nep-pbe New Economics Papers
on Public Economics
Issue of 2023‒01‒23
sixteen papers chosen by
Thomas Andrén

  1. Firms' tax rate misperception: Measurement, drivers, and distortionary effects By Fochmann, Martin; Heinemann-Heile, Vanessa; Huber, Hans-Peter; Maiterth, Ralf; Sureth, Caren
  2. Welfare-enhancing taxation and price discrimination By Anna D’Annunzio; Antonio Russo
  3. Sufficient Statistics for Nonlinear Tax Systems with General Across-income Heterogeneity By Ferey, Antoine; Lockwood, Benjamin; Taubinsky, Dmitry
  4. Who Benefits from State Corporate Tax Cuts? A Local Labor Markets Approach with Heterogeneous Firms: Comment By Clément Malgouyres; Thierry Mayer; Clément Mazet-Sonilhac
  5. Productivity Slowdown and Tax Havens: Where Is Measured Value Creation? By Jean-Charles Bricongne; Samuel Delpeuch; Margarita Lopez Forero
  6. Is Charitable Giving Political? Evidence from Wealth and Income Tax Returns By Julia Cagé; Malka Guillot
  7. The Effect of Pension Wealth on Employment By Becker, Sebastian; Buslei, Hermann; Geyer, Johannes; Haan, Peter
  8. Differential corporate taxation and inter-asset investment distortions in South Africa By Mashekwa Maboshe; Matthew Stern; Yash Ramkolowan
  9. Does Hometown Tax Donation System as Interjurisdictional Competition Affect Local Government Efficiency? Evidence from Japanese Municipality level Data By Ogawa, Akinobu; Kondoh, Haruo
  10. Homes Incorporated: Offshore Ownership of Real Estate in the U.K. By Niels Johannesen; Jakob Miethe; Daniel Weishaar
  11. Scale‐dependent and risky returns to savings: Consequences for optimal capital taxation By Eddy Zanoutene
  12. A tax evasion experiment revisited By Andersson, Jonas
  13. Optimal Random Taxation and Redistribution By Stéphane Gauthier; Guy Laroque
  14. Take-Up and Labor Supply Responses to Disability Insurance Earnings Limits By Judit Krekó; Dániel Prinz; Andrea Weber
  15. Regulating Untaxable Externalities: Are Vehicle Air Pollution Standards Effective and Efficient? By Mark R. Jacobsen; James M. Sallee; Joseph S. Shapiro; Arthur A. van Benthem
  16. Fiscal Rules and the Behavior of Public Investment in Latin America and the Caribbean: Towards Growth-Friendly Fiscal Policy?: The case of Argentina By Artana, Daniel; Moskovits, Cynthia; Puig, Jorge; Templado, Ivana

  1. By: Fochmann, Martin; Heinemann-Heile, Vanessa; Huber, Hans-Peter; Maiterth, Ralf; Sureth, Caren
    Abstract: Decisions-makers in firms are expected to use perceived rather than actual tax rates and hence their decisions can be substantially biased by misperception. We quantify firms' misperception of their average tax rate (ATR) and marginal tax rate (MTR) and identify drivers of this tax rate misperception. Using survey data on German firms, we find that the share of firms considerably misperceiving their ATR and MTR exceeds 65% and 57% respectively. Further, we illustrate firms' impaired comprehension of the tax schedule reflected by the relation between ATR and MTR. We find sole proprietorships and partnerships on average considerably overestimate their ATR anchoring at the top marginal tax rate. While corporations show no uniform tax misperception patterns for retained profits, they tend to strongly underestimate ATRs and MTRs on distributed profits. Irrespective of the legal form, we find misperception is mainly driven by tax regime complexity, lack of tax knowledge and dissatisfaction with the tax system. Surprisingly, even though many firms report using the ATR instead of the appropriate MTR in their investment and financing decisions, which suggests that they underestimate their tax burden, this bias is partially attenuated by their ATR misperception. Overall, our findings demonstrate that policymakers and researchers can benefit from incorporating firms' tax rate misperception when estimating firms' tax response and evaluating tax policies.
