nep-pub New Economics Papers
on Public Finance
Issue of 2016‒02‒17
nineteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Do Higher Corporate Taxes Reduce Wages? By Fuest, Clemens; Peichl, Andreas; Siegloch, Sebastian
  2. Capital Income Taxation and Household Production By Apps, Patricia; Rees, Ray
  3. Collusive Tax Evasion and Social Norms By Wrede, Matthias; Abraham, Martin; Lorek, Kerstin; Richter, Friedemann
  4. Property Taxation, Local Labor Markets and Rental Housing By Löffler, Max; Siegloch, Sebastian
  5. Why Pay More? Tax Planning of Married Couples By Büttner, Thiess; Erbe, Katharina; Grimm, Veronika
  6. Corporate Taxes and Strategic Patent Location within Multinational Firms By Riedel, Nadine; Böhm, Tobias; Karkinsky, Tom; Knoll, Bodo
  7. Effective Burden of Business Taxation and Tax Eff ort of Local Governments By von Schwerin, Axel
  8. Economic Integration and Local Tax Mimicking By Holzmann, Carolin; von Schwerin, Axel
  9. Who Competes with Whom? The Structure of International Tax Competition By Reiter, Franz
  10. Electoral Incentives and the Allocation of Public Funds By Finan, Frederico S.; Mazzocco, Maurizio
  11. Social Insurance with Competitive Insurance Markets and Risk Misperception By Cremer, Helmuth; Roeder, Kerstin
  12. Do Fiscal Rules Constrain Fiscal Policy? A Meta-Regression-Analysis By Heinemann, Friedrich; Moessinger, Marc-Daniel; Yeter, Mustafa
  13. Anticipated Tax Amnesties and Tax Compliance: An Experimental Study By Koch, Christian; Müller, Cornelius
  14. Do OECD countries cheat with their national tax revenue forecasts? By Jochimsen, Beate Regina; Lehmann, Robert
  15. Tax Competition in Europe - Europe in competition with other world regions? By Streif, Frank
  16. Vertical effects of fiscal rules: The Swiss experience By Burret, Heiko T.; Feld, Lars P.
  17. Tax mimicking in the short- and the long-run: Evidence from German reunification By Baskaran, Thushyanthan
  18. Corporate Taxation and Investment Evidence from the Belgian ACE Reform By aus dem Moore, Nils
  19. Soda Taxes and the Prices of Sodas and Other Drinks: Evidence from Mexico By Grogger, Jeff

  1. By: Fuest, Clemens (ZEW Mannheim); Peichl, Andreas (ZEW Mannheim); Siegloch, Sebastian (University of Mannheim)
    Abstract: This paper estimates the incidence of corporate taxes on wages using a 20-year panel of German municipalities. Administrative linked employer-employee data allows estimating heterogeneous worker and firm effects. We set up a general theoretical framework showing that corporate taxes can have a negative effect on wages in various labor market models. Using an event study design, we test the predictions of the theory. Our results indicate that workers bear about 40% of the total tax burden. Empirically, we confirm the importance of both labor market institutions and profit shifting possibilities for the incidence of corporate taxes on wages.
    Keywords: business tax, wage incidence, administrative data, local taxation
    JEL: H2 H7 J3
    Date: 2015–12
  2. By: Apps, Patricia (University of Sydney); Rees, Ray (University of Munich)
    Abstract: The Atkinson-Stiglitz Theorem and its extensions have been interpreted as implying that capital income should not be taxed. If, as seems reasonable on empirical grounds, we introduce production of household goods with close market substitutes, this conclusion no longer holds. We analyse optimal capital income taxation for this case.
    Keywords: optimal capital taxation, household production
    JEL: H22 D13
    Date: 2015–12
  3. By: Wrede, Matthias; Abraham, Martin; Lorek, Kerstin; Richter, Friedemann
    Abstract: Although collusive tax evasion by buyers and sellers of commodities and also by employers and employees is widespread all over the world, it has rarely been analyzed in the tax evasion literature. To fill this gap and to compare collusive tax evasion with independent tax evasion, this paper develops a simple non-cooperative game-theoretic model and confirms the model's predictions in a laboratory experiment. Because collusive tax evasion involves social interaction, this paper focuses on the effect of social norms and theoretically and empirically demonstrates that the tax compliance norm has a stronger negative effect on the magnitude of collusive tax evasion than on independent tax evasion. The reason for this result is that in a collusive tax evasion game with multiple equilibria social norms act as an equilibrium selection device, whereas social norms need to be internalized to change the behavior of taxpayers who evade taxes unobservedly.
