nep-pub New Economics Papers
on Public Finance
Issue of 2016‒11‒27
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Taxation, Sorting and Redistribution: Theory and Evidence By Arash Nekoei; Ali Shourideh; Mikhail Golosov
  2. Taxation, social protection, and governance decentralization By Gil S. Epstein; Ira N. Gang
  3. Experimental evidence on tax salience and tax incidence By Morone, Andrea; Nemore, Francesco; Nuzzo, Simone
  4. Tax Exhaustion, Firm Investment, and Leasing: A Test of the Q Model of Investment By Michael P. O'Malley
  5. Taxation, infrastructure, and firm performance in developing countries By Lisa Chauvet; Marin Ferry
  6. Tax Competition, Policy Competition and the Strategic Use of Policy Restrictions on Foreign Direct Investments By Kaushal Kishore
  7. Can Property Taxes Reduce House Price Volatility? Evidence from U.S. Regions By Tigran Poghosyan
  8. 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: Arash Nekoei (IIES-Stockholm); Ali Shourideh (University of Pennsylavnia); Mikhail Golosov (Princeton University)
    Abstract: We develop a framework for optimal taxation when assignment of workers to firms is endogenous. In our model, workers are heterogeneous with respect to their productivity as well as their firm-specific cost of working. Firms have heterogeneous productivities and production exhibits complementarities between firm and worker productivity. Different workers assign to different firms and this assignment depends on the the distribution of workers characteristics. We show that the nature of the multi-dimensional heterogeneity of the workers implies that income taxes affect the way workers sort into jobs. As a result, taxes affect the allocation of workers among firms and thus aggregate productivity even when traditional notions of labor supply are fully inelastic. Our model allows us to define a notion of sorting elasticity with respect to taxes and technological changes. Furthermore, we can analyze optimal linear and non-linear taxes and provide formulas that relate optimal taxes to the sorting elasticity. Contrary to some results in the literature, technological change that changes firms' distribution of productivity does have an effect on marginal taxes through this sorting elasticity. Finally, we provide evidence on the magnitude of the sorting elasticity and its implications on optimal income taxes using employer-employee data.
    Date: 2016
  2. By: Gil S. Epstein; Ira N. Gang
    Abstract: Governments do not have perfect information regarding constituent priorities and needs. This lack of knowledge opens the door for groups to lobby in order to affect the government’s taxation levels. We examine the political economy of decentralized revenue-raising authority in light of social protection expenditures by constructing a theoretical model of hierarchical contests and comparing the implications of centralized with decentralized governance. Increasing information available to the government may generate additional expenditures by interest groups trying to affect government taxation decisions. We show the potential existence of a poverty trap as a result of decentralization in taxation decisions.
    Keywords: governance, decentralization, economic-models-of-political-processes, contests, rent-seeking, intergovernmental-relation Number: UNU-WIDER Research Paper wp2016-101
  3. By: Morone, Andrea; Nemore, Francesco; Nuzzo, Simone
    Abstract: While a basic theoretical principle in public economics assumes that individuals'behaviour is fully- optimizer with respect to the introduction of a tax, an increasing body of research is presenting evidence that agents decision-making is often affected by non-negligible cognitive biases , which could be responsible for lower market performance as well as for deviations from s tandard theoretical predictions. This paper extends the latter strand of research focusing on two trend topics in public economics: tax salience and tax incidence. While the former refers to the prominence of the tax, the latter places emphasis on the statutory vs. factual division of tax payments. Is market performance affected by the salience of the tax? Is the incidence of a tax independent of which side of the market it is levied on (Liability-Side-Equivalence-Principle, LES)? We address these questions through a laboratory experiment in which one unit of a fictitious good is traded through a double-auction market ins titution. Bas ed on a panel data analys is , our contribution shows that a non-salient tax reduces both the allocational and informational efficiency o f the market with respect to the instance in which the tax is salient. Moreover, we show that the LES does not hold in practice.
