nep-pub New Economics Papers
on Public Finance
Issue of 2015‒06‒27
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Redistribution and Insurance with Simple Tax Instruments By Findeisen, Sebastian; Sachs, Dominik
  2. Income effects and the welfare consequences of tax in differentiated product oligopoly By Griffith, Rachel; Nesheim, Lars; O'Connell, Martin
  3. Joint Design of Emission Tax and Trading Systems By Caillaud, Bernard; Demange, Gabrielle
  4. Trial and Error? Reelection Concerns and Policy Experimentation during the U.S. Welfare Reform By Bernecker, Andreas; Boyer, Pierre C.; Gathmann, Christina
  5. Corporate Tax Incentives and Capital Structure: Empirical Evidence from UK Tax Returns By Michael P. Devereux; Giorgia Maffini; Jing Xing

  1. By: Findeisen, Sebastian (University of Mannheim); Sachs, Dominik (University of Cologne)
    Abstract: We analyze optimal taxation of labor and capital income in a life-cycle framework with idiosyncratic income risk. We provide a novel decomposition of labor income tax formulas into a redistribution and an insurance component. The latter is independent of the social welfare function and determined by the degree of income risk and risk aversion. The optimal linear capital tax is non-zero and trades off redistribution and insurance against savings distortions. Our quantitative results reveal that the insurance component contributes significantly to optimal labor tax rates and provides an informative lower bound on optimal taxes: even for welfare functions that do not value redistribution, marginal tax rates are positive for all income levels. Optimal capital taxes are significant and yield sizable welfare gains; in particular if labor income taxes are suboptimal.
    Keywords: optimal taxation, capital taxation, redistribution, insurance
    JEL: H21 H23
    Date: 2015–06
  2. By: Griffith, Rachel; Nesheim, Lars; O'Connell, Martin
    Abstract: Random utility models are widely used to study consumer choice. The vast majority of applications make strong assumptions about the marginal utility of income, which restricts income effects, demand curvature and pass-through. We show that flexibly modeling income effects can be important, particularly if one is interested in the distributional effects of a policy change, even in a market in which, a priori, the expectation is that income effects will play a limited role. We allow for much more flexible forms of income effects than is common and we illustrate the implications by simulating the introduction of an excise tax.
    Keywords: compensation variation; demand estimation; income effects; oligopoly; pass-through
    JEL: H20 L13
    Date: 2015–06
  3. By: Caillaud, Bernard; Demange, Gabrielle
    Abstract: This paper analyzes the joint design of fiscal and cap-and-trade instruments in climate policies under uncertainty. Whether the optimal mechanism is a mixed policy (with some firms subject to a tax and others to a cap-and-trade) or a uniform one (with all firms subject to the same instrument) depends on parameters reflecting preferences, production, and, most importantly, the stochastic structure of the shocks affecting the economy. This framework is then used to address the issue of the non-cooperative design of ETS in various areas worldwide and to characterize the resulting inefficiency and excess in emission. We provide a strong Pareto argument in favor of merging ETS of different regions in the world and evaluate the welfare gains in each region.
    Keywords: cap-and-trade mechanisms; climate policies; tax
    JEL: D62 H23 Q54
    Date: 2015–06
  4. By: Bernecker, Andreas (University of Mannheim); Boyer, Pierre C. (University of Mannheim); Gathmann, Christina (Heidelberg University)
    Abstract: We study the political economy of policy innovations during the U.S. welfare reform in 1996. Specifically, we investigate how reputation concerns among governors influence the decision to experiment with welfare policies. In line with a political agency model, our empirical results suggest that governors with high reputation among the electorate are less likely to experiment with welfare policies than governors with low reputation. Yet, governors with high reputation who are less concerned about reelection actually experiment more than governors striving for reelection. Overall, our findings imply that reelection concerns may inhibit innovation in the public sector.
    Keywords: policy innovation, reputation concerns, U.S. welfare reform, experimentation, reelection concerns
    JEL: I38 H11 H77 D78 D83
    Date: 2015–06
  5. By: Michael P. Devereux; Giorgia Maffini; Jing Xing
    Abstract: This paper examines how companies’ capital structure is affected by the corporate income tax system. Our analysis employs confidential company-level corporation tax return data in the UK. Our main identification strategy is based on variation in companies⣠marginal tax rates due to the existence of kinks in the corporate tax rate schedule. Using a dynamic adjustment model of capital structure, we find a positive and substantial long-run tax effect on companies' financial leverage. We show that there are considerable discrepancies between estimates of taxable profits reported in tax return data and in financial statements and that the estimated tax effect on capital structure using financial statements is likely to be biased downward. We find that companies adjust their capital structures gradually in response to changes in the marginal tax rate. Moreover, we find that the external leverage of domestic stand-alone companies and of multinational companies responds strongly to corporate tax incentives.
    Keywords: Corporate taxation, capital structure, tax returns.

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