nep-pub New Economics Papers
on Public Finance
Issue of 2012‒10‒13
thirteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal income taxation with tax competition By Vilen Lipatov; Alfons Weichenrieder
  2. Revenue-Maximising Elasticities of Taxable Income in Multi-Rate Income Tax Structures By Creedy, John; Gemmell, Norman
  3. Regression Estimates of the Elasticity of Taxable Income and the Choice of Instrument By Carey, Simon; Creedy, John; Gemmell, Norman; Teng, Josh
  4. The Impact of Tax Incentives on the Economic Activity of Entrepreneurs By Jarkko Harju; Tuomas Kosonen
  5. The Effect of Tax Rates and Tax Bases on Corporate Tax Revenues: Estimates with New Measures of the Corporate Tax Base By Laura Kawano; Joel Slemrod
  6. Unit Tax versus Ad Valorem Tax: A Tax Competition Model with Cross-border Shopping By Hikaru Ogawa; Hiroshi Aiura
  7. Tax Rates as Strategic Substitutes By Ruud A. de Mooij; Hendrik Vrijburg
  8. Incentive Effects of Bonus Taxes in a Principal-Agent Model By Helmut M. Dietl; Martin Grossmann; Markus Lang; Simon Wey
  9. The Tax Gap: A Methodological Review By Gemmell, Norman; Hasseldine, John
  10. Capital Gains Taxation and the Cost of Capital: Evidence from Unanticipated Cross-Border Transfers of Tax Bases By Harry Huizinga; Johannes Voget; Wolf Wagner
  11. The Composition of Government Expenditure with Alternative Choice Mechanisms By Creedy, John; Moslehi, Solmaz
  12. Average Marginal Income Tax Rates in New Zealand, 1907-2009 By Bandyopadhyay, Debasis; Barro, Robert; Couchman, Jeremy; Gemmell, Norman; Liao, Gordon; McAlister, Fiona
  13. The Elasticity of Taxable Income in New Zealand By Claus, Iris; Creedy, John; Teng, Josh

  1. By: Vilen Lipatov (Goethe University Frankfurt); Alfons Weichenrieder (Goethe University Frankfurt, Vienna University of Economics and Business, and CESifo)
    Abstract: We introduce tax competition for mobile labor into an optimal- taxation model with two skill levels and analyze a symmetric subgame- perfect Nash equilibrium of the game between two governments and two taxpayer populations. Tax competition reduces the distortion from the informational asymmetry and increases employment of the less productive individuals. When countries are heterogeneous, this e¤ect is more pronounced in the smaller country.
    Keywords: optimal income tax, migration, unemployment, tax competition, Leviathan government
    JEL: H21 F22
    Date: 2012
  2. By: Creedy, John; Gemmell, Norman
    Abstract: The empirical literature on the elasticity of taxable income (ETI) sometimes questions whether estimated values are consistent with being on the revenueincreasing section of the Laffer curve, usually in the context of a single rate tax system or for top marginal rates. This paper develops conceptual expressions for this ‘Laffer-maximum’ or revenue-maximising ETI for the multi-rate income tax systems commonly used in practice. Using the New Zealand income tax system in 2010 to illustrate its properties, the paper demonstrates that a wide range of revenue-maximising ETI values can be expected across individual taxpayers, across tax brackets and in aggregate.
    Keywords: Income Tax Revenue, Elasticity of taxable income, revenue elasticity, Laffer Curve,
    Date: 2012–09–24
  3. By: Carey, Simon; Creedy, John; Gemmell, Norman; Teng, Josh
    Abstract: This paper examines estimation of the elasticity of taxable income using instrumental variable regression methods. It is argued that the ‘standard instrument’ for the net-of-tax rate − the rate that would be applicable post-reform but with unchanged income levels − is unsatisfactory in contexts where there are substantial exogenous changes in taxable income. Two alternative tax rate instruments are proposed, using estimates of the dynamics of taxable income for a panel of taxpayers over a period that involves no tax changes. The parameters derived from this procedure are then used to construct hypothetical (or counterfactual) post-reform incomes that would be expected in the absence of reform. The first method is based on the tax rate each individual would face if income were equal to ‘expected income’, conditional on income in two periods before the tax change. The second alternative uses the form of the conditional distribution of income for each taxpayer to obtain an instrument based on the ‘expected tax rate’. The methods are applied to the tax change in New Zealand in 2001.
