nep-pub New Economics Papers
on Public Finance
Issue of 2013‒05‒19
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Taxation, match quality and social welfare By Brendan Epstein; Ryan Nunn
  2. Families, Taxes and the Welfare System By Simpson, Nicole B.
  3. Complex Tax Incentives: An Experimental Investigation By Abeler, Johannes; Jäger, Simon
  4. Car User Taxes, Quality Characteristics and Fuel Efficiency: Household Behavior and Market Adjustment By Bruno de Borger; Jan Rouwendal
  5. Tax evasion,tax corruption and stochastic growth By Fred Celimene; Gilles Dufrenot; Gisele Mophou; Gaston N'Guerekata
  6. Optimal Fiscal Policy By Jasper Lukkezen; Coen Teulings
  7. The Fiscal Theory of the Price Level When All Income is Taxed By Pedro Gomis-Porqueras; Solmaz Moslehi; Vivianne Vilar
  8. Capital Gains Taxation and the Cost of Capital: Evidence from Unanticipated Cross-Border Transfers of Tax Bases By Harry Huizinga; Johannes Voget; Wolf Wagner
  9. Tax Rates as Strategic Substitutes By Ruud A. de Mooij; Hendrik Vrijburg

  1. By: Brendan Epstein; Ryan Nunn
    Abstract: A large public finance literature argues that taxable income elasticities are a sufficient statistic for the social welfare consequences of taxation. We develop calibrations that show such deadweight loss calculations are overestimates proportional to the quantitative significance of heterogeneity in amenities across job matches. In particular, the endogenous supply of amenities can substantially exacerbate this overestimation in both static and dynamic environments. Given the possibility of gradual migration of workers into more amenity-focused job matches in response to tax increases, welfare calculations based on long-run taxable income elasticities can be more misleading than those based on short-run elasticities.
    Date: 2013
  2. By: Simpson, Nicole B. (Colgate University)
    Abstract: In this paper, I will describe in detail both the Earned Income Tax Credit and the Child Tax Credit in the U.S., including their origins, their structure, and the effects they have on the labor market and family formation. I will then discuss the macroeconomic implications of U.S. welfare reform, and then conclude by analyzing the effectiveness of the U.S. safety net (broadly defined) during the Great Recession of 2007-2008.
    Keywords: taxes, welfare, families, EITC, child tax credit, TANF
    JEL: D1 H24 H53
    Date: 2013–04
  3. By: Abeler, Johannes (University of Oxford); Jäger, Simon (Harvard University)
    Abstract: How does the tax system's complexity affect people's reaction to tax changes? To answer this question, we conduct a real-effort experiment in which subjects receive a piece rate and face a set of taxes. In one treatment the tax system is simple; in the other treatment it is highly complex. The payoff-maximizing effort level and the incentives around this optimum are, however, identical across treatments. We then introduce the same sequence of additional tax rules in both treatments. We find that subjects in the complex treatment adjust their effort provision less in response to a new tax than subjects in the simple treatment. Many subjects in the complex treatment even ignore the new rule entirely, repeating their previous choice. Contrary to predictions from models of rational inattention, we find no evidence that subjects are less likely to ignore larger changes in incentives. Our results suggest that the effect of a newly introduced tax will be attenuated in a more complex tax system.
    Keywords: complexity, taxation, attention, salience, laboratory experiment
    JEL: C91 D03 H31 J22
    Date: 2013–04
  4. By: Bruno de Borger (University of Antwerp); Jan Rouwendal (VU University Amsterdam)
    Abstract: We study the impact of fuel taxes and kilometer taxes on households' choices of vehicle quality, on their demand for kilometers driven, and on fuel consumption. Moreover, embedding this information in a model of the car market, we analyze the implications of these taxes for the opportunity costs of owning cars of different quality. Higher quality raises the fixed cost of car ownership, but it may raise (engine size, acceleration speed, etc.) or reduce (fuel technology, etc.) the variable user cost. Our results show that kilometer charges and fuel taxes have very different implications. For example, a higher fuel tax raises household demand for more fuel efficient cars, provided that the demand for car use is inelastic; it reduces the demand for characteristics that raise variable user costs. Surprisingly, however, a kilometer tax unambiguously reduces the demand for more fuel efficient cars. Incorporating price adjustments at the market level, we find th at fuel taxes raise the <I>marginal</I> fixed opportunity cost of better fuel efficiency at all quality levels. <I>Total</I> annual opportunity costs of owning highly fuel efficient cars increase, while they decline for cars of low fuel efficiency. We further find that both a fuel tax and a kilometer charge reduce the <I>total</I> annual fixed ownership cost for car attributes that raise the variable cost of driving (engine power, acceleration speed, etc.). There is thus in general a trade-off between fixed and variable car costs: if the latter increase - due to higher fuel prices or a kilometer charge - total demand for cars decreases and a return to equilibrium is only possible by a decrease in fixed costs. All theoretical results are illustrated using a numerical version of the model. The analysis shows that modeling the effect of tax changes on household behavior alone can produce highly misleading results.
