nep-pub New Economics Papers
on Public Finance
Issue of 2018‒03‒12
eleven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Taxes on Capital in the OLG Model with Uninsurable Idiosyncratic Income Risk By Krueger, Dirk; Ludwig, Alexander
  2. Debt Sustainability and Welfare along an Optimal Laffer Curve By Xiaoshan Chen; Campbell Leith; Matta Ricci
  3. Welfare State and Taxation. The Critical Point of Freedom Between Gift and Corruption. By Silvestri, Paolo
  4. Corruption, Taxation, and Tax Evasion By James Alm; Yongzheng Liu
  5. A Revisit to the Annuity Role of Estate Tax By Monisankar Bishnu; Nick L Guo; Cagri Kumru
  6. Learning to save tax-efficiently: Tax misperceptions and the effect of informational tax nudges on retirement savings By Blaufus, Kay; Milde, Michael
  7. The Housing Crisis, Foreclosures, and Local Tax Revenues By James Alm; J. Sebastian Leguizamon
  8. Tax and Corruption: A Global Perspective By Chris Evans; Richard Krever; James Alm
  9. Assisting Developing Countries in Taxation after the OECD’s BEPS Reports: A Suggested Approach for the Donor Community By Durst, Michael
  10. Is there an optimal size for local governments? A spatial panel data model approach. By Miriam Hortas-Rico; Vicente Ríos
  11. What are the Costs of a New Tax Administration? The Case of a Personal Income Tax in Kuwait By James Alm

  1. By: Krueger, Dirk; Ludwig, Alexander
    Abstract: We characterize the optimal linear tax on capital in an Overlapping Generations model with two period lived households facing uninsurable idiosyncratic labor income risk. The Ramsey government internalizes the general equilibrium feedback of private precautionary saving. For logarithmic utility our full analytical solution of the Ramsey problem shows that the optimal aggregate saving rate is independent of income risk. The optimal time-invariant tax on capital is increasing in income risk. Its sign depends on the extent of risk and on the Pareto weight of future generations. If the Ramsey tax rate that maximizes steady state utility is positive, then implementing this tax rate permanently generates a Pareto-improving transition even if the initial equilibrium is dynamically efficient. We generalize our results to Epstein-Zin-Weil utility and show that the optimal steady state saving rate is increasing in income risk if and only if the intertemporal elasticity of substitution is smaller than 1.
    Keywords: Idiosyncratic Risk; Overlapping Generations; precautionary saving; Taxation of Capital
    JEL: E21 H21 H31
    Date: 2018–02
  2. By: Xiaoshan Chen; Campbell Leith; Matta Ricci
    Abstract: A recent literature on sovereign debt sustainability (see Trabandt and Uhlig (2011) and Mendoza et al. (2014)) has produced Laffer curve calculations for Eurozone countries. These calculations have been car- ried out mainly in a quasi-static fashion by considering policy experi- ments where individual tax rates are permanently set at a new value while keeping all others constant. However, such fiscal policy design disregards complementarities among tax instruments as well as the po- tential for altering tax rates during the transition to the steady-state in a manner which exploits expectations. Our paper addresses this issue by considering policy experiments where fiscal policy is set op- timally and fiscal instruments are jointly varied along the transition to steady-state. Through the Ramsey problem we map the maximum amount of tax revenues a government can further raise to the welfare costs of the associated tax distortions. We label this relation as the ‘optimal Laffer curve’. We show that tax revenue and welfare gains relative to the policy experiments examined by the previous literature are dramatic.
    Keywords: Laffer Curve, Optimal Policy, Fiscal Sustainability, Fis- cal Limit, Fiscal Consolidations
    JEL: E62 H30 H60
    Date: 2018–01
  3. By: Silvestri, Paolo (University of Turin)
    Abstract: Can taxation and the redistribution of wealth through the welfare state be conceived as a modern system of circulation of the gift? But once such a gift is institutionalized, regulated and sanctioned through legal mechanisms, does it not risk being perverted or corrupted, and/or not leaving room for genuinely altruistic motives? In this paper I will develop two interrelated arguments. 1) The way these problems are posed as well as the standard answers to them are: a) subject to fallacies: the dichotomy fallacy and the fallacy of composition; b) too reductive and simplistic: we should at least try to clarify what kind of ‘gift’ or ‘corruption’ we are thinking about, and who or what the ‘giver’, the ‘corrupter’, the ‘receiver’ and/or the ‘corrupted’ party are. 2) The answers to these problems cannot be found by merely following a theoretical approach, nor can they be merely based on empirical evidence; instead, they need to take into account the forever troublesome, ambiguous and unpredictable matter of human freedom. To explain the standard answers to the abovementioned questions as well as their implications I will first re-examine two opposing positions assumed here as paradigmatic examples of other similar positions: on the one hand, Titmuss’ work and the never-ending debate about it; on the other, Godbout’s position, in-so-far as it shows how Titmuss’ arguments can easily be turned upside down. I will then introduce and reinterpret Einaudi’s “critical point” theory as a more complex and richer anthropological explanation of the problems and answers considered herein.
