New Economics Papers
on Public Finance
Issue of 2011‒02‒26
eleven papers chosen by

  1. Three VAT Studies By Sijbren Cnossen
  2. Consumption and Cash-Flow Taxes in an International Setting By Alan J. Auerbach; Michael P. Devereux
  3. The Elasticity of Taxable Income and the Optimal Income Tax Rate in Japan: Evidence from the Japanese Household Microdata By Yukinobu Kitamura; Takeshi Miyazaki
  4. Social Security Tax and Endogenous Technical Change in an Economy with an Aging Population By Codrina Rada
  5. Preference Heterogeneity and Optimal Capital Taxation By Mikhail Golosov; Aleh Tsyvinsky; Matthew Weinzierl
  6. Search costs and corporate income tax competition By Kai A. Konrad
  7. Too Low to Be True: The Use of Minimum Thresholds to Fight Tax Evasion By Tonin, Mirco
  8. Comparing the Treatment of Charities Under Value Added Taxes and Retail Sales Taxes By Walter Hellerstein
  9. Media Firm Strategy and Advertising Taxes By Kind, Hans Jarle; Koethenbuerger, Marko; Schjelderup, Guttorm
  10. Inequality, Inequity Aversion, and the Provision of Public Goods By Kölle, Felix; Sliwka, Dirk; Zhou, Nannan
  11. The Origins and Severity of the Public Pension Crisis By Dean Baker

