nep-pub New Economics Papers
on Public Finance
Issue of 2016‒12‒11
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Taxation and R&D Policies By Akcigit, Ufuk; Hanley, Douglas; Stantcheva, Stefanie
  2. Heuristic Perceptions of the Income Tax: Evidence and Implications for Debiasing By Alex Rees-Jones; Dmitry Taubinsky
  3. 'Aggregate Effects of Income and Consumption Tax Changes' By Anh D.M.Nguyen; Luisanna Onnis; Raffaele Rossi
  4. The Macroeconomic Effects of Progressive Taxes and Welfare By Philipp Engler; Wolfgang Strehl
  5. A New Test of Ricardian Equivalence Using the Narrative Record on Tax Changes By Haug, Alfred A.
  6. Tax Evasion and the Impact of International Regulation: A Summary of Empirical Results By Jakob Miethe; Helge Niesytka
  7. Uncertainty and the effectiveness of fiscal policy By Vladimir Arčabić; James Peery Cover
  8. Selection Effects and Heterogeneous Demand Responses to the Berkeley Soda Tax Vote By Debnam, Jakina
  9. Public Education and Child-Care Policies with Pay-As-You-Go Pension By Miyake, Atsushi; Yasuoka, Masaya
  10. The Geography of Linguistic Diversity and the Provision of Public Goods By Desmet, Klaus; Gomes, Joseph; Ortuño-Ortín, Ignacio

  1. By: Akcigit, Ufuk; Hanley, Douglas; Stantcheva, Stefanie
    Abstract: We study the optimal design of R&D policies and corporate taxation when the outputs of innovation are not appropriable in the absence of intellectual property rights policies and there are non-internalized technology spillovers across firms. Firms are heterogeneous in their research productivity, i.e., in the efficiency with which they convert a given set of R&D inputs into successful innovations. There is asymmetric information about firm productivity and about its stochastic evolution over time that prevents the first best solution to the technology spillover. The problem is thus posed as one of dynamic mechanism design with externalities. We characterize the optimal constrained efficient allocations over firms' life cycles and for firms of different productivities. We show that the constrained efficient allocations can be implemented either by a patent system plus a price subsidy for the monopolists' products, together with a parsimonious R&D subsidy function or, equivalently, by a prize mechanism. We estimate our model using firm-level data matched to patent data and quantify the optimal policies. Simpler innovation policies, such as linear R&D subsidies and linear profit taxes, lead to large revenue losses relative to the optimal mechanism.
    Keywords: Corporate taxation; innovation; patents; R&D; Subsidies; Tax credits
    JEL: H21 H23 H25 H32 O31 O32 O33 O38
    Date: 2016–12
  2. By: Alex Rees-Jones; Dmitry Taubinsky
    Abstract: Using responses from an incentivized tax forecasting task, we estimate the prevalence of previously discussed heuristics for simplifying tax forecasts (Liebman and Zeckhauser, 2004). We find strong evidence for “ironing” (linearizing the tax schedule using one's average tax rate), no evidence for “spotlighting” (linearizing the tax schedule using one's marginal tax rate), and we identify the qualitative features of the remaining misperceptions that are not captured by existing models. We then embed these misperceptions in a standard model of income taxation and study a social planner’s decision to "nudge" taxpayers. We find that a social planner would not choose to correct the misperceptions that we estimate because they are helpful in achieving redistributive goals.
    JEL: D03 D04 D1 H0 K34
    Date: 2016–12
  3. By: Anh D.M.Nguyen; Luisanna Onnis; Raffaele Rossi
    Abstract: Do consumption and income tax changes a ect economic aggregates di erently? We answer this question by estimating structural VARs, where we proxy the latent tax shocks with a newly constructed narrative account of income and consumption tax liability changes in the United Kingdom. We find that income tax shocks have large short run effects on GDP, private consumption and investment. The implied income tax present-value multiplier is around 2.7. Consumption tax cuts expand marginally private consumption but their effects are modest and not statistically different from zero on GDP and investment. These results indicate that i) it is crucial to distinguish between direct and indirect taxation when studying the transmission mechanism of fiscal policy, and ii) consistent with conventional public finance theories, consumption taxes are less distortive than income taxes.
