nep-pub New Economics Papers
on Public Finance
Issue of 2010‒04‒17
thirteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The 2008 Financial Crisis and Taxation Policy By Thomas Hemmelgarn; Gaetan Nicodeme
  2. Marginal Deadweight Loss when the Income Tax is Nonlinear By Blomquist, Sören; Simula, Laurent
  3. Optimal Tax Progressivity in Unionised Labour Markets By Stefan Boeters
  4. The Responses of Taxable Income Induced by Tax Cuts – Empirical Evidence from the German Taxpayer Panel By Peter Gottfried; Daniela Witczak
  5. Evaluating Neutrality Properties of Corporate Tax Reforms By Michael P. Devereux; Simon Loretz
  6. Corporate tax harmonization in the EU By Leon Bettendorf; Michael P. Devereux; Albert van der Horst; Ruud de Mooij
  7. Impact of Tax Rate Cut Cum Base Broadening Reforms on Heterogeneous Firms – Learning from the German Tax Reform 2008 By Katharina Finke; Jost H. Heckemeyer; Timo Reister; Christoph Spengel
  8. Externality-correcting taxes and regulation By Vidar Christiansen; Stephen Smith
  9. Environmental Taxation under Productive Differentials: An Efficiency Analysis By Hadjidema, Stamatina; Eleftheriou, Konstantinos
  10. Tax or no tax? Preferences for climate policy attributes By Brännlund, Runar; Persson, Lars
  11. Transition Strategies in Fundamental Tax Reform By Christian Keuschnigg; Mirela Keuschnigg
  12. Does Ricardian Equivalence Hold When Expectations are not Rational? By George W. Evans; Seppo Honkapohja; Kaushik Mitra
  13. Contributing or Free-Riding? Voluntary Participation in a Public Good Economy By Taiji Furusawa; Hideo Konishi

  1. By: Thomas Hemmelgarn (European Commission); Gaetan Nicodeme (European Commission)
    Abstract: The 2008 financial crisis is the worst economic crisis since the Great Depression of 1929. It has been characterised by a housing bubble in a context of rapid credit expansion, high risk-taking and exacerbated financial leverage, ending into deleveraging and credit crunch when the bubble burst. This paper discusses the interactions between tax policy and the financial crisis. In particular, it reviews the existing evidence on the links between taxes and many characteristics of the crisis. Finally, it examines some possible future tax options to prevent such crises.
    Keywords: Taxation, financial crisis, banking crisis, fiscal incentives
    JEL: E62 F21 F30 G10 H20 H30 H50 H60
    Date: 2010–01
  2. By: Blomquist, Sören (Department of Economics); Simula, Laurent (Department of Economics)
    Abstract: Almost all theoretical work on how to calculate the marginal deadweight loss has been done for linear taxes and for variations in linear budget constraints. This is quite surprising since most income tax systems are nonlinear, generating nonlinear budget constraints. Instead of developing the proper procedure to calculate the marginal deadweight loss for variations in nonlinear income taxes a common procedure has been to linearize the nonlinear budget constraint and apply methods that are correct for variations in a linear income tax. Such a procedure leads to incorrect results. The main purpose of this paper is to show how to correctly calculate the marginal deadweight loss when the income tax is nonlinear. A second purpose is to evaluate the bias in results that obtains when the traditional linearization procedure is used. We perform calculations based on the 2006 US tax system and find that the relative deadweight loss caused by increasing existing tax rates is large but less than half of Feldstein’s (1999) estimates for the 1994 tax system.
    Keywords: Deadweight Loss; Taxable Income; Nonlinear Budget Constraint
    JEL: D61 H21 H24 H31
    Date: 2010–02–01
  3. By: Stefan Boeters
    Abstract: In labour markets with collective wage bargaining higher progressivity of the labour income tax creates a trade-off. On the one hand, wages are lowered and unemployment decreases, on the other hand, the individual labour supply decision is distorted at the hours-of-work margin. The optimal level of tax progressivity within this trade-off is determined using a numerical general equilibrium model with imperfect competition on the goods market, collective wage bargaining and a labour-supply module calibrated to empirically plausible elasticity values. The model is calibrated to macroeconomic and institutional parameters of both the OECD average and a number of individual OECD countries. In most cases the optimal degree of tax progressivity is below the actual level. A decomposition approach shows that the optimal level is increased by high unemployment and by the general tax level.
    Keywords: labour taxation; tax progressivity; optimal taxation; collective wage bargaining; unemployment
    JEL: H21 J22 J51 J64
    Date: 2009–10
  4. By: Peter Gottfried; Daniela Witczak
    Abstract: The elasticity of taxable income has gained increasing attention as a fiscal policy parameter. This paper provides empirical evidence for Germany and adds to the relatively small body of literature for European countries. We use a large new panel data set to analyze the taxable income response to tax rate changes in 2004 which were part of an extensive reform programme in Germany at the beginning of this century. We find an average elasticity of approximately 0.6. Separately estimated income effects however are mostly small or insignificant. The results vary when dividing taxpayers by income type and group.
