nep-pbe New Economics Papers
on Public Economics
Issue of 2023‒11‒13
fifteen papers chosen by
Thomas Andrén, Konjunkturinstitutet

  1. Persistence in Tax Revenues: Evidence from Some OECD Countries By Guglielmo Maria Caporale; Silvia García Tapia; Luis Alberiko Gil-Alana
  2. Tax structure and public sector efficiency: new evidence for developing countries By Lucas Menescal; José Alves
  3. A Cost-Benefit Analysis Methodology for Administrative Prefilling of Value-Added Tax Returns: An Application for Chile By Glenn P. Jenkins; Siamand Hesami; Osaid Alshamleh; Anastasiya Yarygina; Carola Pessino
  4. Tax Avoidance or Compliance Costs Avoidance? Evidence from VAT Reforms in Japan By Takafumi Kawakubo; Takafumi Suzuki; Kohei Asao
  5. Incidence of Corporate Income Tax: Estimates from Indian Manufacturing Firms By K. Sankarganesh; K. R. Shanmugam
  6. Education, mobility and redistribution By Pestieau, Pierre; Racionero, Maria
  7. How much tax do the rich really pay? Evidence from the UK By Advani, Arun; Hughson, Helen; Summers, Andy
  8. 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
  9. Disentangling Business- and Tax-Motivated Bilateral Royalty Flows By Lejour, Arjan; Riet, Maarten van ‘t
  10. Graying and staying on the job: The welfare implications of employment protection for older workers By Morries, Todd; Dostie, Benoît
  11. Basic income versus fairness: redistribution with inactive agents By Germain, Antoine
  12. Negotiated transfer pricing and uncertain regulation: a simulated trust game approach By Cascavilla, Alessandro
  13. Fiscal Federalism in India: A Case for Reassigning of Tax Powers By R. Srinivasan; S. Raja Sethu Durai
  14. Sustainability of pension reforms: An EU-wide political stress By Cetin, Sefane; Hindriks, Jean
  15. Replacing Customs Revenue with Taxes on Income and Domestic Consumption: The South African Experience By Andreas Freytag; Krige Siebrits

  1. By: Guglielmo Maria Caporale; Silvia García Tapia; Luis Alberiko Gil-Alana
    Abstract: This paper examines persistence in tax revenues in a set of 21 OECD countries over the period 1965-2021 using long-range dependence techniques based on fractional integration. The results imply that there are only a few cases of mean reversion: one for total revenue (Switzerland); three for VAT (Belgium, Italy, and Spain), and six for tax on income (Austria, Belgium, Finland, Spain, Sweden and USA). The analysis is also carried out for inflation in the same set of countries. Again the I(1) hypothesis cannot be rejected in most cases, mean reversion only occurring in Korea, Iceland, Norway and Sweden. However, stronger evidence of mean reversion is found for the differences between the three original tax series and inflation compared to the tax series themselves, which points to the existence of a linkage between taxation and inflation, especially in the case of VAT and tax on income.
    Keywords: revenues, taxes, persistence, fractional integration, long memory
    JEL: C13 C22
    Date: 2023
  2. By: Lucas Menescal; José Alves
    Abstract: This study examines the effects of the tax structure composition for public sector efficiency in a sample of 41 developing countries for the period between 1997-2019. We start by calculating Public Sector Performance (PSP) composite indicators and use them as outputs to compute data envelopment analysis (DEA) efficiency scores under different orientation setups. After using a general-to-specific approach to identify the most determinant variables, we analyze the relevance of different taxes for public efficiency in a panel regression specification. We find that tax effects are significantly different depending on the orientation of DEA scores. Notably, we observe that taxation presents stronger detrimental effects to input-oriented scores in comparison to output-oriented, and that Opportunity PSP indicators seem more affected by property taxes and working contributions, while Musgravian PSP indicators are more closely related to individual and corporate income taxes. Our results allow us to provide policy implications regarding better tax structures to improve efficiency on the provision of public goods and services.
    Keywords: Public sector performance; Government efficiency; Tax structure; Data envelopment analysis; Developing countries; Panel data.
