nep-pbe New Economics Papers
on Public Economics
Issue of 2023‒11‒20
fifteen papers chosen by
Thomas Andrén, Konjunkturinstitutet

  1. Double taxation treaties and resource revenue mobilization in developing countries: A neural network approach By Harouna Kinda; Abrams M.E. Tagem
  2. Redistribution with Unequal Life Expectancy By Sebastian Koehne
  3. Disentangling Business- and Tax-Motivated Bilateral Royalty Flows By Arjan Lejour; Maarten van 't Riet; Arjan M. Lejour
  4. Tax Progressivity and Output: Evidence from OECD countries By João Tovar Jalles; Georgios Karras
  5. Profit Shifting in the 21st Century: Multinationals’ Use of Intrafirm Patent Transfers By Mickenzie Bass; Jesse LaBelle; Ana Maria Santacreu
  6. Corporate Income Tax Gap Estimation by using Bottom-Up Techniques in Selected Countries: Revenue Administration Gap Analysis Program By Patricio A Barra; Mr. Eric Hutton; Polina Prokof'yeva
  7. Tax Haven Welfare and the Crackdown on Secrecy: Evidence from Night Light Emissions By Hoang Ha Nguyen Thi; Alfons Weichenrieder
  8. Optimal Taxation and Other-Regarding Preferences By Aronsson, Thomas; Johansson-Stenman, Olof
  9. Racial Disparities in the Income Tax Treatment of Marriage By Janet Holtzblatt; Swati Joshi; Nora R. Cahill; William Gale
  10. Financial Innovations, Taxes, and the Growth of Finance By Shuhei Aoki; Makoto Nirei; Kazufumi Yamana
  11. Economic Benefits and Social Costs of Legalizing Recreational Marijuana By Jason Brown; Elior Cohen; Alison Felix
  12. The Effects of Mandatory Profit-Sharing on Workers and Firms: Evidence from France By Elio Nimier-David; David Sraer; David Thesmar
  13. The effect of reducing welfare access on employment, health, and children's long-run outcomes By David A. Green; Jeffrey Hicks; Gaëlle Simard-Duplain; William Warburton
  14. Adaptive maximization of social welfare By Nicolo Cesa-Bianchi; Roberto Colomboni; Maximilian Kasy
  15. Occupational Differences in the Effects of Retirement on Hospitalizations for Mental Illness among Female Workers: Evidence from Administrative Data in China By Wang, Tianyu; Sun, Ruochen; Sindelar, Jody L.; Chen, Xi

  1. By: Harouna Kinda; Abrams M.E. Tagem
    Abstract: Double taxation treaties, by assigning taxing rights to rival countries and thereby eradicating double taxation, aim to facilitate cross-border trade and investment. The eradication of double taxation is achieved through reductions in withholding tax rates on passive income in source countries, resulting in revenue losses. Multinational corporations structure their investments to benefit from treaty-reduced withholding tax rates, exacerbating the revenue losses.
    Keywords: Double taxation treaties, Entropy balancing weights, Resource revenues, Revenue mobilization, Taxes
    Date: 2023
  2. By: Sebastian Koehne
    Abstract: This paper introduces life expectancy inequality into a tractable Mirrleesian life-cycle model and characterizes the optimal income tax policy using theory and calibration. A positive association between life expectancy and income counteracts the well-known static pattern of declining marginal utility. As a result, the mechanical value of redistribution is reduced at all income levels. Moreover, the pension wedge becomes a novel determinant of optimal taxation, motivating relatively lower optimal tax rates for low earners and relatively higher optimal tax rates for high earners. Quantitatively, the effects of the mechanical value of redistribution dominate, and the optimal marginal tax rates fall by up to 10 percentage points when life expectancy is heterogeneous.
    Keywords: optimal taxation, redistribution, life expectancy, inequality
    JEL: D82 H21
    Date: 2023
  3. By: Arjan Lejour; Maarten van 't Riet; Arjan M. Lejour
    Abstract: Shifting intellectual property (IP) rights across jurisdictions is a well-known strategy of multinationals to reduce corporate income taxation. We investigate the extent to which the flows of remunerations for the use of IP rights are affected by differences in corporate income and withholding taxation. Using OECD data between 2014 and 2019, we determine the influence of bilateral tax rates on the IP-location. These rates result from a network analysis that distinguishes between the potential gains from direct shifting of IP rights and treaty shopping. The latter are gains for multinationals from exploiting lower withholding taxes by routing royalty flows through conduit countries. We use these bilateral tax gains to isolate the flows that could be only business-motivated. Next we apply a gravity framework with PPML estimators. We estimate that at least 18% of the royalty flows is motivated by tax planning in this period, which reduces tax revenues by 6.5 to 16 billion US dollar in 2018. We argue that both estimates are lower bounds due to missing observations. More reporting by OECD countries of flows to and from tax havens would improve the precision of the estimates. To the best of our knowledge these are the first estimates of worldwide tax avoidance with royalties.
