nep-pub New Economics Papers
on Public Finance
Issue of 2006‒01‒24
twelve papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Tax Deducations, Consumption Distortions, and the Marginal Excess Burden of Taxation By Parry, Ian
  2. Optimal Income Taxation and Public Good Provision in a Two-Class Economy By Felix Bierbrauer
  3. Optimal Nonlinear Labor Income Taxation in Dynamic Economies By Salvador Balle; Amedeo Spadaro
  4. Income Taxation and Household Size : Would French Splitting Make German Families Better off ? By Alexandre Baclet; Fabien Dell; Katharina Wrohlich
  5. Dividend Taxes and Firm Valuation: New Evidence By Alan J. Auerbach; Kevin A. Hassett
  6. Optimal Corporation Tax: An I.O. Approach By Luca Colombo; Paola Labrecciosa; Patrick Paul Walsh
  7. Competing for a Duopoly: International Trade and Tax Competition By Ferrett, Ben; Wooton, Ian
  8. Taxation and the Financial Structure of Foreign Direct Investment By Frances Ruane; Padraig Moore
  9. Tax Compliance as a Social Norm and the Deterrent Effect of Investigations By Marisa Ratto; Richard Thomas; David Ulph
  10. Hyperbolic Discounting of Public Goods By W. Kip Viscusi; Joel Huber
  11. Relaxing Tax Competition through Public Good Differentiation By Ben Zissimos; Myrna H. Wooders
  12. Should Fuel Taxes Be Scrapped in Favor of Per-Mile Charges? By Parry, Ian

  1. By: Parry, Ian (Resources For the Future)
    Abstract: Certain types of expenditure—e.g. mortgage interest and medical insurance—receive favorable tax treatment and are effectively subsidized relative to other (non-tax-favored) expenditures. Labor taxes (e.g. income taxes) can therefore produce efficiency losses by distorting the allocation of consumption, in addition to distorting the labor market. Using evidence on the responsiveness of taxable income to changes in tax rates, a seminal study by Feldstein (1999) estimates that the marginal excess burden of taxation (MEB) could exceed unity, when the effects of tax deductions are taken into account. This is several times larger than in previous studies of the MEB that focus exclusively on labor market effects. This paper develops a "disaggregated" approach to estimating the MEB that decomposes welfare impacts in the market for labor and tax-favored consumption goods, and uses micro evidence on labor supply elasticities, the demand elasticity for mortgage interest, medical insurance, and so on. Based on Monte Carlo simulations, the author finds a 68 percent probability that the MEB lies between .31 and .48 for government transfer spending and between .21 and .35 for public goods. These estimates are below Feldstein's, but are still considerably higher (70 percent or more) than when we ignore tax deductions.
  2. By: Felix Bierbrauer (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: This paper combines the problem of optimal income taxation with the free-rider problem in public good provision. There are two groups of individuals with private information on their earning ability and their valuation of a public good. Adjustments of the transfer system are needed to discourage the more productive from exaggerating the desirability of public good provision. Similarly, the less productive need to be prevented from understating their valuation. Relative to an optimal income tax, which focuses solely on earning ability, income transfers are increased whenever a public good is installed and are decreased otherwise.