    Keywords: Tax Misperception, Business Taxation, Survey, Tax Policy
    JEL: H25 H32 D91 M41
    Date: 2022
  2. By: Anna D’Annunzio (: TBS Business School); Antonio Russo (Department of Economics, University of Sheffield and CESifo)
    Abstract: We study commodity taxation in markets where suppliers implement second-degree price discrimination, by offering different package sizes or quality-differentiated versions of a product. In these markets, suppliers distort the quantity (or quality) intended for all types of consumers, except for those with the highest marginal willingness to pay. We show that differentiated ad valorem taxes can alleviate this distortion, and thus increase government revenue as well as welfare, provided the tax rate increases with the size of the package (or quality of the version) of the good supplied.
    Keywords: Commodity taxation, tax incidence, price discrimination
    JEL: D4 H21 H22 L1
    Date: 2023–01
  3. By: Ferey, Antoine (LMU Munich); Lockwood, Benjamin (Wharton); Taubinsky, Dmitry (UC Berkeley)
    Abstract: This paper provides general and empirically implementable sufficient statistics formulas for optimal nonlinear tax systems in the presence of across-income heterogeneity in preferences, inheritances, income-shifting capabilities, and other sources. We study unrestricted tax systems on income and savings (or other commodities) that implement the optimal direct-revelation mechanism, as well as simpler tax systems that impose common restrictions like separability between earnings and savings taxes. We characterize the optimum using familiar elasticity concepts and a sufficient statistic for general across-income heterogeneity: the difference between the cross-sectional variation of savings with income, and the causal effect of income on savings. The Atkinson-Stiglitz Theorem is a knife-edge case corresponding to zero difference, and a number of other key results in optimal tax theory are subsumed as special cases. We provide tractable extensions of these results that include multidimensional heterogeneity, additional efficiency rationales for taxing heterogeneous returns, and corrective motives to encourage more saving. Applying these formulas in a calibrated model of the U.S. economy, we find that the optimal savings tax is positive and progressive.
    JEL: D61 H21 H24
    Date: 2022–12–27
  4. By: Clément Malgouyres (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, IZA - Forschungsinstitut zur Zukunft der Arbeit - Institute of Labor Economics); Thierry Mayer (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research - CEPR, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique); Clément Mazet-Sonilhac (Centre de recherche de la Banque de France - Banque de France)
    Abstract: Suárez Serrato and Zidar (2016) identify state corporate tax incidence in a spatial equilibrium model with imperfectly mobile firms. Their identification argument rests on comparative-statics omitting a channel implied by their model: the link between common determinants of a location's attractiveness and the average idiosyncratic productivity of firms choosing that location. This compositional margin causes the labor demand elasticity to be independent from the product demand elasticity, impeding the identification of incidence from the four estimated reduced-form effects. Assigning consensual values to the unidentified parameters, we find that the incidence share born by firm-owners is closer to 25% than 40%.
    Keywords: Incidence, Corporate income tax, Discrete/Continuous choice
    Date: 2022
  5. By: Jean-Charles Bricongne (Centre de recherche de la Banque de France - Banque de France); Samuel Delpeuch (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique); Margarita Lopez Forero (Université Paris-Saclay)
    Abstract: Based on French firm-level data over 15 years we evaluate the contribution of the microlevel profit-shifting-through tax haven foreign direct investments to the aggregate productivity slowdown measured in France. We show that firm measured productivity in France declines over the immediate years following the establishment in a tax haven, with an average estimated around 3.5% in labor apparent productivity. To isolate the contribution of multinationals' tax optimization to this decline of apparent productivity, we then exploit the 2006 Cadbury-Schweppes decision of the European Court of Justice limiting the extent to which member States can counter European MNEs' tax planning strategies. We find that multinational groups benefiting from that loosening of the legal constraints do exhibit lower apparent productivity in France following that ruling. Our results moreover suggest that this bias is bigger when firms rely more intensively on intangible capital. Finally, given these firms' weight in the economy, our results imply an annual loss of 9.7% in terms of the aggregate annual labor productivity growth.
