nep-pub New Economics Papers
on Public Finance
Issue of 2008‒03‒25
twelve papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Pareto-Improving Optimal Capital and Labor Taxes By Albert Marcet; Katharina Greulich
  2. From Pigou to Extended Liability: On the Optimal Taxation of Externalities under Imperfect Financial Markets By TIROLE, Jean
  3. Effective Average Tax Rates for Permanent Investment By Alexander Klemm
  4. Redistributive Taxation and Public Expenditures By Sanghamitra Bandyopadhyay; Joan Esteban
  5. Dividend Taxation and Intertemporal Tax Arbitrage By Anton Korinek; Joseph E. Stiglitz
  6. Tax Treatment of Dividends and Capital Gains and the Dividend Decision Under Dual Income Tax By Seppo Kari; Hanna Karikallio
  7. Social Security, Education, Retirement and Growth. By Amaia Iza; Cruz A. Echevarría
  8. Health Care Financing, Efficiency, and Equity By Sherry A. Glied
  9. The effetcs of fiscal policy in Italy: Evidence from a VAR model By Raffaela Giordano; Sandro Momigliano; Stefano Neri; Roberto Perotti
  10. Tax and Welfare Reforms in the Czech Republic - Structural Implications and Challenges By Thomas Dalsgaard
  11. The Increased Revenue from Finnish Corporate Income Tax in the 1990s By Tuomas Kosonen
  12. Anticipating Tax Changes: Evidence from the Finnish Corporate Income Tax Reform of 2005 By Seppo Kari; Hanna Karikallio; Pirttilä; Jukka

  1. By: Albert Marcet; Katharina Greulich
    Abstract: We show a standard model where the optimal tax reform is to cut labor taxes and leave capital taxes very high in the short and medium run. Only in the very long run would capital taxes be zero. Our model is a version of Chamley??s, with heterogeneous agents, without lump sum transfers, an upper bound on capital taxes, and a focus on Pareto improving plans. For our calibration labor taxes should be low for the first ten to twenty years, while capital taxes should be at their maximum. This policy ensures that all agents benefit from the tax reform and that capital grows quickly after when the reform begins. Therefore, the long run optimal tax mix is the opposite from the short and medium run tax mix. The initial labor tax cut is financed by deficits that lead to a positive long run level of government debt, reversing the standard prediction that government accumulates savings in models with optimal capital taxes. If labor supply is somewhat elastic benefits from tax reform are high and they can be shifted entirely to capitalists or workers by varying the length of the transition. With inelastic labor supply there is an increasing part of the equilibrium frontier, this means that the scope for benefitting the workers is limited and the total benefits from reforming taxes are much lower.
    Date: 2008–02–19
  2. By: TIROLE, Jean
    JEL: D62 D82 H23 J65
    Date: 2008–02
  3. By: Alexander Klemm
    Abstract: This paper extends the effective average tax rate (EATR) developed in Devereux and Griffith (2003) by relaxing the assumption of a one-period perturbation in the capital stock. Instead it allows a permanent investment. While this may appear a small change, it has important implications. First, it allows the EATR to be calculated in the presence of tax holidays, which are an important part of tax systems, especially in developing countries. Second, it reveals an interesting feature of the original EATR: despite the assumption of a one-period investment, the original measure is informative about long-term investments, thanks to the assumption of pooled depreciation. Without this assumption-which is justifiable in a few countries only- the EATR based on one-period perturbation in the capital stock would be less useful for analyzing medium and long-term investments.
