nep-pbe New Economics Papers
on Public Economics
Issue of 2023‒10‒30
sixteen papers chosen by
Thomas Andrén, Konjunkturinstitutet

  1. Tax planning and investment responses to dividend taxation By Aliisa Koivisto
  2. Disentangling business- and tax-motivated bilateral royalty flows By Arjan Lejour; Maarten van 't Riet
  3. The Optimal Taxation of Network Goods By Hargaden, Enda; Hanson, Andrew; Harris, Matthew
  4. Tax-Price Elasticities of Charitable Giving and Selection of Declaration : Panel Study of South Korea By KATO, Hiroki; GOTO, Tsuyoshi; KIM, Youngrok
  6. Multinational firms in tax havens: Corporate motives, regulatory countermeasures, and recent statistics By Olbert, Marcel; Spengel, Christoph; Weck, Stefan
  7. Distributional Impact of Indian GST. By Mukherjee, Sacchidananda
  8. Policy Misperceptions, Information, and the Demand for Redistributive Tax Reform: Experimental Evidence from Latin American Countries By Ardanaz, Martín; Hübscher, Evelyne; Keefer, Philip; Sattler, Thomas
  9. Identifying network ties from panel data: Theory and an application to tax competition By Áureo de Paula; Imran Rasul; Pedro CL Souza
  10. The Impact of R&D tax incentives: Results from the OECD microBeRD+ project By OECD
  11. The Role of Disability Insurance on the Labour Market Trajectories of Europeans By Agar Brugiavini; Petru Crudu
  12. Update to the economic impact assessment of pillar one: OECD/G20 Base Erosion and Profit Shifting Project By Pierce O’Reilly; Tibor Hanappi; Samuel Delpeuch; Felix Hugger; David Whyman
  13. Fiscal Rules: Challenges and Reform Opportunities for Emerging Markets By Ardanaz, Martín; Cavallo, Eduardo A.; Izquierdo, Alejandro
  14. Fiscal Rules and Economic Cycles: Quality (Always) Matters By Andrian, Leandro Gaston; Valencia, Oscar; Hirs, Jorge; Urrea Rios, Ivan Leonardo
  15. The Impact of Covid-19 on Pensions due to Early Withdrawals of Pension Savings By Castro, Rubén; González, Leonardo; Schiappacasse, Ignacio; Tapia, Juan
  16. Participation in supplementary pension savings in Iceland By Asgeir Danielsson; Rannveig Sigurdardottir; Svava J. Haraldsdottir

  1. By: Aliisa Koivisto (Finnish Centre of Excellence in Tax Systems Research, VATT Institute for Economic Research)
    Abstract: This study explores empirically how business owners respond to dividend taxes in a range of diferent margins including tax planning and investment. Using administrative tax data on all privately held Finnish corporations, I fnd exceptionally clear dividend payment responses to tax rate discontinuities and changes. Heterogeneity analysis suggests that more experienced owners and owners with lower income have higher tax base elasticities. Studying the income composition of owners around tax changes reveals clear income shifting between wage and dividends with negligible efect on gross income received from the frm. Evidence on the asset composition of frms indicates that a notable part of the payment response is due to inter-temporal income-smoothing, while changes in the tax schedule did not cause signifcant real responses in output or investment.
    Keywords: Dividend taxation, investment, income shifting, bunching
    JEL: G38 H21 H24 H25
    Date: 2023–09
  2. By: Arjan Lejour (CPB Netherlands Bureau for Economic Policy Analysis); Maarten van 't Riet (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: Multinational firms pay for the use of intellectual property (IP). The IP-rights may be located in another country where the royalty income is taxable. This taxation may differ between countries which offers opportunities for tax avoidance. This implies that bilateral royalty payments may not only be business motivated but may also be tax driven. We determine the shares of tax and business motivated flows. We estimate that at least 18% of the size of the flows is tax driven. The associated worldwide loss of tax revenue is between 6.5 and 16 billion US dollar.
    JEL: H25 H26 H32
    Date: 2023–10
  3. By: Hargaden, Enda; Hanson, Andrew; Harris, Matthew
    Abstract: We derive optimal tax formulas for network goods. The solution trades-off contemporaneous revenue collection against the discounted future flows of reduced network growth. We provide conditions under which the optimal tax sequence is time-invariant, and show that the rates should in general change over time. A quantitative model with consumer heterogeneity highlights patterns in these optimal sequences, and underscores the equity trade-offs
    Keywords: Public Finance, Optimal taxation, network goods, consumption externalities, atmospheric externalities.
