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on Public Economics |
| By: | Krassen Stanchev |
| Abstract: | Since 1989, flat tax (FT) reforms have been attempted in Europe and the EU only by ex-communist countries and Iceland. In the 1990s all ex-communist countries lowered and simplified their income taxes, often starting with corporate taxes. In the late 1990s and early 2000s they also reformed their social security systems. In many respects the tax reforms have never stopped, but with regard to income taxation they are less radical than in the 1990s and at the turn of this century. Even when there were reforms re-establishing progressive taxation, they have almost never returned to complex sets of nominal rates and a steep vertical ladder of progressive thresholds. This report attempts to reconstruct the reasons why EU countries moved to introduce proportional taxation on either corporate or personal income, or both, as well as the reasons behind five of them returning to progressive taxation. These reforms happened in different political and economic contexts. It would be difficult to identify unequivocal causality between flattening taxes and economic performance. However, the report compares the dynamics of economic growth and factors related to competitiveness for periods before and after the reforms were launched. The same effort has been made for indicators of wealth and disposable income. The analysis allows for a discussion of lessons learnt and of the prospects for further reforms. The report concludes that it seems impossible to prove that FT systems have been a key contributor to higher economic growth. However, it does seem that, if the social security contributions remain relatively stable and are financed by other tax revenues, they have a positive impact on fiscal performance and general welfare. |
| Keywords: | tax system, tax reform, proportional taxation, progressive taxation, corporate tax, personal income tax, economic performance, ex-communist countries, EU |
| JEL: | E62 H23 H24 H25 H26 H31 H32 |
| Date: | 2023–12–07 |
| URL: | https://d.repec.org/n?u=RePEc:sec:mbanks:0175 |
| By: | Ruud A. De Mooij; Shafik Hebous; Michael Keen |
| Abstract: | This paper examines the efficiency of the Value Added Tax (VAT), focusing on its role as a revenue-raising tool and its use to achieve non-revenue objectives. The analysis highlights the VAT's potential ability to generate revenue with minimal distortions, emphasizing its advantages over alternative taxes, such as turnover taxes and tariffs, particularly in minimizing the cascading effects of input taxation. The paper also explores the VAT as a macroeconomic policy tool, especially in counter-cyclical fiscal policy, and its potential to address environmental and health objectives. It concludes that a well-designed and implemented VAT is a highly efficient revenue-raising tool, surpassing other forms of consumption taxation, but cautions against its misuse in industrial policy and other contexts for which it is ill-suited. |
| Keywords: | value added tax, efficiency, welfare, consumption taxes |
| JEL: | H21 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12089 |
| By: | Michael Barczay (European University Institute and Study Center Gerzensee) |
| Abstract: | This paper studies the optimal design of differentiated consumption taxes in the presence of progressive labor income taxes and capital income taxation. A quantitative heterogeneousagent model with non-homothetic preferences and uninsurable idiosyncratic risk is estimated using US consumption and price data to match expenditure patterns across the income distribution. Solving the Ramsey problem in which the government jointly chooses labor income and commodity taxes, the optimal policy prescribes a subsidy on necessities of -52% and a positive tax of 7% on luxuries, accompanied by a reduction in labor tax progressivity. Three mechanisms account for these results: subsidized necessities provide consumption insurance, taxation of luxuries acts as an implicit tax on existing wealth, and differentiated rates strengthen labor supply incentives among highly productive households. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:szg:worpap:2503 |
| By: | Kym Anderson |
| Abstract: | Australia taxes alcohol consumption more than most other affluent economies. A switch to low-alcohol beer has been encouraged in Australia by it being subject to a lower rate of excise tax than regular beer, but no such incentive applies to packaged mid-strength beer. Would more or less alcohol be consumed if the tax rates for mid-strength beer were lowered, for example to those for low-strength beer? This study estimates changes in demand that could result from such a policy change. It finds that alcohol consumption from each of beer, wine and spirits could fall, but by little more than 1% in total. |
| JEL: | H20 H24 D12 D49 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pas:papers:2025-11 |
| By: | Marcelo Caffera; Carlos Chávez; James J. Murphy; Juan Briozzo; Carolina López |
