nep-pub New Economics Papers
on Public Finance
Issue of 2015‒02‒22
fourteen 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 Asset Accumulation By Köhne, Sebastian; Abraham, Arpad; Pavoni, Nicola
  3. Optimal taxation under regional inequality By Zoubek, Malte; Kessing, Sebastian G.; Lipatov, Vilen
  4. Designing Efficient Education and Tax Policies By Sachs, Dominik; Findeisen, Sebastian
  5. Capital Taxation and Imperfect Competition: ACE vs. CBIT By Schindler, Dirk; Brekke, Kurt; Pires, Armando; Schjelderup, Guttorm
  6. The Occurrence of Tax Amnesties: Theory and Evidence By Ralph-C. Bayer
  7. Higher taxes, more evasion? Evidence from border differentials in TV license fees By Berger, Melissa; Fellner-Röhling, Gerlinde; Sausgruber, Rupert; Traxler, Christian
  8. Fiscal federalism and tax enforcement By Bönke, Timm; Jochimsen, Beate; Schröder, Carsten
  9. Employment Effects of Local Business Taxes By Siegloch, Sebastian
  10. Musings on the Social Discount Rate By Arnold C. Harberger; Glenn P. Jenkins
  11. When Trade Leads to Inefficient Public Good Provision: a Tax competition model. By Emmanuelle Taugourdeau; Abderrahmane Ziad
  12. The Distribution of Household Income and Federal Taxes, 2011 By Congressional Budget Office
  13. What drives tax refund maximization from inter-temporal loss usage? Evidence from the German taxpayer panel By Werdt, Clive
  14. Tax mimicking in the short- and long-run: Evidence from German reunification By Baskaran, Thushyanthan

  1. By: Heathcote, Jonathan; Tsujiyama, Hitoshi
    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: flat tax; Mirrlees taxation; optimal income taxation; private insurance; Ramsey taxation; social welfare functions; tax progressivity
    JEL: E62 H21 H23 H31
    Date: 2015–02
  2. By: Köhne, Sebastian; Abraham, Arpad; Pavoni, Nicola
    Abstract: Several frictions restrict the government s ability to tax assets. First of all, it is very costly to monitor trades on international asset markets. Moreover, agents can resort to non-observable low-return assets such as cash, gold or foreign currencies if taxes on observable assets become too high. This paper shows that limitations in asset observability have important consequences for the taxation of labor income. Using a dynamic moral hazard model of social insurance, we find that optimal labor income taxes typically become less progressive when assets are imperfectly observed. We evaluate the effect quantitatively in a model calibrated to U.S. data.
    JEL: H21 E21 D82
    Date: 2014
  3. By: Zoubek, Malte; Kessing, Sebastian G.; Lipatov, Vilen
    Abstract: Regional productivity di erences are large and provide scope for productivity-enhancing inter-regional labor mobility. Using an optimal taxation framework that combines an intensive labor supply margin with an extensive, productivity- enhancing migration margin, we explore the implications of regional productivity differences for the design of optimal tax transfer-schemes. Regional inequality poses an additional restriction on the government which can limit optimal redistribution. With intra-regional migration marginal tax rates tend to be reduced and negative tax rates are possible. Our simulations indicate that the additional restriction can be quantitatively important and that negative tax rates can occur for empirically plausible cases.
    JEL: H11 H21 R12
    Date: 2014
  4. By: Sachs, Dominik; Findeisen, Sebastian
    Abstract: We study education and income tax policies in a model with endogenous selection into college. Our framework is strongly influenced by the empirical college literature and incorporates heterogenous returns and tastes for college, earnings risk (implying uncertain returns to college) and potentially borrowing constraints. We (i) calculate revenue effects of various policy reforms starting from the current system and (ii) derive conditions for optimal education and tax policies with various degrees of sophistication: optimal college subsidies for given income taxes and vice versa, jointly optimal taxes and subsidies, and optimal education dependent taxes. We estimate the relevant parameters of the model for quantitative analysis. We find that the endogeneity of the college choice has only a small impact on optimal taxes and increasing subsidies to their optimal level leads to large welfare gains. Finally, we find that for the current US policies, an increase in education subsidies is self-financing via higher tax revenue in the future; if we allow grants to condition on parental background, this effect gets even stronger and children with poor academic background should receive higher subsidies for pure efficiency reasons -- efficient policies favor social mobility.
