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on Public Economics |
| By: | Syed Mainul Ahsan; Syed M. Ahsan |
| Abstract: | This paper, originally designed to focus on discovering a suitable tax structure that befits an aspiring LMIE as it advances toward the UMIE status. On reflection, it becomes evident that it is hard to meaningfully deliberate on the composition of taxes without focussing in equal measure on the issue of the size of tax revenue at stake, namely the tax effort. The transition to UMIE must embrace public’s demand for a healthcare system fully in compliance with the WHO criteria of UHC, for quality human capital, and for both a physical and IT infrastructure consistent with faster growth over the next decade or so. We explore the probable causes of low revenue effort and an unchanged structure of taxes and their persistence over the recent decades. Finally, we delve into the issues of fundamental reforms of the tax system as well as of the softer aspects of tax reform, namely that of tax administration, evasion and compliance. |
| Keywords: | tax structure, taxable capacity, tax handles, tax compliance, tax evasion, informal economy, inheritance and property taxation |
| JEL: | B12 H21 H22 H24 H25 H26 H27 H55 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11484 |
| By: | Nicolas Ajzenman; Guillermo Cruces; Ricardo Perez-Truglia; Darío Tortarolo; Gonzalo Vazquez-Bare |
| Abstract: | This paper investigates the impact of a progressive tax reform on tax compliance. We leverage a major progressive tax reform in a large Argentine municipality. First, we use a quasi-experimental design to estimate the causal effect of changes in a household's own tax rates on its tax compliance. Second, we utilize a large-scale natural field experiment to examine whether, holding a household's own tax rates constant, tax compliance is influenced by the tax rates of poorer or richer households. We find that reducing taxes for poorer households increases their compliance, while increasing taxes for richer households decreases their compliance. When poor households learn about the tax hike on the rich, this increases their perceived fairness of the tax system and their tax compliance. When rich households learn about the tax cuts for the poor, their perceived fairness increases significantly, but their compliance, if anything, goes down. Leveraging another reform (and another field experiment) that took place a year later, we show that both the quasi-experimental and experimental findings replicate. Our evidence highlights that tax compliance depends not only on a household's own tax rate but also on its perception of the broader tax schedule. Our findings also highlight the gap between stated and revealed preferences for redistribution. Lastly, we conduct a counterfactual analysis to illustrate the implications of our findings for the design of tax policies. |
| JEL: | C93 D31 H24 H26 H71 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33286 |
| By: | David R. Agrawal; Laura V. Zimmermann |
| Abstract: | This paper studies the effects of transitioning from a system of sales taxes to a value-added tax (VAT) on firm-level outcomes. We construct a dataset of product- and state-specific tax rates before and after India gradually switched from a sales tax to a VAT. Exploiting staggered state-level adoptions, we first show that following the transition, effective tax rates declined substantially and complexity as measured by various proxies generally also fell. We then show that sales increased by 57% in the medium run. The reform resulted in increased earnings for workers and higher amounts of capital and digital accounting. |
| Keywords: | value added tax, sales tax, production efficiency, firms |
| JEL: | H21 H25 H26 H71 O17 O23 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11469 |
| By: | Felix J. Bierbrauer; Pierre C. Boyer; Andreas Peichl; Daniel Weishaar; Felix Bierbrauer |
| Abstract: | We develop a theory of tax reforms for a setting with multi-dimensional heterogeneity amongst taxpayers and multiple economic decisions that are all subject to fixed and variable costs. The theorems in this paper provide a complete characterization of the conditions under which Pareto- or welfare-improving tax reforms exist. We focus on one application, the taxation of couples, and present a detailed analysis of the behavioral responses to taxation in this setting. Squaring the theorems with this analysis yields sufficient statistics for the existence of Pareto- or welfare-improving tax reforms. In the empirical part, we apply them to US data. Our findings include the following: Tax rates on secondary earnings are inefficiently high when secondary earnings are close to primary earnings. Also, reducing the tax system’s degree of jointness is not Pareto-improving. Whether it raises welfare depends on a trade-off between poverty alleviation and gender balance. |
| Keywords: | taxation of couples, Pareto efficiency, tax reforms, optimal taxation, non-linear income taxation |
