nep-pub New Economics Papers
on Public Finance
Issue of 2018‒02‒26
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Locally Optimal Three-Bracket Piecewise Linear Income Taxation By Alan Krause
  2. Revisiting Tax on Top Income By Ayse Imrohoroglu; Cagri S. Kumru; Arm Nakornthab
  3. Minimum Wage Policy with Optimal Taxes and Unemployment By Adam M. Lavecchia
  4. Loss carryover provisions: Measuring effects on tax symmetry and automatic stabilisation By Tibor Hanappi
  5. The Right Type of Legislator: A Theory of Taxation and Representation By Andrea Mattozzi; Erik Snowberg
  6. Tax evasion, testosterone and personality traits By Arbex, Marcelo; Carré, Justin M.; Geniole, Shawn N.; Mattos, Enlinson
  7. Tax Morale, Fiscal Capacity, and Wars By Alessandro Belmonte; Désirée Teobaldelli; Davide Ticchi
  8. Tax-Free Savings Accounts: Who uses them and how? By Adam M. Lavecchia

  1. By: Alan Krause
    Abstract: The aim of this paper is to examine the setting of income tax policy from the perspective faced by governments. The government takes the current income tax schedule as the starting point, and seeks to implement a small change in the tax schedule that is both feasible and desirable. If no such change is possible, the current income tax schedule is said to be locally optimal, because it cannot be improved upon via a small reform. We assume that the current income tax schedule is piecewise linear with three tax brackets, which approximates most real-world income tax schedules. The characteristics of locally-optimal piecewise linear income tax schedules are then derived, with particular attention paid to the extent to which they depart from linearity.
    Keywords: piecewise linear income taxation, tax reform
    JEL: H21 H24
    Date: 2018–02
  2. By: Ayse Imrohoroglu; Cagri S. Kumru; Arm Nakornthab
    Abstract: In this paper, we study optimal income taxation in a model with entrepreneurial activity. We conduct two types of changes in tax policy: changing the overall progressivity of taxes versus changing the tax rate of the richest 1% of the population. We study the implications of these tax policies on welfare, inequality, and government revenues. Our results indicate that increasing the overall progressivity of taxes results in lower wealth inequality and higher welfare relative to increasing the tax rate on the richest 1% of the population.
    Keywords: Entrepreneurship, taxation, progressivity, labor supply
    JEL: D31 E21 H2
    Date: 2018–02
  3. By: Adam M. Lavecchia (Department of Economics, University of Ottawa, Ottawa, ON)
    Abstract: This paper sheds new light on the desirability of the minimum wage in the presence of an optimal non-linear income tax. Using a search-and-matching framework, I derive a novel condition that links the desirability of the minimum wage to three sufficient statistics: (1) the macro or general equilibrium labor force participation response to the minimum wage by low-skilled individuals; (2) the macro employment response to the minimum wage for low-skilled individuals; and (3) the welfare weight on low-skilled workers. This condition shows that the minimum wage is welfare improving if it pushes the labor market tightness – the ratio of the aggregate number of vacancies to low-skilled job seekers – closer to its efficient level. Guided by the theory, I estimate the first two sufficient statistics using an event study design, as well as state and federal minimum wage variation between 1979-2014. I estimate a macro participation elasticity of -0.24 and a macro employment elasticity of -0.32. The former represents new evidence on a previously overlooked margin of the minimum wage. With these estimates in hand, I simulate the total welfare gains from introducing a minimum wage beginning from the optimal income tax allocation. The simulations show that the minimum wage is welfare improving only if the government has very strong redistributive tastes.
    Keywords: Minimum wage; Sufficient statistics; Optimal policy; Labor force participation
    JEL: H21 H23 J21 J38 J64
    Date: 2018
  4. By: Tibor Hanappi
    Abstract: Loss carryover provisions are an essential part of corporate tax systems. Economic theory suggests that perfect intertemporal loss offsets are a necessary condition for the neutrality of corporate taxation across investment projects with different risk profiles. However, in practice the tax treatment of losses does often not reach this standard, e.g., due to lack of inflation indexation or tax offset restrictions. Using detailed country-level information, this paper presents two tax policy indices capturing the effects of carryover provisions on tax symmetry and stabilisation across a total of 34 OECD and non-OECD countries. The tax symmetry index captures the effectiveness of carryover provisions, including carry-forwards and carry-backs, relative to full symmetry, while the stabilisation index captures the proportion of an adverse revenue shock on loss-making firms which is absorbed by the corporate tax system. The results show that only 18 countries provide unlimited carry-forwards and most countries do not index tax losses to inflation; only 9 countries provide carry-backs while 8 countries limit the amount of tax losses which can be offset in any given year. Cross-country comparison of the two indices suggests that these restrictions have significant impacts on tax symmetry and stabilisation. Perfect tax symmetry is not achieved by the majority of the included corporate tax systems thus implying possible tax-induced distortions towards less risky projects.
