nep-pub New Economics Papers
on Public Finance
Issue of 2015‒09‒26
fifteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The Earned Income Tax Credit By Nichols, Austin; Rothstein, Jesse
  2. Inefficient Taxation of Sin Goods By Giovanni Immordino; Anna Maria C. Menichini; Maria Grazia Romano
  3. Tax evasion and the optimal non-linear labour income taxation By Salvador Balle; Lucia Mangiavacchi; Luca Piccoli; Amedeo Spadaro
  4. On the Optimal Provision of Social Insurance: Progressive Taxation versus Education Subsidies in General Equilibrium By Dirk Krueger; Alexander Ludwig
  5. Earmarking and the political support of fat taxes By Cremer, Helmuth; Goulão, Catarina; Roeder, Kerstin
  6. Tax Policy and Economic Growth: A Semi-Parametric Approach Using AMT By Shafi, Maryam; Asghar, Zahid
  7. The revenue and base effects of local tax hikes: Evidence from a quasi-experiment By Baskaran, Thushyanthan
  8. The Carrot and Stick Approach to Debt Relief : Overcoming Moral Hazard By Marin Ferry
  9. State Taxation and the Reallocation of Business Activity: Evidence from Establishment-Level Data By Xavier Giroud; Joshua Rauh
  10. Behavioral Responses to Local Tax Rates: Quasi-Experimental Evidence from a Foreigners' Tax Scheme in Switzerland By Schmidheiny, Kurt; Slotwinski, Michaela
  11. Can French environmental taxes really turn into green taxes ? By Mireille Chiroleu-Assouline
  12. Tax morale and reciprocity. A case study from Vietnam By Jahnke, Bjoern
  13. Tax Policies and Informality in South Africa By Eliane El Badaoui; Riccardo Magnani
  14. Fair Taxation in the Middle East and North Africa By Mario Mansour; Pritha Mitra; Carlo A. Sdralevich; Andrew Jewell
  15. How does petty corruption affect tax morale in sub-Saharan Africa? An empirical analysis. By Jahnke, Bjoern

  1. By: Nichols, Austin; Rothstein, Jesse
    Keywords: Social and Behavioral Sciences
    Date: 2015–03–01
  2. By: Giovanni Immordino (Università di Napoli Federico II and CSEF); Anna Maria C. Menichini (Università di Salerno and CSEF); Maria Grazia Romano (Università di Salerno and CSEF)
    Abstract: Within an O. Donoghue and Rabin (2006) style model, we study the optimal sin taxes that a government wants to implement when consumers are time-inconsistent, and taxation is inefficient in terms of administrative, collection and compliance costs. We find that, if the inefficiency of taxation is not too large, the optimal tax is positive and it may be higher or lower than the first best depending on the elasticity of demand with respect to taxation. Finally, the extent of the distortion depends on the degree of inefficiency of taxation.
    Keywords: Hyperbolic preferences, Taxation, Sin goods
    JEL: D03 H21 H31
    Date: 2015–09–16
  3. By: Salvador Balle (Department of Physics, University of the Balearic Islands, Spain.); Lucia Mangiavacchi (Department of Applied Economics, University of the Balearic Islands, Spain.); Luca Piccoli (Department of Applied Economics, University of the Balearic Islands, Spain.); Amedeo Spadaro (Department of Applied Economics, University of the Balearic Islands, Spain.)
    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: H21 H26 H31
    Date: 2015–08
  4. 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
  5. By: Cremer, Helmuth; Goulão, Catarina; Roeder, Kerstin
    Abstract: A fat and a healthy good provide immediate gratification, and cause health costs or benefits in the long run, which are misperceived. Additionally, the fat good (healthy good) increases (decreases) health care costs by increasing (decreasing) the probability of suffering from a chronic disease in the future. Individuals differ in income and in their degree of misperceptions concerning the health effects of the consumption of fat and of healthy goods. The level of the fat tax is determined through majority voting. Individuals vote according to their misperceived utility function. Consequently, excessive fat consumption is not due to a self-control problem but due to information deficiencies or cognitive inability to process information. A fraction of the fat tax proceeds is “earmarked” to reduce health insurance premiums while the remaining fraction finances a subsidy on the healthy good. This earmarking rule is determined at a constitutional stage to maximize utilitarian or Rawlsian welfare, anticipating the induced political equilibrium. We show that the fat tax in the political equilibrium is always lower than the utilitarian fat tax. This is no longer necessarily true with a Rawlsian objective. The determination of the optimal earmarking rule is quite complex. Even in the utilitarian case, it is not just used to boost political support for the fat tax. Instead, it may involve a tradeoff between the fat tax and the healthy good subsidy.
