nep-pub New Economics Papers
on Public Finance
Issue of 2017‒11‒05
fourteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Heterogeneity in Needs and Negative Marginal Tax Rates By Spencer Bastani; Sören Blomquist; Luca Micheletto
  2. How Do Entrepreneurial Portfolios Respond to Income Taxation? By Steiner, Viktor; Fossen, Frank; Rees, Ray; Rostam-Afschar, Davud
  3. The Tax Profession: Tax Avoidance and the Public Interest By AnnMarie Bennett; Breda Murphy
  4. Child Care Subsidies, Quality, and Optimal Income Taxation By Spencer Bastani; Sören Blomquist; Luca Micheletto
  5. Indirect Taxation of Financial Services By Vidar Christiansen
  6. Capital Taxation and Government Debt Policy with Public Discounting By Malte Rieth
  7. Until taxes do us part: tax penalties or bonuses and the marriage decision By F. Barigozzi; H. Cremer; K. Roeder
  8. Progressivity of Burden-Sharing in a Lindahl Equilibrium By Wolfgang Buchholz; Dirk Rübbelke
  9. The true art of the tax deal: Evidence of aid flows and bilateral double tax agreements By Braun, Julia; Zagler, Martin
  10. Banks in Tax Havens: First Evidence based on Country-by-Country Reporting By Vincent Bouvatier; Gunther Capelle; Anne-Laure Delatte
  11. Learning to Tax - Interjurisdictional Tax Competition under Incomplete Information By Johannes Becker; Ronald B. Davies
  12. Dynamic Scoring of Tax Reforms in the EU By Dolls, Mathias; Wittneben, Christian
  13. Do mergers of large local governments reduce expenditures? - Evidence from Germany using the synthetic control method By Roesel, Felix
  14. How Does Environmental Regulation Shape Economic Development? A Tax Competition Model of China. By Pedro Naso Author name: Tim Swanson

  1. By: Spencer Bastani; Sören Blomquist; Luca Micheletto
    Abstract: This paper highlights the possibility that negative marginal tax rates arise in an intensive-margin optimal income tax model where wages are exogenous and preferences are homogeneous, but where agents differ both in skills (labor market productivity) and their needs for a work-related consumption good.
    Keywords: nonlinear income taxation, negative marginal tax rates, heterogeneity in needs, redistribution
    JEL: H21
    Date: 2017
  2. By: Steiner, Viktor; Fossen, Frank; Rees, Ray; Rostam-Afschar, Davud
    Abstract: We investigate how comprehensive personal income taxes affect the portfolio share of personal wealth that entrepreneurs invest in their own business. Using detaild wealth information form waves 2002, 2007 and 2013 of the SOEP, 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.
    Date: 2017
  3. By: AnnMarie Bennett (Department of Economics, Finance and Accounting, Maynooth University.); Breda Murphy (DCU Business School)
    Abstract: Professions possess a service ideal orientation (Dillard 2008; Starr 1982; Toren 1975) and play an important role in the 'pursuit of public interest and the common good’ (Jennings et al. 1987, 3). This incorporates ‘serving the public’ or ‘protecting the public interest’ (Pierce 2007, 7). While there is no agreement on what the ‘public interest’ means or how to measure it (Baker 2005; Boseman 2007; Canning and O’Dwyer 2001; Dellaportas and Davenport 2008; Sikka et al.1989), salient suggestions include ‘the collective well-bring of the community of people and institutions the profession serves’ (Institute of Certified Public Accountants 2014) and ‘the net benefits derived for…all society’ (International Federation of Accountants (IFAC 2012, 1). However, in practice, professionals have contractual obligations to serve their clients. Several studies assert that earning potential in relation to technical expertise has established the ‘servicing of the client [as] the primary duty’ (Doyle et al. 2009, 188), and has placed profession’s ethical duties as a secondary consideration (Doyle 2015; Doyle et al. 2009; Shafer and Simmons 2008; Stuebs and Wilkinson 2010, 2014). Accordingly, practices ‘may foster a reduction in the level of ethical behaviour as advisers strive to obtain and retain clients’ (Doyle et al. 2009, 182). This illustrates the difficulty of being a professional with explicit covenant to serve the public interest in situations where there are considerable economic incentives to prioritise economic private interests (Canning and O’ Dwyer 2001; Carrington et al. 2013; Parker 1994; Spence and Carter 2014; Suddaby et al. 2009). Taxation is a vital resource for governments to achieve their