nep-pbe New Economics Papers
on Public Economics
Issue of 2023‒05‒22
fourteen papers chosen by
Thomas Andrén

  1. The individual Laffer curve: evidence from the Spanish income tax By Ana Gamarra; José Félix Sanz-Sanz; María Arrazola
  2. Trends in Corporate Economic Profits and Tax Payments, 1998 to 2017 By Congressional Budget Office
  3. Downward Revision of Investment Decisions after Corporate Tax Hikes By Link, Sebastian; Menkhoff, Manuel; Peichl, Andreas; Schüle, Paul
  4. IPOs and Corporate Tax Planning By Dobridge, Christine L.; Lester, Rebecca; Whitten, Andrew
  5. Recent Reforms in India's Corporate Income Tax Regime: Rationale, Impacts and Improvements. By De, Supriyo
  7. MULTIBILLION-DOLLAR TAX QUESTIONS By James Alm; Jay A. Soled; Kathleen DeLaney Thomas
  9. A Ramsey Theory of Financial Distortions By Marco Bassetto; Wei Cui
  10. The Short-Term Labor Supply Response to the Expanded Child Tax Credit By Brandon Enriquez; Damon Jones; Ernest V. Tedeschi
  11. Do opportunity zones create opportunities? The impact of opportunity zones on real estate prices By James Alm; Trey Dronyk-Trosper; Sean Larkin
  12. Introduction to the Symposium on the Shadow Economy, Tax Behaviour, and Institutions By Granda-Carvajal, Catalina; Kogler, Christoph
  13. Costly, but (Relatively) Ineffective? An Assessment of Germany’s Temporary VAT Rate Reduction During the Covid-19 Pandemic By Victoria Baudisch; Matthias Neuenkirch
  14. The taxation of Financial Transactions: An estimate of Global Tax Revenues By Gunther Capelle-Blancard

  1. By: Ana Gamarra (Melbourne Institute: Applied Economic & Social Research, The University of Melbourne); José Félix Sanz-Sanz (Facultad de Ciencias Económicas y Empresariales, Universidad Complutense de Madrid and ICAE); María Arrazola (Facultad de CC. de la Economía y de la Empresa, Universidad Rey Juan Carlos, Madrid)
    Abstract: This paper characterises the Laffer curve of each individual taxpayer in a schedular multirate income tax with income shifting. Analytical expressions for the revenue-maximising tax rate and the revenue-maximising elasticity are provided for the individual taxpayer and the aggregate population, as well as new estimates of the Elasticity of Taxable Income (ETI). Applying these to the Spanish income tax demonstrates that 49.46% (58.49%) of the taxpaying population in the non-savings tax base (savings tax base) is on the "prohibitive" side ("normal" side) of the Laffer curve. On average, these taxpayers are 6.59 points (24.73 points) above (below) the maximum of the Laffer curve. The fraction of total tax revenue lost through behavioural responses amounts to 53.77%. However, this fraction varies by population subgroup and decreases when we account for income-shifting responses, suggesting the presence of fiscal externalities in the Spanish PIT.
    Keywords: personal income tax, Laffer curve, tax revenue, elasticity of taxable income
    JEL: H24 H21 H26 H31
    Date: 2023–04
  2. By: Congressional Budget Office
    Abstract: Over recent decades, corporate economic profits—that is, profits from current production—have grown faster than the amounts that corporations pay in federal taxes. That pattern, which cannot be explained by changes in statutory tax rates, reflects a divergence between economic profits and the corporate tax base. Because such differences affect how CBO projects revenues from the corporate income tax, the agency has analyzed the relationship between the two measures.
    JEL: E01 H20 H25 H32
    Date: 2023–05–09
  3. By: Link, Sebastian (Ifo Institute for Economic Research); Menkhoff, Manuel (Ifo Institute for Economic Research); Peichl, Andreas (Ludwig-Maximilians-Universität München); Schüle, Paul (Ifo Institute for Economic Research)
    Abstract: This paper estimates the causal effect of corporate tax hikes on firm investment based on more than 1, 400 local tax changes. By observing planned and realized investment volumes in a representative sample of German manufacturing firms, we can study how tax hikes induce firms to revise their investment decisions. On average, the share of firms that invest less than previously planned increases by three percentage points after a tax hike. This effect is twice as large during recessions.
