nep-pub New Economics Papers
on Public Finance
Issue of 2017‒07‒16
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. How do entrepreneurial portfolios respond to income taxation? By Fossen, Frank M.; Rees, Ray; Rostam-Afschar, Davud; Steiner, Viktor
  2. "Multi-Dimensional Pass-Through, Incidence, and the Welfare Burden of Taxation in Oligopoly" By Takanori Adachi; Michal Fabinger
  3. Ramsey-optimal Tax Reforms and Real Exchange Rate Dynamics By Stephane Auray; Aurelien Eyquem; Paul Gomme
  4. Warm-Glow Giving in Networks with Multiple Public Goods By Lionel Richefort
  5. Housing and the tax system: how large are the distortions in the euro area? By Fatica, Serena; Prammer, Doris
  6. The Marginal Welfare Cost of Personal Income Taxation in New Zealand By John Creedy; Penny Mok
  7. The Impact of Taxes and Social Spending on Inequality and Poverty in El Salvador - Working Paper 447 By Margarita Beneke; Nora Lustig; José Andrés Oliva

  1. By: Fossen, Frank M.; Rees, Ray; Rostam-Afschar, Davud; Steiner, Viktor
    Abstract: We investigate how personal income taxes affect the portfolio share of personal wealth that entrepreneurs invest in their own business. In a reformulation of the standard portfolio choice model that allows for underreporting of private business income to tax authorities, we show that a fall in the tax rate may increase investment in risky entrepreneurial business equity at the intensive margin, but decrease entrepreneurial investment at the extensive margin. To test these hypotheses, we use household survey panel data for Germany eliciting the personal wealth composition in detail in 2002, 2007, and 2012. We analyze the effects of personal income taxes on the portfolio shares of six asset classes of private households, including private business equity. In a system of simultaneous demand equations in first differences, we identify the tax effects by an instrumental variables approach exploiting tax reforms during our observation period. To account for selection into entrepreneurship, we use changes in entry regulation into skilled trades. Estimation results are consistent with the predictions of our theoretical model. An important policy insight is that lower taxes drive out businesses that are viable only due to tax avoidance or evasion, but increase investment in private businesses that are also worthwhile in the absence of taxes.
    Keywords: taxation,entrepreneurship,portfolio choice,investment
    JEL: H24 H25 H26 L26 G11
    Date: 2017
  2. By: Takanori Adachi (School of Economics, Nagoya University,); Michal Fabinger (Faculty of Economics, The University of Tokyo)
    Abstract: This paper studies welfare consequences of unit and ad valorem taxes in oligopoly with general demand, non-constant marginal costs, and a generalized type of competition. We present formulas providing connections between marginal cost of public funds, tax incidence, unit tax pass-through, ad valorem tax pass-through, and other economic quantities of interest. First, in the case of symmetric firms, we show that there exists a simple, empirically relevant set of sufficient statistics for the marginal cost of public funds, namely the pass-through and the industry demand elasticity. Specializing to the case of price or quantity competition, we show how marginal cost of public funds and pass-through are expressed using elasticities and curvatures of demand and inverse demand. These results also apply to symmetric oligopoly with multi-product firms. Second, we present a generalization with the tax revenue function specified as a general function parameterized by a vector of tax parameters. We analyze multi-dimensional pass-through, generalizing the results of Weyl and Fabinger (2013), and show that it is crucial for evaluating welfare changes in response to changes in taxation. Finally, we generalize our results to the case of heterogeneous firms, as well as to the case of changes in both production costs and taxes.
    Date: 2017–03
  3. By: Stephane Auray (CREST-Ensai and ULCO); Aurelien Eyquem (CREST-Ensai and Universite de Lyon); Paul Gomme (Concordia University and CIREQ)
    Abstract: We solve for the Ramsey-optimal path for government debt, labor income taxes and capital income taxes for a small open economy with an endogenously-determined real exchange rate. Due to the endogenous exchange rate, the model must be solved using the `primal problem': maximize the lifetime utility of the representative household subject to equilibrium conditions and the government budget constraint. The open economy constrains the government's setting of the capital income tax rate since physical capital cannot be dominated in rate of return by foreign assets. However, the endogenous real exchange rate loosens this constraint relative to a one good open economy model in which the real exchange rate is necessarily fixed.
