nep-pub New Economics Papers
on Public Finance
Issue of 2017‒01‒15
fourteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. "Ad Valorem Capital Tax Competition" By Hikaru Ogawa; Atsushi Yamagishi
  2. Evaluating the Economic Effects of Flat Tax Reforms Using Synthetic Control Methods By Bibek Adhikari; James Alm
  3. Corruption and Firm Tax Evasion By James Alm; Jorge Martinez-Vazquez; Chandler McClellan
  4. Household Incomes in Tax Data : Using Addresses to Move from Tax Unit to Household Income Distributions By Jeff Larrimore; Jacob Mortenson; David Splinter
  5. Using Behavioral Economics in Public Economics By James Alm; Steven M. Sheffrin
  6. Intergenerational Mobility and Preferences for Redistribution By Alberto Alesina; Stefanie Stantcheva; Edoardo Teso
  7. Property Tax Delinquency and its Spillover Effects on Nearby Properties By James Alm; Jin Man Lee; Zackary Hawley; Joshua J. Miller
  8. Honesty or Dishonesty of Taxpayer Communications in an Enforcement Regime By James Alm; David M. Bruner; Michael McKee
  9. Optimal energy taxation in cities By Rainald Borck; Jan Brueckner
  10. What Drives State Tax Reforms? By James Alm; Trey Dronyk-Trosper; Steven M. Sheffrin
  11. W(h)ither the Tax Gap? By James Alm; Jay A. Soled
  12. Regional payroll tax cuts and individual wages: Heterogeneous effects across education groups By Hildegunn Stokke
  13. The Impact of Sovereign Bond Yields on Fiscal Discipline By Karlis Vilerts; Olegs Tkacevs
  14. Fiscal Decentralization and Local Budget Deficits in Viet Nam: An Empirical Analysis By Morgan, Peter; Long, Trinh Q.

  1. By: Hikaru Ogawa (Faculty of Economics, The University of Tokyo); Atsushi Yamagishi (Graduate School of Economics, The University of Tokyo)
    Abstract: Studies of tax competition have found that using a unit tax is commitment-robust for governments, while we observe ad valorem taxes on capital in practice. This study presents a model that explains the emergence of ad valorem capital tax competition, incorporating an elastic supply of capital in the standard tax competition model. Specifically, it shows that if the elasticity of capital supply is positive, governments adopt the ad valorem tax method and thereby ad valorem tax competition prevails. On the other hand, under a fixed capital supply (i.e., zero elasticity of capital supply), countries compete in unit taxes.
    Date: 2016–11
  2. By: Bibek Adhikari (Department of Economics, Tulane University); James Alm (Department of Economics, Tulane University)
    Abstract: Tax reforms are often motivated by their potential to improve economic performance. However, their actual impacts are difficult to quantify. We analyze the impact of flat tax reform on incomes using "synthetic control" methods. We identify the 8 Eastern and Central European countries that adopted flat tax systems between 1994 and 2005, and then compare post-reform GDP per capita of "treated" countries with a convex combination of similar but "untreated" countries, while accounting for the time-varying impact of unobservable heterogeneity. We find positive impacts in all 8 countries, with 7 out of 8 cases significant at the conventional level.
    Keywords: Flat tax, tax reform, synthetic control methods.
