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on Public Economics |
| By: | Steger, Paul |
| Abstract: | In many decentralized countries, local tax rates are set by local governments but are simultaneously linked to tax schedules that are determined by superior governments. In such systems, a change to the tax schedule by a superior level of government creates a vertical tax externality and affects local governments' budgets downstream. This raises the question whether federal tax changes provoke tax increases or other fiscal responses such as reductions of spending on the local level. In such a case, local government reactions eat away at the tax reform and its net effect might be different than anticipated by policymakers. To that end, I exploit a large-scale income tax cut in the Swiss canton of Bern to estimate a municipal response elasticity. I find that municipalities increase municipal tax disproportionately, resulting in higher municipal revenues and higher municipal spending. This implies a novel decentralization result such that municipalities' importance in taxation increases at the cost of cantonal importance. This response is much smaller when municipalities are more exposed to cross-municipal tax competition. |
| Keywords: | Fiscal Federalism, Local Public Finance, Vertical Tax Externality, Tax Competition |
| JEL: | H71 H72 H73 H77 R51 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:zewdip:336763 |
| By: | Ronald B. Davies; Margarita Lopez-Forero; Benjamin Michallet; Johannes Scheuerer |
| Abstract: | Despite their advantages, multinational enterprises (MNEs) receive significant criticism, particularly with regard to offshoring jobs and shifting profits abroad to avoid taxation. Using administrative data for the universe of Norwegian and French firms and workers, we link these two issues by documenting a negative relation between MNE investment in a tax haven and employment in the high-tax country. In particular, exploiting the 2006 European Court of Justice (ECJ) decision on the Cadbury-Schweppes case which upheld the use of EU tax havens, we are able to establish a causal link in which tax haven use lowers domestic employment by 6%. Heterogeneity analyses reveal that the effects are mainly concentrated among high-skilled workers. We further link the employment changes to the substance requirements mandated by the ECJ's ruling and the secrecy inherent to tax havens. |
| Keywords: | tax havens, multinational firms, employment, mass layoffs, economic substance |
| JEL: | F23 H26 J21 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12464 |
| By: | Spengel, Christoph; Gaul, Johannes; Göbel, Alexander; Gschossmann, Emilia; Gundert, Hannah; Jungmann, Felix; Käshammer, Daniel; Kindler, Cornelia; Pfrang, Alina; Porebski, Thu Thao; Schmidt, Christin; Schmidt, Katharina; Schulz, Inga; Spix, Julia; Weck, Stefan; Wickel, Sophia; Winter, Sarah Marie |
| Abstract: | This study examines the evolving landscape of anti-tax avoidance measures in the European Union (EU), focusing on the interplay between the Anti-Tax Avoidance Directive (ATAD), the EU Blacklist Code of Conduct on Business Taxation, various unilateral regulations, and the global minimum tax. Drawing on a comprehensive survey of local tax experts, we investigate how Member States have implemented the five core ATAD measures - interest barrier rules, exit taxation, controlled foreign company (CFC) rules, hybrid mismatch provisions, and general anti-abuse rules (GAAR) - as well as the EU Blacklist and additional national provisions such as royalty deduction limitations. The findings reveal a generally consistent adoption of ATAD rules, albeit with notable variation in strictness and scope across Member States. Furthermore, the study evaluates the interplay with the newly introduced global minimum tax. While this global measure primarily targets rate-based profit shifting, our analysis indicates that it may reinforce or partially overlap the EU's other directives - especially for countries that have already implemented extensive anti-tax avoidance legislation. We conclude by highlighting areas where policy refinements could enhance coherence - reducing complexity, avoiding double regulation, and strengthening the overall framework for combating tax avoidance within the EU. |
| Keywords: | Anti-Tax Avoidance, Taxation in the European Union, Global Minimum Tax |
| JEL: | H25 H26 K34 F23 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:zewdip:336766 |
| By: | Anton Korinek; Lee Lockwood |
