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on Public Economics |
| By: | Fatih Guvenen; Gueorgui Kambourov; Burhan Kuruscu; Sergio Ocampo-Diaz |
| Abstract: | When is a wealth tax preferable to a capital income tax? When is the opposite true? More generally, can capital taxation be structured to improve productivity, incentivize innovation, and ultimately increase welfare? We study these questions theoretically in an infinite-horizon model with entrepreneurs and workers, in which entrepreneurial firms differ in their productivity and are subject to collateral constraints. The stationary equilibrium features heterogeneous returns and misallocation of capital. We show that increasing the wealth tax increases aggregate productivity. The gains result from the “use-it-or-lose-it” effect of wealth taxes when returns are heterogeneous, which causes a reallocation of capital from entrepreneurs with low productivity to those with high productivity. Furthermore, if the capital income tax is adjusted to balance the government's budget, aggregate capital, output, and wages also increase. We then study the welfare maximizing combination of wealth and capital income taxes and show that the optimal mix shifts towards a higher wealth tax and a lower capital income tax as the capital intensity of production increases. For a range of plausible parameter values, the optimal wealth tax is positive, whereas the capital income tax can be positive or negative (a subsidy). We then endogenize the entrepreneurial productivity distribution by introducing either ex ante innovation or entrepreneurial effort in production and show that this strengthens our results: by allowing entrepreneurs to keep more of the upside relative to a capital income tax, a wealth tax incentivizes more innovation and entrepreneurial effort, leading to larger increases in productivity, output, and welfare. |
| JEL: | E21 E25 E60 H21 H24 J31 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32585&r= |
| By: | Hirofumi Takikawa (Faculty of Economics and Business Administration, Goethe University Frankfurt, GERMANY and Junior Research Fellow, Research Institute for Economics & Business Administration (RIEB), Kobe University, JAPAN) |
| Abstract: | The United Nations' "2030 Agenda for Sustainable Development" highlights the importance of formalizing the informal economy, which could potentially increase tax revenues in developing countries. This paper investigates the impact of formalization on optimal tax schedules, emphasizing the need for redistributive incentives alongside formalization. Extending the Mirrlees model to incorporate government intervention against the informal economy, we propose an optimal tax formula. Quantitative analysis shows that aligning the tax schedule with formalization increases tax revenue and income transfers while maintaining social welfare. The result can be interpreted as an implicit cost of welfare-neutral formalization in terms of tax revenues and income transfers. Conversely, leaving the tax schedule unchanged undermines these benefits. This research provides insights into the design of optimal tax policies that incorporate formalization. |
| Keywords: | Informal economy; Formalization; Income tax; Redistribution |
| JEL: | E26 H21 H26 J46 O17 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:kob:dpaper:dp2024-18&r= |
| By: | Lucas Menescal |
| Abstract: | Given the contrasting evidence on the redistributive role of taxation, this study seeks to isolate the redistribution process performed through the tax and transfers system and address the effects of several taxes on the difference between pre- and post-tax and transfers Gini coefficients, commonly referred as the Reynolds-Smolensky Index (RSI), in a panel of 107 advanced and developing economies for the period between 1990 to 2020. Contrary to previous evidence, obtained results showed little evidence that direct taxation had significant redistributive effects, whereas indirect taxation only presented negative impacts on developed economies. Still, robust redistributive effects of social security contributions were observed for both groups, while property taxes seem to be associated with higher redistribution in the long run. Finally, the importance of investment and employment levels is underlined and policy recommendations for higher income redistribution are proposed. |
| Keywords: | Taxation; Income redistribution; Reynolds-Smolensky Index; Panel Data. |
| JEL: | C23 C26 H23 H55 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:ise:remwps:wp03282024&r= |
| By: | Lundberg, Jacob (Research Institute of Industrial Economics (IFN)) |
