nep-pub New Economics Papers
on Public Finance
Issue of 2014‒05‒17
twelve papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Individual heterogeneity, nonlinear budget sets, and taxable income By Soren Blomquist; Anil Kumar; Che-Yuan Liang; Whitney Newey
  2. Publicly Provided Private Goods and Optimal Taxation when Consumers Have Positional Preferences By Aronsson, Thomas; Johansson-Stenman, Olof
  3. Fairness in Tax compliance: A Political Competition Model By Ángel Solano García
  4. Tax Enforcement, Technology, and the Informal Sector By Ceyhun Elgin; Mario Solis-Garcia
  5. The behavioralist as tax collector: Using natural field experiments to enhance tax compliance By Michael Hallsworth; John List; Robert Metcalfe; Ivo Vlaev
  6. Tax Competition with Heterogeneous Firms By Richard E. Baldwin; Toshihiro Okubo
  7. Mansion Tax: The Effect of Transfer Taxes on the Residential Real Estate Market By Wojciech Kopczuk; David J. Munroe
  8. Green Technology and Optimal Emissions Taxation By Stuart McDonald; Joanna Poyago-Theotoky
  9. Uncertainty and fiscal cliffs By Davig, Troy A.; Foerster, Andrew T.
  10. State Fiscal Adjustment During Times of Stress: Possible Causes of the Severity and Composition of Budget Cuts By Clemens, Jeffrey
  11. Fiscal equalisation schemes and sub-central government borrowing By Salvador Barrios; Diego Martínez
  12. Long Run Trends in the Distribution of Income and Wealth By Roine, Jesper; Waldenström, Daniel

  1. By: Soren Blomquist; Anil Kumar; Che-Yuan Liang; Whitney Newey (Institute for Fiscal Studies and MIT)
    Abstract: Given the key role of the taxable income elasticity in designing an optimal tax system there are many studies attempting to estimate this elasticity. To account for nonlinear taxes these studies either use instrumental variables approaches that are not fully consistent, or impose strong functional form assumptions. None allow for general heterogeneity in preferences. In this paper we derive the mean and distribution of taxable income, conditional on a nonlinear budget set, allowing general heterogeneity and optimization errors for the mean. We find an important dimension reduction and use that to develop nonparametric estimation methods. We show how to nonparametrically estimate the conditional mean of taxable income imposing all the restrictions of utility maximization and allowing for measurement errors. We apply this method to Swedish data and estimate for prime age males a significant net of tax elasticity of 0.6 and a significant income elasticity of -0.08.
    Date: 2014–05
  2. By: Aronsson, Thomas (Department of Economics, Umeå School of Business and Economics); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law)
    Abstract: This paper analyzes optimal differential commodity taxation, together with optimal nonlinear income taxation, in order to deal with positional preferences. It also derives the optimal public provision of private goods both when differential commodity taxation is feasible and when it is not. It is shown that publicly provided non-positional private goods which are (possibly imperfect) substitutes for positional private goods should be used as a corrective instrument even if the tax system is optimal, i.e. even when differential commodity taxation is feasible. An exception is the special case where all consumers contribute equally much to the positional externality, in which the commodity tax constitutes a perfect instrument for internalizing the positional externality.
    Keywords: Public provision of private goods; income taxation; commodity taxation; relative consumption; asymmetric information; status; positional goods
    JEL: D62 H21 H23 H41
    Date: 2014–05–06
  3. By: Ángel Solano García (Department of Economic Theory and Economic History, University of Granada.)
    Abstract: This paper analyzes the political economy of income redistribution when voters are concerned about fairness in tax compliance. We consider a two stage-model where there is a two-party competition over the tax rate and over the intensity of the tax enforcement policy in the first stage, and voters decide about their level of tax compliance in the second stage. We find that if the concern about fairness in tax compliance is high enough, a liberal middle-income majority of voters may block any income redistribution policy. Alternatively, we find an equilibrium in which the preferences of the median voter are ignored in favor of a coalition formed by a group of relatively poor voters and the richest voters. In this equilibrium income redistribution prevails with no tax enforcement.
