New Economics Papers
on Public Finance
Issue of 2014‒05‒24
fourteen papers chosen by

  1. A computational model of optimal commodity taxation By John T. Revesz
  2. A Big Data Approach to Optimal Sales Taxation By Christian Baker; Jeremy Bejarano; Richard W. Evans; Kenneth L. Judd; Kerk L. Phillips
  3. On optimal tax differences between heterogenous groups By Beckmann, Klaus; Franz, Nele E.; Schneider, Andrea
  4. Beyond the Labour Income Tax Wedge: The Unemployment-Reducing Effect of Tax Progressivity By Etienne Lehmann; Claudio Lucifora; Simone Moriconi; Bruno Van Der Linden
  5. Income tax and retirement schemes By Philippe Choné; Guy Laroque
  6. Tax Me if You Can! Optimal Nonlinear Income Tax between Competing Governments By Etienne Lehmann; Laurent Simula; Alain Trannoy
  7. Optimal Student Loans and Graduate Tax under Moral Hazard and Adverse Selection By Robert J. Gary-Bobo; Alain Trannoy
  8. Scrapping the Social Security Payroll Tax Cap: Who Would Pay More? By Nicole Woo; Janelle Jones; John Schmitt
  9. The Power Politics of International Tax Cooperation. Why Luxembourg and Austria accepted automatic exchange of information on foreign account holders’ interest income By Lukas Hakelberg
  10. Financial Transaction Tax and Financial Market Stability with Diverse Beliefs By Rieger, Jörg
  11. The Impact of the French Securities Transaction Tax on Market Liquidity and Volatility By Gunther Capelle-Blancard; Olena Havrylchyk
  12. Taxation and Economic Growth in Latin America By Gustavo Canavire-Bacarreza; Jorge Martínez-Vázquez; Violeta Vulovic
  13. Taxation and Economic Growth in Colombia By Roberto Steiner
  14. A long way from tax justice : the Brazilian case By Lavinas, Lena; Moellmann Ferro, Thiago Andrade

  1. By: John T. Revesz (Australian Public Service)
    Abstract: This report examines the structure of optimal commodity tax rates in a many-person many-goods static computational model using segmented LES utility. One of the major findings is that with non-linear Engel curves and linear income tax, optimal commodity tax rates tend to be progressive and highly dispersed under logarithmic utility specifications. However, the dispersion of tax rates is considerably reduced if the inequality aversion of society is low or if tax evasion depends among other things on disparities between commodity tax rates. With exogenously given non-optimal and non-linear income tax schedules, usually there is still a need for differentiated and progressive commodity taxation. Tax evasion tends to reduce optimal tax rates for necessities but increases them for luxuries. Private compliance costs and government administration costs reduce optimal tax rates by a similar amount to the share of these costs from taxes. The results indicate that in a redistributive model the effect of externalities on optimal tax rates exceeds the corresponding Pigovian tax rates or subsidies. The main benefit of higher taxes on leisure complements than leisure substitutes appears to relate to increased tax revenue for redistribution rather than improvement in the utility position of those paying the taxes. The effect of complexities such as tax evasion, administrative costs, externalities and leisure complements/substitutes on redistribution is not neutral. Generally, these complexities tend to increase the progressivity of optimal commodity tax rates. Explanations are provided why the numerical results presented here do not contradict the Laroque-Kaplow proposition, which advocates uniform commodity taxation. Some practical application problems and logical weaknesses of the Laroque-Kaplow proposition are noted.
    Keywords: optimal taxation, computational models
    JEL: C63 H21
    Date: 2014–05
  2. By: Christian Baker; Jeremy Bejarano; Richard W. Evans; Kenneth L. Judd; Kerk L. Phillips
    Abstract: We characterize and demonstrate a solution method for an optimal commodity (sales) tax problem consisting of multiple goods, heterogeneous agents, and a nonconvex policy maker optimization problem. Our approach allows for more dimensions of heterogeneity than has been previously possible, incorporates potential model uncertainty and policy objective uncertainty, and relaxes some of the assumptions in the previous literature that were necessary to generate a convex optimization problem for the policy maker. Our solution technique involves creating a large database of optimal responses by different individuals for different policy parameters and using "Big Data" techniques to compute policy maker objective values over these individuals. We calibrate our model to the United States and test the effects of a differentiated optimal commodity tax versus a flat tax and the effect of exempting a broad class of goods (services) from commodity taxation. We find that only a potentially small amount of tax revenue is lost for a given societal welfare level by departing from an optimal differentiated sales tax schedule to a uniform flat tax and that there is only a small loss in revenue from exempting a class of goods such as services in the United States.
    JEL: C1 H2 H21
    Date: 2014–05
  3. By: Beckmann, Klaus (Helmut Schmidt University, Hamburg); Franz, Nele E. (University of Münster); Schneider, Andrea (University of Münster)
    Abstract: This paper considers optimal linear tax structures that are differentiated according to group membership. Groups can be heterogeneous with respect to both preferences and abilities. Contrary to most arguments in favour of tax privileges for certain groups, e.g. gender-based taxation, it is shown that consideration of the first moment of the relevant distributions (the average labour supply elasticity of the groups) is insufficient. We discuss the factors on which efficient differentiation would depend.
