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on Public Economics |
| By: | Lehmann, Etienne; Zanoutene, Eddy |
| Abstract: | We study the optimal taxation of corporate and dividend income when entrepreneurs can use retained earnings to reduce their tax burden. We show that eliminating dividend taxes while increasing the corporate income tax (CIT) to keep investment unchanged raises total tax revenue. Our simulations suggest net revenue gains of 0.1-0.4% of GDP. In an infinite-horizon model, the optimal policy sets dividend taxes to zero in every period. As the discount factor approaches one and when the planner values only workers’ welfare, the optimal steady-state CIT converges to a standard inverse elasticity rule. |
| JEL: | H21 H24 H25 H26 H32 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21102 |
| By: | Bustos, Sebastian; Pomeranz, Dina; Suárez Serrato, Juan Carlos; Vila-Belda, Jose; Zucman, Gabriel |
| Abstract: | Profit shifting by multinational corporations is thought to reduce tax revenue around the world. This paper provides a comprehensive analysis of the introduction of standard regulations to limit profit shifting. Using administrative tax and customs data from Chile, we find that the reform was ineffective in reducing multinationals’ transfers to lower-tax countries and did not significantly raise tax payments. Interviews with tax advisors and employment history data reveal a drastic increase in consulting services. Our results illustrate that when enforcement can be circumvented by sophisticated tax planning, it can benefit tax consultants at the expense of tax authorities and taxpayers. |
| JEL: | H25 H26 H32 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21105 |
| By: | Patnaik, Megha |
| Abstract: | I study India’s 2017 Goods and Services Tax (GST) to examine how self-enforcing tax design generates formalization cascades through supply chains. GST created incentives for formal procurement by allowing input tax credits only for purchases from registered suppliers. Using firm-level data on 12, 024 firms, I find that firms at the mean pre-reform exposure to non-creditable taxes increased documented input purchases by 6 percent while reducing tax payments by 8 percent. Effects double over five years, consistent with formalization propagating sequentially upstream—a dynamic pattern that provides the first empirical evidence on the dynamics of VAT-driven formalization cascades. At the aggregate level, large firms’ share of national GST collections fell from 46 to 30 percent, implying smaller enterprises entering the formal tax net. The interquartile range of effective tax rates collapsed by 72 percent, reflecting the replacement of heterogeneous cascading taxes with uniform credits. |
| Keywords: | Tax compliance |
| JEL: | H25 H32 O17 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21163 |
| By: | Becerra, Oscar; Briglia, Luigi-Maria; Leon-Diaz, John; Valencia, Óscar; Luetticke, Ralph |
| Abstract: | How should governments design progressive labor-income taxes when workers can shift labor supply into untaxed informal work? Using household surveys for Brazil, Colombia, Mexico, and Peru, we document steep gradients in informality, employment, and unemployment across the income distribution. We analyze non-linear tax schedules in a heterogeneous-agent model with search frictions, savings, and an endogenous formal — informal labor-supply margin. Progressivity operates through an inclusion margin at the bottom-negative income taxes increase formal attachment — and an evasion margin at the top, where higher marginal tax rates shift labor supply into the untaxed sector. These opposing forces imply that both welfare and formality are hump-shaped in progressivity; in a calibration to Mexico, the welfare-maximizing degree of progressivity is about five times the current level. |
| Keywords: | Informality; Progressive taxation; Developing countries |
| JEL: | E26 H24 H26 O17 D31 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21229 |
| By: | Azevedo, Eduardo; Scheuer, Florian; Smetters, Kent; Yang, Min |
| 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 taxation; Venture capital; Dilution; Wealth tax |
| JEL: | G3 H2 J3 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20879 |
| By: | Kay Blaufus; Lena Dräger; Michael Milde; Judith C. Schneider |