    JEL: H20 H21 H23
    Date: 2023–08–01
  4. By: KATO, Hiroki; GOTO, Tsuyoshi; KIM, Youngrok
    Abstract: In this study, we estimate the tax-price elasticity of charitable giving and address the bias caused by the existence of unreported donations and self-selection to the declaration of giving. To eliminate this bias, we propose a simple estimation method based on intentionto- treat analysis. Using our proposed method and the exogenous variation in tax incentives in the 2014 South Korean tax reform, we estimate the price elasticity of donations to be −1.6 for the intensive margin and −2.6 for the extensive margin, which are more elastic than the standard results that do not account for unreported donations and self-selection. The result implies that the 2014 tax reform reduced the total amount of giving and that tax incentives should be expanded.
    Keywords: Charitable giving, Tax incentives, Price elasticity, Selection, Declaration
    JEL: D64 H24 H31
    Date: 2023–09
  5. By: Kazakova, Maria (Казакова, Мария) (The Russian Presidential Academy of National Economy and Public Administration)
    Abstract: The progressive tax system is a tax structure in which the tax rate increases as the taxpayer's income level increases. This means that people with higher incomes pay a larger percentage of their income in taxes than people with lower incomes. The relevance of this work is determined by the fact that currently the issues of reducing inequality and increasing economic growth remain on the agenda of both developed and developing countries, and for the latter the problem of reducing poverty remains acute. In turn, tax system reforms have an impact on the macroeconomic indicators listed above and, thus, can serve as a tool for regulating inequality and poverty, as well as a way to accelerate economic growth. The main purpose of the study is to systematize the results of empirical studies examining the impact of progressive taxation reforms on inequality, poverty and economic growth in countries with different levels of development (subject of the study). A review of academic literature (source of information) devoted to the analysis of the impact of progressive tax reforms on inequality, poverty and economic growth in developed and developing economies contributes to the achievement of the stated goal (research objectives). The study was conducted using such methods as descriptive, statistical and graphical analysis, data analysis, a systematic approach, and comparative analysis. According to the results of the study, it can be concluded that 1) progressive taxation reforms can play a significant role in reducing income inequality in developed countries by redistributing income and providing financing for social programs and services that benefit low-income households; 2) the impact of such reforms on economic growth in developed countries depends on the specific structure of the tax system. the system and the broader economic context in which reforms are being implemented; 3) the described reforms can potentially become an effective tool for poverty reduction in developing countries, but their success will depend on a number of factors, including the specific conditions of each country and the quality of governance and institutions; 4) the impact of progressive tax reforms on economic growth in developing countries is a complex issue that depends on various factors, and the actual impact it can vary greatly depending on the specific circumstances of the country under consideration (scientific novelty of the work). In this regard, a promising direction for future research on this issue is a review of the main approaches to modeling the impact of progressive taxation reforms on macro indicators in developed and developing countries. The results of the review can also be used to develop tax policy measures in the Russian Federation aimed at reducing inequality and increasing economic growth in the country.
    Keywords: progressive taxation, tax reforms, inequality, poverty, economic growth, developed and developing countries
    JEL: E62 H23 H30 O40
    Date: 2023–05–25
  6. By: Olbert, Marcel; Spengel, Christoph; Weck, Stefan
    Abstract: We investigate multinational firms' activities in tax havens and regulatory efforts to curb these activities in three steps. First, we discuss the evolution of information exchange and disclosure regimes among tax authorities, with a focus on the recent Countryby-Country (CbC) reporting regimes, designed to uncover and address tax haven usage by multinational firms. Second, we review existing empirical literature on multinational firms' tax haven utilization, specifically examining the impact of information exchange regulations and Country-by-Country Reporting. Third, we augment the current empirical evidence by presenting tax haven entity statistics from 2007 to 2021 for a representative multinational firm sample, sourced from Bureau van Dijk (BvD) Orbis and the aggregated CbC data provided by the Organisation for Economic Co-operation and Development (OECD). Our analysis suggests that, if exploited systematically, the recent Orbis database provides granular coverage of multinational firms' subsidiaries worldwide, including tax haven entities in jurisdictions without disclosure mandates and information sharing agreements. Our findings reveal that multinational firms' ownership of tax haven entities peaked in 2015, with over 50, 000 legal entities incorporated in tax havens (30, 000 in Big8 tax haven jurisdictions). Although the growth of tax haven entities slowed after 2015, the overall number remains substantial as of 2021. Furthermore, European multinationals experienced a modest decline in tax haven entities following the implementation of mandatory private CbCR. We conclude by discussing policy implications and suggesting avenues for future research.