    Keywords: Profit-shifting FDI, Productivity slowdown, Productivity mismeasurement, Intangible capital, Tax Havens
    Date: 2022–04–15
  6. By: Julia Cagé (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research - CEPR); Malka Guillot (Université de Liège)
    Abstract: Is charitable giving politically motivated? In this article, we use exhaustive administrative household panel data and a natural experiment to quantify empirically the motivations for giving. Our dataset includes all the households filing their income tax and/or their wealth tax returns in France between 2006 and 2019. In France, both charitable and political donations benefit from a 66% income tax credit, but only the charitable ones are eligible for the 75% wealth tax credit. We exploit the 2017 wealth-tax reform – a change in the taxable base that led to a drop of two third in the number of liable households and, as a result, an increase in the price of charitable giving – and show that charitable and political donations are substitute. According to our estimates, a one-percent increase in the price of charitable giving leads to an increase of around 0.12% in political donations. Next, using city-level information, we show that the increase in the price of charitable giving mostly benefits pro-business political parties. Finally, we document that the drop in charitable donations is mostly driven by politically-involved nonprofit organizations, pointing toward political motivations behind charitable giving.
    Keywords: Charitable giving, Political donations, Tax incentives for giving, Tax deductions, Wealth tax credit, Cross-elasticity of donations, Nonprofit organizations
    Date: 2021–06–30
  7. By: Becker, Sebastian (DIW Berlin); Buslei, Hermann (DIW Berlin); Geyer, Johannes (DIW Berlin); Haan, Peter (DIW Berlin)
    Abstract: This study provides novel evidence about the pension wealth elasticity of employment. For the identification we exploit reform-induced variation of pension wealth that is related to the number of children but which does not affect the implicit tax rate of employment. We use a difference-in-differences estimator based on administrative data from the German pension insurance and find that, on average, the negative employment effect of pension wealth is significant and economically important. Heterogeneity analyses document a strong age pattern showing that the employment effects are driven by behavioral responses of women close to retirement. The age pattern is partly explained by the positive effect of pension wealth on disability pensions after the age of 60.
    Keywords: pension reform, pension wealth elasticity, female labour supply, retirement, differences in differences
    JEL: H55 J13 J21 J26
    Date: 2022–12
  8. By: Mashekwa Maboshe; Matthew Stern; Yash Ramkolowan
    Abstract: South Africa has since the 1990’s actively reformed its corporate tax policy to stimulate investment in various assets and industries. While the investment impact of corporate taxation has been evaluated in various studies, no effort has been made to assess the potential inter-asset distortions due to differential taxation. Using a unique asset-industry level dataset, we […]
    Keywords: Africa, corporate taxation, fiscal policy, South Africa
    JEL: D22 F14 L25 O12 O32 O55
    Date: 2021–07–01
  9. By: Ogawa, Akinobu; Kondoh, Haruo
    Abstract: This study analyzes the impact of Hometown Tax Donation (HTD), a unique local fiscal system in Japan, on local government efficiency. It allows residents to make donations to local governments of their choice, receiving deductions on payment of local and national taxes, equivalent to the amount donated, except for small self-paid amounts (JPY2, 000, US$15). Moreover, donors can receive gifts from the recipient government in return, depending on the amount donated. Therefore, tax revenue will outflow from the donor residents’ municipalities to other regions, whereas it will inflow to recipient municipalities from other regions. This makes local governments compete to receive donations under the HTD system by trying to enhance their efficiency. On the other hand, HTD may cause misperception of tax prices, thereby leading to inefficient provision of local public services. This study uses stochastic frontier analysis to quantitatively analyze the impact of HTD on the inefficiency of local governments. The findings reveal that municipalities whose revenues are more dependent on HTD tend to be more inefficient. Moreover, greater dependence on intergovernmental grants and local corporate taxation results in inefficiency, thus, providing implications for local public finance on the importance of decentralization. The results also highlight that competition for income through HTD is a zero-sum game, therefore, more fiscal autonomy is needed to ensure healthy competition, thereby, providing new evidence on the relationship between interjurisdictional competition and local government efficiency.
