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on Public Economics |
| By: | Blaufus, Kay; Maiterth, Ralf; Milde, Michael; Sureth, Caren |
| Abstract: | We examine behavioral frictions in entrepreneurs' tax planning when choosing between corporate and partnership taxation under a check-the-box rule. Using German tax return data, we show that only a small fraction of entrepreneurs opt for corporate taxation, despite substantial potential tax savings. A pre-registered incentivized online experiment demonstrates that complexity aversion, status quo bias, and misperception about the corporate tax burden-arising from the interaction of corporate and deferred dividend taxation-help explain the preference for partnership taxation. We further find that these behavioral frictions heighten liquidity risk under the corporate system, particularly in the face of unexpected cash flow needs. Finally, a survey of German tax advisors indicates that tax advice only partially mitigates these frictions. Some advisors misperceive the benefits of corporate taxation, while others anticipate client biases and therefore refrain from recommending the corporate tax system. |
| Keywords: | Check-the-box, Legal Form, Tax Complexity, Tax Misperception, Behavioral Taxation, Tax Advice |
| JEL: | H25 D91 D22 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:arqudp:323941 |
| By: | Amberger, Harald; Gallemore, John; Wilde, Jaron |
| Abstract: | Effective policymakers must balance the demands of formulating a corporate tax system that raises revenue and spurs economic activity (e.g., investment) while promoting a "level playing field" across firms. Balancing these tradeoffs has likely caused tax systems to become more complex over time, increasing firms' difficulty in understanding and complying with tax regulations. We investigate the impact of tax system complexity on the responsiveness of firm-level investment to tax policy changes. Exploiting staggered tax rate changes and variation in tax system complexity across countries, we document two key findings. First, firm-level investment is less sensitive to changes in the corporate tax rate when tax system complexity is higher, suggesting that such complexity can undermine the ability of tax policy to affect economic growth. Second, the impact of tax complexity on the sensitivity of investment to tax rate changes varies significantly across firms, with domestic-owned, smaller, and private firms being more affected. These cross-sectional disparities are consistent with tax system complexity potentially reducing tax system parity. Collectively, our findings suggest that corporate tax system complexity can negatively impact the ability of fiscal policy to affect investment and lead to heterogeneous tax policy responses across firms. |
| Keywords: | tax complexity, tax rates, investment, employment |
| JEL: | D25 F23 H23 H25 G31 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:arqudp:323939 |
| By: | Braun, Anna-Sophie; Koch, Reinald; Sureth, Caren |
| Abstract: | This study examines the effect of tax complexity on the market value of publicly traded firms. Using firm-level measures of tax complexity, we find that a one standard deviation increase in tax complexity-comparable in magnitude to the rise following the U.S. Tax Cuts and Jobs Act-is associated with a 2.6% decline in Tobin's Q. The effect is particularly pronounced for complexity arising from anti-avoidance regulations and post-filing procedures. The negative valuation effect is more substantial for firms with limited opportunities for international profit shifting, weak governance, or low internal information quality. Further analyses reveal that tax system complexity is associated with a reduced growth potential of firms and less R&D and thus negative real responses that go beyond negative investment effects. Overall, our findings provide novel evidence of the economic costs of tax complexity and contribute to the debate on the design of efficient and equitable tax systems. |
| Keywords: | tax complexity, tax avoidance, firm value, tax code complexity, tax framework complexity, cost of complexity |
| JEL: | M12 H26 H25 H32 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:arqudp:323938 |
| By: | Lundberg, Jacob (Research Institute of Industrial Economics (IFN)); Massenz, Gabriella (Research Institute of Industrial Economics (IFN)) |
| Abstract: | We use a natural experiment and administrative data to study the effect of corporate tax cuts on business activity. For identification, we exploit the abolition of municipal corporate income taxation in Sweden in 1985, which created variation in corporate tax changes faced by different municipalities. Our findings indicate an expansion of business activity and employment in large firms following a tax cut. However, we find no significant impact on these outcomes for small firms. In addition, firm entry rates increase in municipalities experiencing the largest tax cuts. |
