nep-pub New Economics Papers
on Public Finance
Issue of 2014‒06‒02
twenty papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Tax Progressivity: An Analytical Framework By Heathcote, Jonathan; Storesletten, Kjetil; Violante, Giovanni L
  2. An Interpretation of the Gini Coefficient in a Stiglitz Two-Type Optimal Tax Problem By Bo Sandemann Rasmussen
  3. Eliciting Taxpayer Preferences Increases Tax Compliance By Jan-Emmanuel De Neve; Cait Lamberton; Michael I. Norton
  4. The Effect of Increasing Earnings Dispersion on Social Security Payroll Tax Receipts By Richard Kopcke; Zhenyu Li; Anthony Webb
  5. Using a Natural Experiment to Examine Tobacco Tax Regressivity By Adel Bosch; Steven F. Koch
  6. Is [Rural] Property Tax Relevant? By Juanita Villaveces
  7. Household Debt and the Dynamic Effects of Income Tax Changes By Cloyne, James; Surico, Paolo
  8. Work and Tax Evasion Incentive Effects of Social Insurance Programs: Evidence from an Employment-Based Benefit Extension By Bergolo, Marcelo; Cruces, Guillermo
  9. The Impact of Inequality on Cooperation: An Experimental Study By Annarita COLASANTE; Alberto RUSSO
  10. Fiscal Policy for Health Policy Makers By Robert Gillingham
  11. Heterogeneous Consumers and Fiscal Policy Shocks By Anderson, Emily; Inoue, Atsushi; Rossi, Barbara
  12. The Time for Austerity: Estimating the Average Treatment Effect of Fiscal Policy By Jordà, Òscar; Taylor, Alan M.
  13. Threshold Level Public Goods Provision with Multiple Units: Experimental Effects of Disaggregated Groups with Rebates By Liu, Pengfei; Swallow, Stephen K.; Anderson, Christopher M.
  14. Trends in Top Incomes and their Taxation in OECD Countries By Michael Förster; Ana Llena-Nozal; Vahé Nafilyan
  15. Limiting Fiscal Procyclicality: Evidence from Resource-Rich Countries By Coutinho, Leonor; Georgiou, Dimitrios; Heracleous, Maria; Michaelides, Alexander; Tsani, Stella
  16. The impact of Cigarette Excise Tax Increases and Harmonisation in the East African Community By Posen, Jodie; van Walbeek, Corne
  17. Intergenerational altruism and house prices: evidence from bequest tax reforms in Italy By G. Bellettini; F. Taddei; G. Zanella
  18. Fiscal policy management: the experience of Chile By Eric Parrado; Andrés Velasco
  19. Tax Reforms and Intertemporal Shifting of Wage Income: Evidence from Danish Monthly Payroll Records By Kreiner, Claus Thustrup; Leth-Petersen, Søren; Skov, Peer Ebbesen
  20. Production vs Revenue Efficiency With Limited Tax Capacity: Theory and Evidence From Pakistan By Best, Michael; Brockmeyer, Anne; Kleven, Henrik; Spinnewijn, Johannes; Waseem, Mazhar

  1. By: Heathcote, Jonathan; Storesletten, Kjetil; Violante, Giovanni L
    Abstract: What shapes the optimal degree of progressivity of the tax and transfer system? On the one hand, a progressive tax system can counteract inequality in initial conditions and substitute for imperfect private insurance against idiosyncratic earnings risk. At the same time, progressivity reduces incentives to work and to invest in skills, and aggravates the externality associated with valued public expenditures. We develop a tractable equilibrium model that features all of these trade-offs. The analytical expressions we derive for social welfare deliver a transparent understanding of how preferences, technology, and market structure parameters influence the optimal degree of progressivity. A calibration for the U.S. economy indicates that endogenous skill investment, flexible labor supply, and the externality linked to valued government purchases play quantitatively similar roles in limiting desired progressivity.
    Keywords: income distribution; labor supply; partial insurance; progressivity; skill investment; valued government expenditures; welfare
    JEL: D30 E20 H20 H40 J22 J24
    Date: 2014–03
  2. By: Bo Sandemann Rasmussen (Department of Economics and Business, Aarhus University, Denmark; Department of Economics and Business, Aarhus University, Denmark)
    Abstract: In a two-type Stiglitz (1982) model of optimal non-linear taxation it is shown that when the utility function relating to consumption is logaritmic the shadow price of the incentive constraint relating to the optimal tax problem exactly equals the Gini coefficient of the secondbest optimal income distribution of a utilitarian government. In this sense the optimal degree of income redistribution is determined by the severity of the incentive problem facing the policy-maker. Extensions of the benchmark model to allow for more general functional forms of the utility function and for more than two types of workers reveal that also in these cases the desired degree of income redistribution is positively correlated with the shadow prices of the incentive constraints.
