nep-pbe New Economics Papers
on Public Economics
Issue of 2023‒07‒17
fifteen papers chosen by
Thomas Andrén

  1. Profit-shifting Frictions and the Geography of Multinational Activity By Alessandro Ferrari; Sébastien Laffitte; Mathieu Parenti; Farid Toubal
  2. The Impact of Taxation Structure on Growth: Empirical Evidence from EU27 Member States By Giuseppe Piroli; Joerg Peschner
  3. Tax Policy Design in a Hierarchical Model with Occupational Decisions By Sebastian Castillo
  4. Tax Design, Information, and Elasticities: Evidence From the French Wealth Tax By Bertrand Garbinti; Jonathan Goupille-Lebret; Mathilde Muñoz; Stefanie Stantcheva; Gabriel Zucman
  5. The Race between Tax Enforcement and Tax Planning: Evidence from a Natural Experiment in Chile By Sebastián Bustos; Dina Pomeranz; Juan Carlos Suárez Serrato; José Vila-Belda; Gabriel Zucman
  6. Identifying Tax-Setting Responses from Local Fiscal Policy Programs By Valeria Merlo; Andreas Schanbacher; Georg U. Thunecke; Georg Wamser
  7. Migration and tax policy:Evidence from Finnish full population data By Salla Kalin; Ilpo Kauppinen; Kaisa Kotakorpi; Jukka Pirttilä
  8. Rethinking Capital and Wealth Taxation By Thomas Piketty; Emmanuel Saez; Gabriel Zucman
  9. De-Fueling Externalities: How Tax Salience and Fuel Substitution Mediate Climate and Health Benefits By Pier Basaglia; Sophie M. Behr; Moritz A. Drupp
  10. Corporate taxes, productivity, and business dynamism By Andrea Colciago; Vivien Lewis; Branka Matyska
  11. Land, Wealth, and Taxation By Roberto Brunetti; Carl Gaigné; Fabien Moizeau
  12. Public Expenditure and Tax Policy for the Post-War Reconstruction of Ukraine By Tetiana Bogdan; Branimir Jovanović
  13. Taxing Multinationals: Exploring a New Approach By Michael J. Keen
  14. Health Equity and Its Economic Determinants (HEED): protocol for a pan-European microsimulation model for health impacts of income and social security policies By Richiardi, Matteo; Kopasker, Daniel; H. Leyland, Alastair; Vittal Katikireddi, Srinivasa; Pearce, Anna; Rostila, Mikael
  15. The Effect of Means-Tested Transfers on Work: Evidence from Quasi-Randomly Assigned SNAP Caseworkers By Jason B. Cook; Chloe N. East

  1. By: Alessandro Ferrari; Sébastien Laffitte; Mathieu Parenti; Farid Toubal
    Abstract: International tax rules are commonly viewed as obsolete as multinational corporations exploit loopholes to move their profits to tax havens. This paper uncovers how international tax reforms can curb profit shifting and impact real income and welfare across nations. We introduce profit shifting and corporate taxation in a quantitative model of multinational production. The model delivers "triangle identities" through which we recover bilateral profit-shifting flows. Our estimates of both tax-base and profit-shifting elasticities, together with profit-shifting frictions, govern how taxes shape the geography of production and profits. Our model accommodates a rich set of corporate taxation scenarios. A global minimum tax would be beneficial for welfare since it would increase the public good provision and encourage countries to raise their statutory corporate tax rates. Instead, a border-adjustment tax that eliminates profit shifting could result in welfare losses.
    Keywords: Profit Shifting;Tax Avoidance;Tax Havens;International Tax Reforms;Minimum taxation;DBCFT;Multinational firms
    JEL: F23 H25 H26 H32 H73
    Date: 2023–06
  2. By: Giuseppe Piroli; Joerg Peschner
    Abstract: What is the impact of taxation on growth? Is it supported by specific taxes and harmed by others? We use an error correction model to study the relationship between the tax composition and GDP growth in the EU27 Member States over the period 1995-2019. Under the constraint of revenue-neutrality, we find that, in the long-run, shifting tax away from labour (personal income tax) is growth-enhancing. In addition, growth is positively associated with a higher share of corporate income tax and consumption taxes in the total tax mix. However, evidence for property taxation is contrary to our expectation. We find a negative link between the share of property taxes and growth. Expectedly, increasing the overall tax burden has a negative impact on growth in the long-run. Results are robust to different model specifications. Supplementary evidence based on a computable general equilibrium model confirms that de-taxing wages for employees and lowering labour costs for employers would push output.
