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on Public Economics |
| By: | Johannes Kochems (University of Cologne) |
| Abstract: | This paper analyzes how (local) tax havens function. Using the German municipal business tax setting as a laboratory, I investigate the characteristics and emergence of local tax havens. I demonstrate that local tax havens are situated in close proximity to large agglomeration areas, while firms' profit-to-wage ratios in these jurisdictions are exceptionally high. I document that the amount of local profit shifting is substantial. The empirical results indicate that local profit shifting is of a similar magnitude to recent findings regarding international profit shifting by German multinationals. I deploy synthetic difference-in-differences methods, combined with administrative data sources and standard profit shifting equations, to estimate the amount of profit shifting to local tax havens. Between 2013 and 2019, around 52 billion Euros of corporate profits were shifted to local tax havens. The results are driven by a small number of large firms that offer business and financial services. The direct fiscal cost to non-tax haven municipalities amounts to roughly 7.9 billion Euros, while tax haven municipalities gain around 4.3 billion Euros in tax revenues. I conduct a case study on the emergence of Germany's largest local tax havens. I estimate that between 2012 and 2019, around 20.5 billion was transferred to its jurisdiction. The increase in local tax revenues is used to reduce public debt burdens and finance a high level of public expenditures. |
| Keywords: | Public Finance, Fiscal Federalism, Corporate Taxation, Tax Havens, Profit Shifting |
| JEL: | H25 H26 H32 H71 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:ajk:ajkdps:379 |
| By: | Eduardo Azevedo; Florian Scheuer; Kent Smetters; Min Yang |
| Abstract: | Recent proposals to tax unrealized capital gains or wealth have sparked a debate about their impact on entrepreneurship. We show that accrual-based taxation creates two opposing effects: successful founders face greater dilution from advance tax payments, whereas unsuccessful founders receive tax credits that effectively provide insurance. Using comprehensive new data on U.S. venture capital deals, we find that founder returns remain extremely skewed, with 84% receiving zero exit value while the top 2% capture 80% of total value. Moving from current realization-based to accrual-based taxation would reduce founder ownership at exit by 25% on average but would also increase the fraction receiving positive payoffs from 16% to 47% when tax credits are refunded. Embedding these distributions in a dynamic career choice model, we find that founders with no or moderate risk aversion prefer the current realization-based tax system, while more risk-averse founders prefer accrual-based taxation. We estimate that a 2% annual wealth tax has a similar impact on dilution as taxing unrealized capital gains, but produces no risk-sharing benefits due to the absence of tax credits in case of down rounds. |
| Keywords: | capital gains tax, wealth tax, venture capital, entrepreneurship, dilution |
| JEL: | G3 H2 J3 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12275 |
| By: | Aisha Baisalova |
| Abstract: | Differences in excise taxes across states incentivize consumers to make cross-border purchases. In this study, we investigate the “border effect†phenomenon, which refers to the impact of cross-state purchasing behaviors on the excise tax sensitivity of consumption. We analytically formulate the “border effect†as a linear function that decreases with distance from the closest lower-tax state. We reasonably assume that the “border effect†reaches a maximum at the border with the lower-tax state and then linearly decreases with distance from the border, eventually reaching zero after a certain cutoff distance. We estimate the parameters of the “border effect†function employing a threshold regression model with location and time fixed effects. As a robustness check, we also run a segmented regression using separate tax sensitivity estimates for a range of distance intervals. We verify that the estimates from segmented regression align with the linear pattern derived from the threshold model. Further, we enhance the “border effect†function by incorporating a difference between the home state tax and the closest lower-tax state tax as an additional factor, and then compare the estimation results for the two specifications. Beyond geographic variation, we also examine how the tax sensitivity of cigarette consumption differs across demographic groups. Our analysis shows that tax sensitivity varies by income level: high-income consumers are the least responsive to excise tax increases, while low-income consumers are the most responsive, with middle-income consumers falling in between. All income groups are influenced by the “border effect†, but for high-income consumers this effect is only present at distances up to 60 kilometers from the lower-tax state. Our analysis based on employment status indicates that both employed and non-employed consumers display a similar shape in the “border effect†function; however, non-employed consumers show significantly higher tax sensitivity than employed consumers. |
| Keywords: | excise taxation, cigarettes, cross-state purchasing, tax avoidance, border effects |