| JEL: | C72 D72 D82 H21 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11539 |
| By: | Jacob Goldin; Sebastian Koehne; Nicholas Lawson |
| Abstract: | We study the optimal taxation of expenditures that generate income while also serving a consumption function. We characterize the Pareto optimal income tax deduction for such mixed-purpose expenditures within a generalized Atkinson-Stiglitz model. Pareto optimality requires a partial deduction for mixed-purpose expenditures, where the deduction rate depends on the fraction of an expenditure’s marginal benefits that are attributable to income-generation rather than consumption. We extend our results to account for several practical considerations, including potential constraints relating to a uniform deduction rate or a fixed income tax schedule. Our results provide a rationale for non-uniform commodity taxation, distinct from existing models of preference heterogeneity or non-separability. |
| JEL: | H20 H21 H24 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33270 |
| By: | Caravaggio, Nicola; Resce, Giuliano; Idola Francesca, Spanò |
| Abstract: | This paper investigates determinants of local tax policy, with a particular focus on personal income tax rates in Italian municipalities. By employing seven Machine Learning (ML) algorithms, we assess and predict tax rate decisions, identifying Random Forest as the most accurate model. Results underscore the critical influence of demographic dynamics, fiscal health, socioeconomic conditions, and institutional quality on tax policy formulation. The findings not only showcase the power of ML in enhancing predictive precision in public finance but also provide actionable insights for policymakers and stakeholders, enabling more informed decision-making and the mitigation of fiscal uncertainties. |
| Keywords: | Local taxation, Machine learning, Municipalities. |
| JEL: | C53 H24 H71 |
| Date: | 2024–09–24 |
| URL: | https://d.repec.org/n?u=RePEc:mol:ecsdps:esdp24098 |
| By: | Jacob Goldin; Sebastian Koehne; Nicholas Lawson |
| Abstract: | We study the optimal taxation of expenditures that generate income while also serving a consumption function. We characterize the Pareto optimal income tax deduction for such mixed-purpose expenditures within a generalized Atkinson-Stiglitz model. Pareto optimality requires a partial deduction for mixed-purpose expenditures, where the deduction rate depends on the fraction of an expenditure’s marginal benefits that are attributable to income-generation rather than consumption. We extend our results to account for several practical considerations, including potential constraints relating to a uniform deduction rate or a fixed income tax schedule. Our results provide a rationale for non-uniform commodity taxation, distinct from existing models of preference heterogeneity or non-separability. |
| Keywords: | optimal taxation, tax deduction |
| JEL: | D82 H21 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11561 |
| By: | Håkan Selin |
| Abstract: | In a dual income tax (DIT) system, labor income is taxed progressively, while capital income is subject to a lower proportional tax. DIT systems were introduced in Sweden, Norway, and Finland in the early 1990s. In the absence of rules restricting capital income distributions, owners of closely-held corporations would easily be able to circumvent the progressive tax on earned income by withdrawing an appropriate amount of dividends instead of wages. The Nordic countries adopted very different income splitting models, with immediate implications for the tax treatment of dividends. In this article I first review the principles of the income splitting rules of Sweden, Norway, and Finland. I then discuss some of the trade-offs involved in the design of such rules. |
| Keywords: | income taxation, Nordic comparison, dividend taxation |
| JEL: | H32 G35 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11491 |
| By: | Hjalte Fejerskov Boas (Department of Economics, University of Copenhagen); Mona Barake (Skatteforsk, NMBU) |
| Abstract: | Cryptocurrencies pose substantial challenges to tax enforcement due to their anonymous and decentralized properties, undermining conventional regulatory practices. We study the impact of an ambitious new enforcement initiative aimed at addressing these challenges: domestic third-party reporting of crypto income. We estimate tax compliance and behavioral responses to this new policy by combining unique Danish microdata from domestic crypto platforms, administrative tax records, and cross-border bank transfers. Despite the introduction of domestic third-party reporting, over 90% of crypto investors do not declare crypto income. Moreover, we identify a significant and persistent evasion response to the policy as investors shift trading activity from domestic platforms, subject to third-party reporting, to foreign platforms outside regulatory reach. Our findings underscore the limits of domestic enforcement strategies in addressing tax evasion for decentralized, borderless assets like cryptocurrencies, highlighting the need for international coordination. |
