nep-pbe New Economics Papers
on Public Economics
Issue of 2023‒06‒19
seventeen papers chosen by
Thomas Andrén

  1. How do corporate tax rates alter conforming tax avoidance? By Eichfelder, Sebastian; Jacob, Martin; Kalbitz, Nadine; Wentland, Kelly
  2. Norderfriedrichskoog! Tax Havens, Tax Competition and the Introduction of a Minimum Tax Rate By William C. Boning; Drahomir Klimsa; Joel Slemrod; Robert Ullmann
  3. Estimating the Laffer Tax Rate on Capital Income: Cross-Base Responses Matter! By Lefebvre, Marie-Noëlle; Lehmann, Etienne; Sicsic, Michaël
  4. Tax Uncertainty and Welfare-Improving Tax Disputes By Nigar Hashimzade
  5. Corporate Taxes and Economic Inequality: A Credit Channel By Manthos D. Delis; Emilios C. Galariotis; Maria Iosifidi; Steven Ongena
  6. What Drives Tax Policy? Political, Institutional and Economic Determinants of State Tax Policy By Sarah Robinson; Alisa Tazhitdinova
  7. Corporate taxes, productivity, and business dynamism By Andrea Colciago; Vivien Lewis; Branka Matyska
  8. Estimating the Elasticity of Turnover from Bunching: Preferential Tax Regimes for Solo Self-employed in Italy By Francesco Alosa
  9. The Politics of Taxation and Tax Reform in Times of Crisis: Covid-19 and Attitudes Towards Taxation in Sierra Leone By van den Boogaard, Vanessa; Prichard, Wilson; Orgeira, Nicolas
  10. The Child Tax Credit over Time by Family Type: Benefit Eligibility and Poverty By Brehm, Margaret E.; Malkova, Olga
  11. Rethinking Capital and Wealth Taxation By Thomas Piketty; Emmanuel Saez; Gabriel Zucman
  12. Minimum Global Tax: Winners and Losers in the Race for Mergers and Acquisitions By Amendolagine, Vito; Bruno, Randolph Luca; Cipollina, Maria; De Pascale, Gianluigi
  13. Taxing Reproduction : The Invisible Transfer Cost of Rearing Children in Europe By GÁL, Róbert Iván; VANHUYSSE, Pieter; MEDGYESI, Márton
  14. Progressive consumption tax reforms By David Leung; Markus Poschke
  15. The Health Wedge and Labor Market Inequality By Amy Finkelstein; Casey McQuillan; Owen Zidar; Eric Zwick
  16. Hypothetical tax-benefit reforms in Hungary: Shifting from tax relief to cash transfers for family support By Agúndez García, Ana; Christl, Michael
  17. 'Earned, Not Given'? The Effect of Lowering the Full Retirement Age on Retirement Decisions By Dolls, Mathias; Krolage, Carla

  1. By: Eichfelder, Sebastian; Jacob, Martin; Kalbitz, Nadine; Wentland, Kelly
    Abstract: We examine an international panel of domestic firms to quantify the degree to which conforming tax avoidance changes with statutory tax rates. We derive an alternative estimation method that identifies conforming tax avoidance from the variation of tax rates over time and across countries. We incorporate a series of validation tests by considering an alternative measure of conforming tax avoidance, investigating alternative channels for this type of tax avoidance, and showing a more pronounced response to tax rates when a country observes a significant increase in conformity between its book and tax reporting. Overall, we find a 1-percentage point decrease in the corporate tax rate corresponds with a 1.5 percent increase in pre-tax book income in domestic firms, which we interpret as a substantial conforming tax avoidance response by these firms. We also provide preliminary evidence that this type of activity plays a role in multinational firms.