    Keywords: Tax havens, multinational firms, tax avoidance, Country-by-Country Reporting, transparency, information exchange
    JEL: H20 H25 H26 F23 P45
    Date: 2023
  7. By: Mukherjee, Sacchidananda (National Institute of Public Finance and Policy)
    Abstract: We estimate GST rate-wise distributional impact of GST across different consumer groups in India for 2021-22. Multiple rate structure and fixation of GST rates based on product specification make it difficult to assign a specific GST rate (or estimation effective GST rate) across items (or group of items) of consumption. In absence of recent consumer expenditure survey of the National Sample Survey Organisation (NSSO), we use CMIE's Consumer Pyramids Household Survey (CPHS) for 2021-22. We distribute all India average monthly per capita consumption expenditure (MPCE) on 123 items (or group of items) across 9 tax categories [viz., exempted, very low (exempt to 5%), low (5%), lower middle (5 to 12%), middle (12 to 18%), upper middle (18%), upper (28%), high (>28%) and ‘Out of GST’] by regions (i.e., rural and urban) and estimate the share of each tax category in aggregate average MPCE across fractile classes of MPCE. Given the tax category, as the share of consumption expenditure increases (or decreases) with increasing size of the consumption basket (or as represented by fractile class of MPCE), tax burden will increase (or decrease). We find that on average 24.5 per cent of average MPCE is exempted from GST. When we add the shares of very low tax and low tax categories with exempt category for all regions, we find that 57.6 per cent of average MPCE (or average size of the consumption basket) is either exempted or face lower tax rate (upto 5%) in the GST regime. On average 14.5 per cent of average MPCE constitutes consumption of ‘Out-of-GST’ items. Therefore, only 28 per cent of average MPCE of consumers face GST rates above 5 per cent. Out of 28 per cent of average MPCE, on average 14 percent attracts GST rate 18 per cent and the rest is distributed across lower middle, middle and high GST rate categories. Consumer groups with higher average MPCE benefits the most from the tax (GST) exemptions –both in rural and urban areas. Very low and low tax rate benefit the consumers with lower average MPCE. Except for fractile class greater than P95 in urban areas, consumption of items under lower middle tax category shows proportionate tax burden across all fractile classes of MPCE. It is lower strata of consumer groups (having relatively lower average MPCE) who bear the burden of tax on items falling under middle tax category the most. Both in rural and urban areas, lower strata of consumers (upto fractile class P30) face progressive tax burden on consumption of items falling under middle GST rate. Items falling under high tax rate category are intoxicants (cigarettes, bidi and other tobacco products) and in addition to the highest GST rate these items attract GST compensation cess. Distributional effects of tax burden of intoxicants differ across consumer groups and across regions. Consumption of alcoholic beverages, liquor at restaurants, petrol & CNG (compressed natural gas), diesel, and electricity attract taxes other than GST. There is progressivity of tax burden for this category across fractile classes in all regions.
    Keywords: distributional impacts ; tax incidence ; progressive ; regressive ; Goods and Services Tax (GST) ; Value Added Tax (VAT) ; rate restructuring ; India
    JEL: H22 D30 E21 Z18
    Date: 2023–10
  8. By: Ardanaz, Martín; Hübscher, Evelyne; Keefer, Philip; Sattler, Thomas
    Abstract: Why do individuals preferences for redistribution often diverge widely from their material self-interest? Using an original online survey experiment spanning eight countries and 12, 000 respondents across Latin America, one of the most unequal regions in the world, we find significant evidence for an under-explored explanation: misconceptions regarding the distributional effects of current tax policy. Treated respondents who are informed that an increase in the value added tax (VAT) is regressive are significantly more likely to prefer policy reforms that make the tax more progressive. Treatment effects are driven by the large fraction of respondents who underestimate the regressivity of the VAT, even though their misperceptions are linked to fundamental views about the world. These respondents are disproportionately right-leaning and more likely to attribute success to individual effort than luck. Despite the deep-rooted nature of respondents misperceptions, treatment effects are largest among individuals who hold these views of the world. These findings contribute both to understanding the political economy of redistribution and the potential for information interventions to shift support for fiscal adjustment policies protecting the most vulnerable.
