nep-pub New Economics Papers
on Public Finance
Issue of 2010‒06‒18
eleven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Who Benefits from the Earned Income Tax Credit? Incidence among Recipients, Coworkers and Firms By Leigh, Andrew
  2. Income taxes, subsidies to education, and investments in human capital By C. Mendolicchio; D. Paolini; T. Pietra
  3. Optimal Taxes on Wealth and Consumption in the Presence of Tax Evasion By Johann K. Brunner; Susanne Pech; Paul Eckerstorfer
  4. Income Tax Incidence with Positive Population Growth By Michael Sattinger
  5. Tax Buyouts By Marco Del Negro; Fabrizio Perri; Fabiano Schivardi
  6. And the tax winner is ... A note on endogenous timing in the commodity taxation race. By Hubert Kempf; Grégoire Rota-Graziosi
  7. Further Consideration of the Existence of Nash Equilibria in an Asymmetric Tax Competition Game. By Emmanuelle Taugourdeau; Abderrahmane Ziad
  8. Endogenizing leadership in the tax competition race. By Hubert Kempf; Grégoire Rota-Graziosi
  9. Corporate tax effects on the quality and quantity of FDI By Johannes Becker; Clemens Fuest; Nadine Riedel
  10. Tax Evasion and Tax Avoidance in Developing Countries: The Role of International Profit Shifting By Clemens Fuest; Nadine Riedel
  11. Cooperative provision of indivisible public goods. By Pierre Dehez

  1. By: Leigh, Andrew (Australian National University)
    Abstract: How are hourly wages affected by the Earned Income Tax Credit? Using variation in state EITC supplements, I find that a 10 percent increase in the generosity of the EITC is associated with a 5 percent fall in the wages of high school dropouts and a 2 percent fall in the wages of those with only a high school diploma, while having no effect on the wages of college graduates. Given the large increase in labor supply induced by the EITC, this is consistent with most reasonable estimates of the elasticity of labor demand. Although workers with children receive a much larger EITC than childless workers, and the effect of the credit on labor force participation is larger for those with children, the hourly wages of both groups are similarly affected by an EITC increase. As a check on this strategy, I also use federal variation in the EITC across gender-age-education groups, and find that those demographic groups that received the largest EITC increases also experienced a drop in their hourly wages, relative to other groups.
    Keywords: taxation incidence, labor supply, simulated instrument
    JEL: H22 H23 J22 J30
    Date: 2010–05
  2. By: C. Mendolicchio; D. Paolini; T. Pietra
    Abstract: We study a two-sector economy with investments in human and physical capital and imperfect labor markets. Human and physical capital are heterogeneous. Workers and firms endogenously select the sector they are active in, and choose the amount of their sector-specific investments in human and physical capital. To enter the high-skill sector, workers must pay a fixed cost that we interpret as direct cost of education. Given the distribution of the agents across sectors, at equilibrium, in each sector there is underinvestment in both human and physical capital, due to non-contractibility of investments. A second source of inefficiency is related to the self-selection of the agents into the two sectors. It typically induces too many workers to invest in education. Under suitable restrictions on the parameters, the joint effect of the two distortions is that equilibria are characterized by too many people investing too little effort in the high skill sector. We also analyze the welfare properties of equilibria and study the effects of several tax-subsidy policies on the total expected surplus.
    JEL: J24 H2
    Date: 2010–05
  3. By: Johann K. Brunner; Susanne Pech; Paul Eckerstorfer
    Abstract: This article incorporates tax evasion into an optimum taxation framework with individuals differing in earning abilities and initial wealth. We find that despite the possibility of its evasion a tax on initial wealth should supplement the optimal nonlinear income tax, given a positive correlation between initial wealth and earning abilities. Further, even if income and initial wealth are taxed optimally, it is still desirable to levy a tax on commodities, though it can be evaded as well. Thus, our result provides a rationale for a comprehensive tax system. Optimal tax rates on commodities differ in general, however for the special case of a uniform evasion technology it turns out that equal rates are optimal if preferences are homothetic and weakly separable.
