nep-pbe New Economics Papers
on Public Economics
Issue of 2023‒08‒21
fourteen papers chosen by
Thomas Andrén, Konjunkturinstitutet

  1. Taxation and labour supply decisions: an evaluation of the earned income tax credit in Italy By Luca Villamaina; Paolo Acciari
  2. Effective tax rates for R&D intangibles By Ana Cinta González Cabral; Tibor Hanappi; Silvia Appelt; Fernando Galindo-Rueda; Pierce O’Reilly
  3. The Intergenerational Transmission of Poverty and Public Assistance: Evidence from the Earned Income Tax Credit By Nicardo S. McInnis; Katherine Michelmore; Natasha Pilkauskas
  4. Tax and Investment by Multinational Enterprises By Tibor Hanappi; David Whyman
  5. A time series perspective on income-based tax support for R&D and innovation By Ana Cinta González Cabral; Silvia Appelt; Tibor Hanappi; Fernando Galindo-Rueda; Pierce O’Reilly; Massimo Bucci
  6. Corporate Tax Disclosure By Jeffrey L. Hoopes; Leslie Robinson; Joel Slemrod
  7. On Defaults, Framing, and Local Tax Policy: Quasi-Experimental Evidence from Portugal By Christian Bruns; Mariana Lopes da Fonseca
  8. Digital Service Taxes By Kane Borders; Sofía Balladares; Mona Barake; Enea Baselgia
  9. BEPS, Pillar 2, and the Replacement of Tax-Based Incentives With Nontax Incentives By Durst, Michael C.
  10. The marginal cost of public funds: A brief guide By Bastani, Spencer
  11. Relationship between Social Security Programs and Elderly Employment in Japan By Takashi Oshio; Satoshi Shimizutani; Akiko S. Oishi
  12. The Economic Effects of Covid-19 in Sweden: A Report on Income, Taxes, Distribution, and Government Support Policies By Nikolay Angelov; Daniel Waldenström
  13. Local labor markets as a taxable location factor? Evidence from a shock to foreign labor supply By Nover, Justus
  14. Propagation of carbon tax in credit portfolio through macroeconomic factors By G\'eraldine Bouveret; Jean-Fran\c{c}ois Chassagneux; Smail Ibbou; Antoine Jacquier; Lionel Sopgoui

  1. By: Luca Villamaina (Ministry of Economy and Finance); Paolo Acciari (Ministry of Economy and Finance)
    Abstract: The earned income tax credit - so-called ’monthly e80 bonus’ - introduced in Italy in 2014, has been characterized by a rapid phase-out area for budget-constraints reasons, leading to very high effective marginal tax rates. The aim of our analysis is to empirically investigate whether this policy design has effectively determined a reduction of the intensive margin of the labour supply of employees. The empirical analysis is based on the longitudinal electronic database of Personal Income Tax returns from 2011 to 2017 assembled by the Department of Finance of the Italian Ministry of Economy and Finance. The timing and the structure of the reform allow us to exploit the difference-in-discontinuities design using the before/after with the discontinuous policy change. Despite a close to 100% effective average tax rate for a substantial income range, a unique feature among EU and OECD countries, we found that the tax credit design had no negative effect on changes of the labour effort in Italy, challenging the economic theory but confirming previous empirical evidence.
    Keywords: EITC, Public Economics, Labor Market, Labor supply, Personal Income Tax
    JEL: H21 H24 H30 J22 J38
    Date: 2023–08
  2. By: Ana Cinta González Cabral; Tibor Hanappi; Silvia Appelt; Fernando Galindo-Rueda; Pierce O’Reilly
    Abstract: Tax incentives such as intellectual property regimes provide for reduced taxation of the income derived from research, development, and innovation related activities. By doing so, they lower the overall tax burden from investing in certain qualified intangible assets. This paper proposes a methodology to build indicators comparing the effect of income-based tax incentives for R&D and innovation on firms’ incentives to make R&D intangible investments. It provides insights into how such incentives affect firms’ decisions on whether, where and how much to invest in R&D intangibles. These indicators are used to illustrate the extent to which these tax incentives may create potential distortions to firms’ investment, protection and commercialisation decisions. The model is further developed to account for the design changes to such tax incentives introduced by the OECD/G20 Base Erosion and Profit Shifting minimum standard.