    Keywords: investment, corporate taxation, state dependence, business cycle
    JEL: G11 H25 H32 H71 O16
    Date: 2023–04
  4. By: Dobridge, Christine L. (Federal Reserve Board); Lester, Rebecca (Stanford U); Whitten, Andrew (US Department of the Treasury)
    Abstract: Does going public affect the amount and type of corporate tax planning? Using a panel of U.S. corporate tax return data from 1994 to 2018, we show that IPO completion is associated with the implementation of multinational income shifting strategies central to the current international tax policy debate. Specifically, firms (i) expand their foreign tax haven presence, (ii) enter into cross-border agreements that accompany intangible asset transfers to foreign subsidiaries, and (iii) increase their level of foreign related-party payments around the time that they go public. The effects are strongest among firms that switch to more sophisticated tax advisors in the years preceding the IPO. In contrast, we observe little domestic tax planning because large stock option deductions, which increase as a consequence of the IPO, provide large domestic tax shields. The paper contributes to the nascent literature studying IPOs by documenting the types and timing of specific tax strategies that enable public firms to remain lightly taxed in the post-IPO period. Furthermore, the findings imply that U.S. tax policies targeted at early-stage innovative firms are critical for retaining domestically developed IP--and the income earned on such assets--for the U.S. tax base.
    JEL: D12 E21 H24
    Date: 2022–11
  5. By: De, Supriyo (National Institute of Public Finance and Policy)
    Abstract: In a recent innovative policy reform, India's corporate income tax system was overhauled with optional lower rates in lieu of giving up complex deductions. However, official da ta re veals a puzzle wherein la rger co mpanies have op ted more fo r th e lower optional rates while smaller ones appear reticent in switching to the optional regime. This paper explores this issue using empirical methods. The evolution of tax rates is tracked through reforms simplifying the tax system in the 1990s, the subsequent conundrum of zero tax companies leading to introduction of minimum alternate tax, and the persistence of lower effective tax rates for larger c ompanies. This provides the rationale for a simpler tax regime with lower rates but fewer deductions. The user cost of capital approach is used to examine the economically relevant tax impact across various sectors and ownership types. The results indicate that in terms of user cost, the various lower tax options are not attractive, and under certain situat ions may be worse for younger and smaller companies. In light of the analysis, policy options are suggested to improve the scheme so as to achieve the laudable objective of implementing a simple tax regime with lower rates and minimal deductions.
    Keywords: Corporate income tax ; User cost of capital ; Minimum alternate tax
    JEL: D21 E22 H25
    Date: 2023–04
  6. By: Jay A. Soled (Rutgers Business School); James Alm (Tulane University)
    Abstract: The Inflation Reduction Act of 2022 has the potential to encourage taxpayers to make automobile-related gifts. However, the genesis of such gift-giving likely will not be due to genuine generosity, but rather will be part of a strategy designed to achieve significant income tax savings.
    Keywords: Inflation Reduction Act of 2022, Internal Revenue Service, electric vehicles, gift tax, tax compliance
    JEL: H0 H2 H26
    Date: 2023–04
  7. By: James Alm (Tulane University); Jay A. Soled (Rutgers Business School); Kathleen DeLaney Thomas (University of North Carolina School of Law)
    Abstract: Tax compliance in the United States historically hovers in the 80 percent range, costing the nation approximately half a trillion dollars annually in uncollected tax revenue. To foster greater tax compliance, the Internal Revenue Service (IRS) should employ whatever tools are at its disposal. Standard deterrence theory argues that increasing the audit rate and imposing stiffer penalties would foster greater tax compliance. There are political headwinds, however, that strongly suggest that these approaches are not currently viable. Instead, there is a low-cost method that could yield greater tax compliance. Drawing on recent and compelling social science research, the IRS should ask more information-revealing questions on tax returns. By engaging in this important exercise of strategic inquiries, dual benefits are likely to emerge: taxpayers would be more likely to report honestly to avoid acts of commission (e.g., lying); and the IRS would be in a better strategic position because it would possess additional, relevant information on taxpayer activities.