    JEL: H20 H25 H31
    Date: 2016–12
  3. By: James Alm (Department of Economics, Tulane University); Jorge Martinez-Vazquez (Andrew Young School of Policy Studies, Georgia State University); Chandler McClellan (National Bureau of Economic Research)
    Abstract: Although corruption and tax evasion are distinct and separate problems, they can easily become intertwined and reinforcing. A society that is more corrupt may enable more tax evasion as corrupt officials seek more income via bribes; conversely, higher levels of tax evasion may drive corruption by offering more opportunities for bribes. While a large body of work on each subject separately has emerged, the relationship between the two problems has remained a largely unexplored area. This paper focuses on how the potential for bribery of tax officials affects a firm's tax evasion decisions. To test how the potential for bribery affects a firm's tax reporting decisions, we use firm-level information on reporting obtained from the World Enterprise Survey and the Business Environment and Enterprise Performance Survey. Our basic estimation approach uses instrumental variables methods to control for the potential endogeneity of evasion and corruption. We also use propensity score matching methods as a robustness check. Our results show that it is corruption that largely drives higher levels of evasion; that is, corruption of tax officials is a statistically and economically significant determinant of tax evasion. The presence of tax inspectors who request bribes results in a reduction of sales reported for taxes of between 4 and 10 percentage points. Additionally, larger bribes result in higher levels of evasion. Overall these results indicate that governments seeking to decrease tax evasion - and so increase tax revenues - must work first to ensure an honest tax administration.
    Keywords: Tax compliance, corruption.
    JEL: H26 H32 D7
    Date: 2016–12
  4. By: Jeff Larrimore; Jacob Mortenson; David Splinter
    Abstract: Tax return data are increasingly the standard for tracking income statistics in the United States. However, these data have traditionally been limited by their inability to capture non-filers and to identify members of separate tax units living in the same household. We overcome these obstacles and create household records directly in the tax data using mailing address information included on tax forms. We then present the first set of tax-based household income and inequality measures for the entire income distribution. When comparing household income inequality results in the tax data to those using the March CPS, we confirm previous findings that the March CPS understates the inequality of household income. However, we also find that the previous approach of using tax units in the IRS data to proxy for households leads to an overstatement of household income inequality. Finally, using households in the IRS tax records, we illustrate how focusing on tax units rather than households alters the observed distribution of tax programs such as the Earned Income Tax Credit.
    Keywords: EITC ; Household Income ; IRS Data ; Income Inequality ; Tax Unit Income
    JEL: D31 H24
    Date: 2017–01–03
  5. By: James Alm (Department of Economics, Tulane University); Steven M. Sheffrin (Department of Economics, Tulane University)
    Abstract: This paper reviews the methodology of “behavioral economics†, and relates these methods to some specific and recent applications.
    Keywords: Behavioral economics, public economics.
    JEL: H3 D03
    Date: 2016–12
  6. By: Alberto Alesina; Stefanie Stantcheva; Edoardo Teso
    Abstract: Using newly collected cross-country survey and experimental data, we investigate how beliefs about intergenerational mobility affect preferences for redistribution in five countries: France, Italy, Sweden, U.K., and U.S. Americans are more optimistic than Europeans about intergenerational mobility, and too optimistic relative to actual mobility. Our randomized treatment that shows respondents pessimistic information about mobility increases support for redistribution, mostly for equality of opportunity policies. A strong political polarization exists: Left-wing respondents are more pessimistic about intergenerational mobility, their preferences for redistribution are correlated with their mobility perceptions, and they respond to pessimistic information by increasing support for redistribution. None of these apply to right-wing respondents, possibly because of their extremely negative views of government.
    JEL: D31 D72 H21 H23 H24
    Date: 2017–01
  7. By: James Alm (Department of Economics, Tulane University); Jin Man Lee (The Institute for Housing Studies and Department of Economics DePaul University); Zackary Hawley (Department of Economics Texas Christian University); Joshua J. Miller (Department of Housing and Urban Development)
    Abstract: This paper investigates the impact of property tax delinquency on the sales price of nearby residential properties, an effect that we call the "delinquency discount". We use a sample of 34,500 home sales and the population of delinquent properties for Chicago, Illinois during the period 2010 to 2013. We focus on the delinquency discount for properties within the same census block. We also examine the effect of delinquency duration on neighboring properties, as this measures the level of their financial distress. We estimate the magnitude of the delinquency discount using several alternative estimation methods, in each case controlling for local foreclosure activity. Our preferred method is a matching estimator, as it works to eliminate the potential for omitted variable bias that is common in this type of estimation. We find large, negative, and statistically meaningful effects of delinquent properties for which the local government has placed a tax lien and has put the lien up for sale to private investors. For properties with a tax lien that are not successfully sold, we estimate a negative spillover of 5.1 percent ($12,872) on surrounding properties. Properties with a tax lien that are sold to private investors have a smaller, but still negative impact on surrounding property values of 2.5 percent ($6,310).