| Keywords: | Cryptocurrencies, Tax compliance, Tax enforcement |
| JEL: | D31 H24 H26 H31 G5 |
| Date: | 2024–12–19 |
| URL: | https://d.repec.org/n?u=RePEc:kud:kucebi:2421 |
| By: | Christofzik, Désirée I. (German University of Administrative Sciences Speyer); Fuest, Angela (RWI); Jessen, Robin (RWI) |
| Abstract: | This paper quantifies the dynamic macroeconomic effects of tax changes in Germany, allowing for anticipation effects of preannounced tax reforms. Identification is achieved using a narrative approach, which provides information about the timing of tax reforms. An anticipated cut in taxes has a positive effect on output with a peak multiplier of 1.7, observed not until nine quarters after implementation. This positive effect is accompanied by significant negative anticipation effects on output, consumption, investment, hours worked, and wages. Our results suggest that policy makers should take anticipation effects into account when implementing fiscal policy measures. |
| Keywords: | tax policy, anticipation effects, fiscal policy |
| JEL: | H20 H30 E32 E62 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17499 |
| By: | Damiani Genaro Martín |
| Abstract: | This paper provides new theoretical insights into the causes and consequences of indirect tax evasion. I propose a decision-making framework that contemplates biased perceptions of apprehension probabilities, which are affected by the environment where the agents operate. This microfounded formulation allows for the analysis of how taxation affects tax evasion (and vice versa) in the aggregate, emphasizing the existing relationships between the relative size of the shadow economy, tax rates, and government revenue. It is shown that a traditional Laffer curve (inversely U-shaped and with a unique maximum) can only exist under certain conditions. The maximum government revenue attainable turns out to be, in any case, lower than in the absence of tax evasion. Nevertheless, evasion control policies are proven to be always effective in increasing government revenue. |
| JEL: | H26 K42 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:aep:anales:4724 |
| By: | Geoffrey Gee; Jacob Goldin; Joseph Gray-Hancuch; Ithai Lurie; Vedant Vohra |
| Abstract: | Tax benefits tied to children form a central component of the social safety net in the United States. To participate in these programs, taxpayers must claim a child on their tax return. We study the claiming of children on tax returns by drawing on health insurance information returns to establish the presence of children in the United States. We estimate that the vast majority of insured children (approximately 95 percent) and a significant majority (between 88 and 97 percent) of all U.S. children are claimed on tax returns. Unclaimed children are disproportionately concentrated in lower income households and are more likely to live in Black and Hispanic neighborhoods. |
| JEL: | H20 H24 H53 I13 I32 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33277 |
| By: | Bächli, Mirjam (University of Lausanne); Glitz, Albrecht (Universitat Pompeu Fabra) |
| Abstract: | Immigration may affect income inequality not only by changing factor prices but also by inducing policy makers to adjust the prevailing income tax system. We assess the relative importance of these economic and political channels using administrative data from Switzerland where local authorities have a high degree of tax autonomy. We show that immigrant inflows not only raise gross earnings inequality but also reduce the progressivity of local income taxes, further increasing after-tax inequality. Our estimates suggest that around 10 percent of the impact of immigration on the net interquartile and interdecile earnings gaps can be attributed to the political channel. |
| Keywords: | immigration, income taxes, earnings inequality |
| JEL: | H23 H24 H71 J31 J61 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17523 |
| By: | Arozamena Leandro; Ruffo Hernán; Sanguinetti Pablo; Weinschelbaum Federico |
| Abstract: | We present a model that provides insights into the optimal structure of sin taxes, considering the varying health risks of different product variants and the presence of internalities and externalities. Then, we compare its predictions with the tax policies on tobacco, alcoholic beverages, and sugar-sweetened drinks in Latin America and the Caribbean. Our framework confirms the intuition that taxes should be levied based on the health risks these products impose on individuals. Nevertheless, we show evidence from Latin America demonstrating that sin taxes on these products are often not established in proportion to the harm they produce. Our model also suggests that consumption response to taxes is weaker when there is a higher subjective misperception of the health risk, necessitating further tax increases. A key policy issue that relates to the theoretical framework is the potential trade-off between health and revenue objectives that the government may face. Authorities may be worried that increasing these taxes for health purposes may reduce tax revenue if the demand falls to a greater extent than the taxes increase. Our model shows that the revenue argument for taxing sin products may imply higher taxes for all variants (though relatively lower for less harmful versions). |
