nep-pub New Economics Papers
on Public Finance
Issue of 2009‒04‒05
twelve papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal nonlinear redistributive taxation and public good provision in an economy with Veblen effects By Micheletto, Luca
  2. Optimal taxation in the extensive model By Phillippe Choné; Guy Laroque
  3. The Optimal Taxation Approach to Intergovernmental Grants By Dahlby, Bev
  4. The Incidence of Tax Credits for Hybrid Vehicles By James M. Sallee
  5. The economics of a temporary VAT cut By Thomas Crossley; Hamish Low; Matthew Wakefield
  6. Are your firmÕs taxes set in Warsaw? Spatial tax competition in Europe By CrabbŽ, Karen; VANDENBUSSCHE, Hylke
  7. Sales Tax Reform in Ontario: The time is Right By Finn Poschmann
  8. Teaching the Tax Code: Earnings Responses to an Experiment with EITC Recipients By Raj Chetty; Emmanuel Saez
  9. Corporate Tax Evasion: the Case for Specialists By Lipatov, Vilen
  10. The welfare state and Baumol’s law By Martin Paldam
  11. The Marginal Cost of Public Funds and the Flypaper Effect By Dahlby, Bev
  12. Public goodsÕ attractiveness and migrations By GABSZEWICZÊ, JeanÊ; Gvetadze, Salome; Laussel, Didier; Pieretti, Patrice

  1. By: Micheletto, Luca (Uppsala Center for Fiscal Studies)
    Abstract: This paper deals with the consequences of the assumption of negatively interdependent preferences for the shape of the optimal nonlinear income tax and the efficient level of public good provision in a setting where the policy maker maximizes an inequality averse social welfare function and the agents´market ability is private information. The analysis points out that the terms added in the tax formulas due to the presence of Veblen e¤ects might justify a reduction in the optimal marginal tax rates faced by the different individuals. Also, the desir- ability of negative marginal tax rates cannot be ruled out. With respect to the issue of the optimal level of public good provision, we derive a modified Samuelson rule and highlight the fact that the Veblen-based part of the formula might require to distort downwards the efficient level of public good provision.
    Keywords: optimal nonlinear income taxation; modified Samuelson rule; Veblen effects
    JEL: H21 H23 H41
    Date: 2009–03–30
  2. By: Phillippe Choné; Guy Laroque (Institute for Fiscal Studies and INSEE - CREST)
    Abstract: <p>We study optimal taxation in the general extensive model: the only decision of the participants in the economy is to choose between working (full time) or staying inactive. People differ in their productivities and in other features which determine their work opportunity costs. The qualitative properties of optimal tax schemes are presented, with an emphasis on the role of heterogeneity in the equity-efficiency tradeoff. When the government has a redistributive stance, there are a number of cases where the low skilled workers face larger financial incentives to work than in the laissez-faire (negative average tax rates). In particular, this occurs whenever the social weights vary continuously with income and the social weight assigned to the less skilled workers is larger than average.</p>
    JEL: H21 H31
    Date: 2008–11
  3. By: Dahlby, Bev (University of Alberta, Department of Economics)
    Abstract: An optimal tax system equates the marginal cost of public funds across all tax bases. This idea is applied to a federation to derive the optimal unconditional transfers that will promote an optimal allocation of taxation and expenditures among the governments in the federation. This approach provides insights into the concepts of vertical and horizontal fiscal imbalance, fiscal capacity, and fiscal need. Expressions for the optimal fiscal equalization grant and the optimal vertical fiscal gap are derived. We also show how the marginal cost of public funds affects the optimal matching grant rate for activities that generate expenditure externalities.
    Keywords: intergovernmental grants; median voter model; fiscal federalism; vertical fiscal gap; vertical fiscal imbalance; fiscal capacity; fiscal need
    JEL: H21 H71 H72 H77
    Date: 2009–03–10
  4. By: James M. Sallee
    Abstract: A variety of state and federal tax incentives have been used to subsidize gas electric hybrid vehicles. In this paper, I estimate the incidence of these tax incentives using microdata on sales of the Toyota Prius, in order to determine who benefits from these policies. I focus on three sharp changes in federal subsidies stemming from the Energy Policy Act of 2005 and assemble several pieces of evidence which indicate that consumers captured nearly all of the benefit. First, subsidy exclusive transaction prices do not jump in the anticipated direction in response to large changes in federal tax incentives. Second, estimates that account for consumer heterogeneity indicate that consumers captured the majority of the gains. Third, a state panel regression on state tax incentives shows that state tax incentives have little or no effect on transaction prices, which is consistent with the federal result. The conclusion that consumers captured the subsidy poses a challenge to standard models of tax incidence. Toyota faced a binding capacity constraint when the credit was introduced. Given a fixed supply, standard models predict that Toyota would capture the subsidy. I argue that consumers gained instead because Toyota believed that raising prices to clear the market would lower future demand for hybrids. I outline a stylized model in which current prices influence future demand and show that a capacity constraint can generate the tax incidence observed in the data. I then discuss factors that could give rise to such a demand system, drawing on the theory of search among alternatives and the behavioral literature on fairness. Finally, I draw lessons for the study of tax incidence in other markets.