| Abstract: | Transformative artificial intelligence (TAI) - machines capable of performing virtually all economically valuable work - may gradually erode the two main tax bases that underpin modern tax systems: labor income and human consumption. We examine optimal taxation across two stages of artificial intelligence (AI)-driven transformation. First, if AI displaces human labor, we find that consumption taxation may serve as a primary revenue instrument, with differential commodity taxation gaining renewed relevance as labor distortions lose their constraining role. In the second stage, as autonomous artificial general intelligence (AGI) systems both produce most economic value and absorb a growing share of resources, taxing human consumption may become an inadequate means of raising revenue. We show that the taxation of autonomous AGI systems can be framed as an optimal harvesting problem and find that the resulting tax rate on AGI depends on the rate at which humans discount the future. Our analysis provides a theoretically grounded approach to balancing efficiency and equity in the Age of AI. We also apply our insights to evaluate specific proposals such as taxes on robots, compute, and tokens, as well as sovereign wealth funds and windfall clauses. |
| JEL: | H21 H24 O33 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34873 |
| By: | Katarzyna Bilicka; Simone Traini; Katarzyna Anna Bilicka |
| Abstract: | We examine whether the public revelation of sensitive tax information prompts firms to adopt reputation repair policies targeting shareholders. Between 2013 and 2021, the International Consortium of Investigative Journalists (ICIJ) released leaked information on over 800, 000 offshore entities incorporated in tax havens, publicly revealing their use by multinational firms to avoid taxes. Leveraging this setting, we investigate whether firms implicated in the leaks improve their governance, increase investor remuneration, and reorganize their activities to restore shareholder trust relative to unaffected firms. We find that, after the leaks, firms appoint more directors, especially in operations, audit, and finance and accounting, pay higher dividends, and reduce their presence in tax havens, without increasing effective tax rates. Additional analyses suggest that concerns about managerial diversion and public scrutiny may drive these responses. Overall, data leaks appear to change the cost-benefit trade-off of tax strategies in ways that are, on net, favorable to shareholders. |
| Keywords: | offshore subsidiaries, tax havens, data leaks, corporate governance, dividend payouts, reputation repair |
| JEL: | G30 H25 L14 M41 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12435 |
| By: | Julia Cagé; Malka Guillot; Yuchen Huang |
| 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. |
| Keywords: | charitable giving, political donations, tax incentives |
| JEL: | H24 H31 L38 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12444 |
| By: | Johannes Marzian; Christoph Trebesch |
| Abstract: | We study the fiscal consequences of large military buildups. To do so, we assemble the Global Budget Database, a comprehensive dataset of disaggregated central government finances for 20 countries from 1870 to 2022. We identify 114 episodes of military spending booms, in peace and war, and analyze their financing and long-term fiscal legacy. Consistent with theory, wartime booms are financed primarily through debt, while peacetime booms rely on a more balanced mix of debt and taxes. In contrast to the classic notion of “guns versus butter, ” we find little evidence that social spending is cut during military expansions. Instead, when societies rearm, they tend to choose guns and butter, resulting in higher debt, expenditures, and taxes. Debt rises and later falls, but tax rates and tax revenues remain elevated for 15 years or more. Large geopolitical shocks, in war and peace, result in higher taxes and a lasting fiscal expansion. |
| Keywords: | military finance, rearmament, war, fiscal policy, taxes, government debt |
| JEL: | E62 H20 H61 H87 N10 N40 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12469 |
| By: | Janosch Brenzel-Weiss; Winfried Koeniger; Arnau Valladares-Esteban |
| Abstract: | We calibrate a lifecycle portfolio-choice model of homeowners facing uninsurable income risk to show that tax deductions for mortgage interest payments and voluntary pension contributions have sizable effects on household portfolios and macroprudential risks. The deductions reduce the after-tax cost of debt and increase the after-tax return of pension savings so that the mortgage incidence increases and portfolios shift from home equity and liquid assets towards pension savings. Because the consumption responses to a house-price decline are heterogeneous, the distribution of household debt shapes the quantitative effect of the tax deductions on the homeowners' resilience after a house price bust. |