    Keywords: Internal Revenue Service, tax compliance, behavioral economics, nudges, act of omission, act of commission
    JEL: H2 H26 D91
    Date: 2023–04
  8. By: James Alm (Tulane University); Sebastian Leguizamon (Western Kentucky University); Susane Leguizamon (Western Kentucky University)
    Abstract: Recent events have increased the focus on racial justice. One aspect of this attention is the realization that race interacts in important – but often not fully understood – ways with taxation, including taxation of the family. In this paper, we quantify the racial disparity in the magnitude of the “marriage penalty” or “marriage bonus”, using individual micro-level data from the Current Population Survey for the years 1992 to 2019. We find that Black married couples nearly always face a higher averaged marriage penalty (or a smaller averaged marriage bonus) compared to white married couples, even when we compare couples with similar family earnings. This occurs because the incomes of Black married couples tend to be more evenly split between spouses than the incomes of white married couples. The differences between white couples and Hispanic couples tend to be smaller, but nonetheless they are still present in many cases, with Hispanic couples also facing a marriage penalty. We conclude with suggestions for reform of the individual income tax that would reduce the disparate racial and ethnic treatments across families.
    Keywords: Marriage, individual income tax, taxable unit, marriage penalty and bonus, race, ethnicity.
    JEL: H24 J12 J16
    Date: 2023–04
  9. By: Marco Bassetto; Wei Cui
    Abstract: The return on government debt is lower than that of asset with similar payoffs. We study optimal debt management and taxation when the government cannot directly redistribute towards the agents in need of liquidity but otherwise has access to a complete set of linear tax instruments. Optimal government debt provision calls for gradually closing the wedge between the returns as much as possible, but tax policy may work as a countervailing force: as long as financial frictions bind, it can be optimal to tax capital even if this magnifies the discrepancy in returns.
    Keywords: Capital tax; Financing constraints; Asset liquidity; Optimal level of government debt; Low interest rates
    JEL: E22 E62 E44
    Date: 2023–02–28
  10. By: Brandon Enriquez; Damon Jones; Ernest V. Tedeschi
    Abstract: We estimate the extensive and intensive margin labor supply response to the monthly Child Tax Credit disbursed in 2021 as a part of the American Rescue Plan Act. Using Current Population Survey microdata, we compare labor supply outcomes among households who qualify for varying relative increases in household income, as a result of their income level and household size. We do not find strong evidence of a change in labor supply for families receiving the credit. The results are robust to alternative labor supply models, where households respond mainly to cash on hand or changes in the annual budget set.
    JEL: D63 H24 J22
    Date: 2023–04
  11. By: James Alm (Tulane University); Trey Dronyk-Trosper (Tulane University); Sean Larkin (U.S. Census Bureau)
    Abstract: The Tax Cuts and Jobs Act of 2017 allowed governors of the fifty states to designate low-income areas as “Qualified Opportunity Zones” (QOZs). This designation entitled investors in these QOZs to significant tax incentives, with the goal of creating economic opportunities in these areas. In this paper we estimate the impact of QOZ designation on several dimensions of economic development – residential and business real estate prices – using data from Florida for the period 2016-2020 and controlling for endogenous QOZ designation in several estimation approaches. All estimation results indicate little consistent and robust evidence that QOZ designation had a positive impact on sales prices for single family homes, commercial lots, or vacant lots.
    Keywords: opportunity zones, tax incentives, place-based development policies, regression discontinuity estimation
    JEL: H24 I38 O23 R38
    Date: 2023–04
  12. By: Granda-Carvajal, Catalina; Kogler, Christoph
    Abstract: This JOIE Symposium features some of the most influential papers presented in the 7th version of the conference on The Shadow Economy, Tax Behaviour and Institutions. Accordingly, it brings together contributions from several disciplines and schools of thought in the social sciences and the humanities exploring such issues as the role of formal and informal institutions in understanding the shadow economy, the importance of social aversion in the motivations for tax compliance, and the dual nature of corruption. This introduction lays out the scope of the symposium, summarises the preceding literature on the topic, and provides a brief outline of each contributing article, noting that, although each paper focuses on a different economic and cultural context, they share several elements in common with alternative theories addressing the institutional, psychological, and sociological aspects of tax law compliance and other appropriate behaviours.