| Abstract: | This paper develops a comprehensive framework for analyzing the revenue, efficiency and social welfare implications of top income taxation. It generalizes the Saez (2001) formula for the optimal top tax rate by deriving analytical expressions for the Laffer curve and excess burden. Applied to the 2021 U.S. top federal tax bracket, assuming a taxable income elasticity of 0.25, the study finds an excess burden of $101 billion and a maximum potential revenue increase of $111 billion. In contrast, other English-speaking countries and Germany are positioned closer to their Laffer curve peaks, incurring greater efficiency losses, whereas the Nordic countries studied are on the downward-sloping part of the Laffer curve. Additionally, the paper endogenizes the marginal social welfare weight on high-income earners and, following an inverse optimal taxation approach, concludes that in none of the studied countries does the observed top marginal tax rate appear consistent with a conventional welfarist social welfare function. |
| Keywords: | Income taxation; Optimal taxation; Laffer curve; Excess burden |
| JEL: | H21 H24 |
| Date: | 2024–06–18 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:iuiwop:1492&r= |
| By: | Berliant, Marcus; Gouveia, Miguel |
| Abstract: | The literatures dealing with voting, optimal income taxation, implementation, and pure public goods are drawn on here to address the problem of voting over income taxes to finance a public good. In contrast with previous articles, general nonlinear income taxes that affect the labor-leisure decisions of consumers who work and vote are allowed. Uncertainty plays an important role in that the government does not know the true realizations of the abilities of consumers drawn from a known distribution, but must meet the realization-dependent budget; the tax system must be robust. Even though the space of alternatives is infinite dimensional, conditions on primitives are found to assure existence of a majority rule equilibrium. |
| Keywords: | Voting; Income taxation; Public good; Robustness |
| JEL: | D72 D82 H21 H41 |
| Date: | 2024–06–20 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121260&r= |
| By: | Ardanaz, Martín; Hübscher, Evelyne; Keefer, Philip; Sattler, Thomas |
| Abstract: | Though governments regularly implement fiscal adjustments to avert crisis, voter attitudes toward competing adjustment strategies are still poorly understood. A conjoint experiment with 8, 000 survey respondents in Brazil, Colombia, Costa Rica, and Peru confirms that individuals prefer spending- to tax-based adjustments in general. However, preferences change dramatically depending on which specific tax and spending adjustments are included and on individuals' personal characteristics. Consistent with their broad preferences for spending- over tax-based adjustments, respondents oppose increases in the personal income tax and support public employment cuts. However, they support or are indifferent towards higher corporate income or value-added taxes and they oppose cuts in social assistance. Preferences for fiscal adjustment also depend on voter characteristics that are unrelated to their pecuniary interests. Ideology, social beliefs, and trust in government significantly influence their preferences for tax- or spending-based adjustments in general and for the specific composition of those adjustments. |
| Keywords: | Fiscal Adjustment;taxes;public expenditures;conjoint experiment |
| JEL: | D72 E62 H62 |
| Date: | 2024–04 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:13473&r= |
| By: | Jarkko Harju (Tampere University); Kaisa Kotakorpi (Tampere University); Tuomas Matikka (VATT Institute for Economic Research); Annika Nivala (VATT Institute for Economic Research) |
| Abstract: | We analyze firm responses to risk-based tax audits – a central tool in regular tax enforcement – using full-population data on tax audits and tax returns in Finland. We find an immediate and persistent increase in reported profits by the audited firms after being audited compared to matched non-audited firms with a similar development in key outcomes before the audit. This is an indication of significant non-compliance in the baseline. We also examine the anatomy of non-compliance and find that both revenue and labor costs increase after audits, suggesting that some firms may follow a strategy of under-reporting their overall scale of operation. We use novel data on bankruptcy petitions and court decisions to investigate whether stricter tax enforcement has implications for real economic activity. We find a large increase in the likelihood of bankruptcy after audits among non-compliant firms, but no increase in bankruptcies for compliant firms. |
| Keywords: | tax compliance; tax evasion; tax enforcement; firm behavior |
| JEL: | H26 H32 H83 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:fit:wpaper:22&r= |
| By: | Dieler, Tobias (Tilburg University, School of Economics and Management); Biswas, Sonny; Calzolari, Giacomo; Castiglionesi, Fabio (Tilburg University, School of Economics and Management) |
| Date: | 2023 |
| URL: | https://d.repec.org/n?u=RePEc:tiu:tiutis:d936387a-90f0-481a-a75b-3bfa319e44d7&r= |
| By: | Katherine Michelmore; Anna Wiersma Strauss; Emily E. Wiemers |
