nep-pub New Economics Papers
on Public Finance
Issue of 2014‒08‒28
thirteen papers chosen by

  1. Optimal progressive taxation in a model with endogenous skill supply By Konstantinos Angelopoulos; Stylianos Asimakopoulos; James Malley
  2. Capital Taxes, Labor Taxes and the Household By Rigas Oikonomou; Christian Siegel
  3. Financial crises, debt volatility and optimal taxes By Julian A. Parra-Polania; Carmiña O. Vargas
  4. Capital Taxation under Political Constraints By Alexander Wolitzky; Florian Scheuer
  5. The Redistributional Consequences of Tax Reform Under Financial Integration By Ayse Kabukcuoglu
  6. Can tax simplification help lower tax corruption ? By Awasthi, Rajul; Bayraktar, Nihal
  7. Do dividend taxes affect corporate investment? By Alstadsæter, Annette; Jacob, Martin
  8. Are female CFOs less tax aggressive? Evidence from tax aggressiveness By Francis, Bill B.; Hasan, Iftekhar; Wu, Qiang; Yan, Meng
  9. Do tax cuts increase consumption? An experimental test of Ricardian Equivalence By Meissner, Thomas; Rostam-Afschar, Davud
  10. Bracket Creep Revisited: Progressivity and a Solution by Adjusting the Rich Tax in Germany By Flores Unzaga, Ismael Martin; Zhu, Junyi
  11. Inheritance Taxation in Sweden, 1885–2004: The Role of Ideology, Family Firms and Tax Avoidance By Henrekson, Magnus; Waldenström, Daniel
  12. The Swedish Experience of Fiscal Reform: Lessons for Portugal By Jonung, Lars
  13. A Microsimulation of the Impact of Tax Reforms on Child Poverty: the Case of Italy By Roxana Sandu

  1. By: Konstantinos Angelopoulos; Stylianos Asimakopoulos; James Malley
    Abstract: This paper examines whether efficiency considerations require that optimal labour income taxation is progressive or regressive in a model with skill heterogeneity, endogenous skill acquisition and a production sector with capital-skill complementarity. We find that wage inequality driven by the resource requirements of skill-creation implies progressive labour income taxation in the steady-state as well as along the transition path from the exogenous to optimal policy steady-state. We find that these results are explained by a lower labour supply elasticity for skilled versus unskilled labour which results from the introduction of the skill acquisition technology.
    Keywords: optimal progressive taxation, skill premium, allocative efficiency
    JEL: E24 E32 E62
    Date: 2014–07
  2. By: Rigas Oikonomou (HEC Montreal and Institut d'Analisi Economica); Christian Siegel (Department of Economics, University of Exeter)
    Abstract: We study the impact of capital and labor taxation in an economy where couples bargain over the intrahousehold allocation. We present a life cycle model with heterogeneous individuals and incomplete nancial markets. Drawing from the literature of the collective framework of household behavior, we model decision making within the couple as a contract under limited commitment. In this framework more wealth improves commitment and gives rise to insurance gains within the household. Our theory motivates these gains by the empirical observation that wealth, in contrast to labor income, is a commonly held resource within households. Based on this observation we study whether eliminating capital taxes from the economy, and raising labor taxes to balance the government's budget, may generate welfare gains to married households. We illustrate that the quantitative eects from this reform are rather small. We attribute the small effects to the life cycle pattern of wealth accumulation and to the impact of labor income taxes on household risk sharing: In particular, we show that higher labor taxes may deteriorate the limited commitment problem, even though they may make the distribution of labor income more equitable within the household.
    Keywords: Life cycle models, incomplete financial markets, tax reform, intrahousehold allocations.
    JEL: D13 D52 E21 E62 H31
    Date: 2014
  3. By: Julian A. Parra-Polania; Carmiña O. Vargas
    Abstract: We study ?financial crises in a model of a small open production economy subject to a credit constraint and to uncertainty on the real value of debt repayments. We find that, unlike most of the previous literature, the decentralized equilibrium exhibits underborrowing. The future possibility of reducing the severity of crises gives the incentives to the central planner (CP) to increase both current debt and the crisis probability. We also ?find that the CP equilibrium can be implemented by means of a tax on debt (a macro-prudential policy) and, only during crises, subsidies on consumption and a tax on non-tradable labor. The welfare gain of moving to the CP equilibrium is small for the baseline scenario but very sensitive to changes in debt volatility and the degree of openness of the economy.
    Keywords: Financial crisis, capital controls, debt shocks, optimal tax.
