New Economics Papers
on Public Finance
Issue of 2013‒12‒29
twenty-one papers chosen by

  1. Revenue-Maximising Elasticities of Taxable Income in Multi-Rate Income Tax Structures By John Creedy
  2. Optimal Taxation and Life Cycle Labor Supply Profile By Céspedes, Nikita; Kuklik, Michael
  3. Discriminatory Taxes are Unpopular - Even when they are Efficient and Distributionally Fair By Rupert Sausgruber; Jean-Robert Tyran
  4. Anticipation, Learning and Welfare: the Case of Distortionary Taxation By Emanuel, Gasteiger; Shoujian, Zhang
  5. Do payroll tax cuts raise youth employment? By Egebark, Johan; Kaunitz, Niklas
  6. The literacy impact on tax revenues By Mutascu, Mihai; Danuletiu, Dan
  7. Simulating the Elimination of the U.S. Corporate Income Tax By Hans Fehr; Sabine Jokisch; Ashwin Kambhampati; Laurence J. Kotlikoff
  8. Do corporate tax cuts increase investments? By Brandstetter, Laura; Jacob, Martin
  9. Does Corporate Income Taxation Affect Securitization? Evidence from OECD Banks By Gong, D.; Ligthart, J.E.
  10. Estimating Firm-Level Effective Marginal Tax Rates and the User Cost of Capital in New Zealand By Richard Fabling; Norman Gemmell; Richard Kneller; Lynda Sanderson
  11. The impact of Taxation on Bank Leverage and Asset Risk By Horvath, B.L.
  12. Can Tax Breaks Beat Geography? Lessons from the French Enterprise Zone Experience By Briant, Anthony; Lafourcade, Miren; Schmutz, Benoît
  13. The Optimal Distribution of the Tax Burden over the Business Cycle By Angelopoulos, Konstantinos; Asimakopoulos, Stylianosulos; Malley, James
  14. Product market integration, tax distortions and public sector size By Torben M. Andersen; Allan Sørensen
  15. Reforming Family Taxation in Germany: Labor Supply vs. Insurance Effects By Hans Fehr; Manuel Kallweit; Fabian Kindermann
  16. Can Automatic Tax Increases Pay for the Public Spending Effects of Population Ageing in New Zealand? By John Creedy; Norman Gemmell
  17. Fiscal Policy, Sovereign Default, and Bailouts By Juessen, Falko; Schabert, Andreas
  18. Growth and inequality in public good games By Tsakas E.; Gaechter S.; Mengel F.; Vostroknutov A.
  19. Financing public goods and attitudes toward immigration By Gabriel Romero; Iñigo Iturbe-Ormaetxe Kortajarene
  20. The Effects of Political Competition on the Funding and Generosity of Public-Sector Pension Plans By Sutirtha Bagchi
  21. Second Thoughts on Free Riding By Ulrik H. Nielsen; Jean-Robert Tyran; Erik Wengström

  1. By: John Creedy (The Treasury)
    Abstract: This paper provides a technical introduction to the use of the elasticity of taxable income in welfare comparisons and optimal tax discussions. It draws together, using a consistent framework and notation, a number of established results concerning marginal welfare changes and optimal taxes. Particular attention is given to the way value judgements can be specified when using this approach, and results are illustrated using the New Zealand income tax. In addition, some new results, particularly in terms of non-marginal tax changes, are presented.
