nep-pub New Economics Papers
on Public Finance
Issue of 2006‒12‒09
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Should the Average Tax Rate Be Marginalized? By Naomi E. Feldman; Peter Katuscak
  2. Taxing Capital? Not a Bad Idea After All! By Conesa, Juan Carlos; Kitao, Sagiri; Krüger, Dirk
  3. Centralization Trade-off with Non-Uniform Taxes By Peter Tuchyňa; Martin Gregor
  4. Taxes and Benefits: Two Distinct Options to Cheat on the State? By Martin Halla; Friedrich G. Schneider
  5. Pure Redistribution and the Provision of Public Goods By Rupert Sausgruber; Jean-Robert Tyran
  6. The Distributional Effects of Taxation in Australia and the United Kingdom: Evidence from Microsimulations By Justin van de Ven
  7. The Case for Measuring Tax Gap By Jacqui McManus and Neil Warren

  1. By: Naomi E. Feldman; Peter Katuscak
    Abstract: Economic theory assumes that taxpayers use their true marginal tax rate (MTR) to guide their economic decisions. However, complexity of the personal income tax system implies that taxpayers may incorrectly perceive true marginal prices and incentives. We first develop an updating model that formalizes this proposition. A prediction of this model is that an unexpected innovation in the previous year's average tax rate (ATR) influences the perception of the MTR in the current year, even though the MTR is not in fact changing between the two years. This model generalizes the \schmeduling" hypothesis of Liebman and Zeckhauser (2004), who suggest that taxpayers use the ATR in place of the MTR in making their decisions. Then, assuming that taxpayers react to their perceived after-tax price as economic theory would suggest, we test this prediction empirically by examining whether household labor income responds to predictable (but not necessarily predicted) variation in the previous year's ATR due to eligibility for the Child Tax Credit, which depends on the exact timing of a child's 17th birthday. We find that household labor income decreases in response to losing eligibility for the Child Tax Credit. This finding is inconsistent with the rational taxpayer hypothesis, but consistent with the schmeduling hypothesis. Our robustness tests do not provide any consistent evidence that this result is entirely driven by an omitted variable bias due to a direct timing of birth effect. We also discuss the welfare consequences of schmeduling.
    Keywords: Tax, labor supply, average tax.
    JEL: H21 H24 H31
    Date: 2006–09
  2. By: Conesa, Juan Carlos; Kitao, Sagiri; Krüger, Dirk
    Abstract: In this paper we quantitatively characterize the optimal capital and labor income tax in an overlapping generations model with idiosyncratic, uninsurable income shocks, where households also differ permanently with respect to their ability to generate income. The welfare criterion we employ is ex-ante (before ability is realized) expected (with respect to uninsurable productivity shocks) utility of a newborn in a stationary equilibrium. Embedded in this welfare criterion is a concern of the policy maker for insurance against idiosyncratic shocks and redistribution among agents of different abilities. Such insurance and redistribution can be achieved by progressive labor income taxes or taxation of capital income, or both. The policy maker has then to trade off these concerns against the standard distortions these taxes generate for the labor supply and capital accumulation decision. We find that the optimal capital income tax rate is not only positive, but is significantly positive. The optimal (marginal and average) tax rate on capital is 36%, in conjunction with a progressive labor income tax code that is, to a first approximation, a flat tax of 23% with a deduction that corresponds to about $6,000 (relative to an average income of households in the model of $35,000). We argue that the high optimal capital income tax is mainly driven by the life cycle structure of the model whereas the optimal progressivity of the labor income tax is due to the insurance and redistribution role of the income tax system.
    Keywords: capital taxation; optimal taxation; progressive taxation
    JEL: E62 H21 H24
    Date: 2006–11
  3. By: Peter Tuchyňa (Center for Economic Research and Graduate Education-Economics Institute, Prague, Czech Republic); Martin Gregor (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: When local public goods are provided by a centralized authority, spillovers may be coordinated, but heterogeneity in preferences may be suppressed. Besley and Coate (2003) have already solved this classic trade-off for a uniform tax regime. Here, we extend their approach by allowing for a non-uniform tax regime. We find that centralization with our tax system necessarily increases welfare in comparison to uniform-tax centralization. Importantly, with non-cooperative legislators coming from homogenous districts, our centralization dominates decentralization for any degree of spillovers. In other cases, it at least improves odds of centralization, if measured by utilitarian yardstick.
