nep-pub New Economics Papers
on Public Finance
Issue of 2015‒11‒01
eleven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Marginal Tax Rates and Income: New Time Series Evidence By Mertens, Karel
  2. Tax Reporting Behavior: Underreporting Opportunities and Prepopulated Tax Returns By David Bruner; Michael Jones; Michael McKee; Christian Vossler
  3. Housing Transfer Taxes and Household Mobility: Distortion on the Housing or Labour Market? By Christian Hilber; Teemu Lyytikainen
  4. Heterogeneous Vertical Tax Externalities, Capital Mobility, and the Fiscal Advantage of Natural Resources By Fidel Perez-Sebastian; Ohad Raveh; Yaniv Reingewertz
  5. Tourist Tax and Heritage Cities By Guo Ji
  6. A New Carbon Tax in Portugal: A Missed Opportunity to Achieve the Triple Dividend? By Alfredo Marvão Pereira; Rui M. Pereira; Pedro G. Rodriguesa
  7. Fiscal Redistribution In Middle Income Countries:: Brazil, Chile, Colombia, Indonesia, Mexico, Peru and South Africa By Nora Lustig
  8. Dynamic Elasticities of Tax Revenue: Evidence from the Czech Republic By Tomas Havranek; Zuzana Irsova; Jiri Schwarz
  9. Vertical versus Horizontal Tax Incentives Policies in Brazil: Assessing the Impacts Using a Computable General Equilibrium Model By Alexandre Porsse; Felipe Madruga
  10. A tax micro-simulator for Mexico (MEXTAX) and its application to the 2010 tax reforms By Laura Abramovsky; David Phillips
  11. Does tax enforcement counteract the negative effects of terrorism? A case study of the Basque country. By Luca Salvadori

  1. By: Mertens, Karel
    Abstract: Using new narrative measures of exogenous variation in marginal tax rates associated with postwar tax reforms in the US, this study estimates short run elasticities of taxable income of around 1.2 based on time series from 1946 to 2012. Elasticities are larger in the top 1% of the income distribution but are also positive and statistically significant for other income groups. Previous time series studies of tax returns data have found little evidence for income responses to taxes outside the top of the income distribution. The different results in this study arise because of additional efforts to account for dynamics, expectations and especially the endogeneity of tax policy decisions. Marginal rate cuts lead to increases in real GDP and declines in unemployment. This study also presents evidence that the responses are to marginal rather than average tax rates. Counterfactual tax cuts targeting the top 1% alone have positive effects on economic activity and incomes outside of the top 1% but increase inequality in pre-tax incomes. The data and methodology in this study do not permit any conclusions about the impact of tax rate changes targeting lower income taxpayers alone.
    Keywords: Fiscal Policy; Income; Income Distribution; Marginal Tax Rates; Tax Changes
    JEL: E62 H24 H3
    Date: 2015–10
  2. By: David Bruner; Michael Jones; Michael McKee; Christian Vossler
    Abstract: Key Words:
    Date: 2015
  3. By: Christian Hilber; Teemu Lyytikainen
    Abstract: We estimate the effect of the UK Stamp Duty Land Tax on household mobility using micro data. The UK (until 2014) provided an ideal setting to explore the impact of housing transfer taxes on mobility decisions. This is partly because the stamp duty liability is quite substantial, at least for more expensive housing (the top rate is currently 7 percent of the purchase price), and partly because the stamp duty liability, until December 3 of 2014, jumped sharply at various cut-off values, providing various ?discontinuities? that can be exploited empirically. Our analysis focuses on a discontinuity where the stamp duty jumps particularly strongly from 1 percent to 3 percent of the purchase price. This discontinuity allows us to isolate the impact of the stamp duty from other determinants of mobility. In our core analysis we use data from the British Household Panel Survey (BHPS) and compare homeowners with self-assessed house values on either side of the cut-off, while controlling for flexible but smooth functions of house values. We find that the stamp duty has a significant negative effect on household mobility and that this effect is confined to short-distance moves and to moves that are housing- rather than job-related. Our core estimates indicate that the 2 percentage-point increase in the stamp duty reduces the annual rate of mobility by between 2 and 3 percentage points. This is a very substantive effect given that in the UK about 5 percent of all owner-occupier households move each year. To further assess the validity and quantitative significance of the response of households to the stamp duty, we turn our attention to a different dataset from the Land Registry that consists of actual transaction prices. Analysing the distribution of transaction prices of all housing sales in England and Wales, we find additional evidence of a strong behavioural response. We document bunching of observed transaction prices at the cut-offs where the tax rate increases and, consistent with the results of our core analysis, we find that a 2 percentage point increase in the tax rate decreases the volume of sales by roughly 30 percent. The contribution of our study to the existing literature is twofold. Firstly, we identify the long-term (equilibrium) effects of the stamp duty on actual household mobility. Secondly, we are able to distinguish between different types of moves. In particular, our analysis distinguishes between short- and long-distance moves and between housing- and job-related moves. This paper is to our knowledge the first quasi-experimental study that directly evaluates the effect of a real estate transfer tax on actual household mobility.