| Keywords: | mortgage amortization, tax incentives, household consumption, portfolio choice, housing busts, economic stability, macroprudential policy |
| JEL: | D14 D15 D31 E21 G11 G21 H24 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12436 |
| By: | Michael Funke; Raphael Terasa |
| Abstract: | Germany has introduced a comprehensive package of staggered business tax breaks to accelerate business investment and give new momentum to economic growth. The key components of the so-called investment booster program are a temporary tax write-off on machinery and other equipment investments to a maximum of 30% in 2025, 2026, and 2027, followed by a stepwise permanent reduction of the corporate tax rate from 15% to 10% between 2028 and 2032. We first present a stochastic general equilibrium (DSGE) modeling setup and baseline results for the enacted unconventional policy measures incentivizing investment, then assess counterfactual policy regimes including various red tape streamlining supply shock scenarios. Overall, the insights into the unconventional reform package provide actionable guidelines for the design of business tax breaks aimed at stimulating investment. |
| Keywords: | business taxation, unconventional fiscal policy, investment, DSGE model, Germany |
| JEL: | E22 E60 H25 Q54 Q58 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12385 |
| By: | Laurence Jacquet; Zhiyang Jia; Thor Olav Thoresen |
| Abstract: | Empirical evidence suggests that social acceptance of redistribution depends on whether income differences result from preferences (of which individuals are responsible) or from circumstances. We propose a new empirical method that measures the importance of preferences in the distribution of welfare in the context of tax reforms. We compare two types of Compensating Variation: the standard CV and a new one (CVcirc), which is computed assuming that individuals differ only in circumstances. To obtain these metrics, we first estimate a structural job choice model that allows us to take the preferences/circumstances dyad into account. We then use the estimated parameters to compute our two metrics, leveraging a tax reform and applying a simulation approach à la McFadden (1999). Implementing our method with Norwegian data, we find that both welfare metrics display a very similar distribution, except at the very top of the households’ income distribution, suggesting this is where responsibility matters. |
| Keywords: | money metric utility, fairness, tax reform, structural labor supply model |
| JEL: | H31 I31 J22 C25 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12418 |
| By: | Arpad Abraham; Pavel Brendler; Eva Carceles-Poveda |
| Abstract: | We study whether redesigning the social security and income tax-transfer systems can deliver significant welfare gains. Our rich quantitative model features both realistic inequality over the lifecycle and the key channels through which redistributive policies can distort aggregate allocations. We find that there are two distinct ways to achieve significant welfare gains. The first prioritizes reducing distortions through a regressive pension system, resulting in higher inequality. The second reduces inequality through progressive pensions, complemented with a less progressive tax system to mitigate the rise in distortions. In both reform types, pension progressivity emerges as a powerful instrument to either manage distortions or redistribute income within generations. Since redistributive instruments turn out to be highly distortionary in our benchmark economy, the policy reducing distortions turns out to be optimal under utilitarian social welfare. |
| Date: | 2026–01–30 |
| URL: | https://d.repec.org/n?u=RePEc:bri:uobdis:25/820 |
| By: | Rüdiger Bachmann; Benjamin Born; Olga Goldfayn-Frank; Georgi Kocharkov; Ralph Luetticke; Michael Weber |
| Abstract: | We exploit Germany’s temporary three-percentage-point VAT cut in the second half of 2020 to study the spending response to unconventional fiscal policy. We use survey and scanner data on household consumption expenditures and their perceived pass-through of the tax change into prices, and a HANK model to quantify the effects of this VAT policy. The survey and scanner data show that the temporary VAT reduction led to a relative increase in durable and, to a lesser extent, semi-durable spending for individuals with high perceived pass-through. According to the HANK model, the VAT policy increased total aggregate consumption spending by 4.4 percent on impact. |