    Keywords: EU27, growth, tax mix, personal income tax, corporate income tax, consumption taxes, environmental taxes, property taxes, labour tax shift, Computable General Equilibrium model.
    JEL: H2 C23 C68
    Date: 2023–06–05
  3. By: Sebastian Castillo (University o fHelsinki, Helsinki GSE and the Finnish Centre of Excellence in Tax Systems Research)
    Abstract: This study incorporates occupational decisions in a hierarchical model to investigate distortions in the tax policy design. The economy has two sectors, wage-earners and self-employment, where evasion is only possible in the latter. The optimal audit split self-employed between audited and non-audited distorted the occupational decision in the last group. The marginal tax rate is smaller than the case without occupational choices, showing that not considering it produces an upward tax bias. The optimal IRS budget does not allow for auditing the entire self-employment sector but is larger than the case without occupational choices. Production efficiency is not attained at the optimum because occupational decisions are distorted. This result contradicts the Diamond-Mirrlees theorem. Finally, differential taxation is a Pareto improvement but implies higher taxes for self-employment. This result increases distortions in the optimal allocation of agents compared to the former setting.
    Keywords: Tax Evasion, Hierarchical Model, Tax Policy, Auditing, Income Taxation, Occupational Choice, Production efficiency
    JEL: H26 H21 H83
    Date: 2022–11
  4. By: Bertrand Garbinti; Jonathan Goupille-Lebret; Mathilde Muñoz; Stefanie Stantcheva; Gabriel Zucman
    Abstract: We study a French wealth tax reform that starkly reduced the information some taxpayers must report to the tax authority. Using a new dynamic bunching approach we estimate the average response to the reform, the share of compliers, and the local average treatment effect. The annual wealth growth rate of treated taxpayers falls by 0.5 percentage points after the reform. This decline is likely due to increased evasion, as suggested by the sharp responses in self-reported wealth but not in third-party-reported incomes. The wealth tax base becomes more elastic post reform, illustrating the key role of information policy choices for tax base elasticities.
    JEL: H26 H31
    Date: 2023–06
  5. By: Sebastián Bustos; Dina Pomeranz; Juan Carlos Suárez Serrato; José Vila-Belda; Gabriel Zucman
    Abstract: Profit shifting by multinational corporations is thought to reduce tax revenue around the world. While transfer pricing regulations are meant to curtail profit shifting, there have been rising concerns that a sophisticated tax advisory industry can limit their effectiveness. This paper provides a comprehensive analysis of how firms and tax advisors respond to the introduction of standard regulations aimed at limiting profit shifting. Using administrative tax and customs data from Chile in difference-in-differences event-study designs, we find that the reform was ineffective in reducing multinationals’ transfers to lower-tax countries and did not significantly raise tax payments. At the same time, interviews with tax advisors reveal a drastic increase in tax advisory services. The qualitative interviews also allow us to identify and then quantitatively confirm a common tax planning strategy in response to the reform. These results illustrate that when enforcement can be circumvented by sophisticated tax planning, it can benefit tax consultants at the expense of tax authorities and taxpayers.
    JEL: H25 H26 H32
    Date: 2023
  6. By: Valeria Merlo; Andreas Schanbacher; Georg U. Thunecke; Georg Wamser
    Abstract: This paper studies tax policy interaction among local governments for both mobile and immobile tax bases. We exploit exogenous changes in the local tax setting of German municipalities due to participation in state debt reduction programs to learn about the size, scope and nature of strategic interaction among local governments. Our results suggest strong and significant tax policy responses both in corporate as well as in property tax rates. Our estimates imply response function gradients in the range of 0.3 to 0.7, depending on the type of tax and state. Policy spillovers from property tax rates remain very local, which is consistent with yardstick competition behavior.
