nep-pub New Economics Papers
on Public Finance
Issue of 2016‒02‒29
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Taxing Capital? The Importance of How Human Capital is Accumulated By Peterman, William B.
  2. A comment on ``Pareto improving taxes'' By Leventides, John; Michelacakis, Nickolas
  3. Redistribution through Charity and Optimal Taxation when People are Concerned with Social Status By Aronsson, Thomas; Johansson-Stenman, Olof; Wendner, Ronald
  4. Fiscal competition and public debt By Janeba, Eckhard; Todtenhaupt, Maximilian
  5. EU VAT principles as interpretative aids to EU VAT rules: the inherent paradox By Rita de la Feria

  1. By: Peterman, William B. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: This paper considers the impact of how human capital is accumulated on optimal capital tax policy in a life cycle model. In particular, it compares the optimal capital tax when human capital is accumulated exogenously, endogenously through learning-by-doing, and endogenously through learning-or-doing. Previous work demonstrates that in a simple two generation life cycle model with exogenous human capital accumulation, if the utility function is separable and homothetic in each consumption and labor, then the government has no motive to condition taxes on age or tax capital. In contrast, this paper demonstrates analytically that adding either form of endogenous human capital accumulation creates a motive for the government to use age-dependent labor income taxes. Moreover, if the government cannot condition taxes on age, then a capital tax can be optimal in order to mimic such taxes. This paper quantitatively explores the strength of this channel and finds that, including human capital accumulation with learning-by-doing, as opposed to exogenously, causes the optimal capital tax to increase by between 7.3 and 14.5 percentage points. In contrast, introducing learning-or-doing causes a much smaller increase in the optimal capital tax of between 0.7 and 3.7 percentage points. Taken as a whole, this paper finds that the specific formulation by which human capital is accumulated can have notable implications on the optimal capital tax.
    Keywords: Optimal Taxation; Capital Taxation; Human Capital
    JEL: E24 E62 H21
    Date: 2015–12–29
  2. By: Leventides, John; Michelacakis, Nickolas
    Abstract: In an article appeared in the Journal of Mathematical Economics, J. Geanakoplos and H. Polemarchakis, [Geanakoplos J. and Polemarchakis H.M.: "Pareto improving taxes", Journal of Mathematical Economics 44 (2008), 682-696], prove on page 685 the following theorem: "Theorem. For almost all economies with separable externalities and L>I, every competitive equilibrium is constrained Pareto suboptimal, that is, for each competitive equilibrium, there exists an anonymous tax package t and a competitive t-equilibrium allocation which Pareto dominates it." It is the purpose of this comment to show that restrictions must be applied on the limiting cases for the theorem to hold. Proposition 1.3, below, gives a counter-positive result and the ensuing Corollary shows that the Theorem in [Geanakoplos & Polemarchakis 2008][p. 685] does not hold for I=2 and subsequently the example given in Section 6, page 693, of Geanakoplos & Polemarchakis (2008)} appears to be incorrect.
    Keywords: Externalities; Commodity taxes, Constrained suboptimality
    JEL: D50 D6 D60 D62 D82
    Date: 2016–01–29
  3. By: Aronsson, Thomas; Johansson-Stenman, Olof; Wendner, Ronald
    Abstract: This paper deals with tax policy responses to charitable giving based on a model of optimal redistributive income taxation. The major contribution is the simultaneous treatment of (i) warm-glow and stigma effects of charitable donations; (ii) that the warm glow of giving and stigma of receiving charity may to some extent depend on relative comparisons; and (iii) that people are also concerned with their relative consumption more generally. Whether charity should be taxed or supported turns out to largely depend on the relative strengths of the warm glow of giving and the stigma of receiving charity, respectively, and on the positional externalities caused by charitable donations. In addition, imposing stigma on the mimicker (via a relaxation of the self-selection constraint) strengthens the case for subsidizing charity. We also consider a case where the government is unable to target the charitable giving through a direct tax instrument, and examine how the optimal marginal income tax structure is adjusted in response to charitable giving.
    Keywords: Conspicuous consumption, conspicuous charitable giving, optimal income taxation, warm glow, stigma
    JEL: D03 D62 H21 H23
    Date: 2016–01–08
  4. By: Janeba, Eckhard; Todtenhaupt, Maximilian
    Abstract: The existing theoretical literature on fiscal competition has to a large extent ignored the role of government debt as a determinant of taxes and productive public spending. We develop a simple model of fiscal competition with government borrowing. If a default on government debt is no option, initial debt levels play no role in fiscal competition. This neutrality result is overturned when a default is possible. A government that is constrained in its borrowing due to a possible default responds optimally by lowering spending on durable public infrastructure, which in turn induces more aggressive tax setting. A rise in exogenous firm mobility reinforces the link between legacy debt and fiscal competition. Our model may help explain the observation that highly indebted countries in Europe have decreased corporate tax rates over-proportionally. Our model may also be useful for evaluating decentralization reforms in which the power to tax firms is devolved to lower levels of governments which differ in their initial debt levels.
    Keywords: Asymmetric Tax Competition,Business Tax,Sovereign Debt,Inter-Jurisdictional Tax Competition
    JEL: H25 H63 H73 H87
    Date: 2016
  5. By: Rita de la Feria (University of Leeds)
    Abstract: The EU VAT system is founded on two basic principles, namely the principle of VAT as a general consumption tax, and the principle of fiscal neutrality. Based on key elements of the VAT system as it was introduced in the 1960s, they have been both developed by the Court as fundamental principles of the system over an extended period, spanning almost five decades. Once exclusions from the tax base, such as exemptions and reduced rates, are introduced, however, these two principles became contradictory. This results in a dialectic struggle, whereby a choice must be made when interpreting VAT rules on exclusions, namely: interpreting these rules in light with the principle of VAT as a tax on consumption, and its corollary, the principle of strict interpretation, will result in a less neutral system; interpreting these rules in line with the principle of fiscal neutrality, will result in further erosion of the tax base, and legal uncertainty. The paper starts by presenting a typology of European VAT principles based upon the jurisprudence of the CJEU. It then assesses that jurisprudence insofar as exclusions from the tax base are concerned, namely rules on VAT exemptions, and rules on VAT reduced rates, highlighting this dialectic struggle, and identifying both the Court¡¯s traditional stand on it, and its more recent approach. An empirical assessment of the hypothesis is then presented, by reviewing a five years sample of cases on the interpretation of the scope of VAT exemptions, and identifying for each case whether the CJEU decided on the basis of the principle of fiscal neutrality, or on the basis of the principle of strict interpretation. Whilst not meant to be taken as an accurate method of determining the Court¡¯s preferences as regards interpretative methods, the exercise demonstrates not only a growing preference for fiscal neutrality, but also the increasingly casuistic nature of interpreting VAT rules on exclusions of the tax base. The paper concludes that these tendencies are likely to continue in the face of new economic realities, and that the challenge for the CJEU will be to reach the right balance between promoting neutrality and eliminating distortions, without creating an environment of legal uncertainty, which will undermine confidence and economic growth.
    Date: 2016

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