nep-pub New Economics Papers
on Public Finance
Issue of 2013‒12‒15
sixteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Accounting for Income Changes over the Great Recession (2007-2010) Relative to Previous Recessions: The Importance of Taxes and Transfers By Jeff Larrimore; Richard V. Burkhauser; Philip Armour
  2. The European debt crisis and fiscal reaction functions in Europe 2000–2012 By Guido Baldi; Karsten Staehr
  3. Two Sources of Bias in Estimating the Peak of the Laffer Curve By Dan Usher
  4. Marginal Tax Rates and Reported Incomes: New Time Series Evidence By Karel Mertens
  5. Distributional benchmarking in tax policy evaluations By Thor O. Thoresen; Zhiyang Jia; Peter J. Lambert
  6. Long-Term Participation Tax Rates By Charlotte Bartels
  7. Are closely-held firms tax shelters? By Annette Alstadsæter; Wojciech Kopczuk; Kjetil Telle
  8. Tax Evasion, Human Capital, and Productivity Induced Tax Rate Reduction By Max Gillman; Michal Kejak
  9. Estate Taxation with Altruism Heterogeneity By Emmanuel Farhi; Ivan Werning
  10. Culture and Taxes: Towards Identifying Tax Competition By Eugster, Beatrix; Parchet, Raphaël
  11. Do Tax Incentives Affect Charitable Contributions? Evidence from Public Charitiesâ Reported Revenues By Nicolas J. Duquette
  12. The effect of tax enforcement on tax elasticities: Evidence from charitable contributions in France By Gabrielle Fack; Camille Landais
  13. Family Taxation and the Female Labor Supply: Evidence from the Czech Republic By Klara Kaliskova
  14. Taxes, Informality and Income Shifting: Evidence from a Recent Pakistani Tax Reform By Mazhar Waseem
  15. Assessing Fiscal Capacity at the Local Government Level in South Africa By Margaret Chitiga-Mabugu; Nara Monkam
  16. The Social Security Windfall Elimination and Government Pension Offset Provisions for Public Employees in the Health and Retirement Study By Alan L. Gustman; Thomas L. Steinmeier; Nahid Tabatabai

  1. By: Jeff Larrimore; Richard V. Burkhauser; Philip Armour
    Abstract: With data from the March CPS and using shift-share analysis, we analyze the factors that account for changes in post-tax post-transfer income during each of the past four recessions. What distinguishes the Great Recession is that drops in employment rather than wage earnings drove income declines. In addition, taxes and transfers played a much greater role in offsetting market income losses —a result largely missed in analyses that do not account for taxes and transfers. This is particularly so among the bottom quintile of the distribution where lower and increased transfers offset more than one-half of the market income declines.
    JEL: D31 H24 J3
    Date: 2013–12
  2. By: Guido Baldi; Karsten Staehr
    Abstract: After the global financial crisis, some governments in the EU experienced serious debt financing problems, while others were less affected. This paper seeks to shed light on the divergent fiscal performance by assessing the fiscal conduct in the EU countries before and after the outbreak of the crisis. Fiscal reaction functions of the primary balance are estimated for different groups of EU countries using quarterly data for the pre-crisis period 2001–2008 and for the post-crisis period 2009–2012. The pre-crisis estimations reveal some differences in persistence and cyclical reaction between different groups of countries, but generally little feedback from the debt stock to the primary balance. The countries that eventually developed fiscal problems do not stand out. The post-crisis estimations show less counter-cyclicality and much more feedback from the debt stock, and these reactions are particularly pronounced for the countries with severe fiscal problems
    Keywords: fiscal reaction function, global financial crisis, debt crisis, structural break
    JEL: E61 E62 H62 H63
    Date: 2013–07–24
  3. By: Dan Usher (Queen's University)
    Abstract: Important as it is for public policy, there is still no consensus about the size of the revenue-maximizing tax rate at the top of the Laffer curve. The purpose of this essay is not to supply a correct rate, but to identify difficulties in doing so. 1) Estimates of the revenue-maximizing tax rate are distorted by the discrepancy between the “elasticity of taxable income†at observed tax rates and as it would become at the revenue-maximizing tax rate, a discrepancy illustrated with reference to tax evasion as the source of the contraction in the tax base in response to increases in the tax rate. 2) When the response of tax revenue to tax rate is through the supply of labour, the Laffer curve may not be humped at all because the supply of labour may expand, rather than contract, in respond to an increase in the tax rate, causing tax revenue to rise more than proportionally to the tax rate all the way up to 100%.
