nep-pub New Economics Papers
on Public Finance
Issue of 2011‒10‒22
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The Tax Reform Act of 1986: Comment on the 25th Anniversary By Martin S. Feldstein
  2. Tax Reforms in EU Member States 2011: tax policy challenges for economic growth and fiscal sustainability By European Commission
  3. The Value-Added Tax Reform Puzzle By Jing Cai; Ann Harrison
  4. Optimal income taxation with tax avoidance By Casamatta, Georges
  5. Evaluation of the Effectiveness and Efficiency of Tax Benefits By Jerónimo Roca
  6. Tax Expenditures for Promoting Investment Applied to Corporate Income Tax By Juan C. Gómez Sabaini; Pedro Velasco
  7. Political competition and leadership in tax competition By Rupayan Pal; Ajay Sharma
  8. Private Provision of Public Goods and Information Diffusion in Social Groups By Scharf, Kimberley Ann

  1. By: Martin S. Feldstein
    Abstract: The Tax Reform Act of 1986 was a powerful pro-growth force for the American economy. Equally important, as we look back on it after 25 years, we also see that it taught us two important lessons. First, it showed that politicians with very different political philosophies on the right and on the left could agree on a major program of tax rate reduction and tax reform. Second, it showed that the amount of taxable income is very sensitive to marginal tax rates. More specifically, the evidence based on the 1986 tax rate reductions shows that the response of taxpayers to reductions in marginal tax rates offsets a substantial portion of the revenue that would otherwise be lost. This implies that combining a broadening of the tax base that raises revenue equal to 10 percent of existing personal income tax revenue with a 10 percent across the board cut in all marginal tax rates would raise revenue equal to about four percent of existing tax revenue. With personal income tax revenue in 2011 of about $1 trillion, that four percent increase in net revenue would be $40 billion at the current level of taxable income or more than $500 billion over the next ten years.
    JEL: H0 H2 H21 H3 H31
    Date: 2011–10
  2. By: European Commission (European Commission)
    Abstract: Fiscal sustainability and economic growth are key concerns at the current juncture. The focus of tax policy has now shifted away from stimulus measures towards a much needed consolidation of public finances, made even more necessary in light of the difficulties currently faced by some Member States in refinancing their sovereign debt. At the same time, tax policies may play an important role in enhancing the growth potential of the EU economy, which is a goal per se but also a condition for making public finance sustainable. A growth-friendly tax structure is particularly important to cope with today's policy challenges. As a background for the analysis, the 2011 issue of the report ‘Tax reforms in EU Member States’, subtitled this year as ‘Tax policy challenges for economic growth and fiscal sustainability’, provides an overview of recent trends in tax revenues and of tax measures adopted in Member States in 2010 and the first half of 2011. In addition to these descriptive chapters, this year's report provides an analytical focus on two topics of particular relevance at the current juncture. The first analytical chapter of the report addresses the multi-faceted concept of the quality of taxation – particularly relevant for any future tax reforms – with a particular focus on the tax structure. A ‘good’ tax system should design taxes so as to reduce distortions to the minimum possible and, where appropriate, correct market failures. Well-designed tax reforms promoting employment and growth can go hand in hand with social equity. To avoid adverse interaction between cross-country tax systems, tax policies should benefit from an efficient coordination at the EU level. The second analytical chapter discusses three types of potential challenges in the area of tax policy currently faced by EU Member States: (i) addressing severe fiscal consolidation challenges also on the revenue side, (ii) making the overall tax structure more growth friendly and (iii) improving the design of the tax system for individual types of taxes. Applying an indicator-based approach, the report identifies in which euro-area Member States higher tax revenues might potentially contribute to consolidation and which countries might benefit from a shift from labour taxes, in particular those bearing on vulnerable groups, to consumption and real estate taxes. Analysing more specific horizontal challenges related to the design of individual taxes, the report concludes that almost all euro-area Member States face at least one challenge.
