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on Public Economics |
| By: | Georg U. Thunecke |
| Abstract: | This paper empirically investigates whether governments are substituting from corporate to consumption taxation due to tax competition using a novel self-collected data set of corporate and consumption tax regime information. I estimate the slope of the tax policy reaction function between corporate and consumption tax rates exploiting the cross-sectional interdependence of corporate tax rates for an instrumental variable approach. Additionally, I analyze the rate-revenue relationship of both tax instruments to evaluate the overall revenue implications of corporate tax competition. I find that, on average, a one percentage point decrease in the corporate tax rate leads to a 0.35 percentage point increase in the consumption tax rate. The rate-revenue relationship of both corporate and consumption tax rates follows an inverted U-shape. Furthermore, governments can fully compensate for revenue losses from tax competition by substituting to consumption taxation. These results indicate that the debate on corporate tax competition may overstate efficiency considerations and underestimate equity concerns. |
| Keywords: | Corporate Taxation, Consumption Taxation, Tax Competition, Fiscal Externality, Revenue Effects |
| JEL: | H20 H21 H25 F68 |
| URL: | https://d.repec.org/n?u=RePEc:mpi:wpaper:tax-mpg-rps-2023-26 |
| By: | Di Nola, Alessandro; Kocharkov, Georgi; Scholl, Almuth; Tkhir, Anna-Mariia; Wang, Haomin |
| Abstract: | This paper studies the aggregate and distributional effects of raising the top marginal income tax rate in the presence of tax avoidance. To this end, we develop a quantitative macroeconomic model with heterogeneous agents and occupational choice in which entrepreneurs can avoid taxes in two ways. On the extensive margin, entrepreneurs can choose the legal form of their business organization to reduce their tax burden. On the intensive margin, entrepreneurs can shift their income between different tax bases. In a quantitative application to the US economy, we find that tax avoidance weakens the distortionary effects of higher income taxes at the top but makes them ineffective at lowering inequality. Eliminating tax avoidance by implementing an equal tax treatment of entrepreneurs across all legal forms of business organization substantially increases tax revenue, aggregate output, and welfare. |
| Keywords: | Tax Avoidance, Top Income Tax Rate, Occupational Choice, Legal Form of Organization, Wealth Inequality, Incomplete Markets, Heterogeneous Agents |
| JEL: | E21 E62 H25 H26 H32 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:300700 |
| By: | Antinyan, Armenak; Asatryan, Zareh |
| Abstract: | Governments increasingly use nudges to improve tax collection. We synthesize the growing literature that evaluates nudging experiments using meta-analytical methods. We find that simple reminders increase the probability of compliance by 2.7 percentage points relative to the baseline where about a quarter of taxpayers are compliant. Nudges that commonly refer to elements of tax morale increase compliance by another 1.4 percentage points. Deterrence nudges, which inform taxpayers about enforcement parameters, increase compliance the most, amounting to an additional 3.2 percentage points increase on top of reminders. Our additional findings highlight the conditions where nudges are more effective, such as their potential when targeting sub-population of late-payers, and also suggest that even this sample of randomized trials may be susceptible to selective reporting of results. Overall, our findings imply that taxpayers are biased by various informational and behavioral constraints, and that nudges can be of some help in overcoming these frictions. |
| Keywords: | Tax compliance, Tax evasion, Randomized control trials, Nudging, Reminders, Tax morale, Deterrence, Meta-analysis, Publication selection bias |
| JEL: | C93 D91 H26 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:zewdip:300677 |
| By: | Johannes Becker |
| Abstract: | Many federal tax systems employ formula apportionment to allocate the taxable profits of large businesses to the federal subunits, where the subunits’ specific tax rates are then applied. The formulas—such as the one recently proposed by the EU Commission and the one agreed upon by the OECD/G20 Inclusive Framework—are remarkably similar, yet their underlying rationale, particularly the normative criteria from which they are derived, remains largely unexplored. To address this gap, I adopt an axiomatic approach and derive a generalized system of formula apportionment based on three criteria: fixed coverage, positive responsiveness, and external independence. I demonstrate that any formula apportionment system meeting these three criteria will suffer from the same distortion, unless all local tax rates are identical. The generalized system encompasses existing real-world systems, as seen in federations like the US, Canada, and Germany, as special cases, while offering a degree of flexibility that holds the (thus far unrealized) potential for surplus-increasing reform. |
| Keywords: | corporate taxation, business taxation, federalism, formula apportionment |
| JEL: | H25 H71 F23 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11234 |
| By: | Georg Schneider; Frank Stähler; Georg U. Thunecke |
| Abstract: | Border adjustment taxes like the value-added tax (VAT) are commonly regarded as establishing a level-playing field for international competition. We employ a structural gravity model in order to analyse the effects of the VAT on trade in final goods in the European Union (EU). We find that the VAT is de facto non-neutral. A one percentage point VAT increase reduces aggregate imports and internal trade by 3.1% and implies a 1.8 to 5.4% reduction of imports relative to internal trade. Based on these findings, we conduct a counterfactual analysis and illustrate that VAT rate changes simply substantial welfare effects for an average country in the European Union. |
