nep-pub New Economics Papers
on Public Finance
Issue of 2011‒11‒07
seventeen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. What is a "Competitive" Tax System? By Stephen Matthews
  2. Making Fundamental Tax Reform Happen By Bert Brys
  3. Taxation and Innovation By Pamela Palazzi
  4. Why Taxing Executives' Bonuses Fosters Risk-taking Behavior By Martin Grossmann; Markus Lang; Helmut Dietl
  5. Trends in Top Incomes and their Tax Policy Implications By Stephen Matthews
  6. The capital gains tax: A curse but also a blessing for venture capital investment By Achleitner, Ann-Kristin; Bock, Carolin; Watzinger, Martin
  7. Tax Reform Trends in OECD Countries By Bert Brys; Stephen Matthews; Jeffrey Owens
  8. Wage Income Tax Reforms and Changes in Tax Burdens: 2000-2009 By Bert Brys
  9. Consumption Taxation as an Additional Burden on Labour Income By Fidel Picos-Sánchez
  10. Effective taxation of top incomes in Germany By Bach, Stefan; Corneo, Giacomo; Steiner, Viktor
  11. The Evaluation of the Effectiveness of Tax Expenditures - A Novel Approach: An Application to the Regional Tax Incentives for Business Investments in Italy By Antonella Caiumi
  12. Taxation and Labor Force Participation: The Case of Italy By Fabrizio Colonna; Stefania Marcassa
  13. Corporate Taxation and SMEs: The Italian Experience: The Italian Experience By Marco Manzo
  14. Maintaining and Improving Social Security for Poorly Compensated Workers By Shawn Fremstad
  15. Public Expenditures, Taxes, Federal Transfers, and Endogenous Growth By Liutang Gong; Heng-fu Zou
  16. Financing of Public Goods through Taxation in a General Equilibrium Economy: Theory and Experimental Evidence By Juergen Huber; Martin Shubik; Shyam Sunder
  17. Diversity and Public Goods: A Natural Experiment with Exogenous Residential Allocation By Algan, Yann; Hémet, Camille; Laitin, David D.

  1. By: Stephen Matthews
    Abstract: This paper considers how tax policy and administration impact on an economy’s competitiveness and reviews various measures of ‘tax competitiveness’.
    Date: 2011–11–03
  2. By: Bert Brys
    Abstract: This paper discusses the objectives of tax reform and explores the most important environmental factors that influence the reform process, focusing on the circumstances that explain when these objectives and environmental factors may become an obstacle to the design and implementation of tax policies. The second part of this paper discusses strategies that might help policy makers to successfully implement fundamental tax reforms.
    Date: 2011–11–03
  3. By: Pamela Palazzi
    Abstract: Innovation is the cornerstone of sustained economic growth and prosperity. In a globalised world, innovation is a key driver of competitiveness between businesses and it plays a critical role in the rapid growth of emerging economies. At the same time, the global financial crisis has increased the relevance of a better understanding of the role that innovation can play in restoring sustainable growth while giving focus to the issue of constrained public resources and effective public expenditure. Especially in the current context of a global financial and economic downturn, it is particularly important that tax policies continue to provide efficient incentives to fostering innovation...
    Date: 2011–11–03
  4. By: Martin Grossmann (Institute for Strategy and Business Economics, University of Zurich); Markus Lang (Institute for Strategy and Business Economics, University of Zurich); Helmut Dietl (Institute for Strategy and Business Economics, University of Zurich)
    Abstract: Bonus taxes have been implemented to prevent managers from excessive risk-taking. This paper analyzes the effects of taxing executives' bonuses in a principal-agent model. Our model shows that unintentionally the introduction of a bonus tax intensifies the manager's risk-taking behavior and decreases the manager's effort. The principal responds to a bonus tax by offering the manager a higher fixed salary but a lower incentive-based salary.