    Keywords: Income taxation; Taxable income; Elasticity of taxable income; Excess burden of taxation; Marginal welfare cost; Optimum tax
    JEL: H21 H24 H31
    Date: 2013–12
  2. By: Céspedes, Nikita (Banco Central de Reserva del Perú; PUCP); Kuklik, Michael (Long Island University)
    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 non-linear 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 choices early 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: 2013–12
  3. By: Rupert Sausgruber (Department of Economics, Vienna University of Economics and Business); Jean-Robert Tyran (Department of Economics, Copenhagen University)
    Abstract: We explore the political acceptance of taxation in commodity markets. Participants in our experiment earn incomes by trading and must collectively choose one of two tax regimes to raise a given tax revenue. A "uniform tax" (UT) imposes the same tax rate on all markets and is fair in that it yields the same – but low – income to participants in all markets. The "discriminatory tax" (DT) imposes a higher burden on markets with inelastic demand and is therefore efficient but it is also unfair in that incomes are unequal across markets. We find that DT are unpopular, as predicted. Surprisingly, however, DT remain unpopular when they are both efficient and produce a fair (equal) distribution. We conclude that non-discrimination (equal treatment) is a salient fairness principle in taxation that shapes voting on commodity taxes above and beyond concerns for efficiency and equal distribution.
    Keywords: taxation, behavioral public economics, voting, efficiency, fairness
    JEL: C92 H21 D72
    Date: 2013–11
  4. By: Emanuel, Gasteiger; Shoujian, Zhang
    Abstract: We study the impact of anticipated fiscal policy changes in a Ramsey economy where agents form long-horizon expectations using adaptive learning. We extend the existing framework by introducing distortionary taxes as well as elastic labour supply, which makes agents. decisions non-predetermined but more realistic. We detect that the dynamic responses to anticipated tax changes under learning have oscillatory behaviour that can be interpreted as self-fulfilling waves of optimism and pessimism emerging from systematic forecast errors. Moreover, we demonstrate that these waves can have important implications for the welfare consequences of .scal reforms. (JEL: E32, E62, D84)
    Date: 2013
  5. By: Egebark, Johan (Department of Economics, Stockholm University); Kaunitz, Niklas (SOFI, Stockholm University)
    Abstract: In 2007, the Swedish employer-paid payroll tax was cut on a large scale for young workers, substantially reducing labor costs for this group. We estimate a small impact, both on employment and on wages, implying a labor demand elasticity for young workers at around -0.31. Since the tax reduction applied also to excisting employments, the cost of the reform was sizable, and the estimated cost per created job is at more than four times that of directly hiring workers at the average wage. Hence, we conclude that payroll tax cuts are an inefficient way to boost employment for young individuals.
    Keywords: Youth unemployment; Payroll tax; Tax subsidy; Labor costs; Exact matching
    JEL: H25 H32 J23 J38 J68
    Date: 2013–12–20
  6. By: Mutascu, Mihai; Danuletiu, Dan
    Abstract: The paper investigates the relationship between tax revenues and literacy level, using a panel-model approach. The dataset covers the period 1996 to 2010 and includes 123 countries. The estimations suggest that the assumed function is nonlinear, with inverted-U and U-shaped curves. More precisely, a very low literacy level is associated with reduced tax revenues. Furthermore, the government inputs increase as the literacy level increases, reaching a maximum point. Beyond this level, the tax revenues decrease even if the literacy has an ascendant tendency, registering a minimum level. Finally, the tax revenues increase in a parallel manner with the literacy index. --
    Keywords: literacy,tax revenues,nonlinearity,effects,tax policy
    JEL: I20 H20 C23
    Date: 2013
  7. By: Hans Fehr; Sabine Jokisch; Ashwin Kambhampati; Laurence J. Kotlikoff
    Abstract: We simulate corporate tax reform in a single good, five-region (U.S., Europe, Japan, China, India) model, featuring skilled and unskilled labor, detailed region-specific demographics and fiscal policies. Eliminating the model’s U.S. corporate income tax produces rapid and dramatic increases in the model’s level of U.S. investment, output, and real wages, making the tax cut self-financing to a significant extent. Somewhat smaller gains arise from revenue-neutral base broadening, specifically cutting the corporate tax rate to 9 percent and eliminating tax loop-holes.