    Keywords: car market, car quality, fuel tax, kilometer charge, market equilibrium
    JEL: H22 L62
    Date: 2012–11–16
  5. By: Fred Celimene (CEREGMIA, Université des Antilles et de la Guyane); Gilles Dufrenot (Aix-Marseille Université); Gisele Mophou (CEREGMIA, Université des Antilles et de la Guyane); Gaston N'Guerekata (Morgan State University, Baltimore, MD, USA)
    Abstract: This paper presents a continuous time stochastic growth model to study the effects of tax evasion and tax corruption on the level and volatility of private investment and public spending. Our results suggest that there do exist several regimes of mean growth and growth volatility, depending upon the consumer's degree of risk aversion, the tax income yield, the risk-adjusted return of the agent's portfolio, the productivity of public spending. We find that public spending is described asymptotically by an incomplete upper Gamma distribution, while private capital is described by a power law distribution. Depending upon the values of the parameters of these distributions, growth can be characterized by extreme values (high volatility) when the return to taxation lies under a certain threshold and/or when the risk-adjusted return of investing the proceeds of illegal activities evolves above a given threshold. We provide an empirical illustration of the model.
    Date: 2013–02
  6. By: Jasper Lukkezen (Utrecht University, and CPB); Coen Teulings (University of Amsterdam, and CPB)
    Abstract: This paper derives and estimates rules for fiscal policy that prescribe the optimal response to changes in unemployment and debt. We combine the reducedform model of the economy from a linear VAR with a non-linear welfare function and obtain analytic solutions for optimal policy. The variables in our reducedform model –growth, unemployment, primary surplus– have a natural rate that cannot be affected by policy. Policy can only reduce fluctuations around these natural rates. Our welfare function contains future GDP and unemployment, the relative weights of which determine the optimal response. The optimal policy rule demands an immediate and large policy response that is procyclical to growth shocks and countercyclical to unemployment shocks. This result holds true when the weight of unemployment in the welfare function is reduced to zero. The rule currently followed by policy makers responds procyclically to both growth and unemployment shocks, and does so much slower than the optimal rule, leading to significant welfare losses.
    Keywords: optimal control; optimal policy; fiscal policy rules; fiscal consolidation; debt sustainability
    JEL: E6 H6
    Date: 2013–05–06
  7. By: Pedro Gomis-Porqueras; Solmaz Moslehi; Vivianne Vilar
    Abstract: In this paper we explore how the nature of the equilibria changes when the interest income from nominal bond holdings is also taxed in an fully flexible endowment economy. We find that the stability properties of this economy depend on the slope and the intercept of both monetary and fiscal policy rules. Thus, the parameter space consistent with locally determinate equilibria is much larger compared to that of Leeper (1991). For instance, deviations from the Taylor principle can still yield determinate equilibria even when fiscal policy does not aggressively respond to rises in debt levels. In addition, we show that if the government taxes all sources of income and the fiscal authority sets taxes taking into account the level of debt, then the economy exhibits a Laffer curve yielding multiple steady states. As we can see, ignoring the tax treatment of interest income generated by bond holdings is not as innocuous as it may seem.
    Keywords: Taxes, Bond Income, Laffer Curve, Monetary and Fiscal Policy Interactions.
    JEL: C11 E32 E62
    Date: 2013–05
  8. 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
  9. 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

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