| Abstract: | The wealth effects of inflation and taxes on long-term savings, such as retirement investments, can be substantial. Nonetheless, individuals misperceive the impact of both taxes and inflation. Based on a unified theoretical framework, we distinguish between potential cognitive mechanisms underlying tax and inflation misperceptions and derive their implications for investment behavior. Using an incentivized, pre-registered online experiment, we test how these misperceptions influence individual investment decisions. In our baseline setting, inflation and taxation affect investment outcomes equivalently in real or after-tax terms. The results show that — even though all participants were informed about the effects of inflation and taxes on investment returns — investment distortions remain significant in both settings. Distortions driven by money illusion clearly exceed those caused by tax illusion. We find that both rational inattention and anchoring contribute to these distortions, with anchoring appearing more persistent in the inflation setting. Money illusion is therefore not only larger than tax illusion but also harder to undo. Money and tax illusion become more pronounced when future tax and inflation rates are uncertain. We then test the effectiveness of different communication strategies in this setting. Additional tabular information, visualizations, and attention nudges do not systematically reduce money or tax illusion. We show that requiring participants to view real or after-tax consequences before decision making is the most effective intervention; voluntary access has weaker effects, and later display does not systematically reduce the distortions. |
| Keywords: | money illusion, tax illusion, inflation aversion, tax aversion, visual salience, rational inattention, nominal anchoring, long-term investments |
| JEL: | E31 G40 G51 H2 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12799 |
| By: | Ruby Doeleman (WU Vienna); Dominika Langenmayr (KU Eichstätt-Ingolstadt); Dirk Schindler (Erasmus University Rotterdam) |
| Abstract: | Since 2016, Country-by-Country reporting has provided tax authorities with detailed information about multinationals' worldwide activities. We model Country-by-Country reporting as increasing tax planning and tax audit costs for profit-shifting multinationals, where the latter costs depend on the share of profits in tax havens. Then, Country-by-Country reporting makes shifting profits from a high-tax country to a tax haven more attractive compared to shifting from a low-tax country. Thus, while total profits shifted to the haven decrease, profit shifting from high-tax affiliates may increase relative to the situation without Country-by-Country reporting. We confirm these changes in profit-shifting patterns using a difference-in-differences design. |
| Keywords: | Country-by-Country-Reporting, Profit Shifting, Anti-Tax-Avoidance Rules |
| JEL: | F23 H25 H26 |
| Date: | 2026–06–03 |
| URL: | https://d.repec.org/n?u=RePEc:tin:wpaper:20260027 |
| By: | Aguiar, Mark; Moll, Benjamin; Scheuer, Florian |
| Abstract: | Standard optimal capital tax theory abstracts from modeling asset prices, making it unsuitable for thinking about capital gains and wealth taxation. We study optimal redistributive taxation in an environment with asset price movements, adopting the modern finance view that asset prices fluctuate not only because of changing cash flows, but also due to other factors ("discount rates''). We show that a combination of realization-based capital gains and cash flow taxes implements the optimal allocation regardless of the source of asset-price fluctuations. Moreover, the capital gains tax avoids distortions in portfolio choice (the so-called lock-in effect) by targeting total net trades rather than gains from selling individual assets. These results stand in contrast to the classic Haig-Simons comprehensive income tax concept as well as recent proposals for wealth or accrual-based capital gains taxes. |
| JEL: | E2 G1 H2 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21165 |
| By: | Mounir Atlassi (University Mohamed V, Rabat); Mohamed Karim (University Mohamed V, Rabat); Ilham Dkhissi (BEAR Lab - RBS - UIR - BEAR Lab - Rabat Business School - International University of Rabat) |
| Abstract: | This paper examines the dynamics of tax revenues and fiscal structure in Morocco over the period 2000-2024, with a particular focus on the temporal behavior of major tax components and their adjustment to revenue fluctuations. Building on the literature on fiscal dynamics in emerging economies, the study emphasizes the role of tax composition in shaping revenue stability. The empirical analysis relies on autoregressive integrated moving average (ARIMA) models. Unit root tests are first conducted to determine the stochastic properties of the series, followed by model identification, estimation, and diagnostic validation. The results indicate that all tax series are integrated of order one, suggesting persistent shocks and long-lasting effects. The findings also reveal heterogeneous dynamic patterns across tax instruments: personal income tax is sensitive to short-term fluctuations, corporate income tax exhibits dynamics consistent with a highly cyclical tax base, while value added tax displays greater stability due to its broader base. These results highlight the central role of fiscal structure in shaping revenue resilience. The paper contributes to the literature by showing that fiscal performance depends not only on the level of taxation, but also on the stochastic behavior and dynamic properties of its components. |
| Keywords: | revenue volatility, fiscal shocks, tax composition, cyclical dynamics, fiscal resilience, fiscal resilience cyclical dynamics revenue volatility fiscal shocks tax composition C22 H21 H23 E62 |
