nep-pub New Economics Papers
on Public Finance
Issue of 2016‒04‒30
eleven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Incidence of Corporate Income Tax and Optimal Capital Structure: A dynamic analysis By DOI Takero
  2. Revisiting the tax compliance problem using prospect theory. By Rao, R. Kavita; Tandon, Suranjali
  3. Are Preferential Tax Holidays Dynamic Inconsistent? By Kaushal Kishore
  4. The effects of taxation on the individual consumption of sugar-sweetened beverages By Bonnet, Céline; Réquillart, Vincent
  5. Optimality of relaxing revenue-neutral restrictions in green tax reforms. By Eduardo L. Giménez; Miguel Rodríguez
  6. Keeping Pigou on tracks: second-best carbon pricing and infrastructure provision By Siegmeier, Jan
  7. Fiscal Federalism and Tax Equalization: The potential for progressive local taxes By Debra Hevenstone; Ben Jann
  8. U.S. capital gains and estate taxation: a status report and directions for a reform By Kopczuk, Wojciech
  9. Taxing Consumption in Canada: Rates, Revenues, and Redistribution By Richard Bird; Michael Smart; Jorge Martinez-Vazquez
  10. Property Tax and Property Values: Evidence from the 2012 Italian Tax Reform By Tommaso Oliviero; Annalisa Scognamiglio
  11. Tax Revenue Effects of Sectoral Growth and Public Expenditure in Uganda By Mawejje, Joseph; Munyambonera, Ezra

  1. By: DOI Takero
    Abstract: In this study, we analyze the incidence of corporate income tax using a dynamic general equilibrium model. The dynamic macroeconomic model enables us to analyze both the instantaneous and the intertemporal incidence of corporate income tax. We include capital structure (i.e., choices of equity, debt, and retained earnings) in the proposed model in order to implement investment. The model also includes a progressively increasing per unit agency cost on debt. We implement a simulation based on the dynamic model, and measure the incidence of corporate income tax on labor income, when the (effective) corporate income tax rate decreases from 34.62% to 29.74% in Japan. We find that the percentage of the incidence on labor income is about 20%-60%, in the short term (one year), and the percentage of the incidence on capital income is about 40%-80%. In the long term, about 90% of the incidence is on labor income. Thus, almost all of the incidence shifts to labor income in the long term. In contrast, in a neo-classical dynamic general equilibrium model, the entire incidence shifts to labor income in the long term. The difference between these results is caused by the inclusion of the agency cost on debt.
    Date: 2016–03
  2. By: Rao, R. Kavita (National Institute of Public Finance and Policy); Tandon, Suranjali (National Institute of Public Finance and Policy)
    Abstract: The paper presents a model for tax compliance based on prospect theory wherein an individual makes the decision whether to file, and declare a certain amount of income, or to not file based on a set of policy parameters as well as his/her preferences. The paper poses the question- at what incomes would individuals choose to file a return and answers the same using a model based on prospect theory. Further, simulations are presented to illustrate the impact of changes in tax rates, penalty and audit probability on the individual's preference to file. The results from the simulation show that for different values of policy parameters there exists crossover income at which individuals would choose to file a return. Given all else, at the exemption threshold of 0.1 million, individuals would choose to file a return at incomes greater than or equal to 0.6 million.
    Keywords: prospect theory ; compliance ; tax ; exemption threshold ; crossover income
    JEL: H26 H31 D11 K42
    Date: 2016–04
  3. By: Kaushal Kishore (Department of Economics, University of Pretoria)
    Abstract: In a two-period dynamic model, where a single country is trying to attract large investors endowed with capital with varying rate of returns, we show that the result of Kishore and Roy (2014), that a country has incentives to commit to a non-preferential regime to circumvent dynamic inconsistency problem does not hold. Tax revenue of the government may be higher under a preferential regime compared to a non-preferential regime.
    Keywords: Tax Competition, Non-preferential regime, Dynamic Inconsistency, Rational Expectations
    JEL: F21 H21 H25 H87
    Date: 2016–04
  4. By: Bonnet, Céline; Réquillart, Vincent
    Abstract: To assess the impact of taxation on the consumption of sugar-sweetened beverages (SSB), most studies consider the average consumer. Individual consumption is, however, very heterogeneous. In this paper, we propose a three-step methodology to assess the impact of SSB taxation on individual consumption. First, we use a disaggregation method to recover individual consumption from observed household consumption. Second, we estimate a matrix of price elasticities of demand. Third, we simulate the impact on individual consumption of a tax policy. We find that adults, both men and women, consume a larger quantity of regular soft drinks than children. We find large heterogeneity in consumption. Moreover, the average consumption of a beverage, at a given age category, increases with body mass index. We find price elasticities of demand in the range of -1.1 to -3.5 depending on the beverages. Finally, we show that a 0.07 e tax on SSB might decrease the consumption of 5% of the adult population by more than 1.3 kg; the decrease being larger for an obese adult than a normal weight adult. For children, the decrease in sugar consumption is larger than 1 kg per year for about 5% of children.