    JEL: C14 C23 H11 H21 H50
    Date: 2023–10
  3. By: Glenn P. Jenkins (Department of Economics, Queens University, Kingston, Ontario, Canada and Cyprus International University, North Cyprus); Siamand Hesami (Department of Finance Bournemouth University, UK, and Cambridge Resources International Inc.); Osaid Alshamleh (Vienna University of Economics and Business, Cyprus International University, North Cyprus, and Cambridge Resources International Inc.); Anastasiya Yarygina (Inter-American Development Bank (IDB)); Carola Pessino (Inter-American Development Bank (IDB))
    Abstract: Tax administrations (TAs) worldwide have increasingly been moving toward digitalization to increase process efficiency and service delivery. This technical note presents a methodology, and its application for the case of Chile, for evaluating the benefits and costs of a particular component of the TA’s digital transformation: prefilling of value-added tax (VAT) returns. The analysis identifies and allocates the net benefits from both the financial and the economic perspectives considering two major stakeholders: the government and taxpayers. The results show that prefilled VAT returns could benefit TAs and taxpayers, with a reduction in taxpayers’ compliance costs being a primary benefit. The application of the model to the Chilean case shows the economic net present value of the prefilling of VAT returns is US$5.66 billion, with a net benefit to the private sector of US$1.729 billion and a public sector or budgetary impact of US$3.391 billion. Sensitivity analyses show that the results are robust to changes in assumptions, except for the impact on government revenues from the change in taxpayer compliance. Overall, the results show that prefilling tax returns is an effective solution to high taxpayer compliance costs, the associated tax gap, and the risk of burdensome inspections, audit, and tax evasion.
    Keywords: cost-benefit analysis, tax compliance cost, tax administration, digitalization
    JEL: D61 H21 H26 H83
    Date: 2023–10–17
  4. By: Takafumi Kawakubo (London School of Economics and Visiting Scholar, Policy Research Institute, Ministry of Finance, Japan); Takafumi Suzuki (Lecturer, Aichi Shukutoku University); Kohei Asao (Visiting Scholar, Policy Research Institute, Ministry of Finance, Japan)
    Abstract: This paper disentangles the motivations behind how enterprises respond to sizedependent tax regulations by exploiting the value-added tax (VAT) reforms in Japan. In Japan, both tax threshold and tax rate have been changed over the past three decades since the introduction of VAT. We build on the model of Harju et al. (2019) to incorporate various tax reforms and derive empirically testable implications. By using a novel panel of Japanese Census of Manufacture covering the period over VAT introduction and reforms, we conducted bunching estimation. The local estimates imply that the observed output response by enterprises is mainly caused by compliance costs rather than tax rates for small enterprises in Japan. The results suggest that easing compliance costs could be more effective support for small enterprises rather than reducing tax rate/burden.
    Keywords: compliance costs; value-added tax; sole proprietor; firm behavior
    JEL: D22 H25 H32 L11
    Date: 2022–06
  5. By: K. Sankarganesh (Ph.D. Research Scholar, Madras School of Economics, Chennai); K. R. Shanmugam ((Corresponding Author)Director and Professor, Madras School of Economics)
    Abstract: The purpose of this paper is to examine the incidence of corporate tax on capital and labour in Indian manufacturing sector. The paper employs ‘Seemingly Unrelated Regression Method’ with add-up restriction based on the work of Desai, Foley and Hines (2007). The study shows that the corporate tax has a significant adverse impact on both wages paid to employees and profit after tax. Capital owners bear 96.3 percent of the tax burden and labours bear only 3.7 percent. The adverse effect on wages is slightly higher in public firms than in private firms. The relative tax burdens of labour and capital remained the same in the pre-2008 global economic crisis and post crisis periods. The impact on both wages and profits increase with age and size of firms but decrease with leverage. These results will be useful to policymakers and other stakeholders to take appropriate strategies to design the corporate tax policy such that it is more redistributive and not burden to labours in manufacturing firms in India. The study considered only manufacturing sector for the period 2005-2019. This is the first study to analyse the relative contribution/burden of corporate tax shared by capital and labour in Indian manufacturing sector. The paper contributes to the scant empirical literature on corporate tax incidence.