    Keywords: local public finance, tax competition, yardstick competition, spatial interaction, tax setting, marginal cost of public funds
    JEL: C21 H71 H73 R59
    Date: 2023
  7. By: Salla Kalin (University of Helsinki); Ilpo Kauppinen (VATT Institute for Economic Research); Kaisa Kotakorpi (Tampere University); Jukka Pirttilä (University of Helsinki and VATT Institute for Economic Research)
    Abstract: While evidence on the impact of taxation on the international migration of certain special groups of workers has expanded, evidence on the links between taxes and migration of the general population is extremely limited. We aim to fill this gap by estimating the impact of taxation on the migration decisions of the entire working population in a high-tax source country, Finland. We find that the average domestic elasticity of migration with respect to the domestic tax rate is very small (around 0.001). This holds for various occupational and income groups of interest. We also provide a first empirical implementation of the theoretical results of Lehmann et al. (2014), who show that if a fully nonlinear income tax schedule at the top is used, the key sufficient statistic for the optimal tax is a semi-elasticity of migration. Our estimates indicate that the migration responses increase for top earners, but remain very small, at least up to the top per mille of income earners.
    Keywords: taxation, emigration
    JEL: J61 H31
    Date: 2022–10
  8. 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
  9. By: Pier Basaglia; Sophie M. Behr; Moritz A. Drupp
    Abstract: This paper is the first to investigate the effectiveness of fuel taxation to jointly deliver climate and health benefits in a quasi-experimental setting. Using the synthetic control method, we compare carbon and air pollutant emissions of the actual and synthetic German transport sector following the 1999-2003 German eco tax reform. We demonstrate sizable average reductions in CO2 (12%), PM2.5 (10%) and NOX (6%) emissions between 1999 and 2009 across a range of specifications. Using official cost estimates, we find that the eco-tax saved more than 40 billion euros of external damages. More than half of the reductions in external damages are health benefits, highlighting the importance of accounting for co-pollution impacts of carbon pricing. Our fuel and emission specific tax elasticity estimates suggest much stronger demand responses to eco tax increases than to market price movements, primarily due to increases in tax salience, which we measure using textual analysis of newspapers. We further show that gasoline-to-diesel substitution substantially mediates the trade-off between climate and health benefits. Our results highlight the key roles of tax salience and fuel-substitution in mediating the effectiveness of fuel taxes to reduce climate and health externalities.
    Keywords: environmental policy, carbon tax, eco tax, tax elasticity, tax salience, fuel consumption, fuel substitution, externalities, climate, pollution, health
    JEL: Q51 Q58 Q41 H23
    Date: 2023
  10. 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: 2023–06
  11. By: Roberto Brunetti (Univ Rennes, CNRS, CREM-UMR6211, F-35000 Rennes, France); Carl Gaigné (INRAE, SMART, Rennes, France and Laval University, CREATE, Quebec, Canada); Fabien Moizeau (Univ Rennes, CNRS, CREM-UMR6211, F-35000 Rennes, France)
    Abstract: We examine the role of land in wealth dynamics and taxation policy by focusing on the interplay among agents’ bidding for location, mortgage market imperfections, and inheritance. We develop a model in which altruistic agents leave to their heir a financial bequest and their housing wealth. The borrowing constraint generates a housing return premium and spatial wealth sorting, which translate into persistent inequality. We derive an optimal tax schedule that combines a tax on the land share in the value of inherited housing assets and on lifetime wealth, allowing a more efficient allocation of resources and lower inequality.
    Keywords: Mortgage market imperfections; Spatial sorting; Wealth distribution; Wealth Taxation; Efficiency.
    JEL: D31 E21 H21 R14
    Date: 2023–06
  12. By: Tetiana Bogdan; Branimir Jovanović (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: Public spending will play the decisive role in the reconstruction of Ukraine, in rendering aid to the population, providing emergency services, reconstructing infrastructure and driving industrial development in the coming years. For economic recovery and sustainable development in the post-war period, defining the volume and structure of the main public expenditure categories in the medium run are essential. The report outlines priorities and timelines for public funds allocation in the areas of transport and electric power networks, the recovery of agricultural farms, restoration of social infrastructure, reconnecting people to educational and health care services, rebuilding destroyed housing stock and development of the modern defence sector. The role of foreign aid in the post-war recovery is highlighted and efficient mechanisms for coordination and reconciliation of Ukrainian public expenditure with external donor funding are suggested. Moreover, the authors propose tax reform measures with a focus on personal income taxation, social security contributions and improving tax collections that are targeted at financing Ukraine’s reconstruction needs. A debt sustainability analysis (DSA) for the period 2023-2026 is undertaken with probabilistic judgments regarding the trajectory of public debt and the availability of financing. The results indicate that raising the share of foreign grants (vs. loans) plus substantial haircuts to the nominal values of debt will be necessary for supporting Ukraine’s debt sustainability.