    Keywords: Decentralization; Local Public Goods; Distributive Politics; Political Economy
    JEL: H40 H70 H72 P51
    Date: 2005
  4. By: Martin Halla (Department of Economics, Johannes Kepler University Linz, Austria); Friedrich G. Schneider (Department of Economics, Johannes Kepler University Linz, Austria)
    Abstract: Economists have studied many aspects of tax evasion. The vast literature has concentrated on the individual taxpayer’s decision on avoiding taxes by underreporting income. However no comprehensive investigation of the individual taxpayer’s decision on claiming unjustified subsidies (e. g. by underreporting income) exists so far. Employing Austrian survey data we show that the basic attitude towards avoiding taxes (tax morale) and claiming unjustified subsidies (benefit morale) have different determinants. Our applied econometric framework relaxes the often stated assumption of the exogeneity of income as an explaining variable of tax morale. Furthermore we find empirical evidence that tax morale and benefit morale have different impact on actual behavior: Whereas a low benefit morale leads indeed to unjustified claims on benefits and therefore to higher income, we find no statistically significant effect of tax morale on tax evasion. These different determinants and effects of tax morale and benefit morale can be explained by differences in the deterrence factors from the traditional economic approach, by alternative theories or simply by more opportunities to cheat on the state by unjustified subsidies in contrast to avoiding taxes.
    Keywords: tax; subsidies; tax morale; benefit morale; tax evasion; benefit fraud
    JEL: H20 H26
    Date: 2005–08
  5. By: Rupert Sausgruber (Department of Public Economics, University of Innsbruck); Jean-Robert Tyran (Department of Economics, University of Copenhagen)
    Abstract: We study pure redistribution as a device to increase cooperation and efficiency in the provision of public goods. Experimental subjects play a two-stage game. The first stage is the standard linear public goods game. In the second stage, subjects can redistribute payoffs among other subjects in their group. We find that cooperation and efficiency increases substantially with this redistribution scheme, and that the redistribution option is popular. Our results provide an intuitive explanation for why an imposed redistribution rule, as proposed by Falkinger (1996), is capable of sustaining cooperation in the provision of public goods.
    Keywords: experiment; public goods; redistribution
    JEL: C9 H41
    Date: 2006–12
  6. By: Justin van de Ven
    Abstract: The last 60 years have seen Australia and the United Kingdom diverge, both socially and economically. This paper considers how the widening social gap between the two countries is reflected by their respective redistributive systems. The analysis is based upon two microsimulation procedures — one static and the other dynamic — both of which are used to consider the probable distributional effects that would arise if elements of the Australian and UK tax and benefits systems were exchanged. The static microsimulation analysis presented suggests that comparisons based purely upon cross-sectional survey data are affected by population heterogeneity, which tend to overstate the redistributive effect of the Australian transfer system in 1997/98 relative to the UK. The dynamic microsimulations are based on a cohort model, and extend the static analysis to consider distributional effects from a working-lifetime perspective. The analysis undertaken suggests that, on balance, the Australian transfer system is more redistributive than the UK system, and reflects a greater concern for social equity. The UK system, in contrast, reflects a greater concern for social insurance.
    Date: 2006–09
  7. By: Jacqui McManus and Neil Warren
    Abstract: More recently an increasing number of revenue authorities have attempted to estimate the amount of tax that is legally owing to their government but not collected. This amount is commonly referred to as ‘tax gap’. In the past tax gap studies were branded unreliable. Tax administrations and other bodies criticised any attempts at quantifying tax non-compliance on the basis that it was costly and inconclusive. However based on the significant number of tax gap studies undertaken recently there appears to have been a change of heart. This paper considers a range of tax gap studies for the purpose of identifying the core reasons they were undertaken, highlighting their benefits and limitations.
    Keywords: tax gap, hidden economy, tax administration, tax, non-compliance
    Date: 2006–10–17

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