    Keywords: hybrid vehicles, tax credit, tax incidence,
    Date: 2008–12
  5. By: Thomas Crossley (Institute for Fiscal Studies and University of Cambridge); Hamish Low (Institute for Fiscal Studies and Trinity College, Cambridge); Matthew Wakefield (Institute for Fiscal Studies and University College London)
    Abstract: <p><p>1. The rate of VAT has been cut temporarily to 15%, with a return to 17.5% in place for the end of 2009. The government has predicted that this will increase consumer spending by about 0.5%. Much of the analysis of this tax cut has been critical of the policy and concluded that the government's estimates of the impact on spending are over-optimistic. The source of this criticism is a misunderstanding of the mechanism through which the tax cut will have an impact. In fact, we believe the government's estimates are overly-pessimistic. </p><p> </p><p></p><p>2. There are two mechanisms through which the temporary VAT cut might affect spending: </p><p></p><p>first, it will increase spending power, making households feel as if they have more income. This mechanism is likely to be small partly because the tax cut increases income only for one year, and so the increase in total lifetime resources is very small, and partly because the lost revenue will have to be paid back. </p><p> </p><p></p><p>3. However, the second (often ignored) mechanism is likely to be much more important. This second mechanism is the effect that the tax cut will have through changing the price of goods bought in 2009 compared to 2010: the cost of goods bought in 2009 has fallen compared to goods bought in 2010 and this change in prices gives an incentive to bring forward consumer spending to this year, rather than waiting until next. </p><p> </p><p></p><p>4. Economic evidence on households' willingness to move spending from one year into an earlier (or later) year suggests that a 1% fall in the price today will translate into a 1% increase in spending. Since roughly only half of goods purchased are subject to VAT, the cut in the rate by 2.5% is like a cut in prices today by 1.25% and we would expect this to boost spending by about 1.25% over what it would otherwise be. </p><p> </p><p></p><p>5. Of course, this issue of what the spending would otherwise be is crucial: we will not now know what spending in 2009 would have been without the cut in VAT and even with the VAT cut, spending is likely to decline. Our point is simply that economic analysis shows that the cut in VAT will make the situation significantly less bad than it might otherwise have been. </p><p> </p><p></p><p>6. A natural comparison to the fiscal stimulus of a cut in VAT is a monetary stimulus through a cut in the interest rate: both make the price of spending today low compared to next year - an interest rate cut makes saving less attractive than current spending, as does the cut in VAT. The 1.25% fall in prices due to the cut in VAT reduces the price of spending today by more than a 1% point cut in the interest rate. It is surprising that some commentators have labeled the former as "small", while the latter would typically be considered a large cut. </p><p> </p><p>7. There is however a difference between cutting interest rates and cutting VAT: a cut in interest rates penalises savers, whose spending power falls, and rewards borrowers. By contrast, the cut in VAT increases the spending power of savers (as well as borrowers) and this seems a fairer way to stimulate the economy.</p></p>
    Date: 2009–01
  6. By: CrabbŽ, Karen; VANDENBUSSCHE, Hylke (UniversitŽ catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))
    Abstract: Tax competition within the EU is Þercer than in the rest of the OECD with tax rates falling rapidly. This paper analyzes tax responses of EU-15 countries to corporate tax changes in the EU-10 new member states as a function of their proximity to these new member states. The average corporate tax rate in the new member states has always been considerably lower than the average in the EU-15 countries. Their entry into the EU eliminated capital barriers, allowing Þrms to locate in one of the new EU-10 with full access to the European Market. Our results indicate that EU-15 countries geographically closer to the new member states respond stronger to corporate tax changes in these new member states. We use a theoretical and a spatial regression framework to test the hypothesis that distance to a low tax region intensiÞes countriesÕ tax reaction functions.
    Keywords: spatial tax competition, corporate taxes, fiscal reaction function.