    Date: 2016
  4. By: Philipp Engler; Wolfgang Strehl
    Abstract: We analyze the positive and normative effects of a progressive tax on wages in a nonlinear New Keynesian DSGE model in the presence of demand and technology shocks. The non-linearity allows us to disentangle the effects of the progressive tax on the volatility and the level of macroeconomic variables, for both intertemporally optimizing (“Ricardian") and non-Ricardian (“rule-of-thumb") households. We find that the interaction of the two household types is of crucial importance. When only Ricardian households are considered, progressive taxes increase welfare (compared to at taxes) in the presence of technology shocks. Aggregate welfare falls, however, when rule-of-thumb households are added to the analysis. The progressive tax increases the welfare of the latter household by lowering its consumption volatility, but this is overcompensated for by the destabilization of Ricardian household consumption. Under demand shocks, progressive taxes reduce the welfare of both household types, with the welfare of rule-of-thumb households falling despite a decline in their consumption volatility. The reason is a lower average consumption level which is related to the changed curvature of the marginal cost function.
    Keywords: Progressive Taxation, Rule-of-thumb Households, Monetary Policy
    JEL: E2 E3 E52 E62
    Date: 2016
  5. By: Haug, Alfred A.
    Abstract: This paper empirically tests the Ricardian equivalence hypothesis with a narrative measure of tax shocks. The present value, at the time of legislation, of tax increases motivated solely by concerns for improving the fiscal health of the government is used for the tests. These tax news represent a switch from debt to tax financing that should have no effects on the economy if Ricardian equivalence holds as a good approximation. For the post-1980:IV period, I find evidence for fiscal anticipation as many of the tax increases are implemented with substantial delays and distortionary taxes increase economic activity before taxes go up, which iscaused by intertemporal substitution. Therefore, Ricardian equivalence is rejected.
    Keywords: Ricardian equivalence hypothesis; narrative record; exogenous tax changes; government budget deficits
    JEL: C51 E62
    Date: 2016–11–28
  6. By: Jakob Miethe; Helge Niesytka
    Abstract: While combating tax evasion ranks highly on the international policy agenda and journalists are covering leak after leak, the economics profession at large has somewhat neglected the subject until recently. In the last years, however, a combination of better international financial data and ingenious identification strategies in several pioneering studies has made the subject popular in empirical economics. These contributions are summarized below.
    Date: 2016
  7. By: Vladimir Arčabić (Faculty of Economics and Business, University of Zagreb); James Peery Cover (Department of Economics, Finance, & Legal Studies, University of Alabama)
    Abstract: During the Great Recession of 2007-2009 uncertainty in the United States reached historically high levels. This paper analyzes the effectiveness of fiscal policy under different uncertainty regimes in the U.S. High uncertainty is known to make economic agents postpone their decisions on consumption and investment (real-options channel), making economic policy less effective. We use several uncertainty measures in a threshold vector autoregressive model (TVAR) to endogenously estimate different uncertainty regimes. Then we analyze the effectiveness of different fiscal policy shocks in each uncertainty regime. We measure uncertainty using S&P 100 volatility index (VXO) and Baa corporate bond yield relative to yield on 10-year treasury constant maturity (Baa10ym). Our benchmark model consists of aggregate government spending, taxes, uncertainty, and GDP. In addition to the benchmark model, we estimate three extensions. First, we differentiate between government consumption, investment, and defense expenditures. Second, we check the robustness using two different measures of uncertainty – VXO and Baa10ym. Third, we compute impulse responses of GDP aggregates: consumption and investment. Nonlinear impulse response functions differentiate between positive and negative fiscal shocks, as well as between small and big fiscal shocks. Confidence intervals are obtained by bootstrapping in order to determine the statistical significance of impulse responses. This paper has five important findings. (1) We find that fiscal policy shocks have a much larger effect on the economy during periods of high uncertainty. (2) We also find that during periods of average or low uncertainty government spending shocks tend to crowd out private sector investment spending, but during periods of high uncertainty, after a one-year delay, government spending shocks “crowd-in” private sector investment expenditures. (3) We find large shocks typically do not have the same dollar for dollar effect on GDP as small shocks. That is, 2SD shocks tend to have only a 33-50% larger effect than 1SD shocks. (4) We find that expansionary tax shocks are not as powerful as contractionary tax shocks. And finally and perhaps most importantly (5) we find that government investment spending shocks are far more potent that government consumption and government defense spending shocks. This last result suggests that infrastructure investment expenditures are a much better way to stimulate the economy than other types of government spending.