    JEL: H26 A13 H29
    Date: 2015
  4. By: Löffler, Max; Siegloch, Sebastian
    Abstract: Although being heavily analyzed and discussed, there is neither a theoretical nor an empirical consensus on the incidence of the property tax in rental markets. In this paper, we suggest a novel theoretical approach by introducing property taxation into a Rosen-Roback type local labor market model. Besides the standard relative elasticity result, we find that the tax incidence depends on location preferences. The advantageous institutional setting of property taxation in Germany enables us to test our theoretical predictions and provide a clean estimate of the tax incidence using a non-parametric event study research design. Using a panel of roughly 540 communities over up to 20 years, we show that in the short run, the incidence is borne by landlords since housing supply is inelastic. As housing supply becomes more elastic over time, landlords are able to shift the burden onto tenants. After six years, net rents are on the pre-reform level, implying full shifting of the tax.
    JEL: H22 H71 R31
    Date: 2015
  5. By: Büttner, Thiess; Erbe, Katharina; Grimm, Veronika
    Abstract: This paper explores whether tax planning by households is consistent with a minimization of the family tax burden or whether and to what extent altruism and concerns about the tax loss of individual household members matter. To this end, we take advantage of a specific feature of the German tax system which allows married couples to decide which of three different payroll tax regimes applies. Using a 10% random sample of the individual income tax files of all German tax payers, we find that a substantial fraction of all couples choose equal treatment of partners although a preferential tax treatment of the high income earner would yield a higher net family income. Our findings indicate that this result can be partly attributed to equity concerns. Tax planning is used not only to lower the overall tax burden but also to reduce the tax burden on the partner with the lower income.
    JEL: H24 H31 J22
    Date: 2015
  6. By: Riedel, Nadine; Böhm, Tobias; Karkinsky, Tom; Knoll, Bodo
    Abstract: This paper complements a small but growing literature on the effect of corporate taxes on R&D investment and patent holdings. We provide evidence that patent strategies are exploited as a device to shift income to low-tax countries. Using data on the population of corporate patent applications to the European Patent Office, we show that the location of R&D investment and patent ownership is geographically separated in a non-negligble number of cases. We find that countries which levy low patent income taxes attract ownership of foreign-invented patents, especially those patents that have a high earnings potential. Moreover, our results suggest that the probability for a patent to be owned by a party in a tax haven country significantly decreases if the inventor country has implemented controlled foreign company laws.
    JEL: H26 H25 H30
    Date: 2015
  7. By: von Schwerin, Axel
    Abstract: This paper explores to what extent governments consider the effective tax burden of their tax policies. More specifically, the paper asks whether governments set higher statutory tax rates, if the effective tax burden on business is reduced. To address this question, the paper exploits an odd institution in the German federal income tax code, which substantially changed the effective tax burden of the local business tax. A federal tax reform enacted in 2008 made a large part of the business tax deductible from the federal income tax. This paper provides evidence that this implicit subsidy has drastic effects on local tax effort. The empirical analysis exploits the fact the reform has created a quasi-experiment, as the tax burden is treated only below a certain threshold, thus creating a kink point in the public budget constraint. By now, more than 10% of German municipalities have set local tax rates identical to this threshold level, causing excess bunching within the tax rate distribution of more than 10,000 local governments. Using this phenomenon, I will be able to estimate the elasticity of the tax base.
    JEL: H71 H23 H25
    Date: 2015
  8. By: Holzmann, Carolin; von Schwerin, Axel
    Abstract: This paper provides empirical evidence for tax mimicking among unicipalities by exploiting a quasi-experiment in the German local fiscal equalization scheme. We show for the metropolitan area FrankfurtRheinMain that, besides neighborhood, the degree of economic integration of municipalities determines the interdependency among their tax policies. As the metropolitan area spreads across municipalities located in the two German federal states, Hesse and Rhineland-Palatinate, we can show that Rhineland-Palatine municipalities statistically significantly respond in their local tax rates to an exogenous change in the Hessian local fiscal equalization scheme. However, we find tax rate interdependency only for Rhineland-Palatine metropolitan municipalities which are arguably strongly economically integrated with Hessian metropolitan municipalities. The results suggest that regional economic integration is a key determinant for tax mimicking.
    JEL: H20 H71 H70
    Date: 2015
  9. By: Reiter, Franz
    Abstract: Corporate tax rates around the world have considerably decreased in the last decades. While tax competition among countries has been widely accepted as the driving force of this trend, it has remained unclear which countries compete with whom. This paper focuses on country size as a determinant of tax competition. My empirical analysis yields two main results: First, the structure of tax competition is based on a country's size as large countries compete with other large countries and small countries compete with small ones. Second, there is a qualitative di erence as large countries compete worldwide with each other whereas small countries mainly orientate towards geographically close other small states. In an extension I show that tax competition between small countries is particularly strong in Europe.