    JEL: H25 H77 H39
    Date: 2008–12
  7. By: Finn Poschmann (C.D. Howe Institute)
    Abstract: Putting an end to Ontario’s archaic retail sales tax and adopting a value-added tax like the GST would sharply lower the effective tax rate on new business investment and offer the province a much-needed economic boost.
    Keywords: sales tax, VAT, consumer prices
    JEL: H71 R51
    Date: 2009–03
  8. By: Raj Chetty; Emmanuel Saez
    Abstract: This paper tests whether providing information about the Earned Income Tax Credit (EITC) affects EITC recipients' labor supply and earnings decisions. We conducted a randomized experiment with 43,000 EITC recipients at H&R Block in which tax preparers gave simple, personalized information about the EITC schedule to half of their clients. Tracking subsequent earnings, we find substantial heterogeneity in treatment effects across the 1,461 tax professionals who assisted the clients involved in the experiment. Half of the tax professionals, whom we term "compliers", induce treated clients to increase their EITC refunds by choosing an earnings level closer to the peak of the EITC schedule. Clients treated by complying tax professionals are 10% less likely to have very low incomes than control group clients. The remaining tax preparers generate insignificant changes in EITC amounts but increase the probability that their clients have incomes high enough to reach the phase-out region. Treatment effects are larger for the self-employed, but are also substantial among wage earners, suggesting that information provision induced real labor supply responses. When compared with other policy instruments, information has large effects: complying tax preparers generate the same labor supply response along the intensive margin as a 33% expansion of the EITC program, while non-complying tax preparers induce the same response as a 5% tax rate cut.
    JEL: H31 J22
    Date: 2009–04
  9. By: Lipatov, Vilen
    Abstract: Economists agree that accounting specialists are helpful in avoiding taxes. We argue that such help can often be called sophisticated evasion. We analyze it in a game of incomplete information played by tax authority, corporate taxpayers and accounting specialist. When sophisticated evasion is very common, marginal changes in enforcement are not effective, so radical measures are needed for improving compliance. Fines on firms as opposed to specialist are more effective in facilitating such measures. When the evasion is modest, auditing and accounting costs as opposed to fines are more effective in curbing it.
    Keywords: tax evasion; tax avoidance; sophisticated evasion
    JEL: H32 H26
    Date: 2005–05
  10. By: Martin Paldam (School of Economics and Management, University of Aarhus, Denmark)
    Abstract: The paper considers a two-sector economy with a constant population: The public sector, with stable productivity, and a private sector, with productivity growth. Baumol’s law says that such an economy has no steady state. It is demonstrated what this means. Two attempts to uphold a policy that fixes a key ratio are discussed: One policy fixes the tax share - this causes the share of the real public sector to vanish. The other policy fixes the share of real public production - this causes the tax pressure to keep rising.
    Keywords: Welfare state, steady state growth
    JEL: H5 H11 O41
    Date: 2009–03–24
  11. By: Dahlby, Bev (University of Alberta, Department of Economics)
    Abstract: A lump-sum intergovernmental transfer has a "price effect", as well as an "income effect", because it allows the recipient government to reduce its tax rate, which lowers its marginal cost of public funds, while still providing the same level of public service. This reduction in the effective price of providing the public service helps to explain the "flypaper effect" - the empirical observation that a lump-sum grant has a much larger effect on spending than an increase in personal income. Contrary to the assertions of Mieszkowski (1994) and Hines and Thaler (1995), a model of a benevolent local government financing its expenditures with a distortionary tax predicts flypaper effects from lump-sum grants that are similar to those observed in many econometric studies
    Keywords: flypaper effect; marginal cost of public funds; intergovernmental grants; fiscal federalism
    JEL: H71 H72 H77
    Date: 2009–01
  12. By: GABSZEWICZÊ, JeanÊ (UniversitŽ catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)); Gvetadze, Salome (UniversitŽ catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)); Laussel, Didier; Pieretti, Patrice
    Abstract: The aim of this paper is to develop a dynamic model of migrations, in which migration is driven by size asymmetries between countries and by the relative preferences of consumers between private consumption and consumption of public goods. The dynamic trajectories heavily depend on the degree of attractiveness for public goods We show that monotone migrations require sufficiently strong preferences for public goods, and can only be sustained from the small to the large countries. We identify the threshold value of the public goodsÕ intensity of preferences guaranteeing the survival of the small country. For weaker preference intensities, oscillating migrations may arise, but they Þnally converge to situation where both countries are of equal size.
    Keywords: migration, public goods, income tax.
    JEL: H
    Date: 2008–12

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