nep-pub New Economics Papers
on Public Finance
Issue of 2015‒09‒18
sixteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Income Taxation under Unemployment: A Sufficient Statistics Approach By Kavan Kucko; Johannes Schmieder; Etienne Lehmann; Kory Kroft
  2. Evolutionary competition and profit taxes: market stability versus tax burden By Schmitt, Noemi; Westerhoff, Frank
  3. Tax loss carryforwards and corporate behavior By Masanori Orihara
  4. The Effects of the Tax Deduction for Postsecondary Tuition: Implications for Structuring Tax-Based Aid By Caroline M. Hoxby; George B. Bulman
  5. On the Optimal Provision of Social Insurance: Progressive Taxation versus Education Subsidies in General Equilibrium By Dirk Krueger; Alexander Ludwig
  6. Budgets under Delegation By Kimiko Terai; Amihai Glazer
  7. Crowding Out in Ricardian Economies By Andrew B. Abel
  8. State Taxation and the Reallocation of Business Activity: Evidence from Establishment-Level Data By Xavier Giroud; Joshua Rauh
  9. The Financial Feasibility of Delaying Social Security: Evidence from Administrative Tax Data By Gopi Shah Goda; Shanthi Ramnath; John B. Shoven; Sita Nataraj Slavov
  10. Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data By Emmanuel Saez; Gabriel Zucman
  11. Do Small Businesses Respond to an Increase in the Probability of a Tax Audit? Evidence from a Policy Reform in Italy By Alessandro Santoro
  12. Determinants of Fiscal Distress in Italian Municipalities By W. D. Gregori; L. Marattin
  13. Tax Evasion across Industries: Soft Credit Evidence from Greece By Nikolaos Artavanis; Adair Morse; Margarita Tsoutsoura
  14. Natural Disasters and Taxation in Japan By Satoshi Watanabe
  15. Stock market listing and corporate tax aggressiveness: Evidence from legal reforms in squeeze out in Japan By Masanori Orihara
  16. Shale Public Finance: Local Government Revenues and Costs Associated with Oil and Gas Development By Richard G. Newell; Daniel Raimi

  1. By: Kavan Kucko (Boston University); Johannes Schmieder (Boston University); Etienne Lehmann (University Pantheon Assas Paris II); Kory Kroft (University of Toronto)
    Abstract: This paper is the first to derive an empirically implementable formula for the optimal income tax, in the presence of unemployment. This formula nests a broad variety of structures of the labor market, such as the standard competitive model with fixed or flexible wages and models with matching frictions. As such, we are able to show that several previously derived optimal tax formulas are nested by this formula. Our theoretical results show that several reduced-form parameters are welfare-relevant: the macro employment elasticity with respect to taxes and the micro and macro participation elasticities with respect to taxes. We estimate all three of these reduced-form parameters using policy variation in tax liabilities stemming from the U.S. tax and transfer system for over 20 years. Since our tax formula is stated in terms of ?sufficient statistics?, we numerically solve for the optimal tax schedule using our empirical estimates and discuss how the results compare to those in the literature. Finally we also provide estimates of how employment and participation elasticities vary over the business cycle that suggest ? together with our theoretical results ? that in recessions the optimal tax schedule looks more like a Negative Income Tax (NIT) and less like an Earned Income Tax Credit (EITC).
    Date: 2015
  2. By: Schmitt, Noemi; Westerhoff, Frank
    Abstract: The seminal cobweb model by Brock and Hommes reveals that fixed-point dynamics may turn into increasingly complex dynamics as firms switch more quickly between competing expectation rules. While policy-makers may be able to manage such rational routes to randomness by imposing a proportional profit tax, the stability-ensuring tax rate may cause a very high tax burden for firms. Using a mix of analytical and numerical tools, we show that a rather small profit-dependent lump-sum tax may even be sufficient to take away the competitive edge of cheap destabilizing expectation rules, thereby contributing to market stability.
