nep-pub New Economics Papers
on Public Finance
Issue of 2017‒11‒19
thirteen papers chosen by

  1. Optimal Income Taxation with Composition Effects By Laurence Jacquet; Etienne Lehmann
  2. The Rise and Future of Progressive Redistribution By Peter H. Lindert
  3. Taxation and Corporate Risk-Taking By Dominika Langenmayr; Rebecca Lester
  4. Tax incentives for research and development and their use in tax planning By Pfeiffer, Olena; Spengel, Christoph
  5. Tax loss offset restrictions and biased perception of risky investments By Mehrmann, Annika; Sureth-Sloane, Caren
  6. Will Corporate Tax Cuts Cause a Large Increase in Wages? By William R. Cline
  7. Tax Structure and Economic Growth: Do Differences in Income Level and Government Effectiveness Matter? By Halit Yanikkaya; Taner Turan
  8. Tax Morale and Policy Intervention By Nordblom, Katarina
  9. What are the drivers of tax complexity for multinational corporations? Evidence from 108 countries By Hoppe, Thomas; Schanz, Deborah; Sturm, Susann; Sureth-Sloane, Caren
  10. Taxes and Economic Growth in OECD Countries: A Meta-Regression Analysis By Alinaghi, Nazila; Reed, W. Robert
  11. Dynamic scoring of tax reforms in the European Union By Barrios, Salvador; Dolls, Mathias; Maftei, Anamaria; Peichl, Andreas; Riscado, Sara; Varga, Janos; Wittneben, Christian
  12. Tax Mimicking in Local Business Taxation: Quasi-experimental Evidence from Portugal By Mariana Lopes da Fonseca
  13. Rebalancing in China: a taxation approach By Damien Cubizol

  1. By: Laurence Jacquet; Etienne Lehmann
    Abstract: We study the optimal nonlinear income tax problem with multidimensional individual characteristics on which taxes cannot be conditioned. We obtain an optimal tax formula that generalizes the standard one by averaging, with specific weights, the sufficient statistics of individuals who earn the same income. Our first main contribution consists in showing that multidimensional heterogeneity brings a new source of endogeneity to the sufficient statistics that we call composition effects. We highlight that composition effects may substantially affect optimal marginal tax rates. Our results put the stress on the need for empirical studies on sufficient statistics for different demographic groups e.g., according to gender, age, ethnicity. As a second main contribution, we show the equivalence between the tax perturbation and mechanism design approaches which bridges the gap between both methods that have, so far, been used separately in the literature.
    Keywords: optimal taxation, multidimensional screening problems, tax perturbation, allocation perturbation, sufficient statistics
    Date: 2017
  2. By: Peter H. Lindert (University of California–Davis)
    Abstract: Starting from today’s collection of estimates of fiscal distribution within each of 53 countries, we can begin mapping a history of how redistribution has evolved historically, and to project some influences on its trends in the next few decades. There appears to have been a global shift toward progressive redistribution over the last hundred years in all prosperous countries. The retreats toward regressive redistribution have been rare and have been reversed. As a corollary, the rise in income inequality since the 1970s owes nothing to any retreat from progressive government spending. Adding the effects of rising subsidy for public education on the later inequality of adult earning power strongly suggests that a fuller, longer-run measure of fiscal incidence would reveal a history of still greater shift toward progressivity, most notably in Japan, Korea, andTaiwan. The key determinant of progressivity in the decades ahead is population aging, not inequality itself or immigration backlash.
    JEL: H22 H23 H24 N30
    Date: 2017–10
  3. By: Dominika Langenmayr; Rebecca Lester
    Abstract: We study whether the corporate tax system provides incentives for risky firm investment. We analytically and empirically show two main findings: first, risk-taking is positively related to the length of tax loss periods because the loss rules shift some risk to the government; and second, the tax rate has a positive effect on risk-taking for firms that expect to use losses, and a weak negative effect for those that cannot. Thus, the sign of the tax effect on risky investment hinges on firm-specific expectations of future loss recovery.
    Keywords: corporate taxation, risk-taking, net operating losses
    JEL: H25 H32 G32
    Date: 2017
  4. By: Pfeiffer, Olena; Spengel, Christoph
    Abstract: This study provides a comprehensive analysis of various aspects of R&D tax incentives. It explains the economic justification behind the state support of research and development and summarizes its main types. In addition, it gives an overview of the existing R&D tax incentives in Europe and provides a thorough review of the empirical literature on the outcomes of fiscal incentives. Furthermore, the Devereux and Griffith model is used to determine the effective tax burden of multinational firms that reside in countries which implement R&D tax support and countries which do not. The model is developed further following Spengel and Elschner (2010) and Evers et al. (2015) to reflect a potential use of R&D tax incentives by multinational firms for tax planning. The hypothesis developed in the model is tested in an empirical estimation, where we employ the OECD data on international co-operation in patents. According to our main findings, there are at least two reasons why input-oriented R&D tax incentives, such as tax credits and tax super-deductions, constitute a more suitable instrument for fostering research and development than the output-oriented incentives, such as IP Boxes. First, there is robust evidence found in the empirical literature which shows the positive effect introducing input-oriented tax incentives has on a firm's innovative activity, whereas studies on output-oriented tax incentives are not able to support this argument. Secondly, according to our theoretical and empirical analyses, output-oriented R&D tax incentives may be used by multinationals for tax planning as opposed to their intended use of fostering research and development.
