nep-pub New Economics Papers
on Public Finance
Issue of 2007‒01‒14
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Modeling Interjurisdictional Tax Competition in a Federal System By Eduardo Haddad; Alexandre A. Porsse; Eduardo P. Ribeiro
  2. Taxes and Employment Subsidies in Optimal Redistribution Programs (Revised Version) By Beaudry, Paul; Blackorby, Charles; Szalay, Dezso
  3. Fiscal and Externality Rationales for Alcohol Taxes By Parry, Ian W.H.; Laxminarayan, Ramanan; West, Sarah E.
  4. The Tax Incentives on Entrepreneurship and Firms (in Finnish with an English abstract/summary) By Vesa Kanniainen
  5. Corporate Tax Evasion: a Case for Specialists By Lipatov, Vilen
  6. Tax Evasion and Coordination By Lipatov, Vilen

  1. By: Eduardo Haddad; Alexandre A. Porsse; Eduardo P. Ribeiro
    Abstract: Interjurisdictional tax competition is a controversial theme little studied in an empirical approach in spite of the great advance in the theoretical debate at last decades. This paper aims to build a bridge between such theoretical issues and the empirical tools using an interregional general equilibrium model to evaluate the welfare effects of an experimental game of tax competition between two regional governments of the Brazilian federal system. The model recognizes the horizontal and vertical fiscal linkages underlying the Brazilian federalism. The results imply in a welfare-improving Nash equilibrium, in opposition with many theoretical issues. It can be seen that the fiscal externalities of tax competition does matter for such output not only due the mobility of the regional tax base but also because the substitution effect between regional goods and international goods since tax competition reduces the domestic prices. Additionally, the constitutional rules impose a rigid mechanism of fiscal transfers from central government to regional governments and contribute to alleviate the reduction pressures on the regional public goods because the increase in central government’s tax base also increase the regional government revenues. Then, interjurisdicional tax competition in the Brazilian federal system can be associated with gains in private consumption that overcome the reduction in regional public good provisions, reinforcing the welfare-improving equilibrium.
    Date: 2006–08
  2. By: Beaudry, Paul (University of British Columbia, and NBER.); Blackorby, Charles (University of Warwick and GREQAM); Szalay, Dezso (University of Warwick)
    Abstract: This paper explores how to optimally set tax and transfers when taxation authorities : (1) are uninformed about individuals’ value of time in both market and non-market activities and (2) can observe both market-income and time allocated to market employment. We show that optimal redistribution in this environment involves distorting market employment upwards for low wage individuals through decreasing wage-contingent employment subsidies, and distorting employment downwards for high wage individuals through positive and increasing marginal income tax rates. In particular, we show that whether a person is taxed or subsidized depends primarily on his wage, that is, the optimal program involves a cut-off wage whereby workers above the cutoff are taxed as they increase their income, while workers earning a wage below the cutoff receive an income supplement (an earned income tax credit) as they increase their income. Finally, we show that the optimal program transfers zero income to individuals who choose not to work.
    Keywords: Taxation ; Redistribution ; Wage Subsidies Screening
    JEL: D82 H21 H23
    Date: 2006
  3. By: Parry, Ian W.H. (Resources for the Future); Laxminarayan, Ramanan (Resources for the Future); West, Sarah E.
    Abstract: This paper develops and implements an analytical framework for estimating the optimal levels and welfare effects of alcohol taxes and drunk-driver penalties, accounting for externalities and how policies interact with the broader fiscal system. We find that the fiscal component of the optimal alcohol tax exceeds the externality-correcting component under many parameter scenarios and assumptions about revenue recycling; overall, the optimal tax is anything from three to more than ten times the current tax. For more incremental reforms, however, welfare gains from stiffer drunk-driver fines and non-pecuniary penalties are larger, even though they involve implementation costs, possible first-order deadweight losses, and fiscal considerations play a minor role. In contrast to current practice, fiscal considerations warrant relatively heavier taxation of beer and relatively lighter taxation of spirits.
    Keywords: alcohol tax, drunk-driver penalty, fiscal effects, external costs, welfare effects
    JEL: I18 H21 H23
    Date: 2006–11–22
  4. By: Vesa Kanniainen
    Abstract: The report surveys the incentive effects of taxes on capital and entrepreneurial income in light of the research in the field. The cash flow tax, the ACE tax and the tax on distributed profits of mature firms are known to be neutral with respect to the investment decisions. It is not widely understood that they are not neutral with respect to the entry decisions of start-up firms. The idea of creating tax incentives represents a departure from the neutrality principle. The entrepreneurial risk does not as such justify an investment incentive but an asymmetric tax treatment of it does. The Nordic dual income tax encourages the start-up investment of an entrepreneur who is expecting relatively high profitability. However, when setting the share of entrepreneurial income to be taxed as capital income, the failure risk matters. The empirical studies on the relation between the income tax rates and entrepreneurship point – due to the tax avoidance motive – to a positive relationship, though only at high tax rates. When judging the tax incentives on R&D spending, the strategic behavior between firms becomes relevant to be analyzed. Underinvestment or overinvestment are both potential outcomes. The entry barriers reduce in principle the validity of a tax policy based on the idea of tax neutrality.
    Keywords: entrepreneurship, taxation, tax incentives
    JEL: H25
    Date: 2006–12–08
  5. By: Lipatov, Vilen
    Abstract: Accounting specialists do not always help to fill in tax reports properly. In fact, in many cases they help to evade taxes. Employing a game of incomplete information played by tax authority, corporate taxpayers and accounting specialist, we find out that fines on firms as opposed to specialist are most effective in deterring such evasion. We also show that when the sophisticated evasion is very common, the best way to fight it is stricter enforcement. When the evasion is modest, auditing and accounting costs are more effective in curbing it.
    Keywords: tax evasion; tax avoidance; sophisticated evasion
    JEL: H32 H26
    Date: 2005–05
  6. By: Lipatov, Vilen
    Abstract: We consider corporate tax evasion as a decision affecting business partners. There are costs of uncoordinated tax reports, both in terms of catching inspectors' attention and running accounts. If these costs are small, there exist a unique Nash equilibrium of the game between the tax authority and a population of heterogenous firms. In this equilibrium, the miscoordination costs enhance non-compliance if and only if more than 50% of the firms are cheating. This provides one rationale for developing countries to be cautious with employing refined auditing schemes and for developed countries to promote complicated accounting procedures.
    Keywords: tax evasion; coordination; business partners
    JEL: H32 H26
    Date: 2006–02

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