    Keywords: taxes;redistribution;Survey experiment
    JEL: D72 D90 H20 H30
    Date: 2022–12
  9. By: Áureo de Paula; Imran Rasul; Pedro CL Souza
    Abstract: Social interactions determine many economic behaviors, but information on social ties does not exist in most publicly available and widely used datasets. We present results on the identification of social networks from observational panel data that contains no information on social ties between agents. In the context of a canonical social interactions model, we provide sufficient conditions under which the social interactions matrix, endogenous and exogenous social effect parameters are globally identified if networks are constant over time. We also provide an extension of the method for time-varying networks. We then describe how high-dimensional estimation techniques can be used to estimate the interactions model based on the Adaptive Elastic Net Generalized Method of Moments. We employ the method to study tax competition across US states. The identified social interactions matrix implies that tax competition differs markedly from the common assumption of competition between geographically neighboring states, providing further insights into the long-standing debate on the relative roles of factor mobility and yardstick competition in driving tax setting behavior across states. Most broadly, our identification and application show that the analysis of social interactions can be extended to economic realms where no network data exists.
    Date: 2023–10–11
  10. By: OECD
    Abstract: This document reports on the final output of the OECD microBeRD+ project. Drawing on the outcomes of previous work, this study presents new evidence on the impact of business R&D support policies – tax incentives and direct forms of support – on business R&D investment (R&D input additionality) and the innovation and economic performance of firms (R&D output additionality). The report also provides an exploratory analysis of R&D spillovers.
    JEL: H25 O38 L25
    Date: 2023–10–09
  11. By: Agar Brugiavini (Department of Economics, University Of Venice CÃ Foscari; Institute for Fiscal Studies); Petru Crudu (Department of Economics, University Of Venice CÃ Foscari)
    Abstract: This work documents the role played by disability insurance, typically part of a wider public pension provision package, on the labour market trajectories and retirement decisions. We will first employ a machine learning approach to estimate a Transition Probability Model able to uncover the most likely labour market histories and then evaluate the effects of policy reforms, including reforms to the eligibility for disability insurance benefits. The main contribution is the introduction of disability insurance programs within a framework, which models the entire life course of older Europeans. This requires the detailed administrative eligibility criteria prevailing in each of the 11 countries from 1970 to 2017. Results show that the disability route and early retirement are substitutes. In addition, tightening eligibility rules of disability programs crowd out disabled workers, whose reductions in working capacities are correctly assessed, towards other compensatory schemes (e.g., unemployment benefits or early pension) in which working is not expected. On the contrary, individuals with over-assessed reductions in working capacities are the most reactive to disability policy restrictions. In conclusion, efficient disability assessment procedures are crucial for incentivising labour market participation without hurting individuals most in need.
    Keywords: Retirement, Disability, Path Dependence, Simulation
    JEL: J14 J26 I38 H55
    Date: 2023
  12. By: Pierce O’Reilly; Tibor Hanappi; Samuel Delpeuch; Felix Hugger; David Whyman
    Abstract: This paper presents an update to the Economic Impact Assessment of Amount A of Pillar One of the Two Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy. The revised assessment is based on Amount A as detailed in the text of the Multilateral Convention to Implement Amount A of Pillar One. With results extending from 2017 to 2021, the paper details the changes in the design of Amount A as well as updates to the data and methodology of the impact assessment. The paper outlines the impact of Amount A on the allocation of taxing rights and the resulting revenue impacts.
    JEL: H F
    Date: 2023–10–11
  13. By: Ardanaz, Martín; Cavallo, Eduardo A.; Izquierdo, Alejandro
    Abstract: Fiscal rules have gained popularity as tools to strengthen debt sustainability by constraining policy discretion. However, their track record in the case of emerging markets is mixed, as setting up a fiscal rule has been no guarantee of debt stabilization. International experience and empirical evidence regarding the working of fiscal rules suggest that paying attention to the quality of rule design, the mechanisms behind better compliance, forward guidance on return to the rule, and the impacts on different dimensions of public finances (particularly spending composition) is key to enhancing fiscal rule performance. In addition, fiscal rules should be complemented with credible medium-term fiscal frameworks and independent fiscal councils that together set relevant policy anchors to support effectively the goal of safeguarding fiscal sustainability.
