nep-pub New Economics Papers
on Public Finance
Issue of 2015‒02‒05
fifteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Income Taxation: Mirrlees Meets Ramsey By Heathcote, Jonathan; Tsujiyama, Hitoshi
  2. Optimal Income Taxation with a Stationarity Constraint in a Dynamic Stochastic Economy By Berliant, Marcus; Fujishima, Shota
  3. Tax evasion and the optimal non-linear labour income taxation By Salvador Balle; Lucia Mangiavacchi; Luca Piccoli; Amedeo Spadaro
  4. Simple Labor Income Tax Systems with Endogenous Employment Contracts By Yiqing Xing; Anqi Li
  5. The Taxable Income Elasticity: A Structural Differencing Approach By Kumar, Anil; Liang, Che-Yuan
  6. Capital Taxation and Imperfect Competition: ACE vs. CBIT. By Brekke, Kurt R.; Garcia Pires, Armando J.; Schindler, Dirk; Schjelderup, Guttorm
  7. Shifting Taxes from Labour to Property. A Simulation under Labour Market Equilibrium By Coda Moscarola, Flavia; Colombino, Ugo; Figari, Francesco; Locatelli, Marilena
  8. Optimal Spatial Taxation: Are Big Cities Too Small? By Eeckhout, Jan; Guner, Nezih
  9. Norms, Enforcement, and Tax Evasion By Besley, Timothy J.; Jensen, Anders; Persson, Torsten
  10. The value added tax. The impact of procedures applyed to agricultural producers (reverse charge, quota reducing and the exemption from VAT). Case study: wheat, flour, bread and bakery products By Toma, Mircea
  11. Cigarette Taxes and Older Adult Smoking: Evidence from the Health and Retirement Study By Johanna Catherine Maclean; Asia Sikora Kessler; Donald S. Kenkel
  12. Corporate Tax Convergence in Asian and Pacific Economies By Yang Chen; Juan Carlos Cuestas; Paulo José Regis
  13. The impact of a carbon tax on manufacturing: evidence from microdata By Ralf Martin; Laure B. de Preux; Ulrich J. Wagner
  14. Mansion tax: The Effect of Transfer Taxes on the Residential Real Estate Market By Kopczuk, Wojciech; Munroe, David
  15. Public Private Partnership from Budget Constraints: Looking for Debt Hiding? By Marco Buso; Frederic Marty; Tra Tran Phuong

  1. By: Heathcote, Jonathan (Federal Reserve Bank of Minneapolis); Tsujiyama, Hitoshi (Goethe University Frankfurt)
    Abstract: What structure of income taxation maximizes the social benefits of redistribution while minimizing the social harm associated with distorting the allocation of labor input? Many authors have advocated scrapping the current tax system, which redistributes primarily via marginal tax rates that rise with income, and replacing it with a flat tax system, in which marginal tax rates are constant and redistribution is achieved via non-means-tested transfers. In this paper we compare alternative tax systems in an environment with distinct roles for public and private insurance. We evaluate alternative policies using a social welfare function designed to capture the taste for redistribution reflected in the current tax system. In our preferred specification, moving to the optimal flat tax policy reduces welfare, whereas moving to the optimal fully nonlinear Mirrlees policy generates only tiny welfare gains. These findings suggest that proposals for dramatic tax reform should be viewed with caution.
    Keywords: Optimal income taxation; Mirrlees taxation; Ramsey taxation; Tax progressivity; Flat tax; Private insurance; Social welfare functions
    JEL: E62 H21 H23 H31
    Date: 2015–01–22
  2. By: Berliant, Marcus; Fujishima, Shota
    Abstract: We consider the optimal nonlinear income taxation problem in a dynamic, stochastic environment when the government cannot change the tax rule as uncertainty resolves. Due to such a stationarity constraint, our taxation problem is reduced to a static one over an expanded type space. We strengthen the argument in the static model that the zero top marginal tax rate result is of little practical importance because it is actually relevant only when the top earner in the initial period receives the highest shock in every subsequent period. Under a general stochastic structure such that the support of types moves over time, all people’s allocations are almost surely distorted in any period.