    JEL: F0 F20 H0 H2 H3 J20
    Date: 2013–12
  8. By: Brandstetter, Laura; Jacob, Martin
    Abstract: This paper studies the effect of corporate taxes on investment. Using firm-level data on German corporations, we investigate the 2008 tax reform that cut corporate taxes by 10 percentage points. We expect heterogeneous investment responses across firms, since firms with a foreign parent have more cross-country profit shifting opportunities than domestically owned firms. Using a matching difference-in-differences approach, we show that, following the corporate tax cut, domestically owned firms increased investments to a larger extent than foreign-owned firms. Our results imply that corporate tax changes can increase corporate investment but have heterogeneous investment responses across firms. --
    Keywords: Corporate taxation,Investment
    JEL: G31 H24 H25
    Date: 2013
  9. By: Gong, D.; Ligthart, J.E. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: Corporate income taxation, by affecting the after-tax cost of funding, has implications for a bank's incentive to securitize. Using a sample of OECD banks over the period 1999-2006, we fi nd that corporate income taxation led to more securitization at banks that are constrained in funding markets, while it did not affect securitization at unconstrained banks. This is consistent with prior theory suggesting that the tax effects of securitization depend on the extent to which banks face funding constraints. Our results suggest that a country's tax system has distorting effects on banks' securitization decisions and therefore proposals of new taxes on bank profi ts are inappropriate.
    Keywords: Securitization;Banking;Corporate Income Tax
    JEL: G21 H25
    Date: 2013
  10. By: Richard Fabling; Norman Gemmell; Richard Kneller; Lynda Sanderson (The Treasury)
    Abstract: Effective marginal tax rates (EMTRs) can be very different from the statutory rate and vary across firms, reflecting such factors as the extent and nature of taxable deductions (losses, depreciation), asset and ownership structures, and debt/equity financing. We estimate firm-specific EMTRs and related user cost of capital (UCC) measures allowing for shareholder-level taxation using data for 2000-2010 from the Longitudinal Business Database. Examining distributions of various UCC measures we find substantial firm-level heterogeneity, systematic changes as a result of tax reforms between 2004 and 2011, and systematic differences between foreign-owned and domestically-owned firms. Choices among alternative UCC measures make a difference to interpretations.
    Keywords: User cost of capital; tax reform; EMTR; New Zealand
    JEL: D22 G30 H25
    Date: 2013–12
  11. By: Horvath, B.L. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: The tax-bene t of interest deductibility encourages debt nancing, but regulatory and market constraints create dependency between bank leverage and risk. Using a large international sample of banks this paper estimates the short and long run effects of corporate income taxes (CIT) on bank capital structure and portfolio risk accounting for their simultaneous determination. A 10 percentage point increase in the statutory CIT rate is associated with an increase of 0.8-1.4 percentage points in bank leverage and a 2-7-percentage point reduction in the average risk-weight of assets. While the estimated overall effect of taxation on bank risk is modest, it induces signi cant portfolio reallocation toward less lending. These results suggest that any elimination of the tax-bias of debt may not bring the expected benefi ts for bank stability.
    Keywords: Bank leverage;Bank regulation;Bank risk;Corporate taxation;Debt-bias
    JEL: G21 G28 G32 H25
    Date: 2013
  12. By: Briant, Anthony; Lafourcade, Miren; Schmutz, Benoît
    Abstract: This paper demonstrates that geography matters to the effectiveness of place-based policies, using the French enterprise zone program as a case study. Using a series of indicators of spatial isolation for treated and non treated neighborhoods, we show that geographical heterogeneity determines the ability of the program to impact firms’ settlements, job creation and earnings. In particular, whereas a focus on the average impact of the program would lead to the conclusion that it mostly succeeded in displacing pre-existing firms, a lower level of spatial isolation was a clear determinant of the decision to create new firms from scratch.
