nep-pub New Economics Papers
on Public Finance
Issue of 2014‒11‒22
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. When a Price is Enough: Implementation in Optimal Tax Design By Sander Renes; Floris T. Zoutman
  2. Time-consistent consumption taxation By Sarolta Laczo; Raffaele Rossi
  3. State Fiscal Policies and Regional Economic Activity By Matthias Uhl
  4. 2012 Update Report to the Study to quantify and analyse the VAT Gap in the EU-27 Member States By Luca Barbone; Mikhail Bonch-Osmolovskiy; Grzegorz Poniatowski
  5. Recent developments in Corporate Taxation in Sweden By Thomann, Christian
  6. Fiscal Policy and Inclusive Growth in Latin America: Lessons for Asia By Lee, Sang-Hyop; Park, Donghyun

  1. By: Sander Renes (Erasmus University Rotterdam, the Netherlands, and University of Mannheim, Germany); Floris T. Zoutman (Norwegian School of Economics, Norway)
    Abstract: This paper studies the design of tax systems that implement a planner's second-best allocation in a market economy. An example shows that the widely used Mirrleesian (1976) tax system cannot implement all incentive-compatible allocations. Hammond's (1979) "principle of taxation" proves that any incentive-compatible allocation can be implemented through at least one tax system. However, this tax system is often undesirable since it severely restricts the choice space of agents in the economy. In this paper we derive necessary and sufficient conditions to verify whether a given tax system can implement a given incentive-compatible allocation. We show that when an incentive-compatible allocation is on the Pareto frontier, and/or surjective onto the choice space, a tax system that equates the marginal tax rates to the optimal wedges can implement the second best, without restricting the choice space of the agents. It follows that the Mirrleesian tax system can successfully implement the second best in the identified classes. Since the second-best allocation of welfarist planners is always on the Pareto frontier, our results (ex post) validate most tax systems proposed in the literature. Outside of the identified classes, the planner may need to restrict the choice space of agents to implement its second best in the market. This sheds new light on rules, quotas and prohibitions used in real-world tax and benefit systems.
    Keywords: optimal non-linear taxation, redistribution, tax system, market implementation, price mechanism, private information
    JEL: H21 H22 D82 H24
    Date: 2014–09–11
  2. By: Sarolta Laczo; Raffaele Rossi
    Abstract: We characterise optimal fiscal policies when the government has access to consumption taxation but cannot credibly commit to future policies, in a calibrated Real Business Cycle model of the United States economy. Contrary to the case where only labour and capital income are taxed, the optimal time-consistent policies are remarkably similar to their Ramsey counterparts, as long as the capital income tax causes some distortion within the period. The welfare gains from commitment are negligible, while they are substantial without consumption taxation. Further, the welfare gains from taxing consumption are much higher without commitment. These results suggest that the policy-maker's ability to commit is of secondary importance if consumption is taxed optimally.
    Keywords: fiscal policy, Markov-perfect policies, consumption taxation, variable capital utilisation, endogenous government spending
    JEL: E62 H21
    Date: 2014
  3. By: Matthias Uhl (University of Marburg)
    Abstract: In this paper, I estimate a structural panel vector autoregression to study the consequences of changes in U.S. state government fiscal policies for local economic activity in the short-term. My main result is that the state-level spending multiplier is relatively small and the tax multiplier relatively large. After four years, the government spending multiplier is 0.6 and the tax multiplier -2.62. This conclusion is found to be robust across different model specifications. I also find that both state spending and state revenue shocks increase out of state output.