| JEL: | D12 H26 H71 L66 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:cer:papers:wp803 |
| By: | Lorenzo Garlanda-Longueville; Mathias Lé; Kevin Parra Ramirez |
| Abstract: | Tax havens represent the largest financing hub for financial institutions. For banks, they account for more than 20% of all cross-border banking debts worldwide. Yet, our understanding of the underlying drivers remains limited, partly due to data scarcity and partly because of the difficulty of disentangling tax incentives from regulatory effects. Drawing on a unique global dataset covering major international banks and offshore financial centres – and employing a novel approach to isolate regulatory arbitrage – this paper finds that the location of cross-border intra-group debt held by multinational banks is shaped by tax considerations, even when regulatory differences are accounted for. In doing so, we provide, for the first time, direct evidence of profit shifting via debt shifting at a global scale, overcoming a key limitation of existing studies, which typically rely on single-country data. Based on our sample data, we show that the magnitude of “excess” offshore banking debt globally recorded in tax havens is significant. |
| Keywords: | Profit shifting, Debt shifting, Multinational banks, Taxation, Intragroup transactions |
| JEL: | H26 G21 F23 F34 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:drm:wpaper:2025-43 |
| By: | Aisha Baisalova |
| Abstract: | The availability of lower-taxed goods in neighboring states incentivizes consumers to make cross-border purchases. Using transaction-level data from the NielsenIQ Consumer Panel, we analyze how proximity to a lower-tax state affects the pass-through of tax to cigarette prices. We analytically formulate tax pass-through to prices as the “true†passthrough rate attenuated by the “border effect†. The “border effect†refers to the impact of cross-state purchasing behavior on the extent to which excise taxes are passed on to cigarette prices. We model the border effect as an exponential function that decreases with distance from the lower-tax state, reaching the highest value at the border itself and diminishing to zero at large distances. We estimate the parameters of the “border effect†function by employing an exponential regression model with location, time, and UPC fixed effects. The results of the robustness check, where we estimate a segmented regression using separate tax pass-through estimates for a range of distance intervals, support the linear pattern observed in the exponential model. We also extend the model to account for the tax differential between the home state and the nearest lower-tax state and perform a comparative analysis of the two model specifications. In addition to geographic variation, we also analyze how the pass-through of cigarette taxes varies across different demographic groups. High-income households face the highest tax pass-through and are largely unaffected by border proximity, while middle-income households are affected by the “border effect†only when the distance from the lower-tax state does not exceed 90 kilometers. Low-income households remain sensitive to “border effects†at greater distances, though their responsiveness declines beyond 200 kilometers. Moreover, consumers who are not engaged in paid employment exhibit significantly lower pass-through, suggesting greater scope for tax avoidance through flexible shopping behavior. |
| Keywords: | excise taxation, cigarettes, tax pass-through rate, cross-state purchasing, tax avoidance, border effects |
| JEL: | D12 H26 H71 L66 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:cer:papers:wp804 |
| By: | Boyd, Laura (Central Bank of Ireland); McIndoe-Calder, Tara (Central Bank of Ireland) |
| Abstract: | Fiscal drag occurs when incomes rise but tax bands and reliefs increase by less, such that more income becomes subject to tax. We show that fiscal drag varies across the distribution and has the potential to more adversely impact lower income taxpayers relative to higher income taxpayers. The mechanisms driving fiscal drag vary across the distribution too – with loss of tax credits the key driver for the bottom, while progressivity of tax brackets is most important at the top. We also find variation by income source, highlighting that income composition is a relevant factor too. However, over 2019 to 2023, we estimate actual policy changes offset up to four fifths of the potential fiscal drag that could have occurred if no tax changes were made. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:cbi:stafin:4/si/25 |
| By: | Youngsoo Jang (Yonsei University) |
| Abstract: | I study a dynamic game of successive governments in an incomplete-markets economy, where governments set labor income taxes and lump-sum taxes/transfers depending on their commitment ability. I find that commitment enables the government to coordinate policies across periods, thereby internalizing the effects of current policy decisions on the evolution of factor prices and wealth distributions shaped by past history. Commitment facilitates substantial long-term taxes and transfers, incurring long-run welfare losses but yielding short-run welfare gains through front-loaded reductions in precautionary savings and favorable factor price adjustments for low-income individuals. Without commitment, the government overlooks this intertemporal trade-off, yielding smaller short-run gains. |
