nep-pub New Economics Papers
on Public Finance
Issue of 2014‒09‒25
eleven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Pareto-improving Consumption Tax When the Return from Capital is idyosyncratic and (Optimal or non-Optimal) Capital Income Tax is available By Hisahiro Naito
  2. Can Removing the Tax Cap Save Social Security? By Shantanu Bagchi
  3. Cigarette Taxation and Pregnancy: Policy Based Estimates of the Price Elasticity of Smoking During Pregnancy By David Simon
  4. Taxes in Cities By Marius Brülhart; Sam Bucovetsky; Kurt Schmidheiny
  5. Taxing the Job Creators: Efficient Progressive Taxation with Wage Bargaining By Nicholas Lawson
  6. The Effects of Repatriation Taxes on FDI:Evidence from OECD Multinationals By Hirokazu Mizobata; Masaaki Suzuki
  7. Income redistribution in the European Union By Avram, Silvia; Levy, Horacio; Sutherland, Holly
  8. The redistributive effect and progressivity of taxes revisited: an international comparison across the European Union By Verbist, Gerlinde; Figari, Francesco
  9. A General Microsimulation Model for the EU VAT with a specific Application to Germany By Lars-H. R. Siemers
  10. Progressivity-Improving VAT Reforms in Italy By Francesca Gastaldi; Paolo Liberati; Elena Pisano; Simone Tedeschi
  11. Why tax effort falls short of capacity in Indian states: A Stochastic frontier approach By Garg, Sandya; Ashima Goyal; Rupayan Pal

  1. By: Hisahiro Naito
    Abstract: In the standard multi-period model, the consumption tax and the wage tax are equivalent. When a capital market is incomplete, such that the rate of return from capital is idiosyncratic, the consumption tax, in contrast to the wage tax, can play a role in risk-sharing. However, risk-sharing may disappear if the government applies a linear or non-linear capital income tax, because the source of risk is the return from capital. The present study shows that a consumption tax, when instituted in the presence of a wage tax, increases welfare when the capital market is incomplete, even if the government applies a non-linear capital income tax for risk-sharing and subsidizes investments.
    Date: 2014–08
  2. By: Shantanu Bagchi (Department of Economics, Towson University)
    Abstract: The maximum amount of earnings in a calendar year that can be taxed by Social Security in the U.S. is currently capped at $106,800. In this paper, I use a general-equilibrium overlapping-generations model to examine if removing this cap can solve Social Security's budgetary problems. I find that in general, removal of the cap increases Social Security revenues, but by only a small percentage, and most of these extra revenues go towards paying benefits to high-income retirees no longer subject to the cap. Even when the cap is removed only from taxes but retained on the amount of earnings creditable towards Social Security benefits, the fiscal advantages are quite small.
    Keywords: Social Security, Tax cap, Mortality risk, Productivity shock, Partial insurance, general equilibrium.
    JEL: E21 E62 H55
    Date: 2014–09
  3. By: David Simon (University of Connecticut)
    Abstract: Cigarette taxation has long been a policy tool used to incentivize healthier behavior. Pregnant women are a group of particular interest in this context due to their unique position to pass health capital down to the next generation. This paper reviews the literature on the tax and price responsiveness of pregnant women to smoking during pregnancy. I first discuss the use of cigarette taxes as a natural experiment and the econometric specifications typically used in the literature. I continue to review overall trends in the tax responsiveness of smoking during pregnancy as well as results by subgroups. Next, I discuss evidence on how facing a tax during pregnancy might uniquely effect women’s decision to smoke. I conclude with a discussion of how taxes have been extended into second-stage effects on birth outcomes and future avenues of research. I generally find evidence of pregnant women responding to tax increases, although the elasticities have decreased in magnitude in more recent years. This is consistent with the story suggesting that the least addicted smokers quit in the 1990s, leaving less elastic smokers in the 2000s. Furthermore, women seem to be more responsive to taxes during pregnancy than before pregnancy. Overall, cigarette taxes can be used to evaluate health outcomes, which is a fertile area for future research.