    Keywords: uncertainty, fiscal policy, threshold, VAR model
    JEL: C32 D81 E62 H30
    Date: 2016–12–02
  8. By: Debnam, Jakina
    Abstract: Early evidence from household-level surveys suggests that the one-cent-per-ounce tax on sugarsweetened beverages which took effect March 1, 2015 in Berkeley, California decreased consumption of sugar-sweetened-beverages by 21%2. Even if these findings are robust, the welfare implications of expanding the Berkeley soda tax policy at a national level are complicated by selection effects inherent in the populations of both voters and consumers. Based on their demographic composition, the soda preferences of voters who supported the Berkeley referendum likely differ from the preferences of high-soda-consuming households, and from the preferences of the average-soda consuming household in the United States. Further, we find consumption responses related to the tax interact nontrivially with consumer heterogeneity. Some of these responses directly counter the public policy goals of a soda tax: first, highconsuming households are less price sensitive, and therefore less responsive to price changes following a tax; and, second, “reactance” among high-consuming populations led to increases in soda consumption immediately following the passage of the tax, partially mitigating reductions in soda consumption.
    Keywords: Demand and Price Analysis, Public Economics,
    Date: 2016–11
  9. By: Miyake, Atsushi; Yasuoka, Masaya
    Abstract: This paper presents consideration of the effects of child allowances and subsidies for private education investment on fertility and private education investment. The level of public education expenditure plays an important role in the effects of child care policies. To raise fertility, although child allowances are effective in an economy with low public education investment, subsidies for education investment are effective in an economy for which public education investment is high. The results presented in this paper are helpful for reconciling the conflicting results reported from previous studies. In addition, this paper presents an examination of the effects of those child care policies on pension benefits. A subsidy for private education can raise both fertility and pension benefits.
    Keywords: Fertility, Child allowance, Subsidy for education investment
    JEL: D91 H52 H55 I2 J13
    Date: 2016–07–20
  10. By: Desmet, Klaus; Gomes, Joseph; Ortuño-Ortín, Ignacio
    Abstract: This paper theoretically analyzes and empirically investigates the importance of local interaction between individuals of different linguistic groups for the provision of public goods at the national level. Depending on whether local interaction mitigates or reinforces antagonism towards other groups, the micro-founded theory we develop predicts that a country's provision of public goods (i) decreases in its overall linguistic fractionalization, and (ii) either increases or decreases in how much individuals locally learn about other groups. After constructing a 5 km by 5 km geographic dataset on language use for 223 countries, we compute measures of overall fractionalization and local learning, and investigate their relation to public good provision at the country level. While overall fractionalization worsens outcomes, we find a positive causal relation between local learning and public goods. Local mixing therefore mitigates the negative impact of a country's overall linguistic fractionalization. An IV strategy shows that this result is not driven by the possible endogenous spatial distribution of language speakers within countries.
    Keywords: contact theory; linguistic diversity; local learning; Public Goods; spatial distribution of diversity
    JEL: D7 H4 H5 R1 Z10
    Date: 2016–12

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