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on Public Finance |
| By: | Karantounias, Anastasios G. (Federal Reserve Bank of Atlanta) |
| Abstract: | We study optimal time-consistent distortionary taxation when the repayment of government debt is not enforceable. The government taxes labor income or issues noncontingent debt in order to finance an exogenous stream of stochastic government expenditures. The government can repudiate its debt subject to some default costs, thereby introducing some state-contingency to debt. We are motivated by the fact that domestic sovereign default is an empirically relevant phenomenon, as Reinhart and Rogoff (2011) demonstrated. Optimal policy is characterized by two opposing incentives: an incentive to postpone taxes by issuing more debt for the future and an incentive to tax more currently in order to avoid punishing default premia. A generalized Euler equation (GEE) captures these two effects and determines the optimal back-loading or front-loading of tax distortions. |
| Keywords: | labor tax; sovereign default; Markov-perfect equilibrium; time-consistency; generalized Euler equation; long-term debt |
| JEL: | D52 E43 E62 H21 H63 |
| Date: | 2017–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2017-12&r=pub |
| By: | David Neumark; Peter Shirley |
| Abstract: | We use longitudinal data on marriage and children from the Panel Study of Income Dynamics to characterize women’s exposure to the federal and state Earned Income Tax Credit (EITC) during their first two decades of adulthood. We then use measures of this exposure to estimate the long-run effects of the EITC on women’s earnings as mature adults. We find some evidence indicating that exposure to a more generous EITC when women were unmarried and had young (pre-school) children leads to higher earnings and hours, and perhaps wages, in the longer run. We also find some evidence that exposure to a more generous EITC when women had young children but were married leads to lower earnings and hours in the longer run. These longer-run effects are to some extent consistent with what we would expect if the short-run effects of the EITC on employment that are documented in other work, and predicted by theory, are reflected in effects of the EITC on cumulative labor market experience (and other consequences of labor market attachment) that influence earnings. |
| JEL: | H24 H71 J18 J22 J24 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24114&r=pub |
| By: | Philippe Aghion; Ufuk Akcigit; Matthieu Lequien; Stefanie Stantcheva |
| Abstract: | We study how strongly individuals respond to tax simplicity and how they learn about the complexities of the tax system. We focus on the self-employed, who can more easily adjust to tax incentives and whose responses directly stem from their own understanding of the tax system. We use new French tax returns data from 1994 to 2012. France serves as a good quasi-laboratory: it has three fiscal regimes – or modes of taxation – for the self-employed, which differ in their monetary tax incentives and in their tax simplicity. Two key features are that, first, these regimes are subject to eligibility thresholds; we find large excess masses (bunching) right below the latter. Second, the regimes impact different agents heterogeneously and have changed extensively over time. Taken together, these two key elements give us measures of tax responses (the bunching) as well as the variation needed to jointly estimate a value of tax simplicity and taxable income elasticities. They also give us an opportunity to study how individuals learn about and respond over time to changing policy parameters. We estimate a large value for tax simplicity of up to 650 euros per year per individual depending on the regime and activity. We also find sizable costs of tax complexity; agents are not immediately able to understand what the right regime choice is, leave significant money on the table, and learn over time. The cost of complexity is “regressive” in that it affects mostly the uneducated, low income, and low skill agents. Agents who can be viewed as more informed and knowledgeable (e.g., the more educated or high-skilled) are more likely to make the correct regime choice and to learn faster. |
| JEL: | H21 H24 H25 H26 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24049&r=pub |
| By: | Arun Advani (Institute for Fiscal Studies); William Elming (Institute for Fiscal Studies and Institute for Fiscal Studies); Jonathan Shaw (Institute for Fiscal Studies and Turing Institute) |
| Abstract: | Understanding tax non-compliance and the effectiveness of strategies to tackle it is crucial for a modern tax authority. In this paper we study how and why audits impact reported tax in the years after audit - the dynamic effect - for individual income taxpayers. We exploit data from a random audit program covering almost 35,000 income tax self assessment returns in the UK. We show that audits raise reported tax liabilities for at least ve years after audit, with the magnitude of the impact declining over time. In total this raises an additional $1; 230 per audited individual in the fi ve years after audit, 1.5 times the direct revenue raised from the audit. Looking by income source, we see that the magnitude of the initial impact is lower for income components which are third party reported, and the impact declines more quickly for components that are more volatile. We develop a model to allow us to distinguish different mechanisms that might explain the presence of dynamic effects, and show our fi ndings can only be explained by audits providing improved information to the tax authority. |
| Keywords: | tax audits, tax revenue, tax reporting decisions, income tax, self assessment, HMRC |
| JEL: | D04 H26 H83 |
| Date: | 2017–10–26 |
| URL: | http://d.repec.org/n?u=RePEc:ifs:ifsewp:17/24&r=pub |
| By: | Ugo Troiano |