    Keywords: cobweb models,discrete choice approach,intensity of choice,profit taxes,tax burden,stability analysis
    JEL: D84 E30 Q11
    Date: 2015
  3. By: Masanori Orihara (Policy Research Institute, Ministry of Finance,Japan)
    Abstract: Tax losses are prevalent in the corporate sector of many countries. Firms with tax losses can deduct these losses from current or future taxable income. This deduction reduces corporate marginal tax rates and in turn can affect managerial incentives. Using industry-year level tax return data and accounting data, we show that tax loss carryforwards decrease leverage. We also show that tax loss carryforwards increase investments when the effective tax rates among the industry-year observations are considerably affected by tax loss carryforwards. Our findings suggest that the incentive effects of tax loss carryforwards on corporate behavior need to be considered in tax reforms in addition to other factors in public finance.
    Keywords: tax loss carryforward, leverage, investment
    JEL: G31 G32 H25
  4. By: Caroline M. Hoxby; George B. Bulman
    Abstract: The federal tax deduction for tuition potentially increases investments in postsecondary education at minimal administrative cost. We assess whether it actually does this using regression discontinuity methods on the income cutoffs that govern eligibility for the deduction. Although many eligible households take nearly the maximum deduction allowed, we find no evidence that it affects attending college (at all), attending full- versus part-time, attending four- versus two-year college, the resources experienced in college, the amount paid for college, or student loans. Our analysis suggests that the deduction's inefficacy may be due to issues of salience, timing, and the method of receipt. We argue that the deduction might increase college-going if it were modified in simple ways that would not increase costs but would make it more likely to relax liquidity constraints and be perceived as a price change (which they is) as opposed to an income change. We outline how such modifications could be tested. This study has independent applied econometrics interest because households who would be just above a cut-off manage their incomes so that they fall slightly below it. This income management generates bias due to reverse causality, and we explore how to choose "doughnut-holes" that avoid bias without undue loss of statistical power.
    JEL: C21 H2 H24 H26 I22 I23
    Date: 2015–09
  5. By: Dirk Krueger; Alexander Ludwig
    Abstract: In this paper we compute the optimal tax and education policy transition in an economy where progressive taxes provide social insurance against idiosyncratic wage risk, but distort the education decision of households. Optimally chosen tertiary education subsidies mitigate these distortions. We highlight the quantitative importance of general equilibrium feedback effects from policies to relative wages of skilled and unskilled workers: subsidizing higher education increases the share of workers with a college degree thereby reducing the college wage premium which has important redistributive benefits. We also argue that a full characterization of the transition path is crucial for policy evaluation. We find that optimal education policies are always characterized by generous tuition subsidies, but the optimal degree of income tax progressivity depends crucially on whether transitional costs of policies are explicitly taken into account and how strongly the college premium responds to policy changes in general equilibrium.
    JEL: E62 H21 H24
    Date: 2015–09
  6. By: Kimiko Terai (Faculty of Economics, Keio University); Amihai Glazer (Department of Economics, University of California, Irvine)
    Abstract: Consider a principal who sets a budget that the agent allocates among different services. Because the preferences of the agent may differ from those of the principal, the budget the principal sets can be lower or higher than in the first-best solution. When the principal is uncertain about the agentfs preferences, the agent may choose an allocation that signals his type, thereby affecting the size of the budget the principal will set in the following period. The equilibrium may have separation or pooling. In a pooling equilibrium, the agent may mis-represent his preferences, aiming to get a large budget in the future period.
    Keywords: Delegation, Signaling, Budget process, Expenses for public works, Change of government
    JEL: D73 D82 H61
    Date: 2014–11
  7. By: Andrew B. Abel
    Abstract: The crowding-out coefficient is the ratio of the reduction in privately-issued bonds to the increase in government bonds that are issued to finance a tax cut. If (1) Ricardian equivalence holds, and (2) households do not simultaneously borrow risklessly and have positive gross positions in other riskless assets, the crowding-out coefficient equals the fraction of the aggregate tax cut that accrues to households that borrow. In the conventional case in which all households receive equal tax cuts, the crowding-out coefficient equals the fraction of households that borrow. In the United States, about 75% of households borrow, so the crowding-out coefficient is predicted to be 0.75, which differs from econometric estimates that are around 0.5. I explore extensions of the model, such as a departure from Ricardian Equivalence or the introduction of cross-sectional variation in taxes, that might account for this difference.