    Keywords: Optimal Taxation, Tax Evasion
    JEL: D82 H21 H24 H26
    Date: 2010–03
  4. By: Michael Sattinger
    Abstract: This paper develops a model of safety first consumption behavior in which the likelihood of survival to the next period depends on current consumption levels. Below a threshold asset level, individuals follow a decumulation path, and above that level they follow an accumulation path. Saving rates then vary discontinuously with asset level, generating a poverty trap and divergence in incomes. Reduction of risk raises saving rates. A more equitable distribution of assets can be consistent with greater aggregate savings and growth because of declining marginal propensity to save over some asset intervals.
    Date: 2010
  5. By: Marco Del Negro (Federal Reserve Bank of New York); Fabrizio Perri (University of Minnesota, Federal Reserve Bank of Minneapolis, CEPR and NBER); Fabiano Schivardi (Universit`a di Cagliari, EIEF and CEPR)
    Abstract: The paper studies a fiscal policy instrument that can reduce fiscal distortions without affecting revenues, in a politically viable way. The instrument is a private contract (tax buyout), offered by the government to each citizen, whereby the citizen can choose to pay a fixed price in exchange for a given reduction in her tax rate for a period of time. We introduce the tax buyout in a dynamic overlapping generations economy, calibrated to match several features of the US income, taxes and wealth distribution. Under simple pricing, the introduction of the buyout is revenue neutral but, by reducing distortions,it benefits a significant fraction of the population and leads to sizable increases in aggregate labor supply, income and consumption.
    JEL: E62 H21
    Date: 2010
  6. By: Hubert Kempf (Centre d'Economie de la Sorbonne - Paris School of Economics et Banque de France); Grégoire Rota-Graziosi (CERDI, Université d'Auvergne)
    Abstract: This note investigates the endogenous choice of leadership in commodity tax competition. We apply an endogenous timing game, where jurisdictions commit themselves to lead or to follow, to the Kanbur and Keen (1993) model. We show that the Subgame Pefect Nash Equilibria (SPNE) correspond to the two Stackelberg situations, yielding to a coordination issue. Selecting an equilibrium by means of the risk-dominance criterion, we prove that the smaller country has to lead. If asymmetry among countries is sufficient Pareto-dominance reinforces risk-dominance in selecting the same SPE. We deduce two important results for the literature of tax competition : when countries differ sufficiently by their size, the "big-country-higher-tax" rule does not hold anymore ; when countries are close in size, tax harmonization through a unique tax rate among countries occurs without any international agreement.
    Keywords: Commitment, commodity tax competition, strategic complements, Stackelberg Equilibrium, Pareto dominance, risk dominance.
    JEL: C72 H30 H87
    Date: 2010–05
  7. By: Emmanuelle Taugourdeau (Centre d'Economie de la Sorbonne - Paris School of Economics); Abderrahmane Ziad (CREM - Université de Caen)
    Abstract: In this methodological paper, we prove that the key tax competition game introduced by Zodrow and Mieszkowski (1986) and Wildasin (1988), extended to asymmetric regions, possesses a Nash equilibrium under several assumptions commonly adopted in the literature : goods are supposed to be normal ; the public good is assumed to be a desired good ; the demand for capital is concave ; and the elasticity of the marginal product is bounded. The general framework we develop enrables us to obtain very tractable results. By applying our method to several examples with standard production functions, we show that it is easy to use.
    Keywords: Nash equilibrium, tax competition.
