nep-pub New Economics Papers
on Public Finance
Issue of 2016‒08‒07
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Higher Taxes at the Top: The Role of Entrepreneurs By Bettina Brueggemann
  2. Progressive taxation and (in)stability in an exogenous growth model with an informal sector By Vasilev, Aleksandar
  3. Aging of the Baby Boomers: Demographics and Propagation of Tax Shocks By Giuseppe Fiori; Domenico Ferraro
  4. Tax loss carryforward disclosure and uncertainty By Flagmeier, Vanessa; Müller, Jens
  5. Tax Evasion and Institutions. An Experiment on The Role of Principal Witness Regulations By Johannes Buckenmaier; Eugen Dimant; Luigi Mittone
  6. Migration and Tax Yields in a Devolved Economy By Foreman-Peck, James; Zhou, Peng
  7. Taxing Consumption in Canada: Rates, Revenues, and Redistribution By Richard Bird; Michael Smart; Jorge Martinez-Vazquez
  8. Switch towards tax centralization in Italy: a wake up for the local political budget cycle By Massimiliano Ferraresi; Umberto Galmarini; Leonzio Rizzo; Alberto Zanardi
  9. Do Tax Credits Increase Charitable Giving? Evidence from Arizona and Iowa By Daniel Teles
  10. Fiscal Policy, Inequality and Poverty in Iran: Assessing the Impact and Effectiveness of Taxes and Transfers By Ali Enami; Nora Lustig; Alireza Taqdiri

  1. By: Bettina Brueggemann (Goethe University Frankfurt)
    Abstract: This paper contributes to the recent and growing literature on optimal top marginal income tax rates. It computes optimal marginal tax rates for top earners in a Bewley-Aiyagari type economy explicitly accounting for entrepreneurs. Entrepreneurs make up more than one third of the highest-earning one percent in the income distribution despite representing less than ten percent of the population. They are thus disproportionately affected by an increase in the top marginal income tax rate. Since entrepreneurs overall also employ half of the private-sector workforce, such policy changes can have important repercussions for aggregate labor demand and productivity. Nonetheless, the welfare maximizing top marginal tax rate amounts to 82.5 percent, and the revenue maximizing one to 90 percent. A steady state comparison between the benchmark economy featuring the current US tax system and the economy with the welfare maximizing top marginal tax rate illustrates the underlying mechanisms. The substantial increase in taxes leads to a large degree of redistribution, yielding sizable welfare gains for low-income households. Lower equilibrium wages benefit medium-sized entrepreneurs and enable them to grow, such that all entrepreneurs except those directly affected by the higher tax experience considerable welfare gains.
    Date: 2016
  2. By: Vasilev, Aleksandar
    Abstract: We show that in a exogenous growth model with informal economy calibrated to Bulgarian data under the progressive taxation regime (1993-2007), the economy exhibits equilibrium indeterminacy due to the the presence of an unofficial production. These results are in line with the findings in Benhabib and Farmer (1994, 1996) and Farmer (1999). Also, the findings in this paper are in contrast to Guo and Lansing (1988) who argue that progressive taxation works as an automatic stabilizer. Under the flat tax regime (2008-14), the economy calibrated to Bulgarian data displays saddle-path stability. The decrease in the average effective tax rate addresses the indeterminacy issue and eliminates the "sink" dynamics.
    Keywords: Progressive taxation,Informal economy,Equilibrium (in)determinacy
    JEL: D91 J46
    Date: 2016
  3. By: Giuseppe Fiori (North Carolina State University); Domenico Ferraro (Arizona State University)
    Abstract: We investigate the consequences of demographic change for the effects of tax cuts in the United States over the post-WWII period. Using narratively identified tax changes as proxies for structural shocks, we establish that the responsiveness of unemployment rates to tax changes largely varies across age groups: the unemployment rate response of the young is nearly twice as large as that of prime-age workers. Such heterogeneity is the channel through which shifts in the age composition of the labor force impact the response of the aggregate U.S. unemployment rate to tax cuts. We find that the aging of the Baby Boomers considerably reduces the effects of tax cuts on unemployment.
    Date: 2016
  4. By: Flagmeier, Vanessa; Müller, Jens
    Abstract: We examine whether companies voluntarily disclose additional information about tax loss carryforwards when the recoverability is more uncertain. With this study, we aim to explain part of the huge cross-sectional variation in the tax footnote. To assess disclosure behavior, we hand collect data from notes of large German firms' IFRS financial statements and identify voluntarily disclosed information beyond the requirements of IAS 12. We find that uncertainty about the usability of tax losses has a significantly negative relation to the amount and quality of disclosure, controlling for other disclosure determinants derived from prior literature. These findings are robust for several indicators representing information and income uncertainty. Our findings suggest that managers anticipate the investors' need for more private information and disclose them voluntarily to send a signal of credibility to the market participants. It can be assumed that disclosing this information is less costly than facing potential risk premiums demanded by investors leading to higher cost of capital. This result indicates that part of the cross-sectional variation in the tax footnote can be explained by differing expectations to use the tax losses.
    Keywords: tax loss carryforwards,disclosure,uncertainty,capital cost,deferred taxes
    Date: 2016
  5. By: Johannes Buckenmaier; Eugen Dimant (Philosophy, Politics and Economics, University of Pennsylvania); Luigi Mittone
    Abstract: We experimentally study the effectiveness of a principal witness regulation on tax compliance when tax evasion is nested within a corruption framework. Subjects repeatedly declare taxes in institutional environments with and without a principal witness regulation. Our experimental design allows us not only to compare tax compliance under both regimes, but also to investigate whether a transition from one regime to the other can increase compliance or break up established collusive patterns. The results suggest that tax compliance is higher in the presence of a principal witness regulation when the regime is fixed. However, the transition towards a regime with a principal witness regulation has the opposite effect, i.e. introducing it in later rounds causes a drop in compliance. We provide evidence that the effectiveness of new political measures cannot reliably be judged in isolation, but must be considered in view of the actual institutional history, that is the particular institutional framework in place before the measure is introduced.
