nep-pbe New Economics Papers
on Public Economics
Issue of 2023‒11‒06
twelve papers chosen by
Thomas Andrén, Konjunkturinstitutet

  1. Optimal Income Taxation and Charitable Giving By Louis Kaplow
  2. The Economic Effects of an International Student Levy By Xianglong Locky Liu; James Giesecke; Jason Nassios
  3. Multidimensional tax compliance attitude By Bruns, Christoffer; Fochmann, Martin; Mohr, Peter N. C.; Torgler, Benno
  4. Fiscal Federalism and the Role of the Income Tax By Roger H. Gordon
  5. Insurance, Redistribution, and the Inequality of Lifetime Income By Peter Haan; Daniel Kemptner; Victoria Prowse; Maximilian Schaller
  6. Tax-Induced Emigration: Who Flees High Taxes? Evidence from the Netherlands By José Victor C. Giarola; Olivier Marie; Frank Cörvers; Hans Schmeets
  7. Disentangling Business- and Tax-Motivated Bilateral Royalty Flows By Lejour, Arjan; Riet, Maarten van ‘t
  8. Costs of capital and wealth tax: Remarks on Bjerksund and Schjelderup (2022) By Kruschwitz, Lutz; Löffler, Andreas; Lorenz, Daniela; Uttscheid, Moritz
  9. Optimal Taxation and Other-Regarding Preferences By Aronsson, Thomas; Johansson-Stenman, Olof
  10. Retirement Decision of Belgian Couples and the Impact of the Social Security System By Cetin, Sefane; Jousten, Alain
  11. The Effect of Reducing Welfare Access on Employment, Health, and Children's Long-Run Outcomes By Hicks, Jeffrey; Simard-Duplain, Gaëlle; Green, David A.; Warburton, William P.
  12. India’s Goods and Services Tax: Context, Design and Policy Spillovers By Raghbendra Jha; Azad Singh Bali

  1. By: Louis Kaplow
    Abstract: The philanthropic sector is highly consequential, particularly in the United States, and the most important policies directed toward this sector are tax policies. Yet most economic analysis of the optimal tax treatment of charitable giving is ad hoc, treating it as a subject unto itself. This article advances a different approach: integrating the tax treatment of charitable giving into the optimal income tax framework that has been developed over the past half century. The results supplement or overturn conventional wisdom. Notably, the analysis of revenue effects and the purported efficiency of subsidies to charitable giving is recast, focusing on the pertinent externalities rather than the direct revenue costs, which themselves are irrelevant in the basic case. Distributive concerns regarding donors are also misplaced because distributive effects can be offset by tax rate adjustments to the broader income tax and transfer system. These ideas are developed systematically, with an emphasis on intuition rather than technical formalism. The analysis also broadens and deepens the assessment of externalities from charitable giving, which are more numerous and heterogeneous than is generally recognized. Finally, refocusing our understanding of the optimal tax treatment of charitable giving identifies important subjects requiring further research.
    JEL: D64 H21 H22 H24 H41 K34 L38
    Date: 2023–10
  2. By: Xianglong Locky Liu; James Giesecke; Jason Nassios
    Abstract: We investigate the economic impacts and tax efficiency of an international student levy (ISL) levied at a rate of 5%. Like many other taxes, an ISL has adverse economic impacts. At the regional level, the adverse impacts are largest for regions that have relatively large export education sectors. At the industry level, the adverse impacts are largest for sectors involved in the export of education services. To compare the tax efficiency of an ISL to other Australian taxes, we calculate its marginal excess burden (MEB). We find that an ISL levied at a rate of 5% on international student fees has an MEB of 15, i.e. it generates economic damage of 15 cents per dollar of ISL revenue raised. This compares favourably with a number of major federal and state taxes, like personal income tax, GST, payroll tax, stamp duty and insurance duty, all of which have higher MEBs. When assessing tax mix change, comparative efficiency arguments should be balanced against broader economic implications and clear policy objectives.