| Keywords: | Corporate taxation; Business activity; Employment; Firm entry |
| JEL: | G31 G38 H21 H25 |
| Date: | 2025–08–14 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:iuiwop:1531 |
| By: | Doorley, Karina (Economic and Social Research Institute, Dublin); Simon, Agathe (ESRI, Dublin); Tuda, Dora (ESRI, Dublin) |
| Abstract: | This paper evaluates the redistributive and labour supply effects of transitioning from a joint to a fully individualised income tax system in Ireland. The current Irish tax system, which remains partially joint since the early 2000’s, provides a financial advantage to married couples by allowing them to to share tax bands and credits. However, it also creates a financial disincentive for secondary earners (who are typically women) to work. Using the microsimulation model, SWITCH, we estimate the distributional effect of moving to a fully individualised tax system in Ireland. We find that this would result in income losses, which increase with the level of income. Linking SWITCH to a discrete choice labour supply model, we then estimate the behavioural response of married couples to a fully individualised tax regime. We find that a shift to individualised taxation would result in increased labour supply of married women, and a reduction in the hours worked by married men due to intra-household labour substitution effects. We explore the implications of this for a range of outcomes linked to womens’ financial independence. |
| Keywords: | labour supply, taxation of couples, tax-benefit system |
| JEL: | E24 E32 J22 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18035 |
| By: | Antoine Bozio (EHESS - École des hautes études en sciences sociales, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - ENPC - École nationale des ponts et chaussées - IP Paris - Institut Polytechnique de Paris); Thomas Breda (CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - ENPC - École nationale des ponts et chaussées - IP Paris - Institut Polytechnique de Paris); Julien Grenet (CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - ENPC - École nationale des ponts et chaussées - IP Paris - Institut Polytechnique de Paris); Arthur Guillouzouic (CNRS - Centre National de la Recherche Scientifique, AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - ENPC - École nationale des ponts et chaussées - IP Paris - Institut Polytechnique de Paris) |
| Abstract: | We analyze earnings responses to six large payroll tax and income tax reforms in France. Our findings indicate full pass-through to workers when there is a strong and transparent link between contributions and expected benefits. In contrast, employer payroll taxes with no tax-benefit linkage exhibit limited pass-through to workers, while income tax nominally borne by employees show nearly full passthrough. Together with a meta-analysis of the literature, we interpret these results as empirical support for the long-standing hypothesis that tax-benefit linkage matters for the incidence of payroll taxes. In the absence of such linkage, our findings suggest that the individual-level incidence of payroll taxes aligns with their statutory incidence. |
| Keywords: | Tax Incidence Payroll Tax Tax-Benefit Linkage Statutory incidence, Tax Incidence, Payroll Tax, Tax-Benefit Linkage, Statutory incidence |
| Date: | 2025–07–23 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05183758 |
| By: | Deza, María Cecilia; Dondo, Mariana; Jara, H. Xavier; Rodríguez, David; Torres, Javier |
| Abstract: | This paper aims to assess the extent to which cash transfers, direct taxes, and social insurance contributions help to reduce gender income inequalities in seven Latin American countries: Argentina, Bolivia, Colombia, Ecuador, Mexico, Peru, and Uruguay. We apply microsimulation techniques to household survey data and allocate incomes within the household, assuming that each person retains the income they receive (e.g., earnings, benefits targeting mothers) and pays taxes and social insurance contributions on an individual basis according to each country’s rules. Then, we compare gender income ratios based on market (before taxes and benefits) and disposable (after taxes and benefits) income. Our results show that, at the bottom of the distribution, tax-benefit systems significantly reduce gender income disparities in most countries due to the effect of social assistance benefits received by mothers in poor households. Additionally, we find that women have substantially higher poverty rates than men based on individual disposable income. Gender differences in poverty fade away when income is pooled at the nuclear family level and, even more so, at the household level. |
| Keywords: | taxes; benefits; microsimulation; gender gap; Latin America |
| JEL: | D31 J16 J70 H24 I32 I38 |
| Date: | 2025–08–14 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:129049 |