    Keywords: Investment Corporate tax incidence, General equilibrium analysis, Indian manufacturing firms, Panel data, SUR estimation method
    JEL: H32 J30 H25 H22 C33
    Date: 2022–12
  6. By: Pestieau, Pierre (Université catholique de Louvain, LIDAM/CORE, Belgium); Racionero, Maria
    Abstract: Recent evidence suggests that social mobility has declined in many devel- oped countries despite some of them pursuing proactive redistribution policies. In this paper we characterize the optimal mix of income tax and education poli- cies that a government should adopt to maximize a long-term social objective that includes considerations for income redistribution and upward mobility. We show that switching from an elitist to a meritocratic education system, or from a short-term to a long-term vision of social welfare, fosters upward mobility but it can sometimes lead to increased inequality.
    Keywords: Social mobility ; education policy ; Great Gatsby curve
    JEL: H20 H31 H50
    Date: 2023–09–01
  7. By: Advani, Arun; Hughson, Helen; Summers, Andy
    Abstract: Using anonymized administrative data on the population of UK taxpayers, we show that—in line with high-profile anecdotes about the tax affairs of the rich—effective average tax rates (EATRs) decline at the top of the distribution of income and capital gains. We also document substantial variation in EATRs within remuneration level: a quarter of those in the top 1 per cent pay headline rates, while another quarter pay at least 9pp less than the headline rate. Most of this effect is driven by the composition of remuneration, with investment income having lower tax rates and capital gains having lower rates still. If all individuals with income above £100, 000 paid the headline rates, this would raise tax revenue on income and gains by £23 billion on a static basis, an increase of 27 per cent in the tax paid by this group.
    Keywords: inequality; horizontal equity; effective tax rates; capital gains tax; through the CAGE Research Centre at Warwick (ES/ L011719/1) and ‘Taxing the Super-Rich’ Research Grant (ES/W012650/1)
    JEL: D63 H23 H24
    Date: 2023–08–18
  8. By: Hicks, Jeffrey; Simard-Duplain, Gaëlle; Green, David A.; Warburton, William
    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.
    JEL: H23 H31 I14 I24 I38 J62
    Date: 2023
  9. By: Lejour, Arjan (Tilburg University, School of Economics and Management); Riet, Maarten van ‘t
    Date: 2023
  10. By: Morries, Todd; Dostie, Benoît
    Abstract: We study the welfare implications of employment protection for older workers, exploiting recent bans on mandatory retirement across Canadian provinces. Using linked employeremployee tax data, we show that the bans cause large and similar reductions in job separation rates and retirement hazards at age 65, with further reductions at higher ages. The effects vary substantially across industries and firms, and around two-fifths of the adjustments occur between ban announcement and implementation dates. We find no evidence that the demand for older workers falls, but the welfare effects are mediated by spillovers on savings behavior, workplace injuries, and spousal retirement timing.
    Keywords: employment protection, retirement, welfare, active and passive savings responses, health effects, spousal spillovers
    JEL: J26 J78 H55
    Date: 2023
  11. By: Germain, Antoine (Université catholique de Louvain, LIDAM/CORE, Belgium)
    Abstract: This paper studies redistributive transfers between inactive, unemployed and employed agents. In a model with fully heterogeneous preferences and arbitrarily unequal skills, labor market inactivity arises from home production and disutility of participation. The social objective champions the ethics of equality of opportunity while upholding the Pareto principle. In the Mirrleesian second-best, it turns out that welfare analysis is reduced to a sufficient statistic. Its empirical application suggests that an inactivity benefit would not be welfare-improving in most high-income countries. Overall, the equity gains of introducing a basic income with respect to equality of opportunity are tenuous, whatever its efficiency costs.
    JEL: D63 D82 H21 H23 H24 I38
    Date: 2023–07–15
  12. By: Cascavilla, Alessandro
    Abstract: This study presents a novel approach to transfer pricing within multinational enterprises (MNEs), focusing on the strategic dynamics between two key divisions, the parent and subsidiary, operating in distinct countries that vary in corporate tax rates. Departing from traditional literature, we introduce a trust game framework to model the negotiation of transfer pricing among divisional managers. Our agent-based algorithm simulates an economy comprising multiple MNEs and a regulating State. The simulation outcomes shed light on the complex interplay of factors in this context. Without State intervention and managerial influence, MNEs tend to maximize their transfer pricing, strategically shifting profits to lower-tax jurisdictions. However, when we incorporate managerial negotiation, increasing transfer pricing leads to a decline in parent division profits but a surge in subsidiary division profits, ultimately increasing the overall MNE's profitability. The State's role emerges as pivotal, with the potential for random controls and penalties to nudge the game dynamics toward a cooperative equilibrium. This research offers valuable insights into the multifaceted world of international tax planning and coordination, underscoring the intricate balance between profit optimization and regulatory compliance in a globalized economy.