    JEL: G11 H21 H25
    Date: 2018–02–22
  5. By: Andrea Mattozzi; Erik Snowberg
    Abstract: We develop a theory of taxation and the distribution of government spending in a citizen-candidate model of legislatures. Individuals are heterogeneous in two dimensions: productive ability in the private sector and negotiating ability in politics. When these are positively correlated, rich voters always prefer a rich legislator, but poor voters face a trade-off. A rich legislator will secure more pork for the district, but will also prefer lower taxation than the poor voter. Our theory organizes a number of stylized facts across countries about taxation and redistribution, parties, and class representation in legislatures. We demonstrate that spending does not necessarily increase when the number of legislators increases, as the standard common-pool intuition suggests, and that many policies aimed at increasing descriptive representation may have the opposite effect.
    JEL: D72 D78 H10 H23
    Date: 2018–02
  6. By: Arbex, Marcelo; Carré, Justin M.; Geniole, Shawn N.; Mattos, Enlinson
    Abstract: High testosterone levels in men may inhibit tax evasion. From a laboratory experiment with 121 young men, we present suggestive evidence that putative markers of prenatal and pubertal testosterone exposure and some personality traits predict the decision of evading taxes. We also observe a sizable and negative, although weakly signi cant (at 10%), treatment e ect, controlling for individual characteristics, testosterone exposure markers, medication and drugs use. Reinforced by permutation tests for the treatment variable, a lower prevalence of tax evasion in the treated group is in line with recent results that suggest testosterone may increase prosocial or less sel sh behavior.
    Date: 2018–02
  7. By: Alessandro Belmonte (IMT School for advanced studies); Désirée Teobaldelli (University of Urbino); Davide Ticchi (Marche Polytechnic University)
    Abstract: This paper studies how mobilization for war motivates citizens to contribute to their own community and therefore help forming tax morale in a constituency. We derive a theoretical model to investigate government's decision to expand tax revenues from alternative sources, namely changing the country's culture of tax compliance or expanding fiscal capacity. Despite the two are initially substitute, we show how in equilibrium dynamic complementarity arises. Our mechanism exploits exogenous variation in the cost of tax morale formation, induced by an expected war (either internal or external) that makes easier for the government to mobilize the constituency. We motivate our theory through a novel cross-country analysis that uses information on war frequency, tax morale, and fiscal capacity. We additionally discuss some historical cases consistent with our mechanism.
    Keywords: tax morale, state capacity, external threat, civil wars, dynamic complementarity, culture and institutions
    JEL: P16 H11 H26 H41
    Date: 2018–02
  8. By: Adam M. Lavecchia (Department of Economics, University of Ottawa, Ottawa, ON)
    Abstract: This paper studies the savings effect of Canadian Tax-Free Savings Account (TFSAs) using microdata from the 2012 Survey of Financial Security. TFSA contributions are made with after-tax income, balances accumulate tax-free and withdrawals do not increase taxable income. The paper makes two important contributions. First, I characterize the profiles of TFSA owners, documenting new patterns in account ownership and balances. The age profile of TFSA ownership is U-shaped and balances are positively correlated with educational attainment and saving in other retirement accounts. Second, I develop a new instrumental variables strategy to estimate whether TFSA balances crowd-out saving in taxable financial assets and saving in traditional tax-deferred plans. The results suggest that TFSA balances crowd-out saving in taxable fixed income assets and have no statistically significant effect on balances in tax-deferred accounts.
    Keywords: Tax-preferred savings accounts; pre-paid versus post-paid; Tax-Free Savings Account;crowd-out
    JEL: H2 H31
    Date: 2018

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