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on Public Economics |
| By: | Chen, Xuyang (Université catholique de Louvain, LIDAM/CORE, Belgium); Sun, Rui |
| Abstract: | This paper investigates how the OECD’s global minimum tax (GMT) affectsmultinational enterprises (MNEs) behavior and countries’ corporate taxes. We consider both profit shifting and capital investment responses of the MNE in a formal model of tax competition between asymmetric countries. The GMT reduces the true tax rate differential and benefits the large country, while the revenue effect is generally ambiguous for the small country. In the short run where tax rates are fixed, due to tax deduction of the substance-based income exclusion (SBIE), a higher minimum rate exerts investment incentives but also incurs a larger revenue loss for the small country. We show that under high (low) profit shifting costs the former (latter) effect dominates so that the small country’s revenue increases (decreases). In the long run where countries can adjust tax rates, the GMT reshapes the tax game and the competition pattern. In contrast to the existing literature, we reveal that the minimum rate binds the small country only if it is low. With the rise of the GMT rate, countries will undercut the minimum to boost real investments and collect top-up taxes. Our simulations show that introducing a GMT with moderate minimum rate raises both countries’ revenues and the large country’s welfare. However, it may reduce the small country’s welfare if the welfare weight of private income is high. |
| Keywords: | Corporate taxes, Global minimum tax, Profit shifting, SBIE, Tax competition |
| JEL: | F21 F23 H25 H73 H87 |
| Date: | 2025–09–01 |
| URL: | https://d.repec.org/n?u=RePEc:cor:louvco:2025019 |
| By: | Hindriks, Jean (Université catholique de Louvain, LIDAM/CORE, Belgium); Nishimura, Yukihiro |
| Abstract: | We develop a simple conceptual framework of asymmetric countries competing simultaneously for real investment and for profit shifting in the presence of tax haven. Our goal is to identify how this two-dimensional tax competition affects the performance of tax policy, including minimum tax rules. We define a developing country as one with either a narrower tax base or lower tax capacity. The developing country sets a lower tax rate, attracting FDI. We show that policies aimed at promoting FDI competition—such as reducing transaction costs, country risk, or market-entry barriers—do not necessarily benefit the developing country. There exists a critical threshold of real-investment competition beyond which intensified competition harms the developing country (and the developed country as well). We also identify a “tax capacity externality”: fighting profit shifting in the developed (high-tax) country always raises revenue in the developing country. Finally, we determine the level of the minimum tax that the developing country prefers. This preferred minimum tax increases with both the intensity of FDI competition and the developing country tax capacity. |
| Keywords: | Profit shifting ; FDI competition ; Tax competition ; Minimum tax |
| JEL: | C72 F23 F68 H25 H87 |
| Date: | 2025–12–30 |
| URL: | https://d.repec.org/n?u=RePEc:cor:louvco:2025022 |
| By: | Hindriks, Jean; Nishimura, Yukihiro |
| Abstract: | Technological advances and economic globalization have enabled multinational enterprises (MNEs) to avoid taxes by shifting both profits and real investment to low-tax jurisdictions. We develop a tax-competition model in which asymmetric countries compete for profit and investment in the presence of a tax haven. A key feature of the model is that tax haven can only attract profit but not investment. We show that the impact of the Global Minimum Tax (GMT) depends on the form of country asymmetry (unequal tax base or tax capacity), and on the intensity of competition for investment relative to competition for profit. A central result, shared across both types of country asymmetry, is that intensified competition for investment (via market integration or lower country risk), together with stricter profit-shifting regulations, leads the low-tax host country to prefer a higher minimum tax. |
| Keywords: | Profit shifting ; Tax competition ; Tax enforcement |
| JEL: | C72 F23 F68 H25 H87 |
| Date: | 2025–12–30 |
| URL: | https://d.repec.org/n?u=RePEc:cor:louvco:2025023 |
| By: | Flora Bellone (Université Côte d'Azur, CNRS, GREDEG, France; OFCE, Sciences Po, France); Charlie Joyez (Université Côte d'Azur, CNRS, GREDEG, France); Xavier Poulet-Goffard (Université Côte d'Azur, CNRS, GREDEG, France) |