    Keywords: elasticity of taxable income; tax reform; net-of-tax rate
    JEL: H24 H31
    Date: 2009–11
  5. By: Michael P. Devereux (Oxford University Centre for Business Taxation); Simon Loretz (Oxford University Centre for Business Taxation)
    Abstract: We propose a methodology for assessing the neutrality of corporate tax reform proposals in an open economy. The methodology identifies variation in effective tax rates to assess the proximity of a tax system to capital export neutrality (CEN) and to market neutrality (MN, which holds if all potential competitors in a single market face the same effective tax rate). We apply the methodology to two reform options in the EU. Optional international loss consolidation would move the EU tax system away from both CEN and MN. The proposed common consolidated corporate tax base (CCCTB) has mixed effects which depend on the precise comparisons made.
    Keywords: Corporate Taxation; International Loss Consolidation; Ap- portionment Rules; Common Consolidated Tax Base; Neutrality;
    JEL: H25 H87
    Date: 2010
  6. By: Leon Bettendorf; Michael P. Devereux; Albert van der Horst; Ruud de Mooij
    Abstract: This paper explores the economic consequences of proposed EU reforms for a common consolidated corporate tax base. The reforms replace separate accounting with formula apportionment as a way to allocate corporate tax bases across countries. To assess the economic implications, we use a numerical CGE model for Europe. It encompasses several decision margins of firms such as marginal investment, FDI decisions, and multinational profit shifting. The simulations suggest that consolidation does not yield substantial welfare gains for Europe. The variation of effects across countries is large and depends on the choice of the apportionment formula. Consolidation with formula apportionment does not weaken incentives for tax competition. Tax competition instead offers a rationale for rate harmonisation, in addition to base harmonisation.
    Keywords: Corporate Tax Harmonisation; Common Consolidated Corporate Tax Base; Applied General Equilibrium; European Union
    JEL: C68 F23 H25
    Date: 2009–11
  7. By: Katharina Finke (Centre for European Economic Research (ZEW)); Jost H. Heckemeyer (Centre for European Economic Research (ZEW)); Timo Reister (Centre for European Economic Research (ZEW),); Christoph Spengel (University of Mannheim)
    Abstract: The German corporate tax reform of 2008 has brought about important cuts in corporate tax rates, which were at the same time accompanied by significant changes in the determination of the tax base for both major German corporate taxes - corporate income tax and trade tax. The reform followed the distinct and internationally prevalent pattern of tax rate cut cum base broadening. Its implications are thus not unique to Germany. Especially in view of the current economic crisis, questions on the distribution of the tax burden among firms of different characteristics have arisen and still remain at the heart of the academic and political debate in Germany and other countries. In this paper we present a new corporate microsimulation model, ZEW TaxCoMM, which allows for the coherent micro-based analysis of revenue implications of tax reforms and the distribution of tax consequences among heterogeneous firms. The model processes firm-level financial accounting input data and derives the firm specific tax base and tax due endogenously in accordance with the tax code. To smooth out distortions between the sample and the population of German corporations, the sample is extrapolated on the basis of the corporate income tax statistic. The simulation results show inter alia that less than 5% of all corporations did not benefit from the reform. The average annual relief as measured by the average decline in the effective tax burden on cash flows amounts to 2.8 percentage points for large corporations and to 6 percentage points for small corporations. Furthermore, the results illustrate that firms with low profitability, high debt ratio and high capital intensity benefit least from the reform. As to tax revenues, the reform induced decrease amounts to € 9.8 billion and the trade tax gains fiscally in importance.
    Keywords: tax reform, microsimulation, tax policy evaluation
    JEL: H25 H32 K34 C8
    Date: 2010
  8. By: Vidar Christiansen; Stephen Smith (Institute for Fiscal Studies and University College London)
    Abstract: <p>Much of the literature on externalities has considered taxes and direct regulation as alternative policy instruments. Both instruments may in practice be imperfect, reflecting informational deficiencies and other limitations. We analyse the use of taxes and regulation in combination, to control externalities arising from individual consumption behaviour. We consider cases where taxes are either imperfectly differentiated to reflect individual differences in externalities, or where some consumption escapes taxation. In both cases we characterise the optimal instrument mix, and show how changing the level of direct regulation alters the optimal externality tax.</p>
    Keywords: externalities, Pigouvian taxes, regulations
    JEL: H21 H23
    Date: 2009–09
  9. By: Hadjidema, Stamatina; Eleftheriou, Konstantinos
    Abstract: In recent years, the pollution tax instrument has become a focus of the environmental policy debate. Many countries are presently considering implementing or increasing the rate of pollution taxes, while pollution abatement subsidies are used by local governments. However, a great part of the literature argues that environmental taxation fails to create a “double-dividend” outcome and leads to a trade off between pollution levels and unemployment. In this context, a simple search and matching model of labour market is developed, where workers are characterized by heterogeneous productive abilities, so as to examine the impact of a pollution tax on employment. Furthermore, an attemption is made in order to determine the efficient level of taxation in the short run, where the assumption of free entry of firms (zero profits) is dropped.
