nep-pub New Economics Papers
on Public Finance
Issue of 2017‒05‒07
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Tax Progressivity and Top Incomes: Evidence from Tax Reforms By Rubolino, Enrico; Waldenström, Daniel
  2. Productivity, Taxation and Evasion: An Analysis of the Determinants of the Informal Economy By Alessandro Di Nola; Georgi Kocharkov; Aleksandar Vasilev
  3. Design of optimal corrective taxes in the alcohol market By Rachel Griffith; Martin O'Connell; Kate Smith
  4. Trends and Gradients in Top Tax Elasticities: Cross-Country Evidence, 1900–2014 By Rubolino, Enrico; Waldenström, Daniel
  5. Corporate Tax Cuts: Examining the Record in Other Countries By Simeon Djankov
  6. Optimal Tax Routing : Network Analysis of FDI Diversion By van 't Riet, Maarten; Lejour, Arjen
  7. Tax Policy for Great Society Programs: Tax Expenditure and the Failure of Comprehensive Tax Reform in the United States in 1969 By Seiichiro Mozumi
  8. Towards neutral distribution taxes and vanishing tax effects in the European Union By Maier, Christoph; Schanz, Deborah
  9. The Policy Process of Environmental Taxation in Denmark By Shintaro Kurachi

  1. By: Rubolino, Enrico (Uppsala University); Waldenström, Daniel (Paris School of Economics)
    Abstract: We study the link between tax progressivity and top income shares. Using variation from large-scale Western tax reforms in the 1980s and 1990s and the novel synthetic control method, we find large and lasting boosting impacts on top income shares from the progressivity reductions. Effects are largest in the very top groups while earners in the bottom half of the top decile were almost unaffected by the reforms. Cuts in top marginal tax rates account for most of this outcome whereas reduced overall progressivity contributed less. Searching for mechanisms, real income responses as measured by growth in aggregate GDP per capita, registered patents and tax revenues were unaffected by the reforms. By contrast, tax avoidance behavior related to the management of capital incomes in the very income top appears to lie behind the observed effects.
    Keywords: taxation, income inequality, tax policy
    JEL: D31 H21 H24 H26 H31 H76
    Date: 2017–03
  2. By: Alessandro Di Nola (University of Konstanz, Germany); Georgi Kocharkov (University of Konstanz, Germany); Aleksandar Vasilev (Department of Economics, American University in Bulgaria)
    Abstract: We evaluate the relative importance of labor productivity versus income taxes and social contributions for tax compliance in an economy with a large degree of informality. Empirical evidence points out that tax evasion in Europe happens through partially concealing wages and profits in formally registered enterprises. To this end, we build a model in which employeremployee pairs of heterogeneous productive capacities make joint decisions on the degree of tax evasion. The quantitative model takes as inputs the income tax structure and social contributions. The model is used to analyze the case of Bulgaria which has the largest informal economy in Europe. The estimation strategy relies on matching the empirical series for the size of the informal economy and other aggregate outcomes for 2000-2014. Our counterfactual experiments show that the most important factor for the changing size of the informal economy is labor productivity, which accounts for more than 75% of the change. The variation in corporate income tax accounts for the rest. Changes in personal income tax levels and progressivity are found not to be quantitatively relevant for tax evasion. We also characterize optimal taxation in 2014 with respect to minimizing tax evasion. The productive gains of imposing optimal taxes are small.
    Keywords: Informal economy, progressive taxation, tax evasion, flat tax reform
    JEL: H24 H25 H26 C63 E62 E65
    Date: 2017–04
  3. By: Rachel Griffith (Institute for Fiscal Studies and IFS and Manchester); Martin O'Connell (Institute for Fiscal Studies); Kate Smith (Institute for Fiscal Studies)
    Abstract: Alcohol consumption is associated with costs to society due to its impact on crime and health. Tax can lead consumers to internalise these externalities. We study optimal corrective taxation in the alcohol market. We allow for the fact that the externality generating commodity (ethanol) is available in many di fferentiated products, over which consumers might have heterogeneous preferences, and that there may also be heterogeneity in marginal externalities across consumers. We show that, if there is correlation in preferences and marginal externalities, setting different tax rates across products can improve welfare relative to a single tax rate on ethanol. We estimate a model of demand in the UK alcohol market and numerically solve for the optimal tax rates. Moving to an optimal system that taxes alcohol types at different rates would close half of the welfare gap between the current UK system and the fi rst best.