    Keywords: Stamp duty; housing transfer taxes; transaction costs; homeownership; mobility
    JEL: D23 H21 H27 J61 R21 R31 R38
    Date: 2015–10
  4. By: Fidel Perez-Sebastian; Ohad Raveh; Yaniv Reingewertz
    Abstract: How do state tax rates respond to federal tax shocks? This paper presents a novel mechanism of heterogeneous vertical tax externalities across levels of …fiscal advantage, showing that tax increases can be expansionary even without their reinvestment. States rich with natural resources have a fi…scal advantage in the inter-state competition over production factors which allows them to respond better to changes in federal taxes and, consequently, attract capital from other parts of the nation. We add heterogeneity in …fiscal advantage levels to an otherwise standard model of vertical tax externalities and horizontal tax competition; the model shows that, irrespective of federal redistribution, the contractionary effect of a federal tax increase can be overturned in states with high …fiscal advantage, through an increase in their tax base. Using the case of the U.S., and narrative-based measured federal tax shocks a-la Romer and Romer (2010), we provide empirical evidence for the various aspects of this mechanism. Specifi…cally, our lower-bound estimates indicate that, controlling for federal transfers, a 1% increase in the GDP share of capital-related federal taxes at the beginning of a year increases the growth in the per capita tax base by approximately 1.6% in high fi…scal advantage states at the end of it, on average.
    Keywords: Fiscal shocks, fiscal capacity, federalism, natural resources, factor mobility, tax competition
    JEL: H77 H71 Q32
    Date: 2015
  5. By: Guo Ji (Beijing Normal University)
    Abstract: Cities, especially those with cultural heritage, attract a large proportion of the world’s tourists each year. A large body of literature studies the sustainability of cultural tourism. It is shown that the excessive visitation of heritage cities strongly affects sensitive urban areas (Russo 2002). The costs of congestion caused by tourism include pressure and damage on urban facilities and premises, typically, historically and culturally important buildings, monuments and artifacts which have variable degrees of “non-excludability” and “non-rivalry” and thus are, at least partly, public goods. Furthermore, the congestion drives citizens and firms to abandon central locations, hampering local development. Spatially differentiated taxation aimed at visitors and tourists is adopted in parts of the world which may promote a more equitable allocation of costs of tourism. However, there is a surprising lack of analytical analysis on either the impacts of tourism on heritage cities or the efficiency of tourist taxation.This paper studies the interactions between tourist tax, local public good provision, which includes protection and restoration of urban facilities/cultural heritage, and the number of tourists in a scenario of multi-regional tax competition between governments of cultural heritage cities. On the one hand, tourism has a positive effect on private income in the heritage cities, as well as government tax revenue. On the other hand however, there is a tourism-related social cost which is equivalent to “congestion” of regular public goods. We believe that the efficiency of tourist taxation is the key to balancing the income and costs brought about by tourism.
