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on Public Economics |
| By: | James Alm (Tulane University) |
| Abstract: | How can tax policy â and other government policies â serve as a tool to promote âdistributive tax justiceâ? In this paper, I briefly discuss the many tax reform proposals that have been proposed by many others for the specific case of the United States. I then focus on a set of specific U.S. tax reforms that are, I believe, both feasible and effective in achieving distributive tax justice. If implemented, these policies would increase the taxes paid by the rich, reduce tax evasion by the rich, and decrease the tax burdens by the gender, race, and ethnicity of taxpayers, all of which would lead to what I believe would be a fairer (and a more productive) tax system. I also argue that these policies apply in some form to most other countries around the world. My basic themes are that tax changes must be feasible and effective rather than simply aspirational but that even within this somewhat limiting framework much can be done. Specifically, these policies all work through existing taxes, they are are all administratively (if not necessarily politically) feasible and effective, none of these policies raise statutory marginal tax rates, these policies are all broadly consistent with the standard âBroad Base, Low Rateâ approach to tax reform, and variants of all of these policies apply world-wide. |
| Keywords: | Distributive tax justice, inequality, tax reform, tax compliance |
| JEL: | H2 H26 D91 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:tul:wpaper:2306&r=pbe |
| By: | Iacono, Roberto; Smedsvik, Bård |
| Abstract: | We analyze behavioral responses to wealth taxation, estimating the causal effects of a unique municipal wealth tax reform in Norway. We exploit variation from the single-period municipal reform reducing the marginal tax rate (MTR) on wealth exclusively in the northern Norwegian municipality of Bø from 0.85% to 0.35%, since 2021. Mimicking the behaviour of a tax haven, Bø represents the first municipality to unilaterally reduce the municipal wealth tax rate since the establishment of wealth taxation in Norway in 1892. We document a significant 66.6% increase in average taxable wealth in response to a 1 percentage point drop in the wealth tax rate. The elasticity of taxable wealth increases to 71.6% when focusing exclusively on wealth taxpayers. We also estimate a significant but more modest 10.3% jump in the weighted mass of wealth taxpayers in the treated municipality. Non-real effects of the reform dominate: mobility of wealthy taxpayers appears as the major behavioral response to the change in the net tax rate, accounting for a staggering 79% of the post-treatment total net wealth in the treated municipality (up from 19% in the pre-reform period). These results emerge in a context with third-party reported wealth data with negligible measurement error, limited evidence of bunching, highly enforced residence-based wealth taxation, and a low degree of out-migration rates. |
| Keywords: | wealth tax; administrative data; mobility effects |
| JEL: | H20 H21 H24 H26 |
| Date: | 2023–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:121084&r=pbe |
| By: | Hirofumi Takikawa |
| Abstract: | Tax revenues, particularly in developing countries, play a crucial role in driving economic development, and formalizing the informal economy offers significant potential for raising revenues, given the large size of the informal economy and the limited role of personal income taxes in tax collection. However, effective formalization also requires sufficient redistributive incentives for a smooth transition to the formal economy. By addressing both formalization and redistribution simultaneously, this study examines the impact of formalizing the informal economy on an optimal tax schedule using an extended Mirrlees model, and identifies an optimal tax formula that incorporates formalization of the informal economy. Quantitative analysis shows that formalization increases tax revenue and income transfers when the tax schedule is optimized together with formalization. Conversely, these benefits diminish when the tax schedule remains unchanged and is not fine-tuned for formalization. This study improves our understanding of the informal economy and provides valuable insights into the implications for designing optimal tax policies with formalization. |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:tcr:wpaper:e189&r=pbe |
| By: | Dingquan Miao; Ravi Kanbur; Jukka Pirttilä |
| Abstract: | The COVID-19 pandemic increased public debt and changed the income distribution in many countries. We use a numerical simulation approach to derive optimal nonlinear marginal tax rates for the pre-crisis and crisis periods. We contribute to the literature by examining optimal tax rates numerically for a developing country and by investigating how the tax rates should be changed as a response to a crisis. Our results indicate that the actual extent of redistribution, especially via direct transfers to low-income individuals, should be considerably higher than what the present system offers. |
| Keywords: | COVID-19, Pandemic, Optimal tax, Income tax, Simulation, Welfare impact |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp-2023-149&r=pbe |
| By: | Enda Patrick Hargaden (University College of Dublin School of Economics); Andrew Hanson (Department of Economics, University of Tennessee); Matthew Harris (Department of Economics, University of Tennessee) |
| 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: | Optimal taxation, network goods, consumption externalities, atmospheric externalities |
| JEL: | H21 H23 |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:ten:wpaper:2023-01&r=pbe |
| By: | Viertola, Marika |
