nep-pbe New Economics Papers
on Public Economics
Issue of 2023‒01‒30
eighteen papers chosen by
Thomas Andrén

  1. The Propagation of Unethical Behaviours: Cheating Responses to Tax Evasion By Andrea F.M. Martinangeli; Lisa Windsteiger
  2. Share Buybacks and Corporate Tax Cuts By Juin-Jen Chang; Chun-Hung Kuo; Hsieh-Yu Lin; Shu-Chun S. Yang
  3. Dividend Taxation and Firm Performance with Heterogeneous Payout Responses By Katarzyna Bilicka; Irem Güçeri; Evangelos Koumanakos; Katarzyna Anna Bilicka; Irem Guceri
  4. Refining Public Policies with Machine Learning: The Case of Tax Auditing By Marco Battaglini; Luigi Guiso; Chiara Lacava; Douglas L. Miller; Eleonora Patacchini
  5. The Importance of Escape Clauses: Firm Response to Thin Capitalization Rules By Martin Eckhoff Andresen; Lars Thorvaldsen
  6. Assessing the Relative Progressivity of the Biden Administration’s Federal Student Loan Forgiveness Proposal By Jacob Goss; Daniel Mangrum; Joelle Scally
  7. The optimal fuel and emission tax combination for life-cycle emissions under imperfect competition By Hiroaki Ino; Toshihiro Matsumura
  8. How can different currency regimes affect the willingness to pay tax? Tax morale evidence from Zimbabwe By Nyamapheni, Joseph; Robinson , Zurika
  9. Firm size distribution and informality effects of a revenue-dependent tax policy By Alvarez, Bruna; Pessoa, João Paulo; Souza, André Portela
  10. Investment Tax Credits and the Response of Firms By Lerche, Adrian
  11. Taxing Intellectual Property Assets on a Cross- Border Transaction: Application of Mobilia Sequuntur Personam and the Case of India-Mauritius Tax Treaty By M. P. Ram Mohan; Aditya Gupta
  12. Financial statement users’ judgment and disaggregated tax disclosure By Eva Eberhartinger; Nadia Genest; Soojin Lee
  13. Measuring the Fiscal Health of U.S. Cities By Howard Chernick; Andrew Reschovsky
  14. Fundamentally Reforming the DI System: Evidence from German Notch Cohorts By Bjoern Fischer; Johannes Micha Geyer; Nicolas R. Ziebarth
  15. Efficiency and Effectiveness of Earmarking for Public Health in the Philippines By Kimwell, Miharu Jay; Ngo, Frances Lois; Puyat, Vicente Alberto; Siton, George Douglas
  16. How High Can You Climb? Earnings Inequality and Intragenerational Earnings Mobility in a Developing Country: Evidence from Thai Tax Returns By Athiphat Muthitacharoen; Trongwut Burong
  17. Optimal Retirement with Disability Pensions By Hans Fehr; Adrian Fröhlich
  18. Determinants of the degree of fiscal sustainability By António Afons; José Alves; José Carlos Coelho

  1. By: Andrea F.M. Martinangeli; Lisa Windsteiger
    Abstract: We explore cheating in a die roll task in response to information about tax evasion in a large-scale experiment on a representative sample of the Italian population. We thus generalise laboratory findings on conditional behaviours (cooperation, cheating) to uncover their real-world bearing in the context of tax compliance. Cheating is conditioned on information about tax evasion, as is the perceived tax compliance norm. We uncover asymmetries along the income gradient: Conditional cheating responses are driven by information about tax evasion on behalf of top income earners, while perceived tax compliance norms are driven by information about tax evasion among low income earners. Instrumental variable investigations of posterior beliefs about tax evasion strengthen these results, and reveal moreover that information about top income tax evasion erodes social trust, reinforces beliefs that wealth accumulation only occurs at others’ expense, and increases beliefs that a fundamental role of the State is that of ensuring an equitable distribution of income.