    Keywords: Principal-agent model, bonus tax, risk-taking, executive compensation, financial regulation
    JEL: H24 J30 M52
    Date: 2011–10
  5. By: Stephen Matthews
    Abstract: This paper uses data derived from tax returns to analyse trends in the share of pre-tax personal income going to top income recipients. These data provide a more reliable source of information on top incomes than household surveys and allow a perspective of almost a century. Since the early 1980s there has been a recovery in the share of top incomes, especially in the share of the top percentile group. The increase started earlier and has been greater in the US than elsewhere. Strong upward trends can also be seen in other English-speaking countries, but such trends are more muted in Continental European countries. The differences in trends between countries may reflect measurement issues to some degree.<P> An important feature of the increased share is that it is mostly attributable to higher employment and business income, not capital income, and reflects such factors as the incentive effects of cuts in (top) marginal tax rates and the fact that the remuneration of top executives and finance professionals has become increasingly related to ‘performance’, particularly through the use of stock and stock options.<P> The policy implications of these trends depend in part on income mobility; and the limited data available suggest that there is significant mobility and that its scale has decreased only slightly over time. They also depend on the likely behavioural response to increased taxation of top incomes, where the empirical literature suggests that taxable income elasticities in some countries can be large. The paper considers the pros and cons of possible reforms in the light of such evidence.
    Date: 2011–11–03
  6. By: Achleitner, Ann-Kristin; Bock, Carolin; Watzinger, Martin
    Abstract: This article documents a statistical association between the number and success of venture capital investments and the capital gains tax rate. To do this, we analyze investment data and taxes of 32 countries from 2000 to 2010. In our data, higher capital gains tax rates are associated with fewer firms financed and a lower probability for ventures receiving follow-up funding. However, if the first investment is received when taxes are high, the probability of a firm eventually going public or being acquired increases. We conclude that high tax rates are associated with fewer, but on average more successful companies. --
    Keywords: capital gains tax,venture capital,investment
    JEL: G24 H25 H32
    Date: 2011
  7. By: Bert Brys; Stephen Matthews; Jeffrey Owens
    Abstract: Over the last two decades almost all OECD countries have made major structural changes to their tax systems. In the case of the personal and corporate income tax regimes reforms have generally been rate reducing and base broadening, following the lead given by the United Kingdom in 1984 and the United States in 1986. In some countries, including Australia and New Zealand, reforms have been profound and sometimes implemented over a very short period of time. In others, including most of Europe, Japan and many other Asian countries, reform has been a gradual process of adaptation.
    Date: 2011–11–03
  8. By: Bert Brys
    Abstract: The tax burden on labour and its evolution over time are issues that feature prominently in the political debate. Averaged across the OECD, personal income taxes, social security contributions and payroll taxes together account for more than 51% of total government revenues in 2008 (OECD, 2010). With tax burdens differentiated by earnings level and family situation, they serve a central role as redistribution policies. Importantly, by shaping both work incentives and the cost of labour, the level and structure of these taxes are major influences on the functioning of labour markets...
    Date: 2011–11–03
  9. By: Fidel Picos-Sánchez
    Abstract: The OECD’s Taxing Wages (TW) Report1 provides details of taxes paid on wages in the 34 OECD member countries. In particular, it covers the personal income tax and social security contributions paid by employees and their employers, as well as cash benefits received by families. The Report calculates the average and marginal tax burden on labour income for taxpayers at different income levels and with different family characteristics (single taxpayers and married couples with or without children). The aim of this paper is to explore the possible consequences of broadening the TW model by introducing consumption taxes, and so include the taxes that workers pay when they spend their wages in addition to the taxes that are paid when they earn them. This has been done by using micro data from Household Budget Surveys provided by several OECD countries and Eurostat, to simulate consumption taxes for families with similar characteristics to the eight types defined in Taxing Wages.
