New Economics Papers
on Public Finance
Issue of 2012‒06‒25
sixteen papers chosen by

  1. Capital Income Taxation and the Mirrlees Review By Apps, Patricia; Rees, Ray
  2. Optimal Capital Income Taxation with Means-tested Benefits By Cagri Seda Kumru; John Piggott
  3. The Impact of Introducing an Interest Barrier: Evidence from the German Corporation Tax Reform 2008 By Hermann Buslei; Martin Simmler
  4. Tax Burden Degree as a Tool to Design Tax Systems By Alcalde, José; Marco-Gil, María del Carmen; Silva-Reus, José A.
  5. Optimal taxation and the skill premium By Angelopoulos, Konstantinos; Malley, James; Philippopoulos, Apostolis
  6. Taxation and Redistribution of Residual Income Inequality By Mikhail Golosov; Pricila Maziero; Guido Menzio
  7. Tax Morale and Tax Evasion: Social Preferences and Bounded Rationality By Zsombor Z. Méder; András Simonovits; János Vincze
  8. Progressive Tax Changes to Private Pensions in a Life-Cycle Framework By George Kudrna; Alan Woodland
  9. Lifetime versus Annual Tax Progressivity: Sweden, 1968–2009 By Bengtsson, Niklas; Holmlund, Bertil; Waldenström, Daniel
  10. Fiscal Union in Europe? Redistributive and Stabilising Effects of an EU Tax-Benefit System By Bargain, Olivier; Dolls, Mathias; Fuest, Clemens; Neumann, Dirk; Peichl, Andreas; Pestel, Nico; Siegloch, Sebastian
  11. On the Political Economics of Tax Reforms: survey and empirical assessment By Micael Castanheira; Gaëtan Nicodème; Paola Profeta
  12. The Effect of Soft Drinks Taxes on Consumption: Evidence from Scanner Data By Colantuoni, Francesca; Rojas, Christian
  13. Social Security Reform with Impure Intergenerational Altruism By Fang Yang
  14. On the Private Provision of Public Goods on Networks By Nizar Allouch
  15. Quantitative reduction in retirement benefits by the 2011 Spanish Social Security reform By Manuela Bosch-Princep (Universitat de Barcelona); Daniel Vilalta (Independent Pension Consultant)
  16. A Numerical Evaluation on a Sustainable Size of Primary Deficit in Japan By Real Arai; Junji Ueda

  1. By: Apps, Patricia (University of Sydney); Rees, Ray (University of Munich)
    Abstract: The Mirrlees Review of the UK tax system, together with its companion volume of research papers, can be expected to influence future discussions of tax reform. Indeed, this can already be recognised in the Henry Review. As far as income taxation is concerned, the most substantive recommendation of the Mirrlees Review is a move toward a system of consumption or expenditure taxation, by exempting the "normal return" to saving and taxing only "excess returns" on the same tax schedule as labour earnings. This paper argues against this direction of reform on the grounds that it is based on a model of household behaviour over the life cycle that ignores important aspects of reality. We present an alternative model, together with supporting empirical evidence. We go on to argue that, against the background of rising inequality and an aging population, the appropriate direction for reform is towards more progressive taxation of both labour earnings and capital income, although not necessarily under the same rate scale.
    Keywords: optimal taxation, labour supply, capital income taxation, family life cycle, time allocation, saving, inequality
    JEL: H21 H24 H31 D13 D91 J22
    Date: 2012–06
  2. By: Cagri Seda Kumru (Research School of Economics, The Australian National University and ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales); John Piggott (ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales)
    Abstract: This paper studies the interaction between capital income taxation and a means tested age pension in the context of an overlapping generations model, calibrated to the UK economy. Recent literature has suggested a rehabilitation of capital income taxation (Conesa et al. (2009)), predicated on the idea that capital is a complement with retirement leisure. This leads naturally to the conjecture that a publicly funded age pension contingent upon holdings of capital or capital income may have a similar effect. We formalize this using a stochastic OLG model with multiple individuals differentiated by labour productivity and pension entitlement. Our preliminary findings suggest that a means tested pension has effects similar to capital income taxation in a life-cycle context.