    JEL: H25 H87 F23
    Date: 2015
  10. By: Finan, Frederico S. (University of California, Berkeley); Mazzocco, Maurizio (University of California, Los Angeles)
    Abstract: It is widely believed that politicians allocate public resources in ways to maximize political gains. But what is less clear is whether this comes at a cost to welfare; and if so, whether alternative electoral rules can help reduce these costs. In this paper, we address both of these questions by modeling and estimating politicians' decisions to allocate public funds. We use data from Brazil's federal legislature, which grants each federal legislator a budget to fund public projects in his state. We find that 26 percent of the public funds are distorted relative to a social planner's allocation. We then use the model to simulate several potential policies reforms to the electoral system, including adopting approval voting and implementing term limits. We find that an approval voting system reduces the distortions by 7.5 percent. Term limits also reduce distortions, but come at the cost of more corruption, which makes it a welfare-reducing policy.
    Keywords: distributive politics, public goods, corruption, electoral rules, term limits
    JEL: H40
    Date: 2016–01
  11. By: Cremer, Helmuth (Toulouse School of Economics); Roeder, Kerstin (University of Augsburg)
    Abstract: This paper considers an economy where individuals differ in productivity and in risk. Rochet (1991) has shown that when private insurance markets offer full coverage at fair rates, social insurance is desirable if and only if risk and productivity are negatively correlated. This condition is usually shown to be satisfied for many health risks, but it appears to be violated for the old age dependency risk (mainly because longevity in turn is positively correlated with productivity). We examine the role of uniform and nonuniform social insurance to supplement a general income tax when neither public nor private insurers can observe individual risk and when it is positively correlated with wages. Consequently, a Rothschild and Stiglitz (1971) equilibrium emerges in the private insurance market and low-wage/low-risk individuals are not fully insured. We show that even when social insurance provided to the poor has a negative incentive effect, it also increases their otherwise insufficient insurance coverage. Social insurance to the rich produces exactly the opposite effects. Whichever of these effects dominates, some social insurance is always desirable. Finally, we introduce risk misperception which exacerbates the failure of private markets. The insurance term now reflects the combined failure brought about by adverse selection and misperception. Now the low-risk individuals are not only underinsured, but also pay a higher than fair rate. However, and rather surprisingly, it turns out that this does not necessarily strengthen the case for public insurance.
    Keywords: social insurance, optimal taxation, adverse selection, overconfidence, long-term care
    JEL: H21 H51 D82
    Date: 2016–01
  12. By: Heinemann, Friedrich; Moessinger, Marc-Daniel; Yeter, Mustafa
    Abstract: Numerical fiscal rules are implemented to counterbalance the deficit bias in budgetary policy. Over the recent years, an increasing number of studies try to test the actual effectiveness of fiscal rules. This meta-analysis condenses the existing evidence from different regional and federal contexts. It explores the study characteristics which are associated with different findings. Based on a preliminary analysis and a still incomplete sample of primary studies, the results point to a consensus that fiscal rules indeed constrain fiscal policies. This result also appears to hold in light of the criticism that rules are the endogenous reflection of fiscal preferences: even studies with a comprehensive control for fiscal preferences do not lead to systematically weaker levels of statistical significance.
    JEL: H61 H74 H69
    Date: 2015
  13. By: Koch, Christian; Müller, Cornelius
    Abstract: Many countries grant exemption from legal prosecution under certain conditions, allowing for voluntary disclosures regarding tax evasion. It has been claimed that tax amnesties are most successful when they are accompanied by an increase in compliance efforts because amnesties then help tax evaders to adjust to the new circumstances. At the same time, time-limited amnesties are often repeated or in some countries even permanent amnesty laws exist. When tax amnesties are, however, anticipated, they can serve as an insurance against a rise in the detection probability, potentially leading to less and not more tax compliance. We test the relevance of this insurance effect in an experimental tax game and find that the overall tax compliance actually decreases by about 9 percent because of this effect.
    JEL: C91 H26 H24
    Date: 2015
  14. By: Jochimsen, Beate Regina; Lehmann, Robert
    Abstract: Nowadays, a solid budget serves as an important quality signal for the electorate. Therefore, politicians might face an incentive to influence tax revenue forecasts which are widely regarded as a key element for budget setups. Looking at the time period from 1996 to 2012, we systematically analyze whether national tax revenue forecasts in 18 OECD countries are biased through political distortions. Based on several theoretical approaches drawn from the theories of political economy, we test four hypotheses using panel estimation techniques. We find strong support for partisan politics. Left governments seem to overestimate tax revenues more than right ones to satisfy their electorate with additional expenditure plans. Contrary to the theoretical prediction based on the common pool problem, we find that more fragmented governments and parliaments tend to produce more pessimistic tax revenue forecasts. One reason might be that at least one of the incumbents will stay in office and will be part of the next government, too. We do not find empirical evidence for political business cycles or an influence of the reelection probability on tax revenue forecasts at all.
