nep-pub New Economics Papers
on Public Finance
Issue of 2016‒11‒13
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Distinguishing between “normal” and “excess” returns for tax policy By Hayley Reynolds; Thomas Neubig
  2. Optimal Taxation and Public Provision for Poverty Reduction By Ravi Kanbur; Tuuli Paukkeri; Matti Tuomala
  3. Financial transaction taxes: Announcement effects, short-run effects, and long-run effects By Eichfelder, Sebastian; Lau, Mona
  4. A Note on the Effects of Income-Splitting under Dual Income Tax By Seppo Kari; Olli Ropponen
  5. Taxing the Rich More: Preliminary Evidence from the 2013 Tax Increase By Emmanuel Saez
  6. Prefilled Income Tax Returns and Tax Compliance: Evidence from a Natural Experiment By Kotakorpi Kaisa; Laamanen Jani-Petri
  7. Effects of income redistribution on the evolution of cooperation in spatial public goods games By Zhenhua Pei; Baokui Wang; Jinming Du
  8. Do fiscal rules reduce the political cycle? Evidence from Italian municipalities By Andrea Bonfatti; Lorenzo Forni

  1. By: Hayley Reynolds; Thomas Neubig
    Abstract: This paper explores the practical challenges tax policy analysts face when trying to apply differential taxation to “normal” and “excess” returns. The distinction between these two elements is being increasingly used in tax policy. The problem is that there is no clear definition for a “normal” return. While it is often equated to a risk-free return, or the return available on a ten-year government bond, many commentators agree that it should incorporate a risk element. The typical rationale for applying differential taxation stems from the desire to achieve neutral taxation, i.e. minimise the real economic responses of taxpayers due to the wedge taxation imposes between before-tax and after-tax returns. A set of important questions are raised for tax policy analysts to consider. Two crucial factors that make the distinction challenging are heterogeneity and uncertainty. Given the potential for unintended consequences, this is an important issue that warrants more discussion and thought. Politique fiscale : distinguer entre rendements « normaux » et « excessifs » Le présent document est consacré aux difficultés pratiques auxquelles les analystes de la politique fiscale sont confrontés lorsqu’ils essaient d’appliquer une imposition différenciée aux rendements selon qu’ils sont considérés comme « normaux » ou « excessifs ». Cette distinction est de plus en plus utilisée en politique fiscale. Le problème est qu’il n’existe pas de définition précise de ce qu’est un rendement « normal ». S’il est souvent assimilé à un rendement sur un actif sans risque, ou au rendement d’une obligation d’État à dix ans, nombre de commentateurs conviennent qu’il conviendrait d’y adjoindre un élément de risque. Le raisonnement ordinairement utilisé pour appliquer une imposition différenciée vient de la volonté d’assurer la neutralité de l’imposition, c’est-à-dire de minimiser les réponses économiques réelles des contribuables au coin fiscal qu’une imposition différenciée produit entre les rendements avant et après impôt. Ce point soulève plusieurs questions importantes que les analystes de la politique fiscale se doivent de prendre en compte. Ainsi, l’hétérogénéité et l’incertitude sont deux facteurs cruciaux qui rendent cette distinction difficile à manier. Étant donné les risques de conséquences non souhaitées, il s’agit là d’une question importante qui mérite que l’on en discute et que l’on y réfléchisse de manière plus approfondie.
    Date: 2016–11–11
  2. By: Ravi Kanbur; Tuuli Paukkeri; Matti Tuomala (School of Management, University of Tampere)
    Abstract: The existing literature on optimal taxation typically assumes there exists a capacity to implement complex tax schemes, which is not necessarily the case for many developing countries. We examine the determinants of optimal redistributive policies in the context of a developing country that can only implement linear tax policies due to administrative reasons. Further, the reduction of poverty is typically the expressed goal of such countries, and this feature is also taken into account in our model. We derive the optimality conditions for linear income taxation, commodity taxation, and public provision of private and public goods for the poverty minimization case, and compare the results to those derived under a general welfarist objective function. We also study the implications of informality on optimal redistributive policies for such countries. The exercise reveals non-trivial differences in optimal tax rules under the different assumptions.
    Keywords: inequality; top incomes; growth; nonlinearity; longitudinal data
    JEL: H21 H40 O12
    Date: 2016–09
  3. By: Eichfelder, Sebastian; Lau, Mona
    Abstract: We analyze the impact of the French 2012 financial transaction tax (FTT) on trading volumes, stock prices, stock liquidity and volatility. We extend the empirical research by the identification of FTT announcement and short-run treatment effects, which may distort difference-in-differences estimates. In addition, we account not only for the intraday volatility but also for long-term volatility measures. While we find strong evidence for a positive FTT announcement effect on trading volumes, there is almost no statistically significant evidence for a long-run treatment effect. Thus, existing evidence on a strong reduction of trading volumes resulting from the French FTT might be biased by FTT announcement effects. We also find an increase of intraday volatilities in the announcement period and a significant reduction of weekly and monthly volatilities in the treatment period. Therefore, our findings support theoretical considerations suggesting a stabilizing impact of FTTs on financial markets. While some of our results suggest a reduction of stock prices in the announcement period, our results on bid-ask spreads and daily returns are not fully conclusive.
