nep-pub New Economics Papers
on Public Finance
Issue of 2014‒08‒16
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Taxing top earners: a human capital perspective By Badel, Alejandro; Huggett, Mark
  2. Heterogeneity and Government Revenues: Higher Taxes at the Top? By Guner, Nezih; Lopez-Daneri, Martin; Ventura, Gustavo
  3. Does the marginal tax rate affect activity in the informal sector? By Søren Leth-Petersen; Peer Ebbesen Skov
  4. Using a Natural Experiment to Examine Tobacco Tax Regressivity By Adel Bosch and Steven F. Koch
  5. Providing global public goods: Electoral delegation and cooperation By Kocher, Martin G.; Tan, Fangfang; Yu, Jing

  1. By: Badel, Alejandro (Federal Reserve Bank of St. Louis); Huggett, Mark (Georgetown University)
    Abstract: We assess the consequences of substantially increasing the marginal tax rate on U.S. top earners using a human capital model. The top of the model Laffer curve occurs at a 53 percent top tax rate. Tax revenues and the tax rate at the top of the Laffer curve are smaller compared to an otherwise similar model that ignores the possibility of skill change in response to a tax reform. We also show that if one applies the methods used by Diamond and Saez (2011) to provide quantitative guidance for setting the tax rate on top earners to model data then the resulting tax rate exceeds the tax rate at the top of the model Laffer curve.
    Keywords: Human Capital; Marginal Tax Rates; Inequality; Laffer Curve
    JEL: D91 E21 H2 J24
    Date: 2014–07–23
  2. By: Guner, Nezih (MOVE, Barcelona); Lopez-Daneri, Martin (University of Southern California); Ventura, Gustavo (Arizona State University)
    Abstract: We evaluate the effectiveness of a more progressive tax scheme in raising government revenues. We develop a life-cycle economy with heterogeneity and endogenous labor supply. Households face a progressive income tax schedule, mimicking the Federal Income tax, and flat-rate taxes that capture payroll, state and local taxes and the corporate income tax. We parameterize this model to reproduce aggregate and cross-sectional observations for the U.S. economy, including the shares of labor income for top earners. We find that a tilt of the Federal income tax schedule towards high earners leads to small increases in revenues which are maximized at an effective marginal tax rate of about 36.9% for the richest 5% of households – in contrast to a 21.7% marginal rate in the benchmark economy. Maximized revenue from Federal income taxes is only 8.4% higher than it is in the benchmark economy, while revenues from all sources increase only by about 1.6%. The room for higher revenues from more progressive taxes is even lower when average taxes are higher to start with. We conclude that these policy recommendations are misguided if the aim is to exclusively raise government revenue.
    Keywords: taxation, progressivity, labor supply
    JEL: E6 H2
    Date: 2014–07
  3. By: Søren Leth-Petersen (Department of Economics, University of Copenhagen); Peer Ebbesen Skov (Department of Economics, University of Copenhagen)
    Abstract: This paper measures the effect of changing the marginal tax rate on earned income on the supply of labor to the informal sector with the purpose of evading taxation. Unlike any previous study, we do this by directly measuring the effect of a Danish 2010 tax reform that changed the marginal rate of taxation of earned income from 63 percent to 56 percent. The analysis is based on longitudinal survey data collected over the period 2009–2012. In each survey round we asked people about their activity in the informal sector. The effect of the tax reform on informal sector activity is measured by comparing the evolution of informal sector activity from 2009 to 2012 for people who in 2009 paid the middle and top rate of tax with people who did not. We find that there is no connection between the marginal tax rate and the supply of labor to the informal sector. As part of the survey we asked people about their perceived marginal net-of-tax income, and we show that the survey participants did not change their perception of their marginal net-of-tax income from before to after the reform. This suggests that the respondents in our survey were not aware of the implications of the reform. We also investigate the effect of the introduction of a tax deduction for the purchase of selected services on the supply of labor to the informal sector. Here again we are unable to detect any effect. Overall, our results indicate the changing the after-tax price of services is not an effective way of reducing undeclared work.
    Date: 2014–05
  4. By: Adel Bosch and Steven F. Koch
    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.
    Keywords: Tobacco tax, Regressivity
    Date: 2014
  5. By: Kocher, Martin G.; Tan, Fangfang; Yu, Jing
    Abstract: This paper experimentally examines the effect of electoral delegation on providing global public goods shared by several groups. Each group elects a delegate who can freely decide on each group member’s contribution (including the contribution of herself) to the global public good. Our results show that people mostly vote for delegates who assign equal contributions for every group member. However, in contrast to standard theoretical predictions, unequal contributions across groups drive cooperation down over time, and it decreases efficiency by almost 50% compared to the benchmark. This pattern is not driven by delegates trying to exploit their fellow group members, as indicated by the theory – quite to the opposite, other-regarding preferences and a re-election incentives guarantee that delegates assign equal contributions for all group members. Since the source of the resulting inefficiency is the polycentric nature of global public goods provision together with other-regarding preferences, we use the term Pinefficiency to describe our finding.
    Keywords: Global Public Goods; Delegation; Cooperation; Experiment
    JEL: C92 D72 H41
    Date: 2014–07–24

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