public service agenda (ActionAid 2011; HM Revenue and Customs (HMRC) 2015; Isbister 1968) and is perceived as a significant cost by corporations (Freedman et al. 2009; Shafer and Simmons 2008; Sikka 2010). Tax avoidance and its adverse impact on public interest have come into sharp focus in recent years (Christensen and Murphy 2004; Dowling 2014; Freedman et al. 2009; Hasseldine and Morris 2013; Payne and Raiborn 2015). It erodes tax bases globally, leading to serious threats to tax revenues, tax sovereignty and tax fairness (OECD 2013) and reduces overall revenue intake for governments which could be used to facilitate public services and thereby promote the public interest (Keightley and Sherlock 2012). Fiscal pressures world-wide have directed attention to billions of euro of tax avoided annually by multinationals such as Apple, Google, Amazon, Facebook and Starbucks, and media reports in the United Kingdom (UK) have focused predominantly on the immorality of their actions (Independent 2016b; The Telegraph 2012). This has been reinforced by regulatory and political commentary which is similarly critical of certain tax arrangements (OECD 2008, 2013; The Financial Times 2016; The Guardian 2017; UK Committee of Public Accounts (UK PAC) 2013). Historically, the focus of attention has been on users of these tax avoidance schemes; however recent reports have highlighted a number of notable criticisms of the role of tax professionals (Financial Reporting Council (FRC) 2013a, 2015a; OECD 2008; UK PAC 2013; US Senate Permanent Subcommittee of Investigations 2003). Stakeholder theory is one of several theories proposed by Frecknall-Hughes and Kirchler (2015) to examine tax practices and the tax profession. We adopt this theory by reviewing key UK stakeholder expectations in relation to public interest. Given the expansiveness of the term ‘public interest’, we have selected to analyse the public interest dimension of tax avoidance. The paper applies the stakeholder framework introduced by Mitchell et al (1997), focusing on identification and salience of stakeholders with reference to power, urgency and legitimacy. We examine the high profile UK case of MG Rover (MGR). The MGR case was selected as it was the first ruling whereby the FRC, the independent regulator for the accounting profession in the UK, criticised the profession for failing to provide clarity with regard to acting in the public interest. The case highlights differing views with regard to the profession’s duty of care and public interest duty. It presses the profession to address this ambiguity. Taking some issues raised in the case and examining expectations of other key stakeholders, we review codes of conduct and guidance documents within the UK tax profession and Big Four professional firms to understand how stakeholders’ concerns regarding tax avoidance and the public interest are addressed by the profession. The paper is based on documentary research. Documents analysed include the FRC tribunal and appeal report on Deloitte and Touche (Deloitte) in respect of the MGR case, the Department for Business Innovation and Skills report on MGR, the UK tax profession and the Big Four firms’ codes of conduct, tax principles and guidance documents, UK PAC reports and media reports. For context, we also refer to newspaper articles, pertinent regulation and regulatory rulings, sourced from newspaper archives and pertinent webpages. Findings highlight heightened awareness of stakeholder perspectives within the UK tax profession and significant progress in responding to public interest responsibilities. The paper reports a shift in focus whereby the stakeholder concept is increasingly embedded within professional guidance. Mitchell et al.’s (1997) stakeholder salience model is used to identify influential stakeholders and analyse the pressures applied by them. The use of this model as a lens to interpret the tax profession’s response to public interest, in respect of the tax avoidance issue, is a key contribution. The paper is structured as follows. Section 2 details literature regarding the role of the tax profession, tax avoidance and its ethical dimension. Section 3 reviews the theoretical framing, namely stakeholder theory. Section 4 analyses the MGR case. Section 5 examines codes of conduct and key principles of professional tax bodies and large professional firms. Finally, Section 6 discusses the profession’s response and reports conclusions.
