nep-pub New Economics Papers
on Public Finance
Issue of 2016‒04‒04
eleven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Pareto-Improving Optimal Capital and Labor Taxes By Katharina Greulich; Sarolta Laczó; Albert Marcet
  2. Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach By Kory Kroft; Kucko Kavan; Etienne Lehmann; Johannes Schmieder
  3. The Optimal Distribution of Income Revisited By Ray C. Fair
  4. Taxing Pensions By Cremer, Helmuth; Pestieau, Pierre
  5. Corporate Tax: A brief assessment of some exemptions. By Rao, R. Kavita; Tandon, Suranjali; Mukherjee, Sacchidananda
  6. Tax Policy Toward Low-Income Families By Hilary Hoynes; Jesse Rothstein
  7. Taxing and Regulating Vices By Annamaria Menichini; Giovanni Immordino; Maria Grazia Romano
  8. On tax evasion, entrepreneurial generosity and fungible assets By Bittschi, Benjamin; Borgloh, Sarah; Moessinger, Marc-Daniel
  9. Income inequality and willingness to pay for public environmental goods By Baumgärtner, Stefan; Drupp, Moritz A.; Meya, Jasper N.; Munz, Jan M.; Quaas, Martin F.
  10. Progressive Universalism? The Impact of Targeted Coverage on Healthcare Access and Expenditures in Peru By Sven Neelsen; Owen O’Donnell
  11. Tax Mobilization in Sub-Saharan Africa: The Impact of Tax and Business Law Reforms By Luisito Bertinelli; Arnaud Bourgain

  1. By: Katharina Greulich; Sarolta Laczó; Albert Marcet
    Abstract: We study Pareto-optimal fiscal policy in a model with agents who are heterogeneous in their labor productivity and wealth. We show a natural modification of the standard Ramsey problem to guarantee that long-run capital taxes are zero. We focus on Pareto-improving policies and we find that a gradual reform is crucial in achieving a Pareto improvement: labor taxes should be cut and capital taxes should remain high for a very long time before reaching zero. Therefore, the long-run optimal tax mix is the opposite of the short- and medium-run one. This policy redistributes wealth in favor of workers so that all agents benefit, and it favors quick capital growth after the reform. The labor tax cut is financed by deficits which lead to a positive level of government debt in the long run, reversing the standard prediction that the government accumulates savings in models with optimal capital taxes. The welfare benefits from the tax reform are relatively large and they can be shifted entirely to capitalists or workers by varying the length of the transition. We address a number of technical issues such as sufficiency of Lagrangian solutions in a Ramsey problem, relation of Pareto-improving allocations with welfare functions, asymptotic behavior, and solution algorithms.
    Keywords: fiscal policy, Pareto-improving tax reform, redistribution
    JEL: E62 H21
    Date: 2016–03
  2. By: Kory Kroft (University of Toronto - University of Toronto); Kucko Kavan (Boston University [Boston]); Etienne Lehmann (ERMES - Equipe de recherche sur les marches, l'emploi et la simulation - UP2 - Université Panthéon-Assas - M.E.N.E.S.R. - Ministère de l'Éducation nationale, de l’Enseignement supérieur et de la Recherche - CNRS - Centre National de la Recherche Scientifique); Johannes Schmieder (Boston University [Boston])
    Abstract: This paper reassesses whether the optimal income tax program features an Earned Income Tax Credit (EITC) or a Negative Income Tax (NIT) at the bottom of the income distribution, in the presence of unemployment and wage responses to taxation. The paper makes two key contributions. First, it derives a sufficient statistics optimal tax formula in a general model that incorporates unemployment and endogenous wages. This formula nests a broad variety of structures of the labor market, such as competitive models with fixed or flexible wages and models with matching frictions. Our results show that the sufficient statistics to be estimated are: the macro employment response with respect to taxation and the micro and macro participation responses with respect to taxation. We show that an EITC-like policy is optimal provided that the welfare weight on the working poor is larger than the ratio of the micro participation elasticity to the macro participation elasticity. The second contribution is to estimate the sufficient statistics that are inputs to the optimal tax formula using a standard quasi-experimental research design. We estimate these reduced-form parameters using policy variation in tax liabilities stemming from the U.S. tax and transfer system for over 20 years. Using our empirical estimates, we implement our sufficient statistics formula and show that the optimal tax at the bottom more closely resembles an NIT relative to the case where unemployment and wage responses are not taken into account.