    Keywords: research and development,R&D,tax planning,corporate taxation
    JEL: H25 F23 H26 H3
    Date: 2017
  5. By: Mehrmann, Annika; Sureth-Sloane, Caren
    Abstract: We investigate how tax loss offset restrictions affect an investor's evaluation of risky investments under bounded rationality. We analytically identify behavioral tax effects for different levels of loss offset restrictions, tax rate and prospect theoretical biases (loss aversion, probability weighting and reference dependence) and find tax loss offset restrictions significantly bias investor perception, even more heavily than the tax rate. If loss offset restrictions are rather generous, investors are very loss averse or assign a huge weight to loss probabilities, taxation is likely to increase the preference value of risky investments (behavioral tax paradox). Surprisingly, the identified significant perception biases of tax loss offset restrictions occur under both high and low tax rates and thus are relatively insensitive to tax rate changes. Finally, we identify huge differences in behavioral tax effects across countries indicating that tax loss offset restrictions crucially determine the perceived tax quality of a country for risky investments. Our analysis is relevant for policy makers discussing future tax reforms as well as for investors assessing risky investment opportunities.
    Keywords: asymmetric taxation,investment decisions,loss offset restrictions,perception bias,risktaking,tax effects,tax losses,prospect theory,behavioral taxation
    JEL: D81 D91 H21 H25
    Date: 2017
  6. By: William R. Cline (Peterson Institute for International Economics)
    Abstract: Proponents of lowering corporate taxes cite an estimate by the Trump administration’s Council of Economic Advisers (CEA) that cutting the corporate tax rate from 35 to 20 percent would raise average annual household income by $4,000 to $9,000, corresponding to an increase in wages ranging from 6 to 14 percent, respectively. The council’s conclusion is based on cross-country and cross-state statistical tests and are subject to weaknesses highlighted by Lawrence Summers and Jason Furman, among others. In contrast, Gregory Mankiw has pointed out that a simple aggregate production function approach could generate wage increases that substantially exceed the tax revenue loss. This Policy Brief examines the use of the production function approach and concludes that although Mankiw provides a useful reminder that a corporate tax cut could raise worker productivity and wages through its potential for providing more capital for labor to work with, the likely magnitudes of the gains are far smaller than the range claimed by the CEA.
    Date: 2017–11
  7. By: Halit Yanikkaya (Department of Economics, Gebze Technical University); Taner Turan (Department of Economics, Gebze Technical University)
    Abstract: We empirically examine the effects of both overall tax rate and changes in tax structure on growth by using data for more than 100 high, middle and lower income countries by employing the GMM estimation methods. We classify the countries by their income and their government effectiveness levels. We investigate whether the government effectiveness is important in affecting the nature of the relationship for non-OECD countries. Although there are some exceptions, our results don’t support the idea that overall tax rate or changes in tax structure have a significant effect on growth rate. We find that a shift from income to consumption and property taxes leads to a positive and significant effect on growth rate while holding overall tax burden constant. Our results also suggest that a shift from consumption and property taxes to income taxes has a positive effect on growth rate for low-income countries.
    Keywords: taxation, growth, tax structure, government effectiveness
    JEL: O23 O50
    Date: 2017–11–10
  8. By: Nordblom, Katarina (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: This paper deals with tax morale and how norms may evolve over time. The special focus is on buying black-market services. I apply mechanisms from social psychology to explain how personal norms may evolve due to one's own past behavior through self-signaling and due to conformity based on social interactions. These changes over time result in multiple equilibria, so that the economy can develop stronger social norms and less evasion over time, or weaker norms and more evasion in the long run. An economy on a trajectory toward the “bad” equilibrium may be permanently pushed onto a trajectory toward the “good” equilibrium by means of a suffciently strong temporary policy. Observations from a recent tax reform in Sweden strongly support the theory and suggest that other policies than enforcement may indeed be a powerful tool in inuencing both behavior and attitudes.
    Keywords: Social norms; Endogenous norms; Tax evasion; Self-signaling; Normative conformity.
