nep-pub New Economics Papers
on Public Finance
Issue of 2014‒02‒02
fifteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Dynamic Tax Reforms By Nicolas Werquin; Aleh Tsyvinski; Mikhail Golosov
  2. Taxation, Innovation and Entrepreneurship By Schetter, Ulrich; Gersbach, Hans; Schneider, Maik
  3. Fair optimal tax with endogenous productivities By Fleurbaey M.; Valletta G.
  4. Income Taxation and Labor Supply: An Experiment on Couple's Work E ffort By Schröder, Melanie; Schmitt, Norma; Heynemann, Britta; Brünn, Claudia
  5. Optimal capital taxation for time-nonseparable preferences By Koehne, Sebastian; Kuhn, Moritz
  6. Fair Inheritance Taxation in the Presence of Tax Planning By Wrede, Matthias
  7. M&A and the Tax Benefits of Debt Financing By Scheuering, Uwe
  8. FAT or VAT? The Financial Activities Tax as a Substitute to Imposing Value Added Tax on Financial Services By Erbe, Katharina; Büttner, Thiess
  9. Sharing the burden? Empirical evidence on corporate tax incidence By Dwenger, Nadja; Rattenhuber, Pia; Steiner, Viktor
  10. Do budget balance rules anchor budget balance expectations? -- Some international evidence By Rülke, Jan-Christoph; Frenkel, Michael; Lis, Eliza
  11. Beauty is in the eye of the beholder: The effect of corporate tax avoidance on the cost of bank loans By Hasan, Iftekhar; Hoi, Chun-Keung (Stan); Wu, Qiang; Zhang, Hao
  12. Growth and inequality in public good games By Tsakas E.; Gaechter S.; Mengel F.; Vostroknutov A.
  13. Wage Incidence of Local Corporate Taxation - Micro Evidence from Germany By Peichl, Andreas; Fuest, Clemens; Siegloch, Sebastian
  14. Progression and Dual Income Tax in Germany By Jenderny, Katharina
  15. INTER-JURISDICTIONAL TAX COMPETITION IN CHINA By Yongzheng Liu; Jorge Martinez-Vazquez

  1. By: Nicolas Werquin (Yale University); Aleh Tsyvinski (Yale University); Mikhail Golosov (Princeton University)
    Abstract: This paper derives novel formulas for the welfare gains of any tax reform around initial (optimal or suboptimal) dynamic tax systems. We use a perturbation-based method to express these formulas in terms of easily interpretable and empirically estimable parameters: elasticities of income and savings with respect to the tax rates, and the shape of the income and savings distributions. This generates new theoretical insights about dynamic optimal taxes, as well as policy implications regarding directions of tax reforms of the current US tax code.
    Date: 2013
  2. By: Schetter, Ulrich; Gersbach, Hans; Schneider, Maik
    Abstract: We examine how basic research should be financed. While basic research is a public good benefiting innovating entrepreneurs it also affects the entire economy: occupational choices of potential entrepreneurs, wages of workers, dividends to shareholders, and aggregate output. We show that the general economy impact of basic research rationalizes a pecking order of taxation to finance basic research. In particular, in a society with desirable dense entrepreneurial activity, a large share of funds for basic research should be financed by labor taxation and a minor share is left to profit taxation. Such tax schemes induce a significant share of agents to become entrepreneurs, thereby rationalizing substantial investments in basic research. These entrepreneurial economies, however, may make a majority of citizens worse off if those individuals do not possess shares of final good producers in the economy. In such circumstances, stagnation may prevail. --
    JEL: H20 H40 O38
    Date: 2013
  3. By: Fleurbaey M.; Valletta G. (GSBE)
    Abstract: What is a good incentive-compatible policy when one wants to respect individual choices of labor and human capital but eliminate inequalities due to unequal access to human capital and different returns to human capital, and when earnings and human capital expenditures are the only verifiable variables We propose a social ordering that incorporates this goal and we analyze the evaluation of tax reforms and the properties of optimal linear and non-linear taxes. For reform evaluation and for optimal non-linear taxation, the focus is on the situation of individuals with the most disadvantaged characteristics who work full time and spend a certain high amount in human capital.