    JEL: H21 H23 H24
    Date: 2014–05–25
  3. By: Jan-Emmanuel De Neve; Cait Lamberton; Michael I. Norton
    Abstract: Two experiments show that eliciting taxpayer preferences on government spending—providing taxpayer agency--increases tax compliance. We first create an income and taxation environment in a laboratory setting to test for compliance with a lab tax. Allowing a treatment group to express nonbinding preferences over tax spending priorities, leads to a 16% increase in tax compliance. A followup online study tests this treatment with a simulation of paying US federal taxes. Allowing taxpayers to signal their preferences on the distribution of government spending, results in a 15% reduction in the stated take-up rate of a questionable tax loophole. Providing taxpayer agency recouples tax payments with the public services obtained in return, reduces general anti-tax sentiment, and holds satisfaction with tax payment stable despite increased compliance with tax dues. With tax noncompliance costing the US government $385billion annually, providing taxpayer agency could have meaningful economic impact. At the same time, giving taxpayers a voice may act as a two-way "nudge," transforming tax payment from a passive experience to a channel of communication between taxpayers and government.
    Keywords: Tax compliance, taxpayer agency, taxpayer satisfaction, government spending
    JEL: D03 H26 H30 H50 I31
    Date: 2014–05
  4. By: Richard Kopcke; Zhenyu Li; Anthony Webb
    Abstract: This paper decomposes trends in the distribution of earnings over the period 1982-2009 and calculates the effect of increases in dispersion in wage and salary earnings on revenues from the U.S. Social Security Old-Age and Survivors Insurance payroll tax. This tax is levied on earnings, up to a maximum that, with minor changes, has been indexed since 1975 to movements in average wages. If the earnings of very high earners increase more rapidly than those of individuals with earnings below the taxable maximum, the percentage of total earnings that is subject to the tax will decrease and tax revenues will be lower than would otherwise be the case. Using the Continuous Work History Sample (CWHS), we show that most of the increase in the dispersion of wage and salary earnings over the above period was the result of increases of within-cohort, rather than between-cohort, earnings disparities. Between–cohort disparities increased among women, but not among men. The increases in earnings dispersion would have resulted in a substantial decline in the percentage of workers earning more than the taxable maximum, had it not been for the aging of the outsize boomer cohort into their peak earning years. The percentage of total earnings subject to the payroll tax has declined substantially. To restore this percentage to the 1982 level would require an increase in the 2009 taxable maximum from $106,800 to $144,248, which would approximate the 97th percentile of the earnings distribution, well above historic norms. We estimate that, if there had been no increase in earnings dispersion, 2009 payroll tax receipts from wage and salary earnings would have been 6 percent higher, of which 4 percent can be attributed to increases in within-cohort dispersion.
    Date: 2014–05
  5. By: Adel Bosch (Department of Economics, University of Pretoria); Steven F. Koch (Department of Economics, University of Pretoria)
    Abstract: We take advantage of a tobacco tax hike that occurred during the collection of the South African Income and Expenditure Survey to examine the regressivity of tobacco taxes. We are also able to examine the relative change in regressivity following the tax increase. Like previous research into commodity taxes, we find that tobacco taxes are regressive. However, we find that tobacco tax increases reduce the tax burden at the lower end of the income distribution, such that after the cigarette tax increase, cigarette taxes are less regressive than before the increase.
    Date: 2014–05
  6. By: Juanita Villaveces
    Abstract: Abstract: The present document presents the general notions and the definition of property taxation and, as part of it, the working definition of rural property taxation emphasizing that property taxation is a matter of “property” and rural property taxation is linked with rural property, specifically with land ownership. In addition, the document presents some facts about the performance of property taxation based on a secondary source of cross-country analysis. In order to give a definition of rural property tax, I will explain the logic of taxation linked to property and then present the nature and logic behind property taxation in theory.