    JEL: E62 G11 H6
    Date: 2015–09
  8. By: Xavier Giroud; Joshua Rauh
    Abstract: In a sample of over 27 million establishments of U.S. firms with activities in more than one state, we estimate the impact of state business taxation on business activity. Only firms organized as subchapter C corporations are subject to the corporate tax code, whereas the income of partnerships, sole-proprietorships, and S corporations is passed through annually to the firm's owners and taxed at individual rates. For C corporations, both employment at existing establishments (intensive margin) and the number of establishments in the state (extensive margin) have corporate tax elasticities of -0.4. Pass-through entities, which serve as a control group for the corporate tax reforms, respond only to the personal tax code, with tax elasticities of -0.2 to -0.3. Around half of the effects are driven by reallocation of productive resources to other states where the treated firms have establishments. Capital shows similar patterns but is 36% less elastic than labor. A narrative approach confirms that the results are robust and strongest in the sample of tax changes that were implemented due to inherited budget deficits, long-run goals, or cross-state variation caused by Federal tax reforms.
    JEL: H25 H71 H73
    Date: 2015–09
  9. By: Gopi Shah Goda; Shanthi Ramnath; John B. Shoven; Sita Nataraj Slavov
    Abstract: Despite the large and growing returns to deferring Social Security benefits, most individuals claim Social Security before the full retirement age, currently age 66. In this paper, we use a panel of administrative tax data on likely primary earners to explore some potential hypotheses of why individuals fail to delay claiming Social Security, including liquidity constraints and private information regarding one’s expected future lifetime. We find that approximately 31-34% of beneficiaries who claim prior to the full retirement age have assets in Individual Retirement Accounts (IRAs) that would fund at least 2 additional years of Social Security benefits, and 24-26% could fund at least 4 years of Social Security deferral with IRA assets alone. Our analysis suggests that these percentages would be considerably higher if other assets were taken into account. We find evidence that those who claim prior to the full retirement age have higher subjective and actual mortality rates than those who claim later, suggesting that private information about expected future lifetimes may influence claiming behavior.
    JEL: D14 H31 H55
    Date: 2015–09
  10. By: Emmanuel Saez; Gabriel Zucman
    Abstract: This paper combines income tax returns with macroeconomic household balance sheets to estimate the distribution of wealth in the United States since 1913. We estimate wealth by capitalizing the incomes reported by individual taxpayers, accounting for assets that do not generate taxable income. We successfully test our capitalization method in three micro datasets where we can observe both income and wealth: the Survey of Consumer Finance, linked estate and income tax returns, and foundations' tax records. We find that wealth concentration was high in the beginning of the twentieth century, fell from 1929 to 1978, and has continuously increased since then. The top 0.1% wealth share has risen from 7%in 1978 to 22% in 2012, a level almost as high as in 1929. Top wealth-holders are younger today than in the 1960s and earn a higher fraction of the economy's labor income. The bottom 90% wealth share first increased up to the mid-1980s and then steadily declined. The increase in wealth inequality in recent decades is due to the upsurge of top incomes combined to an increase in saving rate inequality. We explain how our findings can be reconciled with Survey of Consumer Finances and estate tax data.
    Keywords: income tax, wealth inequality,
    Date: 2015–08
  11. By: Alessandro Santoro
    Abstract: This paper uses a panel of administrative data concerning 71,000 Italian small businesses observed in tax years 2005-2008. The aim of the paper is to evaluate the impact of a reform of audit rules implemented in 2006. The reform repealed a special audit exemption previously granted to businesses which adopted a stringent accounting standard. It is shown that the reform increased the level of economic activity, as measured by the value of inventory, for the generality of businesses involved. However, an increase in profits and turnover was reported only by the subset of businesses which were more likely to perceive it as an increase in the probability of an audit. This result is in line with the predictions of the Allingham-Sandmo model and it casts some doubts on the possibility to reduce evasion by limiting the opportunities of manipulating accounting books.