    JEL: H21 H23 I22
    Date: 2014
  5. By: Schindler, Dirk; Brekke, Kurt; Pires, Armando; Schjelderup, Guttorm
    Abstract: This paper sets up an imperfect-competition model of a small open economy, and undertakes a welfare comparison of the Corporate Business Income Tax (CBIT) and the Allowance for Corporate Equity tax (ACE). A main result is that a small open economy should levy a positive source tax on capital in a market with free firm entry. Our analysis also shows that the well known neutrality property of the ACE tax is no longer true when firms are mobile and can enter the market. Which tax system is better from a welfare point of view, CBIT or ACE, is shown to depend on assumptions about production technology and entry.
    JEL: H25 D43 H32
    Date: 2014
  6. By: Ralph-C. Bayer (School of Economics, University of Adelaide)
    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 balances costs and benefits of amnesty programs. From the model we derive hypotheses about the factors that should influence the occurrence of tax amnesties. To test these predictions empirically, 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 governmentÂ’s fiscal requirements and the taxpayersÂ’ expectations on future amnesties.
    Date: 2015–02
  7. By: Berger, Melissa; Fellner-Röhling, Gerlinde; Sausgruber, Rupert; Traxler, Christian
    Abstract: This paper studies the evasion of TV license fees in Austria. We exploit border differentials to identify the effect of fees on evasion. Comparing municipalities at the low- and high-fee side of state borders reveals that higher fees trigger significantly more evasion. The central estimate from a spatial regression discontinuity design indicates that a one percent increase in fees raises the evasion rate by 0.3 percentage points. The positive effect of fees on evasion is confirmed in different parametric and non-parametric approaches and survives several robustness checks.
    Keywords: Evasion,TV License Fees,Border Tax Differentials,Regression Discontinuity Design
    JEL: H26 H27
    Date: 2015
  8. By: Bönke, Timm; Jochimsen, Beate; Schröder, Carsten
    Abstract: In many federations, fiscal equalization schemes soften fiscal imbalances across the member states. Such schemes usually imply that a member state internalizes only a small fraction of the additional tax revenue from an expansion of the state-specific tax base, while the remainder of the additional tax revenue is redistributed horizontally or vertically. We address the question as to which extent state-level authorities in such a federation under-exploit their tax bases. By means of a stylized model we show that the state authorities in such a federation have incentives to align the effective tax rates of the state residents to the internalized marginal return from a stricter enforcement of the tax law. We empirically test the model using two approaches. In a state-level approach, we explore whether the state-specific internalized marginal returns matter for the states investments in tax enforcement. In a micro-econometric approach, using OLS regressions and natural-experiments, we explore whether internalized marginal returns matter for the effectiveness of the states tax enforcement activities, captured by the tax deductions granted to tax units. All our estimates support the results from our theoretical model.
    JEL: H21 H77 C21
    Date: 2014
  9. By: Siegloch, Sebastian
    Abstract: This is the first paper to thoroughly investigate the employment effects of corporate taxation. Higher taxes are theoretically shown to have a negative impact on employment through reduced investments, if labor is regionally mobile. I test this prediction by exploiting the specific setting of the German local business tax, where on average 10% of the 11,441 German municipalities change their tax rate each year. Relying on rich administrative linked employer-employee panel data, I provide non-parametric and parametric evidence that employment declines if corporate tax rates increase. For given wages, a one euro increase in the tax bill of corporate firms leads to a reduction in the wage bill by 30 cents over two years. I show empirically that the negative employment effect is triggered by reduced net investments and that workers are mobile within labor market regions.