  1. By: Sijbren Cnossen
    Abstract: This volume presents three studies on the VAT. The first study is a VAT primer for lawyers, economists, and accountants who rarely talk to each other about tax issues, particularly in the Netherlands. The different views illuminate the nature and workings of the VAT.
    JEL: H2 H7 K34
    Date: 2010–12
  2. By: Alan J. Auerbach; Michael P. Devereux
    Abstract: We model the effects of consumption-type taxes which differ according to the base and location of the tax. Our model incorporates a monopolist producing and selling in two countries with three sources of rent, each in a different location: a fixed factor (located with production), mobile managerial skill, and a monopoly mark-up (located with consumption). In the general case, we show that for national governments, there are tradeoffs in choosing between alternative taxes. In particular, a cash-flow tax on a source basis creates welfare-impairing distortions to production and consumption, but is incident on the owners of domestic production who may be non-resident. By contrast, a destination-based cash-flow tax does not distort behavior, but is incident only on domestic residents. In the alternative case of perfect competition, with the returns to the fixed factor accruing to domestic residents, the only distortion from the source-based tax is through the allocation of the mobile managerial skill. In this case, the sourcebased tax is also incident only on domestic residents, and is dominated by an equivalent tax on a destination basis, or by a sales tax.
    Date: 2010–05
  3. By: Yukinobu Kitamura; Takeshi Miyazaki
    Date: 2010–08
  4. By: Codrina Rada
    Abstract: This paper presents a classical model of economic growth which incorporates class conflict and induced technological change to show how demographic changes can affect future income distribution and production relations in industrialized countries. Specifically, I use an extended real wage Phillips curve to account for the effects of a social security tax on income distribution and therefore on capital accumulation and employment. In this framework output growth is determined from the supply side by available savings. Analytical and simulation results indicate that the sustainability of an economy with fast population aging over transient paths hinges upon improvements in labor productivity, hence, the specific mechanism of technical progress in place.
    Keywords: Population aging; Social security tax; Endogenous technical change
    JEL: E62 E24 O30
    Date: 2011
  5. By: Mikhail Golosov; Aleh Tsyvinsky; Matthew Weinzierl
    Abstract: We analytically and quantitatively examine a prominent justification for capital income taxation: goods preferred by those with high ability ought to be taxed. We study an environment where commodity taxes are allowed to be nonlinear functions of income and consumption and find that, when ability is positively related to a preference for a good, optimal marginal commodity taxes on this good may be regressive: i.e., declining with income. We derive an analytical expression for optimal commodity taxation, allowing us to study the forces for and against regressivity. We then parameterize the model to evidence on the relationship between skills and preferences and examine the quantitative case for taxes on future consumption (saving). The relationship between skill and time preference delivers quantitatively small, generally regressive capital income taxes and would justify only a fraction of the prevailing level of capital income taxation.
    Date: 2010–06
  6. By: Kai A. Konrad (Max Planck Institute for Tax Law and Public Finance)
    Abstract: This paper studies corporate tax competition if it is costly to learn some of the elements that determine the e¤ective tax burden. Search cost may, but need not, eliminate the tax competition pressure. The outcome depends on the boundaries of tax rate and tax base choices. Search cost can explain the empirically observed tax cuts cum base broadening.
    Keywords: Costly search, tax competition, corporate taxation, monopoly pricing paradox
    JEL: H70 H87
    Date: 2011
  7. By: Tonin, Mirco (University of Southampton)
    Abstract: The enforcement of compliance with tax regulation is a complex task. This is particularly the case when the administrative capacity of the tax authority is low, as it often happens in developing and transition countries. This paper draws on some international experiences in fighting tax evasion to identify tools that can be used to reduce underreporting by employed labor, small and medium enterprises, self-employed, and professionals. In particular, I analyze the use of minimum thresholds, where taxpayers cannot declare an income below a certain amount or, alternatively, are subject to a higher probability of an audit if they decide to do so. First, I model the impact of minimum thresholds by explicitly taking into account low administrative capacity. The model shows that introducing a threshold creates a spike and a "missing middle" in the distribution of declared incomes and highlights under which conditions a threshold is likely to increase net revenues. I then analyze two policies used to fight underreporting: the Italian "Business Sector Analysis" and the Bulgarian "Minimum Social Insurance Thresholds". The Italian tax authority infers "normal" revenues and compensations by small and medium enterprises, self-employed, and professionals from indicators that are difficult to conceal or manipulate. In case the taxpayer decides to declare less than the "normal" level, the probability of an audit increases and the burden of proof is reversed. Bulgaria has established a system of differentiated minimum social insurance thresholds depending on sector and profession, so that social security contributions cannot be lower than the ones implied by the threshold. To conclude, I appraise the applicability of these two systems in other countries.
    Keywords: tax evasion, minimum threshold, studi di settore
    JEL: H26 K35 K42 P37
    Date: 2011–02
  8. By: Walter Hellerstein (University of Georgia)
    Abstract: This paper compares the treatment of charities under value added taxes (VATs) and retail sales taxes (RSTs) from both a normative and descriptive perspective. There is general agreement that an ideal VAT and an ideal RST would tax supplies or sales in the same way by imposing a uniform levy on all sales to final consumers and relieving businesses of any economic burden from the tax, except the burden of tax collection. Although it may appear desirable to relieve charities’ purchases or sales of a VAT or RST burden to encourage charitable undertakings, attempting to support charities through modification of the VAT or RST creates a number of problems. These include undermining economic neutrality, by distorting input choices, incentivizing self-supply, and frustrating the destination principle; producing negative revenue consequences; fostering “exemption” or “rate reduction” creep; and adding to the complexity of tax administration. Because of these concerns, “best practices” for charities under a VAT or an RST counsel against special treatment within the tax regime itself and favor support of charities through direct government subsidies. In practice, however, most VAT and RST regimes do seek to provide relief for charities within the tax regime. Most VAT regimes treat charities as exempt, imposing no tax on their sales but taxing their purchases without credit or refund for taxes paid. Under the American subnational RST, over half the states with RSTs relieve charities of the burden of paying sales tax and roughly one third exempt charities’ sales from taxation, although many charities’ sales fall outside the scope of the American RST, which generally does not apply to services. As a consequence, VATs and RSTs often give rise to the problems identified above.
    Date: 2011
  9. By: Kind, Hans Jarle (Dept. of Economics, Norwegian School of Economics and Business Administration); Koethenbuerger, Marko (Dept. of Economics, University of Copenhagen); Schjelderup, Guttorm (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: Empirical evidence suggests that people dislike ads in TV programs and other media products. In such situations standard economic theory prescribes that the advertising volume can be optimally reduced by levying a tax on ads. However, making use of recent advances in the theory of firm behavior in two-sided markets, we show that taxation of ads may be counterproductive. In particular, we identify a number of situations in which ad-adverse consumers are negatively affected by the tax, and we even show that the tax may lead to higher ad volumes. This unorthodox reaction to a tax may arise when consumers significantly dislike ads, i.e. in situations where traditional arguments for corrective taxes are strongest.
    Keywords: Two-sided markets; media market; pricing strategy; taxation
    JEL: H20
    Date: 2011–02–21
  10. By: Kölle, Felix (University of Cologne); Sliwka, Dirk (University of Cologne); Zhou, Nannan (University of Cologne)
    Abstract: We investigate the effects of inequality in wealth on the incentives to contribute to a public good when agents are inequity averse and may differ in ability. We show that equality may lead to a reduction of public good provision below levels generated by purely selfish agents. But introducing inequality motivates more productive agents to exert higher efforts and help the group to coordinate on equilibria with less free-riding. As a result, less able agents may benefit from initially disadvantageous inequality. Moreover, the more inequity averse the agents, the more inequality should be imposed even by an egalitarian social planner.
    Keywords: public goods, inequality, inequity aversion, social welfare, voluntary provision, income distribution, heterogeneity
    JEL: H41 D31 D63 J31 M52
    Date: 2011–02
  11. By: Dean Baker
    Abstract: There has been considerable attention given in recent months to the shortfalls faced by state and local pension funds. Using the current methodology of assessing pension obligations, the shortfalls sum to nearly $1 trillion. Some analysts have argued that by using what they consider to be a more accurate methodology, the shortfalls could be more than three times this size. Based on these projections, many political figures have argued the need to drastically reduce the generosity of public sector pensions, and possibly to default on pension obligations already incurred. This paper shows: * Most of the pension shortfall using the current methodology is attributable to the plunge in the stock market in the years 2007-2009. * The argument that pension funds should only assume a risk-free rate of return in assessing pension fund adequacy ignores the distinction between governmental units, which need be little concerned over the timing of market fluctuations, and individual investors, who must be very sensitive to market timing. * The size of the projected state and local government shortfalls measured as a share of future gross state products appear manageable.
    Keywords: pension funds, pensions
    JEL: H H5 H55
    Date: 2011–02

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