| By: | Felix K\"ubler; Simon Scheidegger; Oliver Surbek |
| Abstract: | We develop a computational framework for deriving Pareto-improving and constrained optimal carbon tax rules in a stochastic overlapping generations (OLG) model with climate change. By integrating Deep Equilibrium Networks for fast policy evaluation and Gaussian process surrogate modeling with Bayesian active learning, the framework systematically locates optimal carbon tax schedules for heterogeneous agents exposed to climate risk. We apply our method to a 12-period OLG model in which exogenous shocks affect the carbon intensity of energy production, as well as the damage function. Constrained optimal carbon taxes consist of tax rates that are simple functions of observables and revenue-sharing rules that guarantee that the introduction of the taxes is Pareto improving. This reveals that a straightforward policy is highly effective: a Pareto-improving linear tax on cumulative emissions alone yields a 0.42% aggregate welfare gain in consumption-equivalent terms while adding further complexity to the tax provides only a marginal increase to 0.45%. The application demonstrates that the proposed approach produces scalable tools for macro-policy design in complex stochastic settings. Beyond climate economics, the framework offers a template for systematically analyzing welfare-improving policies in various heterogeneous-agent problems. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2507.01704 |
| By: | Jennifer Alonso-Garcia; Len Patrick Dominic M. Garces; Jonathan Ziveyi |
| Abstract: | This paper investigates optimal withdrawal strategies and behavior of policyholders in a variable annuity (VA) contract with a guaranteed minimum withdrawal benefit (GMWB) rider incorporating taxation and a ratchet mechanism for enhancing the benefit base during the life of the contract. Mathematically, this is accomplished by solving a backward dynamic programming problem associated with optimizing the discounted risk-neutral expectation of cash flows from the contract. Furthermore, reflecting traded VA contracts in the market, we consider hybrid products providing policyholders access to a cash fund which functions as an intermediate repository of earnings from the VA and earns interest at a contractually specified cash rate. We contribute to the literature by revealing several significant interactions among taxation, the cash fund, and the benefit base update mechanism. When tax rates are high, the tax-shielding effect of the cash fund, which is taxed differently from ordinary withdrawals from the VA, plays a significant role in enhancing the attractiveness of the overall contract. Furthermore, the ratchet benefit base update scheme (in contrast to the ubiquitous return-of-premium specification in the literature) tends to discourage early surrender as it provides enhanced downside market risk protection. In addition, the cash fund discourages active withdrawals, with policyholders preferring to transfer the guaranteed withdrawal amount to the cash fund to leverage the cash fund rate. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2507.07358 |
| By: | Leslie Shiell (Department of Economics, University of Ottawa, Canada) |
| Abstract: | In March 2015, the Canadian Prime Minister terminated the federal carbon price and rebate system, in response to widespread belief that the carbon price was a major factor in the ongoing affordability crisis. The previous autumn, the Parliamentary Budget Officer (PBO 2024) released a report indicating that, including both cash and economics effects, approximately 60% of households paid more on the carbon price than they received in the rebate, and therefore the average household across the eight affected provinces (all but BC and Quebec) was made worse off by the policy. However, there are several features of PBO (2024) which were apt to create confusion and lead to misunderstanding of the results, including: (i) vagueness about income levels, (ii) disproportionate emphasis on 2030 results, (iii) use of after-tax (disposable) income as the basis of analysis, (iv) use of average income, rather than median income, to summarize typical impact, and (v) lack of information on greenhouse gas (GHG) emissions at different income levels. We address these issues and provide a clearer picture of the distributional impacts of the carbon price and rebate system. In 2024-2025, the policy made 50% or more of households, in four of the eight affected provinces, better off financially, and all households were forecast to be better off by the final year of the policy, 2030-2031, than they were in 2024-2025, as standard growth factors were forecast to outweigh the modest costs associated with the policy. We conclude that, far from making most households worse off, the federal carbon price and rebate policy was an effective policy to counteract the affordability crisis among those who needed help the most, and of course it was forecast to result in important environmental benefits as well. |
