nep-pub New Economics Papers
on Public Finance
Issue of 2014‒12‒03
twelve papers chosen by

  1. In Praise of Frank Ramsey's Contribution to the Theory of Taxation By Joseph E. Stiglitz
  2. Paternalism against Veblen: Optimal Taxation and Non-Respected Preferences for Social Comparisons By Aronsson, Thomas; Johansson-Stenman, Olof
  3. Extending taxation of interest and royalty income at source: An option to limit base erosion and profit shifting? By Finke, Katharina; Fuest, Clemens; Nusser, Hannah; Spengel, Christoph
  4. Sufficient Statistic or Not? The Elasticity of Taxable Income in the Presence of Deduction Possibilities By Doerrenberg, Philipp; Peichl, Andreas; Siegloch, Sebastian
  5. Taxation and Top Incomes in Canada By Kevin Milligan; Michael Smart
  6. Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data By Emmanuel Saez; Gabriel Zucman
  7. Seesaws and Social Security Benefits Indexing By Matthew Weinzierl
  8. Distributional Effects of Means Testing Social Security: An Exploratory Analysis By Alan Gustman; Thomas Steinmeier; Nahid Tabatabai
  9. Social security around the world: A review of datasets By Grünewald, Aline
  10. Shared Mandates, Moral Hazard and Political (Mis)alignment in a Decentralized Economy By Antonio Estache; Grégoire Garsous; Ronaldo Seroa da Motta
  11. Ethnic stereotypes and preferences on poverty assistance By Horváth, Ágnes; Janky, Béla
  12. U.S. State Fiscal Policy and Natural Resources By Alexander G. James

  1. By: Joseph E. Stiglitz
    Abstract: Frank Ramsey's classic paper "A contribution to the theory of taxation" gave rise to the modern theory of optimal taxation. This paper traces the literature that grew out of Ramsey's 1927 paper and assesses which of its key insights has proven robust. Though the path breaking work of Peter Diamond and James Mirrlees showed that Ramsey's results could be generalized in some important ways, other work showed that the domain of applicability of Ramsey's original insights may be more limited: changes in assumptions about the set of feasible taxes (not allowing certain taxes, or allowing a progressive income tax or non-linear commodity taxes), and in particular about the taxation of pure rents, incorporating more explicitly distributional considerations, and/or recognizing the important ways in which our economy differs from the competitive model underlying Ramsey's analysis all change the optimal structure of commodity taxation in important ways.
    JEL: E62 H2 H21
    Date: 2014–09
  2. By: Aronsson, Thomas (Dept of Economics, Umeå School of Business and Economics, Umeå University); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: This paper deals with optimal income taxation and relative consumption under a welfarist government that fully respects people’s preferences and a paternalist government that does not share the consumer preference for relative consumption. Consistent with previous findings, relative consumption concerns typically lead to higher marginal income tax rates in the welfarist case. A remarkable result is that the optimal tax rules turn out to be very similar when people’s preferences for social comparisons are not respected. Indeed, if the relative consumption concerns are based on mean value comparisons and all consumers are equally positional, or if they are driven by within-type comparisons, the paternalist and welfarist governments can implement their respective first-best allocations through exactly the same marginal income tax formulas. Yet, also in these cases, there are some remaining differences that follow from second-best considerations.
    Keywords: Paternalism; nonlinear taxation; redistribution; status; positional goods
    JEL: D62 H21 H23 H41
    Date: 2014–11
  3. By: Finke, Katharina; Fuest, Clemens; Nusser, Hannah; Spengel, Christoph
    Abstract: This paper discusses tax policy measures to reduce corporate tax avoidance by extending taxation in the source country without imposing double taxation. We focus on four options: Bilaterally restricting interest and royalty deductibility, introducing an inverted tax credit system, levying withholding taxes on all interest and royalty payments and levying withholding taxes as an anti-avoidance regulation. We calculate the tax revenue effects of introducing a minimum withholding tax on royalty payments and an inverted tax credit. For the withholding tax we find that the US would suffer the greatest tax revenue losses, while some other countries would increase their tax revenue. In general, gains and losses depend not only on net balances in royalty income flows but also on withholding tax and credit rules under the status quo. The inverted tax credit would increase tax revenue in particular in high-tax countries. Revenue redistribution would only arise if withholding taxes were replaced by the inverted credit.