    Keywords: Spending multiplier, Tax multiplier, Subnational government
    JEL: E62 H30 R50
    Date: 2014
  4. By: Luca Barbone; Mikhail Bonch-Osmolovskiy; Grzegorz Poniatowski
    Abstract: This report provides estimates of the VAT Gap for 26 EU Member States for 2012, as well as revised estimates for the period 2009-2011. It is a follow-up to the report “Study to quantify and analyse the VAT Gap in the EU-27 Member States”,1 published in September 2013. This update incorporates the NACE Rev. 2 classification of economic activities into the calculation of the theoretical liability. The year 2012 saw overall unfavourable economic developments, as the GDP of the European Union shrank by 0.4 percent. These developments contributed to a slowdown of nominal final consumption and of other economic activities that form the basis of the Value Added Tax.A few countries applied changes to standard or reduced rates, but on the whole the structure of VAT rates was relatively stable compared to the numerouschanges in the wake of the onset of the Great Recession in 2008-2009. For the EU-26 as a whole, VAT revenues grew by slightly over 2 percent, from Euro 904 billion in 2011 to Euro 922 billion in 2012; and the theoretical VAT liability (VTTL) also grew by a similar percentage. The overall VAT Gap, as estimated according to the refined methodology, for the EU-26 saw a slight increase in absolute numbers (of about Euro 6 billion) between 2011 and 2012, to reach Euro 177 billion, but remained essentially stable as a percentage of the overall VTTL, at 16 percent. The estimates for 2009-2011 have been revised because of the switch to NACE-2 classification and refinements in the methodology, and are slightly lower compared to those discussed in the 2013 VAT Gap report.2 In 2012, Member States’ estimated VAT Gaps ranged from the lo of 5 percent in the Netherlands and Finland, to the high of 44 percent in Romania. The median absolute change in the VAT Gap of the individual Member States from 2011 to 2012 was 1.1 percent, with a number of countries registering considerably higher changes. Overall, 11 Member States decreased their VAT Gap, with the largest improvements noted in Greece, despite the depth of its recession, and Bulgaria. However, 15 Member States saw an increase in the VAT Gap, ranging from virtually nil (e.g., Slovenia) to a substantial deterioration (e.g., Slovakia, Poland). This report also provides estimates of the Policy Gap for the EU-26. This is an indicator of the additional VAT revenue that a Member State could theoretically collect if it applied uniform taxation to all consumption. Estimates of the Policy Gap confirm the finding that in most countries the loss of revenue compared to an “ideal” system with no reduced rates and no exemptions, is due to a greater extent to policy decisions than to non-compliance and weak enforcement.
    Keywords: Optimal Taxation, Efficiency, Incidence, Externalities, Redistributive Effects, Environmental Taxes and Subsidies, Personal Income and Other Nonbusiness Taxes and Subsidies, Business Taxes and Subsidies, Tax Evasion, Other Sources of Revenue, Other
    JEL: H20 H24 H25 H26 H62
    Date: 2014
  5. By: Thomann, Christian (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: This article investigates if increasing neutrality between debt and equity capital might improve the efficiency in a corporate tax system. Firm-level and sector-level taxation data from Sweden is used to study if a tax system that is characterized by very few limitations with respect to the deductibility of interest costs leads to systematic differences in the taxes paid by different sectors. This paper finds that there are differences between different sectors’ tax payments and these differences can be explained by the sectors’ use of debt capital.
    Keywords: Tax Reform; Corporate Tax; Debt; Equity
    JEL: D58 H25
    Date: 2014–10–10
  6. By: Lee, Sang-Hyop (University of Hawaii at Manoa); Park, Donghyun (Asian Development Bank)
    Abstract: Broadly speaking, developing Asia and Latin America are at similar income and development levels. Relative to the advanced economies, economic growth and development are much more urgent priorities for both, yet Latin America has significantly more experience in using fiscal policy to tackle inequality and to promote inclusive growth. Therefore, its greater experience with inclusive fiscal policy can offer valuable lessons for developing Asia in its new-found quest to leverage public spending and taxation to spread the benefits of growth to the broader population. While the Latin American experience has general implications for Asia, of particular interest is its generally successful experience with conditional cash transfer (CCT) programs. Overall, the evidence suggests that CCT programs can be an effective tool for inclusive growth in Asia, too. However, CCTs are not a panacea for poverty and inequality, and the ingredients for their success in Asia may differ from those in Latin America.
    Keywords: fiscal policy in Latin America; conditional cash transfer; social protection
    JEL: H50 H53 I38
    Date: 2014–10–28

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