    Keywords: Investment , Tax rates ,
    Date: 2008–03–05
  4. By: Sanghamitra Bandyopadhyay; Joan Esteban
    Abstract: We introduce a model of redistributive income taxation and public expenditure. Besides redistributing personal income by means of taxes and transfers, the government supplies goods and services. The government chooses the tax schedule that is found acceptable by the largest share possible of the population. We show that there is a unique income tax schedule that is universally acceptable. The progressivity of the income tax is shown to depend on the composition of the public expenditure and on the substitutability between the goods and services supplied by the government and the consumption goods privately obtained through the market. We test the empirical implications of the model. Specifically, we use OECD data to observe the relationship between marginal tax rates and the distribution over the taxpayers of the benefits produced by the specific composition of the government expenditure in the provision of goods and services. We confirm that for lower elasticities of substitution between public and private goods, there is a negative relationship between marginal tax rates and pro-taxpayer-bias, and for higher elasticities, there is a positive relationship.
    Keywords: Government Policy, Income Taxation, Public Expenditure
    JEL: H23 H50 O50
    Date: 2007
  5. By: Anton Korinek; Joseph E. Stiglitz
    Abstract: We analyze the effects of changes in dividend tax policy using a life-cycle model of the firm, in which new firms first access equity markets, then grow internally, and finally pay dividends when they have reached steady state. In accordance with the traditional view of dividend taxation, new firms raise less equity and invest less the higher the level of dividend taxes. However, as postulated by the new view of dividend taxation, the dividend tax rate is irrelevant for the investment decisions of internally growing and mature firms. Since aggregate investment is dominated by these latter two categories, the level of dividend taxation as well as unanticipated changes in tax rates have only small effects on aggregate investment. Anticipated dividend tax changes, on the other hand, allow firms to engage in inter-temporal tax arbitrage so as to reduce investors' tax burden. This can significantly distort aggregate investment. Anticipated tax cuts (increases) delay (accelerate) firms' dividend payments, which leads them to hold higher (lower) cash balances and, for capital constrained firms, can significantly increase (decrease) aggregate investment for periods after the tax change. The analysis of dividend taxation in a contestable democracy thus has to take into account future policy changes as well as expectations thereof. This can significantly alter the evaluation of any given dividend tax policy.
    JEL: G35 G38 H32
    Date: 2008–03
  6. By: Seppo Kari; Hanna Karikallio
    Abstract: The paper analyses efficiency aspects of a dual income tax system with a higher tax on capital gains than dividends. It argues that apart from the distortions to investments claimed in earlier literature, the system puts even more emphasis in creating incentives for entrepreneurs to participate in tax planning. The paper suggests that the owner of a closely held company can avoid all personal taxes on entrepreneurial income by two tax-planning strategies. The first is the avoidance of distributions, which would be taxed at the tax rate on labour income. These funds would instead be invested in the financial markets. The second strategy is a distribute-and-call-back policy, converting retained profits into new equity capital. Interestingly, the outcome is that investment in real capital is not distorted in the long-run equilibrium. Empirical evidence using micro data is also provided.
    Keywords: Dual income tax, small business taxation, income shifting
    JEL: H24 H25
    Date: 2007–04–05
  7. By: Amaia Iza (The University of the Basque Country); Cruz A. Echevarría (The University of the Basque Country)
    Abstract: n this paper we analyze the effects of social security policies in an unfunded, earnings-related social security system on the incentives to education investment and voluntary retirement, on growth and on income inequality. Growth is endogenously driven by human capital investment, individuals differ in their innate (learning) ability at birth, and the pension scheme includes a minimum pension. More skilled individuals spend more on education, minimum pensions reduce low skill individuals' incentives to invest in human capital, there is no monotonic relationship between per capita growth and income inequality.
    Keywords: Social Security; Pay-as-you-go; Voluntary Retirement; Human Capital; Minimum Pension
    JEL: O40 H55 J10
    Date: 2008–03–11
  8. By: Sherry A. Glied
    Abstract: This paper examines the efficiency and equity implications of alternative health care system financing strategies. Using data across the OECD, I find that almost all financing choices are compatible with efficiency in the delivery of health care, and that there has been no consistent and systematic relationship between financing and cost containment. Using data on expenditures and life expectancy by income quintile from the Canadian health care system, I find that universal, publicly-funded health insurance is modestly redistributive. Putting $1 of tax funds into the public health insurance system effectively channels between $0.23 and $0.26 toward the lowest income quintile people, and about $0.50 to the bottom two income quintiles. Finally, a review of the literature across the OECD suggests that the progressivity of financing of the health insurance system has limited implications for overall income inequality, particularly over time.
