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on Public Finance |
| By: | Koehne, Sebastian; Kuhn, Moritz |
| Abstract: | This paper studies the effect of habit formation on optimal capital taxes in a dynamic Mirrleesian model. We make three distinct contributions. First, we decompose intertemporal wedges (implicit capital taxes) for general time-nonseparable preferences into a wealth effect, a complementarity effect, and a future incentive effect. Second, we provide conditions under which intertemporal wedges are positive. Third, we derive a recursive formulation of constrained efficient allocations and evaluate the quantitative impact of habit formation. In a model parameterized to the U.S. economy, habit formation reduces average intertemporal wedges by about 40 percent compared to the time-separable case. Moreover, intertemporal wedges are close to zero for the largest part of the working life. |
| Keywords: | optimal taxation; intertemporal wedge; habit formation; recursive contracts; new dynamic public finance |
| JEL: | D82 E21 H21 |
| Date: | 2013–03–18 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:45203&r=pub |
| By: | Ryoji Hiraguchi (Faculty of Economics, Ritsumeikan University); Akihisa Shibata (Institute of Economic Research, Kyoto University) |
| Abstract: | We investigate an overlapping generations model (OLG) model in which agents who live for two periods receive idiosyncratic productivity shocks when they are old. We show that a combination of lump-sum and linear capital taxes can always Pareto-improve the allocation, that is, it can raise the equilibrium welfare of one generation without affecting that of the others. As D?vila et al. (Econometrica (2012)) show, a capital reduction in one period raises the welfare levels of agents who are old in that period, but lowers that of the young agents, because it reduces their wages. We show that the government can compensate for these wage losses by additionally taxing the old agents, such that their welfare gains remain positive. |
| Keywords: | idiosyncratic risk; capital tax, incomplete markets, overlapping generations |
| JEL: | E5 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:853&r=pub |
| By: | Tuomas Kosonen; Jarkko Harju |
| 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 out corporations. We use a difference-indifferences 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. |
| Keywords: | Entrepreneurs, small businesses, tax incidence |
| JEL: | H22 H24 H25 |
| Date: | 2013–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:fer:wpaper:42&r=pub |
| By: | Jarkko Harju; Tuomas Matikka |
| Abstract: | This study examines the extent of direct tax avoidance through income-shifting between wages and dividends, and approximates the deadweight loss due to this behavior for the owners of privately held corporations. The dual income tax system in Finland offers noticeable incentives for income-shifting. The extensive dividend tax reform of 2005 enables us to study how this particular form of tax avoidance reacts to an exogenous change in tax rates. Our results support highly active income-shifting, and the apparent tax avoidance behavior has considerable welfare effects. We also find evidence that costs related to income-shifting behavior affect the effectiveness of taxation. |
| Keywords: | Tax avoidance, income shifting, entrepreneurs, dual income tax |
| JEL: | H32 H21 H25 |
| Date: | 2013–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:fer:wpaper:43&r=pub |
| By: | Oscar Bajo-Rubio (Universidad de Castilla-La Mancha); Antonio G. Gómez-Plana (Universidad Pública de Navarra) |
| Abstract: | In this paper, we examine the effects of several alternative measures intended to reduce government deficits, distinguishing between those acting through either taxes or spending, for the case of Spain. The empirical methodology is based on a computable general equilibrium model. All the simulated policies lead to a decrease in the levels of output and employment, and to a higher unemployment rate. Spending cuts show greater contractionary effects than tax increases, and are associated with a worsening in the distribution of income for labour. These effects are stronger in the case of spending cuts in Public education. |
| Keywords: | Computable general equilibrium, Government deficit, Taxes, Spending |
| JEL: | C68 H62 H20 H50 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:aee:wpaper:1302&r=pub |
| By: | Djawadi, Behnud Mir (University of Paderborn); Fahr, René (University of Paderborn) |
| Abstract: | We investigate the impact of trust in authorities on tax compliance within a controlled laboratory setting. Embedded in two hypothetical tax systems with high and low power of authorities respectively, we gradually increase trust in authorities in form of tax knowledge about public expenditures and by allowing taxpayers to decide on what public goods they want their tax dollars to be spend for. To clearly disentangle any effects from factors that are known to influence tax compliance from previous studies, we control for tax commitment, risk attitude, income and effort exerted to earn the income which the taxpayers report truthfully or underreport to the tax authority. Non-parametric statistical analyses as well as multivariate regressions provide clear evidence that tax compliance is higher in tax systems with low power of authorities when providing complete transparency on public expenditures and when taxpayers are given the possibility to decide on the use of their taxes. With a powerful tax authority in place which is reflected in high audit rates, compliance does not change when increasing trust in authorities. Our results have important policy implications as the mere hypothetical possibility to express preferences on budget spending influences tax compliance. |
| Keywords: | tax evasion, tax compliance, tax knowledge, budget spending, real effort, experimental economics |
| JEL: | H26 C91 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7255&r=pub |
| By: | Boyd-Swan, Casey (Arizona State University); Herbst, Chris M. (Arizona State University); Ifcher, John (Santa Clara University); Zarghamee, Homa (Barnard College) |
| Abstract: | This paper contributes to the small but growing literature evaluating the health effects of the Earned Income Tax Credit (EITC). In particular, we use data from the National Survey of Families and Households to study the impact of the 1990 federal EITC expansion on several outcomes related to mental health and subjective well-being. The identification strategy relies on a difference-in-differences framework to estimate intent-to-treat effects for the post-reform period. Our results suggest that the 1990 EITC reform generated sizeable health benefits for low-skilled mothers. Such women experienced lower depression symptomatology, an increase in self-reported happiness, and improved self-efficacy relative to their childless counterparts. Consistent with previous work, we find that married mothers captured most of the health benefits, with unmarried mothers' health changing very little following the 1990 EITC reform. |
| Keywords: | Earned Income Tax Credit (EITC), happiness, health, subjective well-being |
| JEL: | I1 J00 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7261&r=pub |
| By: | Joshua Elliott; Don Fullerton |
| Abstract: | One country that tries to reduce greenhouse gas emissions may fear that other countries get a competitive advantage and increase emissions (“leakage”). Estimates from computable general equilibrium (CGE) models such as Elliott et al (2010a,b) indicate that 15% to 25% of abatement might be offset by leakage. Yet the Fullerton et al (2012) analytical general equilibrium model shows an offsetting term with negative leakage. To derive analytical expressions, their model is quite simple, with only one good from each country or sector, a fixed stock of capital, competitive markets, and many identical consumers that purchase both goods. Their model is not intended to be realistic, but only to demonstrate the potential for negative leakage. Most CGE models do not allow for negative leakage. In this paper, we use a full CGE model with many countries and many goods to measure effects in a way that allows for negative leakage. We vary elasticities of substitution and confirm the analytical model’s prediction that negative leakage depends on the ability of consumers to substitute into the untaxed good and the ability of firms to substitute from carbon emissions into labor or capital. |
| JEL: | H23 Q56 Q58 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18897&r=pub |