nep-pub New Economics Papers
on Public Finance
Issue of 2012‒01‒03
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Fiscal Stimulus and Distortionary Taxation By Thorsten Drautzburg; Harald Uhlig
  2. Optimal Piecewise Linear Income Taxation By Patricia Apps; Ngo Van Long; Ray Rees
  3. Income tax evasion dynamics: Evidence from an agent-based econophysics model By Pickhardt, Michael; Seibold, Goetz
  4. Optimal tax enforcement under prospect theory By Gwenola Trotin; Amedeo Piolatto
  5. Quality of taxation and the crisis: Tax shifts from a growth perspective By Doris Prammer
  6. The effect of debt tax benefits on firm investment decisions By Addessi, William; Saltari, Enrico
  7. Optimal Government Size and Economic Growth in France (1871-2008) : An explanation by the State and Market Failures. By François Facchini; Mickaël Melki
  8. The elasticity of taxable income of high earners: Evidence from Hungary By Áron Kiss; Pálma Mosberger
  9. Measuring intra-generational and inter-generational redistribution in the reformed Italian social security system By Carlo Mazzaferro; Marcello Morciano

  1. By: Thorsten Drautzburg (University of Chicago - Department of Economics); Harald Uhlig (University of Chicago - Department of Economics)
    Abstract: We quantify the fiscal multipliers in response to the American Recovery and Reinvestment Act (ARRA) of 2009. We extend the benchmark Smets-Wouters (2007) New Keynesian model, allowing for credit-constrained households, the zero lower bound, government capital and distortionary taxation. The posterior yields modestly positive short-run multipliers around 0.52 and modestly negative long-run multipliers around -0.42. The multiplier is sensitive to the fraction of transfers given to credit-constrained households, the duration of the zero lower bound and the capital. The stimulus results in negative welfare effects for unconstrained agents. The constrained agents gain, if they discount the future substantially.
    Keywords: Fiscal Stimulus; New Keynesian model; liquidity trap; zero lower bound; fiscal multiplier
    JEL: E62 E63 E65 H20 H62
    Date: 2011–05
  2. By: Patricia Apps; Ngo Van Long; Ray Rees
    Abstract: Given its signiÖcance in practice, piecewise linear taxation has received relatively little attention in the literature. This paper o§ers a simple and transparent analysis of its main characteristics. We fully characterize optimal tax parameters for the cases in which budget sets are convex and nonconvex respectively. A numerical analysis of a discrete version of the model shows the circumstances under which each of these cases will hold as a global optimum. We Önd that, given plausible parameter values and wage distributions, the globally optimal tax system is convex, and marginal rate progressivity increases with rising inequality.
    Keywords: piecewise linear; income; taxation
    JEL: H21 H31 J22
    Date: 2011–12
  3. By: Pickhardt, Michael; Seibold, Goetz
    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. --
    Keywords: tax evasion,tax compliance,Ising Model,econophysics,numerical simulation
    JEL: H26 O17 C15
    Date: 2011
  4. By: Gwenola Trotin (EQUIPPE); Amedeo Piolatto (Universidad de Alicante)
    Abstract: Prospect Theory (PT) has become the most credited alternative to Expected Utility Theory (EUT) as a theory of decision under uncertainty. This paper characterizes the optimal income tax and audit schemes under tax evasion, when taxpayers behave as predicted by PT. We show that the standard EUT results keep holding under PT, under even weaker conditions. Under fair assumptions on the reference income and on the utility function of taxpayers, we show that the optimal audit probability function is non-increasing and the optimal tax function is nondecreasing and concave.
    Keywords: Tax evasion; Income tax enforcement; Prospect theory
    JEL: D81 H26 K42
    Date: 2011–12
  5. By: Doris Prammer (European Commission)
    Abstract: One aim of consolidation after the crisis on the taxation side is to curb growth as little as possible. Economic literature suggests that some tax systems are more conducive to growth, in particular those relying on consumption, environmental and property taxation. This paper reflects on behavioural responses of economic agents to taxation and reviews the literature on the impact of tax structures on growth. Furthermore, it analyses the tax structure in the EU-27 Member States and assess if the crises has triggered a move towards tax systems more conducive to growth.