    Keywords: optimal linear income taxation; preference heterogeneity; gender-based taxation; horizontal equity
    JEL: D31 H21
    Date: 2014–05–15
  4. By: Etienne Lehmann; Claudio Lucifora; Simone Moriconi; Bruno Van Der Linden
    Date: 2013
  5. By: Philippe Choné (Centre de Recherche en Économie et Statistique); Guy Laroque (Centre de Recherche en Économie et Statistique)
    Abstract: This article aims at understanding the interplay between pension schemes and tax instruments. The model features extensive labor supply in a stationary environment with overlapping generations and perfect financial markets. Compared with the reference case of a pure taxation economy, we find that taxes become more redistributive when the pension instrument is available, while pensions provide incentives to work.
    Date: 2014–06
  6. By: Etienne Lehmann (CREST and CRED (TEPP) Universite Panth ´ eon-Assas); Laurent Simula (Uppsala Center for Fiscal Studies & Department of Economics, Uppsala University); Alain Trannoy (Aix-Marseille Universite (Aix-Marseille School of Economics) CNRS EHESS)
    Abstract: We investigate how potential tax-driven migrations modify the Mirrlees income tax schedule when two countries play Nash. The social objective is the maximin and preferences are quasilinear in consumption. Individuals differ both in skills and migration costs, which are continuously distributed. We derive the optimal marginal income tax rates at the equilibrium, extending the Diamond-Saez formula. We show that the level and the slope of the semi-elasticity of migration (on which we lack empirical evidence) are crucial to derive the shape of optimal marginal income tax.
    Keywords: optimal income tax, income tax competition, migration, labor mobility, Nash-equilibrium tax schedules
    JEL: D82 H21 H87
    Date: 2014–05–14
  7. By: Robert J. Gary-Bobo (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique); Alain Trannoy (AMSE - Aix-Marseille School of Economics - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM))
    Abstract: We characterize the set of second-best optimal "menus" of student-loan contracts in a simple economy with risky labour-market outcomes, adverse selection, moral hazard and risk aversion. The model combines student loans with an elementary optimal income-tax problem. The second-best optima provide incomplete insurance because of moral hazard; they typically involve cross-subsidies between students. Generically, optimal loan repayments cannot be decomposed as the sum of an income tax, depending only on earnings, and a loan repayment, depending only on education. Therefore, optimal loan repayments must be income-contingent, or the income tax must comprise a graduate tax. The interaction of adverse selection and moral-hazard, i.e., self-selection constraints and effort incentives, determines an equal treatment property; the expected utilities of different types of students are equalized at the interim stage, conditional on the event of academic success (i.e., graduation). But individuals are ex ante unequal because of differing probabilities of success, and ex post unequal, because the income tax trades off incentives and insurance (redistribution).
    Keywords: student loans; graduate tax; adverse selection; moral hazard; risk aversion
    Date: 2014–04
  8. By: Nicole Woo; Janelle Jones; John Schmitt
    Abstract: There is currently $2.7 trillion in the Social Security Trust Fund, held in Treasury bonds. Since the program is currently taking in more revenues (taxes on payroll and benefits as well as interest on the bonds) than it is paying out, the Trust Fund will continue to grow to about $2.9 trillion. The Trust Fund was set up to help pre-fund the retirement of the baby boomer generation. In about 2033, these funds will be drawn down, so after that point, if no changes are made, beneficiaries would receive about 75 percent of scheduled benefits. This gap between what the program would be able to pay and scheduled benefits is equivalent to about one percent of Gross Domestic Product over the next 75 years. To help avoid a reduction in payments and alleviate the program’s budget shortfall, one option is raising – or even abolishing – the cap on the maximum amount of earnings that are subject to the Social Security payroll tax. In 2014, that cap is set at $117,000 per year (it is adjusted annually to keep up with inflation). This issue brief analyzes Census Bureau data from the most recently available American Community Survey to ascertain how many workers would be affected if the Social Security payroll tax cap were raised or phased out.
    Keywords: CPI, social security, social security cap, inequality, payroll tax cap,
    JEL: H H5 H55 H2 H3
    Date: 2014–04
  9. By: Lukas Hakelberg
    Abstract: Theories of tax competition predict that small countries competing with large countries benefit, as they find it relatively easy to substitute revenue lost in a tax cut with revenue gained from incoming foreign tax base. If small countries can only lose from tax co-operation, why are Luxembourg and Austria bound to agree to a revised EU Savings Tax Directive that will oblige them to automatically provide information on foreign account holders’ interest income to residence countries? Putting emphasis on the neglected issue of power, I show that Luxembourg and Austria were first coerced into bilateral agreements on automatic exchange of information by the United States, which then activated a most-favored nation clause contained in the EU Directive on Administrative Co-operation in Tax Matters. As a result, the two countries were under a legal obligation to also extend greater co-operation to EU partners.