    Keywords: Optimal fiscal policy, Tax reforms, Welfare
    JEL: E32 E52 F41
    Date: 2017–07
  4. By: Lionel Richefort (Université de Nantes, LEMNA)
    Abstract: This paper explores a voluntary contribution game in the presence of warm-glow effects. There are many public goods and each public good benefits a different group of players. The structure of the game induces a bipartite network structure, where players are listed on one side and the public good groups they form are listed on the other side. The main result of the paper shows the existence and uniqueness of a Nash equilibrium. The unique Nash equilibrium is also shown to be locally asymptotically stable. Then the paper provides some comparative statics analysis regarding pure redistribution, taxation and subsidies. It appears that small redistributions of wealth may sometimes be neutral, but generally, the effects of redistributive policies depend on how public good groups are related in the contribution network structure.
    Keywords: Multiple Public Goods, Warm-glow Effects, Bipartite Contribution Structure, Nash Equilibrium, Comparative Statics
    JEL: C72 D64 H40
    Date: 2017–07
  5. By: Fatica, Serena; Prammer, Doris
    Abstract: This paper presents new evidence on the impact of the preferential treatment of owner-occupied housing in Europe. We find that tax benefits to homeowners reduce the user cost of housing capital by almost 40 percent compared to the efficient level under neutral taxation. On average, the tax subsidy translates into an excess consumption of housing services equivalent to 7.8 percent of the value of owner-occupied housing, or about 30 percent of financial asset holdings in household portfolios. The bulk of the subsidies stems from under-taxation of the return to home equity, while the average contribution of the tax rebate for mortgage interest payments is driven down by relatively low loan-to-value ratios in the data. However, at the margin, the tax–induced incentive to use mortgage debt to finance the purchase of the main residence is sizable. JEL Classification: H24, H31, D14
    Keywords: owner-occupied housing, taxation, user cost
    Date: 2017–07
  6. By: John Creedy; Penny Mok (The Treasury)
    Abstract: The present paper reports estimates of welfare changes and the marginal welfare cost of income taxation for a wide range of income and demographic groups in New Zealand, in the context of a uniform increase in all marginal income tax rates. The results are obtained using enhancements to the NZ Treasury’s behavioural microsimulation model, Taxwell-B, which uses discrete hours modelling to examine the labour supply responses of all individuals to an income tax change. Considerable variation is found in the marginal welfare costs for different groups, with an overall value of 12 cents per extra dollar raised. The paper also demonstrates the use of a money metric utility measure in a social welfare function evaluation. A smaller reduction in ‘social welfare’ is obtained compared with the use of net incomes.
    Keywords: Direct taxation; excess burden; marginal welfare cost; welfare measurement
    JEL: H20 H31 I30 D63
    Date: 2017–06
  7. By: Margarita Beneke; Nora Lustig; José Andrés Oliva
    Abstract: We conducted a fiscal impact study to estimate the effect of taxes, social spending, and subsidies on inequality and poverty in El Salvador, using the methodology of the Commitment to Equity project. Taxes are progressive, but given their volume, their impact is limited. Direct transfers are concentrated on poor households, but their budget is small so their effect is limited; a significant portion of the subsidies goes to households in the upper income deciles, so although their budget is greater, their impact is low. The component that has the greatest effect on inequality is spending on education and health. Therefore, the impact of fiscal policy is limited and low when compared with other countries with a similar level of per capita income. There is room for improvement using current resources.
    Keywords: fiscal incidence, poverty, inequality, El Salvador
    JEL: D31 H22 I14
    Date: 2017–01

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