    Date: 2017
  4. By: Spencer Bastani; Sören Blomquist; Luca Micheletto
    Abstract: In this paper we examine the desirability of subsidizing child care expenditures in a model where parents can choose both the quantity and the quality of child care services they purchase in the market. Our vehicle of analysis is a Mirrleesian optimal tax framework where child care services not only enable parents to work, but also contribute to children’s formation of human capital. In addition, there are externalities related to the parents’ choice of child care arrangements for their offspring. Using a quantitative simulation model calibrated to the US economy, we evaluate the relative merits of some the most common forms of child care subsidies (tax deductions, tax credits, and opting-out public provision schemes) in terms of their effectiveness in alleviating the distortions associated with income taxation and increasing the quality of child care chosen by parents.
    Keywords: optimal income taxation, child care subsidies, tax deductibility, tax credit, public provision of private goods
    JEL: H21 H41
    Date: 2017
  5. By: Vidar Christiansen
    Abstract: An important question is whether VAT exemption of financial services is a desirable property or whether it is justified only due to practical and administrative necessity. This paper singles out a number of financial services for discussion of this issue in a context allowing for other taxes and other preexisting distortions. It discusses taxation of intermediation that facilitates savings and borrowing, payment services and currency exchange. It also elaborates on the distortionary effects of taxing intermediate goods due to VAT exemption with focus on exports and consumer prices.
    Keywords: financial services, indirect taxation, value added tax, VAT exemptions
    JEL: H20 H21 H22
    Date: 2017
  6. By: Malte Rieth
    Abstract: This paper characterizes capital taxation and public debt policy in a quantitative macroeconomic model with an impatient government and uncertainty. The government has access to linear taxes on capital and labor, and to non-state-contingent bonds. Government impatience generates positive and empirically realistic longrun levels of both capital taxes and public debt. Prior predictive analysis shows that the simulated model matches the distribution of both variables in a sample of 42 countries, alongside other statistics. The paper then presents econometric evidence that countries with higher political instability, used as an approximation of unobservable public discount rates, have both higher capital taxes and debt.
    Keywords: Fiscal policy, prior predictive analysis, political instability, macro panel, Ramsey optimal policy
    JEL: E62 H21 H63 C23
    Date: 2017
  7. By: F. Barigozzi; H. Cremer; K. Roeder
    Abstract: The tax regimes applied to couples in many countries including the US, France, and Germany imply either a marriage penalty or a marriage bonus. We study how they affect the decision to get married by considering two potential spouses who play a marriage proposal game. At the end of the game they may get married, live together without formal marriage, or split up. In this signaling game, proposing (or getting married) is costly but can indicate strong love. The striking property we obtain is that a marriage bonus may actually reduce the probability that a couple gets married. If the bonus is sufficiently large, the signaling mechanism breaks down, and only a pooling equilibrium in which fewer couples get married remains. Similarly, a marriage penalty may increase the marriage probability. Speciffically, the penalty may lead to a separating equilibrium with efficiency enhancing information transmission, which was otherwise not possible. Our results also imply that marriage decisions in the laissez-faire are not necessarily privately optimal. In some cases a bonus or a penalty may effiectively make the marriage decision more efficient; it may increase the number of efficient marriages that otherwise may not be concluded.
    JEL: J12 D82 H31
    Date: 2017–10
  8. By: Wolfgang Buchholz; Dirk Rübbelke
    Abstract: In this paper, we show that progressivity (regressivity) of burden sharing in a Lindahl equilibrium is a direct consequence of gross complementarity (substitutability) between the private and the public good when the public good is taken as the numéraire. We, moreover, link the respective conditions for gross complementarity to the more familiar ones in which the private good serves as the numéraire.