    JEL: H22 H25 J21
    Date: 2014
  10. By: Arnold C. Harberger (University of California, Los Angeles, USA); Glenn P. Jenkins (Queen’s University, Canada and Eastern Mediterranean University, North Cyprus)
    Abstract: This paper is mainly concerned with weighted average measures of the social discount rate, where the components of the average are the marginal productivity of investment (measured by its gross-of-tax rate of return), and the marginal rate of time preference (measured by the net-of-tax yield of capital). We believe that these components should best be measured using data (the national accounts) that span the whole economy and reflect the product actually produced and the rewards actually perceived. We use a methodology based on just four familiar parameters to generate productivity estimates applicable to a wide range of countries. In the process, we make an adjustment for infrastructure investment, also excluding income from land, monopoly markups, supra-marginal returns due to TFP increases, and returns to capital in financial intermediation. The end products are estimates of social discount rates averaging around 8 percent for the advanced countries, and 10 percent for healthy developing countries and Asian Tigers.
    Keywords: Social discount rate, benefit-cost analysis, opportunity cost, time preference
    JEL: H43 D61
    Date: 2015–01
  11. By: Emmanuelle Taugourdeau (Centre d'Economie de la Sorbonne - Paris School of Economics); Abderrahmane Ziad (CREM - Université de Caen)
    Abstract: This paper analyses the tax competition mechanisms in a context of commodity trade. We show that the trade market equilibrium may restore the efficiency of the public good provision when agents from different countries have symmetric preferences. Asymmetry in preferences implies over or underprovision in public goods depending on the degree of asymmetry between countries. In both cases, the price adjustment leaves the capital stock unchanged so that the stock of capital is not affected by the taxes. Finally, we show that the centralized choice does not systematically restore the efficiency of the public good provision.
    Keywords: Tax competition, Nash equilibrium, Interregional Trade.
    JEL: H21 H41 E62 F12
    Date: 2015–02
  12. By: Congressional Budget Office
    Abstract: Because higher-income households receive a much greater share of the nation’s before-tax income and pay higher average federal tax rates on that income, they pay much more in federal taxes than lower-income households do. In 2011, households in the top quintile received 52 percent of before-tax income and paid 69 percent of federal taxes; households in the bottom quintile received 5 percent of before tax-income and paid 1 percent of federal taxes.
    JEL: H20 H24 H50 J30
    Date: 2014–11–12
  13. By: Werdt, Clive
    Abstract: This paper investigates the inter-temporal loss usage of tax units in Germany. Tax units that experience a loss in a year can offset that loss with positive income from adjacent year to receive a tax refund. Similar to companies, tax units can employ losses as carry-back in the year before the loss or as carry-forward in the year following the loss. The tax code does not force a particular loss usage but provides tax units with freedom to allocate the losses between carry-back and carry-forward. Choosing an individual appropriate allocation of carry-back and carry-forward creates a maximal tax refund. Intertemporal loss usage is a special case of tax avoidance: tax units receive a tax refund from loss usage as carry-forward (carry-back) but forfeit the alternative refund from carry-back (carry-forward). Estimations show that the probability of maximizing the tax refund highly depends on the difference of the tax rates from the loss adjacent years. An increase of 10 percentage points of the tax rate difference increases the probability of tax refund maximization by 24.5%. This confirms that tax avoidance is strong in case of significant tax incentives.
    Keywords: losses,tax planing,taxpayer panel,administrative data
    JEL: H24 H63 D14
    Date: 2015
  14. By: Baskaran, Thushyanthan
    Abstract: This paper uses the quasi-experiment of Germany´s reunification to identify local tax mimicking by municipalities in Eastern-Germany. After reunification, East-German municipalities were allowed to independently set, for the first time in decades, local business and property tax rates. I explore whether the tax rates chosen by East-German border municipalities were influenced by the tax rates of adjacent West-German municipalities. To obtain causal estimates, I rely on instrumental variables regressions within the spatial lag framework, using West-German border municipalities - tax rates in 1989 as instruments for their post-reunification tax rates. The results suggest that East-German municipalities mimicked business tax rates immediately after reunification, but not in later years. I find no evidence of mimicking for property taxes. These results indicate that mimicking is not an important determinant of local tax policy.
    Keywords: tax mimicking,business taxes,property taxes,German reunification
    JEL: H20 H71 H77
    Date: 2015

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