nep-pub New Economics Papers
on Public Finance
Issue of 2014‒12‒29
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal progressive taxation in a model with endogenous skill supply. By Angelopoulos, Kostantinos; Asimakopoulos, Stylianos; Malley, James
  2. Optimal taxation with home production By Conny Olovsson
  3. Optimal Taxation with Rent-Seeking By Rothschild, Casey; Scheuer, Florian
  4. The optimal distribution of the tax burden over the business cycle By Konstantinos Angelopoulos; Stylianos Asimakopoulos; James Malley
  5. High Marginal Tax Rates on the Top 1%? Lessons from a Life Cycle Model with Idiosyncratic Income Risk By Kindermann, Fabian; Krueger, Dirk
  6. Effects of the corporate tax rates on firms' location selections through the trasfer pricing system By Toshiharu Ishikawa
  7. Taxation, Innovation, and Entrepreneurship By Hans Gersbach; Ulrich Schetter; Maik T. Schneider
  8. The tax-rate elasticity of local business profits By Fossen, Frank M.; Steiner, Viktor
  9. Fiscal Policy, Debt Constraint and Expectation-Driven Volatility By Kazuo Nishimura; Thomas Seegmuller; Alain Venditti
  10. Taxation, Profit Distribution and Investment of Non-listed Companies in Finland By Määttänen, Niku; Ropponen, Olli

  1. By: Angelopoulos, Kostantinos; Asimakopoulos, Stylianos; Malley, James
    Abstract: This paper examines whether efficiency considerations require that optimal labour income taxation is progressive or regressive in a model with skill heterogeneity, endogenous skill acquisition and a production sector with capital-skill complementarity. We 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. We find that these results are explained by a lower labour supply 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: Conny Olovsson (Sveriges riksbank)
    Abstract: Optimal taxes for Europe and the U.S. are derived in a realistically calibrated model where agents buy consumption goods and services, and use home capital and labor to produce household services. The optimal tax rate on services is substantially lower than the tax rate on goods. Specifically, the planner cannot tax home production directly and instead lowers the tax rate on market services to increase the relative price of home production. The optimal tax rate on the return to home capital is strictly positive, and the welfare gains from switching to optimal taxes are large.
    Date: 2014
  3. By: Rothschild, Casey; Scheuer, Florian
    Abstract: We develop a framework for optimal taxation when agents can earn their income both in traditional activities, where private and social products coincide, and in rent-seeking activities, where private returns exceed social returns either because they involve the capture of pre-existing rents or because they reduce the returns to traditional work. We characterize Pareto optimal non-linear taxes when the government does not observe the shares of an individual’s income earned in each of the two activities. We show that the optimal externality correction typically deviates from the Pigouvian correction that would obtain if rent-seeking incomes could be perfectly targeted, even at income levels where all income is from rent-seeking. If rent-seeking externalities primarily affect other rent-seeking activity, then the optimal externality correction lies strictly below the Pigouvian correction. If the externalities fall mainly on the returns to traditional work, the optimal correction strictly exceeds it. We show that this deviation can be quantitatively important.
    Keywords: Multidimensional screening; Rent-seeking; Tax policy
    JEL: D5 D8 E6 H2 J6
    Date: 2014–11
  4. By: Konstantinos Angelopoulos; Stylianos Asimakopoulos; James Malley
    Abstract: This paper analyses optimal income taxation over the business cycle for households di¤erentiated by labour skill, income and wealth. A model incorporating capital-skill complementarity in production and di¤erential access to labour and capital markets is developed to capture the cyclical characteristics of the US economy, as well as the empirical observations on wage (skill premium) and wealth inequality. We …rst …nd that, under a fully ‡exible budget, the income taxation burden over the business cycle is spread roughly equally across the high-, middle- and low-income households. However, under a balanced budget restriction, the burden is distributed least favourably to the middle-income and most favourably to the high income households.
