nep-pub New Economics Papers
on Public Finance
Issue of 2014‒11‒07
thirteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal progressive taxation in a model with endogenous skill supply By Stylianos Asimakopoulos; James Malley; Konstantinos Angelopoulos
  2. Optimal income taxation without commitment: policy implications of durable goods By Shigeo Morita
  3. Optimal Tax Base with Administrative Fixed Costs By Stéphane Gauthier
  4. Taxing Top Earners: A Human Capital Perspective By Mark Huggett; Alejandro Badel
  5. High Marginal Tax Rates on the Top 1%? Lessons from a Life Cycle Model with Idiosyncratic Income Risk By Fabian Kindermann; Dirk Krueger
  6. Do Tax Cuts Increase Consumption? An Experimental Test of Ricardian Equivalence By Thomas Meissner; Davud Rostam-Afschar; ;
  7. Why the split of payroll taxation between firms and workers matters for macroeconomic stability By Simon Voigts; ; ;
  8. Dodging the Taxman: Firm Misreporting and Limits to Tax Enforcement By Paul Carrillo; Dina Pomeranz; Monica Singhal
  9. Are Hotel Property Taxes Fully Passed on to Hotel Guests? By James Mak
  10. Tax Policy under the “Generational Election System” By Doi, Takero
  11. Personal Income Tax Reforms and the Elasticity of Reported Income to Marginal Tax Rates: An Empirical Analysis Applied to Spain By Arrazola, María; de Hevia, José; Romero, Desiderio; Sanz-Sanz, José Félix
  12. Growth and Inequality in Public Good Games By Simon Gaechter; Friederike Mengel; Elias Tsakas; Alexander Vostroknutov
  13. The time consistent public goods provision By Shigeo Morita

  1. By: Stylianos Asimakopoulos; James Malley; Konstantinos Angelopoulos
    Abstract: This paper examines quantitatively the extent of progressivity or regressivity of optimal labour income taxation in a model with skill heterogeneity, endogenous skill acquisition and a production sector with capital-skill complementarity. We Â…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. In particular, in the steady state, skilled labour income is taxed about 40% more than unskilled labour income. We further Â…nd that these results are explained by a lower work time elasticity for skilled versus unskilled labour which results from the introduction of the skill acquisition technology.
    Keywords: optimal progressive taxation, skill premium, allocative efficiency
    Date: 2014
  2. By: Shigeo Morita (Graduate School of Economics, Osaka University)
    Abstract: This paper examines the design of a tax policy applied to the consumption of durable goods and labor income. We consider cases wherein the government cannot commit to a tax policy in the second period. If the type of taxpayers is unrevealed, it is optimal to tax the durable goods consumption of a high-income earner and subsidize that of a low-income earner. On the other hand, when the type of taxpayers is revealed, imposing a positive tax rate on a high-income earnerfs durable goods consumption is desirable. This implies that the government should design taxes on durable goods consumption to be progressive and supplement its optimal tax policies.
    Keywords: Commitment, Optimal Taxation, Time consistency
    JEL: D82 H21
    Date: 2014–10
  3. By: Stéphane Gauthier (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: This note characterizes the optimal base for commodity taxation in the presence of administrative fixed costs varying across goods. For low tax rates, the optimal base only comprises commodities whose discouragement index is greater than the ratio of their administrative costs to the tax they yield. An illustration with UK data shows that a category of goods should be taxed only if the revenue generated on this category is at least ten times greater than its administrative fixed cost. The cost imputable to the category of goods taxed at the standard rate would be at most 6 percent of total VAT revenue.Theadministrationcostassociatedwithcategoriesofgoodscurrently tax free could justify exemption.
    Keywords: indirect taxation; VAT; tax base; administrative costs
    Date: 2013
  4. By: Mark Huggett (Department of Economics, Georgetown University); Alejandro Badel (Research Division, Federal Reserve Bank of St. Louis)
    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
  5. By: Fabian Kindermann (Institute for Macroeconomics and Econometrics, University of Bonn); Dirk Krueger (Department of Economics, University of Pennsylvania)
    Abstract: n this paper we argue that very high marginal labor income tax rates are an effective tool for social insurance even when households have preferences with high labor supply elasticity, make dynamic savings decisions, and policies have general equilibrium effects. To make this point we construct a large scale Overlapping Generations Model with uninsurable labor productivity risk, show that it has a wealth distribution that matches the data well, and then use it to characterize fiscal policies that achieve a desired degree of redistribution in society. We find that marginal tax rates on the top 1% of the earnings distribution of close to 90% are optimal. We document that this result is robust to plausible variation in the labor supply elasticity and holds regardless of whether social welfare is measured at the steady state only or includes transitional generations.
    Keywords: Progressive Taxation, Top 1%, Social Insurance, Income Inequality
    JEL: E62 H21 H24
    Date: 2024–10–10
  6. By: Thomas Meissner; Davud Rostam-Afschar; ;
    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 nd that the Ricardian Equivalence proposition does not hold in general. Our results suggest that taxation has a signicant 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 diculty to smooth consumption. In our experiment, we nd the behavior of about 62% of our subjects to be inconsistent with the Ricardian proposition. Our results show dynamic eects; taxation in uences consumption beyond the current period.
