nep-pub New Economics Papers
on Public Finance
Issue of 2014‒12‒08
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Positive Long Run Capital Taxation: Chamley-Judd Revisited By Ludwig Straub; Iván Werning
  2. Capital Income Taxation with Household and Firm Heterogeneity By Orhan Atesagaoglu; Eva Carceles-Poveda; Alexis Anagnostopoulos
  3. Taxation and incentives to innovate: a principal-agent approach By Diego d'Andria
  4. Corporate Tax Games with International Externalities from Public Infrastructure By Gerda Dewit; Kate Hynes; Dermot Leahy
  5. Tax Morale By Erzo F.P. Luttmer; Monica Singhal
  6. Piketty’s Elasticity of Substitution: A Critique By Gregor Semieniuk
  7. Shift in tax burden and its impact on economic growth in the European Union By Szarowska, Irena
  8. Distributional Effects of Means Testing Social Security: An Exploratory Analysis By Alan Gustman; Thomas Steinmeier; Nahid Tabatabai
  9. Social costs of inequality: Heterogeneous endowments in public-good experiments By Keser, Claudia; Markstädter, Andreas; Schmidt, Martin; Schnitzler, Cornelius
  10. Can Indonesia’s Fiscal Policy be Sustained, with Exploding Debt? By Tari Lestari

  1. By: Ludwig Straub; Iván Werning
    Abstract: According to the Chamley-Judd result, capital should not be taxed in the long run. In this paper, we overturn this conclusion, showing that it does not follow from the very models used to derive them. For the model in Judd (1985), we prove that the long run tax on capital is positive and significant, whenever the intertemporal elasticity of substitution is below one. For higher elasticities, the tax converges to zero but may do so at a slow rate, after centuries of high capital taxation. The model in Chamley (1986) imposes an upper bound on capital taxation and we prove that the tax rate may end up at this bound indefinitely. When, instead, the bounds do not bind forever, the long run tax is indeed zero; however, when preferences are recursive but non-additive across time, the zero-capital-tax limit comes accompanied by zero private wealth (zero tax base) or by zero labor taxes (first best). Finally, we explain why the equivalence of a positive capital tax with ever rising consumption taxes does not provide a firm rationale against capital taxation.
    JEL: H2 H63
    Date: 2014–08
  2. By: Orhan Atesagaoglu (SUNY-Stony Brook); Eva Carceles-Poveda (Stony Brook University); Alexis Anagnostopoulos (Stony Brook University)
    Abstract: The US tax code stipulates taxation of capital income at the firm level (corporate profits) and at the household level (dividends and capital gains). Even though all of those are capital income taxes, they have different effects both on incentives for household savings and firm investment and in terms of distribution. We argue that these effects can work both from the aggregate savings (household) side and from the aggregate investment (firms) side and provide a model that incorporates both aspects. The model features heterogeneous households and heterogeneous firms and is used to: 1. Evaluate the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) of 2003, which reduced and equalized tax rates on dividends and capital gains and 2. Analyze the optimal mix between the different types of capital income taxes. We find that the JGTRRA reduces investment and capital mainly due to a wealth effect. In particular, the dividend tax cut raises stock prices and, as a result, aggregate wealth held by stockholders. In order to be willing to hold additional wealth, stockholders require a higher return which pushes capital demand and investment down. Interestingly, capital is more efficiently allocated and, as a result, GDP actually rises slightly. On the second question, we search for a tax scheme that provides incentives for investment without the usual negative redistribution side effects.
    Date: 2014
  3. By: Diego d'Andria (Friedrich Schiller University of Jena, DFG Research Training Group "The Economics of Innovative Change")
    Abstract: A principal-agent multitasking model is used to explore the effects of different tax schemes on innovation in a pure knowledge economy. Corporate taxes and labor income taxes can affect both the firm owner's and the employee's incentives to commit to innovative tasks, when the former compensates the latter (a manager, technical or R&D employee) by means of variable pay tied to measures of the company's success. Results point to a complementary role between "patent box" tax incentives and reductions in the tax rate levied on profit sharing schemes. This complementarity holds, albeit with different relative importance for the two tax incentives, also with non-deductible labor costs, with a stochastic innovation value coupled with a risk-averse agent, and with multiple principals competing for talented agents.
    Keywords: tax incentives for R&D, patent box, principal-agent models, multitasking models, profit sharing schemes, incentives to innovate
    JEL: H2 O31 J33
    Date: 2014–11–11
  4. By: Gerda Dewit (Economics, National University of Ireland, Maynooth); Kate Hynes (Economics, National University of Ireland, Maynooth); Dermot Leahy (Economics, National University of Ireland, Maynooth)
    Abstract: We construct a model of corporate tax competition in which governments also use public infrastructural investment to attract foreign direct investment, thus enhancing their tax bases. In doing so, we allow for inter-regional infrastructural externalities. Depending on the externality, governments are shown to strategically over- or under-invest in infrastructure. We examine how tax cooperation influences investment in infrastructure and find that welfare may be lower under tax cooperation than under tax competition; this is, in fact, the case when infrastructure is sufficiently effctive in raising the tax base and generates a sufficiently large negative interregional externality
    Keywords: Tax competition, Tax cooperation, Public infrastructure investment, Externalities.