    Keywords: Property tax, rural taxation, property rights
    JEL: H20 P14
    Date: 2014–05–01
  7. By: Cloyne, James; Surico, Paolo
    Abstract: Using a long span of expenditure survey data and a new narrative measure of exogenous income tax changes for the United Kingdom, we show that households with mortgage debt exhibit large and persistent consumption responses to tax changes. Home-owners without a mortgage, in contrast, do not appear to react, with responses not statistically different from zero at all horizons. Splitting the sample by age and education yields only limited evidence of heterogeneity as the distributions of these demographics tend to overlap across housing tenure groups. We interpret our findings through the lens of traditional and more recent theories of liquidity constraints, providing a novel interpretation for the aggregate effects of tax changes on the real economy.
    Keywords: liquidity constraints; mortgage debt; narrative tax changes
    JEL: E21 E62 H31
    Date: 2013–09
  8. By: Bergolo, Marcelo (IECON, Universidad de la República); Cruces, Guillermo (CEDLAS-UNLP)
    Abstract: This article studies how social insurance programs shape individual's incentives to take up registered employment and to report earnings to the tax authorities. The analysis is based on a social insurance reform in Uruguay that extended healthcare coverage to the dependent children of registered private-sector workers. The identification strategy relies on a comparison between individuals with and without dependent children before and after the reform. The reform increased benefit-eligible registered employment by 1.6 percentage points (about 5 percent above the pre-reform level), mainly due to an increase in labor force participation rather than to movement from unregistered to registered employment. The shift was greater for parents with younger children and for cohabiting adults whose partners' jobs did not provide the couples' children with access to the benefit. Finally, the reform increased the incidence of underreporting of salaried earnings by about 4 percentage points (25 percent higher than the pre-reform level), mostly for workers employed at small firms. The increase in fiscal revenue from higher levels of registered employment was several orders of magnitude greater than the loss of revenue due to an increase in underreporting.
    Keywords: labor supply, work incentives, social insurance, tax evasion
    JEL: J22 H26 O17
    Date: 2014–05
  9. By: Annarita COLASANTE (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali); Alberto RUSSO (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali)
    Abstract: This paper analyzes the impact of inequality in the distribution of endowments on contributions. We conduct a lab experiment using the well-known Public Good Game to test the relation between inequality and contribution to a public fund. We introduce the possibility to choose among three different redistribution rules: equidistribution, proportional to contribution and progressive to endowment. This novelty, combined with a payoff function that depends also on previous period behavior, allows us to verify the hypothesis that players show inequity averse preferences. Results show that inequality has a negative impact on individual contribution. Since inequality is decreasing during repetitions, we deduce that players show inequity averse preferences.
    Keywords: Inequality, Public Good Game, Reciprocity
    JEL: C9 D7 H41
    Date: 2014–05
  10. By: Robert Gillingham
    Abstract: This paper summarizes the basic principles that should form the basis of fiscal policy. These principles encompass decisions on the functions of government, its spending, and the financing of its spending that affect economic growth, employment, inflation, and economic welfare. Although the principles are broadly applicable, it is especially important that health policy makers understand them. Ensuring access to health care is one of society's, and therefore the government's, most important goals. In meeting this goal, policy makers must be cognizant of fiscal realities; what they can reasonably expect government to achieve in the health sector and at what cost. Resources are limited, and many valuable programs in both the private and public sectors vie for them. Allocating these resources efficiently is of paramount importance, with implications for what the government does and how it finances its activities. The absolute level and share of government resources allocated to the health sector will depend on a variety of factors, but the bottom line is that health programs must compete with other government programs for scarce resources to ensure that these resources are put to their best use.
