nep-pub New Economics Papers
on Public Finance
Issue of 2008‒09‒13
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Corporate Taxation and the Welfare State By Christian Keuschnigg
  2. Redistribution and Tax Expenditures: The Earned Income Tax Credit By Nada Eissa; Hilary Hoynes
  3. Optimal Tax and Expenditure Policy in the Presence of Migration - Are Credit Restrictions Important? By Backlund, Kenneth; Sjögren, Tomas; Stage, Jesper
  4. Anticipated Tax Reforms and Temporary Tax Cuts: A General Equilibrium Analysis By Strulik, Holger; Trimborn, Timo
  5. Imputed Rental Income, Taxation and Income Distribution in Finland By Saarimaa; Tuukka
  6. Anticipating Tax Changes: Evidence from the Finnish Corporate Income Tax Reform of 2005 By Seppo Kari; Hanna Karikallio; Pirttilä; Jukka
  7. Social Classes, Inequality and Redistributive Policies in Canada By Abdelkrim Araar
  8. Fairness of Public Pensions and Old-Age Poverty By Friedrich Breyer; Stefan Hupfeld

  1. By: Christian Keuschnigg
    Abstract: The paper compares the impact of corporate taxation and social insurance on foreign direct investment (FDI) and unemployment. Four main results are derived: (i) the optimal size of the welfare state depends on the degree of risk-aversion and the unemployment rate as a measure of labor income risk. The unemployment rate partly reflects the country's exposure to globalization; (ii) corporate taxation and social insurance have equivalent effects on unemployment and outbound FDI; (iii) while an increase in the corporate tax can raise corporate tax revenue, it is rather likely to worsen the government's total fiscal stance. A corporate tax cut can thus be self-financing due to fiscal increasing returns in the presence of a large public sector; (iv) a corporate tax should be used to contribute to welfare state financing only in exceptional cases when job creation is excessive and the unemployment rate is inefficiently low. These conditions are probably unlikely to hold in Europe's generous welfare states with high structural unemployment rates.
    Keywords: Corporate tax, foreign direct investment, unemployment, welfare state
    JEL: F21 H21 H53 J64 J65
    Date: 2008–08
  2. By: Nada Eissa; Hilary Hoynes
    Abstract: This paper examines the distributional and behavioral effects of the Earned Income Tax Credit (EITC). We chart the growth of the program over time, and argue several expansions show that real responses to taxes are important. We use tax data to show the distribution of benefits by income and family size, and examine the impacts of hypothetical reforms (expansions and contractions) to the credit. Finally, we calculate the efficiency effects of marginal changes to EITC parameters. Targeting the EITC to lower-income families by raising the phase-out rate generates a welfare loss for single mothers, primarily because of the disincentive to enter the labor market and not the traditional hours-of-work distortion.
    JEL: H2
    Date: 2008–09
  3. By: Backlund, Kenneth (Department of Economics, Umeå University); Sjögren, Tomas (Department of Economics, Umeå University); Stage, Jesper (Department of Economics, Göteborg University)
    Abstract: This paper concerns optimal income taxation in the presence of emigration. The basic model is a two-period model where all agents are identical and live in the home country in the first period of life, but where some emigrate at the end of the first period. It is shown that with a binding credit restriction, the government will tax labor income in the first period at a higher rate than otherwise, whereas the labor income tax in the second period is unaffected by emigration. With heterogenous agents, the labor income tax in period two will be affected by emigration.
    Keywords: optimal taxation; labor mobility; intertemporal consumer choice
    JEL: D91 H21 J61
    Date: 2008–08–29
  4. By: Strulik, Holger; Trimborn, Timo
    Abstract: Macroeconomic studies of tax policy in dynamic general equilibrium usually assume that reforms hit the economy unexpectedly and last forever. Here, we explore how previous results change when we allow policy changes to be pre-announced and of finite duration and when these facts are anticipated by households and firms. Quantitatively we demonstrate a headstart advantage from pre-announcement that is never caught up by a surprising reform. The welfare gain from announcement of a corporate tax cut, for example, is estimated to be around 10 percent of the total gain from the reform. We show that adjustment dynamics of important variables like firm value, dividend payout, and investment differs qualitatively depending on whether the reform comes expected or not. We are also able to demonstrate a genuine welfare gain from temporary tax cuts. Impulse responses generated by our numerical method can be retraced by phase diagram analysis which facilitates explanation and interpretation of the produced results.
