nep-pub New Economics Papers
on Public Finance
Issue of 2017‒02‒26
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Higher Tax for Top Earners By Jim Jin; Felix FitzRoy
  2. Lower Tax For Minimum Wage Earners By Jim Jin; Felix FitzRoy
  3. How taxes impact the choice between an annuity and the lump sum at retirement By Bütler, Monika; Ramsden, Alma
  4. Household bargaining, spouses' consumption patterns and the design of commodity taxes By Cremer, Helmuth; Lozachmeur, Jean-Marie; Roeder, Kerstin
  5. Implementing Tax Coordination and Harmonization through Voluntary Commitment By Grégoire ROTA-GRAZIOSI
  6. How Taxes and Required Returns Drove Commercial Real Estate Valuations over the Past Four Decades By Duca, John V.; Hendershott, Patric H.; Ling, David C.
  7. Linking taxation and social protection: Evidence on redistribution and poverty reduction in Ethiopia By Hirvonen, Kalle; Mascagni, Giulia; Roelen , Keetie

  1. By: Jim Jin; Felix FitzRoy
    Abstract: The literature can justify increasing and decreasing marginal taxes (IMT & DMT) on top income under different social objectives and income distributions. Even if DMT are optimal, they are often politically infeasible. Then a flat tax seems to be a constrained optimal solution. We show however that, if we want to maximize the utility of a poor majority any flat tax can be inferior to some IMT. We provide a sufficient condition for (two-band) IMT to dominate any flat tax and further generalize this result to allow different welfare weights, declining elasticity of labour supply and more tax bands.
    Keywords: flat tax, increasing marginal taxes, income redistribution
    JEL: D30 D60 H20
    Date: 2017–02–16
  2. By: Jim Jin; Felix FitzRoy
    Abstract: We show that minimum wage earners should pay a lower tax than high earners. Though intuitive, this idea is not supported by the existing literature. The optimal maximin tax curve and two-band taxes are usually decreasing. Since decreasing marginal taxes would be unpopular, by continuity a flat tax seems to be superior to increasing marginal taxes and should be a second best solution. However, using a simple utility function and a general income distribution, we find that lowering the marginal tax for minimum wage earners not only dominates the optimal flat tax under maximin, but also make everyone better off.
    Keywords: flat tax, income redistribution, maximin, Pareto improvement
    JEL: H20 D60
    Date: 2017–02–16
  3. By: Bütler, Monika; Ramsden, Alma
    Abstract: We analyze the role of taxation in individual annuitization decisions in an environment that shows large di?erences in relative taxation between the one-o? lump sum payment and the life-long annuity. For each individual whose retirement choice is recorded in an administrative dataset from a large Swiss pension fund we impute taxes for both options. We show that taxes can explain a signi?cant part of the variation in annuity rates. Exploiting kinks in the tax schedule we also ?nd evidence for tax optimization strategies by individuals. Our ?ndings suggest that individuals react strongly to tax incentives when making retirement choices.
    Keywords: Annuity Puzzle, Taxation, Occupational Pension
    JEL: D81 D91 H24 J26
    Date: 2017–01
  4. By: Cremer, Helmuth; Lozachmeur, Jean-Marie; Roeder, Kerstin
    Abstract: We study the role and structure of commodity taxes when consumption and labor supplies are determined through a bargaining procedure between spouses, and where an optimal income tax is also available. We focus on the question whether there should be differences in tax treatment between "female"and "male" products. When weights (as well as wages) differ across couples, the heterogeneity is multidimensional and the Atkinson and Stiglitz theorem does not apply. In addition, when the social welfare function is individual-based, spouses'social weights may differ from their weights within the couples. This brings about Pigouvian considerations which in themselves may justify commodity taxes. We show that the expressions for the tax rates include Pigouvian and incentive terms. Their roles are most apparent in the case where some goods are consumed exclusively by one of the spouses. Supposing, for instance, that the female spouse has the lower bargaining weight, we ?nd conditions under which the Pigouvian term calls for a subsidization of the "female good", and a taxation of the "male good"?. The incentive term depends on the distribution of bargaining weights across couples. For instance, for the exclusive consumption case, when the weight of the female spouse increases with wages, the female good tends to be consumed in larger proportion by more productive couples. Consequently, the incentive term makes it a candidate for taxation. In this case the Pigouvian term is mitigated.
    Keywords: Couples' taxation, household bargaining, optimal commodity taxation
    JEL: D10 H21 H31
    Date: 2017–02
  5. By: Grégoire ROTA-GRAZIOSI (Ferdi)
    Abstract: Pareto-improving tax coordination, and even tax harmonization, are Nash implementable between sovereign countries without any supranational tax authorities. Following Schelling’s approach, we consider voluntary commitment, which constrains countries’ respective tax rate choices. We develop a commitment game where countries choose their strategy sets in preliminary stages and play consistently during the final one. We determine the set of tax rates, which are implementable by commitment. This allows countries to reach Pareto-improving equilibriums. We also establish that complete tax harmonization may emerge as the subgame perfect Nash equilibrium of the commitment game as long as the asymmetry between countries remains limited. Our analysis contributes to the rationale of tax ranges and, more broadly, of non binding but self-enforcing commitments (not equivalent to cheap talk) in the context of tax competition.
    Keywords: Tax competition, tax coordination, commitment
    JEL: H30 C72
    Date: 2016–12
  6. By: Duca, John V. (Federal Reserve Bank of Dallas); Hendershott, Patric H. (University of Aberdeen); Ling, David C. (University of Florida)
    Abstract: We document the evolution of U.S. tax law regarding commercial real estate (CRE) since 1975, noting changes in income and capital gains tax rates and tax depreciation methods. The most prominent changes were the 1981 and 1986 Tax Acts, but numerous significant changes occurred in the last dozen years. We then compute the present value of tax depreciation per dollar of acquisition price and an effective tax rate for CRE. We explain the quarterly variation in CRE capitalization rates using an error correction framework and find that the long run estimates are statistically significant in the way theory would suggest. Moreover, the required financial asset return and the tax depreciation variable temporally predict (“cause”) capitalization rates in the long run, but not vice versa.
    JEL: G12 H20 H30 R30
    Date: 2017–01–27
  7. By: Hirvonen, Kalle; Mascagni, Giulia; Roelen , Keetie
    Abstract: The reduction of poverty, and more recently inequality, are pressing concerns in many low- and middle-income countries, not in the least as a result of the Sustainable Development Goals committing countries to significant improvements by 2030. Redistribution is important for reaching these goals, and is shaped by countries’ tax and welfare systems. Despite redistribution resulting from the simultaneous effect of revenue collection and public expenditures, policies and analyses of their distributional effects have largely been undertaken from narrow and singular perspectives. In this paper, we aim to jointly assess the distributional effect of taxes and transfers (through social protection) using Ethiopia as a case study. We find that currently Ethiopia’s flagship social protection programme is more effective than income taxation in achieving poverty reduction, while neither policy achieves a sizeable reduction in overall inequality. Overall, our findings provide support for the common belief that social spending is more suitable than taxation to achieve redistribution. We also assessed whether Ethiopia would have the capacity to achieve the desired level of redistribution by applying higher marginal rates on relatively high incomes. Our results suggest that Ethiopia does not currently have the capacity to close the poverty gap, or to fully fund its main safety net programme using domestic income sources alone.
    Keywords: Development Policy, Economic Development, Governance,
    Date: 2017

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