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on Public Economics |
| By: | Jules Ducept; Sarah Godar |
| Abstract: | This paper documents the rise of corporate tax-base narrowing measures in the EU using a novel dataset covering both tax rate and tax base reforms implemented between 2014 and 2022. Our findings indicate a shift away from the ’cut rate – broaden base’ approach, as governments increasingly align corporate taxation with industrial policy objectives. We show that EU tax competition exerts downward pressure on high-tax countries, while the likelihood of tax cuts also varies with the political orientation of governments. Using financial accounts from more than 40, 000 affiliates, we find that the average effective tax rate of multinational enterprises in the EU has declined more rapidly than the statutory rate and estimate that tax base reforms account for 24% of this decline. The estimated revenue cost of all reforms combined amounts to 3.5% of total corporate tax revenue collected from the sample firms. These revenue losses should be carefully weighed against the anticipated benefits of tax reforms. |
| Keywords: | Effective Tax Rates, Multinationals, Tax Competition, Corporate Income Tax, Tax Reform, Political Orientation, European Union |
| JEL: | F23 H25 H26 P11 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2117 |
| By: | Xavier Dufour; Pierre-Carl Michaud; Michael Smart |
| Abstract: | We use variation in marginal tax rates and in tax bracket thresholds at which they apply in order to identify the substitution and income effects of tax reforms. We use a triple-difference estimator that exploits variation from subnational tax reforms, for which behavioral responses to taxes are identified even in the presence of unobservable shocks to the income distribution. While high-income taxpayers respond more to tax changes, our results suggest this reflects much more the income or salience effects of tax reforms, rather than inherent heterogeneity in substitution effects. We discuss the implications for optimal redistributive tax policies. |
| Keywords: | income and substitution effects, tax salience, optimal progressivity |
| JEL: | D31 H21 H24 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11693 |
| By: | Laurence Jacquet; Etienne Lehmann (CY Cergy Paris Université, THEMA) |
| Abstract: | When should governments sacrifice production efficiency for redistribution? We generalize the celebrated result of Diamond and Mirrlees (1971a, b) by allowing for imperfect competition, suboptimal and nonlinear taxation. We demonstrate that production efficiency hinges on the flexibility of the tax system in compensating gains and losses from changes in factor prices. This requires the tax system to target each factor’s income. We show how to adjust tax systems or production policies for imperfect targeting and market failures, even when the tax system is not flexible enough. Endogenous factor prices do not modify the test to identify Pareto-improving tax reforms. |
| Keywords: | Production efficiency, Nonlinear income taxation, Several income sources |
| JEL: | H21 H22 H23 H24 L5 F13 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ema:worpap:2025-08 |
| By: | Dirk Krueger; Chunzan Wu |
| Abstract: | Household consumption and welfare are more strongly associated with lifetime income, but most countries base income taxes on current income and use progressive taxes to reduce inequality and provide social insurance. Is lifetime income a better tax base for a government seeking to provide social insurance and redistribution? To answer this question, we build a quantitative life-cycle model of heterogeneous households with endogenous labor supply and idiosyncratic wage risks, and calibrate it to the U.S. economy. We document that switching to a lifetime income tax leads to a more efficient distribution of hours worked over time and across states of the world. This benefit rises with tax progressivity under a lifetime income tax, whereas the opposite is true under an annual income tax. Consequently, the optimal lifetime income tax is more progressive and achieves larger ex-ante welfare for a cohort of households than the optimal annual income tax. |
| JEL: | E60 H20 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33664 |
| By: | Floris Zoutman |
| 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: | H26 F23 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11810 |
| By: | Mara Faccio; Jin Xu |
| Abstract: | Using limitations to the deductibility of interest payments triggered by the introduction of interest ceiling rules globally, we show that affected private firms reduce leverage relative to unaffected firms. In support of a causal effect of taxes on corporate capital structure choices, we show that the results hold for firms near the thresholds triggering the limitations, in a propensity score matched sample, and in countries required to adopt the interest ceiling rules. In contrast, falsification tests show no reduction in leverage for affected firms around pseudo-reform years. Furthermore, within a country, firms with a higher fraction of nondeductible interest payments are less responsive to tax rate changes. More broadly, across 93 countries, we document that private firms tend to decrease leverage in response to tax rate cuts and increase leverage in response to corporate tax rate hikes. |