    Keywords: Multinational enterprise, Corporate tax, Tax avoidance, Transfer pricing, Trust game, Negotiation, Foreign direct investment, Arm's length principle, Tax competition
    JEL: F23 H21 H26 L51
    Date: 2023
  13. By: R. Srinivasan (Full-Time Member, State Planning Commission, Government of Tamil Nadu, Chennai - 600005); S. Raja Sethu Durai (Professor, School of Economics, University of Hyderabad, Hyderabad - 500046)
    Abstract: In an ideal federation, each level of government should have its own revenue resources to sufficiently finance its own expenditures. In most of the federal countries, due to overlapping revenue and expenditure assignments warranted by their constitution, the fiscal balance is elusive. Vertical Fiscal Imbalance (VFI) arises when the own revenue potential of regional governments is inadequate to meet their own expenditure. As noted in the literature, VFI adversely affects the fiscal performance of the regional government. This study examines the VFI for India from 2005 to 2021 and provides evidence that it is raising over the period, and a feasible solution rests in the reassignment of commodity taxation powers to the states.
    Keywords: Fiscal Federalism, Vertical Fiscal Imbalance, Tax Reassignment
    JEL: H10 H77
    Date: 2022–10
  14. By: Cetin, Sefane (Université catholique de Louvain, LIDAM/CORE, Belgium); Hindriks, Jean (Université catholique de Louvain, LIDAM/CORE, Belgium)
    Abstract: Many countries have adopted various pension reforms to deal with aging population. Those reforms involve some balance between ”refinancing” (contribution increase) and ”retrenchment” (benefit cut). The question we address is whether policymakers have the future capacity to sustain the legislated pension reforms in the EU given the growing influence of the elderly in the democratic process. To answer this question, we draw on the 2021 Economic Policy Committee (EPC) projections of pension benefit rates that we compare with the policy adjustments over the amount of refinancing and benefit cut arising from continuously negotiated reforms over time between the successive cohorts of workers and retirees. We compute the optimal bargaining trajectory of benefit and contribution rates that match the aging population. We then use the ”democratic gap” as a political stress test. This democratic gap measures how the implicit bargaining power that rationalizes the projected pension benefits deviates from the population shares. We complement the analysis with the ”benefit gap” that measures how the projected pension benefits deviate from the bargaining outcome when bargaining power evolves according to population aging.
    Keywords: Pension reform ; Aging ; Bargaining ; Sustainability ; Stress test
    JEL: D63 H55 J18
    Date: 2023–05–31
  15. By: Andreas Freytag; Krige Siebrits
    Abstract: The African Continental Free Trade Agreement (AfCFTA) was signed by 54 member states of the African Union and is the largest free trade area in the world. Among other things, dismantling tariffs will have effects on public revenues in member states; this will require a revenue transition from customs duties to other forms of public revenues such as income and value added taxes. This transition may be a politically difficult process. This paper analyses the process of revenue transition in South Africa after World War I and after the end of the Apartheid regime to improve understanding of the constraints to and effects of such a revenue transition. The transition in South Africa from a tax revenue structure anchored by customs revenue to one dominated by income taxes and taxes on domestic consumption was a protracted and unplanned process. The general revenue needs of the government led to the introduction of income taxes in 1914 and a broad-based consumption tax in 1979. In addition, excise taxes have been in use ever since the establishment of the Union of South Africa in 1910 and in recent times have become increasingly important for other purposes as well. Along with the shift in the role of customs duties from revenue-generating to protective instruments and fairly extensive use of non-tariff barriers, these developments meant that import taxes became markedly less important tax handles during the course of the 20th century. As a result, the revenue implications of the trade liberalisation process in the early 1990s were minor, and the implementation of AfCFTA would not be a large shock to government revenue in South Africa either.
    Keywords: free trade agreements, revenue transition, taxes, South Africa
    JEL: H20 H27
    Date: 2023

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