nep-pub New Economics Papers
on Public Finance
Issue of 2017‒07‒30
eleven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal taxation and the tradeoff between efficiency and redistribution By George Economides; Anastasios Rizos
  2. Quantifying the Welfare Gains from History Dependent Income Taxation By Marek Kapicka
  3. The Impact of Taxes on Income Mobility By Mario Alloza
  4. Corporate Income Tax as a Genuine own Resource By Fabien CANDAU; Jacques LE CACHEUX
  5. Using Tax Deductions to Promote Lifelong Learning: Real and Shifting Responses By Van den Berge, Wiljan; Jongen, Egbert L. W.; van der Wiel, Karen
  6. The Role of Taxes in the Disconnect between Corporate Performance and Economic Growth By Urooj Khan; Suresh Nallareddy; Ethan Rouen
  7. Emission Taxes and Damage Thresholds in the Presence of Pre-existing Regulations By Ross McKitrick
  8. The Effects of the Affordable Care Act on Health Insurance Coverage and Labor Market Outcomes By Mark Duggan; Gopi Shah Goda; Emilie Jackson
  9. Happiness and Public Expenditure: Evidence from a Panel Analysis By Kamal KASMAOUI; Othmane BOURHABA
  10. Do People Respond to the Mortage Interest Deduction? Quasi-Experimental Evidence from Denmark By Jonathan Gruber; Amalie Jensen; Henrik Kleven
  11. The Effect of Taxpayer Education on Tax Compliance in Kenya.( a case study of SME's in Nairobi Central Business District) By Gitaru, Kelvin

  1. By: George Economides (Athens University of Economics and Business); Anastasios Rizos
    Abstract: This paper studies the aggregate and distributional implications of introducing consumption taxes into an otherwise deterministic version of the standard neoclassical growth model with income taxes only and heterogeneity across agents. In particular, the economic agents differ among each other with respect to whether they are allowed to save (in physical capital) or not. Policy is optimally chosen by a benevolent Ramsey government. The main theoretical finding comes to confirm the widespread belief that the introduction of consumption taxes into a model with income taxes only, creates substantial efficiency gains for the economy as whole, but at the cost of higher income inequality. In other words, consumption taxes reduce the progressivity of the tax system, and maybe, from a normative point of view, this result justifies the design of a set of subsidies policies which will aim to outweigh the regressive effects of the otherwise more efficient consumption taxes.
    Keywords: Ramsey taxation, heterogeneity, efficiency, inequality
    JEL: H21 H23 E62
    Date: 2017–06–30
  2. By: Marek Kapicka (UCSB)
    Abstract: I quantify the welfare gains from introducing history dependent income tax in an incomplete markets framework where individuals face uninsurable random walk idiosyncratic shocks. I assume that the income tax paid is a function of a geometrical weighted average of past incomes, and solve for the optimal weights. I find that the optimal weights on past incomes decline geometrically at a rate equal to the discount rate. The welfare gains from history dependence are large, about 1.77 percent of consumption. I decompose the total effect into an efficiency effect that increases labor supply, and an insurance effect that reduces volatility of consumption and find that, quantitatively, the insurance effect dominates the efficiency effect. The optimal tax increases consumption insurance by trading higher tax progressivity with repect to past incomes for a reduced tax progressivity with respect to the current income.
    Date: 2017
  3. By: Mario Alloza (Banco de España and CFM)
    Abstract: This paper investigates how taxes affect relative mobility in the income distribution in the US. Household panel data drawn from the PSID between 1967 and 1996 is employed to analyse the relationship between marginal tax rates and the probability of staying in the same income decile. Exogenous variation in marginal tax rates is identified by using counterfactual rates based on legislated changes in the tax schedule. I find that higher marginal tax rates reduce income mobility. An increase in one percentage point in marginal tax rates causes a decline of around 0.8 percentage points in the probability of changing to a different income decile. Tax reforms that reduce marginal rates by 7 percentage points are estimated to account for around a tenth of the average movements in the income distribution in a year. Additional results suggest that the effect of taxes on income mobility differs according to the level of human capital and that it is particularly significant when considering mobility at the bottom of the distribution.