    JEL: H25 O34 O38 E22
    Date: 2023–07–27
  3. By: Nicardo S. McInnis; Katherine Michelmore; Natasha Pilkauskas
    Abstract: This paper examines the intergenerational effects of the Earned Income Tax Credit (EITC) on poverty and public assistance use. Using data from the PSID, we find that increased exposure to the EITC in childhood reduces the use of public assistance in adulthood (WIC and other public assistance) and reduces the likelihood of being in poverty (
    JEL: H20 I38
    Date: 2023–07
  4. By: Tibor Hanappi; David Whyman
    Abstract: This paper investigates two closely related questions concerning the responses of Multi-National Enterprise (MNE) investment to corporate income taxation using a panel of unconsolidated subsidiary-level and consolidated group-level data from the ORBIS database. First, the paper provides new evidence on the heterogeneity of investment responses to taxation across multinational firms. This paper finds that profit shifting opportunities, access to credit, and market power at the group level are associated with decreased investment sensitivity to taxation among MNE subsidiaries. Second, a new empirical approach is used to investigate how tax changes at the host jurisdiction level affect investment at the MNE group level and whether there are propagation effects to foreign subsidiaries within the same MNE group. This paper finds that taxation in one jurisdiction in which an MNE is active is positively associated with investment in its subsidiaries in other jurisdictions. This finding suggests that the well-document negative relationship between taxation and MNE investment within a host jurisdiction masks the MNE rebalancing the location of its investment to other host jurisdictions in response to changes in cross-jurisdictional tax rate differentials rather than purely decreasing its investment globally.
    Keywords: investment, Multinational Enterprises, Taxation
    JEL: F21 H32 H25
    Date: 2023–07–27
  5. By: Ana Cinta González Cabral; Silvia Appelt; Tibor Hanappi; Fernando Galindo-Rueda; Pierce O’Reilly; Massimo Bucci
    Abstract: The use of 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, has accelerated over the last two decades. The globalisation of R&D together with the greater mobility of intangible income may have contributed to the rise in such incentives to attract and retain R&D and innovation activity while preventing the transfer of taxable base to other countries. This paper documents the changes to the availability and design of income-based tax incentives from 2000 onwards for 48 countries, including all OECD countries and EU countries. Building on this, the paper analyses trends in the generosity of income-based tax support over time by building indicators of effective tax rates that can provide insights into the impact of Action 5 of the OECD/G20 Base Erosion and Profit Shifting project.
    JEL: E22 H25 O34 O38
    Date: 2023–07–27
  6. By: Jeffrey L. Hoopes; Leslie Robinson; Joel Slemrod
    Abstract: Policies that require, or recommend, disclosure of corporate tax information are becoming more common throughout the world, as are examples of tax-related information increasingly influencing public policy and perceptions. In addition, companies are increasing the voluntary provision of tax-related information. We describe those trends and place them within a taxonomy of public and private tax disclosure. We then review the academic literature on corporate tax disclosures and discuss what is known about their effects. One key takeaway is the paucity of evidence that many tax disclosures mandated with the aim of increasing tax revenue have produced additional revenue. We highlight many crucial unanswered questions, answers to which would inform future tax legislation and financial accounting rule making.