| JEL: | F30 G30 G32 G38 H2 H25 H26 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33685 |
| By: | Paloma Péligry (CEPS - Centre d'Economie de l'ENS Paris-Saclay - Université Paris-Saclay - ENS Paris Saclay - Ecole Normale Supérieure Paris-Saclay); Xavier Ragot (Sciences Po - Sciences Po) |
| Abstract: | We analyze the convergence or divergence of the diversity of fiscal systems after the financial crisis of 2007. Studying 29 countries, we first document the evolution of the taxation of households, firms, labour, consumption and capital. We identify three types of fiscal systems: liberal, intermediate and high-redistribution, which can be ranked in ascending order of tax rates, confirming known typologies in the diversity of capitalism literature. Only the tax rate on corporate profits shows signs of downward convergence over the period. The other tax rates show rather signs of divergence. Second, a divergence is observed among the liberal and high-redistribution group over the period. The European countries are converging towards the high-redistribution model, with the exception of Great Britain, which is moving towards the liberal model. Thus, the financial crisis seems to contribute not to the convergence, but to the divergence of fiscal systems. |
| Keywords: | tax systems, globalization, capital taxation |
| Date: | 2024–04 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05033579 |
| By: | Thomas Eichner; Marco Runkel |
| Abstract: | Within a two-country model, this paper identifies a novel emission leakage channel that is caused by moral behavior of (atomistic) consumers. In a non-cooperative emission tax game between the countries, the leakage effect lowers the governments’ marginal benefit of emission taxation, so equilibrium emission tax rates are even lower and the emission levels even higher than in the business-as-usual without moral consumers. The detrimental effect of consumer morality may remain, if governments behave morally, too, and may even be exacerbated under country asymmetries. It disappears, if governments choose emission caps, since the caps fix national emissions and avoid morality-induced leakage. |
| Keywords: | moral behaviour, emissions, tax, cap, leakage |
| JEL: | H23 H71 Q58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11698 |
| By: | Olivier J Blanchard (Peterson Institute for International Economics) |
| Abstract: | Most of the focus of recent stabilization policy research and practice has been on monetary rather than fiscal policy. This paper argues that, given the limits on monetary policy, fiscal policy should play a larger role. Because of the well-known problems with fiscal policy in general, it argues that we should develop quasi-automatic stabilizers--changes in taxes or transfers triggered by an aggregate variable. It discusses design issues, in particular how to make them debt neutral, and what aggregate variable to use. It then focuses on a specific stabilizer, a variable value-added tax (VAT) rate. It shows its effect in a minimalist New Keynesian model and then discusses a number of analytical issues, both within and out of the minimalist model, such as the implications for inflation, the choice of the tax base, the implications of liquidity constraints, and the implication of anticipation effects. The paper concludes by reviewing the empirical evidence on passthrough of VAT changes and the effects on demand of VAT changes, permanent or temporary. |
| Keywords: | Fiscal Policy, Value-Added Tax, Stabilization Policy, Automatic Stabilizers, Taxes and Transfers |
| JEL: | E62 H2 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:iie:wpaper:wp25-6 |
| By: | Alan J. Auerbach |
| Abstract: | This paper considers questions about the implications of rising inequality for the theory and practice of public finance. It begins by addressing fundamental reasons why the distribution of income or wealth on an annual basis before taxes and transfers offers insufficient information: (1) it does not tell us what resources are actually available to households for consumption; and (2) in providing a snapshot of the resources available to individuals of different ages at a given moment in time, without controlling for life-cycle related differences or income dynamics, it can provide a misleading estimate of the underlying degree of inequality. The paper then considers the implications of high and perhaps rising economic inequality for the design of government policy: top marginal tax rates, phase-outs of government policies for those with higher incomes, the political economy of inequality, and other subjects. |