    Keywords: enterprise zones; spatial isolation; transportation accessibility; urban severance
    JEL: H25 R34 R38 R58
    Date: 2013–12
  13. By: Angelopoulos, Konstantinos; Asimakopoulos, Stylianosulos; Malley, James
    Abstract: This paper analyses optimal income taxes over the business cycle under a balanced-budget restriction, for low, middle and high income households. A model incorporating capital-skill complementarity in production and differential access to capital and labour markets is developed to capture the cyclical characteristics of the US economy, as well as the empirical observations on wage (skill premium) and wealth inequality. We .nd that the tax rate for high income agents is optimally the least volatile and the tax rate for low income agents the least countercyclical. In contrast, the path of optimal taxes for the middle income group is found to be very volatile and counter-cyclical. We further find that the optimal response to output-enhancing capital equipment technology and spending cuts is to increase the progressivity of income taxes. Finally, in response to positive TFP shocks, taxation becomes more progressive after about two years.
    Keywords: optimal taxation, business cycle, skill premium, income distribution,
    Date: 2013
  14. By: Torben M. Andersen (Department of Economics and Business, Aarhus University); Allan Sørensen (Department of Economics and Business, Aarhus University; Department of Economics and Business, Aarhus University)
    Abstract: The implications of product market integration for public sector activities (transfers and public consumption) are considered in a standard setting. The analysis supports that a larger public sector (higher tax rate) tends to increase wages and worsen wage competitiveness. However, the implications of product market integration for the public sector are far from straightforward. The reason is gains-from-trade effects which tend to increase the tax base and decrease the opportunity costs of public consumption (marginal utility of private consumption falls). It follows that the retrenchment view that product market integration inevitable leads to a downward pressure on public sector activities does not get support in a standard setting. A particularly noteworthy ?finding is that a country with a large public sector (strong preferences for public consumption) may bene?fit more by integrating with a country with a smaller public sector (weak preferences for public consumption).
    Keywords: labour taxation, product market integration, public sector, policy spill-over
    JEL: H2 F1 J22
    Date: 2013–12–18
  15. By: Hans Fehr; Manuel Kallweit; Fabian Kindermann
    Abstract: The present paper quantifies the economic consequences of eliminating the system of income splitting in Germany. We apply a dynamic simulation model with overlapping generations where single and married agents have to decide on labor supply and homework facing income and lifespan risk. The numerical exercise computes the resulting welfare changes across households and isolates aggregate efficiency effects of a move towards either individual taxation or family splitting. Our results indicate strongly that a switch towards individual taxation performs best in terms of economic efficiency due to reduced labor market distortions and improved insurance provision. In our benchmark calibration the efficiency gain amounts to roughly 0.4 percent of aggregate resources. Excluding home production significantly reduces aggregate efficiency gains while including marital risk slightly improves the efficiency of individual taxation.
    Keywords: Stochastic general equilibrium, home production, female labor supply, tax unit choice, insurance provision
    JEL: H21 H24 J12 J22
    Date: 2013
  16. By: John Creedy; Norman Gemmell (The Treasury; Victoria University of Wellington)
    Abstract: This paper examines the extent to which projected aggregate tax revenue changes, in association with population ageing over the next 50 years, can be expected to finance expected increases in social welfare expenditures. It uses projections from two separate models, dealing with social expenditures and income tax and GST revenue. The results suggest that the modest increase required in the overall average tax rate over the next 50 years can be achieved automatically by adjusting income tax thresholds using an index of prices rather than wages. Based on evidence about the New Zealand tax system over the last 50 years, comparisons of average and marginal tax rates suggest that such an increase may be feasible and affordable. The paper discusses the range of considerations involved in deciding if this automatic increase in the aggregate average tax rate, via real fiscal drag of personal income taxes, is desirable compared with alternative fiscal policy changes.
    Keywords: Social welfare expenditures; income tax; GST; real fiscal drag; ageing population
    JEL: E62 H68
    Date: 2013–12
  17. By: Juessen, Falko (University of Wuppertal); Schabert, Andreas (University of Cologne)
    Abstract: This paper examines fiscal policy without commitment and the effects of conditional bailout loans. The government relies on distortionary taxation and decides between full debt repayment and costly default. It tends to overborrow due to myopia, which induces default to be a relevant policy option and provides a rationale to constrain sovereign borrowing. We consider a lump-sum financed fund that offers loans at a favorable price and conditional upon minimum primary surpluses. While the government prefers defaulting in the most adverse states, we find that it is willing to accept conditional loans in close-to-default states. These bailouts can lead to an increase in the mean debt price and a lower default probability that are associated with enhanced household welfare. Yet, these outcomes can be reversed when bailouts are too generous, while public debt never decreases in the long-run when bailout loans are available.