    Keywords: externality, corrective taxes, alcohol
    JEL: D12 D62 H21 H23
    Date: 2017–01–31
  4. By: Rubolino, Enrico (Uppsala University); Waldenström, Daniel (Paris School of Economics)
    Abstract: We compile data spanning the period 1900–2014 and up to 30 countries to study long-run patterns in the tax elasticity of top incomes. Our results show that top tax elasticities vary tremendously over time; they were medium-to-low before 1950, virtually zero during the postwar era up to 1980 and have thereafter increased to unprecedented levels. We document a strong income gradient in tax response within the top, underlining the importance to study even small top groups separately. Several mechanisms are investigated. Tax-driven income shifting between wage and capital income is important in the very top. Wars, financial crises, and country-specific effects and trends have bearing on top elasticities whereas standard macroeconomic factors and indicators of "real responses" do not.
    Keywords: taxation, income inequality, economic history
    JEL: D31 H21 H24 H26 N40
    Date: 2017–03
  5. By: Simeon Djankov (Peterson Institute for International Economics)
    Abstract: At 35 percent, the United States has the highest statutory corporate income tax rate among advanced economies, and this high rate coexists with a number of large preferences and exceptions. Reform of the widely criticized corporate tax is among the top agenda items of the Trump administration and the Republican leadership of Congress, and even many Democrats say the time has come to revamp the tax to make US-based multinational corporations more competitive in the global economy. Djankov analyzes episodes of tax rate cuts in other advanced economies and finds that radical corporate tax cuts, of 15 or more percentage points, are rare, but modest cuts of about 10 percentage points are possible in normal economic conditions and practical to implement as they do not trigger large fiscal imbalances. He concludes that a US corporate income tax cut of 10 to 15 percentage points—from 35 percent to 20 to 25 percent at the federal level—would bring the US rate in line with the average rate (23 percent) among other advanced economies.
  6. By: van 't Riet, Maarten; Lejour, Arjen (Tilburg University, Center For Economic Research)
    Abstract: The international corporate tax system is considered as a network and, just like for transportation, ‘shortest’ paths are computed, minimizing tax payments for multinational enterprises when repatriating profits. We include corporate income tax rates, withholding taxes on dividends, double tax treaties and the double taxation relief methods. We find that treaty shopping leads to an average potential reduction of the tax burden on repatriated dividends of about 6 percentage points. Moreover, an indicator for centrality in the tax network identifies the United Kingdom, Luxembourg and the Netherlands, amongst others, as the most important conduit countries. Tax havens do not have a crucial role in treaty shopping. In the regression analysis we find that the centrality indicators are robustly significant explanatory variables for bilateral FDI stocks. This also holds for our treaty shopping indicator.
    Keywords: Corporate taxation; tax treaties; treaty shopping; tax havens; shortest path
    JEL: F23 H25 H26 H87
    Date: 2017
  7. By: Seiichiro Mozumi (Faculty of Economics, Keio University)
    Abstract: On December 30, 1969, Richard Nixon signed the Tax Reform Act of 1969-originally crafted by the Treasury Department during the presidency of Lyndon B. Johnson-into law. Some scholars who discussed the tax reform have evaluated that it succeeded in making the federal tax system somewhat fairer, simpler, and more equitable, while the others have pointed out that its legislative process exemplified the quandary of comprehensive tax reform; this paper analyzes and demonstrates the conflict regarding with the tax reform between tax reform proponents, such as the Treasury Department and Democrats in Congress, and the Johnson administration. The unenthusiastic Johnson administration, and particularly the CEA's argument of temporary tax surcharge based on "domesticated Keynesianism," delayed the proposal and legislation of the tax reform until the Nixon presidency, and doomed the ideal tax reform that the Treasury crafted on the basis of the concept of "tax expenditures." With greater support of the Johnson administration, the Tax Reform Act of 1969 could have not only made the federal tax system so much fairer and more equitable, but also restored the taxation -expenditure nexus the Kennedy-Johnson tax cut of 1964 had broken.