| JEL: | H21 H22 H23 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33691 |
| By: | Robin Boadway; Michael Smart |
| Abstract: | We propose a method for cost-benefit analysis of public policies that identifies potential Pareto improvements when losers from a reform are compensated through income tax changes. Reforms are desirable when they decrease aggregate excess burden in commodity and labor markets. This condition is equivalent to a weighted sum of individual compensating variations, where weights reflect the impacts of the policy reform on individuals’ labor incomes, rather than marginal social valuations of transfers to them. We identify cases in which distributional weights are increasing in individual incomes, in spite of inequality concerns. |
| Keywords: | applied welfare economics, weighted surplus, excess burden |
| JEL: | D60 H20 H40 I30 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11692 |
| By: | Nicolas Djob Li Ngue Bikob (CY Cergy Paris Université, THEMA) |
| Abstract: | This paper is a model of an open economy in two countries in which we answer the question of whether the non-cooperative indirect tax should be in the country of consumption or the country of production. In this paper, each country has skilled and unskilled labor used in the production of differentiated goods in a monopolistically competitive economy. When a country raises its tax level, this causes both cross-border movement of firms and changes in labor and capital income, influencing welfare at home and abroad. We show that if in a country skilled labor is used more intensively than unskilled labor in the production of differentiated goods, the non-cooperative tax levied in the country of production leads to higher welfare than that levied in the country of consumption. The opposite is true if the country uses unskilled labor more intensively in the production of differentiated goods. |
| Keywords: | tax competition, origin principle, destination principle, monopolistic competition |
| JEL: | F10 H20 H25 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ema:worpap:2025-07 |
| By: | Cabral, Sónia (Banco de Portugal); Garcia, Joana (Banco de Portugal); Miranda, Raquel (Banco de Portugal); Peralta, Susana (Nova School of Business and Economics); Pereira dos Santos, João (Queen Mary University of London) |
| Abstract: | What type of employment exists in low-tax jurisdictions? How are employment and individual workers affected by reforms aimed at better aligning profits with real activities? Using a unique employer-employee dataset for Zona Franca da Madeira, a tax paradise on a Portuguese island, we show that workers are highly educated, perform specialized tasks, and benefit from a wage gap, particularly at the top. A reform designed to link profits more closely with real substance resulted in worker exits, while those who remained experienced wage increases and a higher likelihood of working for multiple firms simultaneously. New hires faced more precarious conditions, earning, on average, 30% less than incumbents, often working under temporary contracts. These results offer insights into policies promoting economic substance in low-tax jurisdictions. |
| Keywords: | substance requirements, labor market, corporate tax avoidance, matched employer-employee data |
| JEL: | J08 H26 F23 J31 J38 J48 H30 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17799 |
| By: | Conor J. Clarke; Wojciech Kopczuk |
| Abstract: | Income inequality is important, but attempts to measure it arrive at strikingly different conclusions. Why? We use recent disputes over measuring United States income inequality to return to first principles about both the income concept and inequality measurement. We emphasize two broad points. First, no measure of the income distribution is truly comprehensive, or could attempt to be comprehensive without making controversial choices. We document the practical and conceptual problems that the standard ideal—comprehensive Haig-Simons income—raises. Second, much of the controversy in this area turns on the many tradeoffs between starting with individual tax data versus attempting to match more expansive income concepts. Individual tax data reflects only a shrinking subset of a more comprehensive income concept—but it is individual data. Broader alternatives, on the other hand, are harder to allocate to individuals. We document some of the most important and contestable assumptions that allocating national income requires. |
| JEL: | D31 H20 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33678 |
| By: | van der List, Catherine (University of Essex) |
| Abstract: | To study the distribution of economic activity across space and place-based policies, I develop a model of the location choice of new establishments incorporating monopsonistic labor markets, taxes, and spillovers. Estimates using German administrative data indicate that establishments prefer lower taxes and lower worker outside options which enable establishments to pay lower wages. The degree to which various types of productivity spillovers matter in the location decision varies between industries. I also quantify the effects of a counterfactual place-based policy and find that the response of a commuting zone to the place-based policy depends on the degree of labor market power in that commuting zone. More monopsonistic labor markets receive more benefit from the place-based policy. |