    Keywords: Ricardian Equivalence, Taxation, Life Cycle, Consumption, Laboratory Experiment
    JEL: H55 H21 E30 E32 E60
    Date: 2014–10
  7. By: Simon Voigts; ; ;
    Abstract: Conventional wisdom states that the statutory split of payroll taxa- tion between rms and workers is of no macroeconomic relevance, because the tax incidence is fully determined by the market structure. This pa- per breaks with this view by establishing a theoretical link between the statutory split and the average volatility of prices and wages. It is shown that shifting taxation towards workers signicantly reduces the volatility in nominal variables without entailing long-run redistribution. The gain in stability of prices and wages reduces ineciencies in the equilibrium allocation of the stochastic model and thereby reduces welfare costs of business cycle uctuations. In a standard DSGE model, welfare costs un- der the full taxation of rms are 11.25% larger than under the full taxation of workers.
    Keywords: Payroll taxes, social security, business cycles, automatic stabilizers, optimal taxation
    JEL: H55 H21 E30 E32 E60
    Date: 2014–10
  8. By: Paul Carrillo (George Washington University); Dina Pomeranz (Harvard Business School, Entrepreneurial Management Unit); Monica Singhal (Harvard University)
    Abstract: Reducing tax evasion is a key priority for many governments, particularly in developing countries. A growing literature has argued that the ability to verify taxpayer self-reports against reports from third parties is critical for modern tax enforcement and the growth of state capacity. However, there may be limits to the effectiveness of third-party information if taxpayers can make offsetting adjustments on less verifiable margins. We present a simple framework to demonstrate the conditions under which this will occur and provide strong empirical evidence for such behavior by exploiting a natural experiment in Ecuador. We find that when firms are notified by the tax authority about detected revenue discrepancies on previously filed corporate income tax returns, they increase reported revenues, matching the third-party estimate when provided. Firms also increase reported costs by 96 cents for every dollar of revenue adjustment, resulting in minor increases in total tax collection.
    JEL: H25 H26 O23 O38
    Date: 2014–10
  9. By: James Mak (UHERO, University of Hawaii at Manoa)
    Abstract: Recent research on the excise tax effects of the property tax in small, multi-sector open economies suggests that the property tax may not be fully forward shifted to consumers as previously believed. I adapt this analysis to examine whether local hotel property taxes in Hawaii are fully passed on to hotel guests as lawmakers had intended. We conclude that full forward shifting is unlikely. I argue that an excise/sales tax on hotel occupancy is preferable to the property tax as a tourist tax.
    Keywords: Property tax, excise tax effects, hotel occupancy tax, hotel property tax
    Date: 2013–12
  10. By: Doi, Takero
    Abstract: This chapter investigates the effects of introducing the “generational election system” proposed by Ihori and Doi (1998). The generational election system (or the election district by generation) consists of election districts divided by not only region but also generation. In industrial countries, intergenerational conflicts of interest are large at present. In particular, the older generation has more political power because of aging and fewer children. In an electoral system that consists of election districts divided only by region, conflicts of interest among regions can be dealt with in the Congress, but intergenerational conflicts are buried in each district because the opinions of older people dominate those of younger people. Therefore, this chapter analyzes the effects of introducing the generational election system using an overlapping generations model. The results of the voting equilibrium show that the preferred policy of the younger generation can be better represented in the generational election system compared with the current majoritarian system. Furthermore, the selected policy does not depend on the turnout rate of the younger generation. These results suggest that introducing the generational election system benefits both the younger and future generations.
    JEL: H20 D72 H31
    Date: 2014–09
  11. By: Arrazola, María; de Hevia, José; Romero, Desiderio; Sanz-Sanz, José Félix
    Abstract: This paper shows the utility of the elasticity of reported income to assess tax reforms in detail from the perspectives of tax revenue and well-being. We provide evidence of the value of the elasticity of reported income in Spain given the variations in marginal rates of the Personal Income Tax. The mean value of this parameter for the entire Spanish territory is 1,541. Nevertheless, we confirm the existence of considerable heterogeneity in the value of this elasticity depending on taxpayers’ characteristics. Based on these estimated elasticities, we make a detailed assessment of the impact of the recent increase in marginal tax rates that Spain approved in 2012.
    Keywords: Personal income tax, Taxable income elasticity, Excess burden, Tax inefficiency,
    Date: 2014
  12. By: Simon Gaechter (School of Economics, University of Nottingham); Friederike Mengel (University of Essex and Maastricht University); Elias Tsakas (Maastricht University); Alexander Vostroknutov (Maastricht University and European University at St.Petersburg)
    Abstract: In a novel experimental design we study public good games with dynamic interdependencies. More precisely, each agent's income at the end of a period serves as her endowment in the following period. In this setting growth and inequality arise endogenously allowing us to address new questions regarding their interplay and effect on cooperation levels. In stark contrast to standard public good experiments, we find that contributions are increasing over time even in the absence of punishment possibilities. In both treatments (with and w/o punishment) inequality and group income are positively correlated for poor groups (below median income), but negatively correlated for rich groups. There is very strong path dependence: inequality in early periods is strongly negatively correlated with group income in later periods. These results give new insights into why people cooperate and should make us rethink previous results from the literature on repeated public good games regarding the decay of cooperation in the absence of punishment.
  13. By: Shigeo Morita (Graduate School of Economics, Osaka University)
    Abstract: In this study, we reconsider the optimal non-linear tax problem with the public goods from the perspective of the commitment issue and examine how it affects the condition of the public goods provision. We show that the Samuelson rule should be modified when the government cannot commit and the skill types of taxpayers are revealed. Even if taxpayers have the same preference, which is separable and additive with respect to consumption and leisure, the Samuelson rule breaks down. Our analysis focuses on the effect of commitment issue on the marginal cost of public funds and the level of public goods provision. Our findings imply that the level of investment in public goods may be excessive in comparison to the case where the commitment issue is not considered.
    Keywords: Public goods provision, Optimal Taxation, Time consistency
    JEL: D82 H21
    Date: 2014–10

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