    JEL: F23 H40
    Date: 2014
  5. By: Erzo F.P. Luttmer; Monica Singhal
    Abstract: Standard economic models of tax compliance have focused on enforcement-driven compliance. Notably, tax administrators also tend to place a great deal of emphasis on the importance of improving "tax morale" by encouraging voluntary compliance, creating a culture of compliance, and changing social norms. Tax morale does indeed appear to be an important component of compliance decisions, and there is strong evidence that tax morale operates through a variety of underlying channels. There is less evidence - to date - that indicates we know how to leverage these channels to improve compliance and revenue collection in a consistently successful way.
    JEL: H26 O17
    Date: 2014–09
  6. By: Gregor Semieniuk (Schwartz Center for Economic Policy Analysis (SCEPA))
    Abstract: This note examines Thomas Piketty's (2014) explanation and prediction of simultaneously rising capital income ratio and profit share by an elasticity of substitution, sigma, greater than one between labor and capital in an aggregate production function. I review Piketty's elasticity argument, which relies on a non-standard capital definition. In light of the theory of land rent, I discuss why the non-standard capital definition is problematic for estimating elasticities. For lack of existing results, I make a simple estimate of sigma in the class of constant elasticity of substitution functions for Piketty's data as well as for a subset of his capital measure that comes closer to the standard capital definition. The estimation results cast doubt on Piketty's hypothesis of a sigma greater than one.
    Keywords: rent theory, wealth definition, capitalization of land, elasticity of substitution, Piketty
    JEL: B12 E01 E25
    Date: 2014–08
  7. By: Szarowska, Irena
    Abstract: This article deals with a tax burden in the European Union in as financial and economic crisis has impacted also on tax systems in the European Union. Governments´ tax measure aims to consolidate public finance and promote an economic growth. The article provides empirical evidence on a shift in a tax burden and its structure and analyzes the effects of shift in tax burden on economic growth in the EU. It is used the Eurostat definition to categorize tax burden by economic functions and implicit rates of consumption, labour and capital are investigated. The analysis is based on annual data of the EU member states in a period 1995-2010. Pairwise Granger Causality Test was used for examining relations between economic growth and tax burden by economic functions in short-term. Results confirm that there is two-way causality between change of implicit tax rate of consumption and GDP growth; and also GDP growth Granger-cause change of implicit tax rate of capital and implicit tax rate of labour through one-way causality. On average, labour taxes have decreased by 1.9 p.p., capital taxes have also decreased – by 2.1 p.p., but consumption taxes have mildly increased by 0.4 p.p. in the European Union in a period 1995-2010.
    Keywords: tax burden, tax shift, implicit tax rates, growth conductive system, economic functions, economic growth
    JEL: E62 H2 O11
    Date: 2013
  8. By: Alan Gustman (Dartmouth College); Thomas Steinmeier (Texas Tech University); Nahid Tabatabai (Title: Dartmouth College)
    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 W2 earnings. The empirical analysis, based on data from the Health and Retirement Study, starts with a baseline benefit for each household, calculated as the product of the average benefit-tax ratio under the current system, multiplied by the taxes paid by the household. These means tests would reduce total household benefits by 7 to 9 percentage points, amounting to 15.4 to 16.4 percent of the benefits of affected workers at baseline. 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.
    Date: 2014–08
  9. By: Keser, Claudia; Markstädter, Andreas; Schmidt, Martin; Schnitzler, Cornelius
    Abstract: We compare voluntary contributions to the financing of a public good in a symmetric setting to those in asymmetric settings, in which four players have different, randomly allocated endowments. We observe that a weak asymmetry in the endowment distribution leads to the same contribution level as symmetry. Players tend to contribute the same proportion of their respective endowment. In a strongly asymmetric setting, where one player has a higher endowment than the three other players together, we observe significantly lower group contributions than in the other settings. The super-rich player does not contribute significantly more than what the others contribute on average and thus a much lower proportion of the endowment.
    Keywords: experimental economics,linear public good,income heterogeneity
    JEL: C92 D63 H41
    Date: 2014
  10. By: Tari Lestari (Directorate of State Finance and Monetary Analysis (BAPPENAS))
    Abstract: The debate over debt issues always becomes hot potatoes to be discussed. Recent data in debt position which accounted for 1.977,71 trillion IDR onDecember31st2012 has made a thousand eyes looking at The Central Government and questioning whether Indonesia should continue to rely on debt for development financing, and whether its debt level is dangerous for fiscal sustainability or not. This paper analyzes debt sustainability by using Natural Debt Limit (NDL) approach introduced by Mendoza-Oveido. In order to examine how the Indonesian government reacts to changes in its debt position, this paper estimates fiscal reaction functions using an econometric approach, namely Vector Error Correction Model (VECM). The result shows that: (i) natural debt limit for Indonesia is 32,3% over GDP; (ii) since 1992 the central government has run a sustainable fiscal policy, by reducing the primary deficit or increasing the surplus in response towards rising debt. Indonesia has a space to utilize more debt, but in a good manner (well-managed) especially aimed for productive and priority spending such as for infrastructure and education.
    Keywords: Crisis, Fiscal sustainability, Natural Debt Limit, Public Debt, Fiscal Reaction Function, Deficits
    JEL: H62 H63
    Date: 2014–11

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