    Keywords: tax evasion, political parties, income redistribution, fairness.
    JEL: D72 H26
    Date: 2014–04–15
  4. By: Ceyhun Elgin; Mario Solis-Garcia
    Date: 2014–05
  5. By: Michael Hallsworth; John List; Robert Metcalfe; Ivo Vlaev
    Abstract: Tax collection problems date back to the earliest recorded history of mankind. This paper begins with a simple theoretical construct of paying (rather than declaring) taxes, which we argue has been an overlooked aspect of tax compliance. This construct is then tested in two large natural field experiments. Using administrative data from more than 200,000 individuals in the UK, we show that including social norms and public goods messages in standard tax payment reminder letters considerably enhances tax compliance. The field experiments increased taxes collected by the Government in the sample period and were cost-free to implement, demonstrating the potential importance of such interventions in increasing tax compliance.
    Date: 2014
  6. By: Richard E. Baldwin; Toshihiro Okubo
    Abstract: This paper studies tax competition in an economic geography model that allows for agglomeration economies with trade costs and heterogeneous firms. We find that the Nash equilibrium involves the large country charging a higher tax than the small nation, with this rate being too low from a social point of view. Lower trade costs lead to an intensification of competition, a drop in Nash tax rates, and a narrowing of the gap. Since large, productive firms are naturally more sensitive to tax differences in our model, large firms are the crux of tax competition in our model. This also means that tax competition has consequences for the average productivity of the big and small nations‟ industry; by lowering tax rates, the small nation can attract high-productivity firms.
    Keywords: firm heterogeneity, spatial sorting, Nash equilibrium tax, tax cooperation, average productivity
    JEL: H32 P16
    Date: 2014–05
  7. By: Wojciech Kopczuk; David J. Munroe
    Abstract: Houses and apartments sold in New York and New Jersey at prices above $1 million are subject to the so-called 1% "mansion tax" imposed on the full value of the transaction. This policy generates a discontinuity (a "notch") in the overall tax liability. We rely on this and other discontinuities to analyze implications of transfer taxes in the real estate market. Using administrative records of property sales, we find robust evidence of substantial bunching and show that the incidence of this tax for transactions local to the discontinuity falls on sellers, may exceed the value of the tax, and is not explained by tax evasion (although supply-side quality adjustments may play a role). Above the notch, the volume of missing transactions exceeds those bunching below the notch. Interpreting our results in the context of an equilibrium bargaining model, we conclude that the market unravels in the neighborhood of the notch: its presence provides strong incentive for buyers and sellers in the proximity of the threshold not to transact. This effect, the identification and recognition of which is novel to this paper, is above and beyond the standard extensive margin response. When present, unraveling affects interpretation and estimation of bunching estimates. Finally, we show that the presence of the tax affects how the market operates away from the threshold---taxation increases price reductions during the search process and in the bargaining stage and weakens the relationship between listing and sale prices. We interpret these results as demonstrating that taxation affects the ultimate allocation in this search market.
    JEL: H2 H7 R3
    Date: 2014–05
  8. By: Stuart McDonald (School of Economics, The Universty of Queensland, Australia); Joanna Poyago-Theotoky (School of Economics, La Trobe University, Australia; Rimini Centre for Economic Analysis (RCEA), Italy)
    Abstract: We examine the impact of an optimal emissions tax on research and development of emission reducing green technology (E-R&D) in the presence of R&D spillovers. We show that the size and eectiveness of the optimal emissions tax depends on the type of the R&D spillover: input or output spillover. In the case of R&D input spillovers (where only knowledge spillovers are accounted for), the optimal emissions tax required to stimulate R&D is always higher than when there is an R&D output spillover (where abatement and knowledge spillovers exist simultaneously). We also nd that optimal emissions taxation and cooperative R&D complement each other when R&D spillovers are small, leading to lower emissions.