| Abstract: | The OECD's Base Erosion and Profit Shifting (BEPS) initiative, adopted in 2015, introduced country-by-country reporting (CbCR) obligations for multinational groups with consolidated turnover above €750 million. This paper examines whether the reform generated unintended behavioral responses among smaller firms below the reporting threshold. Using firm-level data on French multinationals from OFATS, FARE, and DIANE (2007, 2009, 2014–2022), we estimate difference-in-differences models in a linear probability framework with firm and year fixed effects. We focus on restructuring at the extensive margin, distinguishing entry into and exit from tax-haven jurisdictions. Firms below the threshold significantly increase their probability of opening tax-haven affiliates after 2016, the year CbCR started to be enforced in Europe, while larger firms become more likely to exit. The results are robust to alternative tax-haven definitions and to excluding firms near the cutoff. Heterogeneity analyses show that the post-reform entry in tax havens is concentrated among financially structured small MNEs. Overall, the findings suggest that targeted transparency reforms can reallocate tax-haven activity across the firm size distribution rather than uniformly reduce it. |
| Keywords: | tax avoidance; multinational enterprises; BEPS; country-by-country reporting; tax havens; firm heterogeneity |
| JEL: | F23 H26 H32 K34 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:gre:wpaper:2026-10 |
| By: | Canavire Bacarreza, Gustavo (World Bank); Herrero-Olarte, Susana (Universidad de Barcelona); Kim, Yeon Soo (World Bank) |
| Abstract: | This paper critically reviews the empirical and structural literature on the effects of income taxation on informal economic activity. Although labor taxation has been widely studied for labor market outcomes, evidence linking income taxes to informality remains fragmented and uneven across countries. Synthesizing findings from both developed and developing economies, the review finds that income taxes have limited effects on formal employment but significant impacts on labor informality, particularly in contexts with weak enforcement, fragile institutions, and highly vulnerable labor markets. Estimated elasticities of informality with respect to income taxation generally range between 3 and 5 percent, averaging around 3.5 percent. The literature, however, is skewed toward high-income countries and relies mainly on reduced-form empirical approaches, limiting understanding of behavioral responses, long-term dynamics, and institutional heterogeneity. Standard theoretical models, grounded in labor supply frameworks, often fail to treat informality as an endogenous margin under weak compliance and regulatory capacity. Consequently, studies may overstate revenue gains and understate distributional impacts. |
| Keywords: | income taxation, labor informality, developing economies, behavioral responses, labor markets, fiscal policy, critical review |
| JEL: | H22 H24 H26 J08 J21 J46 O17 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18449 |
| By: | Gustavo Canavire-Bacarreza (World Bank, Poverty and Equity Global Practice, and Universidad Privada Boliviana); Kenyi Cansino (International Fund for Agricultural Development); Luis Castro-Peñarrieta (Centro de Investigacion y Docencia Economicas (CIDE), Department of Applied Economics, and Universidad Privada Boliviana); Jorge Martinez-Vazquez (International Center for Public Policy, Georgia State University); Javier Beverinotti (Inter-American Development Bank, Andean Countries Department) |
| Abstract: | Many decentralized countries struggle with low levels of subnational tax effort. As a remedy for this situation, specific-purpose incentive schemes designed for own revenue mobilization at the subnational level can be simple, efficient, and cost-effective tools. We examine the effects of an incentive transfer program established in 2010 in Peru aimed at increasing property tax revenue at the subnational level. Specifically, Peruvian districts would receive a monetary transfer if they increased their property tax collection above a certain threshold in the previous year, thereby raising their own revenues. Using quasi-experimental methods, we find that the property tax revenue of districts that (actively) participated in the program significantly increased over the following decade. Our results are robust to the choice of estimator and a series of additional tests. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ays:ispwps:paper2612 |
| By: | Robin Young |