    JEL: E61 H54 H63
    Date: 2023–02
  14. By: Andrian, Leandro Gaston; Valencia, Oscar; Hirs, Jorge; Urrea Rios, Ivan Leonardo
    Abstract: Governments can issue public debt for both good and bad reasons. The former include intertemporal tax smoothing, fiscal stimulus, and asset management. In contrast, the bad reasons, which generate higher indebtedness, are mainly associated with political cycles, rent capture, intergenerational transfers, and common pool problems. Fiscal rules aim to eliminate the problem of time inconsistency of public finances and minimize debt accumulation by setting debt limits. Despite the theoretical relevance of fiscal rules and institutions to the proper management of fiscal processes in different countries, the evidence indicates mixed results regarding the effectiveness of this type of mechanism for fiscal performance. To understand the effect that fiscal rules have on public debt, this paper studies the effect of different types of rules on debt behavior and their differential effects with respect to the economic cycle. Using a dynamic panel, which enables us to control for endogeneity problems, and the use of a fiscal rule quality index (Schaechter et. al., 2012), this paper finds that fiscal rules only have a significant effect on the reduction of public debt during the positive side of the economic cycle if adequate institutional arrangements accompany them. Furthermore, only some types of fiscal rules (expenditure rules) show a significant effect during the negative part of the cycle. These results have relevant policy implications, as they underscore the importance of (1) developing institutional arrangements that promote the proper functioning of fiscal rules and (2) considering economic cycle asymmetries in order to ensure the appropriate operation of fiscal rules and the fulfillment of policy objectives.
    Keywords: Fiscal Rules;Public Debt;Business cycle
    JEL: E32 E61 E62 H30 H63
    Date: 2022–11
  15. By: Castro, Rubén; González, Leonardo; Schiappacasse, Ignacio; Tapia, Juan
    Abstract: The Chilean pension system was hit hard during 2020-2021 by the withdrawal of 25 per cent of the individual pensions funds accumulated by 2019, an amount equivalent to 20 per cent of Chiles GDP. We estimate here the impact of those withdrawals on new pension allowances, using a combination of official data sets and the IDB model for the actuarial projection of pensions, including its heterogeneity matrix, to simulate the distribution of pension impacts. The withdrawal impact decreases in new retirees of future years until disappearing around the year 2065. We estimate respective impacts of about 31 percent and 37 percent for males and females new self-financed pensions around the year 2022, which goes to about 56 percent among the third of the affiliates with the lowest savings. However, we found that the recent increase in non-contributory pensions more than counteracted this impact for roughly 90 percent of 2022 new retirees. Regarding labor markets shocks, we found only a moderate role for them in the long-term evolution of the pension system, as we also found to be the case of seven Caribbean countries (Cuba, Haiti, Dominican Republic, Jamaica, Trinidad and Tobago, Bahamas and Barbados). As an overall conclusion, we recommend studying contribution rates, because low-salary workers attain a substantial replacement rate with just the non-contributory pension, which casts doubt on whether a mandatory contribution is appropriate for them.
    Keywords: COVID-19;Labor markets
    JEL: H55 H68 J20
    Date: 2022–10
  16. By: Asgeir Danielsson; Rannveig Sigurdardottir; Svava J. Haraldsdottir
    Abstract: We analyse participation in supplementary pension savings in Iceland using microdata on every person, aged 16 and over, registered in Iceland in 1999-2017. Although sizeable subsidies are offered, a large share of those eligible do not participate. The significant increase in subsidies in 2014 did affect participation, although less than expected. We find that women participate significantly more than men, apart from the youngest and oldest age groups. The difference between women and men is larger for single persons than for couples. It is also larger for those with only primary education than for those with tertiary education. The subsidies are such that the rate of return on the savings increases with age. Despite this, we find that participation rates are nearly constant between age 30 and age 60, whereupon participation starts to decline at around the time the savings can be withdrawn. We observe a significant correlation between the decision to start withdrawing funds and the decision to stop participating. Estimating equations for wage income using cross-sectional data, we find the usual concave (Mincer) shape, except for people in their late sixties, whose average wage income starts to increase, reflecting the tendency among higher-income people to retire later. We discuss the problems caused by the correlation between income and education, and between income and gender, and we use two-stage probit least squares to test for exogeneity of income.
    JEL: H2 H3 D12 D14
    Date: 2023–08

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