nep-pub New Economics Papers
on Public Finance
Issue of 2017‒03‒05
twelve papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Inequality and the Size of Government By Weijie Luo; Andrew Pickering; Paulo Santos Monteiro
  2. The crucial role of social welfare criteria for optimal inheritance taxation By Esteban García-Miralles
  3. Automation and inequality with taxes and transfers By Rod Tyers; Yixiao Zhou
  4. Capital Taxation in a Fiscal Union – Implications of Simultaneous Horizontal and Decentralized Leadership By Sjögren, Tomas
  5. Tax policy and entrepreneurial entry with information asymmetry and learning By Diego d'Andria
  6. Taxes and the Location of Targets By Arulampalam, Wiji; Devereux, Michael P.; Liberini, Federica
  7. The effects of tax on bank liability structure By Leonardo Gambacorta; Giacomo Ricotti; Suresh Sundaresan; Zhenyu Wang
  8. The effect of business property and land transfer taxes on new investment By Adam Found; Peter Tomlinson
  9. Optimal Spatial Taxation: Are Big Cities too Small? By Jan Eeckhout; Nezih Guner
  10. Is Local Public Sector Rent Extraction Higher in Progressive Cities or High Amenity Cities? By Matthew E. Kahn
  11. The Intergenerational Causal Effect of Tax Evasion: Evidence from the Commuter Tax Allowance in Austria By Wolfgang Frimmel; Martin Halla; Joerg Paetzold
  12. Envisioning Tax Policy for Accelerated Development in India. By Rao, M. Govinda; Kumar, Sudhanshu

  1. By: Weijie Luo; Andrew Pickering; Paulo Santos Monteiro
    Abstract: The median voter theory of government size predicts that greater inequality leads to greater demand for redistribution and larger government (Meltzer and Richard, 1981). However, this prediction is often rejected empirically. This paper distinguishes between income inequality induced by differences in labor productivity and income inequality induced by differences in capital income. Whilst the standard argument applies to productivity-induced income inequality, greater capital income inequality leads to smaller government if, as often observed, capital income is difficult to tax. Using OECD data, government size and capital income inequality (proxied by the top 1% income share) are found to be negatively related in both fixed effects and instrumental variable regressions. Moreover, controlling for capital income inequality yields a positive and significant relationship between government size and labor income inequality, as originally conjectured.
    JEL: D78 E62 H10
    Date: 2017–02
  2. By: Esteban García-Miralles (Banco de España)
    Abstract: This paper calibrates the full social optimal inheritance tax rate derived by Piketty and Saez (2013) and shows that different assumptions on the form of the social welfare function lead to very different optimal inheritance tax rates, ranging from negative (under a utilitarian criterion) to positive and large (even assuming joy of giving motives). The paper also calibrates the optimal tax rate by percentile of the distribution of bequest received, as Piketty and Saez do, but accounting for heterogeneity in wealth and labor income. The result is that the optimal tax rate from the perspective of the non-receivers varies significantly, contrary to the constant tax rate obtained by these authors.
    Keywords: optimal taxation, inheritance, social welfare criteria
    JEL: H21 H23 H24
    Date: 2017–02
  3. By: Rod Tyers; Yixiao Zhou
    Abstract: Technical change in key OECD countries since 1990 is examined in terms of its contributions to total factor productivity and to factor bias. The dependence of real income and inequality on changes in factor abundance, total factor productivity, factor bias, the relative cost of capital goods and the progressivity of the tax system are quantified using an elemental general equilibrium model with three households. For the US, changes in factor bias are shown to have been responsible to the great majority of the observed increase in inequality between 1990 and 2008. The widely anticipated further twist away from low-skill labour is then examined, with downward rigidity of low-skill wages and transfers that sustain low-skill welfare, the increments to which are financed either from capital income or consumption taxes. The potential is identified for unemployment, or “subsidised leisure”, to rise to extraordinarily high levels, with Pareto improving gains requiring that the technology twist accompanies substantial increases in total factor productivity.