    Keywords: pollution; search; taxes; unemployment
    JEL: H21 H23
    Date: 2010–03–18
  10. By: Brännlund, Runar (Department of Economics, Umeå University); Persson, Lars (Department of Economics, Umeå University)
    Abstract: Today, many countries around the world respond to the global warming and its consequences with various policy instruments such as e.g. taxes, subsidies, emission permit trading, regulations and information campaigns. In the economic literature, policy instruments have typically been analyzed with respect to efficiency, while little effort has been put on public preferences for these instruments. In this paper, an Internet-based choice experiment is conducted where respondents are asked to choose between two alternative policy instruments that both reduce the emissions of CO2 by the same amount. The policy instruments are characterized by a number of attributes; a technology-effect, an awareness-effect, cost distribution, geographic distribution and private cost (presented in more detail in the paper). By varying the levels of each of the attributes, respondents indirectly reveal their preferences for these attributes. Half of the respondents are faced with instruments labeled by ‘tax’ and ‘other’, whereas the other half are faced with unlabeled instruments. As for the label, the results show that people dislike the ‘tax’. The results also show that people prefer instruments with a positive effect on environmentally-friendly technology and climate awareness. A progressive-like cost distribution is preferred to a regressive cost distribution, and the private cost is negatively related to the choice. Finally, the results indicate that Swedes want the reduction to take place in Europe but not necessarily in Sweden.
    Keywords: preferences; climate policy measures; choice experiment; web-survey
    JEL: H20 H31 Q48 Q50
    Date: 2010–04–06
  11. By: Christian Keuschnigg; Mirela Keuschnigg
    Abstract: This paper discusses alternative transition strategies of moving towards an S-base cash-flow business tax. While the tax has attractive neutrality properties, moving from the current situation towards the new system often involves a stark trade-off between short-run losses and long-run gains. We evaluate several alternative transition strategies. The preferred strategy consists of instantaneous implementation, an 80% devaluation of historical tax depreciation claims, and transitory deficit financing for intertemporal tax smoothing. This policy prevents windfall gains or losses on old capital, avoids a negative impact on labor market performance and thereby prevents short-run income losses. Simulations with a calibrated model for Germany indicate that this transition policy induces strong investment driven growth and yields a 7% gain in GDP per capita and a reduction in the unemployment rate by 1.5 percentage points in the long-run.
    Keywords: Cash-flow tax, investment, unemployment, transition policy
    JEL: H21 H25 H32 J64
    Date: 2010–04
  12. By: George W. Evans; Seppo Honkapohja; Kaushik Mitra
    Abstract: This paper shows that the Ricardian Equivalence proposition can continue to hold when expectations are not rational and are instead formed using adaptive learning rules. In temporary equilibrium, with given expectations, Ricardian Equivalence holds under the standard conditions for its validity under rational expectations. Furthermore, Ricardian Equivalence holds for paths of temporary equilibria under learning provided suitable additional conditions on learning dynamics are satisfied. New cases of failure of the Ricardian proposition emerge under learning. Most importantly, agents¡¯ expectations must not de?pend on government¡¯s financial variables under deficit financing.
    Keywords: Taxation, Expectations, Ramsey Model, Ricardian Equivalence.
    JEL: E62 D84 E21 E43
    Date: 2010–03
  13. By: Taiji Furusawa; Hideo Konishi
    Abstract: We consider a (pure) public goods provision problem with voluntary participation in a quasi-linear economy. We propose a new hybrid solution concept, the free-riding-proof core (FRP-Core), which endogenously determines a contribution group, public good provision level, and its cost-sharing. The FRP-Core is always nonempty in public good economies but does not usually achieve global efficiency. The FRP-Core has support from both cooperative and noncooperative games. In particular, it is equivalent to the set of perfectly coalition-proof Nash equilibrium (Bernheim, Peleg, and Whinston, 1987) of a dynamic game with players' participation decisions followed by a common agency game of public goods provision. We illustrate various properties of the FRPCore with an example. We also show that the equilibrium level of public good shrinks to zero as the economy is replicated.
    Keywords: endogenous coalition formation, externalities, public good, perfectly coalition-proof Nash equilibrium, free-riders, free-riding-proof core, lobbying, common agency game
    Date: 2010–03

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