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on Public Economics |
| By: | Thomas Aronsson (University of Umea, Sweden and University of Graz, Austria); Olof Johansson-Stenman (University of Gothenburg, Sweden) |
| Abstract: | We analyze optimal redistributive income taxation within a Mirrleesian framework that incorporates other-regarding preferences, examining both a general model and four specific cases. Two of these reflect self-centered inequality aversion, based on models by Fehr & Schmidt and Bolton & Ockenfels, respectively, while the other two reflect non-self-centered inequality aversion, where individuals prefer a low Gini coefficient and a high minimum disposable income. We find that other-regarding preferences can substantially increase the income tax rates, including top income tax rates, and enhance the overall redistribution. Furthermore, different types of other-regarding preferences have markedly different implications for optimal taxation. |
| Keywords: | Optimal Taxation, Redistribution, Social Preferences, Inequality Aversion. |
| JEL: | D62 D90 H21 H23 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:grz:wpaper:2024-22 |
| By: | Enid Slack (University of Toronto); Joan Youngman (Lincoln Institute of Land Policy and the World Bank) |
| Abstract: | This paper begins with the basic "big picture, " focusing on the benefits the property tax offers as a tool for fiscal decentralization. We then look at property taxes "from the ground up" to determine what is needed to make the tax succeed today Ð the right tax base, workable valuation methods, the right tax rate, appropriate tax relief, and adequate responses to real-life challenges. We end with a discussion of how a well-functioning property tax can also serve other purposes besides supplying revenue for local governments -- as a value-capture instrument, as a form of wealth taxation, and as a way to reduce pressure on land transfer taxes. |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:ays:ispwps:paper2410 |
| By: | Vanessa Heinemann-Heile (Paderborn University) |
| Abstract: | I investigate whether a machine learning model can reliably predict firms’ tax rate perception. While standard models assume that decision-makers in firms are perfectly informed about firms’ tax rates and tax implications, also their tax rate perception influences the way in which they incorporate taxes into their decision-making processes. However, studies examining firms’ tax rate perception and its consequences remain scarce, mostly due to a lack of observations of firms’ tax rate perception. Using a dataset of German SMEs, I apply machine learning in the form of Extreme Gradient Boosting, to predict firms’ tax rate perception based on firm and personal characteristics of the decision-maker. The results show that Extreme Gradient Boosting outperforms traditional OLS regression. The model is highly accurate, as evidenced by a mean prediction error of less than one percentage point, produces reasonably precise predictions, as indicated by the root mean square error being comparable to the standard deviation, and explains up to 23.2% of the variance in firms’ tax rate perception. Even based on firm characteristics only, the model maintains high accuracy, albeit with some decline in precision and explained variance. Consistent with this finding, Shapley values highlight the importance of firm and personal characteristics such as tax compliance costs, tax literacy, and trust in government for the prediction. The results show that machine learning models can provide a time- and cost-effective way to fill the information gap created by the lack of observations on firms’ tax rate perception. This approach allows researchers and policymakers, to further analyze the impact of firms’ tax rate perception on tax reforms, tax compliance, or business decisions. |
| Keywords: | Tax Rate Perception, Business Taxation, Prediction, XGBoost, Shapley |
| JEL: | H25 D91 C8 C53 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:pdn:dispap:128 |
| By: | Benjamin Ching; Chelsey Reid; Luke Symes (The Treasury) |
