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on Public Finance |
| By: | Crutzen, Benoît SY; Sahuguet, Nicolas |
| Abstract: | We extend the discussion of redistributive politics across electoral systems to allow for taxation to be distortionary. We allow politicians to choose any tax rate between zero and unity and then redistribute the money collected. We build on the model put forward by Myerson (1993) and Lizzeri and Persico (2001 and 2005) to show that the use of distortionnary taxation can be understood as an analysis of the trade-off between efficiency and targetability. We derive the equilibrium taxes and redistribution schemes with distortions. We show that the presence of distortions makes full taxation unattractive. We also derive the size of the government, the deadweight loss and inequality as a function of distortions. |
| Keywords: | distortionary taxation; redistributive politics |
| JEL: | D72 D78 H23 H31 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5975&r=pub |
| By: | Marcel Gérard |
| Abstract: | This paper investigates replacing separate taxation by consolidation and formulary apportionment in a Bottom-up Federation, when a multijurisdictional firm is mobile in various respects. The reform is decided cooperatively by all the jurisdictions or by some of them, while tax rates remain within the competence of each jurisdiction. The paper sets forth the conditions for the reform to be social welfare enhancing, while not increasing tax competition. Among them, the formula should emphasize criteria that the Multijurisdictional Enterprise cannot easily manipulate and the consolidating area should protect its capacity to levy taxes by adopting a crediting system, possibly extended to accrued capital gains, vis-à-vis the rest of the world. Policy conclusions are suggested accordingly. |
| Keywords: | taxation of multinational enterprises, consolidation and formulary apportionment, fiscal federalism |
| JEL: | H32 H73 H87 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1860&r=pub |
| By: | Jens Brøchner; Jesper Jensen; Patrik Svensson; Peter Birch Sørensen |
| Abstract: | This study evaluates the economic effects of corporate tax coordination in the enlarged European Union using a computable general equilibrium model and a comprehensive set of scenarios for both a common corporate EU tax base and for full harmonisation of tax bases and tax rates. Our main findings are as follows: (i) Corporate tax coordination can yield modest aggregate welfare gains, but the details of the coordination policies determine outcomes and economic gains cannot be taken for granted. (ii) All scenarios for coordination leave some EU Member States as winners and others as losers. An agreement on tax coordination is therefore likely to require elaborate compensation mechanisms. (iii) The large and diverse country effects suggest that Enhanced Cooperation for a subset of the Member States may be the most likely route towards tax coordination. Coordination among a subset of relatively homogenous Member States will lead to less radical policy changes, but also to smaller gains. (iv) Identifying winners and losers from coordination for the purpose of a compensation mechanism may be problematic, since countries experiencing gains in GDP and welfare tend to lose tax revenues, and vice versa. |
| JEL: | H77 H87 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1859&r=pub |
| By: | Ernesto Crivelli; Klaas Staal |
| Abstract: | There is much evidence against the so-called "too big to fail" hypothesis in the case of bailouts to sub-national governments. We look at a model where districts of different size provide local public goods with positive spillovers. Matching grants of a central government can induce socially-efficient provision, but districts can still exploit the intervening central government by inducing direct financing. We show that the ability of a district to induce a bailout from the central government and district size are negatively correlated. |
| Keywords: | bailouts, soft-budget constraints, jurisdictional size, public goods, spillovers |
| JEL: | H40 H70 R10 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1858&r=pub |
| By: | Frank Blasch; Alfons Weichenrieder |
| Abstract: | The paper examines 157 German listed corporations that had the option of changing their fiscal year to achieve a possible tax reduction in connection with the major tax reform of 2000/2001. The tax reduction from a change was larger, the larger the expected profits. However, with costs of changing the fiscal year, not all firms that expect a tax reduction from a change may do so. The paper presents empirical evidence that the propensity to change the fiscal year was significantly related to the amount of expected tax savings. This suggests that the corporate tax reduction – in combination with the special German transitory provisions – induced a deadweight loss: corporations incurred a non-tax cost to avoid a tax cost. |