| JEL: | H2 D6 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:aep:anales:4708 |
| By: | Terzic, Saudin |
| Abstract: | The capacity of a country to collect taxes can significantly impact its economic development, regardless of its economic system and social-political order. Governments carefully consider the amount of tax revenue they need to collect when determining their short- and medium-term fiscal policy goals. This paper's goal is to examine the problem of estimating Bosnia and Herzegovina's (BiH) tax capacity and to present evidence of the elements that impact tax capacities based on the opinions of tax practitioners in this area through gender analysis. The sample in this study used a simple random sampling method. The results of the research are the formulation of some conclusions regarding the tax capacity and specific factors of social benefits and security regulation and regulation of the shadow economy, therefore, it is necessary to change them in many aspects. In order to determine which factors have the biggest impact on tax capacity, the article uses both theoretical and empirical analyses. The empirical analysis uses a chi-square proportion test |
| Keywords: | tax, tax capacity, gender analysis |
| JEL: | H26 |
| Date: | 2024–08–08 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122846 |
| By: | Rolf Aaberge; Marco Francesconi; Jørgen Modalsli; Ola L. Vestad |
| Abstract: | This paper presents estimates of income concentration and inequality for Norway using a new comprehensive measure of income, which identifies business income as it is earned by companies rather than when it is paid out as dividends to owners. We assemble several sources of high quality register data that allow us to account for multiple layers of business ownership across all companies between 2001 and 2018. Compared to official statistics, the new measure implies that the share of income attributable to the top 1% of the distribution more than doubles and the Gini coefficient estimates increase by about 40%. Our new measure identifies substantial tax regressivity for individuals in the top percentile, a feature that cannot be detected by standard income measures. For instance, while the share of gross income paid in taxes by individuals at the 99th percentile is about 36% in 2016, the corresponding share paid by individuals in the top 1% is 19%. |
| Keywords: | income distribution, top income shares, Gini coefficient, dividends, retained earnings, tax burden |
| JEL: | D31 D63 E01 H24 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11496 |
| By: | Audrey Guo (Santa Clara University); Melanie Wallskog (Duke University) |
| Abstract: | How costly are taxes for young firms? In this paper, we demonstrate that even small payroll taxes significantly distort entry, growth, and hiring decisions. First, leveraging cross-sectional variation in the taxes faced by new employers, we find that higher taxes discourage new firms from hiring their first workers, with an elasticity of the number of new employers to taxes of -0.1. Second, studying changes in taxes after entry, we find that higher taxes lead more firms to exit, while also reducing employment for those who survive and leading some firms to avoid taxes by using non-taxable contract labor. |
| Keywords: | firm entry, young firms, labor costs, unemployment insurance |
| JEL: | H25 H71 L26 M13 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:upj:weupjo:24-410 |
| By: | Tobias Bergmann (PIK Potsdam, Technical University Berlin); Nikolaj Moretti (PIK Potsdam, University of Potsdam, CEPA) |
| Abstract: | We develop a simple two-period principal-agent model in which a present-biased government, the agent, chooses public investment levels given a deficit rule imposed by the principal. The principal sets a deficit cap to curb current debt-financed consumption. In doing so, it also reduces long-term government investment. We characterize the optimal deficit rule that balances these opposing effects. Our analysis yields three key insights. First, a deficit rule is always a second-best instrument resulting in nonzero deficits and inefficiently low public investment. Second, while identifying the optimal deficit rule is challenging in practice, we demonstrate that under general conditions, shocks to the productivity of public investment entail an increase in the optimal deficit cap. Third, we compare the welfare effects of three fiscal rules: a balanced budget rule, the absence of any deficit rule, and a benchmark deficit rule. The benchmark deficit rule limits the agent’s deficit to the level incurred by an agent without present bias. For moderate levels of present bias, the absence of a deficit rule leads to higher welfare than the balanced budget rule. The absence of a rule is consistently welfare-dominated by the benchmark deficit rule. Only in cases of substantial present bias does the balanced budget rule result in higher welfare than the benchmark deficit rule. |