| Keywords: | Structural gravity, value-added taxation, neutrality, discrimination, border adjustment |
| JEL: | F10 F14 H24 |
| URL: | https://d.repec.org/n?u=RePEc:mpi:wpaper:tax-mpg-rps-2023-20 |
| By: | Valeria Merlo; Andreas Schanbacher; Georg U. Thunecke; Georg Wamser |
| Abstract: | This paper studies tax-policy interaction and competition among local governments for both mobile and immobile tax bases. We exploit exogenous changes in the local tax setting of German municipalities due to participation in state debt reduction pro- grams to learn about the size, scope and nature of strategic interaction among local governments. Our results suggest strong and significant tax-policy responses both in corporate and property tax rates. Based on these results, we calculate tax-response function gradients in a range of 0.30 to 0.69. Spatial, political, demographic, and administrative municipality characteristics all influence the tax response qualitatively and quantitatively. |
| Keywords: | Local Public Finance, Tax Competition, Yardstick Competition, Spatial Interaction, Tax-Response Functions |
| JEL: | C21 H71 H73 R59 |
| URL: | https://d.repec.org/n?u=RePEc:mpi:wpaper:tax-mpg-rps-2023-23 |
| By: | Klejdysz, Justyna (LMU Munich and ifo Institute); Zawisza, Tom (OECD and Institute for Fiscal Studies) |
| Abstract: | How does the differential tax treatment of employees versus self-employed affect the decision to switch to self-employment? Using administrative data on the universe of taxpayers, we study the impact of a large tax cut for business owners in Poland on high-income individuals’ decisions to transition from employment to self-employment. In 2004, the marginal tax rate for business owners in the top income bracket decreased from 40% to a flat rate of 19%, while employees remained subject to a progressive tax schedule with a top rate of 40%. We find a 17% increase in the probability of high-income employees switching to self-employment five years after the reform. The increase in entries to self-employment was driven by increased transitions to long-term solo self-employment (self-employment without dependent workers), especially in high-skilled service industries. In 2009, another reform reduced the tax differential. The entries from employment to self-employment temporarily decreased, but those who had previously switched to self-employment did not return to employment. These findings suggest that large tax differentials increased the attractiveness of self-employment as an alternative to employment but also increased the share of entrants to self-employment who do not hire workers. |
| Keywords: | employment; self-employment; optimal taxation; income tax; highincome earners |
| JEL: | D31 H20 J62 L26 |
| Date: | 2024–08–16 |
| URL: | https://d.repec.org/n?u=RePEc:ris:mfplwp:0043 |
| By: | Aner Sela (BGU); Yizhaq Minchuk (Department of Industrial Engineering and Management, Shamoon College of Engineering, Beer-Sheva) |
| Keywords: | All-pay auctions, incomplete information, taxation, subsidies |
| JEL: | C72 D44 H25 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:bgu:wpaper:2407 |
| By: | Montpetit, Sébastien; Beaureard, Pierre-Loup; Carrer, Luisa |
| Abstract: | Leveraging the introduction of universal low-fee daycare in Québec in 1997, we assess the welfare effect of universal childcare provision. First, using novel data on local daycare coverage and a difference-in-differences design, we show that positive impacts on maternal labor supply and childcare use are greater in areas with larger daycare expansion, suggesting that childcare availability, not just affordability, drives these responses. We then estimate the policy's Marginal Value of Public Funds (MVPF), defined as the ratio of beneficiaries' utility gains to net governmental costs. Unlike the standard sufficient-statistics metric, which assumes a marginal change in fiscal policy, we quantify the beneficiaries' utility gains through a model of maternal labor supply and childcare choices. This allows us to relax the common marginal-policy assumption and to incorporate non-pecuniary benefits for parents. Our results indicate substantial welfare gains from universal policies, with approximately $3.5 of benefits per dollar of net government spending - over twice the amount captured by the sufficient-statistics metric. Counterfactual simulations suggest that allocating more resources to increasing availability, rather than improving affordability, could yield even larger social returns. |
| Keywords: | universal childcare, daycare coverage, social welfare, sufficient statistics |
| JEL: | H43 J13 J22 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:clefwp:300866 |
| By: | Juergen Jung (Department of Economics, Towson University); Vinish Shrestha (Department of Economics, Towson University) |
| Abstract: | We use an overlapping generations model with labor supply decisions, health risk, and health insurance choices to investigate the impact of proposed work requirements for Medicaid eligibility. Calibrating the model to US data, we simulate counterfactual experiments with a minimum weekly work hours requirement. Our partial and general equilibrium results indicate that Medicaid work requirements increase labor force participation, reduce hours worked, and boost output. However, most scenarios show overall welfare losses, mitigated somewhat by general equilibrium effects. Welfare losses are higher among low-income households, smaller for middle-income households, and result in gains for high-income households. The smallest welfare loss occurs when the reform targets healthy individuals, allowing sicker individuals to remain on Medicaid regardless of their work status. |
| Keywords: | The Patient Protection and Affordable Care Act (ACA), Medicaid expansion, Labor supply, Labor market distortions, Health risk. |
| JEL: | H51 I13 I14 I38 J21 D58 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:tow:wpaper:2024-10 |