    JEL: H25
    Date: 2023–07
  7. By: Christian Bruns; Mariana Lopes da Fonseca
    Abstract: We find that policy decisions made by elected politicians in Portuguese municipalities violate the predictions of standard microeconomic theory. Municipalities can choose a withholding rate between zero and five percent of the income tax revenue collected within their boundaries by the national tax authority. A reform altered the withholding rate applicable if a municipality fails to communicate its chosen rate to the national tax authority, reducing it from five to zero percent. According to standard microeconomic theory, this reform leaves a municipality’s decision problem unchanged. In municipalities with strong electoral competition, however, right-leaning mayors choose significantly lower rates than their left-leaning counterparts after the reform. Adopting a behavioral perspective, we argue that the reform influenced perceptions and resulted in increased electoral accountability, especially in municipalities with intense electoral competition. Politicians in these municipalities responded by adjusting withholding rates to better align with their constituents’ (ideological) preferences.
    Keywords: perception, income taxation, local taxation, ideology, accountability
    JEL: D72 D91 H71
    Date: 2023
  8. By: Kane Borders (EU Tax - EU Tax Observatory); Sofía Balladares (EU Tax - EU Tax Observatory); Mona Barake (EU Tax - EU Tax Observatory); Enea Baselgia (HSG - University of St.Gallen)
    Abstract: Digital Service Taxes (DSTs) are a recently introduced fiscal tool designed to tax digital companies. This note collects all publicly available data to take stock of the first few years of DST implementation. Currently, twelve countries – both OECD and non-OECD – have an active DST in place. Current tax revenues from these DSTs are mostly in line with expected revenues, comparable in magnitude to estimated Pillar 1 revenues, and rising rapidly. First experiences (e.g., from the UK) suggest that DSTs can be effective at taxing digital companies that have tended to pay low corporate income tax rates in destination countries in a targeted way. However, the available data remains limited and more research needs to be done to progress towards a full cost-benefit analysis of DSTs.
    Date: 2023–06–15
  9. By: Durst, Michael C.
    Abstract: The 15 percent minimum tax will reduce the appeal of both the implicit investment incentives made available by BEPS planning and the explicit tax-based incentives that countries provide through measures like tax holidays.4 Pressure of Tax Competition The pillar 2 proposal can best be understood as an attempt to limit the pressures of tax competition on governments by reducing the extent to which all countries can lower their ETRs, even if they wish to do so.5 The reduction of tax competition is intended to enable countries to reach a more desirable policy balance, regarding ETRs, than the balance that countries can achieve when faced by the pressures of today’s level of tax competition.
    Keywords: Finance,
    Date: 2023
  10. By: Bastani, Spencer (Research Institute of Industrial Economics (IFN); Uppsala Center for Fiscal Studies (UCFS), Uppsala Center for Labor Studies (UCLS), CESIfo, Germany)
    Abstract: When deciding on the social desirability of public investment, the cost of a project is sometimes adjusted by a factor known as the Marginal Cost of Public Funds (MCP F ), which captures the cost of raising public funds through distortionary taxation. However, there is no scholarly consensus on its definition or quantification. The purpose of this paper is to provide a brief up-to-date guide to the theoretical background, practical application, and empirical quantification of the MCP F, taking into account some recent developments in the public finance literature, and highlighting the broad applicability of the MCP F beyond taxation.
    Keywords: benefit-cost analysis; marginal value of public funds; excess burden; distortions; public goods; taxes
    JEL: D61 H21 H41 H53
    Date: 2023–05–23
  11. By: Takashi Oshio; Satoshi Shimizutani; Akiko S. Oishi
    Abstract: This study examines how elderly employment is associated with social security programs and how it responds to recent reforms in Japan. To this end, we employed a rich and longitudinal dataset of middle-aged and older individuals collected between 2005 and 2018. By incorporating various factors related to social security incentives into a single index of implicit tax (ITAX), we confirmed that the index successfully captured the incentives and their changes incorporated in recent social security reforms. We further estimated the association of ITAX with an individual’s decisions concerning retirement and pension benefit claims. Lastly, we conducted counterfactual simulations to assess the effect of recent social security forms on retirement based on the estimated regression parameters. The results showed that a higher ITAX drove individuals, especially men, to retire and claim benefits earlier.