    Keywords: State and Local Taxation, Housing Supply and Markets, Property Tax Delinquency.
    JEL: H71 R31
    Date: 2016–12
  8. By: James Alm (Department of Economics, Tulane University); David M. Bruner (Department of Economics, Appalachian State University); Michael McKee (Department of Economics, Appalachian State University)
    Abstract: In many settings the true likelihood of capture when engaging in an illegal activity, such as tax evasion, is not well known to an individual. "Official" statements from the tax administration regarding enforcement effort provide some information. In addition, "informal", or "unofficial", communication among taxpayers can supplement these official announcements, but individuals do not know with certainty whether such unofficial information is honest (or accurate) versus dishonest (or inaccurate). We examine the truthfulness of an individual's revelation of unofficial information to other individuals, along with the factors that affect any revelation, focusing on the intrinsic motivations for revelations. Our experimental design allows us to examine the type and the honesty of messages that an individual chooses to send to other individuals regarding their own audit outcome and their own compliance behavior. Our results indicate that most individuals send accurate messages about their own audit outcomes and their own compliance behaviors. Nevertheless, many individuals are also systematically dishonest about being audited; that is, we observe a significant tendency for individuals to claim that they were audited when they were not. We also observe a strong interaction between individuals' audit outcomes and their compliance behaviors, so that individuals who engaged in tax evasion and who were audited were more truthful in their communications than those whose tax evasion went undetected.
    Keywords: Tax compliance, Tax audits, Information, Honesty, Experimental economics.
    JEL: H2 H26 C91
    Date: 2016–12
  9. By: Rainald Borck; Jan Brueckner
    Abstract: This paper presents the first investigation of the effects of optimal energy taxation in an urban spatial setting. Rather than exploring the effects of a carbon tax, our approach is to derive the supplements to existing taxes that are needed to support the social optimum. We then analyze the effects of these taxes on urban spatial structure. Emissions are generated by housing consumption and commute trips, and the optimal tax structure has a tax on commuting, housing floor space, and land. These taxes reduce the extent of commuting and the level of housing consumption while increasing building heights, generating a more-compact city with a lower level of emissions per capita.
    Keywords: emissions; energy; taxation; monocentric city
    JEL: Q4 Q5 R1
    Date: 2016–12
  10. By: James Alm (Department of Economics, Tulane University); Trey Dronyk-Trosper (Department of Economics, Tulane University); Steven M. Sheffrin (Department of Economics, Tulane University)
    Abstract: This paper discusses recent trends in state (and local) taxation, examines the prospects for reform of state tax systems, and analyzes a wide range of issues that relate to ongoing state efforts to reform their tax systems.
    Keywords: Tax reform, Schanz-Haig-Simons taxation.