    JEL: H11 H68 P16
    Date: 2015
  15. By: Streif, Frank
    Abstract: Corporate tax levels have fallen substantially in Europe during the last decades. There is a broad literature on tax competition which has been identified as one reason for the decline in corporate tax levels. However, none of these studies explicitly ask the question whether tax competition within regions is di erent from tax competition across regions, e.g. due to "global regionalism" of foreign direct investments. This is a crucial question to answer in order to discuss the desirability of (local) tax harmonization, for example, within the European Union. Therefore, the study aims to give hints on the following questions: Is the decline in corporate tax levels in Europe mainly driven by inner-European tax competition? Or is it (also) due to pressure from other world regions? The results of this study which makes use of tax reaction functions (spatial econometrics) indicate that there is evidence for tax competition within Europe (with respect to effective average tax rates) whereas there is no evidence that European countries compete with countries from other regions.
    JEL: H20 H77 H87
    Date: 2015
  16. By: Burret, Heiko T.; Feld, Lars P.
    Abstract: Formal fiscal rules have been introduced in many countries throughout the world. While most studies focus on the intra-jurisdictional effects of fiscal rules, vertical effects on the finances of other levels of government have yet to be explored thoroughly. This paper investigates the influence of Swiss cantonal debt brakes on municipal finances during the years 1980-2011 by examining aggregated and disaggregated local data. A Difference-in-Differences estimation (twoway fixed effects) provides little evidence that budget constraints at the cantonal level affect average municipal finances and fiscal decentralization.
    Keywords: Fiscal Rule,Vertical Effect,Fiscal Shock,Decentralization,Sub-national Finances
    JEL: H60 H77 H74 H72
    Date: 2016
  17. By: Baskaran, Thushyanthan
    Abstract: This paper uses the quasi-experiment of Germany's reunification to identify local tax mimicking by municipalities in Eastern-Germany. After reunification, East-German municipalities were allowed to independently set, for the first time in decades, local business and property tax rates. I explore whether the tax rates chosen by East-German border municipalities were influenced by the tax rates of adjacent West-German municipalities. To obtain causal estimates, I rely on instrumental variables regressions within the spatial lag framework, using West-German border municipalities' tax rates in 1989 as instruments for their post-reunification tax rates. The results suggest that East-German municipalities mimicked business tax rates immediately after reunification, but not in later years. I find no evidence of mimicking for property taxes. These results indicate that mimicking is not an important determinant of local tax policy.
    JEL: H71 H77 H20
    Date: 2015
  18. By: aus dem Moore, Nils
    Abstract: We contribute to the empirical literature on the relationship between corporate taxes and investment. We exploit the introduction of the so-called ACE corporate tax reform in Belgium that came into effect in January 2006 to evaluate this relationship in a quasiexperimental setting based on firm-level accounting data. To identify the causal effect of the reform on capital spending of Belgian corporations, we focus on the indirect effect of taxes on investment via their impact on free cash-flow. We use the systematic variation of the cash-flow sensitivity of investment between small and medium versus large firms to form treatment and control groups for difference-in-differences (DiD) estimations. Our benchmark results provide highly significant and robust estimates that correspond to an increase in investment activity by small and medium-sized firms of about 3 percent in response to the ACE reform. We substantiate the robustness of our results by means of triple differences estimations (DDD) that use a matched sample of French companies as an additional dimension of contrast.
    JEL: H25 H32 G31
    Date: 2015
  19. By: Grogger, Jeff (University of Chicago)
    Abstract: To combat a growing obesity problem, Mexico imposed a nationwide tax on drinks with added sugar, popularly referred to as a "soda tax," effective January 2014. Since the tax took effect nationwide, there is no conventional control group that can be used as a baseline to estimate how the tax affected prices. Instead, I make use of control commodities, that is, untaxed goods that are not substitutes for the taxed drinks. I analyze data from Mexico's Consumer Price Index program, using the synthetic control method and a time-series intervention analysis. I employ a placebo inference approach, akin to permutation inference, in both cases. The estimates show that soda prices rose by more than the amount of the tax. There is less evidence that the prices of potential substitutes rose, possibly indicating that consumers did not switch to those products after the tax took effect. Some simple calculations suggest that the soda price increase could lead to a two- to four-pound reduction in mean weight. This in turn amounts to roughly 1.6 to 2.7 percent of mean body mass, which compares to weight reductions that analysts have argued would have meaningful health consequences in the U.S.
    Keywords: soda taxes, overshifting, obesity
    JEL: H22 I10
    Date: 2016–01

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