| Keywords: | Canada’s carbon tax and rebate; distributional impact. |
| JEL: | H23 Q52 Q58 D31 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ott:wpaper:2505e |
| By: | Rossen Rozenov; Mr. Waikei Raphael Lam; Yang Yang; Yinjie Yu |
| Abstract: | Ireland’s reliance on corporate income tax (CIT) receipts from multinational enterprises, concentrated in a small number of companies, presents significant risks to the budget. The uncertain nature of this revenue calls for a robust fiscal framework to safeguard public finances. This paper proposes strengthening the national fiscal framework by establishing a prudent medium-term debt anchor and an expenditure rule to guide the annual budget process. We first establish a prudent debt anchor for Ireland by calibrating CIT shocks and simulating possible debt trajectories. Second, we propose an operational rule based on multi-year expenditure ceilings. The ceilings are calibrated such as to stabilize debt at the anchor level while accounting for the economy’s cyclical position. Although tailored to Ireland, the methodology employed has broader applicability for designing effective fiscal rules. |
| Keywords: | Fiscal Framework; Debt Anchor; Expenditure Ceilings; Fiscal Reaction Function; debt trajectory; debt fan; expenditure rule; FDI risk; Corporate income tax; Fiscal governance; Fiscal rules; Fiscal stance; Global |
| Date: | 2025–07–25 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/149 |
| By: | Brébion, Clément (Copenhagen Business School); Briole, Simon (Paris School of Economics); Khoury, Laura (PSL Université Paris Dauphine) |
| Abstract: | While extensive research on unemployment insurance (UI) has examined how benefits affect workers’ job search, little is known about how eligibility conditions shape firms’ hiring decisions. These conditions, often requiring a minimum work history, affect the value workers place on contracts meeting the eligibility threshold. Exploiting a French reform that modified these requirements after 2009, we show that firms internalize workers’ preferences and adjust contract durations to align with the new threshold. This reveals an overlooked ex-ante mechanism, where firms respond to UI incentives when posting vacancies—before meeting workers—rather than only through ex post adjustments. This response shifts contract duration distributions, also affecting workers already eligible for UI. Our findings have two implications: first, UI shapes firms’ behavior at the vacancy stage, influencing job creation decisions ex ante, not just separation decisions ex post; second, UI eligibility conditions generate significant spillover effects. |
| Keywords: | firm behavior, employment duration, unemployment insurance, temporary employment |
| JEL: | J08 J64 J65 H32 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18014 |
| By: | Vîntu, Denis |
| Abstract: | The budget deficit, defined as the excess of government expenditures over revenues within a fiscal year, is a central indicator of a nation’s fiscal health and a critical variable in macroeconomic policy analysis. This paper examines the budget deficit from both theoretical and applied perspectives, integrating definitions, classifications, and competing economic interpretations. It explores the structural, cyclical, and political economy factors that contribute to fiscal imbalances, as well as the short- and long-term economic implications of persistent deficits for debt sustainability, inflation dynamics, private sector investment, and external sector stability. Special attention is given to the interaction between the budget deficit and the balance of payments through the twin deficits hypothesis, highlighting the mechanisms by which domestic fiscal policy can influence external imbalances. The paper also discusses the principal methods of financing budget deficits and assesses their macroeconomic consequences. The analysis culminates in a case study of the Republic of Moldova, providing historical trends, policy evaluations, and an assessment of fiscal–external linkages. The findings underscore the importance of maintaining a sustainable fiscal stance through a combination of prudent expenditure management, effective revenue mobilization, and coherent coordination between fiscal and monetary policies, while recognizing the role of temporary deficits in counter-cyclical economic management. |
| Keywords: | Budget deficit; Fiscal deficit; Primary deficit; Structural deficit; Cyclical deficit; Public debt; Fiscal policy; Twin deficits hypothesis; Balance of payments; Debt sustainability; No-Ponzi-game condition; Economic growth; Public finance; Government borrowing; Fiscal adjustment. |
| JEL: | E62 F32 F41 H62 H63 O23 P24 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125693 |