| Abstract: | We present the results of a series of public-bad laboratory experiments in which we assess whether a salient message suggesting pro-social behavior with an implicit moral appeal, and a tax that is insufficient to induce the optimal level of the externality, can complement each other when implemented jointly. Our results suggest that, on average, (a) behavior is consistent with subjects having moral preferences, (b) a salient message suggesting pro-social behavior can be effective, (c) preferences are nonseparable from the choice of instrument (i.e, the tax crowds-out part of the subjects´ moral preferences), and crucially, (d) the tax and the informative message do not complement each other. The tax has a greater impact on reducing the externality than the prosocial guideline, even though the tax was only half of that needed to reach the socially optimal level. Nevertheless, when implemented together, the total effect of both instruments is similar to that of the tax alone. This result is stronger for those subjects that are more “nudgeable†by the prosocial guideline. These results challenge the policy recommendation that nudges can effectively complement low taxes while awaiting the political will to raise them. |
| Keywords: | Economic experiment, nudge, prosocial guideline, public bad, tax. |
| JEL: | H23 Q52 Q58 C91 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:mnt:wpaper:2501 |
| By: | Mark Verhagen; Menno Schellekens; Michael Garstka |
| Abstract: | Across the developed world, there are growing calls to streamline and improve ever more complex income tax codes. Executing reform has proven difficult. Even when the desired outcomes of a reform are clear, the tools to design fitting reforms are lacking. To remedy this, we developed \texttt{TaxSolver}: a methodology to help policymakers realize optimal income tax reform. \texttt{TaxSolver} allows policymakers to focus solely on what they aim to achieve with a reform -- like redistributing wealth, incentivizing labor market participation or reducing complexity -- and the guarantees within which reform is acceptable -- like limiting fluctuations in taxpayer incomes, protecting households from falling into poverty or shocks to overall tax revenue. Given these goals and fiscal guarantees, \texttt{TaxSolver} finds the optimal set of tax rules that satisfies all the criteria or shows that the set of demands are not mathematically feasible. We illustrate \texttt{TaxSolver} by reforming various simulated examples of tax codes, including some that reflect the complexity and size of a real-world tax system. |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2508.03708 |
| By: | Mukherjee, Sacchidananda (National Institute of Public Finance and Policy) |
| Abstract: | Assessment of the revenue performance of states in the GST is vital, as State GST (SGST) constitutes a significant part of states' own tax revenue. Sustaining the revenue stream from taxes included in the GST is crucial for managing state finances. It is expected that states will at least generate revenue from SGST to maintain the share of revenue (in the nominal GSDP) incorporated into the GST during the base year (i.e., 2015-16). This paper's assessment reveals that some states, between 2018-19 and 2023-24, did not achieve the required share. Even with GST compensation, some states still fall short of the target share. This indicates that managing revenue shortfalls will be a challenge for some states after the GST compensation period. Moreover, there is a need to explore options for increasing states' revenue base by examining new tax sources and investigating innovative areas of taxation (e.g., storage and usage of digital information, online video sharing, robotics). The taxation system could also address externalities related to the environment, biodiversity, health, and activities/entertainments that have financial risks. |
| Keywords: | Revenue performance assessment ; Goods and Services Tax (GST) ; Tax buoyancy |
| JEL: | H20 E62 H26 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:npf:wpaper:25/433 |
| By: | Piergallini, Alessandro |
| Abstract: | I develop flexible- and sticky-price general equilibrium models that embody endogenous corporate financing decisions affecting firm value due to distortionary taxes. Nominal interest-rate variations impact the costs of debt and equity capital asymmetrically and thereby induce firms to modify the financial structure, altering the gap between the optimization-based weighted average cost of capital and the real interest rate. Under these circumstances, I characterize conditions under which rules-based monetary policies that set the nominal interest rate as an increasing function of the inflation rate induce aggregate stability in the form of a unique stable equilibrium. In contrast to what is commonly argued, I demonstrate that both passive interest rate policies, which underreact to inflation, and mildly active interest rate policies, which overreact to inflation but below a threshold reflecting both tax and capital structures, ensure determinacy of equilibrium. Conversely, excessively aggressive inflation-fighting monetary actions are destabilizing in the presence of price stickiness by generating either multiple equilibria or the nonexistence of stable equilibria. Under the stabilizing monetary regimes, I prove that macroeconomic dynamics following either interest rate normalization or temporary monetary tightening critically depend upon the tax code and the steady-state debt-equity ratio. |
| Keywords: | Corporate Finance; Firm Financial Structure; Weighted Average Cost of Capital; Distortionary Taxation; Interest Rate Policy; Equilibrium Dynamics; Monetary Policy Shocks. |
| JEL: | E31 E52 G32 H24 H25 |
| Date: | 2025–03–05 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125362 |
| By: | Fotis Delis (European Commission, Joint Research Centre); Manthos D. Delis (Audencia Business School); Sotirios Kokas (University of Essex - Essex Business School); Luc Laeven (European Central Bank (ECB); Centre for Economic Policy Research (CEPR)); Steven Ongena (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)) |