    Keywords: soft drinks, excise tax, differentiated products, individual consumption.
    JEL: D12 H31 I18 Q18
    Date: 2016–04
  5. By: Eduardo L. Giménez; Miguel Rodríguez
    Abstract: Green Tax Reforms [GTR] have been initially devised as a policy proposal to tackle simultaneously several political goals, such as accomplishing environmental objectives together with lesser tax distortions requiring tax revenue recycling. Yet, recent fiscal stress episodes in many developed countries have defied this view. In this paper, we assess the convenience of revenue-neutral restrictions in GTR on efficiency basis. Usual revenue-neutral conditions impose on policymakers additional constraints that may restrain welfare gains. Our conclusions may provide theoretical support for the third generation of GTR (calling for a departure from revenue-neutral conditions on GTR), as well as some recent legal European experiences.
    Keywords: green tax reforms, revenue neutrality, optimal taxation
    JEL: H23 Q48
    Date: 2016–04
  6. By: Siegmeier, Jan
    Abstract: Long-lived public infrastructure (for example roads) complements private goods (cars) and may perpetuate carbon-intensive demand patterns and technologies far into the future. Thus, climate policy must combine `direct' instruments such as carbon taxation with public investment shifts (from roads towards rails or bicycle paths). This is particularly important and complex because infrastructure supply changes slowly and carbon taxation may be politically constrained: This paper shows that if carbon taxation is non-optimal, infrastructure provision should be used to actively change private behavior. Nevertheless, if one instrument is restricted, the other may also have to be less ambitious: Intuitively, if clean infrastructure provision is non-optimal, polluting should also be penalized less (and vice versa), unless welfare gains from environmental quality are large. More precisely, for two public goods complementing private goods in utility, general second-best policy conditions are derived and applied to a specific utility function. Constrained public spending composition leaves the (Pigouvian) tax rule unchanged, but constrained taxation implies that the environmental externality enters the condition for public spending composition. Nevertheless, the second-best level of either policy instrument is below its first-best when `dirty' consumption is sufficiently important in utility.
    Keywords: infrastructure, public spending, carbon price, environmental tax, second-best, transport
    JEL: H23 H41 H54 R48
    Date: 2015–12–31
  7. By: Debra Hevenstone; Ben Jann
    Abstract: We construct an empirically informed computational model of fiscal federalism, testing whether horizontal or vertical equalization can solve the fiscal externality problem in an environment in which heterogeneous agents can move and vote. The model expands on the literature by considering the case of progressive local taxation. Although the consequences of progressive taxation under fiscal federalism are well understood, they have not been studied in a context with tax equalization, despite widespread implementation. The model also expands on the literature by comparing the standard median voter model with a realistic alternative voting mechanism. We find that fiscal federalism with progressive taxation naturally leads to segregation as well as inefficient and inequitable public goods provision while the alternative voting mechanism generates more efficient, though less equitable, public goods provision. Equalization policy, under both types of voting, is largely undermined by micro-actors' choices. For this reason, the model also does not find the anticipated effects of vertical equalization discouraging public goods spending among wealthy jurisdictions and horizontal encouraging it among poor jurisdictions. Finally, we identify two optimal scenarios, superior to both complete centralization and complete devolution. These scenarios are not only Pareto optimal, but also conform to a Rawlsian view of justice, offering the best possible outcome for the worst-off. Despite offering the best possible outcomes, both scenarios still entail significant economic segregation and inequitable public goods provision. Under the optimal scenarios agents shift the bulk of revenue collection to the federal government, with few jurisdictions maintaining a small local tax.
