nep-pub New Economics Papers
on Public Finance
Issue of 2011‒12‒13
thirteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities By Piketty, Thomas; Saez, Emmanuel; Stantcheva, Stefanie
  2. Optimal Dynamic Taxes By Mikhail Golosov; Maxim Troshkin; Aleh Tsyvinski
  3. Capital Income Taxation and Progressivity in a Global Economy By Rosanne Altshuler; Benjamin Harris; Eric Toder
  4. Income Tax Evasion Dynamics: Evidence from an Agent-based Econophysics Model By Michael Pickhardt; Goetz Seibold
  5. Tax Evasion and Presumptive Taxation Methods. A Case Study in Italy: Sector Studies By Giuseppe Pulina
  6. Ramsey, Pigou, heterogenous agents, and non-atmospheric consumption externalities By Wendner, Ronald
  7. Income inequality, regional disparities and fiscal decentralization in industrialized countries By Agnese Sacchi; Simone Salotti
  8. Tax decentralization and public deficits in OECD countries By Baskaran, Thushyanthan
  9. Earmarked Taxation for Financing Public Investments Projects By Lisa Grazzini; Alessandro Petretto
  10. Quality of tax administration : how relevant is country size ? By Amin, Mohammad
  11. How does income inequality affect cooperation and punishment in public good settings? By Sebastian Prediger
  12. Understanding U.S. Corporate Tax Losses By Rosanne Altshuler; Alan Auerbach; Michael Cooper; Matthew Knittel
  13. Alleged Tax Competition: The Mysterious Death of Bequest Taxes in Switzerland By Brülhart, Marius; Parchet, Raphaël

  1. By: Piketty, Thomas; Saez, Emmanuel; Stantcheva, Stefanie
    Abstract: This paper analyzes the problem of optimal taxation of top labour incomes. We develop a model where top incomes respond to marginal tax rates through three channels: (1) the standard supply-side channel through reduced economic activity, (2) the tax avoidance channel, (3) the compensation bargaining channel through efforts in influencing own pay setting. We derive the optimal top tax rate formula as a function of the three elasticities corresponding to those three channels of responses. The first elasticity (supply side) is the sole real factor limiting optimal top tax rates. The optimal tax system should be designed to minimize the second elasticity (avoidance) through tax enforcement and tax neutrality across income forms, in which case the second elasticity becomes irrelevant. The optimal top tax rate increases with the third elasticity (bargaining) as bargaining efforts are zero-sum in aggregate. We then analyze top income and top tax rate data in 18 OECD countries. There is a strong correlation between cuts in top tax rates and increases in top 1% income shares since 1975, implying that the overall elasticity is large. But top income share increases have not translated into higher economic growth, consistent with the zero-sum bargaining model. This suggests that the first elasticity is modest in size and that the overall effect comes mostly from the third elasticity. Consequently, socially optimal top tax rates might possibly be much higher than what is commonly assumed.
    Keywords: optimal income taxation
    JEL: H21
    Date: 2011–11
  2. By: Mikhail Golosov; Maxim Troshkin; Aleh Tsyvinski
    Abstract: We study optimal labor and savings distortions in a lifecycle model with idiosyncratic shocks. We show a tight connection between its recursive formulation and a static Mirrlees model with two goods, which allows us to derive elasticity-based expressions for the dynamic optimal distortions. We derive a generalization of a savings distortion for non-separable preferences and show that, under certain conditions, the labor wedge tends to zero for sufficiently high skills. We estimate skill distributions using individual data on the U.S. taxes and labor incomes. Computed optimal distortions decrease for sufficiently high incomes and increase with age.
    JEL: E62 H21 H24 H31
    Date: 2011–12
  3. By: Rosanne Altshuler (Rutgers University, Department of Economics); Benjamin Harris (Brookings Institution); Eric Toder (Urban-Brookings Tax Policy Center)
    Abstract: The increase in international capital mobility over the past two decades has put pressure on the tax treatment of corporate equity income. Corporate-level taxes distort investment flows across locations and create opportunities for tax avoidance by shifting income across jurisdictions. Outward flows of capital shift part of the burden of the corporate-level tax on equity income from capital to labor, thereby making its incidence less progressive. Individual-level taxes on corporate equity income lower the after-tax return to savings but have less distorting effects on investment location and are more likely to fall on owners of capital than workers. This logic suggests there may be both efficiency gains and increases in progressivity from shifting taxes on corporate equity income from the corporate to the shareholder level. We estimate the distributional effects of a tax reform that raises shareholder-level taxes on corporate equity income and uses the revenue to cut the corporate tax rate. We find that taxing capital gains and dividends as ordinary income (subject to a maximum 28% rate on long-term capital gains) would finance a cut in the corporate tax rate from 35% to about 26%, assuming no behavioral response. While the distributional effect depends on what one assumes about the incidence of the corporate income tax, our results suggest that even if the corporate income tax were paid entirely by capital income, the reform would make the tax system more progressive.