    Keywords: tax evasion, tax avoidance, conditional cooperation, cheating, survey experiment
    JEL: D01 D31 D63 H23 H26
    Date: 2022
  2. By: Juin-Jen Chang (Institute of Economics, Academia Sinica, Taipei, Taiwan); Chun-Hung Kuo (Department of Economics, National Tsing Hua University); Hsieh-Yu Lin (Department of Economics, Tunghai University); Shu-Chun S. Yang (Institute of Economics, Academia Sinica, Taipei, Taiwan)
    Abstract: Since the mid-1980s, U.S. corporate tax cuts have become less expansionary and increasingly associated with rising share buybacks. Using dynamic general equilibrium models with corporate financial allocations, we show that buybacks render a corporate tax cut less expansionary. Simulations based on the Tax Cuts and Jobs Act have the optimal buyback response much smaller than that observed. This implies that restricting buybacks is likely to enhance the expansionary effects of a corporate tax cut. Both shareholders and non-shareholders enjoy higher income from a corporate tax cut, but most of the income increases accrue to shareholders. Whether non-shareholders enjoy higher consumption de- pends on the fiscal adjustment mechanism.
    Keywords: corporate tax cuts, share buybacks, tax policy effects, fiscal policy effects, SVAR estimation
    JEL: E62 H25 H30 C32 D53
    Date: 2022–11
  3. By: Katarzyna Bilicka; Irem Güçeri; Evangelos Koumanakos; Katarzyna Anna Bilicka; Irem Guceri
    Abstract: We analyze the short and long-run performance of firms that were differentially affected by a new tax on dividends in the lead-up to the Global Financial Crisis. We use exogenous policy variation for firms with different legal statuses and financial year-end dates to causally identify the policy impact. Consistent with intertemporal tax arbitrage, immediately-affected firms significantly reduce payouts. At a time of severe liquidity shortage, the average firm uses the undistributed cash to pay back debt. In the long run, the allocation of undistributed cash to investment, retained earnings, and debt repayment predicts growth and the likelihood of bankruptcy.
    Keywords: dividend tax, firm survival, investment, intertemporal tax arbitrage
    JEL: H32 H25 G32 G11
    Date: 2022
  4. By: Marco Battaglini; Luigi Guiso; Chiara Lacava; Douglas L. Miller; Eleonora Patacchini
    Abstract: We study the extent to which ML techniques can be used to improve tax auditing efficiency using administrative data, without the need of randomized audits. Using Italy's population data on sole proprietorship tax returns, audits and their outcome, we develop a new approach to address the so called selective labels problem - the fact that a ML algorithm must necessarily be trained on endogenously selected data. We document the existence of substantial margins for raising revenue from audits by improving the selection of taxpayers to audit with ML. Replacing the 10% least productive audits with an equal number of taxpayers selected by our trained algorithm raises detected tax evasion by as much as 38%, and evasion that is actually payed back by 29%.
    JEL: H2 H20 H26
    Date: 2022–12
  5. By: Martin Eckhoff Andresen; Lars Thorvaldsen
    Abstract: Escape clauses, where small firms are exempt from particular tax rules, is a crucial feature of a number of corporate tax schemes, but creates incentives to avoid taxation by manipulating the measures that determine inclusion. We evaluate the impact of thin capitalization rules, which commonly feature such escape clauses across the world, by exploiting the introduction of these rules in Norway in 2014. Combining difference-in-differences, regression discontinuity and bunching estimates, we show that what appears to be a strong response in the capital structure among exposed firms primarily reflect within-group reallocation of debt to avoid exposure to the rules. We observe sharp bunching among both new and existing subsidiaries at both thresholds for rule inclusion, and find that internal corporate group debt is offloaded to these bunching subsidiaries in order to avoid additional tax costs. As a result, significant and large effects on firm-level capital structure in response to the thin capitalization rules is driven by reshuffling of capital within corporate groups with little real effects. Re-estimating the difference-in-difference specification at the corporate group level confirms this finding, questioning the extent to which thin capitalization rules affect the real economy due to the presence of escape clauses.
    Keywords: thin capitalization rules, capital structure, escape clauses, difference-in-differences, bunching
    JEL: H25 H26 G30
    Date: 2022
  6. By: Jacob Goss; Daniel Mangrum; Joelle Scally
    Abstract: We quantify the total stock of balances eligible for the 2022 federal student loan forgiveness policy and explore which groups benefit most. Roughly $441 billion in balances are eligible for forgiveness, which would leave almost 40 percent of federal borrowers with no remaining balance. The borrowers who benefit most, as measured by the ratio of forgiven balances to balances held, are younger, have lower credit scores, and live in lower-income neighborhoods. Compared to other salient fiscal policies, the forgiveness policy distributes less benefit to lower income ZIP codes than the Earned Income Tax Credit, but more benefit to lower income ZIP codes than the 2019 Child Tax Credit and the 2019 education tax credits for higher education. Lastly, we note a recent uptick in credit card and auto loan delinquency for student loan borrowers that may portend more widespread payment difficulties for borrowers if payments resume without relief.