    Keywords: Environmental R&D, Green Technology, R&D Spillover, Emissions Tax
    JEL: H23 L11 Q55
    Date: 2014–03
  9. By: Davig, Troy A. (Federal Reserve Bank of Kansas City); Foerster, Andrew T. (Federal Reserve Bank of Kansas City)
    Abstract: Motivated by the US Fiscal Cliff in 2012, this paper considers the short- and longer- term impact of uncertainty generated by fiscal policy. Empirical evidence shows increases in economic policy uncertainty lower investment and employment. Investment that is longer-lived and subject to a longer planning horizon responds to policy uncertainty with a lag, while capital that depreciates more quickly and can be installed with few costs falls immediately. A DSGE model incorporating uncertainty over future tax regimes produces responses to fiscal uncertainty that match key features of the data. The model features uncertainty over the average tax rate and rational expectations about the resolution of uncertainty with specific outcomes and timing. Uncertainty injects noise into the economy and lowers the level of economic activity.
    Keywords: Fiscal policy; Uncertainty; Distorting taxation
    Date: 2014–04–01
  10. By: Clemens, Jeffrey
    Abstract: Efforts to maintain balanced budgets lead to substantial pro-cyclicality in states' capital investments, transfers to local governments, and spending in areas like education and transportation. Reliance on volatile revenue sources predicts relatively severe volatility in these expenditures. States with strict balanced budget requirements must restore fiscal balance faster than those without, leading to rescissions during years in which they face unexpected shocks. I find that these rescissions occur disproportionately in areas with readily deferred projects. Evidence points to the relative strength of public sector union groups as a driver of variation in the composition of mid-year rescissions across states.
    Keywords: State and Local Governments; Fiscal Institutions; Balanced Budget Requirements; Unions
    JEL: H11 H71 H72 H77
    Date: 2013–01–16
  11. By: Salvador Barrios; Diego Martínez
    Abstract: We analyse the role played by fiscal equalisation schemes in determining sub-national borrowing. We test econometrically the link between the regional government primary fiscal balances and the GDP per capita in Canada, Germany and Spain. We find that either poor or rich regions can display higher regional public borrowing on average and explain how these results can be linked to the institutional design of regional equalisation systems in place in these countries. Particularly, elements such as tax effort and fiscal capacities play a relevant role in this regard. Reforms of these schemes can therefore prove instrumental in reducing regional heterogeneity in public borrowing.
    Keywords: fiscal equalisation, public deficit, fiscal capacity, taxation.
    JEL: H7 H6
    Date: 2014–04
  12. By: Roine, Jesper (Stockholm School of Economics); Waldenström, Daniel (Department of Economics, Uppsala University)
    Abstract: This paper reviews the long run developments in the distribution of personal income and wealth. It also discusses suggested explanations for the observed patterns. We try to answer questions such as: What do we know, and how do we know, about the distribution of income and wealth over time? Are there common trends across countries or over the path of devel-opment? How do the facts relate to proposed theories about changes in inequality? We present the main inequality trends, in some cases starting as early as in the late eighteenth century, combining previous research with recent findings in the so-called top income literature and new evidence on wealth concentration. The picture that emerges shows that inequality was historically high almost everywhere at the beginning of the twentieth century. In some coun-tries this situation was preceded by increasing concentration, but in most cases inequality seems to have been relatively constant at a high level in the nineteenth century. Over the twentieth century inequality decreased almost everywhere for the first 80 years, largely due to decreasing wealth concentration and decreasing capital incomes in the top of the distribution. Thereafter trends are more divergent across countries and also different across income and wealth distributions. Econometric evidence over the long run suggests that top shares increase in periods of above average growth while democracy and high marginal tax rates are associat-ed with lower top shares.
    Keywords: Income inequality; Income distribution; Wealth distribution; Economic history; Top incomes; Welfare state; Taxation
    JEL: D31 H20 J30 N30
    Date: 2014–05–05

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