| Abstract: | This note is the second in a two-part series that seeks to improve our understanding of effective average tax rates (EATRs) in New Zealand. EATRs measure the net effect of taxes and transfers as a proportion of a taxpayer’s income. Measuring EATRs can provide insight into some important questions with implications for the fairness and efficiency of the tax and transfer system: Who pays tax and who receives transfer payments? How much do they pay or receive? Where might taxes and transfers distort decisions to save and invest? This series focuses on the first two questions and what EATRs can tell us about progressivity (defined as having higher tax rates and lower transfer rates for higher levels of income or wealth). Measuring EATRs can also help us to identify tax distortions caused by the inconsistent tax treatment of different types of income. Such distortions can create allocative inefficiencies and reduce productivity. This work stems from a recommendation by the Tax Working Group Secretariat (2018, recommendation 69) that ‘strongly encouraged’ the Government to release more statistical and aggregated information about the tax system. A lack of data on the distribution of capital gains prevented the Tax Working Group from being able to provide precise impact analysis of extending the taxation of capital gains. Closing this knowledge gap is particularly important because capital gains can be a significant source of economic income. |
| JEL: | C81 D31 E21 H24 H71 I38 |
| Date: | 2023–04–26 |
| URL: | https://d.repec.org/n?u=RePEc:nzt:nztans:an23/03 |
| By: | Fadzayi Chingwere; Matthew Clance; Nicky Nicholls; Aimable Nsabimana; Eleni Yitbarek |
| Abstract: | This study examines the impact of tax incentives on charitable donations within South Africa, with a focus on donations declared on individuals' tax returns. Leveraging the universe of South African tax administrative data spanning over a decade (2011-21), we apply the bunching approach to assess how individual taxpayers respond to donation tax incentives. |
| Keywords: | Tax incentive, Tax policy, South Africa |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:unu:wpaper:wp-2024-72 |
| By: | Ciyata Coleman; Charles Hokayem; Sanghun (Eric) Kim; Ethan Krohn; Krishnan Patel; Dean Plueger |
| Abstract: | The Earned Income Tax Credit (EITC), enacted in 1975, offers a refundable tax credit to low income working families. This paper provides taxpayer and dollar participation estimates for the EITC covering tax year 2021. The estimates derive from an approach that relies on linking the 2022 Current Population Survey Annual Social and Economic Supplement (CPS ASEC) to IRS administrative data. This approach, called the Exact Match, uses survey data to identify EITC eligible taxpayers and IRS administrative data to indicate which eligible taxpayers claimed and received the credit. Overall in tax year 2021 eligible taxpayers participated in the EITC program at a rate of 78 percent while dollar participation was 81 percent. |
| Keywords: | Earned Income Tax Credit, Participation |
| JEL: | H24 H31 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:cen:wpaper:24-75 |
| By: | Thomas Aronsson (University of Umea, Sweden and University of Graz, Austria); Olof Johansson-Stenman (University of Gothenburg, Sweden) |
| Abstract: | A substantial body of empirical and theoretical research suggests that individuals care about, and derive instrumental benefits from, their rank in society. This paper extends the Mirrleesian model of optimal income taxation to a framework where individuals derive utility from their perceived ability rank. Such concerns generate externalities that tend to increase the optimal marginal tax rates for both corrective and redistributive reasons. While empirical evidence on the magnitude of these concerns is limited, their potential impact on optimal income taxation could be substantial, with top marginal income tax rates potentially exceeding 90%. |
| Keywords: | Redistributive taxation, ability, ordinal comparisons, externalities. |
| JEL: | D62 D82 D90 H21 H23 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:grz:wpaper:2024-21 |
| By: | Jaylson Jair da Silveira; Gilberto Tadeu Lima; Leonardo Barros Torres |
| Abstract: | There is considerable empirical evidence that heterogeneity in tax compliance behavior is persistent and pervasive. This paper develops an evolutionary analytical framework in which taxpayers periodically choose between to comply or not to comply with their tax obligations. Aggregate demand formation arising from private and public expenditures depends on the frequency distribution of tax compliance behavior across taxpayers, so that the macrodynamic of the rates of capacity utilization and output growth is coevolutionarily coupled to the microdynamic of tax compliance across individuals. The analytical framework set forth here replicates several pieces of evidence on tax evasion. First, the proportion of non-complying taxpayers (and hence the volume of tax evasion) depends on the tax rate and the expected cost of tax evasion. Second, heterogeneity in tax compliance behavior is evolutionarily persistent instead of temporary. Third, the immediate impact of a change in the proportion of tax evading individuals on the rates of capacity utilization and output growth is non-linear. Fourth, the proportion of non-complying taxpayers and the rates of capacity utilization and output growth vary positively with the tax rate in the evolutionary equilibrium. |