    Keywords: Fiscal Federalism, Equalization Grants, Computational Modeling, Tiebout Sorting, Theory of Justice, Multi-community model
    JEL: C63 D63 H21 H23 H3 H71
    Date: 2016–04–12
  8. By: Kopczuk, Wojciech
    Abstract: Recent changes in the U.S. estate taxation significantly reduced its reach and revenue, although the tax continues to contribute to progressivity of the overall tax system and is likely to play a role in influencing the long term concentration of wealth. I discuss recent changes, empirical evidence and theory applying to this form of taxation. I then discuss directions for a reform of the tax. The interaction between estate taxation and other components of the tax system is most important in the context of capital gains, with step up in basis partially compensating for high marginal rates while at the same time creating very strong deferral incentives. Modifying this interaction is long overdue and experience from the temporary repeal of the tax in 2010 is helpful in understanding challenges. I discuss options for modifying this interaction, including implications both for estate tax design and for the great majority of taxpayers who are not subject to the estate tax. Eliminating the step-up in basis would allow for increasing the efficiency of the tax system, while the additional revenue could be used to either mitigate the consequences for the affected taxpayers by reducing the estate tax burden or increasing the overall progressivity. I note that any exemption for capital gains at death does retain deferral incentives for individuals with unrealized capital gains smaller than the exemption and suggest that a lifetime exemption would have better incentive properties. I also note that the treatment of spousal transfers under any capital gains at death approach is critical for the revenue implications.
    Keywords: capital gains tax; Estate tax
    JEL: H20 H30
    Date: 2016–03
  9. By: Richard Bird (University of Toronto, Department of Economics); Michael Smart (University of Toronto, Department of Economics); Jorge Martinez-Vazquez
    Abstract: The introduction of the VAT in Canada, initially in the form of the federal GST in 1991, did not signify a major change in the tax mix even after most provincial sales taxes also became VATs. Canadians do not pay much if any more in taxes on their consumption than they did 25 years ago. Although the GST and its provincial companions are not perfect, the evidence is that they create fewer barriers to investment and growth than the taxes they replaced so that Canadians appear as a whole to be better off than they were before setting off down the road to VAT. Nonetheless, perhaps in part because the VAT in Canada unlike in other countries is generally quoted separately (like retail sales taxes in the US) and hence highly visible, it continues to be politically unpopular and considered undesirably regressive. The major contribution of this paper is to examine in some detail and with some new evidence the incidence of Canada’s sales and excise taxes, a question that has received surprisingly little analysis. Because the share of total consumption taxes coming from sales rather than excise taxes has increased, these taxes are now less regressive than they were before the move to VAT, regardless of how incidence is measured. More importantly, there are solid arguments for using consumption than income as a basis for evaluating the progressivity of consumption taxes, and on this measure the GST and its companion taxes appear to be mildly progressive. However because the remaining excises are quite regressive even on this basis, on the whole the sales and excise system remains mildly regressive.
    Keywords: sales tax, excise tax, value-added tax, incidence, progressivity
    Date: 2016–03
  10. By: Tommaso Oliviero (CSEF, Università di Napoli Federico II); Annalisa Scognamiglio (CSEF, Università di Napoli)
    Abstract: This paper estimates the impact of property taxes on property values. The unexpected introduction of a new fiscal regime on property taxes in 2012 adopted by the Italian government in December 2011 within the austerity plan to face the sovereign debt crisis ("Manovra Salva Italia") provides an ideal empirical setting. We exploit the cross-sectional variation in the tax rates set by each Italian municipality as the intensity of the treatment. We address the endogeneity problem by instrumenting the tax rate on primary residences with the timing of the elections. As showed by Alesina and Paradisi (2014) municipalities that did not have elections in 2013 set a tax rate about 0.1 percentage points higher than the others. Our results show that in those municipalities there has been a reduction in average property values about 6% higher the others. The effect is attributable to the relative higher property tax rate and provide evidence in favor of the capitalization hypothesis on property values.
    Keywords: Immovable property tax, Property values.
    JEL: H22 H31 R21
    Date: 2016–04–16
  11. By: Mawejje, Joseph; Munyambonera, Ezra
    Abstract: This paper contributes to a growing strand of literature on the determinants of tax revenue performance in developing countries, particularly in Sub-Saharan Africa. More specifically we estimate the tax elasticities of sectoral output growth and public expenditure. The unique features of this paper are twofold: First we develop a simple analytical model for tax revenue performance taking into account some structural features pervasive in most developing countries with large informal sectors. Second we test the model predictions on Ugandan time series data using ARDL bounds testing techniques. Results indicate that dominance of the agricultural and informal sectors pose the largest impediments to tax revenue performance. In addition development expenditures, trade openness, and industrial sector growth are positively associated with tax revenue performance. We propose policies to support the development of value added linkages between agricultural and industrial sectors while emphasizing the need to unlock the potentially large contributions of the informal sector with a view of widening the tax base.
    Keywords: Consumer/Household Economics, Financial Economics, Industrial Organization, Institutional and Behavioral Economics, International Relations/Trade, Labor and Human Capital, Public Economics,
    Date: 2016–01

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