    Keywords: financial transaction taxes,market quality,volatility,trading volume,liquidity,price discovery,announcement effects,short-run treatment effects
    JEL: G02 G12 H24 M41
    Date: 2016
  4. By: Seppo Kari; Olli Ropponen
    Abstract: This paper reconsiders the income-splitting rules of the Nordic dual income tax system, introduced to address the incentives to shift income between labor and capital income tax bases. These rules impute a return on equity, categorized as capital income, and tax the residual roughly at the rates levied on labor income. There are broadly two ways to calculate the capital income part. One is to impute a return on the acquisition price of shares (Sweden and Norway) and the second is to calculate a return on the net book assets of the firm (Finland). This paper addresses the economic effects of the net asset-based splitting method, which has not been studied thoroughly in earlier literature. Using a dynamic investment model, we show that at appropriately chosen parameter values the net assets-based split exhibits the key properties of the reportedly neutral ACE corporation tax. Our analysis, therefore, implies that the incentive problems of Finnish taxation of closely held companies, found in some earlier studies, derive from wrong parameter values rather than from wrong principles.
    Keywords: dual income tax, income-splitting, neutral taxation, investment, depreciation allowances
    JEL: H32 H24 H21 H25
    Date: 2016–10–14
  5. By: Emmanuel Saez
    Abstract: This paper provides preliminary evidence on behavioral responses to taxation around the 2013 tax increase that raised top marginal tax rates on capital income by about 9.5 points and on labor income by about 6.5 points. Using published tabulated tax statistics from the Statistics of Income division of the IRS, we find that reported top 1% incomes were significantly higher in 2012 than in 2013, implying a large short-run elasticity of reported income with respect to the net-of-tax rate in excess of one. This large short-run elasticity is due to income retiming for tax avoidance purposes and is particularly high for realized capital gains and dividends, and highest at the very top of the income distribution. However, comparing 2011 and 2015 top incomes uncovers only a small medium-term response to the tax increase as top income shares resumed their upward trend after 2013. Overall, we estimate that at most 20% of the projected tax revenue increase from the 2013 tax reform is lost through behavioral responses. This implies that the 2013 tax increase was an efficient way to raise revenue.
    JEL: H31
    Date: 2016–11
  6. By: Kotakorpi Kaisa; Laamanen Jani-Petri (School of Management, University of Tampere)
    Abstract: Despite the adoption of prefilled tax forms in many countries, little is known about their effects on taxpayers’ reporting behaviour. We estimate the effect of the income tax filing system on taxpayers’ reporting behaviour, utilising data from a Finnish policy experiment. We find that receiving a (partially) prefilled income tax return lead to a significant reduction in non-prefilled deductions and self-reported income, and an increase in deductions that were prefilled in the new system. However, we do not find effects on individuals’ total taxable income or taxes paid. We discuss complexity and compliance costs, salience effects, and changes in the opportunities for tax evasion as possible explanations for our findings.
    Keywords: embezzlement, permanent income, transitory income
    JEL: H24 H26 H31
    Date: 2016–05
  7. By: Zhenhua Pei; Baokui Wang; Jinming Du
    Abstract: Income redistribution is the transfer of income from some individuals to others directly or indirectly by means of social mechanisms, such as taxation, public services and so on. Employing a spatial public goods game, we study the influence of income redistribution on the evolution of cooperation. Two kinds of evolutionary models are constructed, which describe local and global redistribution of income respectively. In the local model, players have to pay part of their income after each PGG and the accumulated income is redistributed to the members. While in the global model, all the players pay part of their income after engaging in all the local PGGs, which are centered on himself and his nearest neighbours, and the accumulated income is redistributed to the whole population. We show that the cooperation prospers significantly with increasing income expenditure proportion in the local redistribution of income, while in the global model the situation is opposite. Furthermore, the cooperation drops dramatically from the maximum curvature point of income expenditure proportion. In particular, the intermediate critical points are closely related to the renormalized enhancement factors.
    Date: 2016–10
  8. By: Andrea Bonfatti (University of Padova); Lorenzo Forni (University of Padova)
    Abstract: The paper provides evidence that fiscal rules can limit the political budget cycle. It uses data on Italian municipalities during the early 2000 and shows that: 1) municipalities are subject to political budget cycles in capital and total spending; 2) the Italian sub-national fiscal rule introduced in 1999 has been enforced by the central government; 3) municipalities subject to the fiscal rule show more limited political budget cycles than municipalities not subject to the rule. In order to identify the effect, we rely on the fact that the domestic fiscal rule does not apply to municipalities below 5,000 inhabitants. We find that the political budget cycle increases real capital spending by about 15 percent on average, and total spending by 5 percent, in the years prior to municipal elections and that the sub-national fiscal rule reduces these figures by about one third. A regression discontinuity analysis around the 5,000 threshold reinforces these results, as the reduction in capital spending in pre-electoral years for municipalities subject to the fiscal rule is about two-thirds as compared to the municipalities not subject to the rule.
    Keywords: fiscal rules, local government finance, difference-in-difference.
    JEL: C21 C23 H62 H72 H77
    Date: 2016–09

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