    Keywords: Ukraine, public expenditure, tax reform, post-war reconstruction, debt sustainability
    JEL: H56 H20 H41 H63
    Date: 2023–06
  13. By: Michael J. Keen (International Monetary Fund (IMF), CERDI - Centre d'Études et de Recherches sur le Développement International - IRD - Institut de Recherche pour le Développement - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne)
    Abstract: The international tax treatment of multinationals has fallen into disrepute. Over the last few years, the 140 or so members of the G20/OECD-led Inclusive Framework have put considerable effort into finding ways to fix it. In a recent paper, my co-authors and I explore alternative arrangements — 'Residual Profit Allocation' — that have been proposed to bring the system back to some coherence. And (while we do not claim causality) those arrangements have strong similarities with those that have now secured wide political agreement.
    Abstract: Le traitement fiscal international des multinationales est tombé en discrédit. Au cours des dernières années, les quelque 140 membres du cadre inclusif dirigé par le G20 et l'OCDE ont déployé des efforts considérables pour trouver des moyens d'y remédier. Dans un article récent, mes coauteurs et moi-même explorons des arrangements alternatifs - "l'allocation des bénéfices résiduels" - qui ont été proposés pour ramener le système à une certaine cohérence. Et (bien que nous ne prétendions pas qu'il y ait un lien de cause à effet), ces arrangements présentent de grandes similitudes avec ceux qui ont aujourd'hui obtenu un large accord politique.
    Keywords: International taxation, Multinationals, Tax coordination, Taxation internationale, Multinationales, Coordination fiscale
    Date: 2023–03–27
  14. By: Richiardi, Matteo; Kopasker, Daniel; H. Leyland, Alastair; Vittal Katikireddi, Srinivasa; Pearce, Anna; Rostila, Mikael
    Abstract: Introduction: Government policies on taxation and social security are important determinants of population health outcomes and health inequalities. However, there is a shortage of evidence to inform policymakers of the health consequences of such policies. The Health Equity and Its Economic Determinants project aims to assess the potential impacts of different taxation and social security policies across Europe on population health and health inequalities using a computer-based simulation that provides projections over multiple health domains. Methods and analysis: In the first phase, key input parameters for the model will be estimated using estimation techniques that control for the effects of prior exposure on time-varying confounders and mediators (g-methods). The second phase will involve developing and validating the microsimulation model for the UK. Policy proposals, developed with policymakers, will be simulated in the third phase to investigate the impacts of income tax and social security changes on population health and health inequalities. In the final phase, the microsimulation model will be extended across other European countries. Ethics and dissemination: This project will use deidentified secondary data for which ethical approval and consents were received by the original data collectors. No further ethical approval will be required for our main analytical datasets. Dissemination plans include academic publications, conference presentations, accessible policy briefings, mass media engagement and a project website. Both the syntax and the underlying synthetic data for the HEED microsimulation model will be made freely available through GitHub and the project website.
    Date: 2022–11–01
  15. By: Jason B. Cook; Chloe N. East
    Abstract: We are the first to document that Supplemental Nutrition Assistance Program (SNAP) caseworker behavior impacts program receipt, likely due to differing levels of helpfulness in navigating the complicated application process. We use the conditional random assignment of caseworkers as an instrument for SNAP receipt to assess the impact of SNAP on work decisions. Two-thirds of SNAP applicants do not work before applying and experience no change in work if granted SNAP. Those working beforehand decrease work temporarily. The canonical, static labor supply model cannot fully explain these results, but taking account of other reasons individuals do not work can.
    JEL: H51 H53 I38 J22
    Date: 2023–06

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