nep-pub New Economics Papers
on Public Finance
Issue of 2010‒05‒15
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal capital income taxation with housing By Makoto Nakajima
  2. Income Taxation in an Empirical Collective Household Labour Supply Model with Discrete Hours By Hans G. Bloemen
  3. Investment Behavior and the Biased Perception of Limited Loss Deduction in Income Taxation By Martin Fochmann; Dirk Kiesewetter; Abdolkarim Sadrieh
  4. Measuring the Effects of Fiscal Policy By Hafedh Bouakez; Foued Chihi; Michel Normandin
  5. Does Ricardian Equivalence hold when expectations are not rational? By Evans , George W; Honkapohja , Seppo; Mitra, Kaushik

  1. By: Makoto Nakajima
    Abstract: This paper quantitatively investigates the optimal capital income taxation in the general equilibrium overlapping generations model, which incorporates characteristics of housing and the U.S. preferential tax treatment for owner-occupied housing. Housing tax policy is found to have a substantial effect on how capital income should be taxed. Given the U.S. preferential tax treatment for owner-occupied housing, the optimal capital income tax rate is close to zero, contrary to the high optimal capital income tax rate implied by models without housing. A lower capital income tax rate implies a narrowed tax wedge between housing and non-housing capital, which indirectly nullifies the subsidies (taxes) for homeowners (renters) and corrects the over-investment to housing.
    Keywords: Taxation ; Housing
    Date: 2010
  2. By: Hans G. Bloemen (VU University Amsterdam)
    Abstract: Most empirical studies on the impact of labour income taxation on the labour supply behaviour of households use a unitary modelling approach. In this paper we empirically analyze income taxation and the choice of working hours by combining the collective approach for household behaviour and the discrete hours choice framework with fixed costs of work. We identify the sharing rule parameters with data on working hours of both the husband and the wife within a couple. Parameter estimates are used to evaluate various model outcomes, like the wage elasticities of labour supply and the impacts of wage changes on the income sharing between husband and wife. We also simulate the consequences of a policy change in the tax system. We find that the collective model has different empirical outcomes of income sharing than a restricted model that imposes pooling of men's earnings and the household's non-labour income in the female's budget constraint. These differences in outcomes have consequences for the evaluation of a policy change in the tax system.
    Keywords: Labour supply; Household Behaviour; Collective Model; Taxation
    JEL: J22
    Date: 2010–01–07
  3. By: Martin Fochmann (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Dirk Kiesewetter (Faculty of Economics and Management, JUlius-Maximilians University Würzburg); Abdolkarim Sadrieh (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: We use a laboratory experiment to study the extent to which investors’ choices are affected by limited loss deduction in income taxation. We first compare investment behavior in the no tax baseline to a tax control setting, in which the income from investments is taxed. We find that investors significantly reduce their risk-taking as predicted by theory. Next we compare the baseline investment choices to choices under three different types of income taxation. We observe that risk-taking is significantly increased with partial and with capped loss deduction, but is unaffected by a tax system that allows no loss deduction. Since in all these treatments the after tax outcomes of the prospects were identical, we conjecture that investors have a positively biased perception of partial and capped loss deduction that promotes their willingness to take risks.
    Keywords: risk-taking behavior, distorting taxation, tax perception
    JEL: C91 D14 H24
    Date: 2010–01
  4. By: Hafedh Bouakez; Foued Chihi; Michel Normandin
    Abstract: Measuring the effects of discretionary fiscal policy is both difficult and controversial, as some explicit or implicit identifying assumptions need to be made to isolate exogenous and unanticipated changes in taxes and government spending. Studies based on structural vector autoregressions typically achieve identification by restricting the contemporaneous interaction of fiscal and non-fiscal variables in a rather arbitrary way. In this paper, we relax those restrictions and identify fiscal policy shocks by exploiting the conditional heteroscedasticity of the structural disturbances. We use this methodology to evaluate the macroeconomic effects of fiscal policy shocks in the U.S. before and after 1979. Our results show substantive differences in the economy’s response to government spending and tax shocks across the two periods. Importantly, we find that increases in public spending are, in general, more effective than tax cuts in stimulating economic activity. A key contribution of this study is to provide a formal test of the identifying restrictions commonly used in the literature.
    Keywords: Fiscal policy, Government spending, Taxes, Primary deficit, Structural vector auto-regression, Identification
    JEL: C32 E62 H20 H50 H60
    Date: 2010
  5. By: Evans , George W (University of Oregon, University of St Andrews); Honkapohja , Seppo (Bank of Finland); Mitra, Kaushik (University of St Andrews)
    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 depend on government financial variables under deficit financing.
    Keywords: taxation; expectations; Ramsey model; Ricardian Equivalence
    JEL: D84 E21 E43 E62
    Date: 2010–05–05

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