer (2010) in the period 1962–2003, we assess the relationship between tax bills’ complexity and financial markets using an event study approach. Our results show a negative (positive) and significant relationship between the present value of tax bills and changes in the 10-year government bond yields (S&P 500 returns). The magnitude of this relationship increases over time, suggesting that market participants underreact at first and need a couple of days to digest the information contained in the tax bills. This delay can be explained by the textual characteristics of the bills in the case of the 10-year yields as a lower readability partly offsets the negative relationship for up to three days after the signing of a tax bill, but not thereafter. In the case of the stock market, we find similar offsetting evidence, but only for a part of the readability measures employed in this paper.
    Keywords: complexity, event study, financial markets, readability, tax bills
    JEL: G14 H20 H30
    Date: 2022
  9. By: David M. Brasington; Marios Zachariadis
    Abstract: We identify an exogenous cut in local taxes accompanied by an equivalent reduction in local government spending, and estimate the impact of these exogenous changes on income by applying a novel regression discontinuity design. This exploits a unique regional dataset that combines local income data with local voting outcomes on renewals of current expense tax levies. We find that balanced budget reductions in taxes and spending cause a large drop in local incomes, suggesting that government expenditure effects on income are larger than fiscal revenue effects. Importantly, this effect of local tax-financed government spending is prominent in low-income areas. Overall, our results regarding the effect of locally tax-financed government spending on income are suggestive of the importance of mechanisms related to the prevalence of liquidity constrained agents.
    Keywords: Balanced budget, government spending, tax levies, exogenous variation
    JEL: E62 H30 H72 R11
    Date: 2022–11–18
  10. By: Tobias König; Renke Schmacker
    Abstract: Sin taxes have become a widely suggested policy instrument to discourage the consumption of goods deemed harmful to individuals and society. Using surveys and experiments on a representative sample of the US population, we provide evidence on how individuals think and reason about such corrective policies. We reveal that preferences for taxes on sugar-sweetened beverages (SSBs) are driven by normative considerations, including efficiency-related ideas and distributional concerns. In contrast, self-interested motives play only a minor role. Among the efficiency arguments, people place relatively large weight on externality correction, and motives to correct health cost misperceptions matter more than motives to correct a lack of self-control. However, anti-paternalistic attitudes and regressivity concerns are also prevalent, which helps to explain why the majority of respondents oppose SSB taxes, even though they agree that behavioral biases and externalities are relevant. Preferences for SSB taxes turn out to be malleable. Explaining to individuals the idea behind corrective taxation yields significant increases in the support for SSB taxes and the general openness to paternalistic intervention.
    Keywords: sin tax, internality, externality, soda tax, self-control
    JEL: H23 I18 D12 D78
    Date: 2022
  11. By: James Alm (Tulane University); Matthias Kasper (University of Vienna)
    Abstract: ‘Behavioural economics’, or the application of methods and evidence from other social sciences to economics, has increased greatly in significance and use in the last two decades. In this paper we discuss the basic elements of behavioural economics. We then assess the applications of behavioural economics to the analysis of tax compliance. Our central conclusion is that many, perhaps most, of the recent insights on what motivates tax compliance have flowed directly from behavioural economics. We conclude with suggestions on – and predictions of – directions in which future applications should prove useful.
    Keywords: Behavioural economics; tax compliance; expected utility theory; non-expected utility theory; social interactions theory
    JEL: C9 H26 H83
    Date: 2022–11
  12. By: Francisco Cabezon
    Abstract: Almost every public pension system shares two attributes: earning deductions to finance benefits, and benefits that depend on earnings. This paper analyzes theoretically and empirically the trade-off between social insurance and incentive provision faced by reforms to these two attributes. First, I combine the social insurance and the optimal linear-income literature to build a model with a flexible pension contribution rate and benefits' progressivity that incorporates inter-temporal and inter-worker types of redistribution and incentive distortion. The model is general, allowing workers to be heterogeneous on productivity and retirement preparedness, and they exhibit present-focused bias. I then estimate the model by leveraging three quasi-experimental variations on the design of the Chilean pension system and administrative data merged with a panel survey. I find that taxable earnings respond to changes in the benefit-earnings link, future pension payments, and net-of-tax rate, which increases the costs of reforms. I also find that lifetime payroll earnings have a strong positive relationship with productivity and retirement preparedness, and that pension transfers are effective in increasing retirement consumption. Therefore, there is a large inter-worker redistribution value through the pension system. Overall, there are significant social gains from marginal reforms: a 1% increase in the contribution rate and in the benefit progressivity generates social gains of 0.08% and 0.29% of the GDP, respectively. The optimal design has a pension contribution rate of 17% and focuses 42% of pension public spending on workers below the median of lifetime earnings.
