nep-pub New Economics Papers
on Public Finance
Issue of 2017‒08‒06
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Should Pollution Taxes be Targeted at Income Redistribution? By Bas B. Jacobs; Rick F. van der Ploeg
  2. Social Security's Financial Outlook: The 2017 Update in Perspective By Alicia H. Munnell
  3. Efficient Public Good Provision in Networks : Revisiting the Lindahl Solution By Anil K. Jain
  4. Taxation trends in the European Union: 2017 edition By European Commission
  5. Tax Audits as Scarecrows: Evidence from a Large-Scale Field Experiment By Marcelo L. Bérgolo; Rodrigo Ceni; Guillermo Cruces; Matias Giaccobasso; Ricardo Perez-Truglia
  6. More Giving or More Givers? The Effects of Tax Incentives on Charitable Donations in the UK By Almunia, Miguel; Lockwood, Ben; Scharf, Kimberley
  7. The Taxation of Recreational Marijuana: Evidence from Washington State By Benjamin Hansen; Keaton Miller; Caroline Weber
  8. The effect of tax harmonisation in the Southern African Development Community on Foreign Direct Investment By Michael Ade; Jannie Rossouw; Tendai Gwatidzo

  1. By: Bas B. Jacobs (Erasmus University Rotterdam, Tinbergen Institute and CESifo; Tinbergen Institute, The Netherlands); Rick F. van der Ploeg (University of Oxford, Tinbergen Institute, CEPR and CESifo)
    Abstract: This paper analyses optimal corrective taxation and optimal income redistribution. Under general utility functions, the Pigouvian pollution tax is higher if pollution damages disproportionally hurt the poor due to equity weighting of pollution damages. Moreover, optimal pollution taxes should be set below the Pigouvian tax if the poor spend a disproportionate fraction of their income on polluting goods. However, if preferences for commodities are of the Gorman (1961) polar form, optimal pollution taxes should follow the first-best rule for the Pigouvian corrective tax even if the government wants to redistribute income and the poor spend a disproportional part of their income on polluting goods. The often-used quasi-linear, CES and Stone-Geary utility functions all belong to the Gorman polar class. If preferences are Gorman polar, and if pollution taxes are not optimized, Pareto-improving green tax reforms exist that move the pollution tax closer to the Pigouvian tax. Simulations demonstrate that optimal corrective taxes should be Pigouvian if the demand for polluting goods is derived from a LES demand system, but deviate from the Pigouvian taxes if demand for polluting goods demand is derived from a PIGLOG demand system.
    Keywords: redistributive taxation; corrective pollution taxation; Gorman polar form; Stone-Geary preferences; PIGLOG preferences; green tax reform
    JEL: H21 H23 Q54
    Date: 2017–08–01
  2. By: Alicia H. Munnell
    Abstract: The 2017 Trustees Report repeats the drumbeat that the Social Security program faces a deficit over the next 75 years and that its Old-Age, Survivors and Disability Insurance (OASDI) trust fund is scheduled for exhaustion in the early 2030s. The size of the deficit and the timing of the exhaustion date changed very little from last year’s report. The 75-year deficit increased slightly from 2.66 percent to 2.83 percent of taxable payrolls, and the exhaustion date remained at 2034. This brief updates the numbers for 2017 and puts the current report in perspective. It also briefly summarizes two very different approaches to restoring balance to the program over the next 75 years, offered by Representatives Sam Johnson and John Larson. In addition, it looks at the implications of early versus later action. Finally, it discusses the continuing absence of replacement rate data from the Trustees Report. The bottom line remains the same. Social Security faces a manageable financing shortfall over the next 75 years, which should be addressed soon to share the burden more equitably across cohorts, restore confidence in the nation’s major retirement program, and give people time to adjust to needed changes.
    Date: 2017–07
  3. By: Anil K. Jain
    Abstract: The provision of public goods in developing countries is a central challenge. This paper studies a model where each agent’s effort provides heterogeneous benefits to the others, inducing a network of opportunities for favor-trading. We focus on a classical efficient benchmark – the Lindahl solution – that can be derived from a bargaining game. Does the optimistic assumption that agents use an efficient mechanism (rather than succumbing to the tragedy of the commons) imply incentives for efficient investment in the technology that is used to produce the public goods? To show that the answer is no in general, we give comparative statics of the Lindahl solution which have natural network interpretations. We then suggest some welfare-improving interventions.
    Keywords: Networks ; Public goods ; β-core ; Repeated games ; Coalitional deviations ; Institutions ; Centrality ; Lindahl equilibrium
    JEL: H41 O43 D60
    Date: 2017–07–28
  4. By: European Commission
    Abstract: This report contains a detailed statistical and economic analysis of the tax systems of the Member States of the European Union, plus Iceland and Norway, which are Members of the European Economic Area. The data are presented within a unified statistical framework (the ESA2010 harmonised system of national and regional accounts), which makes it possible to assess the heterogeneous national tax systems on a fully comparable basis.