    Keywords: health, fiscal policy for health, public finance, revenue mobilization, expenditure decision making ;� health, fiscal policy for health, public finance, revenue ... See More + mobilization, expenditure decision making, , accounting, accounting standards, Accumulation of Debt, addiction, adverse selection, aging, asymmetric information, beneficiaries, beneficiary, bequest, borrowing requirement, budget surplus, budgeting, capital gains, cash flows, cash transfers, commodities, consumer durable, consumer durables, consumers, CONSUMPTION TAXES, contract laws, corporate income tax, corporate income taxes, crime, debt, debt ratio, debt relief, decision making, dedicated revenue, deficits, demand curve, democratic environment, deposits, developing countries, development agencies, development assistance, discounted value, distributional equity, dividends, durable goods, economic crisis, economic development, economic efficiency, economic growth, Economic Outlook, economies of scale, elasticity, electricity, environmental issues, Equity issues, evasion, Excise Taxes, exercises, expenditure, expenditures, exports, externalities, finances, financial assets, financial risk, financial services, FISCAL POLICY, fiscal surplus, fraud, GDP, GDP per capita, good governance, government action, government asset, government budget, government budgets, government finance, government finances, Government financing, government funds, GOVERNMENT INTERVENTION, Government investment, government involvement, government revenues, government securities, government spending, growth rate, health care, health outcomes, HEALTH POLICY, health services, health spending, horizontal equity, housing, human capital, Human Development, immunization, implicit tax, income elasticity of demand, income groups, income level, income support, income tax, INCOME TAXES, incomes, indebtedness, inefficiency, inflation, inflation taxes, inheritance, insurance, insurance premium, interest rate, interest rates, Intergovernmental fiscal relations, International Bank, international standards, INTERVENTION, investment projects, isolation, issuance, labor market, laws, less developed countries, level of debt, levies, levy, licenses, life expectancy, loan, local government, local governments, local taxes, long-term interests, low-income countries, low-income country, marginal cost, Market failures, Market mechanisms, market prices, middle-income countries, Monetary Fund, moral hazard, mortgage, mortgage interest, national income, natural resources, negative externalities, negative externality, net debt, NONTAX REVENUE, normal good, Nutrition, old-age income, open economy, output, outputs, PARETO EFFICIENCY, payroll taxes, pension, pension contributions, pension system, pension systems, PENSIONS, personal income, personal property, POLITICAL ECONOMY, political economy of reform, pollution, positive externalities, prepayment, price rationing, Price subsidies, private market, private markets, private sector, privatization, progressive taxes, property rights, property taxes, provisions, public, public asset, public good, public goods, public health, Public pension, PUBLIC PENSIONS, public sector, public-private partnerships, Purchasing power, rapid growth, rate of return, rates of return, real income, real property, rent seeking, reserves, returns, REVENUE SOURCES, roads, sales taxes, savings, savings accounts, securities, small enterprises, social cost, social costs, stocks, structure of government, supply curve, surgery, sustainable reforms, tax, tax collections, tax policy, tax rate, tax rates, tax revenues, tax subsidies, tax subsidy, tax system, tax systems, TAXATION, technological change, trade liberalization, trade tax, Trade Taxes, trades, transparency, Treasury, Trust Fund, trust funds, turnover, unemployment, urbanization, user charges, value added, value of assets, vertical equity, voters, wages, waste, WEALTH, wealth tax, WEALTH TAXES, workers, world economy, world trade
    Date: 2014–03
  11. By: Anderson, Emily; Inoue, Atsushi; Rossi, Barbara
    Abstract: This paper studies stylized empirical facts regarding the effects of unexpected changes in aggregate macroeconomic fiscal policies on consumers that are allowed to differ depending on their individual characteristics. We use data from the Consumption Expenditure Survey (CEX) to estimate individual-level impulse responses as well as multipliers for government spending and tax policy shocks. The main empirical finding of this paper is that unexpected fiscal shocks have substantially different effects on consumers depending on their age, income levels, and education. In particular, the wealthiest individuals tend to behave according to the predictions of standard RBC models, whereas the poorest individuals tend to behave according to standard IS-LM (non-Ricardian) models, due to credit constraints. Furthermore, government spending policy shocks tend to decrease consumption inequality, whereas tax policy shocks most negatively affect the lives of the poor, more so than the rich, thus increasing consumption inequality.
    Keywords: Fiscal policy; Government spending shocks; Heterogeneity; Tax shocks
    JEL: D1 E21 E4 E52 H31 I3
    Date: 2013–09
  12. By: Jordà, Òscar; Taylor, Alan M.
    Abstract: Elevated government debt levels in advanced economies have risen rapidly as sovereigns absorbed private-sector losses and cyclical deficits blew up in the Global Financial Crisis and subsequent slump. A rush to fiscal austerity followed but its justifications and impacts have been heavily debated. Research on the effects of austerity on macroeconomic aggregates remains unsettled, mired by the difficulty of identifying multipliers from observational data. This paper reconciles seemingly disparate estimates of multipliers within a unified framework. We do this by first evaluating the validity of common identification assumptions used by the literature and find that they are largely violated in the data. Next, we use new propensity score methods for time-series data with local projections to quantify how contractionary austerity really is, especially in economies operating below potential. We find that the adverse effects of austerity may have been understated.