| Abstract: | Families provide substantial care to older adults with functional limitations. Policies that incentivize work have the potential to reduce this valuable care. This study uses the Health and Retirement Study (HRS) and a simulated instrument approach to examine the consequences of increases in the generosity of the Earned Income Tax Credit (EITC), a work-contingent cash benefit, for the care that parents receive from their EITC-eligible daughters. We find that increases in EITC generosity reduce the care that parents receive from their EITC-eligible daughters, especially older parents and those with functional limitations. To assess the full effect of this reduction in caregiving, we examine whether financial transfers increase as a substitute for reduced care, whether other adult children fill the care gap left by EITC-eligible daughters, and whether paid caregiving increases in response to declines in family care. We find no evidence of increased financial transfers and care gaps remain for older parents that are not filled by other children or paid care providers. We conclude that an unintended consequence of the EITC is that the older parents of EITC recipients receive less care from their children overall in response to increased EITC benefit generosity. |
| JEL: | H24 I38 J22 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32583&r= |
| By: | Kopecky, Joseph; Campbell, Douglas; Brodeur, Abel; Johannesson, Magnus; Lusher, Lester; Tsoy, Nikita |
| Abstract: | Cloyne (2013) constructs a novel dataset documenting fiscal tax shocks in the United Kingdom using the narrative approach developed by Romer and Romer (2010), and estimates the impact of tax changes on GDP. He finds that a tax cut of one percent of GDP causes a 0.6 percent increase in output in the initial quarter of the policy, rising to a peak of 2.5 percent over three years. We first reproduce all of the VAR tables and figures in the original paper, and then test for robustness through a number of changes to the baseline regression model, particularly: changes in lag structure, changes in the control set, alternative estimation procedures, and excluding influential observations. In 60% of robustness the impact effect is significant at the 95% level, with a mean estimated coefficient of 0.63, while in 70% of robustness tests the peak response remains significant at the 95% level, with a mean peak response of 2.27. |
| Keywords: | Fiscal policy, taxation, narrative shocks, macroeconomics |
| JEL: | E23 E32 E62 H20 H61 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:i4rdps:132&r= |
| By: | Ajzenman, Nicolás; Ardanaz, Martín; Cruces, Guillermo; Feierherd, Germán; Lunghi, Ignacio |
| Abstract: | Recent literature highlights a paradox in corruption prevention messaging: instead of reducing tolerance for corruption, such campaigns can inadvertently intensify it by priming the existence of corruption while failing to diminish citizens beliefs about government misbehavior. Building on Cheeseman and Peiffer (2022), which demonstrates that messages focused on combating corruption often backfire among individuals with preexisting negative perceptions of corruption, we posit that an effective strategy to mitigate backfiring involves shifting those pessimistic perceptions before delivering the corruption eradication messages. To test our hypothesis, we conducted a randomized survey experiment within the context of a major institutional reform to reduce tax agency corruption in Honduras. Results confirm the backfiring findings of previous literature, but also show that our approach effectively mitigates perceived corruption and diminishes the propensity for tax evasion, especially among skeptics. |
| Keywords: | corruption;tax administration;Tax evasion;Survey experiment |
| JEL: | C90 D90 H26 K42 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:13555&r= |
| By: | Jiwan Lee; Katherine Michelmore; Natasha Pilkauskas; Christopher Wimer |
| Abstract: | In 2021, the U.S. Congress temporarily expanded the Earned Income Tax Credit for workers without a qualifying child (childless EITC), to help counteract the impact of the COVID-19 pandemic on lower-wage working adults. This expansion roughly tripled the maximum benefits for qualifying filers and lowered the minimum age to claim the credit from 25 to 19, providing new benefits to low-income young adults. Using data from the Census Bureau’s Household Pulse Survey and a difference-in-differences design, this study is among the first to examine the impact of the expanded childless EITC on young adults’ material hardship (food, housing, and expenses). We find that the temporary expansion led to a significant decrease in housing hardship among low-income, childless, young adults, and suggestive evidence that it also reduced food insufficiency and difficulty with expenses. Overall our findings show that the temporary expansion of the childless EITC helped reduce material hardship among young adults. |
| JEL: | H20 I32 J08 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32571&r= |
