nep-pub New Economics Papers
on Public Finance
Issue of 2015‒01‒09
eleven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. How High Might the Revenue-maximizing Tax Rate Be? By Dan Usher
  2. How Does Tax Progressivity and Household Heterogeneity Affect Laffer Curves? By Holter, Hans A.; Krueger, Dirk; Stepanchuk, Serhiy
  3. The Elasticity of Taxable Income and Income-shifting: What is "Real" and What is Not? By Jarkko Harju; Tuomas Matikka
  4. Is income redistribution a form of insurance, a public good or both? By Peter Backus; Alejandro Esteller-Moré
  5. Capital Taxation and Imperfect Competition: ACE vs. CBIT By Brekke, Kurt R.; Pires, Armando J. Garcia; Schindler, Dirk; Schjelderup, Guttorm
  6. Adaptation, Taxation, and Public Goods By Aronsson, Thomas; Schöb, Ronnie
  7. The Occurrence of Tax Amnesties: Theory and Evidence By Bayer, Ralph-C.; Oberhofer, Harald; Winner, Hannes
  8. Public finance sustainability gap and raising the retirement age, abstract and full summary By Heikki Oksanen
  9. The Cost of Kelo: Are Property Taxes a Form of Public Use? By Thomas J. Miceli
  10. Income taxation and equity: new dominance criteria and an application to Romania By Brunori, Paolo; Palmisano, Flaviana; Peragine, Vito
  11. The Taxation of Owner-Occupied House in Italy: 1974-2014 By Bruno Bises; Antonio Scialà

  1. By: Dan Usher (Queen's University)
    Abstract: Through tax evasion, through the labour-leisure choice or in other ways, taxpayers reduce the tax base in response to an increase in the tax rate. The process is commonly-believed to generate a humped Laffer curve with a revenue-maximizing tax rate well short of 100%. That need not be so. In the “new tax responsiveness literatureâ€, the revenue-maximizing tax rate is inferred from the observed “elasticity of taxable incomeâ€. It is shown in this article 1) that the inference is unwarranted because the elasticity of taxable income may vary with the tax rate, 2) that the “new tax responsiveness literature†imposes the implicit assumption that tax revenue falls to 0 when the tax rate rises to 100%, 3) that tax revenue may increase together with the tax rate all the way up to 100% and 4) that the Laffer curve is ill-defined because tax revenue at any given rate may depend upon how tax revenue is spent.
    Keywords: revenue-maximizing tax rate, Laffer curve
    JEL: H21 H23
    Date: 2014–12
  2. By: Holter, Hans A.; Krueger, Dirk; Stepanchuk, Serhiy
    Abstract: How much additional tax revenue can the government generate by increasing labor income taxes? In this paper we provide a quantitative answer to this question, and study the importance of the progressivity of the tax schedule for the ability of the government to generate tax revenues. We develop a rich overlapping generations model featuring an explicit family structure, extensive and intensive margins of labor supply, endogenous accumulation of labor market experience as well as standard intertemporal consumption-savings choices in the presence of uninsurable idiosyncratic labor productivity risk. We calibrate the model to US macro, micro and tax data and characterize the labor income tax Laffer curve under the current choice of the progressivity of the labor income tax code as well as when varying progressivity. We find that more progressive labor income taxes significantly reduce tax revenues. For the US, converting to a flat tax code raises the peak of the Laffer curve by 6%, whereas converting to a tax system with progressivity similar to Denmark would lower the peak by 7%. We also show that, relative to a representative agent economy tax revenues are less sensitive to the progressivity of the tax code in our economy. This finding is due to the fact that labor supply of two earner households is less elastic (along the intensive margin) and the endogenous accumulation of labor market experience makes labor supply of females less elastic (around the extensive margin) to changes in tax progressivity.
    Keywords: Fiscal Policy; Government Debt; Laffer Curve; Progressive Taxation
    JEL: E62 H20 H60
    Date: 2014–11
  3. By: Jarkko Harju; Tuomas Matikka
    Abstract: Previous literature shows that income taxation significantly affects the behavior of high-income earners and business owners. However, it is still unclear how much of the response is due to changes in effort and other real economic activity, and how much is caused by tax avoidance and tax evasion. This distinction is important because it affects the welfare implications and policy recommendations. In this paper we distinguish between real responses and tax-motivated income-shifting between tax bases. We show how the explicit inclusion of income-shifting affects the welfare analysis of income taxation. In our empirical example we find that income-shifting accounts for over two thirds of the overall elasticity of taxable dividend income among Finnish business owners. The large income-shifting response significantly decreases the marginal excess burden compared to the standard model in which the overall elasticity defines the welfare loss. However, in addition to income-shifting, we find that dividend taxation significantly affects the real behavior of owners.
