nep-pbe New Economics Papers
on Public Economics
Issue of 2023‒05‒08
thirteen papers chosen by
Thomas Andrén

  1. The Optimal Taxation of Couples By Mikhail Golosov; Ilia Krasikov
  2. Changes in Effective Tax Rates due to Fundamental Corporate Tax Reforms: Analysis of Financing Neutrality Using a Forward-Looking Model By Toshiyuki Uemura
  3. State Taxation of Nonresident Income and the Location of Work By David R. Agrawal; Kenneth Tester
  4. Tax and Governance in Rural Areas: The Implications of Inefficient Tax Collection By van den Boogaard, Vanessa; Beach, Rachel
  5. The international tax agreement of 2021: Why it's needed, what it does, and what comes next? By Kimberly A. Clausing
  6. Design features of income-based tax incentives for R&D and innovation By Ana Cinta González Cabral; Pierce O’Reilly; Silvia Appelt; Fernando Galindo-Rueda; Tibor Hanappi
  7. Cost and uptake of income-based tax incentives for R&D and innovation By Silvia Appelt; Ana Cinta González Cabral; Tibor Hanappi; Fernando Galindo-Rueda; Pierce O’Reilly
  8. US Taxation of Gambling Winnings and Incentives to Bet By Whelan, Karl
  9. Sanction-busting through tax havens By Kerim Can Kavakli; Giovanna Marcolongo; Diego Zambiasi
  10. Analysys of the implementation of the Spanish Financial Transaction Tax in equity markets By Ramiro Losada, Albert Martínez Pastor
  11. Deciding for Others: Local Public Good Contributions with Intermediaries By Andrej Angelovski; Praveen Kujal; Christos Mavridis
  12. Transitory Earnings Opportunities and Educational Scarring of Men By Jósef Sigurdsson
  13. Wealth and welfare across generations By David Sturrock

  1. By: Mikhail Golosov; Ilia Krasikov
    Abstract: We consider optimal joint nonlinear earnings taxation of couples. We use multi-dimensional mechanism design techniques to study this problem and show that the first-order approach – that restricts attention to only local incentive constraints – is valid for a broad set of primitives. Optimal taxes are characterized by the solution to a certain second-order partial differential equation. Using the Coarea Formula, we solve this equation for various conditional averages of optimal tax rates and identify key forces that determine the optimal tax rates; show how these rates depend on earnings of each spouse, correlation in spousal earnings, and redistributive objectives of the planner; compare optimal rates for primary and secondary earners; identify both the conditions under which simple tax systems are optimal and the sources of welfare gains from more sophisticated taxes when those conditions are not satisfied. Under realistic assumptions, optimal tax rates for married individuals are increasing in correlation of spousal earnings. However, they remain lower than the tax rates for single individuals, and the marginal rates for one spouse increase (decrease) in the earnings of the other if both spouses have low (high) earnings.
    JEL: D82 H21
    Date: 2023–04
  2. By: Toshiyuki Uemura (School of Economics, Kwansei Gakuin University)
    Abstract: While the current corporate tax system in Japan allows interest expense on debt to be deductible, no such mechanism exists for other financing, leading to a "debt bias." Therefore, the Comprehensive Business Income Tax (CBIT), Allowance for Corporate Equity (ACE), and Allowance for Corporate Capital (ACC) have been proposed. According to international comparisons by the OECD, the marginal effective tax rates in ACE-adopting countries are low, and these countries have reformed their corporate tax systems toward financing neutrality. This study conducts a comprehensive survey of empirical analyses of Japan's effective corporate tax rates and classifies them into four effective corporate tax rates. Further, fundamental corporate tax reform proposals using forward-looking effective tax rates are analyzed in line with Hanappi (2018), OECD (2020), and Spengel et al. (2020), who conducted international comparative studies of effective corporate tax rates. This study makes improvements to Japan's 2020 parameters in Spengel et al. (2020) to obtain the cost of capital (user cost of capital), marginal effective tax rate, and average effective tax rate values by financing and assets. The parameters of the proposed reforms are then incorporated into a model of the effective corporate tax rate to conduct a simulation analysis under a constant statutory tax rate. First, a simple CBIT that does not allow deductions of interest expenses increases the cost of capital, marginal effective tax rate, and average effective tax rate for debt financing. Second, a simple ACE that allows the deduction of opportunity cost at the notional interest rate on equity lowers the cost of capital, the marginal effective tax rate, and the average effective tax rate for retained earnings and new equity. Third, a simple ACC that allows all financing to deduct opportunity costs at the notional interest rate lowers the cost of capital, marginal effective tax rate, and the average effective tax rate for all financing. However, these results are difficult to compare due to different average effective tax rates. Therefore, conducting similar simulations under a constant average effective tax rate results in statutory tax rates of 25.57% for CBIT, 42.33% for ACE, and 42.62% for ACC, compared with 31.30% for the base case. Thus, CBIT reduces its tax rate by five percentage points from the current rate, but ACE/ACC requires a ten percentage point increase. It is also indicated that CBIT increases the cost of capital and the marginal effective tax rate while ACE/ACC reduces these rates. The above simulations are conducted assuming a simple CBIT with no deductible interest expense, a simple ACE/ACC where the notional interest rate matches the nominal interest rate, and the rate at which ACE/ACC is applied matches the statutory corporate income tax rate. Simulations that relax these conditions are conducted under a constant average effective tax rate. First, under CBIT, varying the deductibility of interest expenses has a limited effect on the cost of capital and the marginal effective tax rate. Second, when the notional interest rate is set lower than the nominal interest rate or when the tax rate to which ACE/ACC is applied is set lower than the statutory tax rate, the effect on the marginal effective tax rate is significant. These results have some implications: CBIT can ensure financing neutrality, but it increases the cost of capital and the marginal effective tax rate, which may negatively affect investment. On the contrary, ACE/ACC decreases the cost of capital and marginal effective tax rate, which can positively affect investment. In particular, the ACE has been introduced in many countries and is considered a promising proposal for future corporate tax reform in Japan.