    Keywords: Optimal income taxation; New dynamic public finance
    JEL: H21
    Date: 2015–01–28
  3. By: Salvador Balle (Universitat de les Illes Balears); Lucia Mangiavacchi (Universitat de les Illes Balears); Luca Piccoli (Universitat de les Illes Balears); Amedeo Spadaro (Universitat de les Illes Balears)
    Abstract: The present work studies optimal taxation of labour income when taxpayers are allowed to evade taxes. The analysis is conducted within a general non-linear tax framework, providing a characterisation of the solution for risk-neutral and risk-averse agents. For risk-neutral agents the optimal government choice is to enforce no evasion and to apply the original Mirrlees' rule for the optimal tax schedule. The no evasion condition is precisely determined by a combination of a sufficiently large penalty and a constant auditing probability. Similar results hold for risk-averse agents. Our findings imply that a government aiming at maximizing social welfare should always enforce no evasion and provide simple rules to pursue this objective.
    Keywords: Tax Evasion, Optimal Taxation, Social Welfare
    JEL: D31 H21 H26
    Date: 2015
  4. By: Yiqing Xing (Stanford University); Anqi Li (Washington University in St. Louis)
    Abstract: We use firm's endogenous contractual response to help implement the constrained first best through a simple yet powerful progressive labor income tax system. In our model, workers privately experience both a persistent ability shock and many transient productivity shocks during their life cycles. The optimal tax system is anonymous and time-invariant, but it achieves two goals. First, it directly redistributes the life-cycle income across workers of different ability types. Second, it indirectly induces firms to insure workers against transient shocks with efficiency wage contracts.
    Date: 2014
  5. By: Kumar, Anil (Research Department, Federal Reserve Bank of Dallas); Liang, Che-Yuan (Uppsala Center for Fiscal Studies)
    Abstract: We extend a standard taxable income model with its typical functional-form assumptions to account for nonlinear budget sets. We propose a new method to estimate a taxable income elasticity that is more policy relevant than the typically estimated elasticity based on linearized budget sets. Using U.S. data from the NBER tax panel for 1979-1990 and differencing methods, we estimate an elasticity of 0.75 for taxable income and 0.20 for broad income. These estimates are higher than those obtained by specifications based on linearization. Our approach offers a new way to address the problem of endogenous observed marginal tax rates.
    Keywords: taxable income; nonlinear budget sets; panel data
    JEL: D11 H24 J22
    Date: 2015–01–07
  6. By: Brekke, Kurt R. (Dept. of Economics, Norwegian School of Economics and Business Administration); Garcia Pires, Armando J. (Dept. of Economics, Norwegian School of Economics and Business Administration); Schindler, Dirk (Dept. of Economics, Norwegian School of Economics and Business Administration); Schjelderup, Guttorm (Dept. of Economics, Norwegian School of Economics and Business Administration)
    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: 2014–11–03
  7. By: Coda Moscarola, Flavia; Colombino, Ugo; Figari, Francesco; Locatelli, Marilena
    Abstract: A tax shifting from labour income to housing taxation is generally advocated on efficiency grounds. However, most of the empirical literature focuses on the distributional implications of property tax reforms without paying much attention to potential consequences on the labour market. The aim of this paper is to fill this gap by investigating the effects of a tax shifting from labour income to property, guaranteeing revenue neutrality, and to assess the consequences of labour market equilibrium, both on occupation rates and income distribution. We propose to consider a hypothetical tax reform in Italy which uses the revenue of the tax on house property (actually implemented in 2012) for increasing tax credits on low incomes and making them refundable. In order to evaluate the reform we have developed a structural model of household labour supply which takes into account the labour market equilibrium conditions. Overall, the simulated policy provides a more effective income support and better inc
    Date: 2014–12–23
  8. By: Eeckhout, Jan (University College London); Guner, Nezih (MOVE, Barcelona)
    Abstract: We analyze the role of optimal income taxation across different local labor markets. Should labor in large cities be taxed differently than in small cities? We find that a planner who needs to raise revenue and is constrained by free mobility of labor across cities does not choose equal taxes for cities of different sizes. The optimal tax schedule is location specific and tax differences between large and small cities depend on the level of government spending and on the concentration of housing wealth. Our estimates for the US imply higher marginal rates in big cities, but lower than what is observed. Simulating the US economy under the optimal tax schedule, there are large effects on population mobility: the fraction of population in the 5 largest cities grows by 8.0% with 3.5% of the country-wide population moving to bigger cities. The welfare gains however are smaller. Aggregate consumption goes up by 1.53%. This is due to the fact that much of the output gains are spent on the increased costs of housing construction in bigger cities. Aggregate housing consumption goes down by 1.75%.