| Keywords: | public debt, fiscal rules, present bias, principal-agent, public investment |
| JEL: | D82 E62 H30 H63 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:pot:cepadp:85 |
| By: | Ali Enami (University of Akron); Nora Lustig (Tulane University) |
| Abstract: | Income redistribution through taxes and transfers varies significantly across countries and over time. Existing explanations for this heterogeneity range from pre-fiscal inequality (e.g., the median voter theorem) to factors like democracy, development level, ethnic fractionalization, and unemployment. This study re-examines the determinants of income redistribution. We measure redistribution as the change in the pre- and post-fiscal Gini coefficient using a novel dataset comprising 100 data points from 77 primarily low- and middle income countries. Our analysis covers more fiscal interventions than found in the literature: in addition to direct taxes and transfers, it includes indirect taxes and subsidies. It also addresses econometric issues prevalent in the literature, such as post-treatment bias. The change in the Gini coefficient is further decomposed into three channels: progressivity, size, and rerankingâan analysis not previously undertaken comprehensively. Our findings indicate that a stronger rule of law, higher ethnic fractionalization, a larger share of old-age population, greater female parliamentary representation, higher unemployment, a higher income ratio between middle and top deciles and having a federal system are associated with greater income redistribution. Conversely, democracy and larger population size are associated with lower levels of redistribution. We find that the size and progressivity of direct transfers and indirect taxes are the primary mechanisms driving these relationships. |
| Keywords: | income redistribution, Gini, progressivity and size of fiscal interventions, reranking |
| JEL: | D63 H22 H23 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:tul:wpaper:2502 |
| By: | Shani, Ron; Reingewertz, Yaniv |
| Abstract: | This paper introduces a model for optimizing the provision of local public goods across national, regional, and local government tiers. We study how spillovers, heterogeneity of preferences, and economies of scale affect the decision to centralize or decentralize responsibilities among these three tiers of government. We provide three key insights – (a) Adding a regional level to the standard fiscal federalism model creates a subnational solution for the problem of spillovers between local governments, (b) Preference heterogeneity creates an incentive to decentralize the provision of local public goods, (c) Economies of scale create an efficiency gain from centralization. The ultimate distribution of responsibilities is contingent upon the interplay of these three competing forces. Our model integrates insights from previous studies to develop a unified theory encompassing the powers that influence decisions to centralize or decentralize. |
| Keywords: | Fiscal Federalism; subnational governments, decentralization, local public goods |
| JEL: | H11 H41 H77 R13 |
| Date: | 2024–11–30 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122835 |
| By: | Jonathan Colmer; Suvy Qin; John Voorheis; Reed Walker |
| Abstract: | This paper explores the relationships between air pollution, income, wealth, and race by combining administrative data from U.S. tax returns between 1979–2016, various measures of air pollution, and sociodemographic information from linked survey and administrative data. In the first year of our data, the relationship between income and ambient pollution levels nationally is approximately zero for both non-Hispanic White and Black individuals. However, at every single percentile of the national income distribution, Black individuals are exposed to, on average, higher levels of pollution than White individuals. By 2016, the relationship between income and air pollution had steepened, primarily for Black individuals, driven by changes in where rich and poor Black individuals live. We utilize quasi-random shocks to income to examine the causal effect of changes in income and wealth on pollution exposure over a five year horizon, finding that these income–pollution elasticities map closely to the values implied by our descriptive patterns. We calculate that Black-White differences in income can explain ∼10 percent of the observed gap in air pollution levels in 2016. |
| Keywords: | income, wealth, air pollution, inequality |
| JEL: | H00 H40 Q50 R00 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11465 |