    Keywords: conforming tax avoidance, tax avoidance, international tax, book-tax conformity
    JEL: H25 H26
    Date: 2023
  2. By: William C. Boning; Drahomir Klimsa; Joel Slemrod; Robert Ullmann
    Abstract: German municipalities levy local business taxes by choosing a tax rate to apply to local business income, where the tax base is defined uniformly at the national level. Before the federal government’s imposition of a minimum tax rate in 2004, some municipalities such as the tiny North Sea town of Norderfriedrichskoog chose to act as tax havens by setting a zero tax rate. We combine administrative microdata from firm tax returns with municipality-level information to study the choice to become a tax haven; the (reported and real) income tax havens attracted from other municipalities before and after the introduction of the minimum tax rate; and how the introduction of the minimum tax rate affected tax competition between municipalities. We find that income was shifted to tax haven municipalities both before and after the introduction of the minimum tax rate. The mandated increase in tax havens’ tax rates did not lead to rate increases (or decreases) among municipalities in general, or among tax haven municipalities’ geographical neighbors. Our results suggest that tax havens largely did not affect the business tax rates set by non-havens.
    JEL: H25 H26 H71
    Date: 2023–05
  3. By: Lefebvre, Marie-Noëlle (CRED, Université Panthéon Assas Paris 2); Lehmann, Etienne (CRED, Université Panthéon Assas Paris 2); Sicsic, Michaël (CRED, Université Panthéon Assas Paris 2)
    Abstract: We theoretically express the Laffer tax rate on capital income as a function of the elasticities of capital income (the "direct" elasticity) and of labor income (the "cross" elasticity) with respect to the net-of-tax rate on capital income. We estimate these elasticities using salient capital tax reforms that took place in France between 2008 and 2017. Graphical evidence and Instrumental variables (IV) estimates confirm the existence of significant responses of both capital and labor income to capital tax reforms. Both approaches lead to positive cross responses, in contrast to the prediction of income-shifting models but in line with the two-period "working and saving" model. We obtain a direct elasticity around 0.76 which is robust across specifications. Ignoring the cross elasticity leads to a Laffer rate around 56%. However, since labor incomes are much larger than capital incomes, the Laffer tax rate is especially sensitive to the cross elasticity. Using our estimated positive cross elasticity dramatically reduces the Laffer tax rate on capital income to around 44%, taking income tax on labor income into account.
    Keywords: capital income taxation, optimal tax, Laffer tax rate, instrumental variables
    JEL: H21 H24 H31 C23 C26
    Date: 2023–05
  4. By: Nigar Hashimzade
    Abstract: Tax law is often uncertain. In particular, the use of tax shelters tends to be in the “grey area” between illegal tax evasion and legal tax avoidance. In this paper I show that uncertainty in tax law can help achieve higher efficiency than allowing or disallowing a tax shelter with certainty. Furthermore, a tax dispute can lead to a net welfare gain despite the litigation costs. Thus, tax uncertainty and tax disputes can be socially desirable.
    Keywords: tax uncertainty, tax shelter, tax avoidance, rent-seeking
    JEL: K34 H26 D72
    Date: 2023
  5. By: Manthos D. Delis (Audencia Business School); Emilios C. Galariotis (Audencia Business School); Maria Iosifidi (Montpellier Business School); Steven Ongena (University of Zurich, SFI, KU Leuven, NTNU Business School, CEPR)
    Abstract: Corporate taxation can have redistributive effects on income and wealth. We hypothesize and empirically establish such an effect working via bank credit. Using a unique sample of majority owned firms that apply for credit, we show that after a decrease in corporate tax rates the relatively poor get easier access to credit. However, this policy also considerably increases loan amounts and decreases loan spreads for the relatively rich. Ultimately, reducing the corporate tax rate predominantly increases the future income and wealth of relatively rich business owners.
    Keywords: Corporate taxes, Economic inequality, Bank credit, Credit score
    JEL: G20 G21 H25 D63
    Date: 2023–02
  6. By: Sarah Robinson; Alisa Tazhitdinova
    Abstract: We collect detailed data on U.S. state personal income, corporate, sales, cigarette, gasoline, and alcohol taxes over the past 70 years to shed light on the determinants of state tax policies. We provide a comprehensive summary of how tax policy has changed over time, within and across states. We then use permutation analysis, variance decomposition, and machine learning techniques to show that the timing and magnitude of tax changes are not driven by economic needs, state politics, institutional rules, neighbor competition, or demographics. Altogether, these factors explain less than 20% of observed tax variation.
