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on Public Economics |
| By: | Tim Bayer; Lenard Simon; Jakob Wegmann |
| Abstract: | To collect income taxes, almost all countries require employers to withhold monthly tax prepayments which are then fully credited against the őnal income tax liabilities of their employees. Despite being a fundamental component of income taxation systems worldwide, the impact of these withholding taxes on labor supply is poorly understood. We investigate their importance in the context of married couples in Germany where the withholding tax liability can be redistributed between spouses. We exploit a reform that reduced the withholding tax for some marriedwomen more than for others, while inducing no differences in income taxes. Using administrative data for the full population of German taxpayers, we estimate an elasticity of labor income with respect to the withholding tax eight years after the reform of 0.14. Additional evidence from a self-conducted survey suggests imperfect understanding of the tax system and limited pooling of resources within the household as the main mechanisms. As the majority of couples shift parts of the withholding tax liability from the husband to the wife, our results suggest that the increased withholding tax liability of married women contributes to their low labor supply. This highlights the need for governments to be aware of the distortion of labor supply incentives when the design of withholding taxes does not match actual income tax incentives. |
| Keywords: | Withholding Taxes, Income Taxation, Gender, Labor Supply |
| JEL: | H21 H31 J16 J20 K34 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_631 |
| By: | Ropponen, Olli |
| Abstract: | Abstract This report examines the behavioral effects of inheritance, estate and gift taxes. It also provides an overview of inheritance, estate and gift tax practices in other countries, as well as the reasons that led to the abolition of inheritance taxes in Sweden and Norway. Economic literature acknowledges various behavioral responses to inheritance, estate and gift taxes from both the bequeather and the heir, with wealthier individuals demonstrating greater sensitivity to such taxes. These responses encompass both real behavioral changes (such as migration) and tax avoidance strategies. These behavioral distortions affect both the efficiency and revenue-raising potential of inheritance, estate and gift taxes. Among OECD countries, a significant number impose inheritance, estate and gift taxes, while others do not, some have abolished them, and a few have never implemented such taxes. Among Nordic countries, Sweden and Norway have abolished these taxes, citing several reasons: they were seen as obstacles to the intergenerational transfer of family businesses, their administrative burden was deemed high, and compared to the administrative burden the revenues collected were relatively low. Additionally, the taxes facilitated tax planning opportunities and were perceived as inequitable. |
| Keywords: | Inheritance, estate and gift tax, Behavioral responses, Tax elasticities, Tax avoidance |
| JEL: | D9 H24 H26 H3 |
| Date: | 2025–01–28 |
| URL: | https://d.repec.org/n?u=RePEc:rif:report:157 |
| By: | Rosella Levaggi; Francesco Menoncin; Andrea Modena |
| Abstract: | Tolerating tax evasion may increase debt less than an equivalent tax cut. In our model, utility-maximizing entrepreneurs earn income from risky production technologies and risk-free bonds. The government uses income taxes and bonds to finance its expenses. Entrepreneurs can evade taxes at the risk of being audited and fined. Aggregate tax evasion and debt-to-GDP are positively related in equilibrium. Nevertheless, reducing effective tax rates by tolerating evasion may generate a lower debt-to-GDP ratio (but also lower growth) than equivalent debt-financed nominal tax cuts. Policies are equivalent with log utility. |
| Keywords: | Dynamic tax evasion; general equilibrium; public debt. |
| JEL: | D5 E6 H2 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_623 |
| By: | Johannes Fleck; Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante |
| Abstract: | Combining a variety of survey and administrative data, this paper measures the progressivity of taxes and transfers at the U.S. federal level and separately for each state. The findings are as follows. (i) The federal tax and transfer system is progressive. (ii) State and local tax and transfer systems are close to proportional, on average. (iii) There is substantial heterogeneity in tax levels and tax progressivity across states. (iv) States that are funded mostly by sales and property taxes tend to have regressive tax systems and low average tax rates. States that are funded mostly by income taxes tend to have progressive tax systems and high average tax rates. (v) Regressive states are concentrated in the South and attract more inter-state net migration, especially of high-income migrants. (vi) State progressivity has remained broadly stable between 2005 and 2016. (vii) Incorporating corporate income and business taxes decreases average state progressivity but increases federal progressivity. (viii) Including spending on public goods and services as a transfer has a large positive impact on measured progressivity. |
| JEL: | E60 H10 R28 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33385 |
| By: | Laura Montenbruck |
| Abstract: | This article provides evidence that increased salience of public service provision can strengthen the social contract and increase tax compliance in a low-capacity setting. I conduct a field experiment randomizing information about public service provision across 5, 494 property owners and tenants in Freetown, Sierra Leone. Receiving information increases property tax payments by 20% on average. The effect is driven by increases in tax compliance on both the extensive and intensive margin. Residents of low-value properties are 7–16 percentage points more likely to pay taxes when informed about public services that are both geographically accessible and respond to the citizens’ most urgent needs, suggesting a benefit-based approach to taxation. Revenue effects are largely driven by residents of high-value properties, who depend less on the public provision of services, and for whom the treatment seems to act as a more general signal of government performance. |
