nep-pub New Economics Papers
on Public Finance
Issue of 2009‒10‒17
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Direct versus Indirect Taxation: Trends, Theory and Economic Significance By Jorge Martinez-Vazquez; Violeta Vulovic; Yongzheng Liu
  2. Public Provision of Private Goods and Nondistortionary Marginal Tax Rates: Some Further Results By Vidar Christiansen and Luca Micheletto, Sören Blomquist,
  3. Tax Rate Harmonization, Renegotiation and Asymmetric Tax Competition for Profits with Repeated Interaction By Eggert, Wolfgang; Itaya, Jun-ichi
  4. Top Incomes in the Long Run of History By Anthony B. Atkinson; Thomas Piketty; Emmanuel Saez
  5. Optimal taxation in the presence of bailouts By Stavros Panageas
  6. Endowments, Fiscal Federalism, and the Cost of Capital for States: Evidence from Brazil, 1891-1930 By André C. Martínez Fritscher; Aldo Musacchio

  1. By: Jorge Martinez-Vazquez (International Studies Program. Andrew Young School of Policy Studies, Georgia State University); Violeta Vulovic (Andrew Young School of Policy Studies, Georgia State University); Yongzheng Liu
    Abstract: One of the oldest questions in the theory and practice of taxation is that of the appropriate mix of direct and indirect taxes. The choice between direct and indirect taxes has contributed to a long animated debate, in political and academic circles, regarding the virtues and defects of those two forms of taxation. In this paper we provide an overview of the evolution of the ratio of direct taxes to indirect taxes across countries over the past three decades, the theorizing that has gone behind the alleged superiority of one form of taxation or the other, the determinants that appear to be behind the intensity with which both forms of taxation are used, and the economic relevance of the choice of tax structure in terms of economic growth, macroeconomic stability, the distribution of income, and the flow of foreign direct investment (FDI).
    Keywords: Direct Taxation,Indirect Taxation, Taxation, Foreign direct investment (FDI).
    Date: 2009–08–01
  2. By: Vidar Christiansen and Luca Micheletto, Sören Blomquist, (Uppsala Center for Fiscal Studies)
    Abstract: The incidence and efficiency losses of taxes have usually been analyzed in isolation from public expenditures. This negligence of the expenditure side may imply a serious misperception of the effects of marginal tax rates. The reason is that part of the marginal tax may in fact be a payment for publicly provided goods and reflects a cost that the consumers should bear in order to face the proper incentives. Hence, part of the marginal tax may serve the same role as a market price in the sense that it conveys information about a real social cost of working more hours. <p> We develop this idea formally by studying an optimal income tax model in combination with a type of public provision scheme not analyzed before; the provision level is individualized and positively associated with the individual's labor supply. As examples we discuss child care, elderly care, primary education and health care. We show that there is a potential gain in efficiency where public provision of such services replaces market purchases. We also show that it is necessary for efficiency that, other things equal, marginal income tax rates are higher than in economies where the services are purchased in the market. This is because the optimal tax should be designed so as to face the taxpayers with the real cost of providing the services. Hence, it might very well be that economies with higher marginal tax rates have less severe distortions than economies with lower marginal tax rates.
    Keywords: Nonlinear income taxation; Marginal income tax rates; Public provision of private goods; In-kind transfers
    JEL: H21 H42 I38
    Date: 2009–10–09
  3. By: Eggert, Wolfgang; Itaya, Jun-ichi
    Abstract: This paper analyzes a model of corporate tax competition with repeated interaction and with the strategic use of profit shifting within multinationals. We show that international tax coordination is more likely to prevail if the degree of asymmetry in terms of productivity differences between countries is smaller, or if concealment costs of profit shifting are larger when the tax authorities adopt grim-trigger strategies. Allowing for renegotiation in the tax harmonization process generally requires more patient tax authorities to support tax harmonization as a subgame perfect equilibrium. We find somewhat paradoxical situations where higher costs of profit shifting make international tax arrangements less sustainable under weakly-renegotiation-proof strategies.
    Keywords: corporate taxation, tax coordination, multinational firms,
    JEL: H25 H87 F23
    Date: 2009–10–13
  4. By: Anthony B. Atkinson; Thomas Piketty; Emmanuel Saez
    Abstract: This paper summarizes the main findings of a recent literature that has constructed top income shares time series over the long-run for more than 20 countries using income tax statistics. Top incomes represent a small share of the population but a very significant share of total income and total taxes paid. Hence, aggregate economic growth per capita and Gini inequality indexes are very sensitive to excluding or including top incomes. We discuss the estimation methods and issues that arise when constructing top income share series, including income definition and comparability over time and across countries, tax avoidance and tax evasion. We provide a summary of the key empirical findings. Most countries experience a dramatic drop in top income shares in the first part of the 20th century in general due to shocks to top capital incomes during the wars and depression shocks. Top income shares do not recover in the immediate post war decades. However, over the last 30 years, top income shares have increased substantially in English speaking countries and in India and China but not in continental Europe countries or Japan. This increase is due in part to an unprecedented surge in top wage incomes. As a result, wage income comprises a larger fraction of top incomes than in the past. Finally, we discuss the theoretical and empirical models that have been proposed to account for the facts and the main questions that remain open.
    JEL: H2 N10 O15
    Date: 2009–10
  5. By: Stavros Panageas
    Abstract: The termination of a representative financial firm due to excessive leverage may lead to substantial bankruptcy costs. A government in the tradition of Ramsey (1927) may be inclined to provide transfers to the firm so as to prevent its liquidation and the associated deadweight costs. It is shown that the optimal taxation policy to finance such transfers exhibits countercyclicality and history dependence, even in a complete market. These results are in contrast with pre-existing literature on optimal fiscal policy, and are driven by the endogeneity of the transfer payments that are required to salvage the financial firm.
    JEL: E62 G28 H2 H21
    Date: 2009–10
  6. By: André C. Martínez Fritscher; Aldo Musacchio
    Abstract: In the last few years there has been an explosion in the number of papers that aim to explain what determines country risk (defined as the difference between the yield of a sovereign’s bonds and the risk free rate). In this paper, we contribute to the discussion using by showing that Brazilian states with natural endowments that allowed them to export commodities that were in high demand (e.g., rubber and coffee) between 1891 and 1930 ended up having higher revenues per capita and, thus, lower cost of capital. The link between exports and state government revenues works in the Brazilian case because of the extreme form of fiscal federalism that the Brazilian government adopted in the Constitution of 1891, giving state governments the sole right to tax exports. We create a panel of state debt risk premia and a series of state level fiscal variables and we show, using OLS, that having specific commodities gave states access capital in better terms (i.e., lower risk premium) in international markets. We also confirm our results that states with better commodities had lower risk premia when we use export price indices for each of the states as instruments for state revenue per capita.
    JEL: H4 H74 N0 N16 N96
    Date: 2009–10

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