    Date: 2022–11
  13. By: Lerche, Adrian (LMU Munich)
    Abstract: This paper estimates the direct effects of investment tax credits on firms' production behavior and the additional indirect effects arising from agglomeration economies. Exploiting a change in tax credit rates by firm size in Germany, I find that manufacturing firms increase capital and employment, with labor demand in information and communication technology-intensive industries shifting towards college-educated workers. Using geolocation data, I show that agglomeration benefits lead to a sizable further firm production expansion with these benefits materializing within distances of 5 kilometers. Worker flows from the service sector and from non-employment, rather than between manufacturing firms, explain the employment effects.
    Keywords: investment tax incentives, capital, labor demand, agglomeration
    JEL: D22 H25 H32 J23 R11
    Date: 2022–10
  14. By: Benjamin G. Hyman; Matthew Freedman; Shantanu Khanna; David Neumark
    Abstract: We examine firm responses to location-based hiring subsidies. We leverage institutional features of the California Competes Tax Credit (CCTC), a large-scale business incentive program that incorporates best practices from prior job creation policies. The CCTC award selection procedure combines formula-based and discretionary components. Leveraging applicant score eligibility cutoffs in a regression discontinuity design and taking advantage of rich longitudinal microdata on establishments and their parent firms, we find that firms expand activity in California in response to CCTC awards, particularly in disadvantaged parts of the state. Moreover, we find little evidence of spillovers to other states. Our results suggest that targeted and audited hiring subsidies can be effective in promoting local business expansions without significant cross-state displacement effects.
    JEL: H25 H71 H73 J23 J38 R12 R38 R58
    Date: 2022–11
  15. By: Jana Schuetz; Silke Uebelmesser; Ronja Baginski; Carmela Aprea
    Abstract: Demographic change has an impact on pay-as-you-go pension systems. To maintain their financial sustainability, reforms are necessary, but often lack public support. Based on representative survey data from Germany, we conduct a survey experiment which allows investigating whether salience of or information about demographic change enhances preferences towards reforms in general as well as towards specific reform measures. We find that salience and information provision significantly increase the perceived reform necessity. Furthermore, salience increases preferences for an increase of the retirement age over other reform measures, while information provision reduces preferences for tax subsidies. In addition, we highlight the impact of prior beliefs on the treatment effects. As the salience and the information treatments barely differ, we conclude that it is not the information about the demographic change, which matters. Rather, being made aware of the challenges of the pension system impacts reform preferences.
    Keywords: pension reform preference, survey experiment, demographic change, information provision
    JEL: H55 J26 C90
    Date: 2022
  16. By: Sergio Clavijo
    Abstract: This document examines the macro-economic performance of Colombia before pandemic (2015-2019) and then assess prospects over 2020-2024, with particular emphasis on fiscal stabilization. We first provide a long-term view and extract some of the fiscal characteristic of Colombia such as: i) directional persistence in tax and spending adjustments; and ii) searching for modular effect (building-blocks), given a complex "political-economy" that hair-cuts the proposed ambitious reforms. Then we turn to carry-out some public finance simulations regarding the required fiscal balance stemming from additional social expenditure and tax revenue efforts. By highlighting public expenditure rigidities, associated mainly with decentralization andmounting pressure for additional social expenditure, we also discuss prospects of the new Fiscal Rule (under Law 2155 of 2021) focusing on anchors related to debt-ratio targets and primary balance requirements. We conclude with some recommendations regarding a "political economy" strategy in order to pursue several structural reforms under the new Administration of 2022-2026, where computing a so-called "Social Betas" could help in setting priorities.
    Keywords: Taxes, Public Goods, Public Debt, Latin America.
    JEL: H2 H44 H63 O54
    Date: 2022–11–09
  17. By: Elin Halvorsen; Zhiyang Jia; Herman Kruse; Trond C. Vigtel (Statistics Norway)
    Abstract: This paper examines the substitution between pension wealth and household saving by studying Norway’s 2011 pension reform. The analysis identifies the effect of reductions in social security pension generosity on household saving using cohort, time and sector variation in pension wealth induced by the reform. Our study focuses on saving behavior between ages 57-61 for the 1954-1956 birth cohorts, who are the first three birth cohorts affected by a reduction in future pension wealth due to the reform. We find that they increased their saving rate around 1.2 percentage points (annually) after the reform, which corresponds to a five-year increase in household saving of about 27,000 NOK. When taking into account the remaining life-cycle changes to household saving, this corresponds to an offset effect of about 56 percent of the total loss in pension wealth.
    Keywords: Pension reform; household saving; difference-in-difference; quasi-natural experiment
    JEL: D14 E21 H55
    Date: 2022–09

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