    Keywords: Elasticity of taxable income, Variable regression methods, Tax rate instrument,
    Date: 2012–09–21
  4. By: Jarkko Harju; Tuomas Kosonen
    Abstract: Based on existing evidence, we know little about how the taxation of small business owners affects their economic activity. This paper studies the effect of two Finnish tax reforms, in 1997 and 1998, on the effort decisions of the owners of small businesses utilizing both theoretical model and empirical data. The reforms reduced the income tax rates of small business owners and applied only to unincorporated firms, leaving corporations out. We use a difference-in-differences strategy to estimate the causal impact of tax incentives on the economic activity of small businesses. The results imply that lighter taxation leads to an increase in the turnover of firms that we interpret as an increase in effort exerted by their owners.
    JEL: H22 H24 H25
    Date: 2012–10
  5. By: Laura Kawano; Joel Slemrod
    Abstract: Several recent analyses have suggested that the revenue-maximizing corporate tax rate resides in the low-30's. We challenge this result by re-examining this relationship using a new compilation of changes in corporate tax base definitions for OECD countries between 1980 and 2004. By considering tax base changes in addition to tax rate changes, we can address the estimation bias that applies to tax rates absent their consideration. We find that the relationship between corporate tax rates and corporate tax revenues is tenuous. The large behavioral response to corporate tax rates implied in the literature does not obtain when accounting for persistent differences in tax policy and business environments across countries.
    JEL: H25
    Date: 2012–10
  6. By: Hikaru Ogawa; Hiroshi Aiura
    Abstract: Within the framework of spatial tax competition with cross-border shopping, we examine the choice of tax method between ad valorem tax and unit (specific) tax. The paper shows that governments endogenously choose ad valorem tax not because of a classic welfare reason, but because it is a good strategy in competing for mobile customers. Another key finding is that while governments are committed to the ad valorem tax method, the choice is not efficient; Tax-cutting competition becomes more serious when countries adopt ad valorem tax, and competition in ad valorem tax yields smaller payoffs than competition in unit tax.
    Date: 2012–10
  7. By: Ruud A. de Mooij (IMF); Hendrik Vrijburg (Erasmus University Rotterdam)
    Abstract: This paper analytically derives the conditions under which the slope of the tax reaction function is negative in a classical tax competition model. If countries maximize welfare, we show that a negative slope (reflecting strategic substitutability) occurs under relatively mild conditions. Simulations suggest that strategic substitutability occurs under plausible parameter configurations. The strategic tax response is crucial for understanding tax competition games, as well as for assessing the welfare effects of partial tax unions (whereby a subset of countries coordinate their tax rates). Indeed, contrary to earlier findings that have assumed strategic complementarity in tax rates, we show that partial tax unions might reduce welfare under strategic substitutability.
    Keywords: Strategic Substitutes; Asymmetry; Strategic Tax Response; Tax Coordination
    JEL: E62 F21 H25 H77
    Date: 2012–10–02
  8. By: Helmut M. Dietl (Department of Business Administration (IBW), University of Zurich); Martin Grossmann (Department of Business Administration (IBW), University of Zurich); Markus Lang (Department of Business Administration (IBW), University of Zurich); Simon Wey (Department of Business Administration (IBW), University of Zurich)
    Abstract: Several countries have implemented bonus taxes for corporate executives in response to the financial crisis of 2007-2010. Using a principal-agent model, this paper investigates the incentive effects of bonus taxes by analyzing the agent's and principal's behavior. Specifically, we show how bonus taxes affect the agent's incentives to exert effort and the principal's decision regarding the composition of the compensation package (fixed salary and bonus rate). We find that, surprisingly, a bonus tax can increase the bonus rate and decrease the fixed salary. In addition, a bonus tax can induce the principal to pay higher bonuses even though the agent's effort always decreases.