    Keywords: student loans; debt forgiveness; COVID-19; consumer finance
    JEL: H22 H31 H52 I22
    Date: 2023–01–01
  7. By: Hiroaki Ino (School of Economics, Kwansei Gakuin University); Toshihiro Matsumura (Institute of Social Science, The University of Tokyo)
    Abstract: This study examines the optimal combination of emission and fuel taxes for reducing greenhouse gas emissions. Greenhouse gases are emitted during both production and consumption stages. We present two cases in which a government should impose an additional fuel tax even when an optimal emission tax is introduced: the case in which consumers select the fuel consumption and case in which a producer selects fuel efficiency endogenously. In other words, we show that a government should maintain fuel taxes even after introducing an effective emission tax.
    Keywords: fuel tax, emission tax, carbon pricing, heterogeneous consumers, vehicle industry
    JEL: Q58 Q48 H23 L51
    Date: 2023–01
  8. By: Nyamapheni, Joseph; Robinson , Zurika
    Abstract: The article investigates tax morale during different economic milieus, going hand in hand with the introduction of different currency regimes. It was guided by econometric research and data were collected using questionnaires from the 2010-2014 and 2017-2020 World Values Survey (WVS). For Zimbabwe, Wave 6 and Wave 7 had a sample size of 1500 and 1200 respectively. The article?s dependent variable, tax morale and independent variables included marital status, age, income level, employment and religion among others, and analysed them using the Ordered Logit Model. The article concludes with an understanding of how tax morale and its determinants is crucial for governments in their bid to boost voluntary compliance. Also, different economic milieus for a particular country affect the level of tax morale significantly. Tax morale was established to be high when Zimbabwe was experiencing economic growth due to the introduction of multi-currency, herein called the dollarization period, and the opposite was true for the post-dollarization era. Corruption, which is a menace under study, has proven to be an important factor that influences tax morale. Results of all the models show that demographic factors have little effect on tax morale. The article introduced an important variable of hunger in its analysis of determinants of tax morale. The article showed that there is a negative relationship between hunger and tax morale for Zimbabwe in both economic situations. Based on the findings, policy makers should consider the eradication of corruption and hunger in order to boost tax morale, which in turn improves tax compliance. Also, policy makers should include improvement in the perception of democracy in the mix of enhancement strategies of tax compliance.
    Keywords: Determinants; Tax morale; Order Logit Model; Zimbabwe
    Date: 2022–12
  9. By: Alvarez, Bruna; Pessoa, João Paulo; Souza, André Portela
    Abstract: We study how revenue-dependent tax policies affect wages, productivity, and welfare in an economy where formal and informal firms co-exist. We use a dynamic entrepreneurial choice model and bring it to the data to assess the effects of the Brazilian Simples, a simplified tax scheme that reduces the tax burden of small- and medium-sized firms. We find that the Simples increases firm formalization, raising the demand for labor and benefiting workers. Meanwhile, tax collection falls as some formal firms withhold production to pay lower taxes. Overall, productivity (weighted by firm size), per capita production, and welfare fall. Alternative policies that reduce the tax gap between small and large firms perform better in welfare and tax collection terms.
    Date: 2022–12–19
  10. By: Lerche, Adrian (Institute for Employment Research (IAB), Nuremberg, Germany ; LMU Munich ; IZA)
    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." (Author's abstract, IAB-Doku) ((en))
    Keywords: IAB-Open-Access-Publikation
    JEL: H25 H32 J23 R11 D22
    Date: 2022–12–27
  11. By: M. P. Ram Mohan; Aditya Gupta
    Abstract: Intellectual Property (IP) assets enjoy a unique advantage in tax planning. Owing to their intangible nature and the lack of a physical attribution, IP assets can be methodologically parked to transfer income between tax jurisdictions. In 2016, the Delhi High Court was presented with a dispute where IP assets registered in India were transferred between an Australian and English company through their subsidiary holdings in Mauritius. The question before the Court was which tax jurisdiction, India, Australia or Mauritius, would be entitled to tax the capital gains arising from the transaction. The Court held that if a foreign corporation owns an IP asset, regardless of its registration and use in India, it would be taxed by the jurisdiction of the owner’s residence. Coming to its conclusion, the Indian Court found a legislative vacuum in the Indian Income Tax Act, 1961, and relied on the doctrine of Mobilia Sequuntur Personam to fill the lacunae. The present study examines the relevance of the doctrine in line with precedential guidelines and the international treaty framework. The paper reveals that, either inadvertently or by design, the Indo-Mauritian DTAA creates an instance of double tax exemption of Mauritian-owned, Indian-registered IP assets.