    Keywords: profit shifting,multinational firm,source taxation,tax policy,tax reform,optimal taxation
    JEL: H20 H21 H32 F23 K34
    Date: 2014
  4. By: Doerrenberg, Philipp (ZEW Mannheim); Peichl, Andreas (ZEW Mannheim); Siegloch, Sebastian (University of Mannheim)
    Abstract: The elasticity of taxable income (ETI) is often interpreted as a sufficient statistic to assess the welfare costs of taxation. Building on the conceptual framework of Chetty (2009), we show that this assertion does no longer hold for tax systems with deduction possibilities if (i) deductions generate externalities and (ii) deductions are responsive to tax rate changes. While the first condition should arguably hold for almost any imaginable tax deduction, we provide a thorough empirical examination of the second condition. Relying on rich German panel data from administrative tax records, we exploit several tax reforms that were implemented in Germany between 2001 and 2008. Our baseline estimates indicate an overall ETI of 0.49 and an elasticity of deductions with respect to the net-of-tax rate of -2.80. Given that the majority of deductions in the German income tax system generate externalities, our non-zero deduction elasticity suggests that the ETI is not sufficient to calculate the welfare cost of taxation.
    Keywords: elasticity of taxable income, deductions, tax expenditures, sufficient statistic, administrative data, Germany
    JEL: H24 H31
    Date: 2014–10
  5. By: Kevin Milligan; Michael Smart
    Abstract: We estimate the elasticity of reported income with respect to tax rates for high earners using subnational variation across Canadian provinces. We argue this allows for better identification of tax elasticities than the existing literature. We find that elasticities of reported income at the provincial level are large for incomes in the top one percent, but small for lower earners. There are strong indications that the response happens both through earned and capital income. While our estimated elasticities are large, changes in tax rates cannot explain much of the overall long-run trend of higher income concentration in Canada.
    JEL: D31 H21 H24
    Date: 2014–09
  6. By: Emmanuel Saez; Gabriel Zucman
    Abstract: This paper combines income tax returns with Flow of Funds data to estimate the distribution of household wealth in the United States since 1913. We estimate wealth by capitalizing the incomes reported by individual taxpayers, accounting for assets that do not generate taxable income. We successfully test our capitalization method in three micro datasets where we can observe both income and wealth: the Survey of Consumer Finance, linked estate and income tax returns, and foundations' tax records. Wealth concentration has followed a U-shaped evolution over the last 100 years: It was high in the beginning of the twentieth century, fell from 1929 to 1978, and has continuously increased since then. The rise of wealth inequality is almost entirely due to the rise of the top 0.1% wealth share, from 7% in 1979 to 22% in 2012--a level almost as high as in 1929. The bottom 90% wealth share first increased up to the mid-1980s and then steadily declined. The increase in wealth concentration is due to the surge of top incomes combined with an increase in saving rate inequality. Top wealth-holders are younger today than in the 1960s and earn a higher fraction of total labor income in the economy. We explain how our findings can be reconciled with Survey of Consumer Finances and estate tax data.
    JEL: H2 N32
    Date: 2014–10
  7. By: Matthew Weinzierl
    Abstract: The price indexation of Social Security benefit payments has emerged in recent years as a flashpoint of debate in the United States. I characterize the direct effects that changes in that price index would have on retirees who differ in their initial wealth at retirement and mortality rates after retirement. I propose a simple but flexible theoretical framework that converts benefits reform first into changes to retirees' consumption paths and then into a net effect on social welfare. I calibrate that framework using recently-produced data on Social Security beneficiaries by lifetime income decile and both existing and new survey evidence on the normative priorities Americans have for Social Security. The results suggest that the value retirees place on protection against longevity risk is an important caveat to the widespread enthusiasm for a switch to a slower-growing price index such as the chained CPI-U.
    JEL: E31 H55
    Date: 2014–11
  8. By: Alan Gustman; Thomas Steinmeier; Nahid Tabatabai
    Abstract: This paper examines the distributional implications of introducing additional means testing of Social Security benefits where proceeds are used to help balance Social Security's finances. Benefits of the top quarter of households ranked according to the relevant measure of means are reduced using a modified version of the Social Security Windfall Elimination Provision (WEP). The replacement rate in the first bracket of the benefit formula, determining the Primary Insurance Amount (PIA), would be reduced from 90 percent to 40 percent of Average Indexed Monthly Earnings (AIME). Four measures of means are considered: total wealth; an annualized measure of AIME; the wealth value of pensions; and a measure of average indexed lifetime W2 earnings. The empirical analysis is based on data from the Health and Retirement Study. These means tests would reduce total lifetime household benefits by 7 to 9 percentage points. We find that the basis for means testing Social Security makes a substantial difference as to which households have their benefits reduced, and that different means tests may have different effects on the benefits of families in similar circumstance. We also find that the measure of means used to evaluate the effects of a means test makes a considerable difference as to how one would view the effects of the means test on the distribution of benefits.