    Keywords: shadow economy; tax behaviour; informal institutions; regional and country studies
    JEL: D73 H30 K42 O17 O50
    Date: 2023–05
  13. By: Victoria Baudisch; Matthias Neuenkirch
    Abstract: We evaluate Germany’s temporary value-added tax (VAT) rate reduction as a tool to stimulate consumer spending during the Covid-19 pandemic using a comparative case study approach. We construct a credible counterfactual for Germany in a two-step procedure. First, we carry out a careful pre-selection of the donor pool countries to obtain a control group that is highly similar to Germany regarding important post-treatment characteristics. Second, we apply a reweighting scheme on the pre-selected donor countries. The synthetic control group only differs from Germany in the way that it did not implement the temporary VAT rate reduction. Our results indicate that the German VAT cut policy and partial VAT reductions in other countries were relatively ineffective in stimulating consumption with regards to their costs when compared to other measures such as (targeted) direct cash transfers. We attribute this to the fact that direct cash transfers are more comprehensible, salient, and actionable, in particular, in a dynamic environment with high uncertainty induced by unclear future economic prospects.
    Keywords: Consumption, Covid-19, Synthetic Control, Temporary VAT Cut, Unconventional Fiscal Policy
    JEL: E21 E62 E65 H31
    Date: 2023
  14. By: Gunther Capelle-Blancard (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Perceptual confidence has been an important topic recently. However, one key limitation in current approaches is that most studies have focused on confidence judgments made for single decisions. In three experiments, we investigate how these local confidence judgments relate and contribute to global confidence judgments, by which observers summarize their performance over a series of perceptual decisions. We report two main results. First, we find that participants exhibit more overconfidence in their local than in their global judgments of performance, an observation mirroring the aggregation effect in knowledge-based decisions. We further show that this effect is specific to confidence judgments and does not reflect a calculation bias. Second, we document a novel effect by which participants' global confidence is larger for sets which are more heterogeneous in terms of difficulty, even when actual performance is controlled for. Surprisingly, we find that this effect of variability also occurs at the level of local confidence judgments, in a manner that fully explains the effect at the global level. Overall, our results indicate that global confidence is based on local confidence, although these two processes can be partially dissociated. We discuss possible theoretical accounts to relate and empirical investigations of how observers develop and use a global sense of perceptual confidence.
    Abstract: L'idée d'une taxe sur les transactions financières (TTF) est souvent présentée comme une douce utopie, impossible à mettre en pratique, à moins de représenter un « handicap insurmontable » pour les places financières. Les transactions boursières sont pourtant taxées au Royaume-Uni depuis le XVIIe siècle, sous la forme d'un droit de timbre (stamp duty) qui rapporte environ 4 milliards d'euros chaque année, sans que le développement de La City n'ait été entravé. Pratiquement tous les pays développés y ont eu recours, et encore aujourd'hui plus d'une trentaine de pays dans le monde taxent les transactions financières, parmi lesquels la Suisse, Hong Kong ou Taiwan, ainsi bien sûr que la France. La TTF présente les atouts qui font un bon impôt : la TTF est peu distorsive, les recettes fiscales sont potentiellement élevées et les frais de recouvrement minimes ; elle a en outre un effet redistributif. L'équivalent du stamp duty britannique ou de la TTF française, appliqué par les pays du G20, permettrait de lever, malgré ses très nombreuses exemptions, entre 156 et 260 milliards d'euros par an (selon que l'on retient un taux nominal de 0, 3% ou de 0, 5%). L'étendre aux instruments dérivés et aux transactions intra-journalières apporterait des recettes supplémentaires, tout en améliorant la transparence sur les marchés financiers.
    Keywords: overconfidence, confidence-frequency effect, aggregation effect, Securities Transaction Tax, Tobin tax, Innovative financing, Financial transaction tax, Taxe sur les transactions financières, taxe Tobin, financements innovants
    Date: 2023–04–27

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