    Keywords: Smoking, pregnancy, health, cigarettes, tax policy, price elasticity
    JEL: H2 H3 I1 J1
    Date: 2014–07
  4. By: Marius Brülhart; Sam Bucovetsky; Kurt Schmidheiny
    Abstract: Most cities enjoy some autonomy over how they tax their residents, and that autonomy is typically exercised by multiple municipal governments within a given city. In this chapter, we document patterns of city-level taxation across countries, and we review the literature on a number of salient features affecting local tax setting in an urban context. Urban local governments on average raise some ten percent of total tax revenue in OECD countries and around half that share in non-OECD countries. We show that most cities are highly fragmented: urban areas with more than 500,000 inhabitants are divided into 74 local jurisdictions on average. The vast majority of these cities are characterized by a central municipality that strongly dominates the remaining jurisdictions in terms of population. These empirical regularities imply that an analysis of urban taxation needs to take account of three particular features: interdependence among tax-setting authorities (horizontally and vertically), jurisdictional size asymmetries, and the potential for agglomeration economies. We survey the relevant theoretical and empirical literatures, focusing in particular on models of asymmetric tax competition, of taxation and income sorting and of taxation in the presence of agglomeration rents.
    Keywords: cities; taxes; tax competition; fiscal federalism; agglomeration; sorting
    JEL: H71 H73 R28 R51
    Date: 2014–08
  5. By: Nicholas Lawson (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS)
    Abstract: The standard economic view of the personal income tax is that it is a distortionary way of raising revenue which nonetheless has value because it tends to increase equality. However, when wages deviate from marginal product, the laissez-faire equilibrium is inefficient, and there can be an independent efficiency rationale for income taxation. I study a setting of wage bargaining within hierarchical teams of workers and managers, and show that the efficiency case for taxing managers depends on a "job-creation" effect: if increased labour supply allows managers to supervise larger teams and thus collect larger rents, they will have an incentive to work too hard to create jobs at their firm. In other words, it is because of their job-creation activity that the "job creators" should be heavily taxed. Simulation of a calibrated model suggests an efficient tax schedule that is progressive over most of the income distribution with a top marginal rate of between 50% and 60%, and this result is not sensitive to the magnitude of the labour supply response to taxation. For a planner with redistributive motives, optimal marginal tax rates are also considerably higher at the top of the distribution in the presence of wage bargaining rather than a competitive labour market.
    Keywords: optimal income taxation, progressive taxation, wage bargaining, team production
    Date: 2014–08
  6. By: Hirokazu Mizobata (Kyoto University); Masaaki Suzuki (Mizuho Research Institute)
    Abstract: This study empirically investigates whether the tax differentials between home and host countries differently affect multinationals' foreign investment and profit shifting decisions under contrasting international tax systems. In particular,we compare these differential tax effects between credit and exemption systems, using firm-level data on selected OECD countries. Based on the presented analysis, we find that tax differentials affect multinationals' foreign investment decisions to a larger degree under the exemption system than under the credit system when a home country's tax rate is larger than that in the host country.By contrast, our results show that the tax effects on profit shifting are similar under both these systems.
    Keywords: Corporate taxation, International tax system, Multinational firms
    JEL: H25 H87
    Date: 2014–09
  7. By: Avram, Silvia; Levy, Horacio; Sutherland, Holly
    Abstract: The systems of direct taxes and cash benefits in the 27 Member States of the European Union (EU) vary considerably in size and structure. We explore their redistributive effects using EUROMOD, the tax-benefit microsimulation model for the EU. As well as describing redistributive effects in aggregate this allows us to assess and compare the effectiveness of individual types of policy in reducing income disparities. We consider the following categories of benefits and taxes: income taxes, tax allowances, tax credits, social contributions, cash benefits designed to target the poor or redistribute inter-personally (through means-testing) as well as cash benefits intended to redistribute intra-personally across the lifecycle (through social insurance or contingency-based entitlement). We derive results for the 27 members of the European Union using policies in effect in 2010 and present them for each country separately as well as for the EU as a whole.
    Date: 2014–04–30
  8. By: Verbist, Gerlinde; Figari, Francesco
    Abstract: Over the last few years concern for income inequality in European countries has increased remarkably. In this context, taxation is an important redistributive instrument and we investigate the redistributive role of direct taxes. We focus on the EU-15 countries and the evolution over the period 1998-2008, using EUROMOD, the EU-wide tax-benefit model. The research aim of this paper is twofold. First, we investigate empirically whether there is a link between pre-tax income inequality and redistribution through taxes. Second we hereby test whether there is a relationship between progressivity and the average tax level, the two building stones of the redistributive impact of taxes.