    JEL: H55 J14 J26
    Date: 2023–07
  12. By: Nikolay Angelov; Daniel Waldenström
    Abstract: This report analyses the economic consequences of the coronavirus pandemic and support policies using underutilized data sources from the Swedish Tax Agency’s tax register, which provides real-time information on firm sales and employees’ wage income. Firms' sales, particularly in areas heavily impacted by COVID-19, declined by 6.1% on average, inducing a drastic economic recession. Excise tax revenue analysis reveals a decline in industrial electricity and air travel tax revenues, but a rise in alcohol tax revenue. The hospitality industry experienced significant negative effects, with drops in sales, employment, and wage income. Payroll tax revenues decreased due to government intervention, whereas sick pay drastically increased. Average pre-tax labor income decreased by 5%, largely due to increased unemployment among part-time workers, escalating income inequality. Policy simulations indicate government support measures mitigated wage income reduction and unemployment rise, yet they contributed to income inequality under certain conditions. These results provide insight into the diverse, yet significant, economic impacts of the pandemic. A number of policy recommendations are presented based on the empirical findings.
    Keywords: Covid-19, taxation, firms, wages, inequality
    JEL: D31 H12 H24 J22
    Date: 2023
  13. By: Nover, Justus
    Abstract: This paper examines how municipal taxes respond to the local impact of a labor market shock. The analysis exploits a commuting policy that liberalized cross-border labor markets between Switzerland and the EU. The reform was implemented at a time of skilled labor shortages and led to a substantial inflow of cross-border workers into Swiss border municipalities. Identification rests on exogenous regional variation in treatment intensities based on commuting times. The results show that corporate tax changes are significantly larger than zero in highly-treated border municipalities after the reform and when compared to less-affected regions. This is consistent with the theory according to which governments can tax rents that arise from productive location factors - an interpretation supported by several model extensions and robustness tests. The results on personal income taxation indicate a similar yet smaller and lagged response.
    Keywords: productive amenities, agglomeration, cross-border commuting, skill shortage, tax competition, Swiss-EU agreement
    JEL: H71 R23
    Date: 2023
  14. By: G\'eraldine Bouveret; Jean-Fran\c{c}ois Chassagneux; Smail Ibbou; Antoine Jacquier; Lionel Sopgoui
    Abstract: We study how the introduction of carbon taxes in a closed economy propagate in a credit portfolio and precisely describe how carbon taxes dynamics affect the firm value and credit risk measures. We adapt a stochastic multisectoral model to take into account carbon taxes on both sectoral firms' production and household's consumption. Taxes are calibrated on carbon prices, provided by the NGFS scenarios, as well as on sectoral households' consumption and firms' production, together with their related greenhouse gases emissions. For each sector, this yields the sensitivity of firms' production and households' consumption to carbon taxes and the relationships between sectors. Our model allows us to analyze the short-term effects of carbon taxes as opposed to standard Integrated Assessment Models, which are not only deterministic but also only capture long-term trends of climate transition policy. Finally, we use a Discounted Cash Flows methodology to compute firms' values which we then use in the Merton model to describe how the introduction of carbon taxes impacts credit risk measures. We obtain that the introduction of carbon taxes distorts the distribution of the firm's value, increases banking fees charged to clients (computed from the expected loss), and reduces banks' profitability (calculated from the unexpected loss). In addition, the randomness introduced in our model provides extra flexibility to take into account uncertainties on productivity and on the different transition scenarios. We also compute the sensitivities of the credit risk measures with respect to changes in the carbon taxes, yielding further criteria for a more accurate assessment of climate transition risk in a credit portfolio. This work provides a preliminary methodology to calculate the evolution of risk measures of a credit portfolio, starting from a given climate transition scenario described by carbon taxes.
    Date: 2023–07

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