    Date: 2023–01–01
  12. By: Eva Eberhartinger (Vienna University of Economics and Business - WU - Wirtschaftsuniversität Wien [Austria]); Nadia Genest (Vienna University of Economics and Business - WU - Wirtschaftsuniversität Wien [Austria], HEC Montréal - HEC Montréal); Soojin Lee
    Date: 2020–12–31
  13. By: Howard Chernick; Andrew Reschovsky (University of Toronto)
    Abstract: This paper analyzes the fiscal health of 148 U.S. central cities using a specially constructed Fiscally Standardized Cities (FiSC) database that accounts for the revenues and spending of all the governments that provide public services in cities – municipal governments, school districts, counties, and special districts. These data permit comparisons of city finance between cities with widely different governance structures. The fiscal health of a city is defined as the relationship between its expenditure needs and its revenue-raising capacity. The expenditure needs calculations are obtained from regressions of six separate categories of spending. The analysis makes it possible to identify variables that are likely to affect the cost of providing different types of local public services. Tax capacity is measured by applying average tax rates to the major tax bases used by each FiSC in the database. User-charge capacity is based on residents’ ability to pay. Own-source fiscal capacity is supplemented by grants from the federal and state governments. The empirical analysis is based on a panel dataset for 2000 through 2014. The results indicate that that a substantial number of U.S. cities are in weak fiscal health because their revenue-raising capacity, including intergovernmental transfers, falls short of their expenditure needs. Fiscal disparities, measured as the variation in these fiscal gaps, were large in both 2000 and 2014 and increased over that period. On average, own-source revenue-raising capacity grew much faster than intergovernmental transfers. The largest single contributor to the increase in fiscal disparities was the uneven growth in own-source revenue-raising capacity across cities. Targeted increases in federal and state grants could help improve the fiscal health of U.S. central cities and reduce fiscal disparities.
    Keywords: municipal finance, urban fiscal health, municipal revenue, municipal spending, fiscal capacity, expenditure need, transfers, intergovernmental relations
    JEL: H71 H72 H75 H76 H77
    Date: 2023–01
  14. By: Bjoern Fischer; Johannes Micha Geyer; Nicolas R. Ziebarth
    Abstract: We study a fundamental reform of the public Disability Insurance (DI) system in Germany. Effective 2001, cohorts born after 1960 are no longer eligible for “occupational DI.” Occupational DI (ODI) implies benefit eligibility when health shocks prevent employees from working in their previous occupation. For the affected “notch cohorts”, the new DI eligibility rules require work disability in any job. Using administrative data, we first show that the reform significantly reduced the inflow of new DI beneficiaries by more than 30% in the long-run. Next, we validate these findings using representative SOEP household panel data comprised of the entire underlying population. The second part studies interaction effects with the private ODI market. Using representative data, we do not find much evidence that the notch cohorts purchased individual private ODI policies at significantly higher rates to compensate for the reduced generosity of the public DI system. To explain such low take-up, we employ a general equilibrium model featuring the roles of the social safety net, administrative costs, and asymmetric information. These driving forces help explain three stylized facts in the individual experience-rated private market for ODI policies: (1) low private ODI take-up and interaction effects with the public system---despite a high lifecycle work disability risk, (2) strong and positive income and health gradients in private ODI take-up, and (3) inversely related income and health gradients in the lifecycle work disability risk. Simulations illustrate that policy reforms to lower administrative costs have the greatest potential to foster take-up and flatten its income and health gradients.