    Keywords: Dynamic general equilibrium, taxation, welfare
    JEL: E21 E62 H55
    Date: 2012–05
  3. By: Hermann Buslei; Martin Simmler
    Abstract: In this study we investigate the impact of the thin capitalization rule (TCR), introduced in Germany in 2008, on firms' capital structure, investment and profitability. The identification of the causal effects is based on the escape clauses in the regulation using a difference-in-difference approach. Our results present evidence that firms strongly react in order to avoid the limited deductibility of interest expenses: They either decrease their debt ratio or split their assets to use the exemption limit. The latter is especially used by firms with an interest result around the exemption limit of the interest barrier. In case the debt ratio is reduced, our results present evidence for a proportional increase of firms' tax base. In general, in the short term, no negative investment effects are caused by the TCR. This suggests that a part of the firms is able to substitute equity for debt at low costs or expects to be able to circumvent the regulation. However, investment might also be fixed in the short-run for example due to long-lasting contracts.
    Keywords: Thin capitalization, earnings stripping rule, debt ratio, profitability, investment
    JEL: H25 H26 G32
    Date: 2012
  4. By: Alcalde, José (Universidad de Alicante, Departamento de Métodos Cuantitativos y Teoría Económica); Marco-Gil, María del Carmen (Dep. of Economics, Polytechnic University of Cartagena); Silva-Reus, José A. (Universitat d'Alacant. Departament de Mètodes Quantitatius i Teoría Econòmica and Instituto Universitario Desarrollo Social y Paz (IUDESP))
    Abstract: This paper explores an integrated taxation system. Taking as a premise the proposals by the Carter Commission Report, we find out that proportional tax is the unique system that allows to neutrally integrate the taxable income. This analysis leads to explore new tax rules combining the extreme cases of `Flat Tax' and `Equalizing Net Income' rules. As a conclusion we suggest the Equitably Compensatory tax rule which accurately combines both extreme principles. Surprisingly enough, this rule coincides with the Proportional rule for societies whose income is not too unequally distributed.
    Keywords: Tax burden degree; Taxation system; Prop ortional taxation
    JEL: D63 H20 H30
    Date: 2012–06–18
  5. By: Angelopoulos, Konstantinos; Malley, James; Philippopoulos, Apostolis
    Abstract: The stylized facts suggest a negative relationship between tax progressivity and the skill premium from the early 1960s until the early 1990s, and a positive one thereafter. They also generally imply rising tax progressivity, except for the 1980s. In this paper, we ask whether optimal tax policy is consistent with these observations, taking into account the demographic and technological factors that have also affected the skill premium. To this end, we construct a dynamic general equilibrium model in which the skill premium and the progressivity of the tax system are endogenously determined, with the latter being optimally chosen by a benevolent government. We find that optimal policy delivers both a progressive tax system and model predictions which are generally consistent, except for the 1980s, with the stylized facts relating to the skill premium and progressivity. To capture the patterns in the data over the 1980s requires that we adopt a government policy which is biased towards the interests of skilled agents. Thus, in addition to demographic and technological factors, changes in the preferences of policy-makers appear to be a potentially important factor in determining the evolution of the observed skill premium.
    Keywords: skill premium, optimal tax policy, government preferences,
    Date: 2012
  6. By: Mikhail Golosov (Department of Economics, Princeton University and NBER); Pricila Maziero (Department of Finance, Wharton School, University of Pennsylvania); Guido Menzio (Department of Economics, University of Pennsylvania)
    Abstract: This paper studies the optimal redistribution of income inequality caused by the presence of search and matching frictions in the labor market. We study this problem in the context of a directed search model of the labor market populated by homogenous workers and heterogeneous firms. The optimal redistribution can be attained using a positive unemployment benefit and an increasing and regressive labor income tax. The positive unemployment benefit serves the purpose of lowering the search risk faced by workers. The increasing and regressive labor tax serves the purpose of aligning the cost to the firm of attracting an additional applicant with the value of an application to society.
    Keywords: Unemployment benefit, Income tax, Search frictions, Mechanism design
    JEL: H21 J64 J65
    Date: 2012–06–06
  7. By: Zsombor Z. Méder (Maastricht University, Department of Economics, The Netherlands); András Simonovits; János Vincze
    Abstract: We study a family of models of tax evasion, where a flat-rate tax finances only the provision of public goods, neglecting audits and wage differences. We focus on the comparison of two modeling approaches. The first is based on optimizing agents, who are endowed with social preferences, their utility being the sum of private consumption and moral utility. The second approach involves agents acting according to simple heuristics. We find that while we encounter the traditionally shaped Laffer-curve in the optimizing model, the heuristics models exhibit (linearly) increasing Laffer-curves. This difference is related to a peculiar type of behavior emerging within the heuristics based approach: a number of agents lurk in a moral state of limbo, alternating between altruism and selfishness.