| JEL: | J42 J23 H71 R12 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17742 |
| By: | Vethaak, Heike (University of Leiden); de Bruijn, Ernst-Jan (Leiden University); Knoef, Marike (Tilburg University); Koning, Pierre (Vrije Universiteit Amsterdam) |
| Abstract: | This paper investigates the effects of application processing times on welfare applicants’ benefit and employment outcomes. For causal inference, we exploit exogenous variation in application processing times stemming from the random assignment of caseworkers. Our findings indicate that longer application processing times deter applicants from receiving benefits, particularly those with better labor market prospects. In contrast, for applicants who eventually receive benefits, longer processing times reduce labor market attachment and increase benefit dependency. Finally, using exogenous variation in caseworkers’ provision of benefit prepayments, we find that the receipt of welfare prepayments increases the employment and earnings of awarded applicants. This suggests that reduced financial stress improves successful job search. |
| Keywords: | instrumental variables, benefit prepayments, processing times, program application, welfare benefits |
| JEL: | D73 H53 I38 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17839 |
| By: | Jacob Funk Kirkegaard (Peterson Institute for International Economics) |
| Abstract: | As the world and especially other Asian and European economies enter the accelerated process of aging that Japan experienced from the mid-1990s onwards, learning the right policy lessons from Japan's response is crucial. This paper argues that, overall, Japan has done relatively well by implementing a response that--even if often belatedly so--has mitigated some of the worst economic effects of aging. Japan has successfully raised domestic labor utilization and immigration levels, integrated its economy more with the rest of the world, and implemented a fiscal policy based on debt expansion that has seen debt costs decline. Other advanced Asian economies and China now face aging processes materially faster than Japan's and will age simultaneously rather than alone like Japan. In addition, many advanced economies will age during a period of much slower global economic growth and less rather than more global trade and investment opening than what Japan faced from the mid-1990s. These less benign international economic and political circumstances mean that many advanced economies will likely not age with the same relative political and economic stability seen in Japan in the last 30 years. In time, this paper argues, "Japanification" will no longer mean a slowly developing economic disaster but will come to mean competent management of a very difficult economic transition. |
| Keywords: | Japan, Aging, Demographics, Labor Utilization, Immigration, Productivity, Fiscal Policy, Government Debt and Deficits |
| JEL: | E24 E63 F22 H30 H51 H55 H62 J11 J13 N15 N35 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:iie:wpaper:wp25-4 |
| By: | Capra, C. Monica (Claremont Graduate University); Kniesner, Thomas J. (Claremont Graduate University) |
| Abstract: | Nobel Prize winner Daniel Kahneman's last published paper is an adversarial collaboration in which he and Matthew Killingsworth reconcile conflicting empirical results from their previous research on income and reported happiness, with Barbara Mellers as a facilitator. The empirical results use quantile regression to allow for measured income heterogeneity effects that include notch points in the estimated marginal utilities of income. Our analysis examines Kahneman's last paper's conceptual innovations and challenges to assumptions about diminishing marginal utility of income. We review his contributions to emotional well-being measurement and employ a novel AI-simulated dialogue between the late Amos Tversky and Sir Angus Deaton to explore interdisciplinary perspectives on the findings. Our paper demonstrates how Kahneman's final research undermines recent arguments for incorporating income redistribution simply into benefit-cost analysis, suggesting that such objectives remain better addressed through fiscal policy rather than regulatory interventions. His final published work exemplifies Kahneman's commitment to empirical precision and theoretical flexibility, even when contradicting his earlier conclusions. |
| Keywords: | marginal utility, quantile regression, adversarial collaboration, well-being, income satiation, social welfare weights, simulated dialogue with AI |
| JEL: | D12 D61 H23 I31 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17841 |