nep-pub New Economics Papers
on Public Finance
Issue of 2010‒10‒02
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Taxation over the Life Cycle By Gorry, Aspen; Oberfield, Ezra
  2. On the Optimal Taxation of Common-Pool Resources By Georgios Kossioris; Michael Plexousakis; Anastasios Xepapadeas; Aart de Zeeuw
  3. Taxing Intermediate Goods to Compensate for Distorting Taxes on Household Consumption By Bohlin, Lars
  4. Tax progression: International and intertemporal comparison using LIS data By Pogorelskiy, Kirill; Seidl, Christian; Traub, Stefan
  5. Taxation, Dividends, and Share Repurchases: Taking Evidence Global By Jacob, Martin
  6. Competition and Welfare Effects of VAT Exemptions By Helmut Dietl; Christian Jaag; Markus Lang; Urs Trinkner
  7. The economics of wealth transfer tax By CREMER, Helmuth; PESTIEAU, Pierre
  8. The Decomposition of the Redistributive Effect and the Issue of Close Equals Identification By Edyta Mazurek; Simone Pellegrino; Achille Vernizzi
  9. Cooperative provision of indivisible public goods By dEHEZ, Pierre
  10. Fiscal Institutions and Public Spending Volatility in Europe By Bruno Albuquerque

  1. By: Gorry, Aspen; Oberfield, Ezra
    Abstract: We derive the optimal labor income tax schedule for a life cycle model with deterministic productivity variation and complete asset markets. An individual chooses whether and how much to work at each date. The government must finance a given expenditure and does not have access to lump sum taxation. We develop a solution method that combines incentive constraints into a single implementability constraint. The average tax rate determines when an individual will work while the marginal tax rate determines how much she will work. The optimal tax schedule has an increasing average tax rate at low levels of income to encourage labor market participation, even in the absence of redistributive concerns. In contrast to the Mirrleesian optimal taxation literature, the marginal tax rate at the top is strictly positive.
    Keywords: Optimal Taxation; Life Cycle; Mirrlees
    JEL: E62 H21
    Date: 2010–05–26
  2. By: Georgios Kossioris (Department of Mathematics, University of Crete); Michael Plexousakis (Department of Applied Mathematics, University of Crete); Anastasios Xepapadeas (Athens University of Economics and Business and Beijer Fellow); Aart de Zeeuw (TSC, Tilburg University and Beijer Fellow)
    Abstract: Recent research developments in common-pool resource models emphasize the importance of links with ecological systems and the presence of non-linearities, thresholds and multiple steady states. In a recent paper Kossioris et al. (2008) develop a methodology for deriving feedback Nash equilibria for non-linear differential games and apply this methodology to a common-pool resource model of a lake where pollution corresponds to benefits and at the same time affects the ecosystem services. This paper studies the structure of optimal state- dependent taxes that steer the combined economic-ecological system towards the trajectory of optimal management, and provides an algorithm for calculating such taxes.
    Keywords: Differential Games, non-linear Feedback Nash Equilibria, Ecosystems, Optimal State-dependent Tax
    JEL: Q25 C73 C61
    Date: 2010–09
  3. By: Bohlin, Lars (Department of Business, Economics, Statistics and Informatics)
    Abstract: In contrast to the classic result in Diamond and Mirrlees (1971) that fiscal taxes should not be levied on intermediate use of goods, Newbury (1985) showed that, in a closed economy with Leontief technology, input taxes should be used to indirectly tax commodities that for some reason are untaxed in final consumption. <p> This paper extends the Newbury result to more general cases; i.e., to open economies with substitution possibilities in the production functions. Moreover, it shows that the welfare maximizing proportion between the tax rate for intermediate use by firms and final demand by households declines with higher elasticities of substitution in production functions and with higher price elasticities in import demand functions and export supply functions. It also shows that the welfare maximizing proportion of tax rates between households and firms for one commodity will depend upon the corresponding proportion of tax rates for important substitutes for that commodity. These results are shown both in stylized Computable General Equilibrium (CGE) models and in an applied CGE model of the Swedish economy where the tax on electricity is used as an example.