| By: | Schanzenbach, Diane Whitmore (Northwestern University); Strain, Michael R. (American Enterprise Institute for Public Policy Research) |
| Abstract: | The 2021 Child Tax Credit (CTC) expansion increased government benefits to families, and especially to families with the lowest incomes. Economic theory predicts that this policy intervention would have led to a reduction in labor supply among adults in those families. Our review of available research suggests that employment within broadly defined demographic groups was not reduced by the 2021 CTC changes. However, we present evidence that employment was reduced among mothers with relatively low levels of education - the demographic group that was most affected by the CTC expansion. For the 2021 CTC expansion, theory and evidence were in the strongest alignment when the research design that produced the evidence was most focused on the demographic groups most likely to be affected by the expansion. |
| Keywords: | employment, labor supply, cash transfers, maternal employment, child tax credit |
| JEL: | H31 J08 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17041&r= |
| By: | Pablo GARCIA SANCHEZ (Banque Centrale du Luxembourg); Luca MARCHIORI (Banque Centrale du Luxembourg); Olivier PIERRARD (Banque Centrale du Luxembourg) |
| Abstract: | We propose a two-period overlapping generation economy that incorporates health investment in preventive measures during youth. These preventive measures contribute to increased longevity and reduced frailty, which influence old-age dependency and pension costs. As these costs are partly funded through pay-as-you-go social security contributions, investment in prevention creates externalities for the next generation. We analytically determine the optimal level of prevention and characterize the optimal health policy that a government should implement to achieve it. Our findings reveal that the optimal subsidy to long-term care exceeds the optimal subsidy to preventive measures. Furthermore, both subsidies are inversely related to the generosity of the public pension scheme. We explore the robustness of our results through various extensions and demonstrate their consistency with several patterns observed in cross-country OECD data. |
| Keywords: | Health, Prevention, Optimal Ramsey policy, Overlapping generations |
| JEL: | H23 I18 O41 |
| Date: | 2024–06–10 |
| URL: | https://d.repec.org/n?u=RePEc:ctl:louvir:2024008&r= |
| By: | Ahmad, Khalil; Shahid, Muhammad; Bhatti, Muhammad Kashif; Ali, Amjad |
| Abstract: | In macroeconomic literature, fiscal policy is considered a powerful tool to achieve sustainable development, full employment, and social well-being in developed and developing societies. For this, public authority uses expansionary and contractionary tax policies to achieve stable growth and employment environment for the stable labor market. This study theoretically and empirically investigates the problem of inference on income-leisure labor preference. Also, it considers the impact of tax and expenditure structure on labor choices, regarding working hours under the assumption of neoclassical theory. We use quantile regression analysis to investigate the data set for worldwide, high, and lowincome countries from 2000 to 2022, for the macro-level analysis based on the empirical investigation of 123 countries cross-section panel. The outcomes show that, when the fiscal authorities impose a regressive form of taxes, it may hurt the labor wages and distribution of income-leisure preferences or the welfare of labor. Similarly, non-labor income hurts labor utility through a large volume of development expenditure. However, when the progressive form of taxes is imposed it may improve the labor utility, while on the other side, when fiscal authority disburses the development expenditure it may support the non-labor income through the provision of public goods and services. For practice, the empirical results of quantile regression show that government expenditure has a positive while tax hurts labor supply. Fiscal policy in low-income countries has provided an alternative outcome. |
| Keywords: | Expenditures, Taxes, Labor Choices, Method of Moments Quantile Regression |
| JEL: | E62 H24 J22 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121283&r= |
| By: | Salla Kalin (University of Helsinki); Tomi Kyyrä (VATT Institute for Economic Research); Tuomas Matikka (VATT Institute for Economic Research) |