    JEL: F34 F41 H21
    Date: 2014–08–13
  4. By: Alexander Wolitzky (Stanford University); Florian Scheuer (Stanford University)
    Abstract: This paper studies optimal dynamic tax policy under the threat of political reform. A policy will be reformed ex post if a large enough political coalition supports reform; thus, credible policies are those that will continue to attract enough political support in the future. If the reform threat is to fully equalize consumption, we find that optimal marginal capital taxes are U-shaped, so that savings are subsidized for the middle class but are taxed for the poor and rich. If ex post the government may strategically propose a reform other than full equalization in order to secure additional political support, then optimal capital taxes are instead progressive throughout.
    Date: 2014
  5. By: Ayse Kabukcuoglu (Department of Economics, Koc University)
    Abstract: I quantify the welfare effects of replacing the US capital income tax with higher labor income taxes under international financial integration using a two-country, heterogeneous-agent incomplete markets model calibrated to represent the US and the rest of the world. Short-run and long-run factor price dynamics are key: after the tax reform, interest rates rise less under financial openness than in autarky. Therefore, wealthy households gain less. Post-tax wages also fall less as a result of the faster capital accumulation, so the poor are hurt less. Hence, the distributional impacts of the reform are significantly dampened relative to autarky although a majority of households prefer the status quo. Aggregate welfare effect to the US is a permanent 0.2% consumption equivalent loss under financial openness which is roughly 15% of the welfare loss under autarky.
    Keywords: Heterogeneous agents and incomplete markets, taxation, financial integration.
    JEL: E62 F41 D52
    Date: 2014–08
  6. By: Awasthi, Rajul; Bayraktar, Nihal
    Abstract: This paper seeks to find empirical evidence of a link between tax simplification and corruption in tax administration. It attempts to do this by first defining"tax simplicity"as a measurable variable and exploring empirical relationships between simpler tax regimes and corruption in tax administration. Corruption in tax administration is calculated with data series from the World Bank's Enterprise Survey Database. The focus is on business taxes. The study includes 104 countries from different income groups and regions of the world. The time period is 2002-12. The empirical findings support the existence of a significant link between the measure of tax corruption and tax simplicity, so a less complex tax system is shown to be associated with lower corruption in tax administration. It is predicted that the combined effect of a 10 percent reduction in both the number of payments and the time to comply with tax requirements can lower tax corruption by 9.64 percent. Some interesting regional differences are observed in the results. Similarly, the income level of countries plays an important role in determining the impact of tax simplification on tax corruption; specifically, the link is stronger for lower-income level countries. The positive link between tax simplicity and lower tax corruption has useful policy implications.
    Keywords: Taxation&Subsidies,Emerging Markets,Debt Markets,Tax Law,Fiscal Adjustment
    Date: 2014–07–01
  7. By: Alstadsæter, Annette; Jacob, Martin
    Abstract: We test whether dividend taxes affect corporate investments. We exploit Sweden's 2006 dividend tax cut of 10 percentage points for closely held corporations and five percentage points for widely held corporations. Using rich administrative panel data and triple-difference estimators, we find that this dividend tax cut affects allocation of corporate investment. Cashconstrained firms increase investment after the dividend tax cut relative to cash-rich firms. Reallocation is stronger among closely held firms that experience a larger tax cut. This result is explained by higher nominal equity in cash-constrained firms and by higher dividends in cash-rich firms after the tax cut. The heterogeneous investment responses imply that the dividend tax cut raises efficiency by improving allocation of investment. --
    Keywords: Investment,Dividend Taxation,Private Firms
    JEL: G30 G31 H25
    Date: 2014
  8. By: Francis, Bill B. (Lally School of Management, Rensselaer Polytechnic Institute); Hasan, Iftekhar (Fordham University and Bank of Finland); Wu, Qiang (Lally School of Management, Rensselaer Polytechnic Institute); Yan, Meng (Fordham University)
    Abstract: This paper investigates the effect of CFO gender on corporate tax aggressiveness. Focusing on firms that experience a male-to-female CFO transition, the paper compares those firms’ degree of tax aggressiveness during the pre- and post-transition periods. Using the probability of tax sheltering, the predicted unrecognized tax benefits, and the discretionary permanent book-tax differences to measure tax aggressiveness, we find that female CFOs are associated with less tax aggressiveness as compared to their male counterparts. The main findings are supported by additional tests based on propensity score matching, difference-in-difference tests, and tests with a female-to-male CFO transition sample. Overall, our study establishes CFO gender as an important determinant of tax aggressiveness.