    Keywords: corporate taxation, individual taxation
    JEL: H20 H24 H25
    Date: 2011–05–18
  4. By: Michael Pickhardt; Goetz Seibold
    Abstract: We analyze income tax evasion dynamics in a standard model of statistical mechanics, the Ising model of ferromagnetism. However, in contrast to previous research, we use an inhomogeneous multi-dimensional Ising model where the local degrees of freedom (agents) are subject to a specific social temperature and coupled to external fields which govern their social behavior. This new modeling frame allows for analyzing large societies of four different and interacting agent types. As a second novelty, our model may reproduce results from agent-based models that incorporate standard Allingham and Sandmo tax evasion features as well as results from existing two-dimensional Ising based tax evasion models. We then use our model for analyzing income tax evasion dynamics under different enforcement scenarios and point to some policy implications.
    Date: 2011–12
  5. By: Giuseppe Pulina
    Abstract: In this paper we analyze a fiscal mechanism used in Italy, which in Italian is called “Studi di Settore” (Sector Studies). This mechanism relies on information gathered on taxpayers to both partition the population into fairly homogeneous clusters and to determine the presumed income they should declare. When this estimated income is announced, before taxpayers fill out their tax returns, their optimal declaration strategies lead the tax- payer population to be naturally split into three homogeneous groups, one of which pays more taxes than are due, the second group comply but bears the audit cost, while the third evades and it is not audited. This result is close to the Italian situation where the greatest number of taxpayers make a tax declaration according to the announced cluster income, but there are always those who declare less and so are audited.
    Keywords: Tax Evasion; "cut-off" policy; Noncooperative games; Asymmetric Information
    JEL: H26 H32 D82 C72
    Date: 2011
  6. By: Wendner, Ronald
    Abstract: This paper analyzes the effects of non-atmospheric consumption externalities on optimal commodity taxation and on the social cost and optimal levels of public good provision. A negative consumption externality, by lowering the social cost of public good provision, may require the second-best level of public good provision to exceed the first-best level. If those households who are most important for building up the consumption reference level respond the least to commodity taxation, heterogeneity may imply an equity-efficiency tradeoff. This tradeoff is present only if the consumption externality is of the non-atmospheric type.
    Keywords: consumption externality; optimal commodity taxation; Pigou; public good provision; Ramsey rule
    JEL: H21 D62 H41
    Date: 2011–11–25
  7. By: Agnese Sacchi; Simone Salotti
    Abstract: In this paper we investigate the interactions among fiscal decentralization, income inequality and regional disparities, using a sample of 23 OECD countries over the period 1971-2000. We first explore the effects of fiscal decentralization on overall income inequality. We then test whether regional economic disparities influence the fiscal decentralization process. We use novel and robust measures of fiscal decentralization based on differences in the degree of both expenditure and tax autonomy. We also conduct several robustness checks to tackle the potential endogeneity and reverse causality issues. Our results highlight the importance both of the nature of fiscal decentralization – expenditure versus taxation – and of the extent to which responsibility and decision powers are really left to subcentral governaments. While a higher degree of tax decentralization is associated with higher overall income inequality within a country, high regional disparities seem to be correlated with lower expenditure decentralization.
    Keywords: tax decentralization, expenditure decentralization,regional economic disparities
    JEL: H70 H77 D31 R12
    Date: 2011–12
  8. By: Baskaran, Thushyanthan
    Abstract: This article explores the effect of sub-national tax autonomy and sub-national control over shared taxes on primary deficits with panel data for 23 OECD countries over the 1975-2000 period. The results suggest that sub-national tax autonomy has a U-shaped effect on primary deficits. We find that the “average” country in the sample could increase the fiscal stability of its public sector by reducing sub-national tax autonomy. There is also some indication that subnational control over shared taxes increases fiscal stability, but we obtain this result only if Belgium and Spain are included in the sample.
    Keywords: Tax decentralization; Public deficits; Fiscal instability
    JEL: H77 H72 H74
    Date: 2011
  9. By: Lisa Grazzini (Università degli Studi di Firenze, Dipartimento di Scienze Economiche); Alessandro Petretto (Università degli Studi di Firenze, Dipartimento di Scienze Economiche)
    Abstract: This paper deals with the earmarked taxation employed by local governments for fi…nancing public investments projects carried on with some Public-Private Partnerships con…figurations. First, we analyse the theoretical pro…files of earmarked taxation by using the tax-benefi…t approach, and the theory of political competition and accountability. Second, on the ground of the P-P-P literature, we examine the trade-off between fi…nancing mechanisms based on public subsidies to the concessionaire fi…rm, fi…nanced by a earmarked tax, and mechanisms based on users-fees. Then, we discuss cases where the …rst solution turns out to be, even partially, preferred. Finally, we consider the potential role of earmarked taxation on the Italian institutional context, emerging from the recent legislation on fi…scal federalism and municipalities taxation.