    Keywords: Tax Evasion by Small Businesses, Audit Probabil- ity, Accounting Standard
    JEL: H25 H26 H32
    Date: 2015–09
  12. By: W. D. Gregori; L. Marattin
    Abstract: Fiscal distress of local governments and municipalities is a non-negligible component of the public finance turmoil after the Great Recession. In this paper we consider a dataset of Italian municipalities over the period 2000-2012 and look for the main budget determinants of local default. According to our results the default probability is positively affected by the share of loan repayment over total spending. This result is robust to alternative model specifications as well as inclusion of fixed effects, time dummies and macroeconomic control variables.
    JEL: H72 H74
    Date: 2015–09
  13. By: Nikolaos Artavanis; Adair Morse; Margarita Tsoutsoura
    Abstract: We document that in semiformal economies, banks lend to tax-evading individuals based on the bank's assessment of the individual's true income. This observation leads to a novel approach to estimate tax evasion. We use microdata on household credit from a Greek bank, and replicate the bank underwriting model to infer the banks estimate of individuals' true income. We estimate that 43%-45% of self-employed income goes unreported and thus untaxed. For 2009, this implies 28.2 billion euros of unreported income, implying foregone tax revenues of over 11 billion euros or 30% of the deficit. Our method innovation allows for estimating the industry distribution of tax evasion in settings where uncovering the incidence of hidden cash transactions is difficult using other methods. Primary tax-evading industries are professional services — medicine, law, engineering, education, and media. We conclude with evidence that contemplates the importance of institutions, paper trail and political willpower for the persistence of tax evasion.
    JEL: G21 H26
    Date: 2015–09
  14. By: Satoshi Watanabe (Professor, School of International & Public Policy, Hitotsubashi University)
    Abstract: This paper examines the role of taxation policy in response to natural disasters, particularly earthquakes. Disaster-related measures in relation to the taxation system that can be taken before and after a natural disaster are considered separately. Through a comparison of differences in the relationships between disasters and taxation for each item of taxation in Japan, we aim to work back to some basic points for discussion on several anomalies in the structure of taxation.
  15. By: Masanori Orihara (Policy Research Institute, Ministry of Finance,Japan)
    Abstract: Recent literature argues that agency conflicts between shareholders and managers reduce corporate tax aggressiveness. Although stock market listing is a fundamental source of the agency costs, a dearth of widely available data prevents researchers from investigating how monitoring from stock markets affects tax aggressiveness. We use unique panel data that cover both publicly-traded (listed) companies and privately-held (unlisted) companies in Japan. To mitigate endogeneity concerns about the choice to list stocks on public equity markets, we use legal reforms in squeeze out as a quasi-natural experiment. We provide evidence that stock market listing decreases tax aggressiveness among companies whose ownership is concentrated. This result suggests that minority shareholdersf option to sell stocks in public markets reduces managersf incentives to be tax aggressive. Our findings link a function of capital markets with public finance by demonstrating that financial developments can contribute to the effective collection of tax revenues.
    Keywords: tax aggressiveness, stock market listing, ownership structure, squeeze out
    JEL: G30 G38 H25 H26
  16. By: Richard G. Newell; Daniel Raimi
    Abstract: Oil and gas development associated with shale resources has increased substantially in the United States, with important implications for local governments. These governments tend to experience increased revenue from a variety of sources, such as severance taxes distributed by the state government, local property taxes and sales taxes, direct payments from oil and gas companies, and in-kind contributions from those companies. Local governments also tend to face increased demand for services such as road repairs due to heavy truck traffic and from population growth associated with the oil and gas sector. This paper describes the major oil- and gas related revenues and service demands (i.e., costs) that county and municipal governments have experienced in Arkansas, Colorado, Louisiana, Montana, North Dakota, Pennsylvania, Texas, and Wyoming. Based on extensive interviews with officials in the most heavily affected parts of these states, along with analysis of financial data, it appears that most county and municipal governments have experienced net financial benefits, though some in western North Dakota and eastern Montana appear to have experienced net negative fiscal impacts. Some municipalities in rural Colorado and Wyoming also struggled to manage fiscal impacts during recent oil and gas booms, though these challenges faded as drilling activity slowed.
    JEL: H25 H71 H72 H76 Q32 Q33 Q41 Q43 Q48
    Date: 2015–09

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