    Keywords: Automation, income distribution, tax, transfers, general equilibrium analysis
    JEL: C58 D33 D58 O33
    Date: 2017–02
  4. By: Sjögren, Tomas (Department of Economics, Umeå University)
    Abstract: This article concerns capital taxation and public good provision in a two-layer fiscal union where the federal government uses lump-sum transfers to redistribute resources between two local jurisdictions, and where each local government uses a capital tax and a lump-sum tax to finance the provision of a local public good. The novelty is to allow for simultaneous horizontal and decentralized leadership (double leadership) which means that one of the local governments is able to exercise Stackelberg leadership both vis-a-vis the other local government and vis-a-vis the federal government. Among the results it is shown that the capital tax becomes redundant as a policy instrument for the double leader if the other state government acts as a decentralized leader vis-a-vis the federal government. If, instead, the other state government does not exercise leadership vis-a-vis the federal government then the double leader will implement a capital tax which is allocatively efficient from the perspective of the fiscal union as a whole. It is also shown that double leadership exacerbates the under-taxation inefficiency that earlier research has shown exists in a fiscal union with decentralized leadership.
    Keywords: Federalism; capital taxation; commitment; leadership
    JEL: H10 H21 H77
    Date: 2017–02–23
  5. By: Diego d'Andria (European Commission - JRC)
    Abstract: We study a market with entrepreneurial and workers entry where both entrepreneurs' abilities and workers' qualities are private information. We develop an Agent-Based Computable model to mimic the mechanisms described in a previous analytical model (Boadway and Sato 2011). Then, we introduce the possibility that agents may learn over time about abilities and qualities of other agents, by means of Bayesian inference over informative signals. We show how such different set of assumptions affects the optimality of second-best tax and subsidy policies. While with no information it is optimal to have a subsidy to labour and a simultaneous tax on entrepreneurs to curb excessive entry, with learning a subsidy-only policy can be optimal as the detrimental effects of excessive entrepreneurial entry are (partly or totally) compensated by surplus-increasing faster learning.
    Keywords: Entrepreneurship, Taxation, Asymmetric Information, Learning, Adverse Selection, Agent-Based Computational Model
    Date: 2017–02
  6. By: Arulampalam, Wiji (Department of Economics, University of Warwick ; IZA ; Oslo Fiscal Studies ; Oxford Centre for Business Taxation); Devereux, Michael P. (Oxford Centre for Business Taxation); Liberini, Federica (MTEC, ETH Zurich)
    Abstract: We use firm-level data to investigate the impact of taxes on the international location of targets in M & A allowing for heterogeneous responses by companies. The statutory tax rate in the target country is found to have a negative impact on the probability of an acquisition in that country. In addition, the estimated size of the effect is found to depend on whether (i) acquirer is a domestic or a multinational enterprise ; (ii) the acquisition is domestic or cross-border ; and (iii) the acquirer's country has a worldwide or territorial tax system.
    Keywords: Multinational enterprises ; cross-border expansion ; target choice ; corporation income tax ; mixed logit
    JEL: G34 H25 H32 C25
    Date: 2017
  7. By: Leonardo Gambacorta; Giacomo Ricotti; Suresh Sundaresan; Zhenyu Wang
    Abstract: This paper examines the effects of taxation on the liability structure of banks. We derive testable predictions from a dynamic model of optimal bank liability structure that incorporates bank runs, regulatory closure and endogenous default. Using the supervisory data provided by the Bank of Italy, we empirically test these predictions by exploiting exogenous variations of the Italian tax rates on productive activities (IRAP) across regions and over time (especially since the global financial crisis). We show that banks endogenously respond to a reduction in tax rates by reducing non-deposit liabilities more than deposits in addition to lowering leverage. The response on the asset side depends on the financial strength of the bank: well-capitalized banks respond to a reduction in tax rates by increasing their assets, but poorly-capitalized banks respond by cleaning up their balance sheet.