    Date: 2011–11–03
  10. By: Bach, Stefan; Corneo, Giacomo; Steiner, Viktor
    Abstract: We exploit an exhaustive administrative dataset that includes the individual tax returns of all households in the top percentile of the income distribution in Germany to pin down the effective income taxation of households with very high incomes. Taking tax base erosion into account, we find that the top percentile of the income distribution pays an effective average tax rate of 30.5 percent and contributes more than a quarter of total income tax revenue. Within the top percentile, the effective average tax rate is first increasing and then decreasing with income. Since the 1990s, effective average tax rates for the German super rich have fallen by about a third, with major reductions occurring in the wake of the personal income tax reform of 2001-2005. As a result, the concentration of net incomes at the very top of the distribution has strongly increased in Germany. --
    Keywords: personal income tax,taxing the rich,effective progressivity
    JEL: H24 H26 D31
    Date: 2011
  11. By: Antonella Caiumi
    Abstract: This study evaluates the regional tax incentives for business investment in Italy and addresses the following questions: (i) how much additional investment was stimulated by the government intervention; (ii) has the public financing displaced (part of) the private financing; (iii) to what extent would the outcomes on firm performance have not been achieved without the public support? The methodology consists of applying the matching approach and selects a sample of firms composed of both recipients and non-recipients such that for each subsidised firm a comparable unsubsidised counterpart is found, which is similar in every respect except for the tax benefit. An empirical model of firm’s investment behaviour has then been estimated in order to obtain the tax-price elasticity and to test the sensitivity of investment decisions to the availability of internal funds by taking into account the dynamic structure underlying capital accumulation. This new approach to evaluate tax expenditures allows us to deal with the problem of the endogeneity of firms' participation decisions as well as to account for the different channels through which tax incentives operate. Finally, the impact of the investment tax credit on TFP levels is identified by modelling the productivity dynamics at the firm level.<P>Une approche novatrice pour évaluer l'efficacité des dépenses fiscales : Application aux incitations fiscales régionales en faveur de l'investissement des entreprises en Italie<BR>Cette étude évalue les incitations fiscales régionales en faveur de l’investissement des entreprises en Italie et s’intéresse aux questions suivantes : (i) quel est le montant des investissements supplémentaires induits par l’intervention des pouvoirs publics ; (ii) les fonds publics ont ils supplanté, au moins en partie, les financements privés ; (iii) dans quelle mesure les effets sur les performances des entreprises se seraient ils concrétisés sans aide publique. La méthodologie fondée sur le rapprochement consiste à sélectionner un échantillon composé d’entreprises bénéficiaires et non bénéficiaires, en sorte qu’à chaque entreprise subventionnée corresponde une entreprise comparable non subventionnée, similaire en tous points hormis l’avantage fiscal. Un modèle empirique du comportement de l’entreprise en matière d’investissement est alors estimé afin de calculer l’élasticité de la demande par rapport aux prix et à l’impôt et de tester la sensibilité des décisions d’investissement à l’existence de fonds internes, en tenant compte de la structure dynamique qui sous-entend l’accumulation de capital. Cette nouvelle approche de l’évaluation des dépenses fiscales nous permet de traiter le problème de l’endogénéité des décisions de participation des entreprises, et de prendre en compte les différents canaux par lesquels les incitations fiscales exercent leur action. Enfin, l’impact du crédit d’impôt pour investissement sur les niveaux de la PTF est mesuré en modélisant la dynamique de la productivité au niveau de l’entreprise.
    Date: 2011–11–03
  12. By: Fabrizio Colonna (Banca d'Italia); Stefania Marcassa (Paris School of Economics)
    Abstract: Italy has the lowest labor force participation of women among OECD countries. Moreover, the participation rate of married women is positively correlated to their husbands' income. We show that a high tax schedule together with tax credits and transfers raise the burden of two-earner households, generating disincentives to work. We estimate a structural labor supply model for women, and use the estimated parameters to simulate the effects of alternative revenue-neutral tax systems. We find that joint taxation implies a drop in the participation rate. Conversely, working tax credit and gender-based taxation boost it, with the effects of the former concentrated on low educated women.
    Keywords: female labor force participation, Italian tax system, marginal tax rate, joint taxation, gender-based taxation, working tax credit
    Date: 2011–07
  13. By: Marco Manzo
    Abstract: This paper focuses on the tax impediments faced by small and medium-sized enterprises in Italy. The fact that small businesses are characterized by financing constraints and have less access to bank loans is often emphasized as an argument in favour of a special tax treatment for small enterprises. On the one hand, however, the evidence that SMEs suffer severe financing constraints is not overwhelming; on the other hand, tax relief for SMEs is not necessarily the best response to financial market imperfections.