| Date: | 2026–05–29 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-05637487 |
| By: | Douenne, Thomas; Dyrda, Sebastian; Hummel, Albert Jan; Pedroni, Marcelo |
| Abstract: | How should governments design climate policies in the presence of inequality, uninsurable risk, and fiscal constraints? To address this question, we develop a climate—economy model with incomplete markets and idiosyncratic labor-income risk, where Ricardian equivalence fails and optimal long-run capital taxes are positive. We analytically show that the optimal carbon tax equals the social cost of carbon (SCC) adjusted for fiscal distortions. Calibrating the model to the U.S., we show that these deviations are quantitatively negligible: high levels of household inequality, income risk, and fiscal distortions do not, in themselves, justify lowering climate ambitions. Welfare gains under the optimal policy come almost entirely from efficiency and environmental amenities, with almost no effect on redistribution and insurance, and are fairly evenly distributed across households. |
| Keywords: | Climate policy; Carbon taxes; Optimal taxation; Heterogeneous agents; Incomplete markets |
| JEL: | E62 H21 H23 Q5 D52 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20820 |
| By: | Cage, Julia; Guillot, Malka; Huang, Yuchen |
| Abstract: | In many countries, both charitable and political donations benefit from generous – and often similar – tax incentives. While a large literature has studied the tax-price elasticity of charitable giving, little is known about political donations. Using a large-scale survey experiment (N = 12, 600), we investigate the relative efficiency of different tax schemes in fostering political and charitable donations. We document that repealing the existing non-refundable income-tax credit decreases charitable donations but not political donations, pointing toward greater fiscal incentives behind charitable giving. We next show that, conditional on giving, matching – where the government matches individual donations at a fixed rate –increases both political and charitable giving, but that it decreases the probability of giving to charities at the extensive margin. Finally, using a Principal Component Analysis (PCA) and generic machine learning, we document important dimensions of heterogeneity, and discuss the policy implications of our findings. |
| JEL: | H24 H31 L38 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21132 |
| By: | Jason Nassios |
| Abstract: | Australia is one of the world's largest exporters of liquefied natural gas (LNG), which is natural gas cooled into liquid form for transport and export. Yet Petroleum Resource Rent Tax (PRRT) collections remain modest relative to LNG production and export revenues. This paper argues that low PRRT revenues are primarily structural, reflecting incompatibilities between the design of the tax and the economics of modern LNG projects. Two mechanisms are central. First, tax base measurement: gas transfer prices used to value upstream sales are not publicly observed, introducing uncertainty about how LNG-related rents are reflected in the tax base. Second, intertemporal deferral: large upfront capital expenditures generate carried-forward deductions that are uplifted over time, delaying the recognition of taxable rents. As a result, PRRT liabilies are confined to a narrow upstream base and deferred over the life of projects. Despite strong underlying profitability, observed PRRT revenues remain limited. Given this, incremental reforms such as increasing the statutory tax rate, are unlikely to materially improve rent capture, because the underlying tax base is constrained. More substantive gains are likely to arise from reforms that broaden or more accurately define the tax base. Capturing a larger share of LNG-related rents will require fiscal instruments that more directly target observable project values, or better align taxation with the full LNG value chain. |
| Keywords: | Petroleum Resource Rent Tax, Resource rent taxation, Uplift, Deductions |
| JEL: | H21 H25 Q38 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:cop:wpaper:g-372 |
| By: | Esteves, Rui |
| Abstract: | History shows that public debt is a powerful tool for societies to trade with themselves in the future. Debt allows governments to spread the costs of public goods over time, while taxes provide the revenue needed for debt service. History also shows that there are limits to the power of public borrowing. Effective debt management requires balancing borrowing, interest rates, growth and inflation. Failure to do so results in unsustainable debt levels and fiscal crises. However, this essay argues that we need to reevaluate the balance of risks and benefits of sovereign debt. While the stated aim is to understand the past, the essay also speaks to current debates. |
| Keywords: | Taxation; Inflation; Default |
| JEL: | H20 H63 N10 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20821 |
| By: | Sandra Valentina Lizarazo |