| Abstract: | Improving the efficiency of tax collection is important for development and fairness purposes. I study the Audit Exchange Information Agreements, which are agreements between the states and the U.S. federal government to exchange information about income tax audit plans and techniques, signed between the 1950s and the 1970s. Adopting an augmented difference-in-differences identification strategy, I show that the program increased state income tax revenues by about 15 percent. I show that mobility and the reported income do not appear to react to the policy, suggesting that the effects may be linked to higher quality auditing. The effects are stronger in places where there are more civic and social organizations, suggesting that tax compliance is higher when there is more cooperative gathering. |
| JEL: | H21 H26 H77 N92 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24153&r=pub |
| By: | Ugo Troiano |
| Abstract: | I present new quasi-experimental evidence on the relationship between tax policies and the distribution of income. I focus on the twentieth century United States, and on the personal income tax, since its inception. I study three major policy events that, as the existing literature shows, significantly raised the revenues from the income tax: the introduction of the state personal income tax, the introduction of tax withholding together with third-party reporting, and the intergovernmental agreements between the federal and state governments to coordinate tax auditing efforts. All the three policies were introduced in a staggered fashion and increased tax revenues, but had different fiscal consequences. Despite this, I find that income inequality raised after all the tax policy events. The result is robust to different measures of economic inequality and econometric specifications. |
| JEL: | D63 H23 N32 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24175&r=pub |
| By: | E. Mark Curtis; Ryan Decker |
| Abstract: | Entrepreneurship plays a vital role in the economy, yet there exists little well-identified research into the effects of taxes on startup activity. Using recently developed county-level data on startups, we examine the effect of states' corporate, personal and sales tax rates on new firm activity and test for cross-border spillovers in response to these policies. We find that new firm employment is negatively—and disproportionately—affected by corporate tax rates. We find little evidence of an effect of personal and sales taxes on entrepreneurial outcomes. Our results are robust to changes in the tax base and other state-level policies. |
| Keywords: | Labor supply and demand ; Entrepreneurship ; Firm dynamics ; Taxation |
| JEL: | L26 D22 H71 H25 J23 |
| Date: | 2018–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2018-03&r=pub |
| By: | Epstein, Gil S. (Bar-Ilan University); Gang, Ira N. (Rutgers University) |
| Abstract: | Governments do not have perfect information regarding constituent priorities and needs. This lack of knowledge opens the door for groups to lobby in order to affect the government's taxation levels. We examine the political economy of decentralized revenue-raising authority in light of social protection expenditures by constructing a theoretical model of hierarchical contests and comparing the implications of centralized with decentralized governance. Increasing information available to the government may generate additional expenditures by interest groups trying to affect government taxation decisions. We show the potential existence of a poverty trap as a result of decentralization in taxation decisions. |
| Keywords: | rentseeking, contests, economic models of political processes, decentralization, governance, intergovernmental relations |
| JEL: | H77 D72 H73 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp11148&r=pub |
| By: | Croce, Mariano (University of North Carolina at Chapel Hill,); Karantounias, Anastasios G. (Federal Reserve Bank of Atlanta); Raymond, Stephen (University of North Carolina at Chapel Hill); Schmid, Lukas (Duke University) |
| Abstract: | In times when elevated government debt raises concerns about dimmer global growth prospects, we ask: How can the government provide incentives for innovation in a fiscally sustainable way? We address this question by examining the Ramsey problem of finding optimal tax and subsidy schemes in a model in which growth is endogenously sustained by risky innovation. We characterize the shadow value of growth and entry in the innovation sector. We find that a profit tax is required to replicate the first-best in order to balance the externalities associated with innovative activity. At the second-best, the profit tax is designed to optimally respond to growth shocks above and beyond what is prescribed by the standard tax-smoothing incentives in economies with exogenous growth. The interplay of risk and innovation opens a new margin for optimal taxation. |
| Keywords: | innovation; R&D investment; endogenous growth; government debt; labor tax; subsidy; profit tax |
| JEL: | E32 E62 H21 H63 O3 |
| Date: | 2017–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2017-13&r=pub |
| By: | Rachel Griffith (Institute for Fiscal Studies and IFS and Manchester); Martin O'Connell (Institute for Fiscal Studies and Institute for Fiscal Studies); Kate Smith (Institute for Fiscal Studies and Institute for Fiscal Studies) |
| Abstract: | We study optimal corrective taxation in the alcohol market. Consumption generates negative externalities that are non-linear in the total amount of alcohol consumed. If tastes for products are heterogeneous and correlated with marginal externalities, then varying tax rates on different products can lead to welfare gains. We study this problem in an optimal tax framework and empirically for the UK alcohol market. Welfare gains from optimally varying rates are higher the more concentrated externalities are amongst heavy drinkers. A sufficient statistics approach is informative about the direction of reform, but not about optimal rates when externalities are highly concentrated. This is an updated version of previous working paper see here. |
| Keywords: | externality, corrective taxes, alcohol |
| JEL: | D12 D62 H21 H23 |
| Date: | 2017–12–11 |
| URL: | http://d.repec.org/n?u=RePEc:ifs:ifsewp:17/28&r=pub |