| Abstract: | This paper studies how firms manipulate their transfer prices to shift profit from high tax countries to low tax countries. Using detailed transactiondestination level firm data for years 2013-2019, I find evidence of Finnish multinational enterprises underpricing their exports to low tax destinations. By exploiting variation in corporate income tax rate differences and differences in the ownership of affiliates, I apply a triple difference estimation strategy. I find that a 1 percentage point increase in tax rate difference decreases export unit value by 1.2% among multinational firms exporting to low tax countries. My results suggest firms use transfer pricing as a complement channel, as firms more prone to other profit shifting mechanisms also underprice their exports more. Also, I provide evidence that transfer mispricing is concentrated in exports destined to countries where the multinational’s affiliate has a higher level of economic activity. Where the results with exports are very robust, the results with imports are mixed, suggesting an asymmetrical pattern in transfer pricing. |
| Keywords: | multinational firms, international corporate taxation, tax avoidance, profit shifting, Business taxation and regulation, F23, H25, H26, fi=Verotus|sv=Beskattning|en=Taxation|, |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:fer:wpaper:162&r=pbe |
| By: | Christine L. Dobridge; Patrick Kennedy; Paul Landefeld; Jacob Mortenson |
| Abstract: | We study changes in tax positions for U.S. C corporations following passage of the 2017 tax legislation commonly known as the Tax Cuts and Jobs Act (TCJA). While existing research has focused primarily on publicly traded companies, data limitations have prevented more holistic analyses of the corporate sector. Using a representative sample of U.S. corporate tax returns, we highlight how trends in effective tax rates (ETRs) and exposure to the legislation’s main provisions varied for public, private, multinational, domestic, and large versus small firms. We document several novel facts, including that ETRs increased on average for privately held, domestic firms and for firms in the bottom 90% of the firm sales distribution after TCJA. In contrast, public, multinational, and large firms saw substantial ETR cuts on average. We find that firms' pre-TCJA exposure to changes in the corporate tax rate and treatment of net operating losses have the strongest correlation with post-TCJA ETR changes. Overall, the analysis underscores the divergent impacts of TCJA on different firm types and illuminates the economic scope and relative significance of TCJA’s myriad provisions. |
| Keywords: | Corporate taxes; Tax Cuts and Jobs Act; Tax reform |
| JEL: | H20 H25 |
| Date: | 2023–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2023-78&r=pbe |
| By: | Hager, Sandy Brian; Baines, Joseph |
| Abstract: | EXECUTIVE SUMMARY *** Concerns about the market power of large corporations are growing. There are good reasons why monopoly now features so prominently on the political and economic agenda. Mounting evidence shows that corporate concentration stifles innovation and investment, resulting in lower-quality goods and services and less economic dynamism. Concentration is also a catalyst for rising wealth and income inequality, as monopolistic firms are able to suppress workers’ wages and charge consumers higher prices. *** Most of the public policy debate has been focused on the role of antitrust law in combating the monopolistic practices of large corporations. But recently, the focus has shifted somewhat, as more and more people come to recognize the role of federal and state-level taxation in understanding corporate concentration in the US. Yet, there are still many questions about the effect of taxation on market structure: Is there a tax advantage associated with bigness, as measured by revenues? If so, is this advantage confined to a few “bad apples” or is it widespread among large corporations? What role do the domestic and foreign tax systems play in encouraging monopoly power? What does an analysis of the relationship between tax and monopoly tell us about wider macroeconomic shifts in the US economy over the past few decades? *** The purpose of this brief is to address these questions by analyzing and comparing the overall effects of the US tax code on the profit share of large and smaller corporations. *** Our analysis reveals a striking tax advantage for big business in the US. Specifically, we find that the total post-tax profit share of the top 10 percent of listed corporations since the mid-1980s is consistently and significantly higher than their total pre-tax profit share, indicating that the overall tax structure (domestic and foreign) fuels profit concentration at the top of the corporate hierarchy. For example, in the most recent period covered in our analysis, 2019–2022, the overall tax structure has boosted the post-tax profit share of large corporations by 2.32 percentage points relative to their pre-tax share. We then assess the contribution of different tax jurisdictions to concentration by estimating the pre-tax and post-tax profit shares of large corporations, domestically and internationally. Here, our analysis reveals that the domestic tax structure is especially influential in driving concentration. Over the past four decades, the domestic post-tax profits of large corporations have been much larger than their pre-tax share, with the domestic tax structure augmenting the profit share of large corporations by 3.79 percentage points in 2019–2022. The effect of the foreign tax structure on profit concentration is more ambiguous. In most periods it is either slightly positive or slightly negative. For 2019–2022, the foreign post-tax profit share of large corporations was 0.87 percentage points higher than their pre-tax share. Based on these findings, we argue that the tax structure, especially the domestic tax structure, plays a crucial but still underappreciated role in exacerbating the monopoly problem. *** We go on to consider the wider consequences for the US economy of big business’s tax advantage. The political justification