| Keywords: | Tax evasion; evolutionary dynamics; heterogeneous behavior; capacity utilization; economic growth |
| JEL: | B52 C73 E12 E70 H26 |
| Date: | 2025–01–07 |
| URL: | https://d.repec.org/n?u=RePEc:spa:wpaper:2025wpecon1 |
| By: | James Alm (Department of Economics, Tulane University, New Orleans, LA USA); Zehra Farooq (Federal Board of Revenue, Ministry of Finance, Federal Government of Pakistan, Islamabad, Pakistan) |
| Abstract: | When discussing local government taxation in developing countries, it is impossible to avoid the conclusion that most all local governments in most all developing countries around the world simply fail to collect taxes in amounts sufficient to provide desired and needed government services. What accounts for this failure? And what can be done to address this failure? It is these two basic questions what we seek to address Ð if not necessarily to answer Ð here. Our first conclusion is an obvious and well-known one: the main reason for low tax collections is that local governments in developing countries have been assigned largely unproductive tax sources, taxes that are often difficult to administer, lack buoyancy, and allow little discretion to local governments. Our second conclusion may seem less obvious and in fact is driven largely by results from the tax compliance literature: tax collections, especially property tax collections, can be increased by local government policy initiatives that increase tax compliance by improving citizen trust in government, and these initiatives can be implemented quickly and effectively in many if not all settings. In the process we also discuss several other dimensions of local taxation in developing countries. |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:ays:ispwps:paper2406 |
| By: | Benjamin Ching (The Treasury) |
| Abstract: | This note is the first in a two-part series that seeks to improve our understanding of effective average tax rates (EATRs) in New Zealand. EATRs measure the net effect of taxes and transfers as a proportion of a taxpayer’s income. Measuring EATRs can provide insight into some important questions with implications for the fairness and efficiency of the tax and transfer system: Who pays tax and who receives transfer payments? How much do they pay or receive? Where might taxes and transfers distort decisions to save and invest? This series focusses on the first two questions and what EATRs can tell us about progressivity (defined as having higher tax rates and lower transfer rates for higher levels of income or wealth). Measuring EATRs can also help us to identify tax distortions caused by the inconsistent tax treatment of different types of income. Such distortions can create allocative inefficiencies and reduce productivity. |
| JEL: | C81 D31 E21 H24 H71 I38 |
| Date: | 2023–04–26 |
| URL: | https://d.repec.org/n?u=RePEc:nzt:nztans:an23/02 |
| By: | Isaak, Niklas (RWI); Jessen, Robin (RWI) |
| Abstract: | How much does society value redistribution? The common method to derive inverse-optimum welfare weights is by inverting an optimal-tax model. Our alternative imposes fewer restrictions on labor supply and enables comparisons across household types. We use a structural labor supply model to calculate the marginal value of public funds for various small tax reductions, directly linked to welfare weights. An application to Germany finds: i) The tax-transfer system is optimal if society values one additional Euro for the bottom decile three times as much as for the median. ii) At low-medium incomes, weights for couples exceed those for singles substantially. |
| Keywords: | inverse optimum, microsimulation, marginal value of public funds, social welfare function, optimal taxation, labor supply, efficiency |
| JEL: | H21 H31 J22 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17566 |
| By: | William F. Fox (University of Tennessee, Knoxville); George R. Zodrow (Baker Institute for Public Policy, Rice University) |
| Abstract: | This paper begins with a summary of the general consensus among public sector economists regarding subnational tax assignment. We then examine how technological advances in a rapidly evolving and increasingly digital economy are altering the capacity of subnational governments to effectively impose some of their traditional broad-based taxes and discuss some major structural reforms that might facilitate continuing to raise revenues using these tax instruments. These economic changes are more likely to affect larger cities and more developed countries than lower-income cities and countries that often rely on simpler revenue structures. Nevertheless, the impacts of these technological changes will be felt across the world over time, and national and subnational governments in