nep-pub New Economics Papers
on Public Finance
Issue of 2014‒10‒03
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Personal Income Tax Reforms: a Genetic Algorithm Approach By Matteo Morini; Simone Pellegrino
  2. The distributional effects of personal income tax expenditure By Avram, Silvia
  3. Taxing the Job Creators: Effcient Progressive Taxation with Wage Bargaining By Nicholas Lawson
  4. Estate Taxation and Human Capital with Information Externalities By Aaron Hedlund
  5. Tax Competition and Tax Coordination in the European Union: A Survey By Keuschnigg, Christian; Loretz, Simon; Winner, Hannes
  6. Europe's Fatal Affair with VAT By Mason Gaffney
  7. The effect of tax-benefit changes on the income distribution in EU countries since the beginning of the economic crisis By De Agostini, Paola; Paulus, Alari; Sutherland, Holly; Tasseva, Iva Valentinova
  8. The taxation of farm income in Italy. Evidences from the EU-SILC database By Severini, Simone; Tantari, Antonella; Rocchi, Benedetto
  9. Inequality and Poverty in Uruguay by Race: the Impact of Fiscal Policies By Florencia Amábile; Marisa Bucheli; Máximo Rossi

  1. By: Matteo Morini (ENS Lyon, RHÔNE ALPES COMPLEX SYSTEMS INSTITUTE (IXXI), Lyon, France; Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy); Simone Pellegrino (Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy)
    Abstract: Given a settled reduction in the present level of tax revenue, and by exploring a very large combinatorial space of tax structures, in this paper we employ a genetic algorithm in order to determine the optimal structure of a personal income tax that allows the maximization of the redistributive effect of the tax, while preventing all taxpayers being worse off than with the present tax structure. We take Italy as a case study.
    Keywords: Personal income taxation, Genetic algorithms, Micro-simulation models, Reynolds-Smolensky index, Tax reforms
    JEL: C63 C81 H23 H24
    Date: 2014–09
  2. By: Avram, Silvia
    Abstract: Less visible than benefit expenditure, spending channelled through the tax system via tax concessions and advantages can amount to substantial amounts of foregone revenue. In this paper we use EUROMOD, a tax-benefit micro-simulation model covering all EU member states, to investigate the size and distributional effects of tax allowances and tax credits in 6 European countries. We also investigate in detail which types of policy instruments have the most potential to redistribute towards the bottom and which are likely to be mostly benefitting households at the top of the income distribution. We examine both categorical targeting (i.e. eligibility rules that depend on some individual or household general characteristics) and explicit income targeting .We find that with a few exceptions the impact of tax allowances and tax credits on inequality is small. Tax credits are generally more progressive than tax allowances. However, with the exception of refundable tax credits, the design of the allowances/credits appears to be less important than the characteristics of the population they are targeting and/or other features of the income tax system in determining the redistributive effect. Consequently, tax concessions appear ill-suited to target resources towards households in the bottom part of the income distribution.
    Date: 2014–07–04
  3. By: Nicholas Lawson (AMSE - Aix-Marseille School of Economics - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM))
    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
  4. By: Aaron Hedlund (Department of Economics, University of Missouri-Columbia)
    Abstract: This paper investigates the effects of estate taxation when firms cannot directly observe worker skill levels. Imperfect labor market signaling gives rise to an information externality that causes workers to free-ride off of others' human capital acquisition. Inherited wealth exacerbates the information externality because risk-averse workers with larger inheritances exert less effort to acquire skills. By reducing these inheritances, an estate tax induces greater skill acquisition effort, resulting in a higher number of skilled workers, and in many cases, increased wages and output. In a parametrized model, I establish that the optimal estate tax rate is significantly above zero.
    Keywords: information externalities, signaling, free-rider problem, labor markets, bequests, inheritance taxes
    JEL: D62 D82 E21 E24 E60 H21
    Date: 2014–08–08
  5. By: Keuschnigg, Christian; Loretz, Simon; Winner, Hannes
    Abstract: This survey summarizes the state and development of European tax policy, in particular discussing the harmonization progress in direct as well as indirect taxes. Based on an over-view over the theoretical and empirical literature on tax competition, we further ask whether increased tax coordination is necessary to prevent a race to the bottom. We show that theoretical predictions on the outcome of tax competition are ambiguous, and the empirical evidence in this regard is inconclusive as well. This, in turn, gives rise to an only limited scope of stronger tax harmonization.