    Keywords: optimal income, taxation, unemployment
    Date: 2015–11
  3. By: Ray C. Fair (Cowles Foundation, Yale University)
    Abstract: This paper revisits the optimal distribution of income model in Fair (1971). This model is the same as in Mirrlees (1971) except that education is also a decision variable and tax rates are restricted to lie on a tax function. In the current paper the tax-rate restriction is relaxed. As in Fair (1971), a numerical method is used. The current method uses the DFP algorithm with numeric derivatives. Because no analytic derivatives have to be taken,it is easy to change assumptions and functional forms and run alternative experiments. Gini coefficients are computed, which provides a metric for comparing the redistributive effects under different assumptions. Ten optimal marginal tax rates are computed per experiment corresponding to ten tax brackets. The sensitivity of the results to the four main assumptions of the model are examined: 1) the form of the social welfare function that the government maximizes, 2) the form of the utility function that each individual maximizes, 3) the distribution of ability across individuals, and 4) the rate of return to education. The changes in the Gini coefficient from before-tax income to after-tax income for the experiments are compared to actual changes from various countries. Experiments using a lognormal distribution of ability match the data better than those using a lognormal distribution with a Pareto tail---there is less actual redistribution than a Pareto tail implies. The numerical approach in this paper has advantages over the use of analytic expressions. When functional forms are changed, it may be easier to run a new numerical experiment then use an analytic expression, which can be complicated. Also, although not done in this paper, individual heterogeneity is straightforward to handle. The coding can have a different utility function for each individual. And different assumptions about education can be easily incorporated. The approach also shows the problematic nature of assuming a quasi-linear utility function---a utility function with no income effects.
    Keywords: optimal taxation, income distribution
    JEL: H21
    Date: 2016–03
  4. By: Cremer, Helmuth (Toulouse School of Economics); Pestieau, Pierre (CREPP, Université de Liège)
    Abstract: There exists a wide variety of tax treatments of pensions across the world. And the reasons for such a range of regimes are not clear. This note reviews the general principles of pension taxes and analyses the theoretical foundations of why pension incomes ought to be taxed specifically. To do this, one has to distinguish between public and private pensions. The design of public pensions cannot be separated from the one of taxation. Regarding private pensions, the key issue is whether or not pension saving ought to be treated differently from other forms of saving.
    Keywords: private pensions, deferred tax, social security, retirement
    JEL: H21 H55
    Date: 2016–03
  5. By: Rao, R. Kavita (National Institute of Public Finance and Policy); Tandon, Suranjali (National Institute of Public Finance and Policy); Mukherjee, Sacchidananda (National Institute of Public Finance and Policy)
    Abstract: Government of India proposes to reduce the number of tax incentives built into the corporate tax regime and alongside reduce the statutory tax rate on corporate tax to 25 percent. Beneficiaries of the incentive regime tend to argue that these regimes provide tangible benefits which induce higher level of activity within the economy and hence, phasing these out can be detrimental for the Indian economy. An attempt is made in this paper to briefly assess what can be inferred from available evidence on the effectiveness of the incentive regimes. The focus is on three such schemes, incentives provided for investment in backward areas, incentives for special economic zones and incentives provided for expenditure on research and development.
    Keywords: Area based exemption ; SEZ ; R D ; Corporate tax
    JEL: H25 E62 H32
    Date: 2016–03
  6. By: Hilary Hoynes; Jesse Rothstein
    Abstract: In this paper, we review the most prominent provision of the federal income tax code that targets low-income tax filers, the Earned Income Tax Credit (EITC), as well as the structurally similar Child Tax Credit (CTC). We frame the paper around what we see as the programs’ goals: distributional, promoting work, and limiting administrative and compliance costs. We review what is known about program impacts and distributional consequences under current law, drawing on simulations from the Tax Policy Center. We conclude that the EITC is quite successful in meeting its three goals. In contrast, most of the benefits of the CTC go to higher income households. In addition to analyzing current law, we assess possible reforms that would reach groups – for the EITC, those without children; for the CTC, those with very low earnings – who are largely missed under current policy.
    JEL: H24 H53 I38
    Date: 2016–03
  7. By: Annamaria Menichini (CSEF, Università di Salerno); Giovanni Immordino (Università di Napoli Federico II and CSEF); Maria Grazia Romano (University of Salerno and CSEF)
    Abstract: We study the sin taxes and regulatory measures that it is optimal to implement when consumers are time-inconsistent and there are inefficiencies associated with the use of either instrument. For high inefficiency of regulation, only taxation is used and it may be higher or lower than the first-best depending on the price elasticity of demand. For high inefficiency of taxation, only regulation is used to an extent which depends on its effectiveness in terms of quantity reduction relative to the disutility it generates. For moderate inefficiency of either instrument, taxation and regulation are both optimally used.