    Keywords: Optimal taxation; CGE-analysis
    JEL: D58 H21
    Date: 2010–09–21
  4. By: Pogorelskiy, Kirill; Seidl, Christian; Traub, Stefan
    Abstract: The conventional approach to comparing tax progression (using local measures, global measures or dominance relations for first moment distribution functions) often lacks applicability to the real world: local measures of tax progression have the disadvantage of ignoring the income distribution entirely. Global measures are affected by the drawback of all aggregation, viz. ignoring structural differences between the objects to be compared. Dominance relations of comparing tax progression depend heavily on the assumption that the same income distribution holds for both situations to be compared, which renders this approach impossible for international and intertemporal comparisons. Based on the earlier work of one of the authors, this paper develops a unified methodology to compare tax progression for dominance relations under different income distributions. We address it as uniform tax progression for different income distributions and present the respective approach for both continuous and discrete cases, the latter also being employed for empirical investigations. Using dominance relations, we define tax progression under different income distributions as a class of natural extensions of uniform tax progression in terms of taxes, net incomes, and differences of first moment distribution functions. To cope with different monetary units and different supports of the income distributions involved, we utilized their transformations to population and income quantiles. Altogether, we applied six methods of comparing tax progression, three in terms of taxes and three in terms of net incomes, which we utilized for empirical analyses of comparisons of tax progression using data from the Luxembourg Income Study. This is the first paper that performs international and intertemporal comparisons of uniform tax progression with actual data. For our analysis we chose those countries for which LIS disposes of data on gross incomes, taxes, payroll taxes and net incomes. This pertains to 15 countries, out of which we selected 13. This gave rise to 78 international comparisons, which we carried out for household data, equivalized data, direct taxes and direct taxes inclusive of payroll taxes. In total we investigated 312 international comparisons for each of the six methods of comparing tax progression. In two thirds of all cases we observed uniformly greater tax progression for international comparisons. In a bit more than one fifth of all cases we observed bifurcate tax progression, that is, progression is higher for one country up to some population or income quantile threshold, beyond which the situation is the opposite, i.e., progression is higher for the second country. No clear-cut findings can be reported for just one tenth of all cases. But even in these cases some curve differences are so small that they may well be ignored. We also test consistency of our results with regard to the six methods of comparing tax progression and present here twelve (Germany, the UK and the US) plus four comparing Germany and Sweden out of the total of 312 graphs, each containing six differences of first moment distribution functions. These differences can be interpreted as intensity of greater tax progression. We demonstrate the overall picture of uniform tax progression for international comparisons using Hasse diagrams. Concerning intertemporal comparisons of tax progression, we present the results for the US, the UK, and Germany for several time periods. We align our findings with respect to major political eras in these countries, e.g., G. Bush senior, W. Clinton, and G. Bush junior for the United States; M. Thatcher, J. Major, and A. Blair for the United Kingdom, and for Germany, the last year before German re-unification (1989), the beginning of H. Kohl's last term as chancellor (1994), and G. Schröder (2000). In addition, we study sensitivity of our results to the equivalence scale parameter. --
    Keywords: income tax progression,measurement of uniform tax progression,comparisons of tax progression,tax progression with different income distributions
    JEL: H23 H24
    Date: 2010
  5. By: Jacob, Martin (Uppsala Center for Fiscal Studies)
    Abstract: We compile a comprehensive international dividend and capital gains tax data set to study tax explanations of corporate payouts for a panel of 5,767 firms from 25 countries for 1990-2008. We find robust evidence that the tax penalty on dividends versus capital gains is statistically significant and negatively related to firms’ propensity to pay dividends, initiate such payments, and the amount of dividends paid. Our analysis further reveals that an increase in the dividend tax penalty raises firms’ likelihood to repurchase shares, initiate such repurchases, and the amount of shares repurchased. This is strong confirming evidence that when listed industrial firms globally design their payout policies, they take into careful consideration the relative tax implications of their payout choices.
