nep-pub New Economics Papers
on Public Finance
Issue of 2013‒10‒18
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Do the Laws of Tax Incidence Hold? Point of Collection and the Pass-Through of State Diesel Taxes By Kopczuk, Wojciech; Marion, Justin; Muehlegger, Erich; Slemrod, Joel
  2. Housing transfer taxes and household mobility: Distortion on the housing or labour market? By Teemu Lyytikäinen; Hilber; A. L. Christian
  3. More haircut after VAT cut? On the efficiency of service sector consumption taxes By Tuomas Kosonen
  4. Restaurant VAT cut: Cheaper meal and more service? By Tuomas Kosonen; Jarkko Harju
  5. When You Know Your Neighbor Pays Taxes: Information, Peer Effects, and Tax Compliance By James Alm; Kim M. Bloomquist; Michael McKee
  6. Efficient tax reporting: The effects of taxpayer information services By Christian A. Vossler; Michael McKee
  7. Taxpayer confusion over predictable tax liability changes: evidence from the Child Tax Credit By Naomi E. Feldman; Peter Katuscak; Laura Kawano
  8. Do Single-Party and Coalition Governments Differ in their Economic Outcomes? Evidence from Finnish Municipalities By Meriläinen; Jaakko
  9. Provision of Differentiated Public Goods within Organizations By Zudenkova, Galina

  1. By: Kopczuk, Wojciech (Columbia University); Marion, Justin (University of CA, Santa Cruz); Muehlegger, Erich (Harvard University); Slemrod, Joel (University of MI)
    Abstract: The canonical theory of taxation holds that the incidence of a tax is independent of the side of the market which is responsible for remitting the tax to the government. However, this prediction does not survive in certain circumstances, for example when the ability to evade taxes differs across economic agents. In this paper, we estimate in the context of state diesel fuel taxes how the incidence of a quantity tax depends on the point of tax collection, where the level of the supply chain responsible for remitting the tax varies across states and over time. Our results indicate that moving the point of tax collection from the retail station to higher in the supply chain substantially raises the pass-through of diesel taxes to the retail price. Furthermore, tax revenues respond positively to collecting taxes from the distributor or prime supplier rather than from the retailer, suggesting that evasion is the likely explanation for the incidence result.
    Date: 2013–09
  2. By: Teemu Lyytikäinen; Hilber; A. L. Christian
    Abstract: We estimate the effect of the UK Stamp Duty Land Tax on household mobility using micro data. Exploiting a discontinuity in the tax schedule as a quasiexperimental setting, we isolate the impact of the stamp duty from other determinants of mobility. We compare homeowners with self-assessed house values on either sides of a cut-off value where the tax rate increases from 1 to 3 percent and find that a higher stamp duty strongly negatively affects their propensity to move. The 2 percentage-point increase in the stamp duty reduces the annual rate of mobility by between 2 and 3 percentage-points or about 30 percent. This adverse effect is confined to short-distance and non-job related moves, suggesting a distortion in the housing rather than the labour market. As a cross-validation check, we also analyse the distribution of actual transaction prices and find that the tax rate increase reduces the volume of sales by roughly 30 percent.
    Keywords: Stamp duty, housing transfer taxes, transaction costs, homeownership, household mobility
    JEL: R31 R21 J61 H27 H21 R38 D23
    Date: 2013–08–09
  3. By: Tuomas Kosonen
    Abstract: Consumption tax rates targeted at specific sectors are often reformed without empirical knowledge about the efficiency of these policies. This paper sheds light on the efficiency issue, the potential for welfare improving reform, by studying the incidence of value added taxes (VAT) on prices and quantities of barber services traded. I also study the incidence on the profits made by the targeted firms. I utilize a VAT reform targeted at a specific service sector which creates a natural experiment set up. VAT for hairdressing services in Finland was reduced from 22% to 8%, whereas the normal tax treatment still applied to beauty salons and other labor intensive services. The choice of the treatment and control groups was exogenous to circumstances in Finland, since these groups were selected in a more wider European setting. The results suggest that hairdressers cut their prices only by half of what complete pass-through would have implied, and that there was hardly any adjustment in the equilibrium quantity due to the reform. Instead of lowering prices, most hairdressers were able to increase their profits. There is important heterogeneity in the results according to firm size.
    Keywords: VAT reform, efficiency, tax incidence
    Date: 2013–09–26
  4. By: Tuomas Kosonen; Jarkko Harju
    Abstract: This paper provides causally plausible estimates of the effects of consumption taxes in a service sector on prices and demand for restaurant services. We utilize a large VAT reform affecting restaurant meals, where the VAT rate was cut from 22% to 13% in 2010 in Finland. By comparing with restaurants in neighboring countries and other related sectors in Finland, the reform offers a natural experimental approach. The results indicate that restaurants reduced their prices on average by only 2%, which equals roughly a quarter of the full pass-through. Remarkably, at the same time a majority of restaurants did not reduce their prices at all and a non-trivial fraction of restaurants reduced their prices by exactly the full pass-through. Larger restaurants reduced their prices more often than smaller restaurants. We do not observe any increases in the quantity of services sold or in wage sums paid to employees. Furthermore, there are no changes in mediumterm entry and exit due to the reform.
