nep-pub New Economics Papers
on Public Finance
Issue of 2017‒04‒02
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Progressive Income Taxation in a Bewley-Grossman Framework By Juergen Jung; Chung Tran
  2. When do managers highlight their effective tax rate? By Flagmeier, Vanessa; Müller, Jens; Sureth-Sloane, Caren
  3. Should Platforms be Allowed to Charge Ad Valorem Fees? By Wang, Zhu; Wright, Julian
  4. Taxing multinational enterprises as unitary firms By Picciotto, Sol
  5. Does Uncertainty Deter Provision of Public Goods? By Béatrice Boulu-Reshef; Samuel Brott; Adam Zylbersztejn
  6. On the Effect of an Increase in the VAT on Electricity in Portugal By Pereira, Alfredo; Pereira, Rui
  7. Decomposing the Marginal Excess Burden of Australia’s Goods and Services Tax By Verikios, George; Patron, Jodie; Gharibnavaz, Reza

  1. By: Juergen Jung (Department of Economics, Towson University); Chung Tran (Research School of Economics, The Australian National University)
    Abstract: We study the optimal progressivity of income taxation in a Bewley-Grossman model of health capital accumulation where individuals are exposed to earnings and health risks over the lifecycle. We impose the U.S. tax and transfer system and calibrate the model to match U.S. data. We then optimize the progressivity of the income tax code. The optimal income tax system is more progressive than current U.S. income taxes with zero taxes at the lower end of the income distribution and a marginal tax rate of over 50 percent for income earners above US$ 200,000. The Suits index—a Gini coefficient for the income tax contribution by income—is around 0.53 and much higher than 0.17 in the U.S. benchmark tax system. Welfare gains from switching to the optimal tax system amount to over 5 percent of compensating consumption. Moreover, we find that the structure of the health insurance system affects the degree of optimal progressivity of the income tax system. The introduction of Affordable Care Act in 2010—a program that redistributes wealth from high income and healthy types, to low income and sicker types—reduces the optimal progressivity level of the income tax system. Finally, we demonstrate that the optimal tax system is sensitive to the parametric specification of the income tax function and the transfer policy.
    Keywords: Health risk, inequality, tax progressivity, Suits index, social insurance, optimal tax, general equilibrium.
    JEL: E62 H24 I13 D52
    Date: 2017–03
  2. By: Flagmeier, Vanessa; Müller, Jens; Sureth-Sloane, Caren
    Abstract: We examine the disclosure of GAAP effective tax rate (ETR) information in firms' financial statements. Applying the theoretical underpinnings of Wagenhofer (1990) to a tax setting, we argue that firms face a tradeoff in their GAAP ETR disclosure decision. On the one hand, firms have incentives to increase GAAP ETR disclosure if the ratio has a condition that is favorable from an investor's perspective, expecting positive capital market reactions. On the other hand, the disclosure might draw tax auditors' and public attention to the GAAP ETR and result in proprietary costs in terms of additional tax payments or reputational damages. We empirically test the disclosure behavior by examining the relation between disclosure intensity and five different measures of favorable GAAP ETR conditions. First, we provide evidence that the annual report section in which most of the firms disclose GAAP ETR information is the management report, indicating that firms assign considerable relevance to the ratio. Second, we find a higher disclosure intensity if the GAAP ETR has a favorable condition, i.e. is decreasing or near the average ratio of firms in the same industry or size group. We do not find a significant relation to the disclosure level for smooth GAAP ETRs. Our findings indicate that firms assess the benefits of providing the favorable GAAP ETR information to be higher than the related costs. Documenting firms' GAAP ETR reporting behavior, we contribute to the tax disclosure literature by providing insights into possible disclosure incentives. Further, our results could increase awareness among investors to have a second look at the GAAP ETR if the disclosure intensity with respect to the ratio is low.
    Keywords: Effective Tax Rate,Disclosure,Proprietary Costs
    Date: 2017
  3. By: Wang, Zhu (Federal Reserve Bank of Richmond); Wright, Julian (National University of Singapore)
    Abstract: Many platforms that facilitate transactions between buyers and sellers charge ad valorem fees in which fees depend on the transaction price set by sellers. Given these platforms do not incur significant costs that vary with transaction prices, their use of ad valorem fees has raised controversies about the efficiency of this practice. In this paper, using a model that connects platforms' use of ad valorem fees to third-degree price discrimination, we evaluate the welfare consequences of banning such fees. We find the use of ad valorem fees generally increases welfare, including for calibrated versions of the model based on data from Amazon's marketplace and Visa's signature debit cards.