    Keywords: bilateral royalty flows, international tax avoidance, treaty shopping, withholding tax, tax havens
    JEL: H25 H26 H32
    Date: 2023
  4. By: João Tovar Jalles; Georgios Karras
    Abstract: Compared to the economic effects of tax rates, those of tax progressivity have been much less studied. In this paper, we estimate the output effects of changes in tax progressivity using a data set of 33 OECD economies since 1980. Our results show that tax progressivity affects the economy in a way that is broadly consistent with the predictions of a standard neoclassical growth model. In particular, increasing tax progressivity reduces the economy’s growth rate temporarily and the level of income per capita permanently. Both effects are sizable, statistically significant, and robust. Our findings also emphasize the importance of including both the tax rate and tax progressivity in the estimation: omitting either can lead to biased results.
    Keywords: Tax progressivity, Tax rates, Economic Growth, Panel Data, Local Projections
    JEL: E62 H20
    Date: 2023–10
  5. By: Mickenzie Bass; Jesse LaBelle; Ana Maria Santacreu
    Abstract: An analysis indicates that a high percentage of U.S. patents that shifted to tax havens like Bermuda are intrafirm transfers. Such transfers may be a tax avoidance strategy by multinationals.
    Keywords: patents; tax havens; intrafirm patent transfers; tax avoidance; multinational corporations
    Date: 2023–09–12
  6. By: Patricio A Barra; Mr. Eric Hutton; Polina Prokof'yeva
    Abstract: This technical note describes bottom-up CIT gap estimation techniques applied by revenue administrations in the following highly experienced countries in this approach: Australia, Brazil, Canada, Denmark, Sweden, the United Kingdom, and the United States. The main topics included in the descriptions are techniques applied, CIT gap results, advantages and disadvantages of different available options, and future developments and recommendations for any revenue administration interested in starting bottom-up CIT gap estimation programs having no prior experience.
    Keywords: Tax Administration; Tax Compliance; Corporate Income Tax; Tax Gap; Tax Evasion; Random Audit Program; Risk-Based Audits
    Date: 2023–10–31
  7. By: Hoang Ha Nguyen Thi; Alfons Weichenrieder
    Abstract: Following numerous high-profile international initiatives, tax haven jurisdictions have been nudged into agreeing on tax information exchange. We analyse whether these agreements had measurable effects on the economy of cooperative tax havens. As GDP data are missing for many small tax haven jurisdictions, we use night light data as a proxy for economic activity. Depending on the exact list of tax havens, using this proxy allows us to increase the number of tax haven jurisdictions by up to 25 percent compared to using GDP. We find that tax havens which have signed more tax information exchange agreements experienced a significantly higher economic activity, as proxied by the sum of night light emissions. This applies to agreements that provide information exchange on request as well as agreements that implement automatic information exchange. When we use GDP as a measure of economic activity, tax information exchange agreements are not associated with a differential development of economic activity. Both observations suggest that information exchange treaties so far have not reduced economic growth in more cooperative tax havens.
    Keywords: tax haven, night light emissions, tax information exchange, economic development
    JEL: H26 H87 O11
    Date: 2023
  8. By: Aronsson, Thomas (Umeå University, Umeå School of Business); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, Göteborg University)
    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
  9. By: Janet Holtzblatt; Swati Joshi; Nora R. Cahill; William Gale
    Abstract: Although it is generally blind with respect to race, the federal individual income tax can create racial disparities when factors that affect tax liability are associated with race. We provide new evidence on racial differences in marriage penalties and bonuses in the income tax, using data from eight waves of the Survey of Consumer Finances. Our results support Brown’s (2021) hypothesis that, controlling for income, penalties are more frequent and larger for Black couples than white couples. We link these results to racial differences in relative spousal earnings, the presence of dependents, and the level of income. We show that marriage rates are much higher among white adults than Black adults, which implies that two policy reforms we examine end up benefiting a greater share of white adults than Black adults.
    JEL: H20 H24 J15
    Date: 2023–10
  10. By: Shuhei Aoki (Shinshu University); Makoto Nirei (University of Tokyo); Kazufumi Yamana (Deloitte Tohmatsu Consulting LLC)
    Abstract: The U.S. economy since 1980 has experienced the growth of finance, manifested by the increases in the value-added of financial services and the value of financial assets. The growth of finance has been associated with the increase in the mutual fund share in the financial assets and the relatively stable unit cost of finance. This paper constructs an incomplete market dynamic general equilibrium model with the islands structure, which has both idiosyncratic and island-level shocks on the firm’s productivity. Financial intermediaries trade shares of individual firms and risk-free debts, as well as mutual funds which diversify away idiosyncratic shocks but can not diversify island-level shocks. This model, together with the declining transaction costs on mutual funds and personal and corporate income tax rates calibrated from data, can quantitatively account for these facts.
