nep-pub New Economics Papers
on Public Finance
Issue of 2013‒06‒04
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Capital Versus Labor Taxation with Innovation-Led Growth By Philippe Aghion; Ufuk Akcigit; Jesús Fernández-Villaverde
  2. Optimal Taxation and Life Cycle Labor Supply Profile By Michael Kuklik; Nikita Cespedes
  3. Top Marginal Taxation and Economic growth By Santo Milasi
  4. The Power to Pass on Taxes - A Test for Tax Shifting based on Observables By Mario Jametti; Agustin Redonda; Anindya Sen
  5. Local taxation of global corporation: a simple solution By HINDRIKS, Jean; PERALTA, Susana; WEBER, Shlomo
  6. Optimal Fiscal Policy By Jasper Lukkezen; Coen Teulings
  7. Bundling Public with Private Goods By Gerrit Frackenpohl; Gert Pönitzsch
  8. Tax competition and determination of the quality of public goods By Abdessalam, A. H. Ould; Kamwa, Eric
  9. Harsh occupations, health status and social security By PESTIEAU, Pierre; RACIONERO, Maria

  1. By: Philippe Aghion; Ufuk Akcigit; Jesús Fernández-Villaverde
    Abstract: Chamley (1986) and Judd (1985) showed that, in a standard neoclassical growth model with capital accumulation and infinitely lived agents, either taxing or subsidizing capital cannot be optimal in the steady state. In this paper, we introduce innovation-led growth into the Chamley-Judd framework, using a Schumpeterian growth model where productivity-enhancing innovations result from profit-motivated R&D investment. Our main result is that, for a given required trend of public expenditure, a zero tax/subsidy on capital becomes suboptimal. In particular, the higher the level of public expenditure and the income elasticity of labor supply, the less should capital income be subsidized and the more it should be taxed. Not taxing capital implies that labor must be taxed at a higher rate. This in turn has a detrimental effect on labor supply and therefore on the market size for innovation. At the same time, for a given labor supply, taxing capital also reduces innovation incentives, so that for low levels of public expenditure and/or labor supply elasticity it becomes optimal to subsidize capital income.
    JEL: H2 O3 O4
    Date: 2013–05
  2. By: Michael Kuklik; Nikita Cespedes
    Abstract: La tasa óptima de impuesto a los ingresos de capital en Estados Unidos es 36% según Conesa y otros (2009). Este resultado se deriva de un modelo de ciclo de vida y se debe a la existencia de mercado incompletos y a la oferta laboral endógena. Se muestra que este modelo tiene problemas en explicar algunos aspectos básicos de la oferta de trabajo a lo largo de ciclo de vida de los trabajadores. En este trabajo, introducimos no linealidad en los salarios y transferencias entre personas y logramos reproducir las características de ciclo de vida de la oferta de trabajo. El primer supuesto induce a que las horas de trabajo sean altamente persistentes y ayuda a considerar las decisiones de trabajo en el margen extensivo a lo largo del ciclo de vida. El segundo supuesto permite modelar las decisiones de trabajo a temprana edad. El modelo propuesto sugiere que la tasa de impuesto optima a los ingresos de capital es de 7,4%.
    Abstract: The optimal capital income tax rate is 36 percent as reported by Conesa, Kitao, and Krueger (2009). This result is mainly driven by the market incompleteness as well as the endogenous labor supply in a life-cycle framework. We show that this model fails to account for the basic life-cycle features of the labor supply observed in the U.S. data. In this paper, we introduce into this model nonlinear wages and inter-vivos transfers into this model in order to account for the life-cycle features of labor supply. The former makes hours of work highly persistent and helps to account for labor choices at the extensive margin over the life cycle. The latter allows us to account for labor choicesearly in life. The suggested model delivers an optimal capital income tax rate of 7.4 percent, which is significantly lower than what Conesa, Kitao, and Krueger (2009) found.
    Keywords: Labor supply, optimal taxation, capital taxation, non-linear wage, inter-vivos transfer.
    JEL: E13 H21 H24 H25
    Date: 2013
  3. By: Santo Milasi (University of Rome "Tor Vergata")
    Abstract: The paper explores the relationship between statutory top marginal tax rates on personal income and long-run economic growth. While theoretical models of endogenous growth explicitly allow for nonlinear effects of taxation on economic growth, the majority of existing empirical studies assume a linear association. By contrast, this paper investigates both a linear and a non-monotonic relationship between top tax rates and GDP growth. Using a panel of 18 OECD countries over the period 1960-2009, this paper finds support in favor of a quadratic top tax-growth relationship. Results are robust to different model specifications and estimation techniques. The point estimates of the regressions suggest that the marginal effect of higher top tax rates becomes negative above a growth maximizing tax rate on the order of 70 percent. The quadratic relationship found for the whole sample period does not hold over the period 1975-2009. Instead, the link between top tax rates and GDP growth after 1975 is well summarized by a linear and positive top tax-growth relationship. Since top marginal tax rates after 1975 are well below the estimated growth maximizing level, such a result suggest that the top tax-growth relationship after 1975 might be placed on the upward-sloping side of the “growth-hill”. There is an even stronger positive top tax-growth relationship after 1985, when average top tax rates across OECD are lower than 50%.