    Keywords: VAT reform, restaurants, tax incidence
    JEL: H22 H32 H21
    Date: 2013–10–09
  5. By: James Alm; Kim M. Bloomquist; Michael McKee
    Abstract: In this paper, we argue that individuals are affected in their compliance behavior by the behavior of their “neighbors”, or those about whom they may have information, whom they may know, or with whom they may interact on a regular basis. Individuals seem more likely to file and to report their taxes when they believe that other individuals are also filing and reporting their taxes; conversely, when individuals believe that others are cheating on their taxes, they may well become cheaters themselves. We use experimental methods to test the role of such information about peer effects on compliance behavior. In one setting, we inform individuals about the frequency that their neighbors submit a tax return. In a second setting, we inform them about the number of their neighbors who are audited, together with the penalties that they pay. In both cases, we examine the impact of information on filing behavior and also on subsequent reporting behavior. We find that providing information on whether one’s neighbors are filing returns and/or reporting income has a statistically significant and economically large impact on individual filing and reporting decisions. However, this “neighbor” information does not always improve compliance, depending on the exact content of the information. Key Words: Tax evasion; Tax compliance; Behavioral economics; Experimental economics
    JEL: H26 C91
    Date: 2013
  6. By: Christian A. Vossler; Michael McKee
    Abstract: As policy makers recognize the complexity of the tax system can result in some “evasion” being due to errors, there has been increasing focus on the role of taxpayer services as a tool in the enforcement regime. Such programs can improve the image of the tax agency but the critical issue is the effect on tax reporting. While the earlier focus has been on tax evasion, tax overreporting is also an issue since it leads to inefficient resource allocation. Thus, the present paper focusses on the effectiveness of taxpayer service programs in enhancing tax reporting. Data are collected on tax reporting decisions via laboratory experiments designed to implement the tax reporting task. To investigate the effects of taxpayer services, we “complicate” these compliance decisions of subjects, and then provide “services” from the “tax administration” that allow subjects to compute more easily their tax liabilities. Briefly, we find that our subjects are less likely to file when tax liability is uncertain but the provision of information offsets this effect; it appears that simply providing the service, even an imperfect service, increases the propensity to file and the accuracy of the filing. Key Words: tax information services; tax reporting; behavioral economics; experimental economics
    JEL: H2 H26 C91
    Date: 2013
  7. By: Naomi E. Feldman; Peter Katuscak; Laura Kawano
    Abstract: We develop a model of how taxpayers update beliefs over their tax rates when they encounter a non-salient tax liability change. We test the model's hypotheses using the loss of the Child Tax Credit when a child turns 17. Because this tax liability change is lump-sum and predictable, there should be no reaction in labor income if taxpayers are fully informed. Using this age discontinuity, we find, however, that losing the credit reduces household labor income. This finding suggests that taxpayers misperceive the source of tax liability changes, leading to under- or over-reactions to changes in marginal tax rates.
    Date: 2013
  8. By: Meriläinen; Jaakko
    Abstract: Even though Finland has proportional elections, single-party control in Finnish local councils is not uncommon contrary to what one might expect. The largest party holds more than half of the seats in every third Finnish local council and is thus likely to govern alone. This study investigates whether single-party and coalition governed municipalities differ in their economic outcomes. Common pool models predict that when there is a governing coalition, all the parties aim to target some spending at their core constituents, while costs are shared equally across all parties. This would mean that coalition governments result in higher spending. Using data from 445 Finnish municipalities for the years 1980?2010, I provide causal evidence that is consistent with the predictions of common pool models. Estimates suggest that single-party control decreases total expenditures and revenues by around 200?300 euros per capita. I also analyze the effect in several areas of spending and revenues, but do not find any clear results. I exploit close elections as a source of exogenous variation using a regression discontinuity design (RDD) approach tailored for proportional elections.
    Keywords: single-party control, coalition governments, common pool problem, municipal elections, proportional system, regression discontinuity design
    JEL: H72 H71 R50
    Date: 2013–10–07
  9. By: Zudenkova, Galina
    Abstract: This paper analyzes provision of a differentiated public good within an organization. A moderate principal assigns a public good production to one of two extreme agents. A contributing agent then gets the opportunity to choose a public good variety he prefers but has to carry a cost of production. If a production cost is lower than a benefit from having their preferred public good variety implemented then the agents seek assignment. I show that in this case the principal makes the agents compete by committing to public good varieties they would provide if selected. The agents want to make themselves an attractive choice and so announce moderate (still divergent) varieties if production is costly, and the principal's preferred variety if production is not costly. However, if the production cost exceeds the benefit from having their preferred public good variety implemented then the agents want to avoid assignment. My results suggest that in this case the principal just assigns an unpopular public good production to a less extreme agent.
    Keywords: Differentiated Public Goods, Public Good Provision, Spatial Competition.
    JEL: H41
    Date: 2013–09–01

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