    Keywords: Corruption, Institutions, Principal Witness Regulation, Tax Compliance, Tax Evasion
    JEL: D03 D73 D81 H26
    Date: 2016–07
  6. By: Foreman-Peck, James (Cardiff Business School); Zhou, Peng (Cardiff Business School)
    Abstract: Households may migrate between jurisdictions to secure preferred mixes of collectively sup-plied services and taxation. But devolution of taxes to sub-national jurisdictions could reduce expected tax revenue if some move to lower tax regimes, constraining devolved government policy. This paper develops an indirect approach to establish lower bound tax revenue impacts of possible tax changes by devolved governments. We estimate and aggregate migration responses to existing tax differentials between smaller, component administrative areas of the devolved jurisdictions. Because such existing taxes may have different bases from proposed devolved taxes, appropriate corrections are made in a model of the devolved economy. This model also establishes how the tax base and therefore the tax yield of the devolved economy, as well as the output per capita, would be changed by implementing different tax rates, given the migration responses estimated. The model is used to assess the fiscal possibilities for Wales created by the UK Government of Wales Act 2014.
    Keywords: Migration; Fiscal Decentralisation; Tax Revenue
    JEL: R23 J61 H11 H22 H71 H72 H77
    Date: 2016–07
  7. 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
  8. By: Massimiliano Ferraresi (Università di Ferrara); Umberto Galmarini (Università dell'Insubria e IEB); Leonzio Rizzo (Università di Ferrara e IEB); Alberto Zanardi (Ufficio Parlamentare di Bilancio)
    Abstract: The abolition of the municipal property tax on owner-occupied dwellings accomplished in Italy in 2008 offers a quasi-natural experiment that allows for the identification of the presence of political budget cycles - the incentives for municipalities close to elections to manipulate policy outcome decisions. Our empirical analysis shows that the reform impacted on municipalities that in 2008 were in their pre-electoral year, by expanding the size of their budget in the form of an increase of current expenditure and fees and charges, but this did not occurred in municipalities that experienced their pre-electoral year before 2008.
    Keywords: political budget cycle, transfers, federal budget, property tax, fiscal reform, local elections
    JEL: C23 H71 H72
  9. By: Daniel Teles (Department of Economics, Tulane University)
    Abstract: The majority of U.S. states have implemented tax credits that encourage donating to specific classes of nonprofits. However, the effect on the nonprofits themselves is unknown. This paper estimates the causal effect of two of the costliest programs. Arizona’s Working Poor Tax Credit (WPTC) and the Endow Iowa Tax Credit (“Endow Iowa†) provide stark contrast for analysis. The WPTC, the largest tax credit for charitable giving in terms of tax expenditure, provides a broadly targeted 100 percent credit with a cap of $200 per person. Endow Iowa provides a sharply targeted 25 percent credit with a cap of $300,000 per tax-payer. A model of donor budget constraints and preferences suggests that Endow Iowa has greater potential to induce large increases in contributions to its targeted charities than does the WPTC. Using synthetic control methods to construct counterfactuals, I estimate a 125 percent increase in contributions to community foundations in Iowa. In contrast, I find no evidence that the WPTC increased contributions to the targeted Arizona nonprofits. Evidence suggests that the growth in contribution levels in Iowa included increases in both the number of community foundations and the level of contributions per foundation.
    Keywords: Tax credits, tax incentive, subsidies, state taxation, charity, nonprofits, philanthropy.
    JEL: D64 L30 L38 H24 H71
    Date: 2016–06
  10. By: Ali Enami (Department of Economics, Tulane University); Nora Lustig (Department of Economics, Tulane University); Alireza Taqdiri (Department of Economics, University of Akron)
    Abstract: Using the Iranian Household Expenditure and Income Survey (HEIS) for 2011/12, we apply the marginal contribution approach to determine the impact and effectiveness of each fiscal intervention, and the fiscal system as a whole, on inequality and poverty. Net direct and indirect taxes combined reduce the Gini coefficient by 0.0644 points and the headcount ratio by 61 percent. When the monetized value of in-kind benefits in education and health are included, the reduction in inequality is 0.0919 Gini points. Based on the magnitudes of the marginal contributions, we find that the main driver of these reductions is the Targeted Subsidy Program, a universal cash transfer program implemented in 2010 to compensate individuals for the elimination of energy subsidies. The main reduction in poverty occurs in rural areas, where the headcount ratio declines from 44 to 23 percent. In urban areas, fiscally-induced poverty reduction is more modest: the headcount ratio declines from 13 to 5 percent. Taxes and transfers are similar in their effectiveness in achieving their inequality-reducing potential. By achieving 40 percent of its inequality-reducing potential, the income tax is the most effective intervention on the revenue side. On the spending side, Social Assistance transfers are the most effective and they achieve 45 percent of their potential. Taxes are especially effective in raising revenue without causing poverty to rise, indicating that the poor are largely spared from being taxed. In contrast, since the bulk of transfers are not targeted to the poor, they are not very effective: the most effective ones achieve 20 percent of their poverty reduction potential. The effectiveness of the Targeted Subsidy Program could be improved by eliminating the transfer to top deciles and re-allocating the freed funds to the poor.
    Keywords: Inequality, poverty, marginal contribution, CEQ framework, policy simulation.
    JEL: D31 H22 I38
    Date: 2016–07

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