| Abstract: | Profit shifting by multinational enterprises (MNEs) increases after-tax earnings but can expose firms to regulatory and reputational risks. We examine how stock markets price profit shifting using global profit shifting estimates from approximately 30, 000 MNE-year observations between 2010 and 2020. We find that a one standard deviation increase in profit shifting is associated with 6.4% higher monthly stock returns, indicating that stock markets require compensation for the underlying risks. The identified effects become significant only after the initiation of the Base Erosion and Profit Shifting program and gain further strength following the implementation of the Tax Cuts and Jobs Act. |
| Keywords: | Corporate taxes, Profit shifting, Stock returns, Enforcement risk, Global data |
| JEL: | G14 H25 H26 F23 F42 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2562 |
| By: | Manuel Fernández (Universidad de los Andes); Marco Gonzalez-Navarro (University of California-Berkeley); Climent Quintana-Domeque (University of Exeter & IZA) |
| Abstract: | Developing countries often face a cycle where weak tax compliance limits public goods, cutting incentives to pay taxes. We test whether improved local infrastructure can disrupt this cycle, using a randomized street paving experiment in Acayucan, Mexico. Of 56 eligible street projects, 28 were randomly selected. A model highlights two mechanisms: belief updating about government efficiency and reciprocity from direct benefits. Three implications follow: (1) belief updating occurs through exposure to paving anywhere in the network; (2) compliance rises with broader exposure; (3) reciprocity boosts compliance among directly treated owners. Survey data supports belief updating: among initially dissatisfied residents, a one-SD increase in exposure to assigned paving lowered dissatisfaction by 7.9 pp, while exposure to actual paving lowered it by 8.8 pp, with no effect among the satisfied. Property tax records show exposure to assigned paving raised compliance by 1.5 pp, and to actual paving by 2.6 pp (3% above baseline). Reciprocity mattered too: owners whose street was assigned paving (or actually paved) increased compliance by 3.2 pp (4.8 pp, or 5.5% above baseline). Belief updating yields four times as much revenue as reciprocity. |
| Keywords: | taxpayer behavior, roads, infrastructure, belief updating, reciprocity, government efficiency, publi |
| JEL: | C93 H26 H41 H54 O12 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:col:000089:021501 |
| By: | Qun Bao (School of Economics, Nankai University, CHINA); Rui Huang (School of Economics and Trade, Hunan University, CHINA); Guoqin Pan (School of Economics, Nankai University, CHINA); Laixun Zhao (Research Institute for Economics and Business Administration, Kobe University, JAPAN) |
| Abstract: | Governments usually increase taxes or cut spending to tackle deficits. In contrast, local governments in China tend to increase suspicious uses of public funds under fiscal pressure, which is not well understood. Using the reduction of agricultural tax as a revenue shock, we find that greater fiscal pressure leads to higher questionable fund use by county governments. The suspicious activities are triggered by the motivation to reallocate resources, to fields that correlate with officials' own interests like stimulating local economic growth, pursuing personal promotion as well as grabbing resources before retirement. |
| Keywords: | Fiscal pressure; Government audit; Public funds; China |
| JEL: | H83 O23 P37 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:kob:dpaper:dp2025-23 |
| By: | Dominika Langenmayr; Mikayel Tovmasyan; Sebastian Vosseler |
| Abstract: | Are sanctions bypassed by hiding money offshore? Using bilateral data on bank deposits, we compare how offshore deposits from sanctioned versus non-sanctioned countries develop after the U.S. and the EU impose financial sanctions. Sanctions targeting individuals increase offshore deposits, as (potential) targets attempt to hide their funds. Broader financial sanctions reduce offshore (and other foreign) deposits, as money is repatriated. A synthetic control case study of Russia following the annexation of Crimea confirms our main findings, showing a 15% post-sanction increase in offshore deposits. These findings highlight the limits of symbolic sanctions and the need for secondary sanctions and financial surveillance. |
| Keywords: | sanctions, tax havens, illicit financial flows |
| JEL: | F51 H12 K42 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12086 |
| By: | Bergman, Aaron (Resources for the Future); Peplinski, McKenna (Resources for the Future); Rennert, Kevin (Resources for the Future); Roy, Nicholas (Resources for the Future) |
| Abstract: | The Inflation Reduction Act replaced an assortment of technology-specific tax credits for clean electricity with two “technology-neutral” tax credits, the 45Y and 48E tax credits (named after their sections in the tax code). The 45Y tax credit is a “production” tax credit, which pays a set amount for every unit of electricity generated, while the 48E tax credit is an “investment” tax credit that pays a fraction of the capital cost for a qualifying generation or storage technology. Unlike previous iterations, these tax credits apply to any technology that can produce electricity with zero emissions. For more details, see On Deck for Treasury: The Inflation Reduction Act’s New Approach to Clean Electricity Tax Credits and The US Department of the Treasury’s Proposed Guidance for the Tech-Neutral Tax Credits Importantly, the expiration of these tax credits is based on the overall carbon intensity of the electricity sector rather