    Keywords: Hometown Tax Donation (HTD), Local public finance, Local government’s efficiency, Stochastic frontier analysis (SFA), Intergovernmental competition
    JEL: H27 H71
    Date: 2022–12–22
  10. By: Niels Johannesen; Jakob Miethe; Daniel Weishaar
    Abstract: Ownership of real estate through corporations in offshore tax havens creates opportunities for tax evasion and money laundering and may have undesirable effects in housing markets. In this paper, we study offshore ownership of real estate in the United Kingdom by combining several data sources: administrative data from the land register, a comprehensive transaction database, a propriety database on corporate ownership links, and a handful of offshore data leaks. Our descriptive analysis shows that the market share of offshore corporations has increased over time and varies strongly across market segments: It currently stands at 1.25% in the overall residential market and around 15% for top-end properties. When data leaks allow us to trace ownership through offshore corporations to the beneficial owners, we find that around half have ties to Africa, Asia and the Middle East, but that the largest ’foreign’ investor is the United Kingdom itself. Turning to causal evidence, we show that changes in tax incentives and ownership transparency induce strong responses in patterns of offshore ownership, suggesting that both taxation and secrecy are important motives for the beneficial owners. Finally, we show that the Brexit referendum was followed by a sharp increase in property sales by offshore owners and a large differential decrease in property prices in local areas with more offshore ownership, conditional on area and property characteristics. This suggests that the reduction in demand from offshore investors triggered by Brexit had a negative causal effect on property prices and, more broadly, that offshore ownership can have significant real effects in housing markets.
    Keywords: tax havens, tax evasion, offshore financial centers, real estate, hidden wealth
    JEL: H26 F21 R31
    Date: 2022
  11. By: Eddy Zanoutene (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique, CRED - Centre de Recherche en Economie et Droit - Université Paris-Panthéon-Assas)
    Abstract: I present a model of optimal capital taxation where agents with heterogeneous labor productivity randomly draw their rate of return to savings. Because of scale dependence, the distribution of rates of returns can depend on the amount saved. Uncertainty in returns to savings yields an insurance rationale for taxing capital on top of labor income. I first show that, because of scale dependence, agents making the same saving decision should access the same rate of return at the optimum. I then constrain the information set of the government and show that, as soon as return are uncertain, positive capital income taxation is needed at the optimum. The optimal linear tax on capital income trades off insurance with distortions to both savings and to the rate of return in a context of scale dependence. Eventually, I argue that scale dependence in and of itself is not sufficient to justify capital taxation on top of labor income taxes. These results are still valid when agents can optimize between a risk-free and a risky-asset that can both exhibit scale dependence.
    Date: 2022
  12. By: Andersson, Jonas (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: In this paper the experimental data collected by Masclet, Montmarquette, and Viennot-Briot (2019a) is revisited in order to study some aspects of the drivers of the declaration rate, not studied in the authors’ article. By using a zero-one inflated beta regression model, a more detailed analysis of the special values, zero declaration and full declaration, is enabled. It turns out that some of the drivers of the declaration rate is affecting the three parts of the declaration rate distribution, the zero declarers, the full declarers and the intermediate declarers, differently. It is found that the effect of tax payers’ monitoring, i.e., their knowledge about other tax payers’ evasion, increases the probability to declare zero. Among the individuals declaring a part of their income, the effect is significantly positive; they declare more. Another result is that, for the average experiment participant, both the probability to fully declare or declare nothing of the income is increasing as the experiment progresses.