lower-income countries will eventually experience the same issues with their tax instruments as more developed jurisdictions. In any case, these economic changes will require many difficult policy decisions both within individual governments and in governmental interactions to yield workable subnational tax structures, given the increasingly digital nature of economic activity and the impacts of ever-changing technologies. Moreover, the accelerating pace of change creates pressures on governments to adapt more quickly than in the past Ð a potentially difficult task, given that history indicates that revenue sources are typically changed very infrequently. |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:ays:ispwps:paper2411 |
| By: | Anastasios G. Karantounias (University of Surrey) |
| Abstract: | This paper extends the dynamic theory of optimal fiscal policy with a representative agent in several environments by using a generalized version of recursive preferences. I allow markets to be complete or incomplete and study optimal policy under commitment or discretion. The resulting theories are interpreted through the excess burden of taxation, a multiplier, whose evolution gives rise to different notions of “tax-smoothing.” Variants of a law of motion in terms of the inverse excess burden emerge when we allow for richer asset pricing implications through recursive preferences. I highlight a common unifying principle of taxation and debt issuance in all environments that revolves around interest rate manipulation: issue new debt and tax more in the future if this can lead to lower interest rates today. |
| Keywords: | Excess burden, tax smoothing, recursive utility, commitment, discretion, statecontingent debt, incomplete markets, martingale, fiscal hedging |
| JEL: | D80 E62 H21 H63 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:cfm:wpaper:2444 |
| By: | Andrew R Donaldson (SALDRU, University of Cape Town) |
| Abstract: | South Africa’s Youth Employment Incentive is described in this paper and its impact is reviewed. It is argued that in the context of South Africa’s deep structural unemployment, neither the empirical evidence nor the underlying theory supports the current narrowly targeted wage subsidy design. Drawing in part on comparison with the US earned income tax credit, recommendations are outlined for reform of the current youth incentive in favour of a broad-based employment subsidy. Illustrative cost estimates for alternative design parameters are set out, together with a concluding note on financing considerations. |
| Keywords: | Wage subsidies, employment policy, tax incentives, South Africa |
| JEL: | J38 H25 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ldr:wpaper:310 |
| By: | Tod Wright; Hien Nguyen (The Treasury) |
| Abstract: | Analyses of the distributional impact of taxation and government spending typically focus on individuals’ and households’ disposable income – the income they receive “in the hand” after accounting for the transfers they receive from the government, minus the income taxes they pay. A broader perspective is given by fiscal incidence studies, which also consider the taxes households pay on their consumption and the government expenditure on the in-kind benefits they receive, to estimate their so-called final income. In this analytical note we report results for fiscal incidence in the 2018/19 tax year. We augment results for household disposable income produced by the Treasury’s TAWA model with estimates of the consumption taxes that households pay and the cost to the government of the education and health services that they receive. Our analysis broadly follows the approach of previous Treasury publications (Crawford and Johnston, 2004; Aziz et al., 2012). We present results for the distributions of household market, disposable, and final income – and the components of income support, income and consumption taxes, and in-kind benefit spending by which they are related – over deciles of household equivalised disposable income. We also estimate the corresponding distribution of the net fiscal impact, which is the net effect of these four classes of taxation and spending. We estimate Gini coefficients and Lorenz curves corresponding to various definitions of household income. Finally, identifying retired households based on the retirement status of their members and the primary sources of their income, we contrast the distribution of net fiscal impact for these households to that for the complementary set of non-retired households. |
| JEL: | H22 D31 H50 I38 |
| Date: | 2024–03–19 |
| URL: | https://d.repec.org/n?u=RePEc:nzt:nztans:an24/01 |
| By: | François Vaillancourt |