than any specific year.As the new administration and Congress contemplate proposals for the budget reconciliation process, these and other tax credits in the Inflation Reduction Act are on the table for potential repeal. In this issue brief, we explore the consequences of a repeal of these tax credits for retail electricity prices, consumer electricity bills, government expenditures, clean electricity, and emissions.In addition to our reference case, we examine three additional scenarios to assess the impacts of high and low natural gas prices, as well as high electricity demand, on the consequences of a repeal. These scenarios encompass the main parameters known to affect electricity prices. Natural gas prices have displayed wide variation historically, and greater exports of natural gas would put upward pressure on electricity prices. Increased electricity demand, driven by electrification of end-uses or to power data centers and artificial intelligence, would also put upward pressure on electricity prices. We use a high-demand scenario taken from the National Renewable Energy Laboratory’s Electrification Futures Study to account for these factors.We find that repealing these tax credits is modeled to:Increase nationally averaged electricity rates by roughly 5–7 percent across modeled scenarios in 2030, reaching a peak of 6–10 percent higher in 2035. These rate impacts translate into a $75–$100 increase in national average annual electricity bills in 2030, with a peak increase of $100–$150 per year (real 2023 dollars). Rate increases differ significantly by region, with the highest impact seen in the upper plains states ($300–$400 per year increases in the West North Central census region).Reduce tax expenditures by $227–$315 billion dollars over the ten-year budget window (2025–2034, cumulative nominal dollars). After 2035, the annual reduction in tax expenditures is $48–$63 billion per year, declining to $24–$47 billion per year in 2040.Increase power sector carbon dioxide emissions by 350 Mt–400 Mt CO₂ in 2035, with a cumulative increase in power sector emissions of 3, 500 Mt–4, 500 Mt CO₂ between 2025 and 2040.Reduce wind generation capacity in 2035 by 125 GW–225 GW and solar capacity in 2035 by approximately 175 GW. This is a coincidental convergence in 2035. The range increases to 175–225 GW in 2036 and remains at that level through the end of the projection period. |
| Date: | 2025–03–27 |
| URL: | https://d.repec.org/n?u=RePEc:rff:ibrief:ib-25-06 |
| By: | Edenhofer, Ottmar; Kalkuhl, Matthias; Stern, Lennart |
| Abstract: | This paper examines how donor countries can be motivated by self-interest to fund emission reductions in low- and middle-income countries (LMICs). While not solving the broader climate cooperation problem, we propose pragmatic measures that do not require global consensus on future climate risks or binding commitments. We quantify the unilateral benefits for donors - reduced climate damages and improved terms-of-trade from lower fossil fuel prices - resulting from financing fossil fuel demand reductions. To address project-level finance inefficiencies, we introduce jurisdictional reward funds targeting governments, which also generate implicit wealth transfers to LMICs. A self-enforcing coalition of fossil fuel importers, such as the European Union and China, could mobilize USD 66 billion annually for mitigation in LMICs, cutting emissions by 1060 Mt CO₂ per year and transferring USD 33 billion per year. LMICs additionally benefit from USD 78 billion in reduced climate damages and USD 19 billion from lower fuel prices. We explore coalition stability, geopolitical considerations, and how broader tax and reward mechanisms could further improve global climate, forest, and health outcomes. |
| Keywords: | Jurisdictional Reward Funds, tax coalitions, fuel market leakage, global public goods, terms-of-trade effects, demand-side climate policy |
| JEL: | H23 H87 F55 Q41 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ifwkwp:324658 |
| By: | Strehl-Pessina, Matías (University of California, Santa Barbara); Bergolo, Marcelo (IECON, Universidad de la República); Leites, Martin (Universidad de la República, Uruguay) |
| Abstract: | Do top-income individuals support different levels of redistribution compared to the rest of society? If so, what drives these differences? We address these questions using a novel dataset that combines administrative tax records with unique survey data on the social and economic preferences of workers in Uruguay. We document a marked decline in support for redistribution among the Top 1% of the income distribution. Comparing this group with the Top 50-2%, we show that differences in support for redistribution are not solely explained by current income or demographics. A set of beliefs, perceptions, and views, including political ideology, meritocratic beliefs, and views on government, account for much of the observed differences. Instead, a set of behavioral traits and social preferences, such as altruism and risk aversion, measured through incentivized online games, contribute little to explaining the gap. Finally, the differences in support for redistribution persist even when comparing the Top 1% with otherhigh-incomegroups. Together, these findings suggest that the Top 1% is a distinct group with preferences for redistribution that differ from the rest of society, even from other high-income groups. |
| Keywords: | beliefs, social preferences, behavioral traits, preferences for redistribution, top-income individuals, perceptions, views |
| JEL: | D31 D63 D91 H20 H30 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18057 |