    JEL: H2 H7
    Date: 2016–12
  11. By: James Alm (Department of Economics, Tulane University); Jay A. Soled (Rutgers Business University)
    Abstract: For decades, policy makers and politicians have railed against the "tax gap", or the difference between what taxpayers are legally obligated to pay in taxes and what they actually pay in taxes. To close the gap, Congress has instituted numerous reforms, with varying degrees of success. Notwithstanding these efforts, the tax gap has largely remained intact, and, if anything, its size has gradually grown over the last several decades. However, the tax gap may well begin to diminish in size (or "wither" away), if not immediately then over time. Three developments will help narrow the tax gap's size. First, the ubiquity of credit cards, debit cards, and smartphone payment apps has purged cash - the erstwhile driving engine of the tax gap - from its use in many economic transactions. Second, the availability of third-party sources of information, combined with the universal use of computerization to store, access, and analyze information, has significantly curtailed a taxpayer's ability to hide income here in the United States or overseas. Third, broad economic trends such as concentration and globalization have generated a workforce dynamic in which taxpayers generally are employed by large business enterprises (where individual tax compliance is fairly high) rather than in traditional mom-and-pop businesses (where individual tax compliance is typically low). The implications associated with a lower tax gap are vast. Even beyond the usual considerations associated with greater tax compliance (e.g., increased revenues, reduced noncompliance-induced inefficiencies, and improved horizontal and vertical equity of tax burdens), taxpayers would experience a shift in the labor market and an adjustment in the prices paid for consumer goods and services. Also, rather than conducting audits and deterring noncompliance, the Internal Revenue Service (IRS) would be able to dedicate a greater share of its limited resources to other pressing agenda items, such as assisting taxpayers in their compliance endeavors. There are, of course, other countervailing economic trends that may subvert the forces that will act to reduce the tax gap, so its future path remains highly uncertain (and hence the alternative use of "whither"). Also, for a whole host of reasons, especially reductions in IRS funding, the tax gap will not be closed anytime soon. Nevertheless, the tide against tax noncompliance may finally be turning.
    Keywords: Tax gap, tax compliance.
    JEL: H2 H26
    Date: 2016–12
  12. By: Hildegunn Stokke
    Abstract: The empirical evidence on the incidence of payroll taxation is primarily based on the wage bill of firms. This paper applies matched employer-employee register data on individual wages for all private sector workers in Norway. Exploiting a payroll tax reform and using the difference-in-difference approach, I find that 1% reduction in labor costs generates 0.5% wage increase. Among low educated workers the degree of tax shifting equals 50%, while the wage response for highly educated is insignificant. Lower payroll taxes have limited effects on employment. The findings imply that the absolute value of the labor demand elasticity decreases with the level of education.
    Keywords: Payroll tax cut; individual wages; heterogeneous effects; education
    JEL: H22 J23 J31 J38
    Date: 2016–12
  13. By: Karlis Vilerts (Bank of Latvia); Olegs Tkacevs (Bank of Latvia)
    Abstract: This paper studies the impact of sovereign bond yields on fiscal discipline against the background of unprecedentedly low interest rates in advanced economies brought about by ultra-expansionary monetary policies of recent years. By employing the panel data econometric approach for a sample of OECD, EU and euro area countries over the period 1980–2014, the study suggests a positive and statistically significant impact of long-term sovereign bond yields on primary balances (PBs), indicating that a decrease in borrowing costs leads to a statistically significant deterioration of fiscal balances. The findings herein also suggest that falling bond yields pass on to fiscal balances through increases in government expenditure rather than revenue reduction. From the economic policy perspective, these findings imply that monetary policy measures resulting in ultra-low interest rates may cause negative side effects for fiscal discipline.
    Keywords: fiscal policy, fiscal reaction function, sovereign bond yields, panel data
    JEL: E62 H62
    Date: 2016–12–23
  14. By: Morgan, Peter (Asian Development Bank Institute); Long, Trinh Q. (Asian Development Bank Institute)
    Abstract: Since 1975, Viet Nam has gradually decentralized more fiscal responsibilities to local authorities. This study has two objectives: (i) to take stock of the current institutional framework for intergovernmental fiscal relations in Viet Nam, and (ii) to empirically assess the debt sustainability of local governments in Viet Nam. The empirical analysis uses two estimation methods: (i) fully modified ordinary least squares (OLS) to estimate the long-term correlations between co-integration equations, including vectors of co-integration variables, and stochastic regressor innovations; and (ii) fiscal reaction equations at the provincial level, based upon the Bohn (2008) model. The empirical results suggest that deficit levels are generally sustainable at the local level.
    Keywords: Government decentralization; government fiscal balance; intra-government transfers; expenditure assignment; revenue assignment; local government borrowing; Viet Nam
    JEL: H70 H71 H72 H74 H77
    Date: 2016–12–31

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