    JEL: D7 H2 H7
    Date: 2023–05
  7. By: Andrea Colciago; Vivien Lewis; Branka Matyska
    Abstract: We identify the effects of corporate income tax shocks on key US macroeconomic aggregates. In response to a corporate income tax cut, we find that: (i) labor productivity increases; (ii) entry increases with delay; (iii) exit increases; (iv) total labor increases by more than production labor. To rationalize these empirical findings, we build a New Keynesian model with idiosyncratic firm productivity, and entry and exit. Our model features productivity gains due to selection and cleansing along the entry and exit margins. Models with homogeneous firms fail to account for the selection and cleansing process and produce counterfactual results.
    Keywords: corporate taxation, productivity, firm entry and exit.
    JEL: E62 E32 H25
    Date: 2023–02
  8. By: Francesco Alosa
    Abstract: Turnover is a key indicator of economic activity, but we know little about how much entrepreneurs adjust it as a response to taxation. This is because business taxation is usually based on profits, rather than turnover. This paper exploits the notch created by the eligibility cut-off of the preferential (turnover) tax regime for solo self-employed in Italy to study turnover responses to taxation. I find that solo self-employed bunch below the turnover threshold to be eligible for the preferential scheme. Effects are different in different sectors, with professionals and business intermediaries showing the largest responses. Then, I estimate the turnover tax elasticity by focusing on the (last) marginal buncher. To do so, I adapt the models of Kleven and Waseem (2013) and Harju et al. (2019) to derive a modified indifference condition that fits the institutional set-up. The baseline estimate for the turnover tax elasticity is 0.072.
    JEL: H24 H25 H26
    Date: 2023–03
  9. By: van den Boogaard, Vanessa; Prichard, Wilson; Orgeira, Nicolas
    Abstract: The Covid-19 pandemic has had significant fiscal implications around the world. A key question facing governments is whether and how the pandemic has shaped taxpayer attitudes and what that means for the prospects for tax reform and new revenue raising in the wake of the pandemic. We aim to understand the impacts of the Covid-19 pandemic on attitudes toward taxation and, in turn, to unpack what the crisis reveals about the dynamics and politics of taxation more broadly. We do so in the context of Sierra Leone with novel survey data, collected before the pandemic, shortly after the pandemic’s onset, and for almost a year afterwards. Four key findings emerge. First, immediately after the onset of the crisis we see increased support for taxation in Freetown, despite escalating economic challenges. Second, however, we also see taxpayers express increasingly conditional attitudes toward taxation; that is, at the same time that they show greater general support for taxation, they become more likely to believe that one could refuse to pay taxes if government fails to deliver services in return. Third, while we lack baseline data from before the pandemic on support for progressive taxation, we find rising and sustained support for progressive taxation over the course of the pandemic. Finally, although we see an initial increase in willingness to pay more for taxes for services immediately after the onset of the pandemic, we find evidence of that support eroding over time, potentially reflecting a combination of continued economic hardship, declining feelings of social solidarity, and some disappointment with government taxation. These findings have potentially significant implications for understanding both immediate responses to the pandemic, and the broader politics of taxation and tax reform.
    Keywords: Finance, Health, Politics and Power,
    Date: 2023
  10. By: Brehm, Margaret E. (Oberlin College); Malkova, Olga (University of Kentucky)
    Abstract: We examine disparities in Child Tax Credit (CTC) eligibility and anti-poverty effects since 1998 by family type. Initially, single mothers were least likely to be eligible and were underrepresented among those lifted from poverty by the CTC, because the credit was virtually nonrefundable. By 2017, disparities by family type mostly disappear, as eligibility and anti-poverty effectiveness of the CTC among single mothers increases dramatically, because of reforms increasing CTC refundability. When the credit doubles in 2018, disparities revert toward initial levels, as eligibility and the anti-poverty effectiveness of single mothers rises least, because of a phaseout threshold expansion and partial refundability.