    Keywords: Hyperbolic preferences, Taxation, Regulation, Consumption restrictions, Sin goods
    JEL: D03 H21 L51
    Date: 2016–03–25
  8. By: Bittschi, Benjamin; Borgloh, Sarah; Moessinger, Marc-Daniel
    Abstract: We estimate the effects of income from various sources on charitable giving using administrative German income tax data. We demonstrate that charitable contributions are not uniformly affected by different income types. While business and capital income exhibit a positive effect, the remaining income sources do not influence charity on statistically signifcant levels. This exercise is not new and has been conducted for (at least) three different purposes: 1) Relying on the described results, a public finance researcher would state that business and capital income are more prone to tax evasion than the remaining income sources. 2) An entrepreneurship researcher would conclude that business owners are more generous than employees, and 3) a researcher testing the validity of the life cycle theory (or its behavioral counterpart) would refute the fungibility of income. In contrast, we argue that none of these approaches can answer the intended question if solicitation effects of fundraising or measurement error of the income sources are not taken into account. Applying a fixed effect poisson model, we demonstrate that under certain assumptions the results can have a meaningful interpretation.
    Keywords: tax evasion,entrepreneurial behavior,charitable giving,income fungibility,administrative data,fixed effects poisson model
    JEL: D91 E21 H26 H41 L26
    Date: 2016
  9. By: Baumgärtner, Stefan; Drupp, Moritz A.; Meya, Jasper N.; Munz, Jan M.; Quaas, Martin F.
    Abstract: We study how the distribution of income among members of society, and income inequality in particular, affects social willingness to pay (WTP) for environmental public goods. We find that social WTP for environmental goods increases with mean income, and decreases (increases) with income inequality if and only if environmental goods and manufactured goods are substitutes (complements). Furthermore, social WTP for environmental normally changes more elastically with mean income than with income inequality. We derive adjustment factors for benefit transfer to control for differences in income distributions between a study site and a policy site. For illustration, we quantify how social WTP for environmental public goods depends on the respective income distribution for empirical case studies in Sweden, China and the World. We find that the effects of adjusting for income inequality can be substantial.
    Keywords: environmental goods,public goods,income distribution,inequality,willingness to pay,benefit transfer,sustainability policy
    JEL: Q51 D63 H23 H43
    Date: 2016
  10. By: Sven Neelsen (Erasmus University Rotterdam, the Netherlands); Owen O’Donnell (Erasmus University Rotterdam, the Netherlands; University of Lausanne, Switzerland; University of Macedonia, Greece)
    Abstract: Like other countries seeking a progressive path to universalism, Peru has attempted to reduce inequalities in access to healthcare by granting the poor entitlement to tax-financed basic care without charge. We identify the impact of this policy by comparing the target population’s change in healthcare utilization with that of poor adults already covered through employment-based insurance. There are positive effects on receipt of ambulatory care and medication that are largest among the elderly and the poorest. The probability of getting formal healthcare when sick is increased by almost two fifths, while the likelihood of being unable to afford treatment is reduced by more than a quarter. Consistent with the shallow cover offered, there is no impact on use of inpatient care. Mean out-of-pocket (OOP) expenditure on healthcare is unaffected but spending is reduced by up to one quarter at some points of the distribution. Among healthcare users, medical spending is reduced across much of the distribution and in relative terms falls most at lower quantiles, which is consistent with limited nominal and effective coverage of expensive treatments.
    Keywords: Health insurance; health financing; healthcare; Universal Coverage; Peru
    JEL: H42 H51 I18
    Date: 2016–03–16
  11. By: Luisito Bertinelli (CREA, Université du Luxembourg); Arnaud Bourgain (CREA, Université du Luxembourg)
    Abstract: This paper contributes to measuring the influence of business (and tax) law reforms on sub-Saharan African countries’ tax mobilization ability. Relying on a new business law reform indicator, our results validate the significant impact of corporate law modernization on governmental revenue, and unearth a complementary effect between business and tax law reforms.
    Keywords: Tax revenue mobilization, Business law reform, Tax reform
    JEL: H20 O17
    Date: 2016

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