    Keywords: Financing Neutrality, Forward-Looking Effective Tax Rates, Fundamental Corporate Tax Reform
    JEL: H25 H32
    Date: 2023–04
  3. By: David R. Agrawal; Kenneth Tester
    Abstract: Prior studies show that taxes matter for the residential locations of high-income earners. But, states raise a significant share of revenue from nonresidents. Using variation in state tax rates, we provide causal evidence on the effect of the net-of-tax rate on the location of labor supply for professional golfers. State taxes induce high-income earners to shift employment to low-tax states without a residence change. The elasticity of working in a state is 0.34, and consistent with superstar phenomenon, increases with earnings. Our results suggest a novel margin of mobility responses for top-earners: the spatial relocation of labor supply by nonresidents.
    Keywords: state taxes, superstars, taxing the rich, avoidance, mobility, high-frequency labor supply
    JEL: J22 J61 H26 H73 R50
    Date: 2023
  4. By: van den Boogaard, Vanessa; Beach, Rachel
    Abstract: While there has been increasing policy attention on broadening tax bases in low-income countries, taxing citizens in rural areas often leads to neither revenue gains nor stronger accountability outcomes. Through case studies of Sierra Leone and Togo, we demonstrate that revenue collection in rural areas is highly inefficient, leading to little, if any, revenue gains after factoring in collection costs. Accordingly, we question the existing rationales for extending taxation to rural citizens in low-income countries. Instead, we argue for a rethinking of the role of taxation in rural areas, considering the nature of social contracts and limited fiscal reciprocity.
    Keywords: Finance, Governance,
    Date: 2023
  5. By: Kimberly A. Clausing (Peterson Institute for International Economics)
    Abstract: In 2021, more than 135 jurisdictions agreed on transformative new international tax rules that would establish a minimum tax rate of 15 percent on multinational corporate income regardless of where it was reported. In December 2022, the European Union unanimously moved forward to implement this minimum tax, and other countries, including South Korea, Japan, Australia, Canada, and the United Kingdom, are also either implementing the tax or taking substantial steps toward implementation. In tandem, the United States should also reform its international tax system and adopt a stronger minimum tax. While the future of the international agreement is uncertain, it has important implications for the ability of governments worldwide to create tax systems that are administrable, fair, and efficient. The agreement also demonstrates important guiding principles for the future of multilateral cooperation on global collective action problems, including efforts to protect public health from future pandemics, address nuclear proliferation, and resolve territorial conflicts. US progress on international tax reform would enhance much needed international cooperation on these issues.
    Date: 2023–04
  6. By: Ana Cinta González Cabral; Pierce O’Reilly; Silvia Appelt; Fernando Galindo-Rueda; Tibor Hanappi
    Abstract: Tax incentives that provide preferential tax treatment to the incomes arising from research and development (R&D) and innovation activities, such as intellectual property regimes, have become widespread in recent years. This paper describes the key design features of tax incentives available in 49 member countries of the Inclusive Framework on BEPS (IF), covering all OECD countries and EU countries. It outlines differences in the design of such incentives that may translate into differences in the tax benefits offered. The information collected and reported in this paper is a first step towards a more systematic comparison of tax support policies for R&D and Innovation.
    Date: 2023–04–20
  7. By: Silvia Appelt; Ana Cinta González Cabral; Tibor Hanappi; Fernando Galindo-Rueda; Pierce O’Reilly
    Abstract: Despite the increasing adoption of income-based tax incentives for R&D and innovation in the OECD area and beyond, evidence on the availability, design, generosity and actual cost of these incentives remains scarce. This report helps fill this gap by documenting government efforts to provide preferential tax treatment of economic outputs of innovation activities. Drawing on the responses of national contact points to the OECD KNOWINTAX surveys carried out in 2020 and 2021, it presents new evidence on the cost (foregone tax revenues) and uptake of income-based-tax incentives by businesses in 2019, and tracks their distribution by firm size and industry and their evolution over the 2000-2019 period.
