New Economics Papers
on Public Finance
Issue of 2004‒12‒20
nine papers chosen by

  1. Aging and the Welfare State: The Role of Young and Old Voting Pivots By Assaf Razin; Efraim Sadka
  2. Executive Financial Incentives and Payout Policy: Firm Responses to the 2003 Dividend Tax Cut By Jeffrey R. Brown; Nellie Liang; Scott Weisbenner
  3. Aging, pension reform, and capital flows: A multi-country simulation model By Axel Börsch-Supan, Alexander Ludwig, Joachim Winter
  4. Finding out who the crooks are - Tax evasion with sequential auditing By Ralph C Bayer
  5. Confidence Intervals for Policy Reforms in Behavioural Tax Microsimulation Modelling By John Creedy; Guyonne Kalb; Hsein Kew
  6. The excess burden of tax evasion - An experimental detection- concealment contest By Ralph C Bayer; Matthias Sutter
  7. Tax Policy for Health Insurance By Jonathan Gruber
  8. The German Public Pension System: How it Was, How it Will Be By Axel Börsch-Supan and Christina Benita Wilke
  9. Moral constraints and the evasion of income tax By Ralph C Bayer

  1. By: Assaf Razin; Efraim Sadka
    Abstract: An income tax is generally levied on both capital and labor income. The working young bears mostly the burden of the tax on labor income, whereas the retired old, who already acummulated her savings, bears the brunt of the capital income tax. Therefore, there arise two types of conflict in the determination of the income tax: the standard intragenerational conflict between the poor and the rich, and an ntergenerational conflict between the young and the old. The paper studies how aging affects the resolution of these conflicts, and the politico-economic forces that are at play: the changes in the voting pivots and the fiscal leakage from tax payers to transfer recipients.
    JEL: E6 H2
    Date: 2004–12
  2. By: Jeffrey R. Brown; Nellie Liang; Scott Weisbenner
    Abstract: Using the 2003 reduction in dividend tax rates to identify an exogenous change in the after-tax value of dividends to shareholders, we test whether the composition of executives' stock and option holdings is an important determinant of payout policy. We find that when top executives have greater stock ownership, and thus have the incentive to increase dividends for liquidity reasons, there is a significantly greater likelihood of a dividend increase following the 2003 dividend tax cut, whereas no such relation existed in the prior decade when the dividend tax rate was much higher. In contrast, executives with large holdings of stock options, whose value is negatively related to the amount of dividends paid, were less likely to increase dividends both before and after the tax change. These findings hold for dividend increases in general, as well as dividend initiations, and are robust to a rich set of firm and shareholder characteristics. Our results suggest that about one-half of the unanticipated rise in the likelihood of a dividend increase or initiation observed in 2003 can be attributed to the stock vs. option composition of top executive holdings. Many of the firms that increased dividends in 2003 scaled back share repurchases, leaving total payouts little changed. This substitution may have raised the total tax burden on distributions because share repurchases are still tax-advantaged relative to dividends. We find that while dividend-paying firms with a large fraction of individual shareholders saw the biggest stock price gains in response to the tax cut, the market appears to have at least partially anticipated for which firms the tax cut would most likely lead to a substitution of dividends for share repurchases or earnings retention and thus a higher average tax burden on total distributions for individual shareholders.
    JEL: G32 G35 H24
    Date: 2004–12
  3. By: Axel Börsch-Supan, Alexander Ludwig, Joachim Winter (Mannheim Research Institute for the Economics of Aging (MEA))
    Abstract: We present a quantitative analysis of international capital flows induced by differ-ential population aging and pension reform. It is well known that within each country, demo-graphic change alters the time path of aggregate savings. This process may be amplified if pension reform shifts old-age provision towards more pre-funding. While the patterns of population aging are similar in most countries, timing and initial conditions differ substan-tially. Hence, to the extent that capital is internationally mobile, population aging will induce capital flows between countries. In order to quantify these effects, we develop a multi-country overlapping generations model and use long-term demographic projections for several world regions to project international capital flows in the course of population aging. Our simula-tions suggest that capital flows from fast-aging industrial countries such as Germany, Italy or Japan to the rest of the world will be substantial. We also conclude that closed-economy mod-els of pension reform miss quantitatively important effects of international capital mobility.
    Date: 2003–04–09
  4. By: Ralph C Bayer (University of Adelaide)