| Keywords: | Social contract, Property tax, Public services, Tax compliance |
| JEL: | H20 O23 D73 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_620 |
| By: | Berliant, Marcus; Gouveia, Miguel |
| Abstract: | The literatures dealing with voting, optimal income taxation, implementation, and pure public goods are drawn on here to address the problem of voting over income taxes to finance a public good. In contrast with previous articles, general nonlinear income taxes that affect the labor-leisure decisions of consumers who work and vote are allowed. Uncertainty plays an important role in that the government does not know the true realizations of the abilities of consumers drawn from a known distribution, but must meet the realization-dependent budget; the tax system must be robust. Even though the space of alternatives is infinite dimensional, conditions on primitives are found to assure existence of a majority rule equilibrium. |
| Keywords: | Voting; Income taxation; Public good; Robustness |
| JEL: | D72 D82 H21 H41 |
| Date: | 2025–01–16 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123368 |
| By: | Silvia Appelt; Matej Bajgar; Chiara Criscuolo; Fernando Galindo-Rueda |
| Abstract: | Recent firm-level studies find R&D tax incentives to be much more effective at stimulating firms' R&D investment than what aggregate analyses indicate. Based on a distributed analysis of official R&D survey and administrative tax relief micro-data for 19 OECD countries, we show that two factors can reconcile these contrasting results. Firstly, a limited uptake of R&D tax incentives in most countries makes aggregate studies underestimate the effectiveness of R&D tax incentives. Secondly, R&D tax incentives are (much) less effective for large and R&D-intensive firms, which account for a small share of R&D-performing firms but most aggregate R&D tax relief, making firm-level studies overstate the aggregate effectiveness of R&D tax incentives. |
| Keywords: | mental health, employment, earnings, policy evaluation, psychological therapies |
| Date: | 2025–01–29 |
| URL: | https://d.repec.org/n?u=RePEc:cep:cepdps:dp2071 |
| By: | Gkolfinopoulou, Michalitsa; Theophilopoulou, Angeliki |
| Abstract: | This study investigates the impact of discretionary tax cuts on income and consumption inequality in the United Kingdom. Using granular survey data from approximately 340, 000 households, we construct quarterly inequality measures spanning 1970 to 2020 to assess the heterogeneous effects of exogenous tax shocks on income and consumption distributions. Employing a structural VAR framework, we find that tax cuts increase inequality in the UK. Specifically, a 1 percent tax cut leads to a 2 percent rise in the Gini coefficients of gross income and consumption within a year, with these effects persisting for nearly three years. The rise in inequality is primarily driven by increased labour earnings from full-time and part-time employment among middle- and high-income households, while low-income households experience a slight negative impact due to reduced social security income. Additionally, temporary reductions in VAT induce a short-term decline in CPI inflation, disproportionately boosting consumption among wealthier households. These findings highlight the unequal distributional effects of tax policy and its implications for inequality dynamics. |
| Keywords: | Tax shocks; income and consumption inequality; Bayesian SVARs |
| JEL: | C11 D31 E62 H20 |
| Date: | 2025–01–25 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123457 |
| By: | Thomas Breda (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, Ecole Normale Supérieure - UMNG - Université Marien-Ngouabi [Université de Brazzaville] = Marien Ngouabi University [University of Brazzaville], PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Luke Haywood (MCC - Mercator Research Institute on Global Commons and Climate Change - PIK - Potsdam Institute for Climate Impact Research, Leibniz Association); Haomin Wang (Cardiff Business School - Cardiff University) |
| Abstract: | We quantify the unintended effects of a low-wage payroll tax reduction using an equilibrium search model featuring bargaining, worker and firm productivity heterogeneity, labor taxes, and a minimum wage. The decentralized economy is inefficient due to search externalities and labor market policies. We estimate the model using French data and find that a significant reduction in low-wage payroll taxes in 1995 leads to an overall improvement in economic efficiency by increasing employment and correcting existing policy distortions that disincentivize labor force participation. However, the tax reduction, by increasing labor force participation among low-productivity workers and vacancy postings by low-productivity firms, results in negative but minor spillover and reallocation effects due to congestion. We find that the optimal policy mix is a lower minimum wage and lower payroll taxes compared to the policies in place in the early 1990s. |
| Keywords: | Payroll tax, Minimum wage, Equilibrium job search, Worker and firm heterogeneity |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04873024 |
| By: | Julien Albertini (University Lumière Lyon 2, CNRS, Université Jean Monnet Saint-Etienne, emlyon business school, GATE, 69007, Lyon, France); Arthur Poirier (LEDa, Paris Dauphine University); Anthony Terriau (GAINS, Le Mans University) |