    Keywords: tax aggressiveness; tax avoidance; gender; CFO; risk-aversion
    JEL: H26 J16 M41
    Date: 2014–07–09
  9. By: Meissner, Thomas; Rostam-Afschar, Davud
    Abstract: This paper tests whether the Ricardian Equivalence proposition holds in a life cycle consumption laboratory experiment. This proposition is a fundamental assumption underlying numerous studies on intertemporal choice and has important implications for tax policy. Using nonparametric and panel data methods, we find that the Ricardian Equivalence proposition does not hold in general. Our results suggest that taxation has a significant and strong impact on consumption choice. Over the life cycle, a tax relief increases consumption on average by about 22% of the tax rebate. A tax increase causes consumption to decrease by about 30% of the tax increase. These results are robust with respect to variations in the difficulty to smooth consumption. In our experiment, we find the behavior of about 62% of our subjects to be inconsistent with the Ricardian proposition. Our results show dynamic effects; taxation inuences consumption beyond the current period. --
    Keywords: Ricardian Equivalence,Taxation,Life Cycle,Consumption,Laboratory Experiment
    JEL: D91 E21 H24 C91
    Date: 2014
  10. By: Flores Unzaga, Ismael Martin; Zhu, Junyi
    Abstract: This paper studies the redistributive and revenue effects of bracket creep in Germany under various inflation scenarios and evaluates the feasibility to charge a rich tax to fight bracket creep for the income distribution in 2009. Using a tax micro-simulation model developed for the newly available PHF data, we document an inverted U-shaped overall redistribution effect of the tax system with respect to the inflation rate, which contrasts Immervoll (2005) who finds that the fiscal drag always enhances the equalizing property. Delaying indexation might not be better off in terms of inequality. A politically in-between approach is proposed to raise the marginal tax rate for the top bracket to compensate the government revenue loss due to indexing the tax schedule in Germany. The rich tax required for fully financing the indexation can be sizable. Under our simulation environment, this rate can reach above 75% with four years’ inaction on 4% annual inflation. When this rich tax can be fiscally possible, it can totally offset the decrease of global redistribution effect from indexation. Our results echo the inequality indexing proposed by Burman, Shiller, Leiserson, Rohaly and Kennedy (2007) by suggesting institutionalizing a joint adjustment of rich tax and bracket creep / inflation indexing which justifies a pro-growth, risk reducing, revenue-neutral and framing effective policy. --
    Keywords: Inflation,Fiscal Drag,Rich Tax,Progressivity of Income Tax,Income Distribution,Micro-simulation,Inequality Indexation
    JEL: C81 H24 D31 H23
    Date: 2014–07
  11. By: Henrekson, Magnus (Research Institute of Industrial Economics (IFN)); Waldenström, Daniel (Uppsala University)
    Abstract: This paper studies the evolution of the modern Swedish inheritance taxation from its introduction in 1885 to its abolishment in 2004. Our contribution is twofold. First, we compute annual effective inheritance tax rates for differently sized bequests and different types of inherited assets (non-firm wealth and family firm equity), accounting for all relevant exemptions, deductions and valuation discounts. Second, we try to account for the changes in inheritance taxation. Ideology rather than mass mobilization or revenue maximization appears to drive the sharp tax increases of the 1930s through the 1960s. We document increased opportunities for tax planning for the wealthy, in particular a series of drastic tax cuts on inherited family firms from the 1970s onwards. This rise of avoidance opportunities for the rich while more and more middle-class heirs paid notable inheritance taxes contributed to a loss of legitimacy for the tax and its ultimate repeal in 2004.
    Keywords: Gift tax; Inheritance tax; Estate tax; Tax avoidance; Excess burden; Entrepreneurship; Ownership transfers of family firms
    JEL: D31 H20 K34
    Date: 2014–07–06
  12. By: Jonung, Lars (Department of Economics, Lund University)
    Abstract: This paper derives a set of policy lessons for Portugal from the new fiscal framework including a fiscal policy council that gradually emerged in Sweden after the deep economic crisis of the early 1990s. By now, Swedish public finances stand out among the strongest in Europe. Recent Swedish macroeconomic performance has been impressive. As Sweden and Portugal are small open economies in the periphery of Europe, Sweden may serve as a fiscal model for Portugal. Policy lessons are distilled from the Swedish experience for Portugal, stressing the importance of the economic policy culture for macroeconomic outcomes and for trust in government institutions and policies.
    Keywords: Fiscal rules; fiscal policy council; fiscal policy; public debt; Sweden; Portugal.
    JEL: E52 E62 E63 E65 F44 H62 O52
    Date: 2014–08–07
  13. By: Roxana Sandu (European Economic Studies Department, College of Europe)
    Abstract: Microsimulation models have been used in order to find efficient counteractive instruments to poverty. The objective of this paper is to analyse the impact of fiscal policy on poverty, insisting on child poverty rates. Empirical analysis suggests that in fighting poverty, a mix of policies need to be in place, fiscal reforms increasing tax allowances such as child benefit granted to parents with dependent children, are not sufficient to reduce child poverty.
    Keywords: happiness, microsimulation, poverty, fiscal policy
    JEL: H24 I32
    Date: 2014–02

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