    Keywords: tax evasion, tax morale, agent-based simulation
    JEL: H26
    Date: 2012–06–08
  8. By: George Kudrna (ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales); Alan Woodland (School of Economics and ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales)
    Abstract: Tax concessions are a common feature of private pension pillars around the world. Most countries exempt pension fund earnings from any taxation but tax either benefits (EET regime) or contributions (TEE regime) progressively as regular private income. By contrast, Australia's superannuation taxation features concessional flat tax rates on contributions and fund earnings, with benefits being generally tax free. Concerned with the vertical equity of the current superannuation tax concessions, this paper provides a quantitative analysis of hypothetical replacements of the existing superannuation tax treatment with the EET and TEE regimes commonly found in other countries. Using a general equilibrium OLG model calibrated for Australia, we find that these hypothetical tax reforms to superannuation improve the vertical equity in the short, medium and long run, as indicated by larger relative welfare gains and income improvements experienced by lower income households.
    Keywords: Compulsory saving, pension and tax reforms, dynamic OLG model
    JEL: H55 E21 C68
    Date: 2012–01
  9. By: Bengtsson, Niklas (Uppsala University); Holmlund, Bertil (Uppsala University); Waldenström, Daniel (Uppsala University)
    Abstract: This paper analyzes the evolution of tax progressivity in Sweden from both annual and lifetime perspectives. Using a rich micro panel with administrative records of incomes, taxes and benefits over the period 1968–2009, we calculate tax rates across the income distribution accounting for different tax bases as well as the role of transfers. The uniquely long time span also allows us to compute tax progressivity as realized over a cohort's entire life cycle. Our main finding is that taxes are considerably less progressive over the lifetime than in any single year. In fact, life cycle taxes are close to proportional, bearing a redistributive effect of only a few percent. Intragenerational income mobility seems to be driving this result, although the Swedish economic crisis of the 1990s and the tax reforms of 1971 and 1991 are also important. Labor income taxes contribute less to progressivity in recent years, whereas transfers to unemployed and old-age pensioners have become increasingly important. These findings are robust to the use of different tax rates, tax bases, sample populations, rates of discounting and controls for reranking.
    Keywords: tax progressivity, income distribution, lifetime income, redistributive effect, Kakwani index, transfers
    JEL: D31 H20
    Date: 2012–06
  10. By: Bargain, Olivier (University of Aix-Marseille II); Dolls, Mathias (IZA); Fuest, Clemens (University of Oxford); Neumann, Dirk (IZA); Peichl, Andreas (IZA); Pestel, Nico (IZA); Siegloch, Sebastian (IZA)
    Abstract: The current debt crisis has given rise to a debate about deeper fiscal integration in Europe. The view is widespread that moving towards a 'fiscal union' would have a stabilising effect in the event of macroeconomic shocks. In this paper we study the economic effects of introducing two elements of a fiscal union: Firstly, an EU-wide tax and transfer system and secondly, an EU-wide system of fiscal equalisation. Using the European tax-benefit calculator EUROMOD, we exploit representative household microdata from 11 Eurozone countries to simulate these policy reforms and to study their effects on the distribution of income as well as their impact on automatic fiscal stabilisers. We find that replacing one third of the national tax and transfer systems by a European system would lead to significant redistributive effects both within and across countries. These effects depend on income levels and the structures of the existing national tax and transfer systems. The EU system would improve fiscal stabilisation especially in credit constrained countries. It would absorb between 10 and 15 per cent of a macroeconomic income shock. Introducing a fiscal equalisation system based on taxing capacity would redistribute revenues from high to low income countries. The stabilisation properties of this system, however, are ambiguous. This suggests that not all forms of fiscal integration will improve macroeconomic stability in the Eurozone.
    Keywords: European income tax, automatic stabilisation, fiscal union
    JEL: H2 H3 J22
    Date: 2012–05
  11. By: Micael Castanheira (ECARES, Université Libre de Bruxelles, Belgium); Gaëtan Nicodème (European Commission, CESifo, CEPR and Université Libre de Bruxelles, Belgium); Paola Profeta (Università Bocconi, Econpubblica and Dondena, Italy, CESifo)
    Abstract: Political constraints and incentives are the true driver of tax reforms. This paper reviews the political economics literature on personal income tax systems and reforms to see how political mechanisms help explain tax reforms. We take some of the implications of these theories to the data using LABREF, a database that identifies labor tax reforms in the European Union for the period 2000-2007, and control for economic and labor market factors. We find that political variables carry more weight than economic variables, and we show empirical regularities that support political economy theories. We also find that governments tended to reform more in better economic times, engaging in pro-cyclical behavior.