for corporate tax cuts—including those that were part of the Tax Cuts and Jobs Act (TCJA) of 2017—is that they would free up money for companies to invest in productive capacity, in turn generating higher employment and wages. But as our analysis shows, the capital expenditures of large corporations tend to decrease, not increase, when their tax advantage grows. Instead of fueling productive investment, the tax savings of large corporations are principally used to pay out dividends and buy back their own stock. This means that large corporations are less disposed to investments that may indirectly benefit ordinary workers and more disposed to shareholder value enhancement that directly benefits the asset-rich. Overall, we find that the tax system contributes in crucial ways to rising corporate concentration and to widening inequality among households. *** With the objective of leveling the playing field, our findings offer powerful justification for the restoration of graduated statutory corporate income tax rates in the US alongside a global minimum effective tax rate of 25 percent and a graduated excise tax on share buybacks. The monopoly problem has become endemic to US capitalism, and corporate tax reform on its own will not solve it. Yet one clear advantage of taxation is that it has a direct, and therefore much more easily discernible, effect on distributive outcomes compared to other policy measures. A more holistic approach, combining corporate tax reform with more robust antitrust regulation, the strengthening of workers’ rights, and increased public ownership in key sectors, is needed to build an economy based on equity, fairness, and prosperity for all. |
| Keywords: | big business, centralization, concentration, corporation, distribution, dominant capital, production, inequality, power, profit, shareholders, tax, United States |
| JEL: | P P1 P12 H2 H23 D4 D43 L L11 M |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:280835&r=pbe |
| By: | Feng Wei; Jean-François Wen |
| Abstract: | Turnover (sales) is frequently used in developing countries as a presumptive income tax base, to economize on the costs of tax administration and taxpayer compliance. We construct a simple model where a size threshold separates firms paying turnover tax from those paying profit tax (regular income tax), and where firms have the option of producing in the untaxed, informal sector. The optimal turnover tax rate trades off two policy concerns: reducing informality and avoiding strategic reductions in sales by firms seeking to remain below the threshold for the profit tax. We provide analytical results and calibrate the model to compute the optimal policy using realistic parameter values. The optimal turnover tax rate for countries with large informal sectors is found to be around 2.5% across most scenarios, while the threshold separating the turnover tax regime from profit tax lies for the most part between $65, 000 and $95, 000. Introducing an optimally designed turnover tax reduces the rate of informality of businesses by about 12 percentage points in the calibrated model. |
| Keywords: | Turnover Tax; Corporate Income Tax; Compliance Costs; Informality |
| Date: | 2023–12–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/267&r=pbe |
| By: | Gemma Wright; Katrin Gasior; Joonas Ollonqvist; Wynnona Steyn; Winile Ngobeni; Helen Barnes; Michael Noble; David McLennan; Jukka Pirttilä; Ada Jansen |
| Abstract: | In this paper we explore options for augmenting South Africa's personal income tax revenue using two microsimulation models: PITMOD simulates the personal income tax system and is underpinned by a dataset comprising a full extract of anonymized individual-level administrative tax data; and SAMOD simulates personal income tax and social benefits using a nationally representative survey. We explore policy reforms at both the upper and lower ends of the income distribution of tax-registered individuals and assess the impacts on revenue and measures of progressivity. |
| Keywords: | Microsimulation, Personal income tax, Income distribution, South Africa |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp-2023-147&r=pbe |
| By: | Jonah Coste (Federal Housing Finance Agency) |
| Abstract: | In 2000, Philadelphia enacted an abatement policy that exempted new development from property taxes for 10 years. This policy provides an ideal natural experiment to test property tax capitalization because it creates contemporaneous intra-jurisdiction tax variation within a finite and known duration. Consistent with theory, the tax benefits are initially capitalized fully into home prices. However, as abatements near expiration, the benefits become overcapitalized in home prices. This paper also finds that escrow payment shocks cause delinquencies for owners of homes with expiring abatements. |
| Keywords: | housing, tax incentive, property tax, real estate, mortgages, payment shock |
| JEL: | D12 G41 G51 H71 R21 R31 R38 R51 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:hfa:wpaper:24-01&r=pbe |
| By: | Kolsrud, Jonas; Landais, Camille; Reck, Daniel; Spinnewijn, Johannes |
| Abstract: | This paper analyzes consumption to evaluate the distributional effects of pension reforms. Using Swedish administrative data, we show that on average, workers who retire earlier consume less while retired and experience larger drops in consumption around retirement. Interpreted via a theoretical model, these findings imply that reforms incentivizing later retirement incur a substantial consumption smoothing cost. Turning to other features of pension policy, we find that reforms that redistribute based on early-career labor supply would have opposite-signed redistributive effects, while differentiating on wealth may help to target pension benefits toward those who are vulnerable to larger drops in consumption around retirement. |
| JEL: | E21 H23 H55 J22 J26 |
| Date: | 2024–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:121131&r=pbe |