    Keywords: Tax Competition, tax coordination, European economic integration
    JEL: H87 H77
    Date: 2014–08
  6. By: Mason Gaffney (Department of Economics, University of California Riverside)
    Abstract: World lenders have dismissed warnings from credit rating firms and kept buying and holding U.S. Treasuries for security. The likely reason is that our tax system is stronger than Europe's. The major difference is that Europe has come to rely heavily on VATs, while the U.S. stands alone in not having any. VAT's broad tax base is not succeeding in maintaining revenues, even as tax rates climb. J.S. Mill faulted general sales taxes like VAT for taxing capital itself, not just its income, for turning over; Frank Ramsey and A.C. Pigou for ignoring different elasticities of supply and demand. Gaffney refutes the idea that such taxes foster capital formation. VAT arose in 1954 France, and metastasized quickly worldwide. It reversed two centuries of progress in tax systems and turned Europe back towards the practices of l'ancien régime before 1800. The next step is on how the U.S.A. came to adopt and develop tax systems more congenial to commerce and industry and high wages than did Europe. Credit is due to Turgot, and allied French économistes who bent the minds of our Founding Fathers. Credit is later due to leaders of The Progressive Movement who framed our early income-tax laws. Step 3 explains how Germany's Currency Reform under Erhard quickly raised Germany back from the dead, and it how it demonstrated a fundamental principle of how taxes affect incentives positively, the wealth effect. Then, the original French VAT grew as the unseen protegé of European unity, while the U.S.A. fostered VAT everywhere around the world except at home. Step 4 illustrates how Europe stagnated as VAT grew, and how banks and public exchequers grew mutually dependent, together building a house of cards based on future tax revenues – revenues that VAT cannot provide, even as it chokes off productive commerce and industry and employment. Step 5 explains the theory of the excess burdens of VAT taxation, and faults economists, both conventional and Austrian, for failing to expound and highlight these, and relate them to Europe's unstanchable flood of troubles. Step 6 traces the role of a host of economic scholars and statesmen in rationalizing, endorsing and promoting VAT, from Thomas Hobbes to the Republican Platform of 2012. Step 7 discusses the role of the cartel of international agencies and banks in promoting "harmony", in taxing, lending and collecting. It gives evidence that Europe has NOT reached the limit of its taxable capacity; rather, it needs a better tax system and philosophy, with higher rates on narrower and less elastic bases.
    Date: 2013–01
  7. By: De Agostini, Paola; Paulus, Alari; Sutherland, Holly; Tasseva, Iva Valentinova
    Abstract: We compare the distributional effects of policy changes introduced in the period 2008-2013 in twelve EU countries using the EU microsimulation model EUROMOD. The countries, Germany, Estonia, Ireland, Greece, Spain, France, Italy, Latvia, Lithuania, Portugal, Romania and the UK, chose different policy mixes to achieve varying degrees of fiscal consolidation or expansion. We find that comparisons of the size and distributional effects of policy changes over time are sensitive to the counterfactual assumption that is adopted in adjusting 2008 policies for changes in prices and incomes over the period. Nevertheless, it is clear that the direct tax, public pension and cash benefit changes had broadly progressive effects across the pre-policy change income distributions, except in Germany, Estonia and Lithuania. Including increases in VAT alters the comparative picture by making the policy packages appear more regressive, to varying extents. The paper also explores the implications of the policy changes for measures of risk of poverty and examines the incidence of the changes by age.
    Date: 2014–05–02
  8. By: Severini, Simone; Tantari, Antonella; Rocchi, Benedetto
    Abstract: In this paper the level of taxation of Italian farm households is studied by analyzing the data of agricultural households in the Italian EU-SILC database. The proposed approach allows to use the EU- SILC database to fill missing information on FADN database through a methodology of statistical matching. The work provides some indications on the level of tax burden and on some factors affecting it as well as on the degree of progressivity of the taxation of agricultural incomes. The results suggest that the level of tax burden is not very much affected by the amount of income actually produced. Indeed, the taxation of agricultural incomes seems paradoxically to have a regressive effect favouring farm families in which farming accounts for the large part of family income.
    Keywords: income taxation, statistical matching, farm household income, Agribusiness, Consumer/Household Economics, H24, Q12,
    Date: 2014
  9. By: Florencia Amábile (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República); Marisa Bucheli (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República); Máximo Rossi (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República)
    Abstract: In Uruguay the tax structure and social spending reduce inequality and poverty for the whole society (Bucheli et al. 2013). In this study we analyze the effect of fiscal policy by race considering whites, afros and indigenous. The main question of our paper is whether the reduction of inequality and poverty benefit a racial group over the others or affectracial ethnic groups equally. The three racial groups are equally likely to be taken off extreme poverty by the direct transfer system. However, the hazard of leaving moderate poverty is lower for indigenous than for the other two groups. So the direct transfer system reduces poverty of the three groups but does not achieve to put racial groups on an equal footing. When analyzing the average income, the qualitative conclusions are on the same direction. Racial gap narrows slightly –led by in-kind transfers- and does not disappear.
    Keywords: inequality, poverty, race, fiscal policy, direct transfers.
    JEL: I38 I32 D63 H22 H24
    Date: 2014–02

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