| Abstract: | The alignment tax is widely discussed but has not been formally characterized. We provide a geometric theory of the alignment tax in representation space. Under linear representation assumptions, we define the alignment tax rate as the squared projection of the safety direction onto the capability subspace and derive the Pareto frontier governing safety-capability tradeoffs, parameterized by a single quantity of the principal angle between the safety and capability subspaces. We prove this frontier is tight (achieved by perturbation) and show it has a recursive structure. safety-safety tradeoffs under capability constraints are governed by the same equation, with the angle replaced by the partial correlation between safety objectives given capability directions. We derive a scaling law decomposing the alignment tax into an irreducible component (determined by data structure) and a packing residual that vanishes as $O(m'/d)$ with model dimension $d$, and establish conditions under which capability preservation mediates or resolves conflicts between safety objectives. We provide an account consistent with prior empirical findings and generates falsifiable predictions about per-task alignment tax rates and their scaling behavior. |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.00047 |
| By: | Burak Uras (Williams College); Tulio Bouzas (Tilburg University); ; |
| Abstract: | "Why do firms continue to rely on cash in economies where digital payments are widespread and electronic transaction costs are low? This paper shows that the an- swer lies in the interaction between payment technologies and tax enforcement. Us- ing randomized experimental evidence from Kenyan small and medium-sized firms, we establish that the adoption of electronic payments causally increases tax com- pliance by raising transaction traceability. Moreover, SME survey evidence shows that tax evasion is associated with cash discounts. Motivated by these findings, we develop a microfounded general equilibrium model in which heterogeneous firms choose prices, payment acceptance, and tax evasion jointly. Cash facilitates eva- sion but exposes buyers to transaction risk, while electronic payments are safer yet traceable by third parties. These trade-offs generate endogenous cash discounts, selective rejection of digital payments, and coexistence of payment instruments in equilibrium. The calibrated model shows that when electronic payments are non–interest-bearing, inflation increases cash usage and tax evasion, overturning the standard prediction that inflation reduces cash use. We characterize the op- timal policy mix and show that financial development, enforcement intensity, and inflation are tightly intertwined in maximizing government revenues and welfare." |
| Keywords: | E-Money, Pricing Heterogeneity, Tax Compliance, Macro Policy |
| JEL: | E44 G23 H26 |
| Date: | 2026–02–13 |
| URL: | https://d.repec.org/n?u=RePEc:wil:wileco:2026_102 |
| By: | Pestieau, Pierre (Université catholique de Louvain, LIDAM/CORE, Belgium); Racionero, Maria |
| Abstract: | We consider a society where social mobility is influenced by parental wealth transfers and education investments. Specifically, the educational investments capture the time parents devote to the education of their children. We show that, in the absence of government intervention, the market equilibrium results in a level of upward social mobility lower than that in an ideal first-best scenario. Given the challenge of observing individual characteristics, we characterize the second-best solution achievable through the implementation of non-linear taxation. We consider two alternative government objectives: a weighted utilitarian criterion and a Rawlsian criterion. Additionally, we explore the implications of two alternative informational assumptions: whether educational investments are observable or non-observable. |
| Keywords: | Social mobility ; non-linear taxation ; inheritance taxation |
| JEL: | H21 H31 H52 |
| Date: | 2025–06–01 |
| URL: | https://d.repec.org/n?u=RePEc:cor:louvco:2025013 |
| By: | Richiardi, Matteo; van de Ven, Justin; Popova, Daria; Brooks, Natasha |
| Abstract: | This paper describes the integration of labour supply behavioural responses into UKMOD, the UK tax-benefit microsimulation model belonging to the EUROMOD family. Traditional static models quantify only the direct (“morning after†) fiscal and distributional effects of policy reforms, abstracting from behavioural adjustment. We outline a practical framework for extending such models to incorporate indirect effects, with a focus on labour supply responses at both the intensive and extensive margins.After reviewing the evolution of the empirical literature on labour supply elasticities and the distinction between structural and reduced-form approaches, we motivate the adoption of an elasticity-based reduced-form method. While structural random utility models offer theoretically consistent counterfactual analysis, they are computationally demanding and less transparent for routine policy work. By contrast, externally estimated elasticities - widely used by UK institutions - provide a tractable and policy-aligned alternative.We detail the design of the Behavioural Responses (BVR) add-on introduced in UKMOD in 2023. The module computes marginal and average effective tax rates, distinguishes responses to changes in marginal versus average rates, and applies assumed taxable income elasticities to generate post-reform behavioural adjustments. Implementation requires a limited number of simulation loops and preserves transparency and computational efficiency. |