    JEL: D04 D31 D63 E21 H55 I3 J14 J18 J32
    Date: 2014–10
  9. By: Grünewald, Aline
    Abstract: Due to increasing scholarly interest in social policy reforms and processes of policy diffusion, comprehensive datasets on social security systems are all the more necessary. As such, this paper provides an overview of existing datasets on social security and discusses their strengths and shortcomings. The projects presented are appropriate for empirical analyses, including both event history analyses and multivariate regressions. As much of the research on social security systems thus far has mainly focused on OECD countries, this paper takes a closer look on data of the Non-OECD world, which can be used to supplement existing data projects and for the analysis of global social security dynamics.
    Abstract: Mit zunehmendem wissenschaftlichen Interesse an sozialpolitischen Reformen sowie an Prozessen der Politikdiffusion werden umfassende Datensätze zu sozialen Sicherungssystemen umso mehr benötigt. Daher stellt dieses Arbeitspapier einen Überblick über die bestehenden Datensätze zur sozialen Sicherung zur Verfügung und diskutiert deren Stärken und Schwächen. Die präsentierten Projekte eignen sich sowohl für Ereignisdatenanalysen als auch für multivariate Regressionen. Da sich ein Großteil der Forschung bisher hauptsächlich mit OECD Ländern beschäftigt hat, widmet sich dieses Arbeitspapier insbesondere Daten jenseits der OECD Welt, die somit für die weitere Vervollständigung bestehender Datenprojekte und die Analyse von globalen Dynamiken der sozialen Sicherung genutzt werden können.
    Date: 2014
  10. By: Antonio Estache; Grégoire Garsous; Ronaldo Seroa da Motta
    Abstract: This paper investigates the effects of political (mis)alignment on public service deliverywhen mandates are shared between state and local governments. We analyze sewage treatmentpolicies in the State of São Paulo, Brazil. Based on a regression discontinuity design, we establisha causal relationship between political alignment and higher sewage treatment provision.Conceptually, we find that, with uncertain local commitment and weakly enforceable localobligations, shared mandates lead to a moral hazard issue implying service under-provision.When political alignment is an option, our results show that it attenuates such moral hazardeffects.
    Keywords: political alignment; infrastructure provision; moral hazard; regression discontinuity design
    JEL: H40 H54 H70 P48
    Date: 2014–11
  11. By: Horváth, Ágnes; Janky, Béla
    Abstract: The authors introduce a simple model of public preferences on poverty assistance. Their focus is on the roles played by the socioeconomic status of a potential welfare recipient and the stereotypes about his/her ethnic group in shaping taxpayers' preferences on appropriate assistance. The model assumes that status not only informs one about the recipient's material needs but also sends noisy signals about his/her 'deservingness'. Ethnic stereotypes about work ethic, in turn, help to process those noisy signals. The authors show that the influence of stereotypes on welfare preferences tends to diminish as the status of a potential recipient approaches middle-class standards. Their model points to the potential of institutional and media framing of poverty assistance in the ethnicization of welfare preferences.
    Keywords: Poverty assistance,welfare preferences,social preferences,deservingness,stereotypes
    JEL: H8 I3
    Date: 2014
  12. By: Alexander G. James (Department of Economics and Public Policy, University of Alaska Anchorage)
    Abstract: An analytical framework predicts that, in response to an exogenous increase in resource-based government revenue, a benevolent government will partially substitute away from taxing income, increase spending and save. Fifty-one years of U.S.-state level data are largely consistent with this theory. A baseline fixed effects model predicts that a $1.00 increase in resource revenue results in a $0.25 decrease in non-resource revenue, a $0.43 increase in spending and a $0.32 increase in savings. Instrumenting for resource revenue reveals that a positive revenue shock is largely saved and the rest is transferred back to residents in the form of lower non-resource tax rates.
    Keywords: Severance Tax, Fiscal Policy, Natural Resources
    JEL: Q38 H20
    Date: 2014–08

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