    Keywords: Income Taxation, Public Good Provision, Revelation of Preferences, Two-dimensional Heterogeneity
    JEL: D71 D82 H21 H41
    Date: 2005–11
  3. By: Salvador Balle; Amedeo Spadaro (PSE -Paris-Jourdan Sciences Economiques- and Universitat de les Illes Balears, Palma de Mallorca)
    Abstract: The aim of this paper is to explore the characteristics of the optimal nonlinear labor income tax in dynamic economies with information asymmetries and human capital accumulation. We develop a dynamic optimal income tax model in which agent’s productivity evolves over time according to two different factors: an exogenous component and a learning by doing process endogenous to the fiscal policy. The latter is determined by the government, maximizing in the initial period a social welfare function capturing some level of aversion to inequality. We characterize analytically the first order condition driving the optimal tax schedule in a model in which agents choose the consumption and labor supply patterns that maximize their lifetime utility function. We show that the inclusion of the endogenous evolution of productivities into the tax problem changes the results with respect to the static framework `a la Mirrlees (1971). We find that the optimal tax strategy balances social marginal costs of increasing marginal tax rates with social marginal benefits of doing so. The costs are related with the reduction of both past and future human capital accumulation, with the negative impact on aggregate social welfare due to the reduction of the individual utility of all the agents paying more taxes and with the increase of the necessity to redistribute more in the future (given that the spread among social marginal weights of each agents will be higher). The benefits derive from the increase of the instantaneous tax receipts with the consequent reduction of the overall tax burden all along the time horizon and from the reduction of present inequality of incomes and future inequality of the productivities. As a particular extreme result we find that it can be optimal to subsidize (instead of taxing) at the margin high productivity agents.
    Keywords: Dynamic Optimal Income Taxation, Private Information, Learning by Doing.
    JEL: H21 C63
    Date: 2006
  4. By: Alexandre Baclet; Fabien Dell; Katharina Wrohlich
  5. By: Alan J. Auerbach; Kevin A. Hassett
    Abstract: This paper extends our previous analysis (Auerbach and Hassett 2005) of the effects of the "Jobs and Growth Tax Relief Act of 2003" on firm valuation. That paper found that firms with higher dividend yields benefited more than other dividend paying firms, a result that, in itself, is consistent with both new and traditional views of dividend taxation. But further evidence favored the new view. We also found that non-dividend-paying "immature" firms experienced larger abnormal returns than other firms and that a similar bonus accrued to firms likely to issue new shares, two results that are consistent with an anticipated transition to higher dividend payments. Here, we extend our earlier analysis in two ways. First, we consider the impact of the 2004 Presidential election on option prices, to gain further insight into and confirmation of the mechanism through which the 2003 legislation affected firm values. Second, we explore in more detail the determinants of the "immaturity premium" noted above. In contrast to claims in a recent paper by Amromin et al. (2005), we find that the premium is associated with the likelihood of new share issuance, as inferred but not demonstrated in our original analysis.
    JEL: G12 H22
    Date: 2006–01
  6. By: Luca Colombo; Paola Labrecciosa; Patrick Paul Walsh
    Keywords: Note:
    Date: 2005–12–15
  7. By: Ferrett, Ben; Wooton, Ian
    Abstract: Oligopoly is empirically prevalent in the industries where MNEs operate and national governments compete with fiscal inducements for their FDI projects. Despite this, existing formal treatments of fiscal competition generally focus on the polar cases of perfect competition and monopoly. We consider the competition between two potential host governments to attract the investment of both firms in a duopolistic industry. Competition by identical countries for a monopoly firm's investment is known to result in a 'race to the bottom' where all rents are captured by the firm through subsidies. We demonstrate that with two firms, both are taxed in equilibrium, despite the explicit non-cooperation between governments. When countries differ in size, a single firm will be attracted to the larger market. We explore the conditions under which both firms in the duopoly co-locate and when each nation attracts a firm in equilibrium. Our results are consistent with the observed stability of effective corporate tax rates in the face of ongoing globalization, and our analysis readily generalizes to many specifications with oligopoly in the product markets.