| Date: | 2026–03–04 |
| URL: | https://d.repec.org/n?u=RePEc:ese:cempwp:cempa4-26 |
| By: | Clemens, Michael (George Mason University) |
| Abstract: | The US government in 2025 imposed a $100, 000 tax on each high-skill foreign worker entering with an H-1B work visa. The only public economic justification calculates the tax to offset an estimated wage penalty for H-1B workers relative to US natives. But this estimate suffers from substantial bias. Reexamining the same data shows that H-1B workers receive a modest wage premium relative to comparable natives, roughly 6% on average—inconsistent with any wage penalty—when using equivalent wage concepts and comparing workers of the same age, gender, education, and tenure, in the same occupation and local labor market. I trace most of the discrepancy to four methodological choices that inflate the prior estimate: 1) undisclosed imputation of missing data, 2) pooling of non-contemporaneous years, 3) a definition of local labor markets contradicting standard economic practice and US law, and 4) failure to consider H-1B workers' low job tenure. The remaining discrepancy arises from comparing incompatible wage concepts for H-1B versus native workers. Beyond measurement, the theory of public economics implies that a revenue-maximizing immigration tax reduces welfare relative to alternatives, even with zero weight on immigrant welfare. |
| Keywords: | immigration, tax, h-1b, skill, stem, worker, labor, welfare, immigrant, nonimmigrant, visa, wages, gap |
| JEL: | J08 J38 J68 H21 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18435 |
| By: | Nishimura, Y. (University of Osaka); Pestieau, Pierre (Université catholique de Louvain, LIDAM/CORE, Belgium) |
| Abstract: | As income rises, the risk of disability in old age declines, while life expectancy increases. These correlations strengthen the case for public long-term care (LTC) insurance over public pension systems. However, this perspective shifts when considering family solidarity—specifically, the informal care provided by spouses and children to elderly relatives. When viewed through the lens of altruistic caregiving motives, the argument for social LTC insurance becomes more nuanced. The interplay between formal and informal care is a key factor in shaping optimal policy. In this paper, we demonstrate that when family members reliably provide informal care, the design of a comprehensive public LTC system depends on the existence of a private insurance and on the degree of substitutability between informal and formal care. |
| Keywords: | Long-term care ; mortality risk ; disability risk ; informal care |
| JEL: | H2 H5 |
| Date: | 2025–06–09 |
| URL: | https://d.repec.org/n?u=RePEc:cor:louvco:2025012 |
| By: | Palomera, David; Starke, Peter |
| Abstract: | The literature on growth dependencies increasingly calls for post-growth welfare states capable of functioning without reliance on GDP growth in order to remain within planetary limits. Yet empirical research on the relationship between welfare state arrangements and economic growth remains remarkably scarce, even in policy domains where growth dependence appears most plausible, such as pensions. Using panel data of 20 OECD countries from 1971 to 2022, we examine the relationship between public pension spending per capita and replacement rates (i.e. benefit generosity) on the one hand, and GDP per capita on the other. We find that while pension spending per capita remains partially coupled to GDP, pension replacement rates have become decoupled - and in many instances negatively coupled - already at relatively modest income levels. This is consistent with the literature on the social limits to growth, where decoupling likewise occurs at modest income levels. We find that labor-market factors - especially labor participation - are consistently and strongly associated with higher pension benefits. These findings have important policy implications, highlighting that the sustainability of pension systems in post-growth contexts may depend less on infinite economic expansion than on institutional and labor-market policy choices. |
| Keywords: | welfare state, pensions, post-growth, degrowth, sustainable welfare, growth dependence, decoupling |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:penwps:338100 |