    Keywords: Equity, Justice, Inequality, and Other Normative Criteria and Measurement; Social Choice; Clubs; Committees; Associations;
    JEL: D63 D71
    Date: 2013
  4. By: Schröder, Melanie; Schmitt, Norma; Heynemann, Britta; Brünn, Claudia
    Abstract: Complementary to microsimulation studies focusing on the impact of labor supply as a choice of hours worked we shed light on another variable that survey data are not capable of taking into account: the choice of work e ffort. Our aim is to investigate the eff ect of individual and joint taxation on partners' labor supply within an experimental setting. 116 participants (58 real couples) perform under a piece rate compensation on real e ffort tasks in two stages. The couple's income is taxed jointly for one stage and individually for the other. Surprisingly, our data reveal that men, when being in the position of a secondary earner, are more susceptible to changes in tax scheme while women do not react to a change in tax scheme at all. Besides the male breadwinner model we also demonstrate that fairness considerations play a role. --
    JEL: H31 C93 J22
    Date: 2013
  5. By: Koehne, Sebastian; Kuhn, Moritz
    Abstract: We study optimal capital taxation in a dynamic Mirrleesian model with time-nonseparable preferences. The model covers the widely used cases of habit formation and durable consumption. Time-nonseparable preferences change labor supply incentives across time and thereby generate novel motives to distort capital accumulation decisions. We decompose intertemporal wedges (implicit capital taxes) into three components and provide conditions under which intertemporal wedges are positive. We derive a recursive formulation of constrained efficient allocations and evaluate the quantitative importance of habit formation for intertemporal wedges. In our baseline parameterization, habit formation reduces average intertemporal wedges by about 40 percent compared to the time-separable case. --
    JEL: D82 E21 H21
    Date: 2013
  6. By: Wrede, Matthias
    Abstract: This paper analyzes to what extent tax planning impacts on the level of the inheritance tax rate perceived as fair. In a factorial survey conducted in Germany it finds out that tax planning increases the fair tax rate by roughly 4 percentage points. The fair tax rate is not only determined by the size of the bequest, the relationship of the heir to the bequeather, and the type of bequest, but also by the perceived intentions of the bequeather. The families with social motives should be taxed less than those without. The paper looks for support in optimum-tax theory. To this end, it develops a simple model that shows that taxation should not prevent individuals with warm-glow-of-giving motives to contribute substantially more to the social good than individuals without these motives. --
    JEL: H24 H21 D64
    Date: 2013
  7. By: Scheuering, Uwe
    Abstract: I analyze the e ffects of profi t taxation on the fi nancing decision of corporate acquisitions. The deductibility of interest expenses from the corporate tax base creates an incentive for acquiring companies to fi nance a takeover with debt. Regarding the particular decision how to finance the considered deals results are not robust but looking at the whole capital structure development of acquirers I fi nd that an increase of the statutory tax rate by one %-point is associated with an increase of the debt ratio by 0.57 %-points during the acquisition period. --
    JEL: G34 H25 H32
    Date: 2013
  8. By: Erbe, Katharina; Büttner, Thiess
    Abstract: This paper analyzes revenue and welfare effects of implementing a FAT both from a theoretical and a quantitative perspective. The theoretical analysis allows us to derive expressions for the revenue effects and the deadweight loss in a general equilibrium setting, which can be quantified with a minimum of information about the economy and key elasticities. Using data for Germany, the empirical quantification suggests that introducing a modest FAT with a rate of 3% results in a revenue gain of about 1.312 bn. If this revenue gain is used to reduce distorting labor taxes, the results point at a welfare gain of 1.092 bn. Comparing these results with Buettner and Erbe (2012), we find that the introduction of a FAT of 3% would generate similar revenue and welfare effects as a repeal of the financial sector VAT exemption (with a 19% VAT rate). However, taxing financial services through FAT may exert adverse location effects on financial service production. --
    JEL: H24 H25 D57
    Date: 2013
  9. By: Dwenger, Nadja; Rattenhuber, Pia; Steiner, Viktor
    Abstract: This study empirically investigates the direct incidence of the corporate income tax through wage bargaining, using an industry-region level panel data set on all corporations in Germany over the period 1998 to 2006. Our measure of direct incidence for the first time accounts for employment effects which result from tax induced wage changes. Workers share in reductions of the CIT burden; yet, direct incidence is small and confined to 0.19 0.29. Thus, the net effect of wage bargaining on the corporate wage bill, after an exogenous 1 decrease in the CIT burden, is as little as 19 to 29 cents. This is about half of the effect obtained in prior literature under the assumption that employment remained constant. A focus on wages alone leads to an overestimation of direct tax incidence. --
