nep-pub New Economics Papers
on Public Finance
Issue of 2016‒08‒21
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Does capital tax uncertainty delay irreversible risky investment? By Niemann, Rainer; Sureth, Caren
  2. Fiscal Federalism, Taxation and Grants By Martín Gonzalez-Eiras; Dirk Niepelt
  3. Taking the High Road? Compliance with Commuter Tax Allowances and the Role of Evasion Spillovers By Paetzold, Jörg; Winner, Hannes
  4. The Determinants of Tax Morale in Pakistan By Musharraf Rasool Cyan; Antonios M. Koumpias; Jorge Martinez-Vazquez

  1. By: Niemann, Rainer; Sureth, Caren
    Abstract: Tax uncertainty is often claimed to be harmful for investments. Capital taxes, such as property and wealth taxes, are particularly exposed to tax uncertainty. Capital tax uncertainty emerges from expected tax reforms, the unclear outcome of future tax audits, and simplified estimates of capital tax bases in investment models. Uncertain returns on investment as well as stochastic taxation contribute to overall uncertainty and may significantly affect investment decisions. Hitherto, it is unknown how capital tax uncertainty affects investment timing. However, it is well known that both uncertainty and capital tax may be harmful for investment and decelerate investment activities. We are the first to study the investment timing effects of stochastic capital taxes in a real options setting with risky investment opportunities. Our results indicate that even risk neutral investors are sensitive with respect to capital tax risk and may react in a surprising manner to a newly introduced stochastic capital tax. As an apparently paradoxical investment effect, we find that increased capital tax uncertainty can accelerate risky investment if such uncertainty is sufficiently low compared to cash .ow uncertainty. In contrast, high capital tax risk delays high-risk innovative investment projects. To reduce unintended consequences of uncertain tax policy, tax legislators and tax authorities should avoid high levels of capital tax uncertainty. Broadening the capital tax base or increasing the capital tax rate induces ambiguous timing effects. Furthermore, high-growth investments are likely to be postponed if they experience a capital tax cut. Since investment reactions upon tax reforms are well-known to affect income and wealth distribution, reliable estimations of the impact of taxes on economic decisions are necessary.
    Keywords: property tax,capital tax,investment decisions,real options,timing flexibility,uncertainty
    JEL: H25 H21
    Date: 2016
  2. By: Martín Gonzalez-Eiras (University of Copenhagen); Dirk Niepelt (Study Center Gerzensee, University of Bern)
    Abstract: We propose a theory of tax centralization and inter governmental grants in politico-economic equilibrium. The cost of taxation differs across levels of government because voters internalize general equilibrium effects at the central but not at the local level. This renders the degree of tax centralization and the tax burden determinate even if none of the traditional, expenditure-related motives for centralization considered in the fiscal federalism literature is present. If central and local spending are complements and the trade-off between the cost of taxation and the benefit of spending is perceived differently across levels of government, inter governmental grants become relevant. Calibrated to U.S. data, our model helps to explain the introduction of federal grants at the time of the New Deal, and their increase up to the turn of the twenty-first century. Grants are predicted to increase to approximately 5.5% of GDP by 2060.
    Date: 2016–08
  3. By: Paetzold, Jörg (University of Salzburg); Winner, Hannes (University of Salzburg)
    Abstract: This paper provides evidence of evasion in the context of a widely used commuter tax allowance, and explores evasion spillovers as a determinant of the individual compliance decision. For this purpose, we exploit discontinuities in the commuter allowance scheme and employ a research design resting on a large panel of individual tax returns. We find that around 30 percent of all allowance claims are overstated and, consistent with deliberate tax evasion, we observe sharp reactions of taxpayers to thresholds where the allowance discretely jumps to a higher amount. Further, we use variation in job changes to uncover spillover effects from the work environment on the individual compliance decision. These effects appear to be asymmetric: Job changers moving to companies with a higher fraction of cheaters increase their cheating. In contrast, movers to companies with a lower fraction of cheaters tend not to alter their reporting behavior. We provide suggestive evidence that the spillover has more to do with an information environment, but can ultimately not reject other behavioral explanations such as asymmetric persistence of norms.
    Keywords: Tax Evasion; Self-Reporting; Tax Deductions; Spillover Effects
    JEL: D83 H24 H26
    Date: 2016–08–04
  4. By: Musharraf Rasool Cyan (Department of Economics, International Center for Public Policy. Andrew Young School of Policy Studies, Georgia State University); Antonios M. Koumpias (Department of Economics, International Center for Public Policy. Andrew Young School of Policy Studies, Georgia State University); Jorge Martinez-Vazquez (International Center for Public Policy. Andrew Young School of Policy Studies, Georgia State University)
    Abstract: This paper examines what shapes taxpayersÕ attitudes towards tax compliance - otherwise known as tax morale - in Pakistan, a country that has struggled with low tax effort over the past decade. We exploit novel survey data collected in 2014 during a survey of individual taxpayers for the Federal Board of Revenue of Pakistan, which allows us to offer the first study of determinants of tax morale in Pakistan. These determinants are estimated using a binary probit regression model. Our results are, generally, in line with the findings of the modern empirical literature of tax morale in other countries. Overall, groups with lower labor force participation rates have more positive attitudes towards tax compliance in Pakistan. Educated respondents have higher tax morale in comparison to the illiterate but only those with very low or very high attainment levels have higher tax morale with respect to bachelorÕs degree holders. In addition, metropolitan areas which are the largest population centers, are industrialized and seats of government have significantly high tax morale. We show that females have significantly higher tax morale than males. However, their attitudes towards tax compliance drastically worsen with the passage of time to the extent that elderly males have higher tax morale than elderly females. Relevant from the perspective of the tax administration in Pakistan, these findings imply potentially substantial gains from increasing female labor force participation rates. More generally, addressing the current failures of tax administration and dealing with the horizontal inequity resulting from administrative weaknesses is likely to contribute materially to improving voluntary compliance.
    Date: 2016–07

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