    Abstract: This paper investigates multi-item moral hazard with auditing contests. Although the presented model is widely applicable, we choose tax evasion as an exemplary application. We introduce a tax-evasion model where tax authority and taxpayer invest in detection and concealment. The taxpayers have multiple potential income sources and are heterogeneous with respect to their evasion scruples. The tax authority - unable to commit to an audit strategy - observes a tax declaration and chooses its auditing efforts. We show that a tax inspector prefers to audit source by source until he finds evidence for evasion to conduct a full-scale audit thereafter.
    Keywords: Moral Hazard, Auditing Rules, Contest, Tax Evasion
    JEL: H26 D82 K42
    Date: 2004–12–14
  5. By: John Creedy (Department of Economics, The University of Melbourne); Guyonne Kalb (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Hsein Kew (Department of Economics, The University of Melbourne)
    Abstract: This paper addresses the need for a measure of the uncertainty that is associated with the results calculated through tax policy behavioural microsimulation modelling. Deriving the analytical measure would be extremely complicated. Therefore, a simulated approach is proposed which generates a pseudo sampling distribution of aggregate measures based on the sampling distribution of the estimated labour supply parameters. This approach, which is very computer intensive, is compared to a more time-efficient approach where the functional form of the sampling distribution is assumed to be normal. The results show that in many instances the results from the two approaches are quite similar. The exception is when aggregate measures for minor types of payments, involving relatively small groups of the population, are examined.
    Date: 2004–12
  6. By: Ralph C Bayer (University of Adelaide); Matthias Sutter (Max Planck Institute for Research into Economic Systems & University of Innsbruck)
    Abstract: We present an experimental study on the wasted resources associated with tax evasion. This waste arises from taxpayers and tax authorities investing costly effort in the concealment and detection of tax evasion. We show that these socially inefficient efforts - as well as the frequency of tax evasion - depend positively on the prevailing tax rate, but not on the fine which is imposed in the event of detected tax evasion. Tax evasion is less frequent, though, than a model with risk neutral taxpayers predicts. We find evidence that this is due to individual moral constraints rather than to risk aversion.
    Keywords: tax evasion, contest, experiment, tax rates, fines
    JEL: H26 K42 C91
    Date: 2004–12–14
  7. By: Jonathan Gruber
    Abstract: Despite a $140 billion existing tax break for employer-provided health insurance, tax policy remains the tool of choice for many policy-makers in addressing the problem of the uninsured. In this paper, I use a microsimulation model to estimate the impact of various tax interventions to cover the uninsured, relative to an expansion of public insurance designed to accomplish the same goals. I contrast the efficiency of these policies along several dimensions, most notably the dollars of public spending per dollar of insurance value provided. I find that every tax policy is much less efficient than public insurance expansions: while public insurance costs the government only between $1.17 and $1.33 per dollar of insurance value provided, tax policies cost the government between $2.36 and $12.98 per dollar of insurance value provided. I also find that targeting is crucial for efficient tax policy; policies tightly targeted to the lowest income earners have a much higher efficiency than those available higher in the income distribution. Within tax policies, tax credits aimed at employers are the most efficient, and tax credits aimed at employees are the least efficient, because the single greatest determinant of insurance coverage is being offered insurance by your employer, and because most employees who are offered already take up that insurance. Tax credits targeted at non-group coverage are fairly similar to employer tax credits at low levels, but much less efficient at higher levels.
    JEL: H2 I1
    Date: 2004–12
  8. By: Axel Börsch-Supan and Christina Benita Wilke (Mannheim Research Institute for the Economics of Aging (MEA))
    Date: 2003–08–26
  9. By: Ralph C Bayer (University of Adelaide)
    Abstract: This paper re-examines the individual income tax evasion decision in the simple framework introduced by Allingham and Sandmo (1972), where the individual taxpayer decides how much of his income is invested in a safe asset (reported income) and in a risky asset (concealed income). These early models could not convincingly reproduce the empirically observed positive influence of higher tax rates and higher gross income on tax evasion simultaneously. We replace the standard assumption that risk aversion is the factor limiting the extent of evasion by assuming risk neutral taxpayers and argue that this is a reasonable approximation. The observation that concealing income is costly leads to the conclusion that, instead of risk aversion, evasion costs (such as concealment expenses and moral cost) might be the factors that limit tax evasion. We reproduce the stylized facts not explained by older models for very general tax and penalty schemes, including those where the standard model definitely fails to do so.
    Keywords: Tax Evasion, Risk Preferences, Moral Constraints
    JEL: H26
    Date: 2004–12–14

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