nep-pub New Economics Papers
on Public Finance
Issue of 2015‒08‒13
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. On growth-optimal tax rates and the issue of wealth inequalities By Jean-Philippe Bouchaud
  2. Progressive Taxation as an Automatic Destabilizer under Endogenous Growth By Jang-Ting Guo; Shu-Hua Chen
  3. Do Tax Incentives Affect Business Location? Evidence from Motion Picture Production Incentives By Patrick Button
  4. Optimal Taxation and Public Provision for Poverty Reduction By Kanbur, Ravi; Pirttilä, Jukka; Tuomala, Matti; Ylinen, Tuuli
  5. Ownership, Taxes and Default By Giovanna Nicodano; Luca Regis
  6. The Impact of Short- and Long-Term Participation Tax Rates on Labor Supply By Charlotte Bartels; Nico Pestel
  7. Labour supply and taxation with restricted choices By Magali Beffy; Richard Blundell; Antoine Bozio; Guy Laroque; Maxime To
  8. Does tax competition increase disparity among jurisdictions? By Yutao Han; Patrice Pieretti; Benteng Zou
  9. Value Added Tax policy and the case for uniformity: empirical evidence from Mexico By Laura Abramovsky; Orazio Attanasio; David Phillips
  10. Inequality and Fiscal Redistribution in Middle Income Countries: Brazil, Chile, Colombia, Indonesia, Mexico, Peru and South Africa By Nora Lustig

  1. By: Jean-Philippe Bouchaud (Capital Fund Management and Ecole Polytechnique)
    Abstract: We introduce a highly stylized model of the economy, with a public and private sector coupled through a wealth tax and a redistribution policy. The model can be fully solved analytically, and allows one to address the question of optimal taxation and of wealth inequalities. We find that according to the assumption made on the relative performance of public and private sectors, three situations are possible. Not surprisingly, the optimal wealth tax rate is either 0% for a deeply dysfunctional government and/or highly productive private sector, or 100 % for a highly efficient public sector and/or debilitated/risk averse private investors. If the gap between the public/private performance is moderate, there is an optimal positive wealth tax rate maximizing economic growth, even -- counter-intuitively -- when the private sector generates more growth. The compromise between profitable private investments and taxation however leads to a residual level of inequalities. The mechanism leading to an optimal growth rate is related the well-known explore/exploit trade-off.
    Date: 2015–08
  2. By: Jang-Ting Guo (Department of Economics, University of California Riverside); Shu-Hua Chen (National Taipei University)
    Abstract: It has been shown that in an otherwise standard one-sector real business cycle model with an indeterminate steady state under laissez faire, sufficiently progressive income taxation may stabilize the economy against aggregate fluctuations caused by agents' animal spirits. We show that this previous finding can be overturned within an identical model which allows for sustained endogenous growth. Specifically, progressive taxation may operate like an automatic destabilizer that leads to equilibrium indeterminacy and sunspot-driven cyclical fluctuations in an endogenously growing macroeconomy. This instability result is obtained under two tractable progressive tax policy formulations that have been considered in the existing literature.
    Keywords: Progressive Income Taxation, Automatic Stabilizer, Equilibrium Indeterminacy, Endogenous Growth.
    JEL: E62 O41
    Date: 2015–07
  3. By: Patrick Button (Department of Economics, Tulane University)
    Abstract: Incentives for motion picture production are a recent and popular economic development incentive among U.S. states. I estimate the impacts of state-level motion picture production incentives on filming location, establishments, and employment in the motion picture production industry. Filming locations are highly substitutable while locations for establishments in motion picture production are not substitutable due to agglomeration economies. This provides two very different cases to see how tax incentives affect business location. I quantify impacts on filming location, establishments, and employment using two difference-in-differences methodologies: panel regression analysis and synthetic control case studies of New Mexico and Louisiana, who adopted aggressive incentives early. For incentive data, I created a database of all state incentives from 1980 to 2012 through legal research. For filming location, I use the Internet Movie Database (, which provides 189,598 location choices, and for employment and establishment counts I use the Quarterly Census of Employment and Wages (QCEW). I find that most incentives have a moderate effect on filming location but almost no effects on employment or establishments. These results show that incentives affect location decisions when locations are more substitutable, as in filming, but not otherwise. These results also imply that motion picture production incentives cannot create a local film industry.