| Keywords: | Taxes and Transfers, Commitment, Time Inconsistency, Incomplete Markets, Transition Dynamics. |
| JEL: | E61 H21 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:yon:wpaper:2025rwp-269 |
| By: | Han, Lu; Ngai, L. Rachel; Sheedy, Kevin D. |
| Abstract: | Using sales and leasing data, this paper finds three novel effects of a higher property transaction tax: higher buy-to-rent transactions alongside lower buy-to-own transactions despite both being taxed, a lower sales-to-leases ratio, and a lower price-to-rent ratio. This paper explains these facts by developing a search model with entry of investors and households, households choosing to own or rent in the presence of credit frictions, and homeowners deciding when to move house. A higher transaction tax reduces homeowners’ mobility and increases demand for rental properties, which explains the empirical facts and leads to a lower homeownership rate. The deadweight loss is large at 111% of tax revenue, with more than half of this due to distorting decisions to own or rent. |
| Keywords: | rental market; buy-to-rent investors; homeownership rate; transaction taxes |
| JEL: | D83 E22 R21 R31 |
| Date: | 2025–11–11 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:127406 |
| By: | Mariam Camarero (Universitat Jaume I, Economics department & INTECO Joint Research Unit); Juan Sapena (Catholic University of Valencia, Economics department & INTECO-Joint Research Unit); Cecilio Tamarit (University of Valencia, INTECO Joint Research Unit. Department of Applied Economics II) |
| Abstract: | This paper estimates time-varying tax-tilting parameters for eleven EMU member states from 1970 to 2024 using a panel time-varying parameter state-space model that extends the traditional tax-smoothing framework to capture both common and country-specific dynamics. Core countries such as Austria, Belgium, Germany, the Netherlands, France, Ireland, and Finland display a more prudent fiscal stance, while peripheral countries, including Greece, Italy, Portugal, and Spain, shift tax- ation toward the future, generating current deficits. These patterns are driven by differences between government discounting of future revenues and market rates, and are further influenced by structural factors such as aging populations and un- employment. Periods of negative real interest rates relax fiscal constraints, encour- aging governments to delay tax adjustments. The results underscore the need to reduce cross-country fiscal heterogeneity to strengthen long-term sustainability and advance fiscal integration in the Euro Area. |
| Keywords: | Tax-smoothing, time-varying cointegration, multiple structural breaks, Kalman Filter, Time-varying parameters, EU fiscal policy |
| JEL: | H62 E62 C22 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:eec:wpaper:2514 |
| By: | Youngsoo Jang (Yonsei University); Svetlana Pashchenko (University of Georgia); Ponpoje Porapakkarm (National Graduate Institute for Policy Studies) |
| Abstract: | What is the best way to reform Social Security? Academic literature offers diverging advice. There is a well-known result that the optimal size of Social Security is zero, implying it is best to phase the program out. Other studies argue that much can be gained by redesigning the program, given its current size. We provide a unified analysis that examines how the optimal size of Social Security depends on the key features of its design. We first develop a theoretical decomposition tracing the program's welfare effects to (i) income redistribution, (ii) distortions on the annuitization level, and (iii) intertemporal distortions. We then quantitatively assess the role of these channels. We show that the zero-optimal-size result arises because Social Security is too distortive and not redistributive enough. Once these design flaws are corrected, it is even optimal to increase the size of the program. |
| Keywords: | Social Security, Pensions, Annuities, Consumption and Saving, Life-Cycle Models |
| JEL: | D15 E60 H55 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:yon:wpaper:2025rwp-271 |
| By: | Kevin Parra Ramirez; Vincent Vicard |
| Abstract: | While multinational enterprises (MNEs) shift hundreds of billions in profits to low-tax jurisdictions annually, how they do remains disputed. Using firm-level data for France in 2018, we provide the first joint quantification of the three main profit-shifting channels: transfer mispricing in goods trade, intangible assets and services traded with tax havens, and intra-firm debt. We find empirical evidence for all three instruments, but transfer mispricing dominates quantitatively (€10 billion, 0.4\% of GDP), followed by services (up to €6 billion) and debt (€2 billion). Although significant, these direct estimates account for half of total missing profits in France, as estimated indirectly from the location of MNE profits. We document two key blind spots likely to close this gap: cross-border digital payments by households and understudied debt instruments (e.g., securities). |
| Keywords: | Tax Avoidance;Multinational Firms;Profit Shifting;FDI;Trade |
| JEL: | H26 H25 H32 F14 F23 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:cii:cepidt:2025-16 |