| Keywords: | tax reform, deadweight loss, fiscal year |
| JEL: | H25 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1861&r=pub |
| By: | Thomas Eichner; Marco Runkel |
| Abstract: | Within a two-country model with involuntary unemployment, this paper investigates corporate income taxation under separate accounting versus formula apportionment. In contrast to separate accounting, under formula apportionment the corporate tax policy causes a fiscal externality which goes back to unemployment. This unemployment externality is the lowest when the apportionment formula does not contain a payroll factor. It tends to compensate other externalities such that tax rates become inefficiently low. In an empirical calibration, we show that the transition from separate accounting to formula apportionment improves welfare and reduces unemployment. The welfare increase is the strongest under a pure sales formula. |
| Keywords: | separate accounting, formula apportionment, unemployment |
| JEL: | H25 H71 J60 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1868&r=pub |
| By: | Hans Jarle Kind; Marko Koethenbuerger; Guttorm Schjelderup |
| Abstract: | Two-sided platform firms serve distinct customer groups that are connected through interdependent demand, and include major businesses such as the media industry, banking, and the software industry. A well known textbook result in one-sided markets is that a government may increase a monopolist's output and reduce the deadweight loss by subsidizing output. The present paper shows that this result need not hold in a two-sided market. On the contrary, a higher ad-valorem tax rate - rather than a subsidy - could increase output and enhance welfare. |
| Keywords: | two-sided markets, ad-valorem taxes, specific taxes, imperfect competition, industrial organization |
| JEL: | D40 D43 H21 H22 L13 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1871&r=pub |
| By: | Jukka Pirttilä; Håkan Selin |
| Abstract: | Dual income tax systems have become increasingly popular; yet, relatively little is known about the consequences of implementing such tax systems. This paper uses a representative panel of taxpayers from the 1993 Finnish tax reform to measure how overall taxable income and the relative shares of capital income and labour income reacted to the reform. The Finnish tax reform appears to be particularly suitable for analysing the effect of separating labour and capital income tax bases. The reform radically reduced the marginal tax rates on capital income to some, but not all, taxpayers, while the taxation of labour income was not reformed at the same time. We find that the reform led to a small positive impact on overall taxable income, but part of the positive response was probably offset by income shifting among the self-employed. |
| Keywords: | taxable income, income shifting, dual tax system |
| JEL: | C21 H21 H31 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1875&r=pub |
| By: | Ruud de Mooij; Gaetan Nicodème |
| Abstract: | In Europe, declining corporate tax rates have come along with rising tax-to-GDP ratios. This paper explores to what extent income shifting from the personal to the corporate tax base can explain these diverging developments. We exploit a panel of European data on firm births and legal form of business to analyze income shifting via increased entrepreneurship and incorporation. The results suggest that lower corporate taxes exert an ambiguous effect on entrepreneurship. The effect on incorporation is significant and large. It implies that the revenue effects of lower corporate tax rates – possibly induced by tax competition -- partly show up in lower personal tax revenues rather than lower corporate tax revenues. Simulations suggest that between 10% and 17% of corporate tax revenue can be attributed to income shifting. Income shifting is found to have raised the corporate tax-to-GDP ratio by some 0.2%-points since the early 1990s. |
| Keywords: | corporate tax, personal tax, entrepreneurship, incorporation, income shifting |
| JEL: | H25 M13 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1883&r=pub |
| By: | Kleven, Henrik; Kreiner, Claus Thustrup; Saez, Emmanuel |