    Keywords: discretionary fiscal policy, overborrowing, sovereign default, bailout loans, conditionality
    JEL: E32 H21 H63
    Date: 2013–12
  18. By: Tsakas E.; Gaechter S.; Mengel F.; Vostroknutov A. (GSBE)
    Abstract: In a novel experimental design we study dynamic public good games in which wealth is allowed to accumulate. More precisely each agents income at the end of a period serves as her endowment in the following period. In this setting growth and inequality arise endogenously allowing us to address new questions regarding their interplay and effect on cooperation levels. We find that average cooperation levels in this setting are high between 20-60 of endowments and that amounts contributed do not decline over time. Introducing the possibility of punishment leads to lower group income, but less inequality within groups. In both treatments with and w/o punishment inequality and group income are positively correlated for poor groups with below median income, but negatively correlated for rich groups with above median income. There is very strong path dependence inequality in early periods is strongly negatively correlated with group income in later periods. These results give new insights into why people cooperate and should make us rethink previous results from the literature on repeated public good games regarding the decay of cooperation in the absence of punishment.
    Date: 2013
  19. By: Gabriel Romero (Departamento de Economía); Iñigo Iturbe-Ormaetxe Kortajarene (Universidad de Alicante)
    Abstract: We present a model in which individuals choose both the level of provision of a public good and the quota of low-skilled immigrants that are allowed into the country. Individuals can supplement the public good in the private market. Immigrants affect natives through three channels: (i) the labor market; (ii) tax collection; (iii) the quality of the public good. We find that the higher the political weight of the rich (highly skilled) is, the less tolerant the poor and the middle-class are toward immigration and the more demanding they are toward increasing public spending. The rich are the most favorable to immigration. As they have more weight, the political outcome is closer to their preferences and further from the preferences of the other groups. We use data from the European Social Survey to test the implications of our model.
    Keywords: Probabilistic voting model, public goods, immigration
    JEL: H41 J61 D72
    Date: 2013–12
  20. By: Sutirtha Bagchi
    Abstract: In politically competitive jurisdictions, there can be strong electoral incentives to underfund public pensions in order to keep current taxes low. I examine this hypothesis using panel data for 2,000 municipal pension plans from Pennsylvania. The results suggest that as a municipality becomes more politically competitive, it tends to have pension plans that are less funded, more generous, and use higher interest rates at which to discount future actuarial liabilities. An increase in the level of political competition by one standard deviation leads to a decline in the actuarial funded ratio of about 7â10 percent, an increase in the annual average retirement benefits of about $470â620 per retiree, and an increase in the interest rate for discounting actuarial liabilities of about 5 basis points. Instrumental Variable (IV) estimates generated using demographic characteristics of the population as instruments corroborate these findings.
    JEL: H75 J45
    Date: 2013–12–22
  21. By: Ulrik H. Nielsen (Department of Economics, Copenhagen University); Jean-Robert Tyran (Centre for Economic Policy Research (CEPR), University of Vienna, Department of Economics, Copenhagen University); Erik Wengström (Department of Economics, Copenhagen University)
    Abstract: We use the strategy method to classify subjects into cooperator types in a large-scale online Public Goods Game and find that free riders spend more time on making their decisions than conditional cooperators and other cooperator types. This result is robust to reversing the framing of the game and is not driven by free riders lacking cognitive ability, confusion, or natural swiftness in responding. Our results suggest that conditional cooperation serves as a norm and that free riders need time to resolve a moral dilemma.
    Keywords: Response Time, Free Riding, Public Goods, Experiment
    JEL: C70 C90 D03
    Date: 2013–09–04

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