    Date: 2014–04–09
  9. By: Lars-H. R. Siemers
    Abstract: The sales taxes in the EU - and in several other countries - are practiced as value- added tax of the consumption type with invoice method. Literature on microsimulation models (MSM) for this type of VAT is rare, though the importance of VAT has continuously increased. We discuss the issues of VAT-MSM in detail and develop a basic general VAT-MSM, applicable to the EU member states (and beyond). To illustrate the functioning of the general model, we apply it in detail to the specific case of Germany. We provide comprehensive estimation results for the distributional and fiscal effects of the German VAT. Finally, we simulate the effects of a small VAT reform in 2010, comparing static and behavioral response simulations.
    Keywords: VAT microsimulation, VAT exemption, RWI-VAT-SIM, EU
    JEL: H22 H23 H24 C6 D12 D31 D63
    Date: 2014
  10. By: Francesca Gastaldi (Università di Roma, La Sapienza, Italy); Paolo Liberati (Università di Roma Tre, Italy); Elena Pisano (Banca d'Italia, Italy); Simone Tedeschi (Università di Roma, La Sapienza, Italy)
    Abstract: International institutions are recommending policies aimed at shift- ing the tax burden from labour and business incomes to less growth- detrimental forms of taxation, such as consumption taxes. However, de- spite the expected positive macroeconomic effects, a criticism about in- creasing the role of Vat arises from its alleged regressivity over income. Yet, the empirical evidence on this issue is very narrow due to the unavail- ability of joint and detailed data on income and consumption. This paper fills this gap by measuring the distributional impact of Vat in Italy using information on both households' expenditures and incomes integrated in a micro simulation model (EGaLiTe). The paper shows that the regressive profile of Vat in terms of disposable income is almost entirely driven by the very bottom and the top quantiles, which however, at least in part, can be affected by temporary unalignments of income and consumption. Fur- thermore, the current Vat structure in Italy is not optimally targeted to distributional aims, and a different allocation of goods among the existing three rates could mitigate the regressive impact of the tax. In addition, unlike the common opinion that reducing the number of Vat rates would compromise distributional outcomes, it is shown that a two-rate Vat could generate a better distributional impact compared to the current arrange- ment. Finally, the paper proposes a methodology to take into account behavioural responses to price changes in order to assess possible day- after repercussions on the aggregate demand for consumption related to alternative simulated reforms.
    Keywords: Vat, Redistribution, Tax Incidence
    JEL: H22 H23 H25 C15 D12
    Date: 2014–09
  11. By: Garg, Sandya (Indira Gandhi Institute of Development Research); Ashima Goyal (Indira Gandhi Institute of Development ResearchInstitute of Economic Growth); Rupayan Pal (Indira Gandhi Institute of Development Research)
    Abstract: Taxation is an important tool to enhance the economic development and to finance the expenditure responsibilities of a government. This paper attempts to measure the tax capacity and tax effort of 14 major Indian states from 1992-92 to 2010-11 using Stochastic Frontier Analysis. The use of tax capacity frontier helps to identify those states which are operating near their tax capacity and states which are away from tax frontier. The results indicate presence of large variation in tax effort index across states and which seems to be increasing over time. Econometric analysis suggests that economic and structural variables have significant impact on the tax capacity. While per-capita gross state domestic product has positive effect on states' own tax revenue, relative size of agriculture sector of a state has adverse effect on its own tax revenue. The evidence on tax efficiency suggests that the higher inter-governmental transfers tend to reduce tax efficiency. Outstanding liabilities and expenditure on debt repayment also indicate adverse effect on tax efficiency, but the adverse effect of the latter is lesser than the former. Enactment of Fiscal Responsibility and Budget Management Act seems to have improved the tax efficiency which has been further strengthened by the better law and order inside states. Higher political competition inside a state, represented by effective number of parties, has favourable effect on the tax efficiency of a state. Implications are drawn for policy.
    Keywords: tax capacity, tax effort, stochastic frontier analysis, fiscal federalism
    JEL: H21 H29 H71 H77
    Date: 2014–08

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