    Keywords: tax reform, anticipation effects, investment, economic growth, welfare, corporate finance, capital taxation
    JEL: H20 H30 E62 O40
    Date: 2008–08
  5. By: Saarimaa; Tuukka
    Abstract: This paper analyses the effects of imputed rental income from owner-occupied housing and its taxation on income distribution in Finland. Using micro-data from the 2004 Wealth Survey produced by Statistics Finland we find that owner-occupied housing has a significant impact on the well-being of many households. In 2004 imputed rental income constituted on average about 10 percent of homeowner households? disposable income. Furthermore, including imputed rental income to household disposable income decreased overall inequality measured by the Gini index. The estimated tax revenue forgone in 2004 was 1.9 billion euros amounting to almost 15 percent of the total government income and wealth tax revenue collected that year. On the other hand, the tax subsidy resulting from non-taxation of imputed rental income is skewed toward high-income households who are more likely to be homeowners and also more likely to own outright. The paper also made a comparison of the current tax system where imputed rental income is untaxed to two alternative tenure neutral tax systems where imputed rental income is taxed. The results indicate that the effects on overall inequality depend vitally on the way the increased tax revenue is transferred back to the households. The calculations in this paper ignore any behavioural responses by the households. JEL Codes: H23, H24, R21.
    Keywords: Imputed rental income, tax subsidy, income distribution
    Date: 2008–07–02
  6. 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 vexamine 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 in a statistically significant way. 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 offsets much of the potential for increased dividend tax revenue following the reform. JEL Classification: H25, H32
    Keywords: Corporate income taxation, dividends, tax reform, anticipation effects
    Date: 2008–07–02
  7. By: Abdelkrim Araar
    Abstract: The social performance of fiscal redistributive mechanisms in Canada continues to receive a growing interest from politicians and research scientists. The aim of this paper is to assess the evolution of social classes in Canada and to check whether the market and governmental redistribution factors have affected their evolution during the last decade. We focus on the dynamic of inequality, polarization and progressivity of the fiscal system. The results of this study confirm the effectiveness of governmental redistributive mechanism to decrease inequality and polarization significantly and to maintain the middle social class at the detriment of the poorest one. The other evidence concerns the chronic increase in population share and wellbeing of the rich class. Finally, the progressivity of fiscal sytem has registered a significant increase during the last few years.
    Keywords: Social classes, poverty, inequality, redistribution
    JEL: D11 H31 I31 J13
    Date: 2008
  8. By: Friedrich Breyer; Stefan Hupfeld
    Abstract: In several OECD countries, public pay-as-you-go financed pension systems have undergone major reforms in which future retirement benefit promises have been scaled down. A consequence of these reforms is that especially in countries with a tight tax-benefit linkage, the retirement benefit claims of low-income workers might not even exceed the minimum income guarantee which the government provides the aged. Recently, some German politicians have criticized this likely development because it was unjust that persons who have paid contributions over a long working life end up with no higher benefits than people who have never worked or paid any contributions. However, the government defended the current retirement benefit formula with the argument that every Euro paid as contributions had exactly the same value in generating future retirement benefits. But this logic has been questioned recently, e.g. by Breyer and Hupfeld (2007), since the value of a contributed Euro depends on the life expectancy of the individual, which is positively correlated with annual income. In that earlier paper, we introduced the concept of "distributive neutrality", which takes income-group-specific differences in life expectancy into account. The present paper estimates the relationship between annual earnings and life expectancy of German retirees empirically and shows how the formula that links benefits to contributions would have to be modified to achieve distributive neutrality. We compare the new formula to the benefit formulas in other OECD countries and analyze a data set provided by the German Pension Insurance Office on a large cohort of pensioners to find out how the old-age poverty rate would be affected by the proposed change of the benefit formula. Finally, we discuss other possible effects of a change in the benefit formula, especially on the labour supply of different earnings groups.
    Keywords: Social security, life expectancy, poverty, redistribution
    JEL: H55 I38
    Date: 2008

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