| Abstract: | We use detailed, population-wide data from Finland to provide evidence of the impact of earnings disregard policies on part-time work during unemployment spells, and describe the longer-run trends in combining part-time work and social benefits. We find that part-time work while receiving unemployment benefits is strongly concentrated in the service and social and health care sectors, and that women participate in part-time work much more commonly than men (25% vs. 12% of benefit recipients). The share of part-time workers among benefit recipients increased sharply from 10% to 18% over a few years after the implementation of earnings disregards in unemployment benefits and housing allowances, which allowed individuals to earn up to 300 euros per month without reductions in their benefits. Using variation in the impact of the reforms on incentives between individuals eligible for different types of benefits, we estimate a 16–28% increase in participation in part-time work due to the implementation of earnings disregards. However, we find no evidence of economically significant positive or negative effects of increased participation in part-time work on transitions to full-time employment. |
| Keywords: | labor supply; social benefts; part-time work; earnings disregards |
| JEL: | H24 J21 J22 |
| Date: | 2024–04 |
| URL: | https://d.repec.org/n?u=RePEc:fit:wpaper:21&r= |
| By: | Breyer, Friedrich; Breunig, Christian; Kapteina, Mark; Schwerdt, Guido; Sterba, Maj-Britt |
| Abstract: | Citizens and politicians rely on their knowledge of a pension system, particularly its redistributive features, when forming their preferences and evaluating its fairness. Taking advantage of the Bismarckian rule of proportionality in Germany, we provide experimental and survey-based evidence indicating that voters and politicians adjust their preferences and perceptions of fairness when new information becomes available. Information on the proportional character of the pension system increases perceived fairness and decreases redistributive demands, whereas information about inequalities in life expectancy between beneficiary groups lowers perceived fairness and increases the demand for redistribution. Both citizens and politicians reject the Bismarckian principle of strict proportionality between lifetime contributions and pension benefits in favor of more redistribution from high to low earners in the retirement phase. Our design utilizes a representative survey of citizens and state politicians in 2020-22. |
| Keywords: | public pensions, preferences, redistribution, Germany, elites |
| JEL: | H55 D72 D83 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:cexwps:299999&r= |
| By: | Annika Nivala (VATT Institute for Economic Research) |
| Abstract: | Finland had a large regional wage subsidy for hiring the first employee in 2007–2011. In this paper, I show that the take-up of the subsidy was very low: only 2% firms that became employers used the subsidy. The subsidy was restricted to hiring a full-time employee, which reduced the take-up. However, even among full-time employers the take-up rate was only 6%. Hence, a large majority of firms left thousands of euros on the table by not using the subsidy. Based on the descriptive evidence, the low take-up seems to be explained by low awareness in addition to costs of using the subsidy. Using a regional difference-in-differences identification strategy, I estimate the effect of the subsidy on the probability of becoming an employer and other firm outcomes. As a consequence of the low take-up, the estimated effect is zero. |
| Keywords: | Business subsidies, Wage subsidies, Firm behavior, Labor demand, Entrepreneurship, Small Business |
| JEL: | H25 H32 J23 J38 M51 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:fit:wpaper:23&r= |
| By: | Adam Bee; Irena Dushi; Joshua Mitchell; Brad Trenkamp |
| Abstract: | Research has shown that household survey estimates of retirement income (defined benefit pensions and defined contribution account withdrawals) suffer from substantial underreporting which biases downward measures of financial well-being among the aged. Using data from both the redesigned 2016 Current Population Survey Annual Social and Economic Supplement (CPS ASEC) and the Health and Retirement Study (HRS), each matched with administrative records, we examine to what extent underreporting of retirement income affects key statistics such as reliance on Social Security benefits and poverty among the aged. We find that underreporting of retirement income is still prevalent in the CPS ASEC. While the HRS does a better job than the CPS ASEC in terms of capturing retirement income, it still falls considerably short compared to administrative records. Consequently, the relative importance of Social Security income remains overstated in household surveys—53 percent of elderly beneficiaries in the CPS ASEC and 49 percent in the HRS rely on Social Security for the majority of their incomes compared to 42 percent in the linked administrative data. The poverty rate for those aged 65 and over is also overstated—8.8 percent in the CPS ASEC and 7.4 percent in the HRS compared to 6.4 percent in the linked administrative data. Our results illustrate the effects of using alternative data sources in producing key statistics from the Social Security Administration’s Income of the Aged publication. |
| Keywords: | measurement error, household surveys, retirement income; Social Security; poverty, aging |
| JEL: | H31 H55 I32 J14 J26 R29 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:cen:wpaper:24-32&r= |