    Keywords: tourist tax; city infrastructure; tourism externalities; tax competition
    JEL: H21 H23 R00
  6. By: Alfredo Marvão Pereira (Department of Economics, The College of William and Mary); Rui M. Pereira (Department of Economics, The College of William and Mary); Pedro G. Rodriguesa (Center for Administration and Public Policies, Universidade de Lisboa, Portugal)
    Abstract: In 2014, the Portuguese government appointed a Commission for Environmental Tax Reform that formulated a carbon-tax proposal designed to achieve three dividends: to help Portugal meet the European Union’s target for emissions reductions by 2030, to boost long-term employment and GDP above their pre-carbon tax levels, and to strengthen public finances by lowering public indebtedness. A key feature of this proposal was a judicious set of mixed strategies to recycle all carbon-tax revenues back into the economy. In this note, we show how the carbon tax that the Portuguese Parliament eventually approved deviated from such guidelines, and ultimately failed to achieve the triple dividend. We argue that authorities need to quickly amend the existing legislation to avoid this misguided attempt turning into a missed opportunity to improve environmental, macroeconomic, and fiscal outcomes.
    Keywords: Carbon Tax; Triple Dividend; Economic Growth; Fiscal Consolidation; Dynamic General Equilibrium; Portugal.
    JEL: D58 H63 O44
    Date: 2015–10–01
  7. By: Nora Lustig
    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.<BR>Ce document de travail examine l’impact redistributif des politiques budgétaires au Brésil, au Chili, en Colombie, en Indonésie, au Mexique, au Pérou et en Afrique du Sud en utilisant la technique d’analyse d’incidence sur des données aux alentours de l’année 2010. L’impact de la redistribution est le plus important en Afrique du Sud, et le plus faible en Indonésie. La performance de la redistribution est principalement déterminée par l’effort redistributif (part de la dépense sociale dans le PIB de chaque pays) et par la mesure dans laquelle les taxes et transferts sont ciblés vers les plus pauvres et les impôts directs vers les plus riches. Les politiques budgétaires réduisent systématiquement les inégalités, mais pas la pauvreté. La dépense publique augmente la pauvreté au Brésil, en Colombie (au-delà même de la pauvreté mesurée avant redistribution) à cause de la forte taxation des biens élémentaires. L‘impact marginal des taxes directes, des transferts directs et des transferts en nature a toujours un impact progressif. L’impact marginal des taxes indirectes est régressif au Brésil, en Colombie, en Indonésie et en Afrique du Sud. Les dépenses totales d’éducation sont plus favorables aux pauvres, sauf en Indonésie, où elles sont neutres en termes absolus. Les dépenses de santé sont plus favorables aux pauvres au Brésil, au Chili, en Colombie et en Afrique du Sud, globalement neutres en termes absolus et favorables aux pauvres en Indonésie et au Pérou.
    Keywords: developing countries, social spending, inequality
    JEL: D31 H22 I3
    Date: 2015–10–26
  8. By: Tomas Havranek (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic; Czech National Bank); Zuzana Irsova; Jiri Schwarz (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic)
    Abstract: Key parameters for the modeling of public finances are tax revenue elasticities with respect to tax bases. Yet the existing studies estimating these elasticities for emerging countries disregard the effects of tax reforms on tax revenue, which renders their estimates inconsistent. We use a unique data set from the Czech Republic to account for the effects of reforms and estimate both short- and long-run tax revenue elasticities. Our results suggest that the long-run elasticities are 1.4 for wage tax, 0.9 for value added tax, and 1.7 for profit tax. The adjustment process for value added tax is fast, but for the remaining two categories it is important to distinguish between the short- and long-run elasticities: the initial response of revenue to changes in the bases is weak. In the case of wage tax it takes half a year for the elasticity to surpass unity.