    Keywords: platforms; taxation; third-degree price discrimination
    JEL: D4 H2 L5
    Date: 2017–03–22
  4. By: Picciotto, Sol
    Abstract: The international tax system needs a paradigm shift. The rules devised over 80 years ago treat the different parts of a multinational enterprise as if they were independent entities, although they also give national tax authorities powers to adjust the accounts of these entities. This creates a perverse incentive for multinationals to create ever more complex groups in order to minimise taxes, exploiting the various definitions of the residence of legal persons and the source of income. While states may attempt to combat these strategies, they also compete to offer tax incentives, many of which facilitate such techniques to undermine other countries’ taxes. Several alternative approaches have been identified, which start from the economic reality that multinationals operate as unitary firms. These include residence-based worldwide taxation, under which the ultimate home country of a multinational taxes its worldwide profits but with a credit for equivalent foreign taxes paid; a destination-based cash flow tax, which attributes the tax base to the country of ultimate sales to third parties; and unitary taxation with formulary apportionment, which apportions the firm’s consolidated profits according to factors reflecting its real presence in each country. This volume outlines the nature of the problem and discusses attempts to resolve it, including the recent G20/OECD project on base erosion and profit shifting (BEPS). It then explores unitary taxation with formulary apportionment. The contributions discuss how to move towards such a system starting from the current rules; the role of accounting in defining the consolidated tax base; lessons from the experience of existing formulary systems, especially in the USA; evidence from quantitative studies of tax base misalignment under current rules and the possible effects of different apportionment formulas; specific issues in the finance and extractive industries sectors; and the prospects for regional adoption.
    Keywords: Development Policy, Economic Development, Finance, Governance,
    Date: 2017
  5. By: Béatrice Boulu-Reshef (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Samuel Brott (Berkeley Research Group); Adam Zylbersztejn (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - UJM - Université Jean Monnet [Saint-Etienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We study a finitely repeated public goods game (based on the voluntary contribution mechanism) played under complete uncertainty about the marginal benefit of the public good relative to the private consumption (commonly known as the marginal per capita return): neither one's marginal per capita return nor other players' marginal per capita returns are known at the time of decision-making. We show that contributions are equivalent when the rate of return is predetermined and when it is uncertain, and display a similar decay over time. Combined with the previous experimental findings, our results suggest that the cooperation in public goods games is sensitive to the source of uncertainty about marginal per capita return.
    Abstract: Nous étudions un jeu de bien public répété avec un horizon fini et connu (sous la forme du mécanisme de contribution volontaire) avec une incertitude complète sur le rendement marginal du bien public : ni le rendement marginal personnel, ni les rendements marginaux des autres joueurs ne sont connus au moment de la prise de décision sur la contribution individuelle au bien public. Nous montrons que les contributions sont similaires lorsque le rendement marginal du bien public est prédéterminé et parfaitement connu, et lorsqu'il est incertain. Dans les deux cas, les contributions ont tendance à décroitre avec la répétition. En tenant compte des résultats expérimentaux précédents, nos résultats suggèrent que la coopération dans les jeux de biens publics est sensible à la source d'incertitude sur le rendement marginal du bien public.
    Keywords: Cooperation,uncertainty,voluntary contribution mechanism,public good,expected return,incertitude,mécanisme de contribution volontaire,bien public,rendement attendu
    Date: 2017–01
  6. By: Pereira, Alfredo; Pereira, Rui
    Abstract: In this paper we analyze the budgetary, economic, distributional and environmental effects of a permanent increase in Portugal of the value added tax on electricity spending. The analysis in conducted in the context of a new multi-sector and multi-household dynamic general equilibrium model of the Portuguese economy. Simulation results suggest that a permanent increase in the VAT on electricity from 6% to 23% has positive budgetary and environmental effects but both come at the cost of detrimental economic and distributional effects. As economic performance in Portugal improves and the public budgetary situation becomes less constraining, it is inevitable that pressure will mount for this increase in the VAT rate on electricity to be reversed. This mixed bag of results provides an important element in this debate. Reverting to a VAT tax rate of 6% on electricity, would improve economic performance and have positive distributional effects. From this perspective such reversion would be desirable. The question is then whether or not the public budget can somehow compensate for the loss of revenues in a way that would not eliminate the positive economic and distributional effects of such reversion.
    Keywords: Value Added Tax on Electricity, Dynamic Multi-Sector General Equilibrium, Portugal
    JEL: D58 H24 Q43
    Date: 2017–03–15
  7. By: Verikios, George; Patron, Jodie; Gharibnavaz, Reza
    Abstract: We estimate the marginal excess burden of the GST and its components. Our results show that the GST is highly distortionary in its treatment of intermediate inputs and investment, but is efficient as applied to household consumption. We also estimate the general equilibrium effects of changes to the GST base and rate, and its removal from investment. The general equilibrium estimates support the marginal excess burden estimates. Our results suggest that the efficiency of the GST could be improved by broadening the consumption base or removing it from investment. Simply increasing the GST rate would be welfare decreasing.
    Keywords: computable general equilibrium, differential incidence, goods and services tax, marginal excess burden, tax reform, value-added tax.
    JEL: C68 D58 D61 H21 H22
    Date: 2017–03–01

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