    Keywords: optimal taxation, business cycle, skill premium, income distribution
  5. By: Kindermann, Fabian; Krueger, Dirk
    Abstract: In 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: income inequality; progressive taxation; social insurance; top 1%
    JEL: E62 H21 H24
    Date: 2014–10
  6. By: Toshiharu Ishikawa
    Abstract: This paper analyzes effects of the corporation tax rates of countries on firmsÂf location selections using the transfer pricing system. Reduction of transportation costs makes firmsÂf production activities expand to across international borders. This expansion incurs harsh price competition among firms. In order to cope with this competition, firms fragment a production line into small processes to reduce production costs. The fragmented processes tend to move across some countries and locate at some places which are suitable to their production characteristics. The factories must be internationally connected each other in terms of intermediate materials and the related financial treatments. As a result, these factories handle the costs and the revenues arising from the internationally transferred intermediate goods by using the transfer price system. Furthermore, the firms, checking the corporate tax rates of countries, manipulate the transfer prices between their factories which are located in different counties to maximize their profits. This paper shows how the corporate tax rates of countries influence to a firmsÂf location selections through working of the transfer price. Diffusion of the fragmented production processes incurs an increase in the production costs since a firm loses agglomeration economies which it enjoys by consolidating production processes at the same site. Hence it is very important to compare the changes in the benefits and the costs due to the distributing production processes. Incorporating the freight rates of intermediate goods and agglomeration economy into framework of analysis, this paper examines effects of the corporate tax rates of two countries on a firmÂfs transfer price and factoryÂes location. It is shown in this examination that change of the tax rate of a country clearly affects the transfer price but it does not alter factoryÂfs location in a country where transportation costs of intermediate goods are low: The influence of agglomeration economy to a firmÂfs location selections varies according to a combination of the corporate tax rates between countries. Interestingly, there is a case that when the corporate tax rate in one country is raised, the tax revenue of the country increases, while the tax revenue of other country decreases by working of the transfer price. Keywords: Transfer pricing, FirmÂfs location, Corporation tax rates, Freight rates, Monopoly market, Chaotic phenomenon. JEL: R.30.
    JEL: R
    Date: 2014–11
  7. By: Hans Gersbach (ETH Zurich, Switzerland); Ulrich Schetter (ETH Zurich, Switzerland); Maik T. Schneider (ETH Zurich, Switzerland)
    Abstract: We explore optimal and politically feasible growth policies in the form of basic research investments and taxation. Basic research is a public good that benefits innovating entrepreneurs, but its provision and financing also affect the entire economy -- in particular, occupational choices of potential entrepreneurs, wages, dividends, and aggregate output. We show that the impact of basic research on the general economy rationalizes a taxation pecking order to finance basic research. More specifically, in a society with desirably dense entrepreneurial activity, a large share of funds for basic research should be financed by labor taxation, while a minor share should be left to profit taxation. Such tax schemes will induce a significant proportion of agents to become entrepreneurs, thereby rationalizing substantial investments in basic research that fosters their innovation prospects. These entrepreneurial economies, however, may make a majority of workers worse off, giving rise to a conflict between efficiency and equality. We discuss ways of mitigating this conflict and thus strengthening the political support for growth policies.
    Keywords: Basic research; economic growth; entrepreneurship; income taxation; political economys;
    JEL: D72 H20 H40 O31 O38
    Date: 2014–12
  8. By: Fossen, Frank M.; Steiner, Viktor
    Abstract: Local business profits respond to local business tax (LBT) rates that vary across municipalities. We estimate that a one percent increase in the LBT rate decreases the LBT base by 0.45 percent, based on the universe of German LBT return files, which include corporations and unincorporated businesses. However, the fiscal equalization scheme largely compensates municipalities for the loss in the LBT base when they increase the LBT rate. Our estimates suggest that using tax revenue data instead of tax return data, as commonly done in the literature, results in a significant bias of the elasticity away from zero.
    Keywords: local business tax,corporate tax,tax responsiveness,tax-rate elasticity
    JEL: H25 H71
    Date: 2014
  9. By: Kazuo Nishimura (RIEB, Kobe University & KIER, Kyoto University); Thomas Seegmuller (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM & EHESS); Alain Venditti (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & EDHEC)
    Abstract: Imposing some constraints on public debt is often justified regarding sustainability and stability issues. This is especially the case when the ratio of public debt over GDP is restricted to be constant. Using a Ramsey model, we show that such a constraint can however be a fundamental source of indeterminacy, and therefore, of expectation-driven fluctuations. Indeed, through the intertemporal budget constraint of the government, income taxation negatively depends on future debt, i.e. on the expected level of production. This mechanism ensures that expectations on the future tax rate may be self-fulfilling. We show that this is promoted by a larger ratio of debt over GDP.
    Keywords: Indeterminacy, endogenous cycles, public debt, income taxation
    JEL: E32 H20 H68
    Date: 2014–06
  10. By: Määttänen, Niku; Ropponen, Olli
    Abstract: This paper studies the taxation of non-listed companies and their owners in Finland. We first describe the main features of the Finnish tax system regarding the taxation of dividends from non-listed companies. We use firm-level data to illustrate how the tax incentives are reflected in firms’ profit distribution policies. We then build a dynamic investment model that features the main characteristics of the Finnish dividend taxation. In the model, entrepreneurs face a borrowing constraint and have a consumption smoothing motive. We use the model to investigate how the current dividend taxation affects the investment incentives. The results illustrate how the current dividend taxation in certain cases distorts firms’ investment decisions. Key words: Dividend taxation, non-listed companies, firm investment.
    Keywords: Dividend taxation, non-listed companies, firm investment
    JEL: D92 G35 H24
    Date: 2014–12–09

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