    Keywords: allocation bias; austerity; average treatment effect; booms; fiscal policy; identification; inverse probability weighting; matching; multipliers; output fluctuations; slumps
    JEL: C54 C99 E32 E62 H20 H5 N10
    Date: 2013–09
  13. By: Liu, Pengfei (University of Connecticut); Swallow, Stephen K. (University of Connecticut); Anderson, Christopher M. (University of Washington)
    Abstract: We introduce two institutions that provide multiple public good units, assuming that a market-maker has the ability to establish groups of contributors. We set up a public good experiment where either all N individuals form one group to provide two units, or divide the N participants into two groups, and each group provides one unit separately, with all individuals benefiting for any unit(s) provided. Our results show that, under certain circumstances, the latter approach provides more of both units, and it encourages more contribution on average. We also explore the performance of two rebate rules under the two grouping approaches.
    Keywords: Experimental economics, Grouping approach, Provision point mechanism, Rebate, Environmental economics, Ecosystem Service Markets
    Date: 2013–11
  14. By: Michael Förster; Ana Llena-Nozal; Vahé Nafilyan
    Abstract: The shares of top income recipients in total pre-tax income have increased in OECD countries in the past three decades, particularly in most of the English-speaking countries but also in some Nordic (from low levels) and Southern European countries. Today, the richest one percent receives between 7% of all pre-tax income in Denmark and the Netherlands up to almost 20% in the United States. This increase is the result of the top 1% capturing a disproportionate share of overall income growth over the past thirty years: around 20 – 25% in Australia and the United Kingdom, up to 37% in Canada and even 47% in the United States. At the same time, tax reforms in almost all OECD countries reduced top personal income tax rates as well as rates of other taxes affecting the highest income earners. Indeed, while top tax rates were equal to or above 70% in half of the countries in the mid-1970s, this rate has been halved in many countries by 2013. Au cours des trois dernières décennies, la part du revenu avant impôts revenant aux titulaires de hauts revenus a augmenté au sein des pays de l’OCDE, en particulier dans la plupart des pays anglophones mais aussi dans certains pays nordiques (démarrant toutefois d’un niveau relativement bas) et certains pays du sud de l’Europe. Aujourd’hui, les un pourcent les plus riches perçoivent entre 7% du revenu individuel total avant impôts au Danemark et aux Pays-Bas et presque 20% aux États-Unis. Cette forte progression est le résultat d’un partage inéquitable des fruits de la croissance des revenus aux cours des trente dernières années. En effet, entre 20% et 25% des bénéfices de la croissance est captée par les un pourcent les plus riches en Australie et au Royaume-Uni, et jusqu’à 37% au Canada, voire 47% aux États-Unis. Dans le même temps, les réformes fiscales de la plupart des pays de l’OCDE ont été dans le sens d’une réduction des taux d’imposition et d’autres taxes affectant les plus hauts revenus. Ainsi, alors que les taux d’imposition des plus hauts revenus étaient aux alentours de 70% dans la moitié des pays de l’OCDE dans les années 70, ils sont, en 2013, réduits de moitié dans de nombreux pays.
    JEL: D31 D63 H20
    Date: 2014–05–15
  15. By: Coutinho, Leonor; Georgiou, Dimitrios; Heracleous, Maria; Michaelides, Alexander; Tsani, Stella
    Abstract: We provide evidence that fiscal policy in resource-rich countries is strongly procyclical. The empirical analysis reveals that on average real government consumption in these countries tends to significantly rise (fall) in good (bad) times. To control for endogeneity we use an instrumental variable for GDP growth that arises naturally, namely the growth in commodity prices of the main natural resource export. We also find that fiscal policy procyclicality is lower in more democratic regimes, and that operating a sovereign wealth fund is more successful in limiting fiscal policy procyclicality than introducing fiscal rules.