    JEL: H22 H25 J21
    Date: 2013
  10. By: Rülke, Jan-Christoph; Frenkel, Michael; Lis, Eliza
    Abstract: This is the first study that analyzes whether budget balance expectations are anchored and whether budget balance rules effectively anchor expectations. To this end, we use a unique data set which covers budget balance expectations in 17 countries that implemented a budget balance rules. While our results are mixed concerning the general impact of budget balance rules on anchoring expectations, we do find that specific features of budget balance rules are important to successfully anchor budget balance expectations. --
    JEL: H62 H68 H11
    Date: 2013
  11. By: Hasan, Iftekhar (Fordham University and Bank of Finland); Hoi, Chun-Keung (Stan) (E. Philip Saunders College of Business, Rochester Institute of Technology); Wu, Qiang (Lally School of Management, Rensselaer Polytechnic Institute); Zhang, Hao (E. Philip Saunders College of Business, Rochester Institute of Technology)
    Abstract: We find that firms with greater tax avoidance incur higher spreads when obtaining bank loans. This finding is robust in a battery of sensitivity analyses and in two quasi-experimental settings including the implementation of Financial Accounting Standards Board Interpretation No. 48 and the revelation of past tax sheltering activity. Firms with greater tax avoidance also incur more stringent non-price loan terms, incur higher at-issue bond spreads, and prefer bank loans over public bonds when obtaining debt financing. Overall, these findings indicate that banks perceive tax avoidance as engendering significant risks.
    Keywords: tax avoidance; cost of bank loans; information risk; agency risk; audit risk; FIN 48
    JEL: G21 H26
    Date: 2014–01–15
  12. 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
  13. By: Peichl, Andreas; Fuest, Clemens; Siegloch, Sebastian
    Abstract: In this paper we provide empirical evidence on the wage incidence of the German business tax, which is set at the municipal level. For our analysis, we use very rich administrative linked employer-employee panel data, covering 11 years, and link it to data on the business tax rates of about 11,100 German municipalities. On average 8\% of the municipalities adjust their business tax rate per year. We are thus able to exploit multiple quasi-natural experiments to identify the tax incidence on wages. While the unique German setting allows us to gauge general equilibrium wage effects, the detailed administrative data enables us to estimate heterogeneous incidence effects and to explore different channels of how the business tax burden is passed on. Consistent with our theoretical model, we find a negative direct effect of corporate taxation on wage, arising in a collective wage bargaining context. A one euro increase in the annual tax liabilities yields a 50 cent decrease of the annual wage bill. This burden is borne high- and medium-skilled labor. Furthermore, we show that the general equilibrium effect on wages is negligible in the context of our study due to the high regional labor mobility. --
    JEL: H22 H25 J30
    Date: 2013
  14. By: Jenderny, Katharina
    Abstract: This paper analyzes the effect of the introduction of a final withholding tax on capital income on the progression of the German income tax. As previous literature shows, even with synthetic income taxation, tax progression was strongest in the middle of the income distribution, and decreased for high incomes. At the top, notably for the richest top 0.001 % of potential taxpayers, tax progression was not further observable. In 2009, the tax schedule changed and capital income was excluded from the synthetic income tax tariff. Instead, it is taxed at a lower final withholding tax rate. This paper explores the effect of this change on the overall progression on total income. The analysis is based on a microlevel panel dataset of income tax returns between 2001 and 2006, which provides information on the distribution of total taxable income and is particularly representative for the top of the income distribution. --
    JEL: H24 D31 D63
    Date: 2013
  15. By: Yongzheng Liu (School of Finance, China Financial Policy Research Center Renmin University of China); Jorge Martinez-Vazquez (International Center for Public Policy. Andrew Young School of Policy Studies, Georgia State University)
    Abstract: This paper aims to provide empirical evidence on the extent and possible channels of tax competition among provincial governments in China. Using a panel of provincial- level data for 1993-2007, we nd strong evidence of strategic tax interaction among provincial governments. Tax policy is approximated by average eective tax rates on foreign investment, taking into account the tax incentives available to foreign in- vestors. In line with the predictions of the theoretical tax competition literature, we also highlight the impact of each province's characteristics (including its size and level of industrialization) on the strategic interaction with its neighbors. Finally, the paper explicitly identies the establishment of development zones as an important conduit for tax competition among provinces. Tax competition; development zone; China
    Date: 2014–01–06

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