| Keywords: | unconventional fiscal policy, value added tax, household survey data, expectations, consumption, durables, HANK model |
| JEL: | D12 E20 E21 E62 E65 H31 |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_728 |
| By: | Haotian Deng; Sam Desiere; Bart Cockx; Gert Bijnens |
| Abstract: | This paper studies how employment subsidies for start-ups shape their performance. We exploit an unexpected policy reform in Belgium that permanently exempted start-ups hiring their first employee from payroll taxes for that employee. Using firm-level administrative data and a regression-discontinuity-in-time design, we find that subsidized post-reform startups employed fewer workers and generated lower output, value added, and profits compared to pre-reform start-ups. However, post-reform start-ups were more likely to survive as employers. These effects emerged within the first year after hiring and remained stable over a medium horizon of three years. Our findings indicate a compositional shift: the subsidy primarily induced low-productivity firms to enter the market. As most firms nowadays are nonemployers, our results meaningfully generalize the theoretical implications of standard neoclassical entrepreneurship models (employee–employer margin) and fill the important gap of the nonemployer–employer margin. |
| Keywords: | entrepreneurship, start-up, employment subsidy, tax reduction, labor demand; small firms |
| JEL: | H25 J23 J24 J38 L25 L26 M51 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12484 |
| By: | Piera Bello; Vincenzo Galasso; Alessandro Izzo |
| Abstract: | This paper examines how policy uncertainty influences retirement decisions. We develop a simple model in which individuals face a one-time choice between immediate retirement and continued employment until the statutory retirement age. In the absence of policy uncertainty, retirement decisions depend solely on the standard income–leisure trade-off. When future pension reforms are uncertain, however, individuals also take into account the perceived risk of increases in the retirement age or reductions in benefit generosity, and may choose to accept the offer in order to lock in current pension rules. Using administrative data from a large Italian bank that offered a one-time early-retirement scheme in 2017, we find that acceptance rates decline with the expected income loss but rise with the number of years to retirement. These patterns are consistent with workers using early retirement as an insurance against potential policy changes, underscoring the importance of incorporating behavioural responses to policy uncertainty in the design of pension systems. Our findings suggest that individuals with an average annual income of €35, 000 are willing to pay an annual premium of €481 to insure against the probability that the pension system is reformed. |
| Keywords: | retirement, social security, loss aversion, uncertainty, pension reform |
| JEL: | D91 H55 J14 J26 J38 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12488 |
| By: | Lassila, Jukka; Valkonen, Tarmo; Kauppi, Eija |
| Abstract: | Abstract This study evaluates the reforms proposed by the Ministry of Social Affairs and Health for the earnings-related pension system in the 2025 legislative proposal. The proposed reform would allow private-sector pension institutions to take on greater investment risk. According to Etla’s assessment, the investment reform would increase expected returns and strengthen public finances, as intended. The proposal also includes increased prefunding of old-age pensions, which is justified from an intergenerational perspective. The proposed index limiter, however, is problematic: while it would remove incentives to retire early when real wages decline, it would simultaneously and permanently reduce the purchasing power of pensions across age cohorts in an arbitrary manner, regardless of whether such cuts are warranted. Overall, the legislative proposal leaves open what would occur if investment returns fall short of expectations or, conversely, exceed projections over an extended period. Adoption of the proposal would imply that further reforms are likely and that labour market organizations would retain control over this central component of social security and over Finland’s largest—and, following the reform, likely expanding—concentration of assets. |
| Keywords: | Earnings-related pension system, Pension reform, Investment activity, Numerical overlapping-generations model |
| JEL: | H55 G23 D91 |
| Date: | 2026–02–18 |
| URL: | https://d.repec.org/n?u=RePEc:rif:report:173 |