| Abstract: | This paper presents evidence on the evolution of both the complexity of the personal income tax system and the compliance costs incurred by personal income tax filers(PIT) in Canada. The complexity is measured using three indicators: ;length of federal income tax code(1971-2018), number of federal PIT expenditures(1981-2014) and length of PIT forms (2000-2015) .All three indicators show an increase in complexity. The compliance costs of the PIT are calculated using survey information gathered from individual canadians on time expanded and amount spent the following year for the 1985, 2007, 2018 and 2022 tax filing /calendar years. Our results show a decrease in the PIT compliance costs in hours, in total value and as share of GDP and revenues collected. This drop compliance costs is most likely due to the increasing use of software by tax filers to prepare their tax returns; this allows them, amongst other things, to download information from the Revenue agencies. A tax pain index combining complexity and compliance costs is put forward ; its small growth over time may well explain why increasing tax complexity of the PIT in Canada is apparently well tolerated. Cet article présente des résultats sur l'évolution de la complexité du système d'impôt sur le revenu des particuliers et des coûts de conformité encourus par les déclarants de l'impôt sur le revenu des particuliers (IRP) au Canada. La complexité est mesurée à l'aide de trois indicateurs : la longueur du code fédéral des impôts sur le revenu (1971-2018), le nombre de dépenses fédérales PIT (1981-2014) et la longueur des formulaires PIT (2000-2015). Les trois indicateurs montrent une augmentation de la complexité. Les coûts d'observation de l'IRP sont calculés à l'aide de données d'enquête recueillies auprès de particuliers canadiens sur le temps passé et le montant dépensé l'année suivante pour les années civiles/de déclaration de revenus 1985, 2007, 2018 et 2022. Nos résultats montrent une diminution des coûts de conformité associés avec l’IRP en heures, en valeur totale et en part du PIB et des revenus collectés. Cette baisse des coûts de conformité est très probablement due à l'utilisation croissante de logiciels par les déclarants pour préparer leurs déclarations de revenus ; cela leur permet, entre autres, de télécharger des informations auprès des agences fiscales. Un indice de ‘’douleur’’ fiscale combinant complexité et coûts de conformité est proposé ; sa faible croissance au fil du temps pourrait bien expliquer pourquoi la complexité fiscale croissante de l’IRP au Canada est apparemment bien tolérée. |
| Keywords: | Tax complexity, compliance costs, personal income tax, Canada, Complexité fiscale, coûts de conformité, impôt sur le revenu personnel, Canada |
| JEL: | H20 H24 H29 |
| Date: | 2024–12–09 |
| URL: | https://d.repec.org/n?u=RePEc:cir:cirwor:2024s-13 |
| By: | Jodie Keane; Hazel Granger; Prachi Agarwal; Maximiliano Mendez-Parra |
| Abstract: | Nowadays, all policy makers must engage with direct and indirect carbon pricing issues. However, the implications of different types of tools and methods to price carbon and support decarbonization deserve further attention in view of their development implications. Two aspects—revenue recycling and complementary policies—are critical when it comes to ensuring that carbon pricing and taxation measures are supportive of broader sustainable structural economic transformation and help to avoid a 'green squeeze'. |
| Keywords: | Carbon pricing, Carbon tax, Revenue, Redistribution |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:unu:wpaper:wp-2024-85 |
| By: | Herget, Anna (University of Erlangen-Nuremberg); Riphahn, Regina T. (University of Erlangen-Nuremberg) |
| Abstract: | Many countries subsidize low-income employments or small jobs. These subsidies and their phasing out can generate labor market frictions and distort incentives. The German Minijob program subsidizes low-income jobs. It generates a 'Minijob trap' with substantial bunching along the earnings distribution. Since 2003, the newly introduced Midijob subsidy aims to reduce the Minijob-induced notch in the net earnings distribution. Midijobs reduce payroll taxes for employments above the Minijob earnings ceiling. We investigate whether introducing Midijobs reduced the Minijob trap. We apply a regression discontinuity design using administrative data and a difference-in-differences estimation using survey data. While in both cases our results show a small positive overall effect of Midijobs on transitions out of Minijobs, they are effective only for a narrow treatment group. |
| Keywords: | Midijobs, Minijobs, payroll tax subsidy, causal effects, difference-in-differences, regression discontinuity, SOEP, SIAB |
| JEL: | J21 J38 H24 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17587 |
| By: | Tod Wright; Hien Nguyen (The Treasury) |