    Keywords: earmarking; fat tax; misperception; obesity; voting
    JEL: D72 I12 I18
    Date: 2015–09
  6. By: Shafi, Maryam; Asghar, Zahid
    Abstract: The present study explores the impact of tax policy on economic growth using average marginal tax rate and average tax rate for South Asian countries. The data for five developing countries: India, Maldives, Nepal, Pakistan, Sri-Lanka is used for the period of 1991-2010. This study uses Additive Mixed Models with penalized spline methodology. In this study we have constructed the average marginal tax rates using methodology of Seater (1982). It further identifies that the variables like average marginal tax rate (AMTRs), average tax rate (ATR), population growth rate, trade-openness, investment, human capital and real per capita GDP are the significant determinants of economic growth in the sample countries. On average, AMTRs and population growth rate reduce the performance of economic growth in the developing countries. The main findings further suggest that nonlinear effects are exerted by tax policy on economic growth. The increase in average marginal tax rate at the lower level of taxation, effects more adversely, than at higher levels of taxation. So it suggested that to increase the economic growth a substantial tax cut in prevailing tax level is essential in developing countries. As in developing countries the AMTRs affects the economic growth adversely and significantly, so developing countries should introduce tax reforms in a way that will lead to reduce dependence on AMTRs.
    Keywords: Tax Policy, Economic Growth, Semi-Parametric Method, Pakistan, Sri-Lanka, Nepal, India, Maldives, Average Marginal Tax Rate (AMTR)
    JEL: C1 H2 H30
    Date: 2015
  7. By: Baskaran, Thushyanthan
    Abstract: This paper studies the revenue and base effects of local property and business tax hikes using a natural experiment in the German state of North Rhine-Westphalia (NRW). Due to a reform of the local equalization scheme in 2003, a set of municipalities in NRW increased their local tax rates by one to two percentage points while the remaining municipalities kept their rates constant. Using this variation across municipalities and over time to implement a difference-in-differences design covering the period 1995-2010, I find that property tax hikes have a revenue elasticity of unity and no adverse base effects. Business tax hikes have no discernible base effects but also no statistically significant effect on revenues. Furthermore, the results suggest that the tax hikes have no effect on broader economic outcomes such as local employment, firms´ wage bill, and property prices. Overall, increasing local tax rates by one to two percentage points does not seem to affect the local economy adversely.
    Keywords: tax hikes,tax base effects,local business taxes,local property taxes
    JEL: H20 H71 H77
    Date: 2015
  8. By: Marin Ferry (PSL, Université Paris-Dauphine, LEDa, IRD, UMR DIAL)
    Abstract: (english) Using an event-study framework, this paper empirically assesses the impact of debt relief on government's tax effort. Our results suggest that having reached the decision point leads to higher level of tax effort. But our findings also reveal that HIPCs' governments seem to adopt moral hazard behavior (especially when institutional quality is weak) since they deploy the bulk of their tax effort before the decision point in order to get debt relief and then loosen it as they come close to the end of the debt relief process. However, post-debt relief tax effort remains significantly larger than the level recorded before the anticipatory effects took place, thus emphasizing an overall positive effect of the Enhanced HIPC initiative. _________________________________ (français) Cet article évalue l'impact des initiatives d'allègement de la dette multilatérale sur l'effort fiscal des gouvernements bénéficiaires. Les résultats de cette étude indiquent qu'avoir atteint le “point de décision” de l'initiative PPTE conduit les gouvernements concernés à enregistrer un effort fiscal plus important que s'ils n'avaient atteint ce point. Mais des tests additionnels révèlent également un certain aléa moral de la part de ces derniers puisqu'ils semblent déployer l'essentiel de leur effort fiscal dans le but d'obtenir des réductions de dette avant de réduire progressivement ce même effort au fur et à mesure qu'ils s'approchent du “point d'achèvement” et donc de la fin du processus PPTE. Cependant, malgré ce relâchement, le niveau d'effort fiscal observé en fin de parcours reste supérieur à celui enregistré avant que l'effet d'anticipation ne prenne place, permettant ainsi de conclure à un effet global positif de l'initiative PPTE.