    Keywords: income mobility, inequality, marginal tax rate
    JEL: E24 E62 D31 D63 H24 H31
    Date: 2017–07
  4. By: Fabien CANDAU; Jacques LE CACHEUX
    Abstract: This article proposes an original review of the literature on tax competition, providing new evidence on tax competition concerning different types of capital (intangibles, industrial building, etc). We also present fiscal optimization of Multi-National Firms (MNFs) and document some case studies regarding the foregone tax revenue due to evasion. Amounts saved by firms are comparable to the contributions to the EU budget by countries like the UK, Ireland, the Netherlands or Luxembourg. We estimate the revenue losses for the national governments of EU15 due to corporate tax avoidance through profit shifting under three scenarios considering different levels of `CIT efficiency' to raise revenue for the year 2015. The 'intermediate' scenario predicts that the revenue losses for the EU governments due to corporate tax avoidance amount to approximately 98 billion euros. After this description of the failure of the current system of taxation, the defense of corporate income tax at the European level as a genuine own resource for the EU budget, this article analyzes alternative schemes such as the Common Consolidated Corporate Tax Base (CCCTB).
    JEL: F23 H26 H61
    Date: 2017–03
  5. By: Van den Berge, Wiljan (CPB Netherlands Bureau for Economic Policy Analysis); Jongen, Egbert L. W. (CPB Netherlands Bureau for Economic Policy Analysis); van der Wiel, Karen (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: Policymakers are concerned about potential underinvestment in lifelong learning. In this paper we study to what extent a tax deduction helps to stimulate post-initial training. Specifically, we employ a regression kink and regression discontinuity design as jumps in tax bracket rates generate exogenous variation in the effective costs of lifelong learning. Using high quality data on tax returns of the universe of Dutch taxpayers, we find that the tax deduction has heterogeneous effects on lifelong learning. Low-income singles show no response. For high-income singles we find an effect of 10% on the probability to use the tax deduction. Furthermore, ignoring shifting of expenses between partners leads to spurious large estimates for primary earners and spurious negative estimates for secondary earners.
    Keywords: lifelong learning, tax deduction, RKD, RDD
    JEL: C21 H20 J24
    Date: 2017–07
  6. By: Urooj Khan (Columbia University); Suresh Nallareddy (Duke University); Ethan Rouen (Harvard Business School, Accounting and Management Unit)
    Abstract: We investigate the relation between the growth in corporate profits and the overall U.S. economy, focusing on the impact of the U.S. corporate tax regime on this relation. We document that the growth of corporate profits, on average, has outpaced the growth of the economy and this disconnect increases as the difference between the corporate income tax rate of the U.S. and the other OECD countries increases. The underlying mechanism is fewer corporate profits being channeled into subsequent domestic investments when the U.S. tax rate is relatively higher, leading to lower economic growth. Our findings have implications for policy setters.
    Keywords: Taxes, economic growth, GDP, corporate profits, American Jobs Creation Act of 2004
    JEL: E20 H25 K34 O10 M40 M41
    Date: 2017–07
  7. By: Ross McKitrick (Department of Economics, University of Guelph, Guelph ON Canada)
    Abstract: This paper makes two contributions to the economics of pollution policy. First, many studies have looked at the effects of emission taxes in the absence of regulations and vice versa, but the implications for optimal tax design when one is layered on top of the other have been ignored, even though the practice is commonly observed. I develop a model of multiple polluting sectors capable of providing a tractable characterization of this case. Second, numerical modeling has shown that tax interactions can yield a positive damage threshold below which any emission tax is welfare-reducing even if marginal damages are positive, but this has largely been ignored in both the theoretical and policy literatures. I show that a positive damage threshold occurs when the policy is not revenue-raising and/or the rest of the tax system is not optimized, but can also occur in a second-best context with optimal taxes and full revenue-recycling, a result not previously shown. Introducing a pollution tax when one firm is already subject to an emissions constraint yields a positive damage threshold that goes up, the more the regulation distorts the income tax base. Hence, under more general conditions than have previously been realized, pollution taxes are not guaranteed to raise welfare even when marginal damages are positive and revenues are fully recycled.