    Keywords: Child Tax Credit, poverty, gender, tax policy
    JEL: H24 H71 J22
    Date: 2023–05
  11. By: Thomas Piketty (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, PJSE - Paris Jourdan Sciences Economiques - 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); Emmanuel Saez (UC Berkeley - University of California [Berkeley] - UC - University of California); Gabriel Zucman (UC Berkeley - University of California [Berkeley] - UC - University of California)
    Abstract: This paper reviews recent developments in the theory and practice of optimal capital taxation. We emphasize three main rationales for capital taxation. First, the frontier between capital and labor income flows is often fuzzy, thereby lending support to a broadbased, comprehensive income tax. Next, the very notions of income and consumption flows are difficult to define and measure for top wealth holders where capital gains due to asset price effects dwarf ordinary income and consumption flows. Therefore the proper way to tax billionaires is a progressive wealth tax. Finally, as individuals cannot choose their parents, there are strong meritocratic reasons why we should tax inherited wealth more than earned income or self-made wealth for which individuals can be held responsible, at least in part. This implies that the ideal fiscal system should also include a progressive inheritance tax, in addition to progressive income and wealth taxes. We then confront our prescriptions with historical experience. Although there are significant differences, we argue that observed fiscal systems in modern democracies bear important similarities with this ideal tryptic.
    Keywords: optimal capital taxation, wealth taxation, inheritance taxation
    Date: 2022–11–22
  12. By: Amendolagine, Vito (University of Foggia); Bruno, Randolph Luca (University College London); Cipollina, Maria (University of Molise); De Pascale, Gianluigi (University of Foggia)
    Abstract: This study aims to quantify the impact of the global minimum corporate tax rate – a pillar of the OECD's reform of international taxation – on cross-border mergers and acquisitions (M&A) involving large multinational enterprises (MNEs). First, the influence of differences in capital taxation on bilateral cross-border M&A is assessed using a structural gravity model. The resulting estimated coefficients are then applied to evaluate the impact of a 15% global minimum tax rate on cross-border investments by firms whose revenue exceeds €750 million, whenever the target country's corporate tax rate is lower. The study exploits a large, disaggregated dataset of 13, 562 investor-firm M&A data points from 2001 to 2020 relating to 516 industries, defined at the 4-digit level of the NACE Rev. 2 classification, in 109 'source' countries, and 559 industries (defined at the same of detail) in 161 'target' countries. The empirical results suggest that M&A flows are higher when the source and target countries have similar tax rates, while the overall effect of the global minimum corporate tax on M&A flows would be negative (as expected), but small.
    Keywords: global tax rate, bilateral foreign direct investment, profit shifting, Structural Gravity model
    JEL: H2 H87 F23
    Date: 2023–05
  13. By: GÁL, Róbert Iván; VANHUYSSE, Pieter; MEDGYESI, Márton
    Abstract: What are the intergenerational resource transfer contributions of parents and non-parents in Europe? Using National Transfer and National Time Transfer Accounts for twelve countries around 2010, we go beyond public transfers (net taxes) to also value two statistically less visible transfer types in the family realm: of market goods (money) and of unpaid household labor (time). Non-parents contribute almost exclusively to public transfers. But parents additionally provide still larger private transfers: mothers mainly time, fathers mainly money. Estimating transfer stocks over the working life, the average parental/non-parental contribution ratio flips from 0.73 (public transfers alone) to 2.66 (all three transfers combined). The tax rates implicitly imposed thereby on rearing children are multiples of the value-added tax rates in place on consumption goods. The magnitude of these invisible transfer asymmetries carries multiple implications for sociological debates. For instance, it raises the question whether European societies tax their own reproduction too heavily.
    Date: 2023–05
  14. By: David Leung; Markus Poschke
    Abstract: We study the effects of tax reforms in a heterogeneous agent overlapping generations life cycle model with idiosyncratic risk in capital and labour income and a rich tax system. The model replicates empirical joint distributions of income, wealth and tax payments well. In an economy with highly progressive income taxes, a revenue-neutral shift of the tax burden from income to consumption taxes increases saving and output, while also reducing inequality. It particularly benefits those with low wealth relative to income. It tends to harm retirees, who have high wealth relative to income. In contrast, an increase in the progressivity of income taxes also reduces inequality, but implies lower saving and output. Nous étudions les effets de plusieurs réformes fiscales à l’aide d’un modèle de cycle de vie avec générations chevauchantes. Le modèle décrit des agents hétérogènes qui confrontent des risques idiosyncratiques pour leurs revenus du travail et du capital, dans un environnement avec un système fiscal progressif complexe. Le modèle réplique fidèlement les distributions empiriques conjointes du revenu, de la richesse et des paiements de taxes et d’impôts. Dans ce contexte, un déplacement du fardeau fiscal à effet neutre sur les revenus publics vers les taxes à la consommation augmente l’épargne et la production tout en réduisant les inégalités. Cette politique est avantageuse particulièrement pour les individus disposant d’un faible niveau de richesse par rapport à leur revenu, mais tend à nuire aux personnes retraitées en raison du niveau élevé de leur richesse par rapport à leurs revenus. En revanche, une hausse de la progressivité de l’impôt sur le revenu des particuliers réduit aussi les inégalités, mais génère une épargne et une production plus faible.