    Keywords: Debt Relief, Tax Effort, Event-Study, Moral Hazard, Annulation de dette, Effort fiscal, Event-Study, Aléa Moral.
    JEL: F34 F35 H20 H30 H60
    Date: 2015–09
  9. 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
  10. By: Schmidheiny, Kurt; Slotwinski, Michaela
    Abstract: We study behavioral responses to local income taxes exploiting a special tax regime which applies to foreign employees residing in Switzerland. The used institutional setting generates two thresholds through which locally heterogeneous taxation is assigned: An income threshold at 120,000 Swiss francs and a duration threshold at 5 years of stay in Switzerland. We exploit these thresholds by applying a discontinuity in density design and a fuzzy RDD to administrative income data. We find causal evidence for strategic income bunching for wage earners and tax induced intra-national mobility. Several pieces of evidence suggest that individuals have to "learn the tax code" and that knowledge and information transmission through local networks plays a major role in the behavioral response to tax incentives.
    Keywords: income bunching; income taxes; regression discontinuity design; tax induced mobility
    JEL: H24 H31 J61
    Date: 2015–09
  11. By: Mireille Chiroleu-Assouline (Axe Macroéconomie Axe Economie ouverte Axe Environnement - CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics)
    Abstract: French environmental taxes are not really ecologically oriented. Their main aim is to raise revenues. Clear signs of this inappropriate direction are given by the large share of the energy taxes and by the low level of most tax rates, which for the most part, are only implicit tax rates on the polluting goods. An ecological tax reform would imply a global green tax shift with tax rates proportionate to the marginal damages. The success and the acceptation of such a reform by the taxpayers rely on the chosen recycling mechanism for the tax revenues, on government’s efforts in information and pedagogy, on transparency about the policy choices but also, somehow paradoxically, on audacity of actions.
    Abstract: Actuellement, la fiscalité environnementale française répond moins à une finalité écologique qu’à un objectif plus traditionnel de fiscalité de rendement. Les signes manifestes de cette inadéquation sont la très grande part prise par la fiscalité de l’énergie et le faible niveau de la plupart des taux de taxe, qui souvent ne frappent qu’implicitement les produits polluants. Réformer la fiscalité française supposerait de la « verdir » dans son ensemble en appliquant des taux de taxes en relation avec les dommages marginaux. La réussite de la réforme et son acceptation par les contribuables sont conditionnées par le mécanisme de redistribution associé, les efforts de pédagogie et d’information, la transparence mais aussi, paradoxalement, par l’audace des mesures prises.
    Keywords: environmental tax,double dividend,tax progressivity,fiscalité,écotaxe,contribution climat-énergie,double dividende,progressivité de l’impôt
    Date: 2015–06
  12. By: Jahnke, Bjoern
    Abstract: Understanding the effects of reciprocity on tax morale is crucial to explain tax compliance behavior. However, there is only little research about which sources of reciprocity affect tax morale most. Thus, this paper for the first time gauges the effects from two sources of reciprocity on tax morale in an empirical study. The first source, vertical reciprocity, measures how tax payers value their contributions to the government. The second source, horizontal reciprocity, examines the impact of the perceived compliance behavior of other tax payers. The focus of the study is on Vietnam. The country seems to be a promising spot for this type of research because it exhibits an exceptional high level of tax morale and collectivism but only has low tax audit probabilities. This analysis is based on a consumer survey in the City of Hue which combines and extends questions from previous versions of the European and the World Value Survey. The result shows that both reciprocity measures are significantly correlated with tax morale but that vertical reciprocity prevails.