    Date: 2013–05–21
  4. By: Mario Jametti (Istituto di Economia Politica (IdEP), Facoltà di Scienze Economiche, Università della Svizzera italiana, Svizzera); Agustin Redonda (Istituto di Economia Politica (IdEP), Facoltà di Scienze Economiche, Università della Svizzera italiana, Svizzera); Anindya Sen (Department of Economics, University of Waterloo, Canada)
    Abstract: Since gasoline has a relatively inelastic demand, raising government revenue via gasoline taxes could appear appropriate as it entails a relatively small deadweight loss. However, gasoline retail is generally a highly concentrated market, hence the assumption of perfect competition when considering tax incidence might be misleading. Theoretically, in oligopolistic markets taxes can be shifted forward less (more) than proportionally to retail prices; a possibility usually denoted by undershifting (overshifting). Generally, this depends on unobservable parameters of the demand and cost functions. In this paper we device a novel empirical test, based on observables, to assess whether taxes are under- or overshifted in an oligopolistic market. The test depends on the interaction between market structure and taxes. We apply our test to the Canadian retail gasoline market using a panel data set of 10 cities, finding that gasoline taxes are undershifted.
    Keywords: Tax Incidence, Pass-through, Market Structure
    JEL: H22 D43 L13
    Date: 2013
  5. By: HINDRIKS, Jean (Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium); PERALTA, Susana (Nova School of Business and Economics, Lisboa); WEBER, Shlomo (Southern Methodist University, Texas)
    Abstract: The explosion of globalization has increased firms incentives to exploit international tax differentials to their benefit. In this paper we consider a simple world with two countries with different market sizes and two multinationals with a division in each country. Both countries use a source-based profit tax on multinationals, who compete a la Cournot in each local market and use profit shifting based on the tax differential. We assess policies aimed to mitigate inefficient tax choices and show that tax harmonization cannot benefit the small country which adopts a lower tax rate to channel a tax revenue from the large country. We propose a simple revenue sharing mechanism in which countries share equal proportion of their own revenue with each other. It is shown that revenue sharing increases equilibrium tax rates in each country, reduces the tax differential, and benefits both countries despite of reallocation of resources from the high tax to the low tax country
    Keywords: Heterogeneous countries, Profit Shifting, Tax Competition Revenue Sharing
    JEL: F23 H25 H70
    Date: 2013–05–06
  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 thatcannot 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 holdstrue 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: Gerrit Frackenpohl; Gert Pönitzsch
    Abstract: We propose a simple mechanism that might improve voluntary contributions to public goods. Using a laboratory experiment we analyze how bundling public with private goods affects individuals' valuations for both goods. In the experiment, subjects may purchase a private and a public good either separately or in the form of a bundle. The data show superadditivity for bundles of public and private goods, i.e., the willingness to pay for the bundle exceeds the willingness to pay for the two separate goods. In contrast, we find no superadditivity in control treatments with only private goods. We discuss several behavioral concepts which are in line with our results as well as implications for fundraisers and firms.
    Keywords: Public Goods, Bundling, Valuation, Superadditivity
    JEL: C91 D12 H41
    Date: 2013–05
  8. By: Abdessalam, A. H. Ould; Kamwa, Eric
    Abstract: In this paper, the authors analyze the behavior of local governments on capital taxation when the financial choices in terms of a public good quality are done by a central planner. More specifically, they ask the question whether a local government has an interest to tax the mobile factor in addition to the tax on representative households or not. The authors show, through a comparison of social welfare given the strategies chosen by the locals governments, that whatever the quality of the public good and its cost is, a local government always has an interest to tax the mobile factor. This leads to a Nash-equilibrium in dominant strategy in their model. --
    Keywords: tax competition,public goods,taxation,quality,welfare
    JEL: D00 H20 H41 H70 H71
    Date: 2013
  9. By: PESTIEAU, Pierre (CREPP, Université de Liège, Belgium; Université catholique de Louvain, CORE, Belgium); RACIONERO, Maria (Research School of Economics, Australian National University)
    Abstract: We study the optimal design of a social security system when individuals differ in health status and occupation. Health status is private information but is imperfectly correlated with occupation: individuals in harsh occupations are more likely to be in poor health. We explore the desirability of letting the social security policy differ by occupation and compare the results with those obtained when disability tests are used instead. We show that tagging by occupation is preferable to testing when the audit technology is relatively expensive and/or the proportion of disabled workers differs markedly across occupations. We also study the implications of imposing horizontal equity among disabled workers and show that those in the harsh occupation may be induced to retire later.
    Keywords: health status, retirement age, tagging, disability tests
    JEL: H21 H55
    Date: 2013–02–22

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