    Date: 2023–10
  11. By: Jason Brown; Elior Cohen; Alison Felix
    Abstract: We analyze the effects of legalizing recreational marijuana on state economic and social outcomes (2000–20) using difference-in-differences estimation robust to staggered timing and heterogeneity of treatment. We find moderate economic gains accompanied by some social costs. Post-legalization, average state income grew by 3 percent, house prices by 6 percent, and population by 2 percent. However, substance use disorders, chronic homelessness, and arrests increased by 17, 35, and 13 percent, respectively. Although some of our estimates are noisy, our findings suggest that the economic benefits of legalization are broadly distributed, while the social costs may be more concentrated among individuals who use marijuana heavily. States that legalized early experienced similar social costs but larger economic gains, implying a potential first-mover advantage.
    Keywords: marijuana; Cannabis; social costs; State Revenue; government policy; Tax revenue; legalization
    JEL: H71 I18 R52
    Date: 2023–09–29
  12. By: Elio Nimier-David; David Sraer; David Thesmar
    Abstract: Since 1967, all French firms with more than 100 employees are required to share a fraction of their excess-profits with their employees. Through this scheme, firms with excess-profits distribute on average 10.5% of their pre-tax income to workers. In 1990, the eligibility threshold was reduced to 50 employees. We exploit this regulatory change to identify the effects of mandated profit-sharing on firms and their employees. The cost of mandated profit-sharing for firms is evident in the significant bunching at the 100 employee threshold observed prior to the reform, which completely disappears post-reform. Using a difference-in-difference strategy, we find that, at the firm-level, mandated profit-sharing (a) increases labor share by 1.8 percentage points, (b) reduces the profit share by 1.4 percentage points, and (c) does not affect investment nor productivity. At the employee level, mandated profit-sharing increases low-skill workers' total compensation and leaves high-skill workers total compensation unchanged. Overall, mandated profit-sharing redistributes excess-profits to lower-skill workers in the firm, without generating significant distortions or productivity effects.
    JEL: G3 H20 J01 J30
    Date: 2023–10
  13. By: David A. Green (Institute for Fiscal Studies); Jeffrey Hicks (University of Toronto); Gaëlle Simard-Duplain (Carleton University); William Warburton (Enterprise Economic Consulting)
    Date: 2023–10–30
  14. By: Nicolo Cesa-Bianchi; Roberto Colomboni; Maximilian Kasy
    Abstract: We consider the problem of repeatedly choosing policies to maximize social welfare. Welfare is a weighted sum of private utility and public revenue. Earlier outcomes inform later policies. Utility is not observed, but indirectly inferred. Response functions are learned through experimentation. We derive a lower bound on regret, and a matching adversarial upper bound for a variant of the Exp3 algorithm. Cumulative regret grows at a rate of $T^{2/3}$. This implies that (i) welfare maximization is harder than the multi-armed bandit problem (with a rate of $T^{1/2}$ for finite policy sets), and (ii) our algorithm achieves the optimal rate. For the stochastic setting, if social welfare is concave, we can achieve a rate of $T^{1/2}$ (for continuous policy sets), using a dyadic search algorithm. We analyze an extension to nonlinear income taxation, and sketch an extension to commodity taxation. We compare our setting to monopoly pricing (which is easier), and price setting for bilateral trade (which is harder).
    Date: 2023–10
  15. By: Wang, Tianyu (Renmin University of China); Sun, Ruochen (University of Pennsylvania); Sindelar, Jody L. (Yale University); Chen, Xi (Yale University)
    Abstract: Retirement, a major transition in the life course, may affect many aspects of retirees' well-being, including health and health care utilization. Leveraging differential statutory retirement age (SRA) by occupation for China's urban female workers, we provide some of the first evidence on the causal effect of retirement on hospitalizations attributable to mental illness and its heterogeneity. To address endogeneity in retirement decisions, we take advantage of exogeneity of the differing SRA cut-offs for blue-collar (age 50) and white-collar (age 55) female urban employees. We apply a Fuzzy Regression Discontinuity Design (RDD) around the SRA cut-offs using nationally representative hospital inpatient claims data that cover these workers. We show that blue-collar females incur more hospitalizations for mental illness after retirement, while no similar change is found for white-collar females. Conditional on blue-collar females being hospitalized, probabilities of overall and ER admissions due to mental illness increase by 2.3 and 1.2 percentage points upon retirement, respectively. The effects are primarily driven by patients within the categories of schizophrenia, schizotypal and delusional disorders; and neurotic, stress-related and somatoform disorders. Moreover, the 'Donut' RDD estimates suggest that pent-up demand at retirement unlikely dominates our findings for blue-collar females. Rather, our results lend support to their worsening mental health at retirement. These findings suggest that occupational differences in mental illness and related health care utilization at retirement should be considered when optimizing retirement policy schemes.
    Keywords: mental illness, behavioral disorders, retirement, inpatient care, blue-collar females, white-collar females
    JEL: I11 J26 J14 I18 H55
    Date: 2023–10

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