    Keywords: financial crisis, tax efficiency, optimal taxation, tax structure, tax shift
    JEL: H11 H21 H26 E62
    Date: 2011–12
  6. By: Addessi, William; Saltari, Enrico
    Abstract: In this paper we question the idea that the deduction of debt interest is always an effective policy instrument to spur firm investment. We analyze the investment decision in presence of a borrowing constraint on the amount of the debt that the firm can raise. We show that if the debt interest rate is decreasing in the firm capital accumulation and it is available another financial resource more expensive than debt (at least for levels of debt lower than the upper bound), then the deduction of the debt interest from taxes on capital income may reduce firm investment. This theoretical result should be considered when financial intermediaries are not willing to finance beyond a certain threshold but firms have access to other sources of finance.
    Keywords: Corporate taxation; Financing constraints; Investment
    JEL: D21 G31 H32
    Date: 2011–12–17
  7. By: François Facchini (Centre d'Economie de la Sorbonne); Mickaël Melki (Centre d'Economie de la Sorbonne)
    Abstract: This paper analyses the effect of public expenditure on economic growth from both a theoretical and an empirical point of view. Given that the economic literature supplies numerous and conflicting views on the topic, the article offers a framework combining both theories of market failures and State failures to account for an inverted U-shapped relation between government size and GDP growth. The empirical contribution is to provide evidence through a long time-series analysis of the existence of such a relation on the period 1871-2008 for France, which offers one of the longest stable democratic periods to analyse.
    Keywords: Public spending, public expenditure, government size, BARS curve, Armey Curve, economic growth, market failure, France.
    JEL: H11 P44 H50
    Date: 2011–12
  8. By: Áron Kiss (Magyar Nemzeti Bank (central bank of Hungary)); Pálma Mosberger (Central European University)
    Abstract: The paper studies how high-income taxpayers responded to the introduction of the ‘extraordinary tax on individuals’ in Hungary in 2007. The study is based on a panel of tax returns compiled by the Hungarian Tax Authority for the purposes of this study, containing information on 10 percent of tax-filers from 2005 and three subsequent years. We estimate the elasticity of taxable income with respect to the marginal net-of-tax rate and find that the taxable income of Hungarian high earners is moderately responsive to taxation: the estimated elasticity is about 0.2. This means that if the upper tax rate of the 2010 Hungarian tax system were increased by a small amount, the behavioral response of taxpayers would reduce the additional tax revenue by about 60 percent. We find evidence suggesting that the elasticity is a reflection of a labor supply response to the tax change on the intensive margin, and not a reflection of tax shifting, avoidance or evasion.
    Keywords: taxable income elasticity, personal income tax, tax avoidance
    JEL: H20 H24 H31 J22
    Date: 2011
  9. By: Carlo Mazzaferro; Marcello Morciano
    Abstract: Reforms to the Italian social security system, carried out from 1992 onwards, will dramatically change its structure in the long run. So far, empirical research has devoted more attention to their macroeconomic and financial effects while relatively less attention has been paid to analysing their redistributional implications. We present this line of research using CAPP_DYN, a population-based dynamic microsimulation model. The model stochastically simulates the socio-demographic and economic evolution of a representative sample of the Italian population over the period 2010-2050. The initial sample is subjected to a large number of demographic and economic events such as partnership formation/dissolution, birth, education, work, retirement, health and disability and death. While acknowledging the rather complex phasing in of the Notional Defined Contribution system, introduced into the Italian social security system from 1995, a set of indexes (net present value ratio, Gini index, replacement ratios etc.) is used to evaluate the distributional properties of the reformed pension system in each of the simulated years as well as in a life-time/cohort perspective. Two main critical distributional aspects will emerge. Firstly the model predicts an increase in the old-age pensions dispersion in the transitional phase (2015 – 2030) due to the coexistence of different pension regimes and rules in calculating pensions. Moreover, a problem of adequacy in the public pension system from 2035 emerges as the NDC system will be almost completely phased in.
    JEL: H20 H30 H55
    Date: 2011–12

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