    Keywords: Comprehensive tax reform, tax expenditures, domesticated Keynesianism
    JEL: H2 N42
    Date: 2017–03–28
  8. By: Maier, Christoph; Schanz, Deborah
    Abstract: The European Union (EU) has no explicit common income tax law. Nevertheless, Court of Justice decisions have driven EU member states to adopt more similar corporate tax systems, and thus, to align the tax treatment of corporate profit distributions - dividends and capital gains. This paper empirically analyzes the influence of the tax preferences of individual and corporate shareholders for the two corporate distribution types - dividends or capital gains - from 1990 to 2012. In the first years of the observation period, European tax systems have provided opposing tax advantages, where individual shareholders have preferred capital gains and corporate shareholders have preferred dividends. To account for these differences depending on the firm's shareholder structure, we derive firm-specific tax preferences for profit distributions. Our empirical analysis reveals that - in line with current literature - the firm-specific tax preferences indeed affect dividend payments. Moreover, we show that in contrast to our detailed study, a simplified approach to measure tax effects on distributions overestimates this influence. In subsequent years, as European Court of Justice decisions have indirectly aligned EU corporate tax systems, we find that tax preferences have converged to a great extent with the tendency to equal tax treatment of dividends and capital gains for both - individual and corporate - shareholder groups. In line with this development, we find that the association of tax preferences and distribution policies vanishes in the last years of the observation period. Our study implies that the EU common regulatory framework, even in the absence of explicit law, can affect corporate distribution decisions and foster neutral taxation of dividends and capital gains across EU member states.
    Keywords: tax preferences,dividends,capital gains,distributions,neutral taxation,corporate tax systems,European Union,European Court of Justice
    JEL: G30 G35 H24 H25
    Date: 2017
  9. By: Shintaro Kurachi (Faculty of Economics, Keio University)
    Abstract: This study examines why the Danish CO2 tax system has remained a substantial tax break on industry. Denmark was part of the "First Wave" of countries to introduce a CO2 tax, as were the other Nordic countries, in the 1990s. However, the Nordic CO2 tax structure remained a substantial tax break and low tax burden, and was distorted because of the large tax break of the CO2 tax burden on industry. The Danish government tried to increase the burden of the CO2 tax on industry, but this attempt failed owing to problems of international competitiveness and the country's relationship with the EU and the other Nordic countries. The structure of the CO2 tax burden was very regressive, which meant it was too heavy for the low-middle income groups. Therefore, the center-right government introduced a "Tax Freeze" (Skattestoppet) in 2002, to avoid increasing the tax burden on the low-income groups. Nevertheless, the "Tax Freeze" failed to secure the flexibility of the tax policy, and accelerated the real estate bubble precipitated by the Lehman shock in 2008. In order to cover for the reduction in income tax since the 1990s, an environmental taxation was introduced, and then subsequently increased. However, it has become more difficult to acquire additional CO2 tax revenue, needed because of the reduction in income tax. The low-middle income groups did not support the increase in CO2 taxation, because it was not implemented to improve the environment, but rather to generate additional tax revenue. Therefore, the Danish CO2 tax system has recently been reconsidered.
    Keywords: Environmental Taxation, Carbon Taxation, Denmark, Corporate Taxation, Tax Freeze
    JEL: H23 Q58
    Date: 2017–03–31

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