    Keywords: Tax reforms, labor income, capital income, progressive tax system, consumption tax, Réformes fiscales, revenus du travail, revenus du capital, système fiscal progressif, taxe à la consommation
    Date: 2023–04–12
  15. By: Amy Finkelstein (Massachusetts Institute of Technology); Casey McQuillan (Princeton University); Owen Zidar (Princeton University); Eric Zwick (University of Chicago, Booth School of Business)
    Abstract: Over half of the U.S. population receives health insurance through an employer, with employer premium contributions creating a flat “head tax†per worker, independent of their earnings. This paper develops and calibrates a stylized model of the labor market to explore how this uniquely American approach to financing health insurance contributes to labor market inequality. We consider a partial-equilibrium counterfactual in which employer-provided health insurance is instead financed by a statutory payroll tax on firms. We find that, under this counterfactual financing, in 2019 the college wage premium would have been 11 percent lower, non-college annual earnings would have been $1, 700 (3 percent) higher, and non-college employment would have been nearly 500, 000 higher. These calibrated labor market effects of switching from head-tax to payroll-tax financing are in the same ballpark as estimates of the impact of other leading drivers of labor market inequality, including changes in outsourcing, robot adoption, rising trade, unionization, and the real minimum wage. We also consider a separate partial-equilibrium counterfactual in which the current head-tax financing is maintained, but 2019 U.S. health care spending as a share of GDP is reduced to the Canadian share; here, we estimate that the 2019 college wage premium would have been 5 percent lower and non-college annual earnings would have been 5 percent higher. These findings suggest that health care costs and the financing of health insurance warrant greater attention in both public policy and research on U.S. labor market inequality.
    Keywords: Health insurance, inequality, taxation, health insurance tax subsidy, labor market, college premium, nonemployment
    JEL: J32 J31 I26 J22 J23 I13 H24 M52
    Date: 2023–03
  16. By: Agúndez García, Ana; Christl, Michael
    Abstract: This paper evaluates two hypothetical budget-neutral reforms that shift resources from family tax expenditures to family cash transfers. We evaluate these reforms using a structural labor supply model based on the microsimulation EUROMOD model and EUSILC data. We find that both reforms have an inequality-decreasing impact. However, when looking at labor supply responses for different household types, we show that the reforms have a non-negligible impact, especially for females in couple households. Additionally, we show that females in the middle of the income distribution in particular will reduce labor supply in response to the reforms.
    Keywords: family benefits, reform, labor supply, discrete choice, microsimulation, EUROMOD
    JEL: J20 J08 H31
    Date: 2023
  17. By: Dolls, Mathias (Ifo Institute for Economic Research); Krolage, Carla (Ifo Institute for Economic Research)
    Abstract: This paper analyzes behavioral responses to a 2014 reform in the German public pension system that lowered the full retirement age (FRA) of individuals with a long contribution history by up to two years and framed the new FRA as reference age for retirement. Using administrative data from public pension insurance accounts, we first document a substantial bunching response at the FRA exceeding the control group's bunching by 83%. Second, we show in a difference-in-difference setting that a 1.0 year decrease in the FRA leads to a reduction in the average pension claiming age by 0.3-0.4 years. Treated individuals neither have poorer health nor are more likely to be liquidity-constrained than individuals in the control group. Our results suggest that the strong responses to the reform are driven both by the new FRA serving as a reference point and by financial incentives. Estimated fiscal costs of the reform are at the upper end of the range of previous back-of-theenvelope calculations.
    Keywords: retirement age, early retirement, pension reform
    JEL: H55 J14 J18 J26
    Date: 2023–05

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