    Keywords: foreign direct investment; market size asymmetries; oligopoly; tax competition
    JEL: F12 F23 H25 H73
    Date: 2005–12
  8. By: Frances Ruane; Padraig Moore
    Abstract: The vast increase in foreign assets globally has raised interest in how the home country should tax profits flowing from these investments. Broadly speaking, countries have chosen either to exempt foreign income from taxation or to subject foreign income to taxation with credits/deductions given for foreign taxes paid. Recent research has focused on the effect of these foreign income tax rules on the relationship between aggregate FDI flows and corporate tax rates. In this paper we examine how foreign income tax rules can affect the financial structure of subsidiary-level FDI in Europe. The tax-deductibility of interest payments suggests that higher (host-country) corporate tax rates should be associated with a greater proportion of debt-financed FDI, as foreign income tax credit systems should, in theory, limit the benefits of shielding foreign income from host country taxation. Our results indicate that whilst multinationals from tax exemption countries adjust the financial structure of foreign investments in response to corporate tax rates, the effect of corporate tax rates is insignificant for FDI originating from tax credit countries. These results reveal an additional channel through which foreign income tax credit systems attenuate the forces of tax competition.
    JEL: F21 F23 H25 H87 F36 G32
    Date: 2005–12–15
  9. By: Marisa Ratto; Richard Thomas; David Ulph
    Abstract: In this paper we focus on the effects of investigations on tax compliance. In a very general model we explain the direct and indirect effects of investigations and analyse taxpayers’ response to an increase in the probability of audit when tax compliance is a social norm. We define the different elements that determine the impact of audits on compliance and show that if tax compliance is a social norm in the relevant community there is an additional effect arising because of social norm considerations. The behavioural response of taxpayers to an increase in the audit rate is stronger. Our Findings help explain seemingly contradictory results that emerge from the empirical evidence.
    Keywords: tax evasion, social norm, opportunities to evade, optimal audit rule
    JEL: D81 H26 H30 K42
    Date: 2005–07
  10. By: W. Kip Viscusi; Joel Huber
    Abstract: This article examines revealed rates of time preference for public goods, using environmental quality as the case study. A nationally representative panel-based sample of 2,914 respondents considered a series of 5 conjoint policy choices, yielding 14,570 decisions. Both the conditional fixed effect logit estimates of the random utility model and mixed logit estimates implied that the rate of time preference is very high for immediate improvements and drops off substantially thereafter, which is inconsistent with exponential discounting but consistent with hyperbolic discounting. The implied marginal rate of time preference declines and then rises. Estimates of the quasi-hyperbolic discounting parameter range from 0.48 to 0.61. People who are older are especially likely to have a high disutility from delays in improving water quality.
    JEL: Q20 D90 H40
    Date: 2006–01
  11. By: Ben Zissimos (Department of Economics, Vanderbilt University); Myrna H. Wooders (Department of Economics, Vanderbilt University)
    Abstract: This paper argues that, because governments are able to relax tax competition through public good differentiation, traditionally high-tax countries have continued to set taxes at a relatively high rate even as markets have become more integrated. The key assumption is that firms vary in the extent to which public good provision reduces costs. We show that Leviathan governments are able to use this fact to relax the forces of tax competition, reducing efficiency. When firms can `vote with their feet' tax competition leads firms to locate in `too many' jurisdictions. A `minimum tax' further relaxes tax competition, further reducing efficiency.
    Keywords: Asymmetric equilibrium, core-periphery, non-renegotiable minimum tax, tax competition, tax harmonization
    JEL: C72 H21 H42 H73 R50
    Date: 2006–01
  12. By: Parry, Ian (Resources For the Future)
    Abstract: This paper discusses the appropriate balance between traditional gasoline taxes and charging by the mile, focusing mainly on economic efficiency considerations. We begin with a brief discussion of the five major passenger vehicle externalities of concern - local pollution, greenhouse warming, oil dependency, traffic congestion, and traffic accidents - summarizing evidence on the dollar value of the externalities for passenger vehicles in the United States. We then discuss how much fuel taxation might be justified to account for these externalities, as well as how much taxation might be appropriate on fiscal grounds, assuming per-mile charges are unavailable. Finally, we discuss to what extent fuel taxation should be replaced with per-mile charges.
    Keywords: gasoline tax, mileage tax, motor vehicle externalities, fiscal interactions
    JEL: H21 H23 R48

This nep-pub issue is ©2006 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.