    Keywords: political economy, taxation, personal income tax, LABREF
    JEL: H11 H21 H24 P16
    Date: 2012–03
  12. By: Colantuoni, Francesca; Rojas, Christian
    Abstract: The scientific evidence on the effect of sugar consumption on obesity has propelled policy makers in several states across the U.S. to propose the imposition of a tax on soft drinks. In this paper, we look at the effect of a 5.5% sales tax on soft drinks imposed by the state of Maine in 1991. We investigate this question by using sales data collected by scanner devices in Maine, Massachusetts, New York and Connecticut. This sample comprises stores that account for 82% of all grocery sales nationwide and includes brand-level sales data for the 1988-1992 period. We employ a difference-in-difference matching estimator (DIDM) that, in our setting, permits the comparison among treatment and control groups based on brand identity. Results suggest that Maine’s tax had a statistically insignificant impact on the overall consumption of soft drinks. This finding is robust to several alternative specifications.
    Keywords: Consumer/Household Economics, Demand and Price Analysis,
    Date: 2012
  13. By: Fang Yang
    Abstract: This paper studies the long-run aggregate and welfare effect of eliminating Social Security in a quantitative dynamic general equilibrium life-cycle model where parents and their chidren are linked by voluntary and accidental bequests. Social Security in this model with impure altruism has a smaller effect on capital accumulation than in a pure life-cycle model, a bigger effect than in a model with two-sided altruism. The welfare gain of eliminating Social Security system under impure altruism is smaller than that in a pure life-cycle model, and bigger than that in a model with two-sided altruism.
    Date: 2012
  14. By: Nizar Allouch (Queen Mary, University of London, School of Economics and Finance)
    Abstract: This paper analyzes the private provision of public goods where consumers interact within a fixed network structure and may benefit only from their direct neighbors’ provisions. We present a proof for existence and uniqueness of a Nash equilibrium with general best-reply functions. Our uniqueness result simultaneously extends similar results in Bergstrom, Blume, and Varian (1986) on the private provision of public goods to networks and Bramoullé, Kranton, and D'Amours (2011) on games of strategic substitutes to nonlinear best-reply functions. In addition, we investigate the neutrality result of Warr (1983) and Bergstrom, Blume, and Varian (1986) whereby consumers are able to offset income redistributions and tax-financed government contributions. To this effect, we establish that the neutrality result has a limited scope of application beyond regular networks.
    Keywords: Public Goods, Uniqueness Of Nash Equilibrium, Network Games, Neutrality, Bonacich Centrality, Main Eigenvalue
    JEL: C72 D31 H41
    Date: 2012–05
  15. By: Manuela Bosch-Princep (Universitat de Barcelona); Daniel Vilalta (Independent Pension Consultant) (Universitat de Barcelona)
    Abstract: The aim of this paper is to analyse the effect of the recent Social Security reform on public retirement benefits. The main measures af- fecting the calculation of pensions are: 1) extension of the retirement age from 65 to 67 years, 2) changes in covered earnings of the retirement pension, 3) changes in the weighting factor associated with the number of years of contributions to the system at date of retirement and 4) changes in the early retirement rules. The study distinguishes three group of pensioners and compares be- tween previous pension (benchmark pension) and the pension calculated under the new legislation. The reduction in public retirement benefits ranges between 0% and 16% depending on wages and the number of years of contributions at the time of retirement.
    Keywords: social security reforms, public retirement pension
    JEL: H55 J62
    Date: 2012
  16. By: Real Arai (Graduate School of Social Sciences, Hiroshima University); Junji Ueda (Policy Research Institute, Ministry of Finance Japan)
    Abstract: We investigate how large a size of primary deficit to GDP ratio the Japan’s government can sustain. For this investigation, we construct an overlapping generations model, in which multi-generational households live and the government maintains a constant ratio of primary deficit to GDP. We numerically show that the primary deficit cannot be sustained unless the rate of economic growth is unrealistically high, which is more than five percent according to our settings. Our result implies that Japan’s government needs to achieve a positive primary balance in the long-run in order to avoid the divergence of the public debt to GDP ratio.
    Keywords: fiscal sustainability, public debt, primary deficit, economic growth
    JEL: E62 H62 H63 H68
    Date: 2012–06

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