    Keywords: bank liability structure, corporate tax, leverage
    Date: 2017–02
  8. By: Adam Found; Peter Tomlinson
    Keywords: Business Fiscal and Tax Policy
    JEL: H25 H71
    Date: 2016–12
  9. By: Jan Eeckhout (UCL and Barcelona GSE-UPF-ICREA); Nezih Guner (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: We analyze the role of optimal income taxation across different local labor markets. Should labor in large cities be taxed differently than in small cities? We find that a planner who needs to raise a given level of revenue and is constrained by free mobility of labor across cities does not choose equal taxes for cities of different sizes. The optimal tax schedule is location specific and tax differences between large and small cities depends on the level of government spending, the concentration of housing wealth and the strength of agglomeration economies. Our estimates for the US imply higher optimal marginal rates in big cities than in small cities. Under the current Federal Income tax code with progressive taxes, marginal rates are already higher in big cities which have higher wages, but the optimal difference we estimate is lower than what is currently observed. Simulating the US economy under the optimal tax schedule, there are large effects on population mobility: the fraction of population in the 5 largest cities grows by 7.6% with 3.4% of the country-wide population moving to bigger cities. The welfare gains however are smaller. This is due to the fact that much of the output gains are spent on the increased costs of housing construction in bigger cities. Aggregate goods consumption goes up by 1.51% while aggregate housing consumption goes down by 1.70%.
    Keywords: Misallocation, taxation, population mobility, city size, general equilibrium.
    JEL: H21 J61 R12 R13
    Date: 2017–01
  10. By: Matthew E. Kahn
    Abstract: Public finance theories of the median voter’s preferences and local public sector rent extraction posit that liberal cities and high amenity cities will feature a larger, better paid local public sector. Compensating differentials theory predicts that real wages will be lower in beautiful states and localities. Using both Federal and California city level administrative micro data, I study public sector compensation across space. At the Federal level, California workers are only paid 9% more than observationally identical workers in Alabama. Given the high California home prices, such workers are paying for the California amenities. Within California, beach cities hire more workers but pay them less in real terms. Liberal cities both pay public sector workers more and employ more of them. Liberal cities have much larger per-capita pension liabilities.
    JEL: H50 H7 H75 R23
    Date: 2017–02
  11. By: Wolfgang Frimmel; Martin Halla; Joerg Paetzold
    Abstract: Does tax evasion run in the family? To answer this question, we study the case of the commuter tax allowance in Austria. This allowance is designed as a step function of the distance between the residence and the workplace, creating sharp discontinuities at each bracket threshold. The distance to these brackets is a strong determinant of compliance since it corresponds to the probability of detection. The match of different administrative data sources allows us to observe actual compliance behavior at the individual level across two generations. To identify the intergenerational causal effect in tax evasion behavior, we use the paternal distance-to-bracket as an instrumental variable for paternal compliance. We find that paternal noncompliance increases children’s non-compliance by about 20 percent.
    Keywords: Tax evasion, tax morale, intergenerational correlation, intergenerational causal effect.
    JEL: H26 A13 H24 J62 D14
    Date: 2017–01
  12. By: Rao, M. Govinda (National Institute of Public Finance and Policy); Kumar, Sudhanshu (National Institute of Public Finance and Policy)
    Abstract: The objective of the paper is to highlight the reforms needed in the tax system to improve the revenue productivity of the tax system to conform to the vision of accelerating economic growth and development in India. Based on the cross-country analysis of tax-GDP ratios in 98 countries, the paper estimates the extent of under-taxation in India. Assuming 8 per cent growth in GDP, the paper estimates the increase in tax-GDP ratios needed to be raised and this additional effort would provide fiscal space for much needed investments in physical infrastructure and human development. The paper goes on to identify the reforms needed to raise the revenue productivity of the tax system keeping in view the best practice approach to tax reform in India.
    Keywords: Tax Policy ; Tax System ; Revenue Productivity ; India
    JEL: E62 H2
    Date: 2017–02

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