| Abstract: | In this analytical note we report results of a calculation of the final incomes of individuals in New Zealand in tax year 2018/19. An individual’s final income, like their disposable income, adds any income support payments they receive to their market income (from their wage or salary and investments), while accounting for the direct taxes they pay. However, final incomes go beyond this by incorporating both the value of government spending on social services that individuals receive and the indirect taxes they pay on their consumption. The final income concept thus offers a more comprehensive picture of an individual’s income and living standards than is provided by analyses of their market or disposable income alone. We apply a sharing rule to account for the distribution of disposable incomes and indirect taxes such as goods and services tax (GST) within families and households. Combining these shared incomes and taxes with estimates of in-kind spending on education and health services that individuals receive yields their final incomes. We present results for the average market, disposable, and final incomes of individuals in five-year age groups and quantify the inequality of the distribution of each of these income types in each group by their Gini coefficients. Our analysis also covers the various tax and spending components that contribute to final incomes, and the net fiscal impacts of these components, across the age range. We further consider the distributions of the three income concepts over age groups in four distinct family types. These estimates provide a characterisation of the effects of fiscal policies on the incomes of individuals across the course of their lives. |
| JEL: | H22 D31 H50 I38 |
| Date: | 2024–11–13 |
| URL: | https://d.repec.org/n?u=RePEc:nzt:nztans:an24/09 |
| By: | Luis Ayala |
| Abstract: | European tax-benefit systems play a crucial role in providing social insurance and mitigating economic risks, thereby reducing income inequality and fostering social cohesion. They also play a vital role in providing resilience during economic shocks. Despite their stabilizing impact, these systems face the challenge of addressing new social transitions, such as changes in economic activity locations and labour market transformations. This report aims to summarize some of these issues, paying special attention to the problems of income instability. We find that the tax-benefit systems in EU countries play a crucial role in stabilizing incomes during economic downturns, although their effectiveness varies across countries. Strengthening these systems is also necessary to support middle-income groups and enhance inter- and intragenerational income mobility. Tax benefit systems generally increase income mobility, but their impact has declined in many EU countries since the early 21st century, indicating a need for stronger and more consistent policy interventions. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:ipt:iptwpa:jrc139510 |
| By: | Guner, Nezih (CEMFI); Rauh, Christopher (University of Cambridge); Ventura, Gustavo (Arizona State University) |
| Abstract: | How substantial are means-tested transfers in the United States? How have these transfers evolved over time, and what is their impact on the income distribution? We use microdata from the Survey of Income and Program Participation to document the scope of the main means-tested programs for households headed by working-age adults. We report key features of these programs, their generosity, and coverage by household income, marital status, and the number and age of children in the household. We also assess the role of the transfer system in reducing income inequality and document its changing magnitude and effects in recent years. Finally, we provide parametric estimates of transfers as a function of income and household characteristics for use in applied work in macroeconomics and public finance. |
| Keywords: | means-tested transfers, households, income inequality, parametric estimates |
| JEL: | E62 H24 H31 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17551 |
| By: | Soren Blomquist; Anil Kumar; Whitney K. Newey |
| Abstract: | This paper introduces an estimator for the average of heterogeneous elasticities of taxable income (ETI), addressing key econometric challenges posed by nonlinear budget sets. Building on an isoelastic utility framework, we derive a linear-in-logs taxable income specification that incorporates the entire budget set while allowing for individual-specific ETI and productivity growth. To account for endogenous budget sets, we employ panel data and estimate individual-specific ridge regressions, constructing a debiased average of ridge coefficients to obtain the average ETI. |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.00633 |