    Date: 2011–11–03
  14. By: Shawn Fremstad
    Abstract: Millions of American workers are poorly compensated for the work they do. This is not because they do not work hard or deserve adequate compensation. Rather, it is due to a political failure to ensure that increases in economic growth and productivity over the last several decades have been fairly distributed. One consequence of this failure is that many working-class Americans do not enjoy the living standards they deserve either during their working years or when they retire. Without the earned benefits provided by Social Security, along with Medicare and related health insurance benefits for the elderly, these workers would see their already modest living standards in old age fall even further below typical ones. The federal government should strengthen Social Security in ways that increase the retirement security of middle- and working-class Americans. Particular attention should be paid to improving the living standards in retirement of workers in poorly compensated jobs, who typically have little or no retirement savings outside of Social Security. Some recent proposals to cut Social Security would put the retirement security of workers in poorly compensated jobs at further risk. While it would be wise to shore up the long-term finances of Social Security, this can be done without cutting benefits for working- and middle-class retirees. Finally, it is important to remember that Social Security by itself cannot be the sole vehicle for addressing an economy that is out of balance. We need to do much more improve job quality in the United States by ensuring that poorly compensated workers get a better deal. This report examines the essential role that Social Security plays in bolstering the retirement security of poorly compensated workers.
    Keywords: social security, retirement, COLA, CPI
    JEL: H H5 H55 J J1 J14
    Date: 2011–11
  15. By: Liutang Gong (Guanghua School of Management, Peking University); Heng-fu Zou (CEMA, Central University of Finance and Economics; Shenzhen University; Wuhan University; The World Bank)
    Abstract: This paper extends the Barro (1990) model with single aggregate government spending and one flat income tax to include public expenditures and taxes by multiple levels of government. It derives the rate of endogenous growth and, with both simulations and special examples, examines how that rate changes with respect to federal income tax, local taxes, and federal transfers. It also discusses the growth and welfare-maximizing choices of taxes and federal transfers.
    Keywords: Public expenditures, Taxes, Federal transfers, Endogenous growth
    JEL: E0 H2 H4 H5 H7 O4 R5
    Date: 2011
  16. By: Juergen Huber (University of Innsbruck); Martin Shubik (Cowles Foundation, Yale University); Shyam Sunder (Yale School of Management)
    Abstract: We compare general equilibrium economies in which building and maintenance of a depreciating public facility is financed either by anonymous voluntary contributions or by taxing agents on their income from private production. Agents start with an endowment of private goods and money, while the government starts with an endowment of public good and money. All private goods produced are tendered for sale in exchange for money in a sell-all market mechanism. Agents' proceeds from sale are taxed, and they individually allocate their private goods between current consumption and investment in production for the following period. The optimal levels of supply of the public good, and tax rate to sustain it over time, are defined and calculated for infinite and finite horizons. These equilibrium theoretical predications are compared to the outcomes of laboratory economies when (1) the starting public facility is either at or below the optimal level; and (2) the tax rate is either exogenously set at the optimal level, or at the median of rates proposed by individual agents. We find that the experimental economies sustain public goods at about 70-90 percent of the infinite horizon but considerably more than the finite horizon optimum. Payoffs (efficiency) is at 90 percent of the infinite horizon equilibrium level even when the rate of taxation is determined by voting. Starting conditions play only a minor role for outcomes of the economies, as efficiency and the stock of public good adjusts to about the same level irrespective of the starting level. These results contrast with rapid decline in provision of public goods under anonymous voluntary contributions, and point to the possibility that the social institution of government enforced taxation may have evolved to address the problem of under-production of public goods through anonymous voluntary contributions.
    Keywords: Public goods, Experimental gaming, Voting, taxation, Evolution of institutions
    JEL: C72 C91 C92
    Date: 2011–10
  17. By: Algan, Yann (Sciences Po, Paris); Hémet, Camille (Sciences Po, Paris); Laitin, David D. (Stanford University)
    Abstract: This paper demonstrates the effects of ethnic and religious diversity on the quality of public spaces. Its identification strategy relies on the exogeneity of public housing allocations in France, and thereby eliminates the bias from endogenous sorting. The paper uses micro evidence of social interactions within housing blocks from the representative French Housing survey, which allows for a detailed identification of the channels through which diversity operates. Differentiating among three channels of public goods provision, the paper finds that heterogeneity in the housing block leads to low levels of sanctions for anti-social behavior and low levels of collective action to improve housing conditions, but no losses in public safety.
    Keywords: fractionalization, public goods, collective action, discrimination
    JEL: H10 H41
    Date: 2011–10

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