    Keywords: financial crisis, tax policy, taxation, fiscal consolidation
    JEL: H21 H22 H23 H25 H27 H62
    Date: 2011–10
  3. By: Jing Cai; Ann Harrison
    Abstract: We explore the impact of a tax reform in some provinces of China which eliminated the value-added tax on some investment goods. While the goal of the experiment was to encourage upgrading of technology, our results suggest that there was no evident increase overall in fixed investment, and employment fell significantly in the treated provinces and sectors. The reform reduced the total number of employees for all types of firms. For domestic firms, it reduced employment by almost 8%. Our results are robust to a variety of approaches, and suggest that the primary impact of the policy has been to induce labor-saving growth. This experiment has since been extended to the rest of China.
    JEL: F21 F23 H25
    Date: 2011–10
  4. By: Casamatta, Georges
    Abstract: We follow the approach of Grochulski (2007), who determines the optimal income tax schedule when individuals have the possibility of avoiding paying taxes. We however modify his setup by considering a convex concealment cost function. This assumption violates the subadditivity property used in Grochulski (2007) and this has strong implications for the design of the tax schedule. This latter indeed shows that, with subadditivity, all individuals should declare their true income. Tax avoidance is thus not optimal. With a convex cost function, we find that a subset of individuals, located in the interior of the income distribution, should be allowed to avoid taxes, provided that the marginal cost of avoiding the first euro is suciently small. We also provide a characterization of the optimal income tax curve.
    Keywords: fiscal avoidance; optimal income tax
    JEL: H21
    Date: 2011–10
  5. By: Jerónimo Roca
    Abstract: This paper analyzes the role of fiscal incentives in developing countries and provides a theoretical evaluation of benefits and costs of certain taxes. It also reviews the most notable characteristics of tax incentives frequently granted in Latin America are revised. Special attention is paid to their effectiveness, administration costs, and distortions in allocating resources.
    Keywords: Economics :: Fiscal Policy, Effectiveness; Efficiency; Tax Benefits
    Date: 2010–06
  6. By: Juan C. Gómez Sabaini; Pedro Velasco
    Abstract: This report was commissioned by the Inter-American Development Bank's Fiscal and Municipal Management Division of the Institutional Capacity and Finance Sector within the framework of the project Tax Expenditures: Reducing Abuse and Increasing Effectiveness. It tackles controversial questions regarding the interpretation, criteria, and estimation methodologies of tax expenditures in the field of corporate income tax aimed at encouraging investment. It is intended to provide the basis for a dialogue, which could be further developed, leading to the future establishment of tax expenditure estimation directives for Latin American and Caribbean countries, and thereby contributing to the comparison of tax expenditure measurement processes.
    Keywords: Economics :: Fiscal Policy, Private Sector :: Business Development, Tax Expenditures; Tax; Expenditures; Investment; Corporate Income Tax;
    JEL: H50
    Date: 2010–10
  7. By: Rupayan Pal (Indira Gandhi Institute of Development Research); Ajay Sharma (Indira Gandhi Institute of Development Research)
    Abstract: In this paper, we introduce political competition in a sequential move tax competition game between two regions for foreign owned mobile capital. It shows that in case of sequential move, political delegation takes place only in the follower region, not in the leader region. Moreover, political competition need not necessarily lead to higher tax rate in equilibrium. These results are in the sharp contrast to the existing results.
    Keywords: Mobile capital, Tax competition, Political competition, Leadership, Public good
    JEL: F21 H25 D70 H42 D40 R50
    Date: 2011–10
  8. By: Scharf, Kimberley Ann
    Abstract: We describe a model of fundraising in social groups, where private information about quality of provision is transmitted by social proximity. Individuals engage in voluntary provision of a pure collective good that is consumed by both neighbors and non-neighbors. We show that, unlike in the case of private goods, better informed individuals face positive incentives to incur a cost to share information with their neighbors. These incentives are stronger, and provision of the pure public good greater, the smaller are individuals’ social neighborhoods.
    Keywords: private provision of public goods; social learning
    JEL: D6 D7 H1 L3
    Date: 2011–10

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