    Keywords: misallocation, taxation, population mobility, city size, general equilibrium
    JEL: H21 J61 R12 R13
    Date: 2015–01
  9. By: Besley, Timothy J.; Jensen, Anders; Persson, Torsten
    Abstract: This paper studies individual and social motives in tax evasion. We build a simple dynamic model that incorporates these motives and their interaction. The social motives underpin the role of norms and is the source of the dynamics that we study. Our empirical analysis exploits the adoption in 1990 of a poll tax to fund local government in the UK, which led to widespread evasion. We also exploit a series of natural experiments due to narrow election outcomes, which induce shifts into single-majority local governments and lead to more vigorous enforcement of local taxes. The econometric results are consistent with the model’s main predictions on the dynamics of evasion. “A widespread view among tax scholars holds that law enforcement does not explain why people pay taxes. The penalty for ordinary tax convictions is small; the probability of detection is trivial; so the expected sanction is small. Yet large numbers of Americans pay their taxes. ... Some scholars therefore conclude that the explanation for the tendency to pay taxes must be that people are obeying a norm — presumably a norm of tax payment or a more general norm of law-abiding behavior.” Posner (2000, page 1782)
    Keywords: poll tax; social norms; tax evasion
    JEL: H26 H71
    Date: 2015–01
  10. By: Toma, Mircea
    Abstract: The introduction or elimination, increase or decrease of taxes and contributions, theoretical and practical, can not ignore the direct and / or underlying effects (collateral) on chain: Financial institutions - Suppliers of inputs - Agricultural producers - En-gross traders - Processing industry - En-detail traders - Consumer - State Budget. Solutions require transparency, solidarity, equity, social justice in the distribution of efforts and usufruct(profit) for the whole chain participants in achieving useful goods and services to human society. A particularly aspect has VAT with effect from 1 July 1993, as a Romanian fiscal system compatible with EU procedures. By the additions and changes to VAT management procedures for agricultural activities (exemption from VAT of individual producers, the reverse charge in the production of cereals and technical crops, reducing the quota of VAT collected on chain at 9% for bread), fiscal inequity was created between farmers according to the legal status of the organization and operation, between sectors of agricultural production, but also to the users of agricultural production. The most disadvantaged are those of 3,859,000 individual farmers, family farms and associations without legal status, that use 7.45 million ha (56% of the total utilized agricultural of 13,306,000 ha). The study conclusion is the need of adapting VAT management procedures to the realities of Romanian agriculture by recognizing VAT on inputs used for agricultural production by individual producers, legal unorganized, valorised at the economic agents. By the recommended measures the individual producers' incomes grow by about 13-15% (300- 500 lei / ha wheat equivalent) without affecting the cost of raw materials to users of agricultural production, even if it increases the financial effort for its purchase. There are eliminated the discrimination between sectors of agricultural production (crop, livestock, horticulture, wine and fruit growing, fish, etc.), there are created conditions for the consolidation of farms and unblocking the association process and the formation of producer groups and/or agricultural cooperatives and a better use of financial resources and grants. It increases the efficiency and contribution of agriculture to the state budget revenues. Those 3,859,000 of individual producers (individual businesses, family farms, associations) legal unorganized, and the 31 thousand companies with legal personality for the 5.856 million ha(44%) of operation. (RGA-2010) beneficiate the measures proposed. Agricultural production is included in the fiscal system, the receipts and payments are fluidized and reduce the pressure for VAT refunds from the state budget (about 108 million. Lei / year for the wheat used for bread). It reduces the phenomenon of unfair competition and tax evasion area, bureaucracy, abuse and corruption. Fees, taxes and contributions should not be treated as simple budgetary resources, but also as effective tools of orientation farmers, and not only, through the level, mechanisms, procedures of charging and taxing that the state institutions can promote for the stabilization and improvement production and supply of agricultural services as part of a functioning market economy.