| Abstract: | This paper analyzes the optimal income tax treatment of couples. Each couple is modelled as a single rational economic agent supplying labor along two dimensions: primary and secondary earnings. We consider fully general joint income tax systems. Separate taxation is never optimal if social welfare depends on total couple incomes. In a model where secondary earners make only a binary work decision (work or not work), we demonstrate that the marginal tax rate of the primary earner is lower when the spouse works. As a result, the tax distortion on the secondary earner decreases with the earnings of the primary earner and actually vanishes to zero asymptotically. Such negative jointness is optimal because redistribution from two-earner toward one-earner couples is more valuable when primary earner income is lower. We also consider a model where both spouses display intensive labor supply responses. In that context, we show that, starting from the optimal separable tax schedules, introducing some negative jointness is always desirable. Numerical simulations suggest that, in that model, it is also optimal for the marginal tax rate on one earner to decrease with the earnings of his/her spouse. We argue that many actual redistribution systems, featuring family-based transfers combined with individually-based taxes, generate schedules with negative jointness. |
| Keywords: | couples taxation; optimal income tax |
| JEL: | H21 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5978&r=pub |
| By: | Koziarivska Larysa; Oliinyk Andrii |
| Abstract: | The paper researches into the consequences of the pit reform of 2004 introduced on tax revenues, shadow activities, and income streams. The research approach adopted involves constructing theoretical general equilibrium model adapted to Ukrainian practices and further empirical testing of the hypotheses on the firm-level data. The study leads to inferring that the reform did not stimulate any tangible structural changes in the economy; with no effect on the shadow sector size. As a result of the reform, the government's income in the form of PIT revenues was redistributed to firms. The research shows that under the present conditions no other rate is expected to perform better the existing rate. Within the framework of existing structural ties in the economy it would be beneficial to increase compliance by introducing a more severe punishment for evasion. |
| Keywords: | Ukraine, tax reform, tax policy, tax evasion, shadow economy, behavioural response |
| JEL: | D21 E64 H21 H25 H26 H32 |
| Date: | 2006–12–18 |
| URL: | http://d.repec.org/n?u=RePEc:eer:wpalle:06-08e&r=pub |
| By: | Laurent Simula (EHESS); Alain Trannoy (EHESS, Greqam-Idep) |
| Abstract: | In this paper, individuals, initially living in a Mirrleesian economy A, have outside options consisting in settling down in a laissez-faire country B while paying positive migration costs. We first examine the impact of the threat of migration, as- suming participation constraints are taken into account for all individuals, and show that optimal linear income taxes are obtained as corner solutions. We then consider a social criterion allowing emigration of the highest skilled individuals and show by means of an example that social welfare may rise following an increase in income re- distribution, despite this resulting in the departure of the most productive individuals. Numerical simulations on French data illustrate the lack of degrees of freedom o¤ered by linear taxation when agents can vote with their feet, which may be regarded as an argument against linear taxes. |
| Keywords: | Optimal Linear Income Taxation, Participation Constraints, Individual Mobility |
| JEL: | H21 H31 D82 F22 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:iep:wpidep:0606&r=pub |
| By: | Laurent Simula (EHESS); Alain Trannoy (EHESS, Greqam-Idep) |
| Abstract: | This paper examines how allowing individuals to emigrate to pay lower taxes changes the optimal non-linear income tax scheme in a Mirrleesian economy. Type-dependent par- ticipation constraints are borrowed from contract theory. An individual emigrates if his domestic utility is less than his utility abroad net of migration costs, utilities and costs both depending on productivity. Three social criteria are distinguished according to the agents whose welfare matters. Mobility signi.cantly alters the closed-economy results qualitatively, but also quantitatively as veri.ed by simulations. A curse of the middle-skilled occurs in the .rst-best. In the second-best, the middle-skilled can support the highest average tax rates and the marginal tax rates can be negative. Moreover, preventing emigration of the highly-skilled is not necessarily optimal. |
| Keywords: | Optimal Taxation, Income Tax, Emigration, Participation Constraints |
| JEL: | H21 H31 D82 F22 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:iep:wpidep:0610&r=pub |