    Keywords: tax credits, tax incentive, subsidies, state taxation, firm location, motion picture production, film industry
    JEL: H25 H71 R38 L82 Z11
    Date: 2015–07
  4. By: Kanbur, Ravi; Pirttilä, Jukka; Tuomala, Matti; Ylinen, Tuuli
    Abstract: The existing literature on optimal taxation typically assumes there exists a capacity to implement complex tax schemes, which is not necessarily the case for many developing countries. We examine the determinants of optimal redistributive policies in the context of a developing country that can only implement linear tax policies due to administrative reasons. Further, the reduction of poverty is typically the expressed goal of such countries, and this feature is also taken into account in our model. We derive the optimality conditions for linear income taxation,commodity taxation, and public provision of private and public goods for the poverty minimization case, and compare the results to those derived under a general welfarist objective function. We also study the implications of informality on optimal redistributive policies for such countries, and comment on the potential for minimum wage regulation. The exercise reveals non-trivial differences in optimal tax rules under the different assumptions. The derived formulae also capture the sufficient statistics that the governments need to pay attention to when designing poverty alleviation policies.
    Keywords: commodity taxation; income taxation; poverty; public good provision; redistribution
    JEL: H21 H40 O12
    Date: 2015–07
  5. By: Giovanna Nicodano (University of Turin); Luca Regis (IMT Lucca Institute for Advanced Studies)
    Abstract: This paper determines ownership and leverage of two units facing a tax-bankruptcy trade-off. Connected units have higher leverage and lower tax burden, because of internal support through both bailouts and corporate dividends. Ownership adjusts to additional tax provisions. A hierarchical group with a wholly-owned subsidiary results from Thin Capitalization rules. The presence of corporate dividend taxes generates horizontal groups, or a Special Purpose Vehicle, or a private equity fund. Combinations of tax provisions contain tax savings, debt and default in connected units. No bailout provisions, such as the Volcker rule, succeed in reducing leverage and default.
    Keywords: Ownership structure, Capital structure, Dividend taxes, Thin Capitalization, Groups, Securitization, Private equity
    JEL: G32 H25 H32 L22
    Date: 2015–07
  6. By: Charlotte Bartels; Nico Pestel
    Abstract: Generous income support programs as provided by European welfare states have often been blamed to hamper employment. This paper investigates the importance of incentives inherent in the tax-benefit system for the individual decision to take up work. Using German microdata over the period 1993-2010 we find that recent reforms in Germany increased work incentives at the extensive margin measured by the Participation Tax Rate (PTR), particularly for low income individuals. Work incentives are even higher if the time horizon is extended to more than one year, pointing at an overestimation of the disincentives by standard measures. Regression analysis reveals that a decrease in the PTR increases the likelihood of taking up work significantly.
    Keywords: Labor force participation, work incentives, welfare, unemployment insurance, income taxation
    Date: 2015
  7. By: Magali Beffy (Institute for Fiscal Studies); Richard Blundell (Institute for Fiscal Studies and IFS and UCL); Antoine Bozio (Institute for Fiscal Studies and Paris School of Economics); Guy Laroque (Institute for Fiscal Studies); Maxime To (Institute for Fiscal Studies)
    Abstract: A model of labour supply is developed in which individuals face restrictions on hours choices. Observed hours reflect both the distribution of preferences and the distribution of offers. In this framework the choice set is limited and observed hours may not satisfy the revealed preference conditions for ‘rational’ choice. We show first that when the offer distribution is known, preferences can be identified. We then show that, where preferences are known, the offer distribution can be fully recovered. We also develop conditions for identification of both preferences and the offer distribution. We illustrate this approach in a labour supply setting with nonlinear budget constraints. The occurrence of nonlinearities in the budget constraint can directly reveal restrictions on choices. This framework is then used to study the labour supply choices of a large sample of working age mothers in the UK, accounting for nonlinearities in the tax and welfare benefit system, fixed costs of work and restrictions on hours choices.