    Keywords: commodity prices; fiscal procyclicality; fiscal rules; natural resources; sovereign wealth funds
    JEL: E62 H30
    Date: 2013–10
  16. By: Posen, Jodie (WESGRO); van Walbeek, Corne (School of Economics, University of Cape Town)
    Abstract: This paper proposes a model that can be used to predict the likely impacts of tobacco tax increases and harmonisation in the East African Community. The model has five sections, one for each EAC country. These sections consider different cigarette market segments based on tax or price differentials. The model can therefore calculate the likely effects of excise tax increases and harmonisation on the retail selling price of cigarettes, cigarette consumption, government revenue and industry revenue for each individual country and for the EAC as a whole. Two Scenarios are presented in this paper. Scenario 1 explores an increase in the current excise tax rates and a harmonisation across the EAC of a uniform specific tax of UDS 0.60. A sensitivity analysis is conducted to assess the robustness of the assumptions in this scenario. Scenario 2 discusses the use of a mixed tax structure with a specific excise tax of USD 0.60 or an ad valorem excise tax of 40% of the retail selling price, whichever is higher. The advantages and disadvantages of a uniform specific excise tax and other tax structures such as tiered specific taxes, ad valorem taxes and mixed tax structures are explored. Factors such as administrative ease, predictability of revenue flows, inflation and income growth are discussed. A uniform specific tax is shown to be the most preferable excise tax structure, even over a mixed tax structure. The results show that, with an assumed price elasticity of demand of -0.6, as excise tax is increased in the region, consumption decreases and government revenue increases. Scenario 1 shows a decrease in consumption by around 2.3 billlion cigarettes, or 18%, compared to current consumption levels across the EAC of around 12.9 billion cigarettes. Scenario 2 shows a slightly higher decline in consumption of 2.7 billion cigarettes or 21%. In terms of government excise revenue, Scenario 1 shows an increase of around USD 140 million or 80% from the current government revenue of around USD 176 million across the EAC. The second scenario reveals an even greater increase of USD 173 million or 98%. These results show that excise tax increases and harmonisation will contribute to public health and financial objectives of governments in the region.
    Keywords: East African Community; excise tax; tax harmonisation
    JEL: H21
    Date: 2014
  17. By: G. Bellettini; F. Taddei; G. Zanella
    Abstract: We identify the degree of intergenerational altruism in an OLG framework à la Barro exploiting the quasi-experimental variation generated by reforms of bequest taxation (estate or inheritance tax, in the U.S.) and taxes on inter vivos real estate donations (gift tax, in the U.S.) that were enacted in Italy between 2000 and 2001. Employing a unique data set containing information on the housing stock and house prices in 13 large Italian cities between 1993 and 2004, we identify the structural parameter of interest via the effect of changes in the tax rate on house prices. We find that the intergenerational altruism parameter is about 20%. Given the possible anticipation of the reform this estimate should be interpreted as a lower bound.
    JEL: E60 E65 H24
    Date: 2014–05
  18. By: Eric Parrado; Andrés Velasco
    Date: 2013–12–09
  19. By: Kreiner, Claus Thustrup; Leth-Petersen, Søren; Skov, Peer Ebbesen
    Abstract: Intertemporal shifting of wage income takes place when income earned in one tax year is paid out in another tax year in order to save taxes. Shifting has implications for the evaluation of the distortionary and distributional effects of taxes and may cause serious bias in empirical estimates of the elasticity of taxable income (ETI) for use in policy analysis. Based on new monthly payroll records for the universe of Danish employees we provide evidence of widespread intertemporal shifting of wage income in response to a tax reform that significantly reduced the marginal tax rates for 1/4 of all employees. Ignoring shifting, we estimate the overall ETI to be 0.1 and find that the ETI is increasing in the earnings level. After controlling for shifting, we obtain negligible ETI estimates at all earnings levels. We show that shifting is concentrated on few individuals spread out evenly across industry sectors, and we provide evidence suggesting that tax salience, liquidity constraints and firm willingness to cooperate in shifting are important factors in explaining shifting behavior.
    Keywords: elasticity of taxable income; income shifting; monthly payroll records
    JEL: H24 H31
    Date: 2013–10
  20. By: Best, Michael; Brockmeyer, Anne; Kleven, Henrik; Spinnewijn, Johannes; Waseem, Mazhar
    Abstract: This paper analyzes the design of tax systems under imperfect enforcement. A common policy in developing countries is to impose minimum tax schemes whereby firms are taxed either on profits or on turnover, depending on which tax liability is larger. This production inefficient tax policy has been motivated by the idea that the broader turnover tax base is harder to evade. Minimum tax schemes give rise to a kink point in firms' choice sets as the tax rate and tax base jump discontinuously when one tax liability surpasses the other. Using administrative tax records on corporations in Pakistan, we find large bunching around the minimum tax kink. We show that the combined tax rate and tax base change at the kink provides small real incentives for bunching, making the policy ideal for eliciting evasion. We develop an empirical approach allowing us to put (tight) bounds on the evasion response to switches between profit and turnover taxation, and find that turnover taxes reduce evasion by up to 60-70% of corporate income. Our analysis sheds new light on the use of production-inefficient tax tools in countries with limited tax capacity and can easily be replicated in other contexts as the quasi-experimental variation needed is ubiquitous.
    Date: 2013–11

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