    JEL: H42 H51 I18
    Date: 2008–03
  9. By: Raffaela Giordano (Bank of Italy, Economic Research and International Relations); Sandro Momigliano (Bank of Italy, Economic Research and International Relations); Stefano Neri (Bank of Italy, Economic Research and International Relations); Roberto Perotti (IGIER- Bocconi University)
    Abstract: This paper studies the effects of fiscal policy on private GDP, inflation and the long-term interest rate in Italy using a structural vector autoregression model. To this end, a database of quarterly cash data for selected fiscal variables for the period 1982:1-2004:4 is constructed, largely relying on the information contained in the Italian Treasury Quarterly Reports. The main results of the study can be summarized as follows. A shock to government purchases of goods and services has a sizeable and robust effect on economic activity: an exogenous one per cent (in terms of private GDP) shock increases private real GDP by 0.6 per cent after 3 quarters. The response goes to zero after two years, reflecting with a lag the low persistence of the shock. The effects on employment, private consumption and investment are also positive. The response of inflation is positive but small and short-lived. In contrast, public wages, which in many studies are lumped together with purchases, have no significant effect on output, while the effects on employment turn negative after two quarters. Shocks to net revenue have negligible effects on all the variables.
    Keywords: Fiscal policy, Government spending, Fiscal multipliers, VAR
    JEL: E62 H30
    Date: 2008–01
  10. By: Thomas Dalsgaard
    Abstract: The paper provides an analysis and discussion of key structural implications of the 2007 and 2008 welfare and tax reforms in the Czech Republic. Based on a detailed micro-study of marginal and average effective tax rates for individuals at various points along the earnings curve, it concludes that while incentives to save and invest have improved, work incentives are being severely hampered by high marginal effective tax rates for low- and middle income individuals. The reforms also fail to address the most pressing fiscal concern: to put government finances on a sustainable path.
    Keywords: Welfare reform , Czech Republic , Tax reforms , Tax rates , Labor markets , Income distribution ,
    Date: 2008–03–04
  11. By: Tuomas Kosonen
    Abstract: In 2000, revenues from corporate income tax (CIT) in Finland were seven times higher than in 1994. We decompose the aggregate development of CIT revenues in a number of ways in order to establish what aspects of corporate taxation changed. We present the average effective tax rate for corporations as calculated from micro data. We also describe the development of CIT revenues using distributional analysis and the decomposition of the aggregate growth rate. Our analysis suggests that the substantial increase in CIT revenues was not related to any concurrent change in the Finnish corporate tax system. This phenomenon can be ascribed to a few large corporations, that have domicile in Finland. We also find that exceptional increase in the profits of large Finnish corporations explain much of the increase in CIT revenues. Finland can be seen as a case study since CIT revenues also increased in some other European countries in the 1990s.
    Keywords: Tax revenue, corporate taxation, tax competition
    Date: 2007–05–25
  12. By: Seppo Kari; Hanna Karikallio; Pirttilä; Jukka
    Abstract: Using register-based panel data covering all Finnish firms in 1999?2004, we examine how corporations anticipated the 2005 dividend tax increase via changes in their dividend and investment policies. The Finnish capital and corporate income tax reform of 2005 creates a useful opportunity to measure this behaviour, since it involves exogenous variation in the tax treatment of different types of firms. The estimation results reveal that those firms that anticipated a dividend tax hike increased their dividend payouts by 20?50 per cent. This increase was not accompanied by a reduction in investment activities, but rather was associated with increased indebtedness in non-listed firms. The results also suggest that the timing of dividend distributions probably offset much of the potential for increased dividend tax revenue following the reform.
    Keywords: Corporate income taxation, dividends, tax reform, anticipation effects
    JEL: H32 H25
    Date: 2007–10–15

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