    Keywords: Duty to Vote, Tax Evasion, Labour-leisure Choice
    JEL: H21 H26
    Date: 2013–11
  4. By: Karel Mertens (Cornell University)
    Abstract: This paper estimates the effects of changes in marginal tax rates on reported income for different income groups in the postwar US. A large public finance literature focuses on net-of-tax rate elasticities of reported income because it is indicative of the distortionary effects of taxation. Based on static regressions of income on average marginal tax rates, several recent studies find relatively small elasticities for the top 1% income groups and zero elasticities for other income groups. My estimates are dynamic and account explicitly for the endogeneity of average marginal tax rates. The main findings are (i) that reported incomes respond elastically in the year of a change in tax rates, (ii) that incomes respond also outside the top 1% group and (iii) that the response is larger in the years following the change in marginal rates. These results are based on structural vector autoregressions (SVAR) that allow for dynamic interactions with real GDP, the government budget (debt, spending and revenues), inflation and monetary policy. Unanticipated shocks to net-of-tax rates are identified using a narrative measure of federal tax policy changes using the methodology in Mertens and Ravn (AER forthcoming). Using the SVAR measure of exogenous changes in tax rates as an instrument has a large effect on the results of the static regressions previously considered in the literature: elasticities of reported income rise above 1 and are statistically significant across different income groups, including those below the top 1%. I verify the results for different measures for marginal tax rates and different income concepts: I use the 1960-2000 dataset of Saez (2004), a new dataset constructed from the Statistics of Income that spans 1950-2008, and a recent dataset made available by the CBO that starts in 1979. My empirical findings indicate that marginal tax rate changes have considerable effects on behavior, which has important implications for fiscal policy.
    Date: 2013
  5. By: Thor O. Thoresen; Zhiyang Jia; Peter J. Lambert (Statistics Norway)
    Abstract: Given an objective to exploit cross-sectional micro data to evaluate the distributional effects of tax policies over a time period, the practitioner of public economics will find that the relevant literature offers a wide variety of empirical approaches. For example, studies vary with respect to the definition of individual well-being and to what extent explicit benchmarking techniques are utilized to describe policy effects. The present paper shows how the concept of distributional benchmarking can be exploited to describe methodological options for the tax policy analyst. We present classifications of the various approaches which can be found in the literature for evaluations of individual taxation along these lines, and provide empirical illustrations and interpretations for the case of the personal income tax schedule of Norway for the period 2000–2010.
    Keywords: Tax policy; Common base; Welfare metric
    JEL: H23 H24 I31 J22
    Date: 2013–11
  6. By: Charlotte Bartels
    Abstract: Generous income support programs as provided by European welfare states have often been blamed to reduce work incentives for the lowskilled and to increase durations of unemployment. Standard studies measure work incentives based on annual income concepts. This paper analyzes work incentives inherent in the German tax-benefit system when extending the time horizon to three years (long-term). Participation tax rates are computed for 1-year and 3-year periods 1995-1997 and 2005-2007 to reveal potential effects of the labor market and tax reforms between 1999 and 2005. The results show that participation tax rates are significantly lower over a 3- year period pointing at an overestimation of the disincentives by standard measures. Reforms reduced participation tax rates, particularly for singles and low-income individuals.
    Keywords: Welfare, work incentives, unemployment, unemployment insurance
    JEL: H31 J65
    Date: 2013
  7. By: Annette Alstadsæter; Wojciech Kopczuk; Kjetil Telle (Statistics Norway)
    Abstract: In 2004 Norwegian authorities announced a reform introducing dividend taxation for personal (but not corporate) owners to take effect starting in 2006. This change provided incentives to maximize dividends in 2004 and 2005, and to retain earnings in the following years. Using Norwegian registry data that cover the universe of non-publicly traded firms, we find that dividend payments responded very strongly to the anticipated reform, but also that much of the response was compensated by reinjecting shareholder equity in the same firms. On the other hand, following the reform firms began to retain earnings. While all categories of assets grow, the increase in durable assets categories that include equipment, machinery, company cars, planes and boats, is particularly striking. We find that personally owned firms and those that pursued aggressive dividend maximization policy in anticipation of the reform exhibit lower profits and economic activity in its aftermath, but retain earnings and accumulated assets at comparable or faster rate than others. The differential effect on assets is concentrated in financial (a potential substitute for private saving) and durable (a potential substitute for private consumption) asset categories. We interpret these results as indicating both the existence of real tax responses and supportive of the notion that in the presence of dividend taxation closely-held firms partially serve as tax shelters.
