nep-pub New Economics Papers
on Public Finance
Issue of 2011‒01‒03
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Capital taxation with entrepreneurial risk By Vasia Panousi
  2. Corporation Income Taxes and the Cost of Capital: A Revision By James W. Kolari; Ignacio Velez Pareja
  3. On the optimality of Ramsey taxes in Mirless economies By Borys Grochulski
  4. Progressive Taxation and Tax Morale By Philipp Doerrenberg; Andreas Peichl
  5. Fair and efficient taxation under partial control: theory and evidence By Erwin OOGHE; Andreas PEICHL
  6. Optimal taxation and monitoring in an economy with matching frictions and underground activities By Lisi, Gaetano
  7. A short history of tax compliance in Italy By Stefano Manestra

  1. By: Vasia Panousi
    Abstract: This paper studies the effects of capital taxation in a dynamic heterogeneous-agent economy with uninsurable entrepreneurial risk. Although it allows for rich general-equilibrium effects and a stationary distribution of wealth, the model is highly tractable. This permits a clear analysis, not only of the steady state, but also of the entire transitional dynamics following any change in tax policies. Unlike either the complete-markets paradigm or Bewley-type models where idiosyncratic risk impacts only labor income, here it is shown that capital taxation may actually stimulate capital accumulation. This possibility emerges because of the general-equilibrium effects of the insurance aspect of capital taxation. In particular, for the preferred calibrated version of the model, when the tax on capital is 25 percent, output per work-hour is 2.2 percent higher than it would have been had the tax rate been zero. Turning to the welfare effects of a reform in capital taxation, it is examined how these effects depend on whether one focuses on the steady state or also takes into account transitional dynamics, as well as how they vary in the cross-section of the population (rich versus poor, entrepreneurs versus non-entrepreneurs).
    Date: 2010
  2. By: James W. Kolari; Ignacio Velez Pareja
    Abstract: The value of debt tax shields in foundational corporate valuation models by Nobel Laureates Modigliani and Miller (MM) continues to be a controversial issue that is central to our understanding of corporate finance. This paper argues that a fundamental valuation problem exists in the MM tax models. To overcome this problem, we propose a revision to their now famous tax correction model that yields much smaller tax gains on debt usage. Rather than discounting debt interest payments using a riskless interest rate or unlevered equity rate, due to implausible valuation results implicit in this approach, the levered cost of equity is employed. Assuming no bankruptcy risk and no personal taxes, the proposed revised tax model yields an inverted U-shaped firm value function with an interior optimal capital structure. Analyses are extended to Miller’s personal tax extension of MM’s tax model. Also, implications to corporate capital structure decisions and previous literature are discussed.
    Date: 2010–11–30
  3. By: Borys Grochulski
    Abstract: In this paper, we show that a simple, linear capital tax— the kind used in the Ramsey analysis— can be optimal in a Mirrlees economy with private information. We extend the Mirrlees approach to optimal taxation by studying taxes side-by-side with another institution, rather than in isolation. We consider an implementation in which agents use unsecured credit and personal bankruptcy to obtain insurance. Taxes are levied to fund government expenditures. An optimal tax system consists of lump-sum taxes and a simple Ramsey tax on wealth. In Mirrlees private information environments, optimal capital taxes do not have to be complicated.
    Keywords: Financial markets ; Financial institutions ; Bankruptcy
    Date: 2010
  4. By: Philipp Doerrenberg (CGS, University of Cologne); Andreas Peichl (IZA, University of Cologne, ISER and CESifo)
    Abstract: As the link between tax compliance and tax morale is found to be robust, finding the determinants of tax morale can help to understand and fight tax evasion. In this paper we analyze the effect of progressive taxation on tax morale in a cross-country approach - which has not been investigated before. Our theoretical analysis leads to two testable predictions. First, an individual's tax morale is higher, the more progressive the tax schedule is. Second, the impact of tax progressivity on tax morale is declining in income. In our empirical analysis, we make use of a unique dataset of tax progressivity measures and follow most of the tax morale literature by employing the World Values Survey to measure tax morale. Controlling for a wide range of variables, we confirm both hypotheses in our empirical analysis.
    Keywords: Tax Morale, Tax Compliance, Progressivity, Taxation, Redistribution
    JEL: H26 H24 D7 D31
    Date: 2010–12–14
  5. By: Erwin OOGHE; Andreas PEICHL
    Abstract: There is clear evidence that fairness plays a role in redistribution. Individuals want to compensate others for their misfortune, while they allow them to enjoy the fruits of their effort. Such fairness considerations have been introduced in political economy and optimal income tax models with a focus on income acquisition. However, actual tax-benefit systems are based on much more information. We introduce fairness in a tax-benefit scheme that is based on several characteristics. The novelty is the introduction of partial control. Each characteristic differs in terms of the degree of control, i.e., the extent to which it can be changed by exerting effort. Two testable predictions result. First, the tax rate on partially controllable characteristics should be lower compared to the tax rate on non- controllable tags. Second, the total effect of non-controllable characteristics on the post-tax outcome should be equal to zero. We estimate implicit tax rates for different characteristics in 26 European countries (using tEU-SILC data) and the US (using CPS data). We find a robust tendency in all countries to compensate more for the uncontrollable composite characteristic (based on sex, age and disability in our study) compared to the partially controllable one (based on family composition, immigration status, unemployment and education level). We also estimate the degree of fairness of tax-benefit schemes in different countries. Only the Continental countries France and Luxembourg pass the fairness test, whereas the Baltic and Anglo-Saxon countries (including the US) perform worst.
    Date: 2010–12
  6. By: Lisi, Gaetano
    Abstract: This short paper shows the interdependence of taxation and monitoring policy in a search and matching model of equilibrium unemployment with an underground sector. More precisely, from a social welfare standpoint, two options are available to the policy maker: s/he may either substitute a tighter monitoring with a higher penalty or enforce both a higher taxation and an increased monitoring.
    Keywords: optimal taxation; tax evasion; underground economy; job search theory
    JEL: H21 J64 E26 H26
    Date: 2010–11–27
  7. By: Stefano Manestra (Banca d'Italia)
    Abstract: This study retraces the history of tax compliance in Italy from unification to today. We review the attempts at evaluating the gap between actual and potential tax revenue, from nineteenth-century descriptive statistics up until the formal estimates of recent decades, which distinguish lawful tax erosion from avoidance and evasion. Secondly, we analyze the explanations given and solutions proposed to increase tax compliance, grouping them into five "theses": excessive tax burden, structural deficiencies in specific taxes, inefficiency of tax administration, taxpayers’ reluctance and the complexity of tax laws. We also assess the changing attitudes of taxpayers towards tax and the tax authorities over the same period. The excursus shows that compliance problems are a long-term constant of the Italian tax system, even if their scale has diminished over time, at least in percentage terms. The problems have always originated from a specific group of taxpayers (self-employed workers and sole proprietorships). On the other hand the causes, and therefore the solutions to be taken into consideration, are complex and multifaceted.
    Keywords: tax compliance, tax evasion, tax history
    JEL: H2 N4
    Date: 2010–12

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