    Keywords: Tax revenue, tax base, elasticity, error correction models
    JEL: H24 H25 H27
    Date: 2015–10
  9. By: Alexandre Porsse; Felipe Madruga
    Abstract: Since the 2009 financial crisis, some national governments have adopted anticyclical tax policies for recovering and economic growth. These policies can be different in terms of what type of tax incentive policy (income, labor, value added) is chosen as well if the strategy is vertical, benefiting some sectors, or horizontal, benefiting all economic sectors. In Brazil, one of the anticyclical tax policy carried out by the federal government was to reduce the value added tax named ?Imposto sobre Produtos Industrializados? (IPI) using a vertical strategy mainly benefiting the automobile sector among few others. Taking into account this recent experience, this paper aims primary to assess the efficacy of vertical versus horizontal tax incentive policies for promoting economic recovering. Additionally, the paper addresses the distributive effects of these policy strategies considering the impact on the income classes as well on the regional public finances. Considering the price effects of tax policies, the computable general equilibrium approach is the most appropriated methodological framework to achieve the objectives of this paper. We calibrated a CGE model for the Brazilian economy for 2007, recognizing the productive structure for 56 sectors and 8 types of labor segmented by income classes. This model is integrated with a public finance module specifying the government accounts for each level of government (federal, states and municipalities) as well the vertical fiscal linkages. The CGE model allow short run and long run simulations. The CGE model was used for simulating two shock scenarios. The first one represents the vertical tax policy and simulate a reduction in the IPI tax rate of the automobile sector in accordance with the average incentives over the period 2010-2013. The second one represents the horizontal tax policy and the simulation imply reductions in the IPI tax rate of all sector keeping the amount of tax revenue reduction equal to the vertical shock. These shocks were simulated for a short run closure considering the transitory nature of anticyclical policies. The simulation results show that the economic impact of vertical and horizontal tax incentives strategies are quite similar. The policy implication is that both strategies are indifferent in terms of the impact on GDP and employment. Nevertheless, the distributive impact evaluated through the effects on labor factor by income classes shows the vertical policy is more regressive than the horizontal policy. Considering the impact on the regional public finance, both policies imply reductions in the level of transfers to the regional governments due the vertical fiscal linkages of the Brazilian federalism. Despite the positive economic impact on GDP and employment, the magnitude of this effect is not so high and fiscal linkages among governments seems play an important role at least for the Brazilian economy.
    Keywords: tax incentives; economic and distributive impacts; CGE model
    JEL: H23 H25 H30
    Date: 2015–10
  10. By: Laura Abramovsky (Institute for Fiscal Studies and Institute for Fiscal Studies); David Phillips (Institute for Fiscal Studies and Institute for Fiscal Studies)
    Abstract: We develop a tax micro-simulator model (MEXTAX) that can quantify the revenue and distributional impact of tax reforms in Mexico using micro-level data. We use MEXTAX to assess revenue-raising reforms to Mexico’s direct and indirect tax systems of 2010. Initial proposals by the Executive Power included the introduction of a uniform expenditure tax covering traditionally untaxed necessities (such as food). The reform approved by the Congress replaced this with an increase in the standard (non-uniform) rate of VAT, to avoid regressive impacts. Both reform packages included other minor changes to income tax and excise duties. We argue that given that indirect taxes were changed the most in both reforms, expenditure should be used to measured living standards and proportional progressivity. We find that both the reform package proposed and the reform package approved are progressive if expenditure is used as a measure of living standards, although this is not the case for the proposed reform if income is used. However, the proposed reform would have raised more revenues than the approved reform and we argue that the foregone revenues due to the amendments could have been used to target poorer households more effectively using more direct instruments for redistribution. We also find that using alternative assumptions about missing income or labor supply response affect quantitatively, but not qualitatively, results. The model can be extended to incorporate further behavioral margins and to other countries with similar tax structures.
    Keywords: Tax policy; micro-simulators; labour supply; Mexico
    JEL: H20 H22 H30 J20 D30
    Date: 2015–08
  11. By: Luca Salvadori
    Abstract: ABSTRACT: This paper analyses the impact of terrorism on tax enforcement policies by focusing on the case of the Basque Country. The presence of externalities in tax administration attributable to the costs of terrorism is investigated by undertaking a theoretical analysis. The findings of this are tested using Spanish data extracted from repeated surveys and other sources. By employing ordered response models, evidence is found of the negative impact of terrorism on tax enforcement as it is perceived by residents in the Basque Country and Navarre. In particular, this impact is found to be stronger for entrepreneurs and liberal professionals. No significant impact is found for individuals resident in the rest of Spain. MAIN RESULT: This study provides evidence of the fact that the tax administrations of the Basque Country and Navarre employ tax enforcement as an instrument to counter the negative impact that terrorist activity has on tax bases, tax revenues and, in short, on the economy as a whole. This result suggests that previous estimations of the impact of terrorism on the Basque economy are implicitly calculated net of the impact of terrorism on tax administration and, thus, they could be considered as lower bound approximations of the actual net effect of this shock on the Basque economic outcomes.
    Keywords: tax administration and auditing; fiscal externalities; terrorism
    JEL: H83 H23 D74
    Date: 2015–10

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