    JEL: C72 H21 H42 R50
    Date: 2010–01
  8. By: Hubert Kempf (Centre d'Economie de la Sorbonne - Paris School of Economics et Banque de France); Grégoire Rota-Graziosi (CERDI, Université d'Auvergne)
    Abstract: In this paper, we extend the stansard approach of horizontal tax competition by endogenizing the timing of decisions made by the competing jurisdictions. Following the literature on the endogenous timing in duopoly games, we consider a pre-play stage, where jurisdictions commit themselves to move early or late, i.e. to fix their tax rate at a first or second stage. We highlight that at least one jurisdiction experiments a second-mover advantage. We show that the Subgame Perfect Equilibria (SPEs) correspond to the two Stackelberg situations yielding to a coordination problem. In order to solve this issue, we consider a quadratic specification of the production function, and we use two criteria of selection. Pareto-dominance and riskk-dominance. We emphasize that at the safer equilibrium the less productive or smaller jurisdiction leads and hence loses the second-mover advantage. If asymmetry among jurisdictions is sufficient, Pareto-dominance reinforces risk-dominance in selecting the same SPE. Three results may be deduced from our analysis : (i) the downward pressure on tax rates is less severe than predicted ; (ii) the smaller jurisdiction leads ; (iii) the &quotbig-country-higher-tax-rate" rule does not always hold.
    Keywords: Endogenous timing, tax competition, first/second-mover advantage, strategic complements, Stackelberg, Risk dominance.
    JEL: H30 H87 C72
    Date: 2010–05
  9. By: Johannes Becker (Max Planck Institute for Intellectual Property, Competition and Tax Law); Clemens Fuest (Oxford University Centre for Business Taxation); Nadine Riedel (Oxford University Centre for Business Taxation)
    Abstract: This paper measures the relative importance of quality and quantity effects of corporate taxation on foreign direct investment. Quantity is affected if corporate taxes reduce the equilibrium stock of foreign capital in a given country. Quality effects arise if taxes decrease the extent to which investment contributes to the corporate tax base and the capital intensity of production. Depending on the sign of the quality effects, the detrimental welfare effects of corporate taxation are either mitigated or aggravated. We derive a number of hypotheses how corporate tax changes may affect the quality of investment. Our hypotheses are then tested using data from a large sample of European multinationals. With regard to corporate tax effects on the corporate tax base, we find that quality effects account for up to fourty per cent of the total effect. With regard to corporate tax effects on labour income, our results suggest that quality effects mitigate the negative quantity effect by nearly sixty percent (as corporate taxes strongly increase the labor intensity of production). An important implication is that governments should not exclusively care about the size of inbound FDI flows but also about their specific characteristics, i.e. their quality.
    Keywords: Corporate Taxation, Foreign Direct Investment, Multinational Firms
    JEL: H25 F23
    Date: 2010
  10. By: Clemens Fuest (Oxford University Centre for Business Taxation); Nadine Riedel (Oxford University Centre for Business Taxation)
    Abstract: In the debate on the impact of illicit capital flows on developing countries, the view is widespread that profit shifting to low tax jurisdictions undermines the ability of developing countries to raise tax revenue. While the shifting of income out of developed countries is a widely debated issue, empirical evidence on the magnitude of the problem and on the factors driving income shifting is scarce. This paper reviews the literature on tax avoidance and evasion through border crossing income shifting out of developing countries. Moreover, we discuss methods and available datasets which can be used to gain new insights into the problem of corporate income shifting. We argue that results of many existing studies on tax avoidance and evasion in developing countries are difficult to interpret, mainly because the measurement concepts used have a number of drawbacks. We discuss some alternative methods and datasets and present some empirical evidence which supports the view that profit shifting out of many developing countries and into tax havens takes place.
    Date: 2010
  11. By: Pierre Dehez
    Abstract: A community faces the obligation of providing an indivisible public good. Each member is capable of providing it at a certain cost and the solution is to rely on the player who can do it at the lowest cost. It is then natural that he or she be compensated by the other players. The question is to know how much they should each contribute. We model this compensation problem as a cost sharing game to which standard allocation rules are applied and related to the solution resulting from the auction procedures proposed by Kleindorfer and Sertel (1994).
    Keywords: public goods, cost sharing, core, nucleolus, Shapley value.
    JEL: C71 H41 M41
    Date: 2010

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