    Keywords: VAT, reverse charge, exemption, reduced VAT rate, VAT collection; tax evasion, farms, farmers, financial resources, efficiency, economic crisis, budget revenues
    JEL: E62 Q12 Q18
    Date: 2014–11–20
  11. By: Johanna Catherine Maclean (Department of Economics, Temple University); Asia Sikora Kessler (Department of Health Promotion, Social and Economic Behavioral Health, University of Nebraska Medical Center); Donald S. Kenkel (Department of Policy Analysis and Management, Cornell University)
    Abstract: In this study we use the Health and Retirement Study (HRS) to test whether older adult smokers, defined as those 50 years and older, respond to cigarette tax increases. Our preferred specifications show that older adult smokers respond modestly to tax increases: a $1.00 (131.6%) tax increase leads to a 3.8% to 5.2% reduction in cigarettes smoked per day (implied tax elasticity = -0.03 to -0.04). We identify heterogeneity in tax-elasticity across demographic groups as defined by sex, race/ethnicity, education, and marital status, and by smoking intensity and level of addictive stock. These findings have implications for public health policy implementation in an aging population.
    Keywords: smoking, cigarette taxes, older adults
    JEL: I1 J14
    Date: 2015–01
  12. By: Yang Chen (Xi’an Jiaotong - Liverpool University); Juan Carlos Cuestas (University of Sheffield); Paulo José Regis (Xi’an Jiaotong - Liverpool University)
    Abstract: Countries in the Asia and Pacific region have shown many macroeconomic similarities such as current account surpluses, exchange rate appreciation, export-oriented economies, growth success, etc. This paper argues that there may be one more macroeconomic feature to add to the list: strong tax convergence. Using data on the statutory corporate tax rate in 15 countries from 1980 to 2014, we identify (i) a significant dynamic tax convergence pattern, and (ii) three tax convergence clubs. The latter consist of the small tax haven economies of Hong Kong and Singapore, the East Asian countries (plus one), and the South and Southeast Asian and Oceania countries. These economies, within groups, have been reducing the tax gaps with their neighbours over time.
    Keywords: convergence clubs, tax policy, Asia and Pacific region
    JEL: C22 E62
    Date: 2015–01
  13. By: Ralf Martin; Laure B. de Preux; Ulrich J. Wagner
    Abstract: We estimate the impact of a carbon tax on manufacturing plants using panel data from the UK production census. Our identification strategy builds on the comparison of outcomes between plants subject to the full tax and plants that paid only 20% of the tax. Exploiting exogenous variation in eligibility for the tax discount, we find that the carbon tax had a strong negative impact on energy intensity and electricity use. No statistically significant impacts are found for employment, revenue or plant exit.
    Keywords: carbon tax; climate change levy; energy use; manufacturing; policy evaluation; UK
    JEL: D21 H23 Q41 Q48 Q54
    Date: 2014–09
  14. By: Kopczuk, Wojciech; Munroe, David
    Abstract: Houses and apartments sold in New York and New Jersey at prices above $1 million are subject to the so-called 1% “mansion tax" imposed on the full value of the transaction. This policy generates a discontinuity (a “notch") in the overall tax liability. We rely on this and other discontinuities to analyze implications of transfer taxes in the real estate market. Using administrative records of property sales, we find robust evidence of substantial bunching and show that the incidence of this tax for transactions local to the discontinuity falls on sellers, may exceed the value of the tax, and is not explained by tax evasion (although supply-side quality adjustments may play a role). Above the notch, the volume of missing transactions exceeds those bunching below the notch. Interpreting our results in the context of an equilibrium bargaining model, we conclude that the market unravels in the neighborhood of the notch: its presence provides strong incentive for buyers and sellers in the proximity of the threshold not to transact. This effect, the identification and recognition of which is novel to this paper, is above and beyond the standard extensive margin response. When present, unraveling affects interpretation and estimation of bunching estimates. Finally, we show that the presence of the tax affects how the market operates away from the threshold—taxation increases price reductions during the search process and in the bargaining stage and weakens the relationship between listing and sale prices. We interpret these results as demonstrating that taxation affects the ultimate allocation in this search market.
    Keywords: housing market; incidence; transaction tax
    JEL: H2 H7 R3
    Date: 2015–01
  15. By: Marco Buso (University of Padova); Frederic Marty (University of Nice); Tra Tran Phuong (University of Paris)
    Abstract: In this paper, we examine whether budget-constrained public authorities are more likely to use a PPP (Public Private Partnership) than traditional procurement methods. Then, we study the possible mechanisms underlying this choice. Our empirical test focuses on France and consists of a two-stage approach. First, we examine the impact of budget constraints on the use of PPPs and find a positive relationship. Second, to better delineate the debt hiding effect, we exploit the 2011 changes to the ability to underwrite PPP debts. We find that debt hiding is a relevant, but not a sufficient element to explain budget-constrained governmentsÕ attitudes towards PPP.
    Date: 2014–11

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