    Date: 2015–01
  8. By: Yutao Han (University of International Business and Economics, Beijing, China); Patrice Pieretti (CREA, Université de Luxembourg); Benteng Zou (CREA, Université de Luxembourg)
    Abstract: This paper investigates whether a less-developed economy can catch up with a more developed one when they compete for foreign direct investments. The main message of the paper is that jurisdictional competition can enable the lagging country to catch up if capital mobility is sufficiently high and the productivity gap is not too large. Further, we show that size asymmetry reinforces (weakens) the productivity catch-up resulting from interjurisdictional competition when the lagging economy is small (large). Finally, we demonstrate that the development gap widens when capital becomes less mobile, which is at odds with previous findings
    Keywords: interjurisdictional competition; productivity catch-up; size asymmetry
    JEL: H1 H73 C72
    Date: 2015
  9. By: Laura Abramovsky (Institute for Fiscal Studies); Orazio Attanasio (Institute for Fiscal Studies and University College London); David Phillips (Institute for Fiscal Studies)
    Abstract: Value added taxes (VAT) are an important, and in many cases increasing, source of revenue in both developed and developing countries. Unsurprisingly there is an intense academic and policy debate about the appropriate VAT rate structure, for both equity and efficiency reasons. In this paper we examine the distributional and efficiency case for VAT rate differentiation in Mexico, and analyse the effects of the 2010 reforms to Mexico’s tax system, making use of a tax micro-simulation model, MEXTAX. The amendments to the initial proposed reforms were made to make the tax change more ‘progressive’. We find that, measured as a proportion of income or expenditure, poorer households did gain most from the amendments, but that the cash-terms gains were much larger for households with high levels of income and expenditure. In other words, the reduction in tax take from the amendments was weakly targeted at poorer households; even simple universal cash transfers would have been much more beneficial to poor households. This shows the distributional case for zero rates of VAT on goods like food is weak – especially given the growing sophistication of cash transfer programmes in particularly middle income countries. We then examine the efficiency implications of Mexico’s VAT rate structure. We find that deviations from uniformity have a notable effect on spending patterns, but very little effect on aggregate welfare and economic efficiency as estimated by a standard QUAIDS model of consumer demand. We then argue that economic informality may actually provide an efficiency reason for lower rates of tax on goods like food for which informal production and transactions seem to be much more prevalent. This may turn the typical arguments about differential VAT rates on their head. Rather than being justifiable on distributional grounds, but entailing an efficiency cost, the reverse may actually be true.
    Keywords: Indirect taxes, consumer demand, optimal taxation, micro-simulators, Mexico
    JEL: H20 H21 H31 D12 D30
    Date: 2015–02
  10. By: Nora Lustig (Department of Economics, Tulane University)
    Abstract: This paper examines the redistributive impact of fiscal policy for Brazil, Chile, Colombia, Indonesia, Mexico, Peru and South Africa using comparable fiscal incidence analysis with data from around 2010. The largest redistributive effect is in South Africa and the smallest in Indonesia. Success in fiscal redistribution is driven primarily by redistributive effort (share of social spending to GDP in each country) and the extent to which transfers/subsidies are targeted to the poor and direct taxes targeted to the rich. While fiscal policy always reduces inequality, this is not the case with poverty. Fiscal policy increases poverty in Brazil and Colombia (over and above market income poverty) due to high consumption taxes on basic goods. The marginal contribution of direct taxes, direct transfers and in-kind transfers is always equalizing. The marginal effect of net indirect taxes is unequalizing in Brazil, Colombia, Indonesia and South Africa. Total spending on education is pro-poor except for Indonesia, where it is neutral in absolute terms. Health spending is pro-poor in Brazil, Chile, Colombia and South Africa, roughly neutral in absolute terms in Mexico, and not pro-poor in Indonesia and Peru.
    Keywords: fiscal incidence, social spending, inequality, developing countries
    JEL: H22 D31 I3
    Date: 2015–07

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