    Keywords: Tax morale, Tax compliance, Tax evasion, Reciprocity
    JEL: D79 H26 Z13
    Date: 2015–09
  13. By: Eliane El Badaoui; Riccardo Magnani
    Abstract: We use a micro-macro simulation model to evaluate the effects of labor income tax policies in South Africa. The country is characterized by a high unemployment rate while employment in the informal sector is relatively low. Our approach is based on the aggregation of the preferences of individuals who choose among (i) working in the formal sector,(ii) working in the informal sector, and (iii) not working. We quantify the effects of different tax policies on the individual's labor supply choices (formal/informal employment, work/leisure) and at the macro level (GDP, equilibrium wages, size of the informal sector, and unemployment rate). We further analyze the effects in terms of income distribution, poverty and inequality. We find that the introduction of a negative income tax system reduces inequality and poverty but, at the same time, discourages people from participating in the labor market and working in the formal sector and, consequently worsens the equitye efficiency trade-off. We find however that the equity-efficiency trade-off can be improved by introducing (i) a (revenue-neutral) tax system which combines a sufficiently high at rate (25%) and lump-sum transfer paid only to formal workers; (ii) an expansionary policy (a reduction in total taxes or an increase in public expenditures). Interestingly, even though they increase the informal sector, these reforms reduce inequality and poverty through a reduction in the level of unemployment.
    Keywords: Tax Reform, Informal Sector, Labor Supply, CGE Model, Microsimulation, South Africa.
    JEL: J22 H24 O17 C68
    Date: 2015
  14. By: Mario Mansour; Pritha Mitra; Carlo A. Sdralevich; Andrew Jewell
    Abstract: Fairness – and what governments can do about it – is at the forefront of economic and social debate all over the world. In MENA, this has been at the core of recent political transitions but has not been adequately addressed. This SDN explores how tax systems – a critical interface between the state and citizens – can play a role in meeting demands for greater economic fairness in MENA countries. The SDN finds that for countries with well-established non-hydrocarbon tax systems (mostly oil importers) reforms should focus on simplifying tax structures and introducing more progressivity of personal income taxes, broadening tax bases, and better designing and enforcing property taxes. Tax administration should be more efficient and user-friendly while simplifying tax regimes will reduce the scope for arbitrary implementation. MENA countries with less established non-hydrocarbon revenue systems can begin with a “starter pack†that includes introduction of low-rate value-added and corporate income taxes, excises, and property taxes while building up administrative capacity and taxation expertise together with plans for introducing a personal income tax. Across the region, effective communication, transparency, and constructive dialogue between the State and citizens are critical to the success of reforms.
    Date: 2015–09–02
  15. By: Jahnke, Bjoern
    Abstract: Sub-Saharan Africa economies introduced extensive reforms of their tax systems in the last two decades. In most of these countries taxes are now remitted through the self-assessment system that relies on quasi voluntary compliance and audit selection by risk. However, the revenues from direct taxes remained fairly stable and tax/GDP ratios lack behind the industrialized world. Several scholars argue that corruption is one of the major obstacles to increase tax revenues but focus on perceived corruption and remain on the macro-level. This study uses mirco-level data from the Afrobarometer survey wave 5 and thus relates personal corruption experiences to tax morale. The nationally representative survey includes information about corruption experiences in everyday situations when people need to get access to public goods in 31 sub-Saharan African countries. The paper finds that these petty corruption experiences significantly reduce the peoples willingness to pay taxes and hence contribute to the state community. The survey also provides information about trust in tax department in general as well as the perceived number of corrupt tax officials. A mediation analysis estimates that petty corruption experiences not only cause a directly negative effect on tax morale but also have indirectly affect on tax morale via reduced trust in the tax department.
    Keywords: corruption, tax morale, institutional and governance quality, economic development
    JEL: D73 H26 K42
    Date: 2015–09

This nep-pub issue is ©2015 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.