    Keywords: tax competition; tax policy
    Date: 2014–03–04
  10. By: Rieger, Jörg
    Abstract: This papers studies the impact of a financial transactions tax on the trading volume and asset price volatility in a model with heterogeneous beliefs. To model heterogeneous beliefs we follow Kurz (1994, 1997) and restrict the class of beliefs to the subset of rational beliefs. We study a tax on bond and asset purchases. The simulated model shows that the introduction of a transaction tax results in a lower trading volume and therefore in less liquid financial markets. Because of the decreased liquidity the volatility of the stock market increases. We also study the welfare effects of a financial transaction tax and the simulation results also show that there is only a small change in welfare.
    Keywords: Transaction Tax; Financial Regulation; Heterogeneous Beliefs
    Date: 2014–05–19
  11. By: Gunther Capelle-Blancard; Olena Havrylchyk
    Abstract: In this paper, we assess the impact of the securities transaction tax (STT) introduced in France in 2012 on market liquidity and volatility. To identify causality, we rely on the unique design of this tax that is imposed only on large French firms, all listed on Euronext. This provides two reliable control groups (smaller French firms and foreign firms also listed on Euronext) and allows using difference-in-difference methodology to isolate the impact of the tax from other economic changes occurring simultaneously. We find that the STT has reduced trading volume, but we find no effect on theoretically based measures of liquidity, such as price impact, and no significant effect on volatility. The results are robust if we rely on different control groups (German stocks included in DAX and MDAX), analyze dynamic effects or construct a control group by propensity score matching.
    Keywords: Financial transaction tax, Securities transaction tax, Tobin tax, Volatility,Liquidity, Euronext.
    JEL: G21 H25
    Date: 2014
  12. By: Gustavo Canavire-Bacarreza; Jorge Martínez-Vázquez; Violeta Vulovic
    Abstract: Tax policy is among the most common and relevant instruments in the toolkit of policy-makers when thinking about promoting growth, yet there is not compelling evidence regarding its effect in Latin American countries. Using a variety of approaches, we estimate the effects on growth of the most important taxes for the region, namely personal income tax, corporate income tax, general taxes on goods and services, including value added and other sales taxes, and revenues from natural resource. We evaluate the effect of these tax instruments on growth for Argentina, Brazil, Mexico, and Chile using vector autoregressive techniques, and for close to the entire region and a worldwide sample of developing and developed countries using panel data estimation. We find that, for the most part, personal income tax does not have the expected negative effect on economic growth in Latin America, which is largely explained by the small collections in the region. For corporate income tax, our results suggest reducing tax evasion and greater reliance on collection may boost economic growth in the region as a whole and especially for natural resource exporting countries. But, we also find small negative effects of corporate income tax on growth for individual countries, specifically Argentina, Mexico, and Chile. Finally, our results suggest that greater reliance on consumption taxes has significant positive effects on growth in Latin American in general, although we again find slight negative effects in some of the selected countries. On the other hand, natural resource revenues do not seem to contribute to growth.
    Keywords: Fiscal Policy, Investment, Social Security, taxation, growth, Latin America, personal income tax, corporate income tax, goods and sales tax, natural resources tax.
    Date: 2013–08
  13. By: Roberto Steiner
    Abstract: This Working Paper assesses the impact on investment of a reduction in corporate taxes and the impact on employment, labor formality, and growth of a reduction in non-wage labor costs in Colombia. First, and following Hall and Jorgensen (1967), we estimate an investment function, which depends on the user cost of capital, one of whose determinants is the corporate tax rate. Our estimations suggest that a reduction of the corporate tax rate from 33 to 23 percent--as originally envisioned by the government in early 2012, but finally not included in the reform submitted to Congress--has very different short and long-term effects on investment in machinery and equipment. While the user cost of capital declines 0.9 percent, investment (excluding the oil and mining sector) increases on impact only 28 bps in relation to GDP, an increase that does not compensate the fiscal cost incurred. In the long term, however, it is likely that the significant boost in investment (of around 5 percent of GDP) makes such a policy intervention fiscally sustainable. Second, using a computable general equilibrium model calibrated for Colombia, we estimate that the reduction of the "pure tax" component of non-wage labor costs approved in late 2012 is associated with a 0.5 percent increase in overall employment and, more importantly, with a 1.4 percent increase in formal sector employment. Our estimations indicate that this is achieved at no fiscal cost since government revenue increases as a result of higher output and employment.
    Keywords: Economic Development & Growth, Fiscal management, Taxation, Computable general equilibrium models, Investment, User cost of capital, Corporate taxation, Non-wage labor costs
    Date: 2014–03
  14. By: Lavinas, Lena; Moellmann Ferro, Thiago Andrade
    Keywords: tax system, tax reform, wage differential, Brazil, système fiscal, réforme fiscale, disparité des salaires, Brésil, sistema tributario, reforma tributaria, diferencia del salario, Brasil
    Date: 2014

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