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on Public Economics |
| By: | Takuya Obara (Faculty of Commerce, Chuo University); Yoshitomo Ogawa (School of Economics, Kwansei Gakuin University) |
| Abstract: | This study examines optimal nonlinear income taxation on non-cooperative couples that under-provide a household public good. In this study, the income tax has the role of improving the under-provision of the household public good in addition to equity consideration and revenue collection. The optimal marginal tax rate is characterized by the well-known Mirrleesian ABC term and new Pigouvian term. The Pigouvian term can be further decomposed by the two parts. The first reflects the effects of improving the under-provision of the household public good, while the second relates to the expansion of the income tax flexibility. The Pigouvian term results in the marginal tax rate on the top earner being positive. Using US wage data, our quantitative analysis shows that the existence of non-cooperative behavior raises the optimal marginal tax rates at any income level. This result suggests that the optimal marginal tax rates derived in previous studies, which disregard noncooperative behavior, may have been lowly estimated. |
| Keywords: | Optimal Nonlinear Income Taxation, Non-Cooperative Behavior, Household Public Good |
| JEL: | H21 J13 J16 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:kgu:wpaper:291 |
| By: | Nadine Riedel; Ida Zinke |
| Abstract: | South Africa is one of the most unequal economies globally. In this paper, we examine the design of its personal income tax (PIT), with a focus on its redistributive function. We apply the Pfähler decomposition method to analyse the redistributive effects of key components of the South African PIT system, including the marginal tax rate schedule, the definition of gross taxable income, and the provision of tax deductions and tax credits. |
| Keywords: | South Africa, Personal income tax, Decomposition methods, Redistribution, Tax expenditures, Income distribution |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:unu:wpaper:wp-2025-17 |
| By: | Arnemann, Laura |
| Abstract: | This paper contributes to the ongoing discourse on the taxation of top-income earners by empirically investigating the impact of tax policy changes on pay without performance. Using data on executive compensation in the United States, I compare the sensitivity of executive compensation to performance shocks beyond the executives control before and after a change in the federal and state tax rate. Performance shocks beyond the executives control are measured using exogenous export demand shocks. I find that the effect of taxes on pay without performance depends on the type of tax levied. Specifically, state tax hikes increase the sensitivity of executive compensation to performance shocks exogenous to executive effort. Conversely, changes in federal tax rates have a negative but statistically insignificant effect on pay without performance. Pay without performance changes most in response to state tax hikes for executives with greater mobility. Based on a Nash bargaining model, I outline that these heterogeneous findings can be explained by the importance of outside options for the pass-through of exogenous profit shocks to executive earnings. Firms need to increase compensation more in response to exogenous performance shocks after a state tax hike to retain the executive. |
| Keywords: | Tax Incidence, Rent-Sharing, Executive Compensation |
| JEL: | H22 H24 M12 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:zewdip:313009 |
| By: | Zoutman, Floris T. (Dept. of Business and Management Science, Norwegian School of Economics) |
| Abstract: | This paper extends the sufficient statistics approach to study international tax policy. International policy differs from domestic policies because i.) from the perspective of domestic policy makers the welfare weight on foreign agents lies below that of domestic agents, and ii.) behavioral changes by foreign agents have (general equilibrium) spillover effects on the domestic economy that are welfare relevant. I develop a tax model in which a domestic firm produces output by combining domestic and foreign inputs. Production also depends on the aggregate level of the foreign input, thereby generating a production externality. Factor prices are determined in general equilibrium by the interplay between the firm’s demand for factors and the supply provided by foreign and domestic private agents. The firm is taxed based on its factor inputs and factor prices but can avoid taxation using a costly tax avoidance technology. The cost of avoidance partly depends on investment in tax administration. Welfare is defined as a weighted sum of tax revenue and the surpluses of private domestic and foreign agents. I examine the welfare effects of marginal increases in both the tax rate and tax administration. These effects decompose into contributions to the production and fiscal externality and to transfers between domestic agents and the government, as well as between foreign and domestic agents. The sufficient statistics needed for welfare analysis are the elasticity of taxable income, the elasticity of factor prices, and the elasticity of the foreign input with respect to the policy variable of interest. |
| Keywords: | International Tax Policy; Sufficient Statistics; Welfare Effects; Withholding Tax |
| JEL: | F23 H26 |
| Date: | 2025–04–16 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:nhhfms:2025_011 |
| By: | Snigdha Kalra (Indira Gandhi Institute of Development Research); Sargam Gupta (Indira Gandhi Institute of Development Research) |
| Abstract: | This paper explores the possible ways in which the emerging market and developing economies (EMDEs) can improve their tax-to-GDP ratio using a theoretical framework. We do this using a Laffer curve analysis at the balanced growth path. We develop a closed-economy discrete-time neoclassical growth model with heterogeneous agents, and three sectors: households, firms, and the government. This model is calibrated for a typical EMDE and it incorporates two well-documented features that limit their tax capacity. The first feature we model is the presence of a large proportion of the economy that neither pays nor files taxes. To address this, our model includes heterogeneous agents, represented by Ricardian and non-Ricardian households. Non-Ricardian households belong to the informal sector and are entirely exempt from taxes, while Ricardian households may choose to comply with tax obligations, creating a partially endogenous framework for tax evasion. The second critical feature is the relative weakness of institutions in the EMDEs as compared to the advanced economies (AEs). We incorporate aspects such as the probability of audits, penalties for evasion, and the culture of corruption in a minimalist way to capture the essence of the realities of weak institutions. We derive the expression for the Laffer curve for three types of taxes: the labour income tax, the capital income tax, and the consumption tax. We find that the fiscal policies attuned towards bringing a higher percentage of agents under the ambit of tax collection - despite households evading taxes - significantly boost the tax revenues. The model clearly shows that countries with weaker institutions will have a lower tax capacity, as any increase in the tax rates reduces tax compliance and increases tax evasion. Finally, reducing the income tax exemptions, decreasing the share of informal sector firms and employees, and strengthening the institutional quality are essential for improving the fiscal space in the EMDEs. To our knowledge, no coherent neoclassical growth model exists in the literature that effectively captures these features within EMDEs. |