    Keywords: emissions taxes, tax interactions, second-best, carbon taxes
    JEL: H21 H23 Q54 Q58
    Date: 2017
  8. By: Mark Duggan; Gopi Shah Goda; Emilie Jackson
    Abstract: The Affordable Care Act (ACA) includes several provisions designed to expand insurance coverage that also alter the tie between employment and health insurance. In this paper, we exploit variation across geographic areas in the potential impact of the ACA to estimate its effect on health insurance coverage and labor market outcomes in the first two years after the implementation of its main features. Our measures of potential ACA impact come from pre-existing population shares of uninsured individuals within income groups that were targeted by Medicaid expansions and federal subsidies for private health insurance, interacted with each state’s Medicaid expansion status. Our findings indicate that the majority of the increase in health insurance coverage since 2013 is due to the ACA and that areas in which the potential Medicaid and exchange enrollments were higher saw substantially larger increases in coverage. While labor market outcomes in the aggregate were not significantly affected, our results indicate that labor force participation reductions in areas with higher potential exchange enrollment were offset by increases in labor force participation in areas with higher potential Medicaid enrollment
    JEL: H31 H51 J18 J20 J38
    Date: 2017–07
  9. By: Kamal KASMAOUI; Othmane BOURHABA
    Abstract: The present study examines empirically the relationship between Happiness and public spending. We use a panel data from 2006 to 2015 for about 132 countries. We first estimated a Pooled, fixed effect and finally a GMM model to deal with the endogeneity problem. Our main findings suggest, first, that high levels of public expenditure are associated with greater Happiness around the world. Second, as expected, social support, Healthy life expectancy, Freedom to make life choices and confidence in national government contribute significantly to Happiness.
    Keywords: Happiness, Public choice, Government spending, GMM
    JEL: H11 H40 H50 I31
    Date: 2017–04
  10. By: Jonathan Gruber; Amalie Jensen; Henrik Kleven
    Abstract: Using linked housing and tax records from Denmark combined with a major reform of the mortgage interest deduction in the late 1980s, we carry out the first comprehensive long-term study of how tax subsidies affect housing decisions. The reform introduced a large and sharp reduction in the mortgage deduction for top-rate taxpayers, while reducing it much less or not at all for lower-rate taxpayers. We present three main findings. First, the mortgage deduction has a precisely estimated zero effect on homeownership. This holds even in the very long run. Second, the mortgage deduction has a sizeable impact on housing demand at the intensive margin, inducing homeowners to buy larger and more expensive houses. Third, the largest effect of the mortgage deduction is on household financial decisions, inducing them to increase indebtedness. These findings suggest that the mortgage interest deduction distorts the behavior of homeowners at the intensive margin, but is ineffective at promoting homeownership at the extensive margin and any externalities that may be associated with it.
    JEL: H24 H31
    Date: 2017–07
  11. By: Gitaru, Kelvin
    Abstract: Tax is a very important aspect in any country. Revenue collected from taxes enables a country to provide services for its citizens and also development of its economy. However, Kenya does not collect as much revenue as it should. SMEs in particular have the potential of generating a lot of revenue for the government but this is not the case. This poses a significant problem to the government and the country’s growth as a whole. Therefore, this study aimed at assessing the effect of taxpayer education on tax compliance in Kenya, the case of SMEs in Nairobi CBD. The study established the effect of electronic taxpayer education, print media tax payer education, and stakeholder engagement on tax compliance. The target population was SMEs in Nairobi CBD Tax area. The study object was SMEs conducting business within Nairobi CBD. Data was collected by administration of pretested questionnaires to the owners of SMEs business. Data was analyzed using both descriptive and inferential statistics. The nominal and ordinal data was collected using questionnaires and later subjected to quantitative analysis using Statistical Package for Social Sciences. Data was presented in the form of frequency distribution tables & graphs. The study results showed that indeed; electronic taxpayer education, print media tax payer education, and stakeholder engagement, influences tax compliance among SMEs in Nairobi’s CBD area. Correlation Matrix was done to determine the correlation between the independent variables. The results showed that stakeholder’s sensitization is positively related to the taxpayers’ education to correctly calculate the tax compliance, with a correlation coefficient of 0.810. The study recommended that; there was need to improve on tax compliance in SMEs because they are below average, through intensive tax. For SMEs to improve their tax compliances, those involved in their tax matters need knowledge and skills to interpret the various tax laws and regulations. Tax compliance procedures should be simplified because in most cases they are found to be very complicated by SMEs, especially for those who do not keep proper books of account and sometimes do not understand the tax laws in order to reduce the compliance costs in terms of money and time. Small and Medium Enterprises should be levied lower amounts of taxes. The government should consider increasing tax incentives and exemptions. Reduce compliance costs, curb corruption, and improve on accountability and accessibility of KRA services.
    Keywords: Taxpayer education,Tax compliance,SME.
    JEL: H25 H26
    Date: 2017–07–01

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