| Abstract: | Introduced in France in the 1990s to reduce the cost of low-skilled labor, payroll tax reductions on low wages were later expanded and extended to higher wages. This study evaluates the impact of the current payroll tax schedule on employment, fiscal surplus, and welfare. We develop a life-cycle matching model in which workers are heterogeneous in terms of age, education, human capital, family status, hours worked and idiosyncratic productivity, and where search effort, hiring and separations are endogenous. Accounting for interactions with the socio-fiscal system, we demonstrate that reducing payroll tax cuts for low wages would result in declines in both employment and fiscal surplus. Furthermore, we show that increasing the minimum wage would significantly reduce employment and fiscal surplus, with the magnitude of the effect depending on whether the payroll tax schedule and other socio-fiscal measures are indexed to the minimum wage. Lastly, we identify the optimal payroll tax schedule, revealing that employment, fiscal surplus, and welfare can all be improved by increasing payroll tax reductions for wages near the minimum wage while reducing them for wages exceeding twice the minimum wage. |
| Keywords: | Payroll Tax Reductions; Minimum Wage; Search and Matching; Life Cycle |
| JEL: | J23 J31 J32 J38 J64 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:gat:wpaper:2501 |
| By: | Korpela, Heikki |
| Abstract: | I study the potential effects of introducing experience rating for the unemployment insurance tax in Finland. I simulate an array of potential rating systems using register data for all wages and unemployment from 2001 to 2021. Under the current tax regime, about half of all unemployment costs are attributable to employers who pay less than 10% of the UI tax. All the simulated systems would significantly reduce this discrepancy but also differ markedly from each other. The choices in designing the system are reflected in its administrative burden, how strongly it incentivises hirings and discourages dismissals, and how quickly it responds to employment changes. |
| Keywords: | unemployment insurance, experience rating, Labour markets and education, D22, H25, H71, J32, J38, J65, fi=Sosiaaliturva|sv=Social trygghet|en=Social security|, fi=Työmarkkinat|sv=Arbetsmarknad|en=Labour markets|, fi=Verotus|sv=Beskattning|en=Taxation|, |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:fer:wpaper:173 |
| By: | Andrey Timofeev (International Center for Public Policy, Georgia State University) |
| Abstract: | I attempt to reconcile two vast strands of literature that essentially estimate the same empirical relationship. Tax effort studies aim to benchmark a countryÕs tax-to-GDP ratio to tax outcomes observed in other countries under comparable conditions, in particular under similar levels of economic development, proxied with the real GDP per capita. A completely separate strand of literature deals with estimating tax buoyancy, which is measured as the percentage change in tax revenue associated with a 1-percent change in GDP. While dealing with some of the same data (tax revenues and GDP) as in the tax effort studies, the tax buoyancy literature has developed econometric methods that are more robust to the empirical challenges presented by these data. In this paper, I establish correspondence between the statistical parameters estimated in these two separate strands of literature. Thus, I show that an estimate of long-run buoyancy can be translated into the magnitude of the impact of economic development on the tax-to-GDP ratio by making adjustments for how the population size and real exchange rate interact with economic growth. |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:ays:ispwps:paper2417 |
| By: | Yang, Tianli (Renmin University of China); Zhao, Zhong (Renmin University of China) |
| Abstract: | The Chinese government announced the pilot of public long-term care insurance (LTCI) policy in 2016. While most studies focus on LTCI's effects on labor supply and retirement behavior, its effect on retirement intentions, which offer certain advantages over actual behavior, remains unclear. This study applies the difference-in-differences design to estimate the effect of LTCI on urban workers' retirement intentions based on the Chinese Longitudinal Healthy Longevity Survey. The results indicate that LTCI significantly increases the probability of intentions to delay retirement and intended retirement age, especially for the LTCI providing both service and cash benefits. Moreover, the effects are larger and more significant among subgroups, including women, self-employed workers and workers' family members with LTCI eligibility, as these sub-samples are more likely to be caregivers and caregivers' effect is larger. Mechanism analysis reveals that LTCI reduces time support within the family and improves mental health, both of which contribute to delayed retirement intentions. The negative effect of mitigating precautionary saving motives caused by LTCI also exists but subtler. Overall, these empirical evidences support that LTCI helps shape workers' retirement intentions. |
| Keywords: | long-term care insurance, retirement intentions, difference-in-differences, China |
| JEL: | H55 I28 J14 J26 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17642 |
| By: | Lucie Schmidt; Lara Shore-Sheppard; Tara Watson |
| Abstract: | Though Social Security is typically considered a program to support retirees, nearly one in ten children live in a home with Social Security income. Children are substantially more likely to live with an older adult than they were two decades ago, and they are twice as likely to report Social Security income in their household as traditional cash welfare. We use the sharp increase in eligibility for Social Security benefits at age 62 to investigate the role played by the Social Security program in childhood economic resources among children who live with their grandparents. We do not find that Social Security eligibility increases household income on average, but it is associated with a shift towards Social Security income and reductions in deep poverty. We also see increased availability of household members’ time for home production. |
| JEL: | H55 I38 J1 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33381 |