    Keywords: elasticity of taxable income, tax avoidance, income-shifting, real responses
    JEL: H32 H24 H25
    Date: 2014–09–11
  4. By: Peter Backus (Universitat de Barcelona & IEB); Alejandro Esteller-Moré (Universitat de Barcelona & IEB)
    Abstract: This paper is an empirical study of redistributive preferences. Our interest is what motivates net contributors to support redistributive policies. Using instrumental variable estimation and exploiting a particularity of the Spanish labour market we estimate how workers’ declared preferences for unemployment benefits spending respond to changes in the local unemployment rate. We then decompose this response into the part explained by risk aversion, and thus demand for insurance, and the part explained by the public goods nature of redistribution. Our results suggest that the declared preferences of workers for unemployment benefits spending are driven by demand for insurance rather than any public goods component. We show how these results suggest that preferences for redistribution in the form of unemployment benefits are driven by insurance considerations rather than by any public goods consideration.
    Keywords: Redistribution, Preference formation, Public goods
    JEL: D64 H53 H77
    Date: 2014
  5. By: Brekke, Kurt R. (Dept. of Economics, Norwegian School of Economics); Pires, Armando J. Garcia (SNF - Centre for Applied Research at NHH); Schindler, Dirk (Dept. of Accounting, Auditing and Law, Norwegian School of Economics); Schjelderup, Guttorm (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: This paper studies the market and welfare effects of two main tax reforms – the Corporate Business Income Tax (CBIT) and the Allowance for Corporate Equity tax (ACE). Using an imperfect-competition model for a small open economy, it is shown that the well-known neutrality property of ACE does not hold. Both corporate tax regimes distort market entry and equilibrium prices. A main result is that a small open economy should levy a positive source tax on capital in markets with free firm entry. Which tax system is better from a welfare point of view, depends on production technology, the competitive effects of ACE and CBIT, and whether entry is excessive or suboptimal at the given corporate tax rate. Imposing tax income neutrality yields a higher corporate tax rate with ACE, which increases the scope for CBIT to be welfare improving.
    Keywords: Optimal corporate taxation; Corporate tax reform; Imperfect competition; ACE; CBIT
    JEL: D43 H25
    Date: 2014–11–14
  6. By: Aronsson, Thomas (Department of Economics, Umeå School of Business and Economics); Schöb, Ronnie (School of Business and Economics)
    Abstract: This paper shows how the first-best and second-best rules for optimal public good provision depend on the adaptation to private and public consumption. Adaptation in private consumption typically leads to over-provision relative to the Samuelson condition, while adaptation in public consumption works the other way around. The two sources of adaptation only cancel out in the extreme case of full adaptation.
    Keywords: Public goods; adaptation; habit-formation; optimal taxation
    JEL: D03 D60 H21 H41
    Date: 2014–12–09
  7. By: Bayer, Ralph-C. (School of Economics, University of Adelaide); Oberhofer, Harald (University of Salzburg); Winner, Hannes (University of Salzburg)
    Abstract: This paper presents a theoretical model and empirical evidence to explain the occurrence of tax amnesties. We treat amnesties as endogenous, resulting from a strategic game between many taxpayers discounting future payments from punishment and a government that trades off costs and benefits of amnesty programs. From the model we derive hypotheses about the factors that should influence the occurrence of tax amnesties. For our empirical test we rely on amnesty information from US States between 1981 and 2011. In line with the theoretical model, our empirical findings suggest that the likelihood of amnesties is mainly driven by a government's fiscal requirements and the taxpayers' expectations on future amnesties.
