nep-pub New Economics Papers
on Public Finance
Issue of 2014‒07‒05
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Government spending shocks, wealth effects and distortionary taxes By James Cloyne
  2. Taxes and International Risk Sharing By Epstein, Brendan; Mukherjee, Rahul; Ramnath, Shanthi
  3. Vertical externalities revisited: new results with public inputs and unit taxation. By Diego Martínez
  4. Effects of Payroll Tax Cuts for Young Workers By Skedinger, Per
  5. Comparing Itemized Tax Deductions across States: A Simple Decomposition Applied to Mortgage Interest Deductions By Wodon, Quentin
  6. Tax without design: recent developments in UK tax policy By Paul Johnson
  7. Accounting for Trends in Charitable Tax Deductions: Framework and Application to the District of Columbia By Wodon, Quentin; Alleyne, Betty; Cong, Lin; Mulusa, Judy; Niami, Farhad

  1. By: James Cloyne (Bank of England; Centre for Macroeconomics (CFM))
    Abstract: The size and sign of the government spending multiplier crucially depends on how the spending is financed and how consumers respond to implied future tax increases. I investigate this issue in an estimated New Keynesian DSGE model with distortionary labor and capital taxes and, importantly, with preferences that allow the wealth effect on labor supply to vary. Specifically I assess whether the model can explain the empirical evidence for the United States and examine the transmission mechanism, for realistic policy rules. I show that the model can match the positive empirical response of key variables including output, consumption and the real wage. I find that the role of the wealth effect on labor supply is small and that while tax rates rise following a spending shock these increases are modest, with debt rising. Deficit financed spending increases are therefore expansionary, but this is due to sticky prices rather than the wealth effect channel.
    Keywords: Fiscal policy, government spending shocks, spending multiplier, business cycles
    JEL: E20 E32 E62 H20
    Date: 2014–05
  2. By: Epstein, Brendan (Board of Governors of the Federal Reserve System (U.S.)); Mukherjee, Rahul (IHEID); Ramnath, Shanthi (U.S. Treasury Department)
    Abstract: We examine the extent to which differences in international tax rates may account for the small correlations of per capita consumption fluctuations across countries. Theory implies a close relationship between relative consumption growth, and consumption and capital income tax rate differentials. We find strong empirical evidence for this relationship. Idiosyncratic output fluctuations account for the majority of cross country consumption growth variability, but trends in tax differentials are informative about the dynamic evolution of international risk sharing. In particular, adjusting for capital taxes reveals an intuitive positive relationship between financial connectedness and risk sharing that is absent in baseline measures.
    Keywords: International risk sharing; business cycle accounting; taxes
    JEL: F41 F44 H29
    Date: 2014–06–09
  3. By: Diego Martínez
    Abstract: This paper studies the provision of public inputs in a federal system with unit taxation on labor. We use a model with vertical tax and expenditure externalities to analyze the e¢ ciency of equilibria under di¤erent settings, particularly Nash and Stackelberg equilibria. Our results discuss some ?ndings from the previous literature. First, both vertical externalities are interrelated each other. Second, the condition for production e¢ ciency in the public sector becomes irrelevant to assess optimality. And third, the replication of the second-best outcome by the federal government behaving as Stackelberg leader crucially depends on the states?reaction function.
    Keywords: Fiscal federalism, vertical externality, productive public spending.
    JEL: H2 H4 H7
    Date: 2014–06
  4. By: Skedinger, Per (Research Institute of Industrial Economics (IFN))
    Abstract: In response to high and enduring youth unemployment, large payroll tax cuts for young workers were implemented in two Swedish reforms in 2007 and 2009. This paper analyses the effects of the reforms on worker outcomes and firm performance in the retail industry, an important employer of young workers. In general, the estimated effects on job accessions, separations, hours and wages, are small. For workers close to the minimum wage the estimates suggest larger, but still modest, effects on the probability of job accession. There is also some evidence on increasing profits in a subsample of firms that employed relatively many young workers before the first reform, with estimated effects commensurate with small behavioural effects of the payroll tax cuts. The conclusion is that reducing payroll taxes is a costly means of improving employment prospects for the young.
    Keywords: Tax subsidy; Labour costs; Minimum wages; Retail industry
    JEL: H21 H25 H32 J38
    Date: 2014–06–27
  5. By: Wodon, Quentin
    Abstract: This paper proposes a simple multiplicative decomposition that can help in comparing the levels of mortgage interest tax deductions observed in different states or areas, and some of the reasons leading to different levels of deductions. The key parameters in the decomposition are a state’s population, its number of tax filers, the share of filers claiming a specific deduction, the average taxes paid by filers, and the average deduction among claimants. The idea is that such simple decompositions can be useful for states and local authorities to better understand some of the reasons why they may have comparatively high or low deductions in their state, and whether the levels of deductions observed are as one might have expected given their overall tax receipts.
    Keywords: Tax deductions, Mortgage interest, District of Columbia
    JEL: H24
    Date: 2014–04
  6. By: Paul Johnson (Institute for Fiscal Studies)
    Abstract: This paper considers the development of tax policy in the UK over the last decade or so and assesses policy change against a low bar- consistency and coherence. While this government has followed some consistent policies- notably, in some aspects of corporation tax and in increasing the income tax personal allowance- there are few signs of a wider coherent strategy. The same has been true of other recent governments. Many aspects of the system have become more complex. There have been numerous policy reversals. And few of those aspects of the system in most need of reform have been tackled. The need for reform, and a clear strategy for reform, remain as pressing as ever.
    Date: 2014–05
  7. By: Wodon, Quentin; Alleyne, Betty; Cong, Lin; Mulusa, Judy; Niami, Farhad
    Abstract: Charitable tax deductions are one of the largest tax expenditures at the state and federal levels, and they are also crucial for the sustainability of the charitable nonprofit sector. Understanding some of the factors that drive changes in charitable tax deductions over time is needed to inform policy. This paper uses a simple multiplicative decomposition to analyze trends in charitable tax deductions with an application to data from the District of Columbia over the period 2001-2011, thus including the recent recession. The decomposition shows how changes in the District’s population, the share of the population that files tax returns, the share of filers that claim the deduction, the average adjusted gross income of filers, and the average deduction claimed by claimants all contributed to the overall changes in the level of the deductions. The decomposition is applied for the District’s population as a whole as well as by income group.
    Keywords: Charitable Giving, Tax Deduction, District of Columbia
    JEL: H24
    Date: 2014–04

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