    Keywords: Taxation, International Student, CGE modelling, Excess Burden
    JEL: C68 H2 H5 H72
    Date: 2023–08
  3. By: Bruns, Christoffer; Fochmann, Martin; Mohr, Peter N. C.; Torgler, Benno
    Abstract: Citizen tax compliance significantly dictates governmental fiscal capacities. Recognizing this, understanding the determinants of tax compliance remains paramount. While existing literature frequently isolates and tests individual determinants such as audit likelihood, penalty structures, tax morale, and perceived fairness, an integrative, bottom-up approach addressing the spectrum of tax compliance attitudes has largely been overlooked. Addressing this gap, our study constructs a multidimensional Tax Compliance Attitude Inventory (TCAI) by harmonizing real taxpayer responses with established theoretical underpinnings. Through factor analysis, we delineate four pivotal factors: (i) morale, (ii) monetary benefit, (iii) deterrence, and (iv) authority. Notably, morale and deterrence emerge as consistent influencers of tax compliance. Embracing this multidimensionality, our cluster analysis demarcates two distinct taxpayer personas: (a) moralists and (b) rationalists. Our findings underscore that moralists consistently exhibit higher tax compliance than their rationalist counterparts. We further present a streamlined classification algorithm to operationalize the TCAI in new datasets, minimizing item count. This work serves as a seminal contribution, offering both academia and tax authorities a robust, quantitative tool to gauge tax compliance attitudes.
    Keywords: Behavioral economics, compliance attitudes, compliance behavior, tax evasion, heterogeneous individuals
    JEL: C38 C83 D91 H26
    Date: 2023
  4. By: Roger H. Gordon
    Abstract: This paper rethinks the design of the income tax by assuming that the objective of the tax is not to redistribute from rich to poor but instead to provide some insurance to individuals against the uncertainties they face in their future earnings, a motivation for the tax proposed in Buchanan (1976). The income tax provides insurance by collecting money on net from individuals to the extent they end up doing well to finance net transfers to them when they end up doing badly. Individuals differ in the amount of future risks they face. These heterogeneous tastes for insurance provide a rationale for states to offer heterogeneous tax/transfer programs, each state attracting a different clientele in the population. Given the ease of household migration, state tax policies generate fiscal externalities to other states. The paper explores as well possible Federal interventions to improve on the equilibrium choices states make for their tax policies.
    JEL: H21 H24 H31 H71
    Date: 2023–10
  5. By: Peter Haan; Daniel Kemptner; Victoria Prowse; Maximilian Schaller
    Abstract: Individuals vary considerably in how much they earn during their lifetimes. This study examines the role of the tax-and-transfer system in mitigating such inequalities, which could otherwise lead to disparities in living standards. Utilizing a life-cycle model, we determine that taxes and transfers offset 45% of lifetime earnings inequality attributed to dierences in productive abilities and education. Additionally, the system insures against 48% of lifetime earnings risk. Implementing a lifetime tax reform linking annual taxes to previous employment could improve the system’s insurance capabilities, albeit at the cost of a lower employment rate.
    Keywords: Lifetime earnings, lifetime income, tax-and-transfer system, taxation, unemployment insurance, disability benefts, social assistance, inequality, redistribution, insurance, education, productive ability, risk, dynamic life-cycle models.
    JEL: D63 H23 I24 I38 J22 J31
    Date: 2023–10
  6. By: José Victor C. Giarola (Maastricht University); Olivier Marie (Erasmus University Rotterdam); Frank Cörvers (Maastricht University); Hans Schmeets (Maastricht University)
    Abstract: We study the impact of a policy change in the Netherlands that reduced preferential tax treatment duration for high-skilled migrants arriving from specific countries in certain years. Utilizing comprehensive tax and population data, we document substantial tax-induced emigration responses, primarily driven by the top 1% of earners. Highly mobile individuals within the top 5% also emigrate sooner, particularly to competing countries offering tax-breaks to attract skilled workers. Crucially, we uncover no change in mobility behavior among lower-earning workers. The increased tax receipts from lower-income individuals who remain offset the loss from fleeing high earners, making the policy fiscally cost-neutral.
    Keywords: Taxation, immigration, labor income, Netherlands.