    JEL: D91 H26
    Date: 2017–11
  9. By: Hoppe, Thomas; Schanz, Deborah; Sturm, Susann; Sureth-Sloane, Caren
    Abstract: All over the world, firms and governments are increasingly concerned about the rise in tax complexity. To manage it and develop effective simplification measures, detailed information on the current drivers of complexity is required. However, research on this topic is scarce. This is surprising as the latest developments - for example, triggered by the BEPS project - give rise to the conjecture that complexity drivers may have changed, thus questioning the findings of prior studies. In this paper, we shed light on this issue and provide a global picture of the current drivers of tax complexity that multinational corporations face based on a survey of 221 highly experienced tax practitioners from 108 countries. Our results show that prior complexity drivers of the tax code are still relevant, with details and changes of tax regulations being the two most influential complexity drivers. We also find evidence for new relevant complexity drivers emerging from different areas of the tax framework, such as inconsistent decisions among tax officers (tax audits) or retroactively applied tax law amendments (tax enactment). Based on the responses of the practitioners, we develop a concept of tax complexity that distinguishes two pillars, tax code and tax framework complexity, and illustrates the various aspects that should be considered when assessing the complexity of a country's tax system.
    Keywords: Complexity Drivers,International Comparison,Survey,Tax Complexity,Tax Practitioners
    JEL: H20 H25 C83 O57
    Date: 2017
  10. By: Alinaghi, Nazila; Reed, W. Robert
    Abstract: This paper uses meta-analysis to evaluate the results of 42 studies and 641 individual estimates of the effect of taxes on economic growth in OECD countries. Our analysis addresses a number of difficult coding issues such as: implications of the government budget constraint for interpretations of tax effects; units of measurement for economic growth rates and tax rates; implications of equation specifications that measure short-run, medium-run, and long-run effects; length of time period (annual data versus multi-year periods); and other factors. Our main findings are: Estimates in the literature are characterized by significant (negative) publication bias. Controlling for publication bias, we find that increases in unproductive expenditures funded by distortionary taxes and/or deficits have a significant, negative effect on growth; while increases in non-distortionary taxes to fund productive expenditures and/or government surpluses have a significant, positive effect. The estimated differences in these policies indicate that there is scope for tax policy to have a meaningful impact on economic growth. Finally, we find weak evidence that taxes on labour are more growth retarding than other types of taxes, while the evidence regarding other types of taxes is mixed.
    Keywords: Meta-analysis, Taxes, Economic growth, OECD,
    Date: 2017
  11. By: Barrios, Salvador; Dolls, Mathias; Maftei, Anamaria; Peichl, Andreas; Riscado, Sara; Varga, Janos; Wittneben, Christian
    Abstract: In this paper, we present the first dynamic scoring exercise linking a multi†country microsimulation and DSGE models for all countries of the European Union. We illustrate our novel methodology analysing a hypothetical tax reform for Belgium. We then evaluate real tax reforms in Italy and Poland. Our approach takes into account the feedback effects resulting from adjustments in the labor market and the economy†wide reaction to the tax policy changes. Our results suggest that accounting for the behavioral reaction and macroeconomic feedback to tax policy changes enriches the tax reforms' analysis, by increasing the accuracy of the direct fiscal and distributional impact assessment provided by the microsimulation model for the tax reforms considered. Our results are in line with previous dynamic scoring exercises, showing that most tax reforms entail relatively smaller feedback effects in terms of the labor tax revenues for tax cuts benefiting workers, compared with the ones granted to firms.
    Date: 2017–10–30
  12. By: Mariana Lopes da Fonseca
    Abstract: I exploit an exogenous reform introducing a local business tax in Portugal to study tax mimicking among jurisdictions. The identification strategy relies on a quasi-experimental difference-in-differences methodology and heterogeneity in treatment intensity. Results show evidence of significant short-run tax mimicking that decreases over time. I study possible generating processes underlying the strategic interaction among municipalities and find significant evidence of electoral concerns. These electoral concerns are not met with electoral consequences at the local elections, which may be behind the diffusion of local business taxation in the long run.
    Keywords: tax mimicking, yardstick competition, local reform
    JEL: D72 H71 H77
    Date: 2017
  13. By: Damien Cubizol (Univ Lyon, CNRS, GATE L-SE UMR 5824, F-69130 Ecully, France)
    Abstract: The rebalancing of the Chinese economy is analyzed through a heterogeneous taxation of various types of firms. Based on a two-country dynamic general equilibrium model, the paper applies tax reforms to raise consumption, reduce some firms' overinvestment and maintain a high level of welfare. To rebalance consumption and investment, taxation may allow reallocating a part of the labor force to firms that are not overinvesting. Moreover, the correction of distortions in production factor costs (capital and labor) is necessary during certain reforms applied in the model; that is, on the one hand, higher credit costs for State-Owned Enterprises (SOEs) and, on the other hand, a catch-up of foreign firms' wages by domestic firms (public and private). In this model, firms' credit cost is a key channel because it impacts both firms' investment and household consumption (through returns on savings). These consumption and investment reforms bring welfare benefits to households, and the results are close to direct welfare maximization. In this framework, the rebalancing of the domestic demand does not require the readjustment of the external financial position because the aggregate savings rate remains high and the supply of domestic assets is reduced. Finally, another theoretical framework proposes a heterogeneous taxation of consumption across home and foreign goods to enhance consumption.
    Keywords: The Chinese economy, tax reforms, financial intermediation, consumption, investment, welfare, foreign assets
    JEL: F20 F30 H20 H30 P20 P30
    Date: 2017

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