    Keywords: Tax; Tax shelter; Firm
    JEL: H25 H32 H26
    Date: 2013–11
  8. By: Max Gillman (Department of Economics, University of Missouri-St. Louis); Michal Kejak
    Abstract: The paper shows a key role of human capital in explaining how US postwar growth and welfare could have increased while tax rates declined. As in evidence, we assume that the share of government revenue in output has remained stable and model tax evasion within an endogenous growth model with human capital. A trend upwards in the productivity of the goods or human capital sectors grad- ually decreases the degree of tax evasion, and causes a trend upwards in time spent in human capital accumulation. These productivity increases also increase the ratio of tax revenue to GDP at any given tax rate such that the tax rate must be reduced in order to be consistent with the stylized fact of a constant share of government revenue in output. Based on estimated US postwar goods and hu- man capital sectoral productivities, the model explains 30% of the actual decline in a weighted average of postwar US top marginal personal and corporate tax rates. The estimated joint sectoral productivity increases are asymmetric with a larger relative increase in the human capital investment sector, a result related to McGrattan and PrescottÂ’s (2010) relatively larger increase in the productivity of the sector producing intangible capital relative to the goods sector. We show that in a special case of exogenous growth without human capital investment, the explanatory power of the tax trend drops signiÂ…cantly.
    Keywords: Tax evasion, intermediation technology, endogenous growth, human capital productivity, dynamic general equilibrium.
    JEL: E13 E62 H26 O41
    Date: 2013–11
  9. By: Emmanuel Farhi; Ivan Werning
    Abstract: We develop a theory of optimal estate taxation in a model where bequest inequality is driven by differences in parental altruism. We show that a wide range of results are possible, from positive taxes to subsidies, depending on redistributive objectives implicit in the cardinal specification of utility and social welfare functions. We propose a normalization that is helpful in classifying these different possibilities. We isolate cases where the optimal policy bans negative bequests and taxes positive bequests, features present in most advanced countries.
  10. By: Eugster, Beatrix; Parchet, Raphaël
    Abstract: We propose a difference-in-differences strategy to identify the existence of interjurisdictional tax competition, and to estimate its spatial reach. Our strategy rests on differences between desired tax levels, determined by culture-specific preferences, and equilibrium tax levels, determined by interjurisdictional fiscal externalities as well as by preferences. While fiscal preferences differ systematically and demonstrably between French-speaking and German-speaking Swiss regions, we find that local income tax burdens do not change discretely at the language border but exhibit smooth spatial gradients. The slope of these gradients implies that tax competition constrains tax choices of jurisdictions with a preference for higher taxes up to a distance of around 20 kilometers. Hence, tax competition does constrain income taxation by local governments but its effect is confined to a small spatial scale.
    Keywords: Tax competition, fiscal federalism, culture
    JEL: H31 H71 Z10
    Date: 2013–11
  11. By: Nicolas J. Duquette
    Abstract: This paper estimates the effect of the charitable contribution deduction on public charities' donation revenue. The effect is identified by exploiting variation in the change in tax incentives across US states following the federal Tax Reform Act of 1986. At the margin, a one percent increase in the tax cost of giving causes charitable receipts to fall by about four percent, a larger effect than has usually been found in the literature using household data. This result does not reflect intertemporal substitution and is robust to a variety of checks. Further analysis reveals that the effect is stronger for some sectors, notably health charities, and is driven by upper-income households. Tax reform proposals limiting upper-income households' charitable contribution deduction would sharply reduce some charities' contribution revenue.
    JEL: H20 H73 L30
    Date: 2013–12–09
  12. By: Gabrielle Fack; Camille Landais
    Abstract: Optimal tax formulas expressed in "sufficient statistics" are usually calibrated under the assumption that the relevant tax elasticities are unaffected by other available policy instruments. In practice though, tax authorities have many more instruments than the mere tax rates and tax elasticities are functions of all these policy instruments. In this paper we provide evidence that tax elasticities are extremely sensitive to a particular policy instrument: the level of tax enforcement. We exploit a natural experiment that took place in France in 1983, when the tax administration tightened the requirements to claim charitable deductions. The reform led to a substantial drop in the amount of contributions reported to the administration, which can be credibly attributed to overreporting of charitable contributions before the reform, rather than to a real change in giving behaviours. We show that the reform was also associated with a substantial decline in the absolute value of the elasticity of reported contributions. This finding allows us to partially identify the elasticity of overreporting contributions, which is shown to be large and inferior to -2 in the lax enforcement regime. We further show using bunching of taxpayers at kink-points of the tax schedule that the elasticity of taxable income also experienced a significant decline after the reform. Our results suggest that optimizing the tax rate for a given tax elasticity when other policy instruments are not optimized can lead to misleading conclusions when tax authorities have another instrument that could set the tax elasticity itself at its optimal level as in Kopczuk and Slemrod [2002].
    Date: 2013–11
  13. By: Klara Kaliskova
    Abstract: Married couples file joint tax returns in many European countries. Nevertheless, research quantifying the effect of joint taxation on the work incentives of secondary earners is scarce thanks to a lack of recent policy changes. This study makes use of the introduction of joint taxation in the Czech Republic in 2005 to estimate its effect on married women's labor supply. Results based on difference-in-differences and on triple differences with several alternative control groups suggest that the introduction of joint taxation lead to a decline of about 3 percentage points in the employment rate of married women with children. Participation declines are twice as large when the tax work disincentives are highest-among women with high-income husbands.