    Keywords: Taxation; Dividends; Stock Repurchases; Payout Policy
    JEL: G10 G15 G30 G35 H24 H25
    Date: 2010–09–22
  6. By: Helmut Dietl; Christian Jaag; Markus Lang; Urs Trinkner
    Abstract: Distortions under the value-added tax (VAT) arise mainly from the exemption of specific services and sectors. This paper develops an analytical model that is applicable to any sector characterized by asymmetric VAT exemptions of services and activities or differentiated VAT rates. We analyze the effects of such asymmetric VAT regimes on market shares, optimal prices, and tax receipts analytically and by simulation. The analytical model shows how asymmetric VAT exemptions distort competition by strengthening the competitive position of non-rated firms. The net effect of VAT exemptions depends on the fraction of VAT rated inputs versus the fraction of non-rated customers. We further shed light on the main competitive impact of VAT policies, while showing the consequences on overall welfare by presenting simulation results based on a calibrated quantitative model of a selected sector. The contribution of our paper is to provide guidance on how to resolve the policy trade-off between a level playing field, consumer surplus and government tax revenue.
    Keywords: Value-added tax, indirect taxation, tax regulation, tax exemption, universal service obligation, postal sector
    JEL: H21 H25 L51 L87
    Date: 2010–09
  7. By: CREMER, Helmuth (IDEI, Toulouse School of Economics, France); PESTIEAU, Pierre (Center for Operations Research and Econometrics (CORE), Université catholique de Louvain (UCL), Louvain la Neuve, Belgium; CREPP, Université de Liège, Belgium; PSE and CEPR)
    Abstract: This paper discusses the merits of wealth transfer taxation on both efficiency and equity grounds. It first deals with the popular debate that is dominated by American economists. This debate concerns the US estate tax, which is one, among many, types of wealth transfer tax. After addressing the main issues prevailing in this debate and discussing the lack of popular support for such tax, the paper adopts a more theoretical approach to explore the pluses and the minuses of a wealth transfer tax. The main point is that the desirability of a wealth transfer tax depends on the motives of wealth accumulation and transmission.
    Keywords: estate tax, inheritance tax, bequest motives
    JEL: H21 H24
    Date: 2010–06–01
  8. By: Edyta Mazurek (Department of Statistics, Wroclaw University of Economics); Simone Pellegrino (Department of Economics and Public Finance "G. Prato", University of Torino); Achille Vernizzi (Department of Economics, Business and Statistics, University of Milan)
    Abstract: Urban and Lambert (2005, 2008) present an exhaustive summary and an in-depth discussion of the literature contributions about the decomposition of the redistributive effect of a tax (RE). The authors discuss the indexes available in the literature for the potential vertical effect (V), the loss due to horizontal fairness violations (H) and that due to re-rankings (R); they also introduce new indexes specifically conceived to take into account problems arising when groups of exact equals are substituted by groups of close equals. Close equals groups are generally obtained by splitting the pre-tax income distribution into contiguous intervals having the same bandwidth, so that the problem of the bandwidth choice arises. van de Van, Creedy and Lambert (2001) suggest choosing the bandwidth that maximizes the potential vertical effect V. Even looking for V maximization, we discuss a new criterion that yields a compromise between the contrasting needs of minimizing the effects of pre-tax within groups inequalities and the minimization of group average re-rankings. The criterion is then applied to evaluate the components of two decompositions: the former is the one suggested by Urban and Lambert (2005, 2008) as preferable, the latter is suggested by us on the basis of Urban and Lambert’s paving discussion. According to our simulation results, when comparing different income tax systems for a same population as well as adopting the “optimal” bandwidth, the new criterion seems to introduce lower approximation errors than the maximization of V.
    Keywords: Income Tax, Redistributive Effect, Horizontal Inequity, Re-ranking
    JEL: H23 H24
    Date: 2010–09
  9. By: dEHEZ, Pierre (Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium)
    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: 2010–05–01
  10. By: Bruno Albuquerque
    Abstract: This work provides empirical evidence for a sizeable, statistically significant negative impact of the quality of fiscal institutions on public spending volatility for a panel of 25 EU countries over the 1980-2007 period. The dependent variable is the volatility of discretionary fiscal policy, which does not represent reactions to changes in economic conditions. Our baseline results thus give support to the strengthening of institutions to deal with excessive levels of discretion volatility, as more checks and balances make it harder for governments to change fiscal policy for reasons unrelated to the current state of the economy. Our results also show that bigger countries and bigger governments have less public spending volatility. In contrast to previous studies, the political factors do not seem to play a role, with the exception of the Herfindahl index, which suggests that high concentration of parliamentary seats in a few parties would increase public spending volatility.
    JEL: E32 E62 H30
    Date: 2010

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