    Keywords: innovation, research and development, tax incentives
    JEL: O34 O38 H25
    Date: 2023–04–20
  8. By: Whelan, Karl
    Abstract: Sports betting is growing rapidly in the US after its legalization by the Supreme Court in 2018. This paper describes the treatment of gambling winnings and losses in the federal tax code and shows how the system may incentivize some gamblers to substantially increase the scale of their betting in order to have a chance to win. This incentive stems from the fact that gambling losses can only be deducted if taxpayers are filing for itemized deductions, meaning the scale of gambling losses has to be large enough to push a taxpayer’s eligible deductions over the standard deduction. This incentive to engage in large-scale betting applies mostly to lower and middle-income households.
    Keywords: Taxation; risk taking
    JEL: D81 H24 L83
    Date: 2023–02–06
  9. By: Kerim Can Kavakli; Giovanna Marcolongo; Diego Zambiasi
    Abstract: Financial sanctions, which aim to economically hurt a target by restricting its access to financial assets and markets, require the ability to identify who owns an asset. Although experts have long claimed that offshore financial centres that offer secrecy ('tax havens') undermine sanctions by hiding ownership information, so far data limitations have prevented a rigorous test of this claim.
    Keywords: Sanctions, Financial assets, Tax havens, Offshore financial centres, Financial secrecy, Finance
    Date: 2023
  10. By: Ramiro Losada, Albert Martínez Pastor
    Abstract: This paper evaluates the effect of the introduction of the ITF on Spanish shares in secondary markets, focusing on the potential costs. For this purpose, it considers several dimensions of liquidity (measured through the bid-ask spread and the Amihud ratio), volatility (both intraday and historical) and trading volume of the secondary markets in which Spanish shares are traded. The paper uses two models: one based on difference-in-differences and another wich relies on a regression discontinuity design. This approach tries to capture two types of effects: firstly, the impact of the introduction of the tax by comparing the evolution of the variables of Spanish shares subject to the FTT with those of other countries with similar characteristics and not subject to the FTT. Secondly, the evolution of the variables linked to the trading of shares of Spanish companies subject to tax whith those are not. The paper reveals that the effect of the tax on the trading of Spanish shares have been limited in absolute terms and were mostly temporary. Two opposing effects are detected: on the one hand, the trading of taxed Spanish shares decreased after the introduction of the tax. On the other hand, these shares recovered part of the trading volume that was carried out in OTC markets. With respect to volatility, it increased in the short term, and tended to decrease in the long term.
    Keywords: Spanish Financial Transaction Tax, equity markets, data analysis.
    JEL: G18 E52 E62 E63
    Date: 2023
  11. By: Andrej Angelovski (Middlesex University); Praveen Kujal (Middlesex University and Chapman University); Christos Mavridis (Gabriele d’Annunzio University of Chieti-Pescar)
    Abstract: Given the prevalence of local public goods, whose broader use is often limited by distance and borders, we propose a potential solution to the free-riding problem by having each participant/beneficiary delegate the public good contribution decision to a non-local intermediary who neither puts in own endowment into the public good nor benefits from it. Intermediaries make decisions under two compensation mechanisms where the incentives for the intermediary are either non-aligned (fixed) or aligned (variable) with those of the beneficiary. We find that the use of intermediaries, regardless of whether their compensation is aligned or not with that of the beneficiary, significantly increases contributions to the provision of the public good. We conclude that individuals behave differently when they (formally) make decisions for someone else even if their incentive structures are identical.
    Keywords: Public goods, intermediaries, delegation
    JEL: H4 C91 D90
    Date: 2023
  12. By: Jósef Sigurdsson
    Abstract: Men have fallen behind women in education in developed countries. Why? I study the impact of a transitory increase in the opportunity cost of schooling on men’s and women’s educational attainment. I exploit a reform in Iceland that lowered income taxes to zero for one year and compare teenagers above and below the compulsory schooling age. This earnings opportunity increased the dropout rate and led to a permanent loss in years of education for young men, but had no effect on the education of women. Male dropouts suffer substantial losses in lifetime earnings, slow career progression, and reduced marriage and fertility outcomes. The results cannot be explained by negative selection of dropouts or low returns to education but can be reconciled by gender differences in nonpecuniary costs of school attendance, myopia, or perceived returns to education. The findings suggest that due to these gender differences, economic booms misallocate young men away from school, entrenching the gender gap in education.
    Keywords: educational attainment, opportunity cost, gender gap, labor supply, tax reform
    JEL: H24 I21 I26 J16 J24
    Date: 2023
  13. By: David Sturrock (Institute for Fiscal Studies)
    Date: 2023–04–11

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