| Abstract: | Canada’s innovation performance has been strong but shows limited upward momentum despite generous research and development (R&D) subsidies. This paper develops an endogenous innovation, multisector, heterogeneous-agent model calibrated to the Canadian economy to evaluate fiscal policies that promote innovation and growth. The impact of R&D subsidies depends critically on the supply of high-skilled labor. When the supply of scientists is inelastic, subsidies raise research wages, crowd out private R&D, and can reduce long-run growth. When labor supply is more elastic, subsidies generate substantial gains in innovation and output. The analysis also compares alternative policy instruments. Investment tax reductions and education spending foster innovation through capital deepening and an expanded supply of highskilled labor, delivering more robust gains when talent constraints bind, while personal income tax changes have more limited effects. R&D subsidies also increase inequality by disproportionately benefiting high-skilled workers, although these effects are mitigated when labor supply responds. Overall, effective innovation policy requires combining R&D incentives with policies that expand human capital and reduce distortions to investment. |
| Keywords: | Innovation; Human Capital; Taxation; Heterogeneous Agents; Multi-Sector Economy; Spillovers; IMF working papers; innovation policy; R&D subsidy; research wage; policy instrument; Labor supply; Income; Wages |
| Date: | 2026–06–12 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2026/116 |
| By: | Christl, Michael (Universidad Loyola Andalucia, Sevilla, Spain); Sologon, Denisa (LISER, IZA@LISER); Montes-Vinas, Ana (LISER); Wagener, Raymond (LISER) |
| Abstract: | Cross-border labour markets integrate European regions economically, but welfare analysis remains constrained by national institutional systems. We build on the European tax-benefit model EUROMOD to incorporate cross-border taxation, social insurance coordination, and family benefit allocation, and apply it to hypothetical household scenarios for workers residing in France and Belgium and employed in Luxembourg. The disposable income consequences of cross-border employment are substantial and vary by household type and residence country. France's exemption-with-progression mechanism compresses the cross-border premium at high earnings, while Belgium's full exemption lets it persist and grow across the distribution. Modelling cross-border workers under residence-country rules alone overstates income equality, with the bias concentrated among households with children and at the lower end of the income distribution. Combining country-specific EUROMOD models through a harmonised counterfactual approach, the paper offers a replicable method for measuring disposable income in cross-border contexts, and shows that inequality measurement remains tied to national welfare institutions even where labour markets operate at a regional scale. |
| Keywords: | cross-border workers, disposable income, microsimulation, tax-benefit systems, Luxembourg, Greater Region, income inequality, regional integration |
| JEL: | J20 J38 J48 H24 H55 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18749 |
| By: | María Cadaval-Sampedro; Santiago Lago-Peñas; Xoaquín Fernández-Leiceaga; Alejandro Domínguez-Lamela |
| Abstract: | The paper analyses the impact of demographic ageing on age-related public expenditure in the EU-27 over the period 1992-2024. The analysis covers healthcare, long-term care (LTC), and pensions. The results reveal three patterns. First, demographic effects are heterogeneous across countries, driven by short-run responses that vary by spending category—limited in healthcare, absent in LTC. Second, advanced ageing (80+) tends to be more important for long-run dynamics, especially in healthcare. Third, Central and Eastern European economies show weaker or delayed responses, while Western and Nordic countries exhibit stronger adjustments, more evident in healthcare and LTC than in pensions, reflecting the decisive role of institutional design. |
| Keywords: | Ageing, public expenditure, demographic change, European Union |
| JEL: | E60 E62 H20 H51 H55 J11 J14 |
| Date: | 2026–07–08 |
| URL: | https://d.repec.org/n?u=RePEc:ida:wpaper:wp2614 |
| By: | Denise Dipasquale; Edward L. Glaeser; Adam M. Guren; Paul S. Willen |
| Abstract: | What information do policymakers need to design Pigouvian taxes or subsidies? Standard logic suggests that it is sufficient to know the size of the externality and unnecessary to know about quantities. Yet this logic is incorrect if interventions have fixed costs, taxes create deadweight losses, or there are distributional concerns. We present a model in which these considerations can make it more valuable for policymakers to learn about equilibrium quantities. We apply the model to congestion pricing, which has high fixed costs, and to a proposed housing subsidy in Boston that features deadweight losses and distributional concerns. |
| JEL: | H20 H23 R0 R50 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35376 |