    Keywords: Lindahl equilibrium, progressive (regressive) burden sharing, complements and substitutes
    JEL: D63 H23 H41
    Date: 2017
  9. By: Braun, Julia; Zagler, Martin
    Abstract: Nash bargaining model shows that a deal is struck only if both countries mutually benefit. • The model predicts voluntary signature of asymmetric double tax agreements only if there is compensation for the capital importer. Empirical evidence indicates that foreign aid from the capital exporter to the capital importer increases on average by 6 million USD In the signature year of a double tax agreement
    JEL: H2
    Date: 2017
  10. By: Vincent Bouvatier; Gunther Capelle; Anne-Laure Delatte
    Abstract: Since the Great Financial Crisis, several scandals have exposed a pervasive light on banks' presence in tax havens. Taking advantage of a new database, this paper provides a quantitative assessment of the importance of tax havens in international banking activity. Using comprehensive individual country-by-country reporting from the largest banks in the European Union, we provide several new insights: 1) Tax havens attract large extra banking activity beyond the standard factors based on gravity equations; 2) For EU banks, the main tax havens are located within Europe: Luxembourg, Isle of Man and Guernsey rank at the top of the foreign affiliates; 3) Attractive low tax rates are not sufficient to drive extra activity; 4) High quality of governance is not a driver, but banks avoid countries with weakest governance; 5) Banks also avoid the most opaque countries; 6) The tax savings for EU banks is estimated between EUR 1 billion and EUR 3.6 billion.
    JEL: F3 G3 G21 H22 H3 L8
    Date: 2017–07
  11. By: Johannes Becker; Ronald B. Davies
    Abstract: How do countries compete for mobile tax base when they lack precise information on how tax rates affect the tax base? We present a multi-period version of a classic tax competition model in which countries set source-based taxes under incomplete information on the tax base elasticity. This information, however, improves as they observe both their own and their neighbours’ experiences. In contrast to the existing work on policy learning, we focus on learning in the presence of (fiscal) externalities. We show that, because learning can exacerbate this external-ity, the value of learning can be negative and, thus, learning may be too fast. Given that variance in tax policies enhances learning, this implies that, in the sequence of Markov perfect equilibria, tax rates can be too heterogeneous. Furthermore, we contribute to the empirical tax competition literature by showing that learning generates tax patterns that look as if countries react to each other even if there are no fiscal externalities. We conclude that the existing results typically taken as evidence of tax competition may be more nuanced than heretofore recognized.
    Keywords: social learning, policy diffusion, tax competition
    JEL: H25 H32 H87
    Date: 2017
  12. By: Dolls, Mathias; Wittneben, Christian
    Abstract: In this paper, we present a dynamic scoring analysis of tax reforms for EU countries, accounting for the feedback effects resulting from the adjustment in labour supply and economy-wide reaction to tax policy changes. We combine the microsimulation model EUROMOD incorporating an estimated labour supply model, with the new Keynesian DSGE model QUEST used by the European Commission. We illustrate the results obtained when scoring specific reforms in three EU Member States.
    Date: 2017
  13. By: Roesel, Felix
    Abstract: States merge local governments to achieve economies of scale. Little is known to which extent mergers of county-sized local governments reduce expenditures, and influence political outcomes. I use the synthetic control method to identify the effect of mergers of large local governments in Germany (districts) on public expenditures. In 2008, the German state of Saxony reduced the number of districts from 22 to 10. Average district population increased substantially from 113,000 to 290,000 inhabitants. I construct a synthetic counterfactual from states that did not merge districts for years. The results do neither show reductions in total expenditures, nor in expenditures for administration, education, and social care. There seems to be no scale effects in jurisdictions of more than 100,000 inhabitants. By contrast, I find evidence that mergers decreased the number of candidates and voter turnout in district elections while vote shares for populist right-wing parties increased.
    Keywords: Municipal mergers,Local government,Expenditures,Synthetic control method,Local elections,Voter turnout
    JEL: D72 H11 H72 R51
    Date: 2017
  14. By: Pedro Naso Author name: Tim Swanson
    Abstract: We propose a novel theoretical framework to study how environmental regulation shapes economic development in a developing country such as China. We develop a dynamic tax competition model in which local governments, located in development zones, use variation in taxes to attract workers to their jurisdictions. Their objective is to maximize tax revenue less local health costs that are proportional to local pollution. Our main result is that competition generates a reallocation of productive factors when national regulation is introduced. Local governments in more productive regions set greater production taxes than in other regions. This makes workers and output to shift from more to less developed regions of the country.
    Keywords: Tax competition; Asymmetric tax competition; Environment and Development
    JEL: H71 H72 Q56 O13
    Date: 2017–10–05

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