    Keywords: Principal-agent model, bonus tax, executive compensation, incentive, pay regulation
    JEL: H24 J30 M52
    Date: 2012–08
  9. By: Gemmell, Norman; Hasseldine, John
    Abstract: The global economic crisis has highlighted the continuing problem of tax evasion. For tax agencies to respond, an important antecedent necessitates knowing the extent of the problem. This study is the first to comprehensively review recent research on the tax gap. Our primary contributions are two-fold. First we argue that the tax gap, as conventionally defined, is conceptually flawed because it fails to capture behavioral responses by taxpayers adequately. Our second contribution is to review methods for measuring the tax gap and compare empirical estimates. We suggest that many of the most trenchant criticisms of conventional tax gap measurement (and the ‘hidden economy’ measures that underlie them) leave only microdatabased measures of tax non-compliance as likely to deliver more reliable tax gap estimates. Even here, however, further work is required, on both conceptual and empirical aspects, before tax gaps suitable for policy analysis (e.g. implications for enforcement policy) are likely to be delivered.
    Keywords: tax evasion, tax gap, behavioral responses,
    Date: 2012–09–24
  10. By: Harry Huizinga (Tilburg University, and CEPR); Johannes Voget (University of Mannheim, Oxford University Centre for Business Taxation,CentER Tilburg University); Wolf Wagner (Tilburg University, Duisenberg School of Finance)
    Abstract: In a cross-border takeover, the tax base associated with future capital gains is transferred from target shareholders to acquirer shareholders. Crosscountry differences in capital gains tax rates enable us to estimate the discount in target valuation on account of future capital gains. A one percentage point increase in the capital gains tax rate reduces the value of equity by 0.225%. The implied average effective tax rate on capital gains is 7% and it raises the cost of capital by 5.3% of its no-tax level. This indicates that capital gains taxation is a significant cost to firms when issuing new equity.
    Keywords: Capital gains taxation; Cost of capital; International takeovers
    JEL: G32 G34 H25
    Date: 2012–09–27
  11. By: Creedy, John; Moslehi, Solmaz
    Abstract: This paper investigates the choice of the composition of government expenditure using both positive and normative approaches. The former involves aggregation over selfish voters (simple majority voting and stochastic voting are examined), while the latter involves the choice by a single disinterested individual (considered to maximise a social welfare function). The approach allows direct comparisons of the choice mechanisms. The structures examined include a transfer payment combined with a pure public good, and a transfer payment with tax-financed education. Explicit solutions are obtained for the choice of expenditure components, and these are shown to depend on the proportional difference between the arithmetic mean and another measure of location of incomes, where the latter depends on the choice mechanism. In each case the expenditure composition depends on an inequality measure defined in terms of the proportional difference between a measure of location of the income distribution and the arithmetic mean, where the location measure depends on the decision mechanism.
    Keywords: Government expenditure, Majority voting, Stochastic voting, Public goods, Social welfare,
    Date: 2012–09–24
  12. By: Bandyopadhyay, Debasis; Barro, Robert; Couchman, Jeremy; Gemmell, Norman; Liao, Gordon; McAlister, Fiona
    Abstract: Estimates of marginal tax rates (MTRs) faced by individual economic agents, and for various aggregates of taxpayers, are important for economists testing behavioural responses to changes in those tax rates. This paper reports estimates of a number of personal marginal income tax rate measures for New Zealand since 1907, focusing mainly on the aggregate income-weighted average MTRs proposed by Barro and Sahasakul (1983, 1986) and Barro and Redlick (2011). The paper describes the methodology used to derive the various MTRs from original data on incomes and taxes from Statistics New Zealand Official Yearbooks (NZOYB), and discusses the resulting estimates.
    Keywords: Average marginal tax rates, New Zealand, behavioural responses,
    Date: 2012–09–19
  13. By: Claus, Iris; Creedy, John; Teng, Josh
    Abstract: This paper reports estimates of the elasticity of taxable income with respect to the net-of-tax rate for New Zealand taxpayers. The relative stability of the New Zealand personal income tax system, in terms of marginal rates, thresholds and the tax base, provides helpful conditions for deriving these estimates. The elasticity of taxable income was estimated to be substantially higher for the highest income groups. Changes in the timing of income flows for the higher income recipients were found to be an important response to the announcement of a new higher-rate bracket. The marginal welfare costs of personal income taxation were consistent across years, being relatively small for all but the higher tax brackets. For the top marginal rate bracket of 39 per cent, the welfare cost of raising an extra dollar of tax revenue was estimated to be well in excess of a dollar.
    Keywords: Income taxation, Taxable income, Elasticity of taxable income, Excess burden of taxation,
    Date: 2012–09–21

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