    JEL: F22 H31 J61
    Date: 2023–10–12
  7. By: Lejour, Arjan (Tilburg University, Center For Economic Research); Riet, Maarten van ‘t
    Keywords: bilateral royalty flows; international tax avoidance; treaty shopping; withholding tax; tax havens
    Date: 2023
  8. By: Kruschwitz, Lutz; Löffler, Andreas; Lorenz, Daniela; Uttscheid, Moritz
    Abstract: This note incorporates wealth taxes in a simple asset valuation model based on discounted cash flows. Any valuation method requires an adjustment of pre-tax into post-tax costs of capital. By adopting the adjustment procedure proposed in previous literature, we show that arbitrage opportunities can occur - which is incompatible with a consistent valuation. In particular, such problems arise if a wealth tax system applies that uses current (instead of previous) stock prices as the basis for assessment. Furthermore, in this setting we derive a consistent relation between pre-tax and post-tax costs of capital that is compatible with the premise of no-arbitrage by exploiting risk-neutral probabilities.
    Date: 2023
  9. By: Aronsson, Thomas (Department of Economics, Umeå University); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, University of Gothenburg)
    Abstract: The present paper analyzes optimal redistributive income taxation in a Mirrleesian framework extended with other-regarding preferences at the individual level. We start by developing a general model where the other-regarding preference component of the utility functions is formulated to encompass almost any form of preferences for other people’s disposable income, and then continue with four prominent special cases. Two of these reflect self-centered inequality aversion, based on Fehr and Schmidt (1999) and Bolton and Ockenfels (2000), whereas the other two reflect non-self-centered inequality aversion, where people have preferences for a low Gini coefficient and a high minimum income level in society, respectively. We find that other-regarding preferences may substantially increase the marginal tax rates, including the top rates, and that different types of other-regarding preferences have very different implications for optimal taxation.
    Keywords: Optimal Taxation; Redistribution; Social Preferences; Inequality Aversion
    JEL: D62 D90 H21 H23
    Date: 2023–10–19
  10. By: Cetin, Sefane (Université catholique de Louvain); Jousten, Alain (University of Liège)
    Abstract: This paper investigates the retirement patterns of married couples in Belgium. To forecast retirement behavior, we use administrative Social Security data from 2003 to 2017 and a discrete choice random utility model. In particular, we concentrate on the spousal bonus of pension payments to comprehend how financial incentives resulting from the social security system's structural design affect both partners' retirement decisions. We simulate the effect of the elimination of the spousal bonus and find that a small portion of women delay their retirement whereas the rest substitute into alternative social security benefits. Our results do not only highlight the significance of cross-program spillovers between various Social Security benefits, but also the heterogeneity in preferences for retirement and asymmetry of retirement behavior between husbands and wives.
    Keywords: old-age labor supply, retirement incentives, spousal bonus, pension reforms
    JEL: D10 H55 J26
    Date: 2023–09
  11. By: Hicks, Jeffrey (University of Toronto); Simard-Duplain, Gaëlle (Carleton University); Green, David A. (University of British Columbia, Vancouver); Warburton, William P. (Enterprise Economic Consulting)
    Abstract: Welfare caseloads in North America halved following reforms in the 1990s and 2000s. We study how this shift affected families by linking Canadian welfare records to tax returns, medical spending, educational attainment, and crime data. We find substantial and heterogeneous employment responses that increased average income despite reduced transfers. We find zero effects on aggregate health expenditures, but mothers saw reduced preventative care and increased mental health treatment, consistent with the transition to employment elevating time pressure and stress. We find no effect on teenagers' education and criminal charges as young adults but do find evidence of intergenerational welfare transmission.
    Keywords: welfare, income, health
    JEL: H23 H31 I14 I24 I38 J62
    Date: 2023–10
  12. By: Raghbendra Jha; Azad Singh Bali
    Abstract: The 2017 Goods and Services Tax (GST) was one of most ambitious tax reforms introduced in India. This paper documents the context in which the GST was introduced – particularly the regional disparities in economic capacity, discusses design challenges in developing the GST, and the basic contours of the newly introduced GST. The paper advances two arguments. First, the he efficacy of India’s tax reform must be assessed in the context of federal transfers and larger spillovers of the GST to the economy. Further, there is a compelling necessity to review and recalibrate the entire gamut (and not piecemeal) of federal relations – tax, expenditure and transfers. This is critical to ensure the stability and predictability needed to ensure that India’s state driven growth blossoms and attains full fruition.
    Keywords: Fiscal Federalism, GST, federal transfers, India
    JEL: H2 H5 H6 H7 O5
    Date: 2023

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