    Keywords: Tax incidence,Tax salience,Liability Side Equivalence,Choice behaviour,Laboratory
    Date: 2016
  4. By: Michael P. O'Malley
    Abstract: Standard models of investment usually incorporate various tax factors but often overlook "tax exhaustion," the case when a firm has negative taxable income and cannot claim immediately its tax deductions or credits. However, tax exhausted firms face a higher cost of capital, and evidence shows that tax exhaustion is not uncommon. This paper incorporates tax exhaustion into a "Q" model of investment to see whether its performance is improved. In addition, leased investment is fully incorporated into the model, in part because tax exhaustion creates incentives to lease investment products and because investment models explain decisions to use equipment, not the decision about how to finance them. The results show that accounting for leasing improves significantly the performance of the Q model, whereas accounting for tax exhaustion does not affect the results meaningfully.
    Keywords: Investment ; corporate taxation ; leasing
  5. By: Lisa Chauvet; Marin Ferry
    Abstract: This paper investigates the relationship between taxation and firm performance in developing countries. Taking firm-level data from the World Bank Enterprise Surveys (WBES) and tax data from the Government Revenue Dataset (ICTD/UNU-WIDER), our results suggest that tax revenue benefits to firm growth in developing countries, especially in low-income countries and lower-middle income countries. These findings are robust to the inclusion of alternative covariates and specifications, and do not appear to be sample dependent. We also provide evidence that the positive effect of taxation on firm growth falls significantly when corruption is too pervasive, and when the origin of tax revenue origin reduces government accountability. Lastly, our paper finds that the positive effect of domestic revenue on firm performance could channel through the financing of public infrastructures vital to firms operating in lower-income countries. Keywords: taxation, firm growth, infrastructure, corruption
  6. By: Kaushal Kishore (Department of Economics, University of Pretoria, Pretoria)
    Abstract: In a dynamic two-period model of tax competition where competing countries strategically choose foreign investment restrictions which increases sunk cost of investments, we show that choosing a higher level of restriction is beneficial for the competing countries. A higher level of restriction reduces competition and increases tax revenue in the later period, which allows the government to offer large tax holidays during the initial period of investment. The result is counter-intuitive as it is widely believed that sunk cost reduces foreign direct investments. Moreover, even though competing countries are ex-ante symmetric, equilibrium choice of the level of restrictions may not be equal. The result provides sunk cost as another rationale for tax holidays in the presence of competition.
    Keywords: Dynamic Tax Competition, Non-preferential regime, Ownership restrictions, Foreign Direct Investment
    JEL: F21 H21 H25 H87
    Date: 2016–11
  7. By: Tigran Poghosyan
    Abstract: We use a novel dataset on effective property tax rates in U.S. states and metropolitan statistical areas (MSAs) over the 2005–2014 period to analyze the relationship between property tax rates and house price volatility. We find that property tax rates have a negative impact on house price volatility. The impact is causal, with increases in property tax rates leading to a reduction in house price volatility. The results are robust to different measures of house price volatility, estimation methodologies, and additional controls for housing demand and supply. The outcomes of the analysis have important policy implications and suggest that property taxation could be used as an important tool to dampen house price volatility.
    Date: 2016–11–10
  8. By: Ali Enami (Tulane University, U.S.A.); Nora Lustig (Tulane University, U.S.A.); Alireza Taqdiri (University of Akron, U.S.A.)
    Abstract: Using the Iranian Household Expenditure and Income Survey 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 taxes (combined direct and indirect taxes and transfers) reduce the Gini coefficient by 0.0644 points and the poverty headcount ratio by 61 percent. Based on the magnitudes of the marginal contributions, we find that the main driver of this reduction in inequality is the Targeted Subsidy Program (TSP), 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 as opposed to urban areas that experience a modest reduction in the headcount ratio 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 programs which achieves 45 percent of their potential. While taxes are especially effective in raising revenue without causing poverty to rise, transfer programs in general and the TSP in particular are not effective in reducing poverty since the bulk of them are not targeted toward the poor. Using simulation, we show how policy makers can improve the effectiveness of the TSP in reducing poverty.
    Keywords: Inequality, poverty, marginal contribution, CEQ framework, policy simulation.
    JEL: D31 H22 I38
    Date: 2016–10

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