| Keywords: | Laffer curve, Optimal taxes, Growth models, Heterogeneous Agents, Institutions, Tax Evasion |
| JEL: | E02 E13 E62 H21 H26 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:ind:igiwpp:2025-007 |
| By: | Tuomas Kosonen; Sami Jysmä; Riikka Savolainen |
| Abstract: | This paper studies the relationship between substitutability of taxed and nontaxed goods and the price elasticity of demand. We organize the paper through a simple model that yields as a result a highly convex relationship between the demand elasticity and how close non-taxed substitutes are available. Empirically we analyze a Finnish sin tax scheme for sweets, soda and ice cream providing us with quasi-experimental variation through multiple reforms. We have product and storelevel data on sales and prices containing hundreds of millions of observations. We also develop survey evidence on substitution preferences across categories of goods. Our estimated consumption elasticity is close to zero for sweets and ice cream that have intermediate non-taxed substitute: cookies. In a stark contrast, when the tax rate was doubled for sugary soft drinks but not for their close substitute non-sugary soft drinks, consumption elasticity is close to unity. These estimates align well with our theory framework wherein even with intermediate non-taxed substitutes available the demand elasticity is close to zero, while it is close to unity when very close substitutes are available. We also provide evidence that the quasiexperimental price elasticity estimates in the previous literature align with our theory framework. |
| Keywords: | excise taxes, sin tax, consumption, substitution, sweets, soda |
| JEL: | H2 I18 |
| Date: | 2024–04–08 |
| URL: | https://d.repec.org/n?u=RePEc:pst:wpaper:342 |
| By: | Batabyal, Amitrajeet; Beladi, Hamid |
| Abstract: | We analyze how deterministic political competition between the elites and the so-called creative class shapes economic outcomes in a stylized region. By deterministic, we mean a case where political power has shifted from the elites to the creative class with probability one. There are three groups in our region: workers, creative class members, and the elites. Unlike previous studies, tax policy in our region is set not by the elites but instead by the creative class. In this setting, we first present a counterintuitive result in which the creative class prefers to tax itself, and not the elites or the workers, with the tax proceeds being redistributed also to itself via lump-sum transfers. Second, we explain why this counterintuitive result makes sense. Finally, we discuss whether the above counterintuitive result will hold if the proceeds of taxation are redistributed using lump-sum transfers to all the groups in our region and not just to the creative class. |
| Keywords: | Creative Class, Elite, Lump-Sum Transfer, Political Competition, Tax Policy |
| JEL: | H21 R11 |
| Date: | 2025–01–15 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:124205 |
| By: | Christian Gillitzer; Rasmus Landersø; Peer Skov; Jakob Egholt Søgaard |
| Abstract: | We show how tax kinks can be used to estimate the marginal propensity to consume (MPC). Tax kinks create discrete changes in the relationship between taxable income and disposable income, which – under a set of testable assumptions – enables causal identification of the spending response to changes in disposable income. We apply our new approach using administrative data from Denmark. Using a regression kink design (RKD), we estimate a MPC of 0.6 (s.e. 0.1) for taxpayers at the top tax kink. We show theoretically the conditions under which tax kinks provide variation in transitory or permanent income and deduce that the RKD exploits predominately transitory variation in income. Our implementation addresses threats to the research design from manipulation of taxable income through labor supply and other behavioral responses. Our findings inform the targeting of fiscal stimulus and social insurance programs to high income earners. |
| Keywords: | marginal propensity to consume, tax kinks, regression kink designs |
| JEL: | E21 H24 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11755 |
| By: | Arnemann, Laura; Buhlmann, Florian; Ruf, Martin; Voget, Johannes |
| Abstract: | In this paper, we investigate the effect of higher personal income taxes on CEO and firm performance in publicly traded US firms. In response to higher taxes on compensation, CEOs are less likely to reach performance goals and spend more time working in boards outside of their firm. At the same time, firm performance drops before eventually recovering as investment projects with below average profitability are disregarded and due to adjustments in CEO compensation. |
| Keywords: | Executive Compensation, Personal Income Taxation, Firm Performance |
| JEL: | H24 M12 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:zewdip:313010 |
| By: | Bajo-Rubio, Oscar; Gómez-Plana, Antonio G. |
| Abstract: | In this paper, we analyse the effects on the economies of the European Union and the rest of the world, of several austerity policies implemented by the Southern European countries, i.e., Portugal, Italy, Greece, and Spain. In particular, we simulate the reduction in one point in the government deficit-to-GDP ratio in each of these countries, through several alternative policies, both from the spending side and the revenue side. The empirical methodology is based on a computable general equilibrium model, which incorporates the backward sectoral linkages and inter-country flows generated by fiscal consolidations. Our results show that these austerity policies were generally more painful, in terms of a fall in the levels of activity and a worsening in income distribution for labour, in the scenarios of tax increases rather than in those based on spending cuts. The effects on the rest of the European Union and the rest of the world were however mostly negligible. |
| Keywords: | Computable general equilibrium, Austerity policies, Global economy, European Union |
| JEL: | C68 H62 H20 H50 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:glodps:1592 |