    Keywords: Tax amnesties; strategic game; US states
    JEL: H11 H26 H72
    Date: 2014–11–27
  8. By: Heikki Oksanen
    Abstract: The purpose of this study is to investigate a pension reform in which the old-age pension entry age will be increased significantly: first by five years over the next ten years, and will then be linked to the projected increase in life expectancy. This needs to be examined in order to obtain a more comprehensive view of available policy options. By increasing the retirement age, pension contributions can be reduced while still providing adequate pensions.<br><br> The agreement signed by the central labour market organisations on 26 September 2014 will only lead to a moderate increase in the retirement age. The ratio between the number of years spent in retirement and years at work will not decrease but rather still increase a little. Approximately the current level of pension contributions would be required to finance pensions. There are grounds for raising the retirement age more than targeted by the said agreement because the current level is relatively low. This constrains potential production and therefore the tax base. The tax base needs to be expanded, in order for example to meet the expenditure pressures of other publicly financed age-related items.<br><br> The public finance sustainability gap has been much discussed recently, but its actual meaning has remained vague and the gravity of public finance problems has generally not been fully understood. Over the ten years 1999?2008, Finland?s general government budget was in surplus and there was no sustainability gap. After 2008 the international financial and economic crisis hit Finland hard. Production per capita is now at the 2005 level, the gross tax rate has increased, and due to the country?s high production costs overall economic projections are gloomy. Financing expanding age-related expenditure by increasing taxation may prove to be difficult in practice. Increasing taxes would in any event have significant negative impacts. <br><br> The required entry age for old-age pensions can be expected to guide on-the-job training and recruitment already well before the expected retirement age. The signal indicating that the pension age will increase should be strong enough for there to be a clear change in the personnel policies of employers and in the plans of employees in their 50s and 60s, so that people would stay longer in productive work. <br><br> The government has set a target of removing the sustainability gap, which was estimated at 4% of GDP in August 2014. The contribution of the pension agreement between the labour market parties was set at one percentage point, and the outcome of the negotiations met this target. In addition, the government aims at removing the rest of the gap by increasing the participation rates in other age groups and improving the efficiency of public administration and services. For the most part, these measures are yet open. <br><br> Regarding the pension reform being prepared, there will be regular evaluations from 2019 onwards. These evaluations will benefit from studies analysing a wide range of available policy options.<br><br> Key words: pensions, retirement age, sustainability gap, public finance.<br><br> <a href="">Read the full summary (PDF)</a><br><br> <a href="">Publication (PDF, in Finnish)</a><br><br>
    Date: 2014–10–27
  9. By: Thomas J. Miceli (University of Connecticut)
    Abstract: This paper examines the economic implications of the definition of public use advanced by the Supreme Court in the case of Kelo v. New London. In its ruling, the Court asserted that the Fifth Amendment public use requirement is satisfied if the taking in question, even if for private ends, promises enhanced jobs and tax revenues for the community. The paper first reviews the law and economics of public use, and then argues that the Court’s justification creates the potential for an alliance between local governments and developers that will increase the risk of overuse of eminent domain. Underlying this risk is the unobservability of landowners’ subjective values, which requires local governments to rely on market value as the basis for property taxation.
    Keywords: Eminent domain, public use, just compensation, property taxes, subjective value
    JEL: K11 H41 H71
    Date: 2014–11
  10. By: Brunori, Paolo; Palmisano, Flaviana; Peragine, Vito
    Abstract: This paper addresses the problem of the normative evaluation of income tax systems and income tax reforms. While most of the existing criteria, framed in the utilitarian tradition, are uniquely based on information about individual incomes, this paper, building upon the opportunity egalitarian theory, proposes new equity criteria which take into account also the socio-economic characteristics of individuals. Suitable dominance conditions that can be used to rank alternative tax systems are derived by means of an axiomatic approach. Moreover, the theoretical results are used to assess the redistributive effects of an hypothetical tax reform in Romania through a microsimulation analysis.
    Date: 2014–12–01
  11. By: Bruno Bises (Università Roma Tre); Antonio Scialà (Università Roma Tre)
    Abstract: The taxation of the owner-occupied house – the “principal dwelling‖ was a recurrent central issue in the political and economic debate in Italy especially in the last 15 years. It may be useful, therefore, to address this issue, by both examining the theoretical aspects and reviewing the Italian legislation since the general tax reform of the seventies – whose starting point for direct taxation was the year 1974 – with respect to the two tax bases that can be used in the taxation of owner-occupied dwellings, namely the imputed income and the asset value. This paper first analyzes the tax treatment of principal dwellings in Italy on both equity and efficiency grounds over the past forty years and compares it with the solutions adopted in other countries; second an empirical assessment of the evolution of the total tax burden on owner-occupied houses in Italy is proposed.
    Keywords: Housing taxation, Imputed rent, Irpef, Ici, Imu
    JEL: H21 H24 H71
    Date: 2014–11

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