    Keywords: European Union, taxation
    JEL: H23 H24 H25 H27 H71
    Date: 2017–07
  5. By: Marcelo L. Bérgolo; Rodrigo Ceni; Guillermo Cruces; Matias Giaccobasso; Ricardo Perez-Truglia
    Abstract: According to the canonical model of Allingham and Sandmo (1972), firms evade taxes by making a trade-off between a lower tax burden and higher expected penalties. However, there is still no consensus about whether real-world firms operate in this rational way. We conducted a large-scale field experiment, sending letters to over 20,000 firms that collectively pay over 200 million dollars in taxes per year. In our letters, we provided firms with exogenous but nondeceptive signals about key inputs for their evasion decisions, such as audit probabilities and penalty rates. We measure the effect of these signals on their subsequent perceptions about the auditing process, based on survey data, as well as on the actual taxes paid, according to administrative data. We find that firms do increase their tax compliance in response to information about audits. However, the patterns in these responses are inconsistent with utility maximization. The evidence suggests that, much like scarecrows frighten off birds, audits can be a significant deterrent for tax evaders even though they would be perceived as harmless by a rational optimizer.
    JEL: C93 H26 K42
    Date: 2017–07
  6. By: Almunia, Miguel; Lockwood, Ben; Scharf, Kimberley
    Abstract: This paper estimates the tax-price elasticity of giving using UK administrative tax return data, exploiting variation from a large tax reform. We estimate both the in- tensive and extensive-margin elasticity, using a novel instrumental variables strategy. Then, we derive new conditions to evaluate the welfare consequences of changes in the generosity of the subsidy to donations. We find a small intensive-margin elasticity of -0.2 and a substantial extensive-margin elasticity of -0.8, yielding a total elasticity of about -1. These estimates mask considerable heterogeneity: high-income individ- uals respond more on the intensive margin, while the extensive-margin response is stronger among low-income taxpayers.
    Keywords: Donations; Tax policy; Tax Subsidies for Giving
    JEL: D64 H24 H31
    Date: 2017–07
  7. By: Benjamin Hansen; Keaton Miller; Caroline Weber
    Abstract: The median United States voter supports the legalization of marijuana, at least in part due to a desire to increase state tax revenues. However, states with legal markets have implemented wildly different regulatory schemes with tax rates ranging from 3.75 to 37 percent, indicating that policy makers have a range of beliefs about industry responses to taxes and regulation. We examine a policy reform in Washington: a switch from a 25 percent gross receipts tax collected at every step in the supply chain to a sole 37 percent excise tax at retail. Using novel, comprehensive administrative data, we assess responses to the reform throughout the supply and consumption chain. We find the previous tax regime provided strong incentives for vertical integration. Tax invariance did not hold, with some types of firms benefiting much more than predicted. Consumers bear 44 percent of the additional retail tax burden. Finally, we find evidence that consumer demand for marijuana is price-inelastic in the short-run, but becomes price-elastic within a few weeks of a price increase.
    JEL: H2 H20 H21 H22 H23 H25 H26 H32 H71 I1 I18 K4
    Date: 2017–07
  8. By: Michael Ade; Jannie Rossouw; Tendai Gwatidzo
    Abstract: This paper investigates the effect of tax harmonisation on foreign direct investment (FDI) in the Southern African Development Community (SADC) region. Findings of a first attempt to investigate the linkage between taxation (tax rates and policy) and FDI (in all 15 countries), using an eclectic panel data modeling approach from 1990-2010 are presented. A new value added tax (VAT) harmonisation variable is introduced (in addition to a corporate income tax (CIT) harmonisation variable) via a tax policy harmonisation measure (TPHM) in the panel empirical investigation, complemented by a sensitivity analysis (using the extreme-bound analysis (EBA) technique) on the impact of taxation on FDI inflows to the SADC. The investigation shows that when errors in the regressors (for instance contemporaneous correlation, heteroskedasticity, cross-sectional dependence, endogeneity) are controlled for, tax harmonisation (amongst other contributing factors) does indeed have a significant causal relationship with FDI in the SADC. The study generally provides empirical evidence to support the argument for effectively using taxation towards higher FDI inflows in the region. Policy considerations towards improved tax harmonisation emanating from the paper include the need for individual SADC governments to promote national tax policies aimed at supporting regional tax harmonisation objectives, through strengthening existing tax agreements and treaties. This is necessary to reduce disparity in tax rates (including the definition of tax bases), improve existing level of tax co-movement, mitigate tax leakages and promote FDI inflows.
    Keywords: SADC, FDI and Tax Policy Harmonisation, Panel data, Cross-sectional dependence, Sensitivity analysis
    JEL: E60 F15 F21 H25 H27
    Date: 2017–07

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