    Keywords: Earmarked taxes, cost of public funds, subsidies, public investments
    JEL: H23 H54 H71 R42
    Date: 2011
  10. By: Amin, Mohammad
    Abstract: Repeated attempts at uncovering the relevance of country size for various economic factors have produced discouraging results. The present paper sheds new light on the relevance of country size using micro or firm-level data on firms'experience with the quality of tax administration, an important but neglected element of the business climate. The analysis finds that the quality of tax administration is significantly better for small compared with large countries. The instrumental variables regression method confirms that this finding is robust to various endogeneity concerns. The paper also finds some evidence that the country size and tax administration relationship is non-linear, and much stronger for small than large countries. Implications of these findings for the broader literature on country size are discussed.
    Keywords: Taxation&Subsidies,Emerging Markets,Debt Markets,E-Business,Fiscal Adjustment
    Date: 2011–12–01
  11. By: Sebastian Prediger (GIGA)
    Abstract: In the frame of decentralization reforms in Namibia, local water point associations evolved that have to collect water fees from community members to cover maintenance costs. Enforcement, however, is weak and water point associations have to rely on moral pleas. As a consequence, several users refuse to pay. I test the impact of informal sanction mechanisms on cooperation among water point users in groups with equal and unequal incomes. Interestingly, and in contrast to the vast majority of related studies, cooperation does not increase under the threat of punishment, though the punishment option was frequently used. At individual level I show that while punishments do not affect cooperative behaviour, they provoke counter-punishment. This suggests that peer-sanctioning mechanisms as a means to enforce norm-compliance are not accepted among water point association members. Contribution levels were higher in heterogeneous groups compared with homogenous ones, and both pro-social and anti-social punishments occurred more frequently in homogenous groups. A comparison between different income types further reveals that the poor contribute larger shares of their income than those endowed with higher incomes and that they use punishment as frequently and as vehemently as the better-off, despite higher opportunity costs.
    Keywords: Income heterogeneity, public goods experiment, peer punishment, anti-social punishment, Namibia
    Date: 2011
  12. By: Rosanne Altshuler (Rutgers University, Department of Economics); Alan Auerbach (University of California, Berkeley); Michael Cooper (Department of Treasury, Office of Tax Analysis); Matthew Knittel (Department of Treasury, Office of Tax Analysis)
    Abstract: Recent data on corporate tax losses presents a puzzle this paper attempts to explain: the ratio of losses to positive income was much higher around the recession of 2001 than in earlier recessions, even those of greater severity. Using a comprehensive sample of U.S. corporation tax returns for the period 1982-2005, we explore a variety of potential explanations for this surge in tax losses, taking account of the significant use of executive compensation stock options beginning in the 1990s and recent temporary tax provisions that might have had important effects on taxable income. We find that losses rose because the average rate of return of C corporations fell, rather than because of an increase in the dispersion of returns or an increase in the gap between corporate profits subject to tax and corporate profits as measured by the national income accounts. Our analysis also suggests that the increasing importance of S corporations may help explain the recent experience within the C corporate sector, as S corporations have exhibited adifferent pattern of losses in recent years. However, we can identify no simple explanation for the differing experience of C and S corporations. Our investigation concludes with some new puzzles: why did rates of return of C corporations fall so much early in the decade and why has the incidence of losses among C and S corporations diverged?
    Keywords: corporate taxation, tax losses
    JEL: H25
    Date: 2011–05–18
  13. By: Brülhart, Marius; Parchet, Raphaël
    Abstract: Interjurisdictional competition over mobile tax bases is an easily understood mechanism, but actual tax-base elasticities are difficult to estimate. Political pressure for reducing tax rates could therefore be based on erroneous estimates of the mobility of tax bases. We show that tax competition provided the most prominent argument in the policy debates leading to a succession of reforms of bequest taxation by Swiss cantons. Yet, we find only very weak statistical evidence of a relationship between tax burdens on bequests and the concerned tax base of wealthy elderly individuals. Moreover, bequest tax revenues are found to increase in bequest tax rates even in the long run, and we cannot reject the hypothesis that the elasticity of bequest tax revenue with respect to the average bequest tax rate is equal to one. The alleged pressures of tax competition did not seem in reality to exist.
    Keywords: bequest taxation; fiscal federalism; tax competition
    JEL: H3 H7
    Date: 2011–11

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