    Keywords: Tax evasion; Zero-one inflated beta regression; experimental data
    JEL: C46 C50 H26
    Date: 2022–12–30
  13. By: Stéphane Gauthier (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, UP1 - Université Paris 1 Panthéon-Sorbonne, IFS - Laboratory of the Institute for Fiscal Studies - Institute for Fiscal Studies); Guy Laroque (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, UCL - University College of London [London], IFS - Laboratory of the Institute for Fiscal Studies - Institute for Fiscal Studies)
    Abstract: We assess the usefulness of stochastic redistribution among a continuum of riskaverse agents with quasilinear utilities in labor. Agents differ according to their consumption tastes, which remain private information. We identify circumstances where stochastic redistribution is socially dominated by the deterministic policy where aftertax income lotteries are replaced with their certainty equivalent. We also provide a parametric example where feasible and incentive compatible lotteries locally dominate the optimal deterministic menu. In this example the downward pattern of incentives prevailing in the deterministic case is reversed to an upward pattern in the stochastic case.
    Keywords: Redistribution, Asymmetric information, Random taxes, Certainty equivalent
    Date: 2022–09–01
  14. By: Judit Krekó (Centre for Economic and Regional Studies, Budapest Institute for Policy Analysis); Dániel Prinz (Institute for Fiscal Studies); Andrea Weber (Central European University)
    Abstract: In most disability insurance programs beneficiaries lose some or all of their benefits if they earn above an earnings threshold. While intended to screen out applicants with high remaining working capacity, earnings limits can also distort the labor supply of beneficiaries. We develop a simple framework to evaluate this trade-off. We use a reduction in the earnings limit in Hungary to examine screening and labor supply responses. We find that the policy changed selection into the program modestly but reduced labor supply significantly. Viewed through the lens of our model, these findings suggest that the earnings threshold should be higher.
    Keywords: disability insurance, earnings limit, labor supply
    JEL: H53 H55 I38
    Date: 2022–06
  15. By: Mark R. Jacobsen; James M. Sallee; Joseph S. Shapiro; Arthur A. van Benthem
    Abstract: What is a feasible and efficient policy to regulate air pollution from vehicles? A Pigouvian tax is technologically infeasible. Most countries instead rely on exhaust standards that limit air pollution emissions per mile for new vehicles. We assess the effectiveness and efficiency of these standards, which are the centerpiece of US Clean Air Act regulation of transportation, and counterfactual policies. We show that the air pollution emissions per mile of new US vehicles has fallen spectacularly, by over 99 percent, since standards began in 1967. Several research designs with a half century of data suggest that exhaust standards have caused most of this decline. Yet exhaust standards are not cost-effective in part because they fail to encourage scrap of older vehicles, which account for the majority of emissions. To study counterfactual policies, we develop an analytical and a quantitative model of the vehicle fleet. Analysis of these models suggests that tighter exhaust standards increase social welfare and that increasing registration fees on dirty vehicles yields even larger gains by accelerating scrap, though both reforms have complex effects on inequality.
    JEL: H21 H23 H70 Q50 R40
    Date: 2022
  16. By: Artana, Daniel; Moskovits, Cynthia; Puig, Jorge; Templado, Ivana
    Abstract: This paper analyzes the implementation of Fiscal Rules (FR) in Argentina. Several clear attempts to establish a FR at the national level are identified. The analysis suggests that the environment matters. The only FR that was binding in the period was approved in 2004 during an economic boom, with the country under a program with the IMF and with high political support. During the world financial crisis the expenditure ceilings were relaxed, however, and current primary expenditures soared. Simulations show that a countercyclical fund could have been implemented even after reducing highly distorting taxes at the federal and provincial levels, and at the same time securing a high level of capital expenditure as a share of GDP, had Argentina complied with the 2004 FR. Moreover, an econometric exploration of the link between flexible FRs and public investment finds that a flexible FR helps to mitigate the negative effects of fiscal consolidations on provincial public investment. Based on the previous analysis, guidelines for a proposal for a FR in Argentina are provided.
    Keywords: Argentina;public investment;Fiscal Rules
    JEL: H54 E32 H50 E60 H12
    Date: 2021–02

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