    Keywords: joint taxation; female labor supply; difference-in-differences;
    JEL: J21 H24
    Date: 2013–11
  14. By: Mazhar Waseem
    Abstract: This paper analyzes the effects of personal income taxation on earnings, formality and business organization choices of agents. I use a tax reform introduced in Pakistan in 2009, which increased taxation of partnership firms substantially relative to other unincorporated firms, as a natural policy experiment to identify behavioral responses to taxation that include movement into informality, under-reporting taxable earnings, and income shifting to tax-favored business forms. Relying on administrative tax records that comprise the universe of income tax returns filed in 2006â11, I find that the tax rate rise caused the exit of a large number of treated firms: the number of such firms reporting positive taxable earnings declined by 41% in 2009, by another 27% in 2010, and by an additional 15% in 2011. By tracking personal income tax returns of owners of the exited firms, I find that around 45% of the owners moved into informality, the rest switched their business organization. For the treated firms that did not exit, I document almost 50% reduction in reported earnings compared to untreated firms. Combining these estimates of behavioral responses with a simple conceptual framework, I compute that 133% of the projected increase in tax revenue was lost through the behavioral responses, implying that the new tax rate on partnership earnings was on the wrong side of the Laffer curve and would not have been optimal under any social preferences. The excess burden created by the reform increases by nearly 17% if negative spillovers on VAT base are also taken into account.
    JEL: H21 H24 H32 O17
    Date: 2013–12–09
  15. By: Margaret Chitiga-Mabugu (Human Sciences Research Council, Pretoria, South Africa); Nara Monkam (Department of Economics, University of Pretoria)
    Abstract: In recent years, local governments in South Africa have faced daunting challenges, notably significant service delivery backlogs, poor financial management, corruption, and poor capacity due to lack of skills. As a result, numerous municipalities are deemed to be in financial distress, and already questions have been raised concerning their capability to efficiently deliver on expected outcomes on a sustainable basis and to cope with economic shocks. In this context, South Africa has embarked upon a comprehensive review of the local government equitable share (LES) formula which constitutes the main unconditional grant that accrues to municipalities. The objective of this paper is to assess fiscal disparities across municipalities using a comprehensive approach to measuring fiscal capacity. In assessing the overall level of fiscal capacity, the paper uses the Representative Revenue System (RRS) and the Representative Expenditure System (RES) methodologies. To the best of our knowledge, such comprehensive measures of fiscal capacity at the municipal level have yet to be applied in the South African context. Additionally, the contribution of this paper lies mainly in that it provides a more systematic measure of municipal fiscal capacity that should be taken into account in the revision and improvement of the current LES formula to ensure that the LES funds are equitably distributed. Furthermore, an appropriate measure of fiscal capacities across municipalities in South Africa will provide the Municipal Demarcation Board with a tool to re-determine municipal boundaries based on objective and empirical evidence rather than political considerations.
    Keywords: Fiscal capacity, Revenue capacity, Expenditure need, Revenue effort, RRS, RES
    JEL: H11 H20 H71 H72 H77
    Date: 2013–11
  16. By: Alan L. Gustman; Thomas L. Steinmeier; Nahid Tabatabai
    Abstract: This paper uses data from the Health and Retirement Study to investigate the effects of Social Security’s Windfall Elimination Provision (WEP) and Government Pension Offset (GPO) provision on Social Security benefits received by individuals and households. WEP reduces the benefits of individuals who worked in jobs covered by Social Security and also worked in uncovered jobs where a pension was earned. WEP also reduces spouse benefits. GPO reduces spouse and survivor benefits for persons who worked in uncovered government employment where they also earned a pension. Unlike previous studies, we take explicit account of pensions earned on jobs not covered by Social Security, a key determinant of the size of WEP and GPO adjustments. Also unlike previous studies, we focus on the household. This allows us to incorporate the full effects of WEP and GPO on spouse and survivor benefits, and to evaluate the effects of WEP and GPO on the assets accumulated by affected families. Among our findings: About 3.5 percent of households are subject to either WEP or to GPO. The present value of their Social Security benefits is reduced by roughly one fifth. This amounts to five to six percent of the total wealth they accumulate before retirement. Households affected by both WEP and GPO lose about one third of their benefit. Limiting the reduction in the Social Security benefit to half the size of the pension from uncovered employment reduces the penalty from WEP for members of the original HRS cohort by about 60 percent.
    JEL: D31 E21 H55 I3 J14 J26 J32 J45
    Date: 2013–12

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