    JEL: H53 H55 I10 I14 I18 J14 J21 J26
    Date: 2022–12
  15. By: Kimwell, Miharu Jay; Ngo, Frances Lois; Puyat, Vicente Alberto; Siton, George Douglas
    Abstract: The Sin Tax Reform Act (STRA) of 2012 (RA 10351) and its amendments paved the way to revisit excise taxation for sin products, such as tobacco, alcohol, heated tobacco products and vapor products, and sweetened beverages. The ad valorem tax system reform has a two-fold aim: (1) increase revenues for public spending on health and (2) reduce the burden of tobacco smoking and alcohol use. This study has attempted to examine the quality of spending of earmarked funds by the Philippine public health sector and, in doing so, to identify constraints to efficient and effective use. In particular, this study utilized a modified intersectoral framework focusing on four key criteria for evaluating the implementation of the earmarking policy: adequacy, efficacy, equity, and effectiveness. Although the STRA has brought about improvements in program and health outcomes, there is a need to revisit policies and processes to reap the benefits of earmarked funds adequately, efficiently, equitably, and effectively in the public health sector. Comments to this paper are welcome within 60 days from the date of posting. Email
    Keywords: earmarking;Sin Tax;health financing;universal health coverage
    Date: 2022
  16. By: Athiphat Muthitacharoen; Trongwut Burong
    Abstract: This paper investigates inequality and intragenerational economic mobility in a developing country with large inequality. Understanding economic mobility is important because it shapes our perception of inequality. Despite its significance, evidence on intragenerational mobility, especially that based on administrative data, is relatively limited in developing countries. Using Thailand’s tax return data, we study the evolution of earnings inequality, estimate medium-term earnings mobility, and examine the heterogeneity of mobility across age, gender and employment arrangement. Our analysis yields three main findings. First, annual earnings inequality rises during the 2009-2018 period. We find that the inequality is largely permanent, and its increase is primarily driven by top-earnings workers. Second, we find that medium-term mobility follows a Ushaped pattern across the earnings distribution, with extremely high persistence at the top. Our suggestive comparison indicates that Thailand’s earnings mobility is among the lowest in the pool of evidence from both developed and developing countries. Third, there is a considerable heterogeneity in mobility regarding employment arrangement. Workers in less-formal jobs have much lower upward mobility than those in more-formal employment. Our findings also indicate significant heterogeneity in mobility with respect to gender and age. These findings highlight the importance of ensuring that any increase in inequality caused by the Covid-19 crisis does not become permanent, as well as improving access to opportunities for vulnerable workers.
    Keywords: Intragenerational earnings mobility; Inequality
    JEL: D31 D63 H20 J31 J60
    Date: 2023–01
  17. By: Hans Fehr; Adrian Fröhlich
    Abstract: This paper develops a general equilibrium life-cycle model with endogenous retirement and disability risk, in order to quantify the impact of recent pension reforms in Germany. At certain ages households may either apply for disability pensions (DP) or old-age pensions (OAP), de-pending on eligibility rules and the generosity of the two programs. Our policy analysis focus on the increase in the normal retirement age (NRA) from age 65 to 67 (Reform 2007) and the recent increase in the maximum assessment age (MAA) for DP benefits (Reform 2018). In contrast to the first reform, the second reform received hardly any attention in the public pension debate in Germany. Our simulation results indicate that with current eligibility and benefit rules, the second reform will almost neutralize the financial and economic benefits of the first reform. Consequently, securing the financial stability of the system will require a tightening of eligibility rules and/or a reduction of early retirement benefits in the future.
    Keywords: overlapping generations, stochastic general equilibrium, endogenous retirement, disability pensions
    JEL: C68 D91 H55 J24
    Date: 2022
  18. By: António Afons; José Alves; José Carlos Coelho
    Abstract: We assess the link between fiscal sustainability coefficients, namely the responses of the primary government balance and the global government balance to the debt-to-GDP ratio, and the response of government revenues to government expenditures. For 22 OECD developed countries we use annual data between 1950 and 2019. Other determinants of fiscal responses are also studied in the context of quantile regressions. We find that the output gap contributes to increasing fiscal sustainability by positively influencing the responsiveness of the primary and global government balances; the responses of the primary and global government balances to the debt ratio and the response of government revenues to government expenditures depend on the level of the debt ratio. In addition, from the quantile analysis, the influence of the response of government revenues to government expenditures is negative and increasing over the deciles, confirming the existence of a negative cross-relationship between the fiscal sustainability coefficients.
    Keywords: fiscal reaction function; fiscal determinants; panel data; quantile regressions
    JEL: C23 H61 H63 E62
    Date: 2023–01

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