    Date: 2018–02
  4. By: James Alm (Department of Economics, Tulane University); Yongzheng Liu (School of Finance, Renmin University of China)
    Abstract: In this paper, we examine the relationships between corruption, taxation, and tax evasion. We examine three specific questions. First, on a general level, what do simple empirical analyses suggest about some of the causes and the consequences of corruption? Second, on a more specific level, what do similar empirical analyses indicate about the relationship between corruption and taxation? Third, on an even more specific level, what is the relationship between corruption, taxation, and tax evasion? We conclude with a discussion of how this evidence can be used to control corruption, making use of a different if related body of work on tax evasion.
    Keywords: Corruption, tax evasion, behavioral economics, controlled field experiments, laboratory experiments
    JEL: H2 H26 D73
    Date: 2018–03
  5. By: Monisankar Bishnu; Nick L Guo; Cagri Kumru
    Abstract: This paper finds that previous conclusions that a uniform lump-sum estate tax could provide annuity income were reached by not including the bequest income that households receive. We argue that since agents leave behind bequest, they should also receive bequest income from their parents. Moreover, the differential timing and sizes of bequest income will generate unequal wealth effects even with the actuarially fair annuity markets. To restore the first best allocations, the government has to adopt an estate tax regime that is no longer uniform: the estate would depend on both the timing and sizes of bequests that households receive. Thus the uniform estate tax no longer bears the annuity role. The paper reemphasizes the importance of accounting for bequest income received by households in any model that discusses intergenerational transfers and related policies.
    Keywords: Estate Tax, Annuity; Social Security
    JEL: E62 H21
    Date: 2018–02
  6. By: Blaufus, Kay; Milde, Michael
    Abstract: Using a series of laboratory experiments, this paper studies the effect of tax misperceptions on retirement savings and examines whether informational tax nudges and changing the form of the tax subsidy promote tax-efficient savings behavior. We find that deferred pension taxation results in after-tax pensions that are approximately 25% lower compared to an economically equivalent immediate pension tax system. This indicates substantial tax misperceptions. For subjects with low tax and financial knowledge, these misperceptions remain stable even if they have gained experience. Only if we provide subjects with recurrent numerical informational nudges on tax refunds, together with numerical informational nudges on future pension taxes, do tax distortions disappear for all subjects. Regarding the form of the tax subsidy, we demonstrate that replacing the tax deductibility of retirement savings with matching contributions increases tax-efficiency without the need to provide informational tax nudges.
    Keywords: Pension Taxation,Tax Misperception,Learning Behavior,Informational Tax Nudges,Matching Contribution
    JEL: D91 H20 H30
    Date: 2018
  7. By: James Alm (Department of Economics, Tulane University); J. Sebastian Leguizamon (Western Kentucky University)
    Abstract: The housing crisis that began with the "Great Recession" led to a dramatic increase in home foreclosures, and these foreclosures likely had subsequent impacts on local government tax revenues. We investigate the impacts of foreclosures on local government tax revenues, using a reduced form estimation approach that relates changes in foreclosures to changes in local government tax revenues. Unlike most previous work, we examine the nationwide revenue impacts of foreclosures, using data across all local governments in the entire United States during the worst years of the Great Recession. We also examine the impacts of foreclosures on other local government sources of revenues beyond property tax revenues, including revenue sources that were likely affected by the impacts of foreclosures both on household wealth and on other forms of economic activity. Further, we focus in some specifications on the revenue effects for school districts only. Finally, we extend our analysis to the impacts of foreclosures on state governments revenues (and expenditures). Throughout, we use an instrumental variable approach to control for possible endogeneity of foreclosures and housing prices. Overall, we find evidence that the foreclosures created by the Great Recession had a direct, negative, but small effect on total tax revenues at the local level, although there is only weak evidence that this impact can be attributed to declines in local property taxes. However, we find that foreclosures had an indirect and negative impact on local governments via declines in state government funding. We suggest that foreclosures may have affected the real economy, thereby reducing the state government revenues dependent on real economic activity that were used to finance transfers to local governments.
    Keywords: Foreclosures, property taxation, local government, intergovernmental transfers
    JEL: H2 H7 R3 R5
    Date: 2018–03
  8. By: Chris Evans (UNSW Sydney and University of Pretoria;); Richard Krever (University of Western Australia); James Alm (Department of Economics, Tulane University)
    Abstract: This paper summarizes the discussion and the lessons at two recent conferences on corruption.
    Keywords: Corruption; taxation; tax compliance
    JEL: H2 H26 D73
    Date: 2018–03
  9. By: Durst, Michael
    Abstract: developing country taxation; base erosion and profit shifting; corporate taxation.
    Keywords: Finance,
    Date: 2017
  10. By: Miriam Hortas-Rico; Vicente Ríos
    Abstract: The paper presents a framework for determining the optimal size of local jurisdictions. To that aim, we first develop a theoretical model of cost eficiency that takes into account spatial interactions and spillover effects among neighbouring jurisdictions. The model solution leads to a Spatial Durbin panel data specification of local spending as a non-linear function of population size. The model is tested using local data over the 2003-2011 period for two aggregate (total and current) and four disaggregate measures of spending. The empirical findings suggest a U-shaped relationship between population size and the costs of providing public services that varies depending on (i) the public service provided and (ii) the geographical heterogeneity of the territory.
    Keywords: Optimal Government Size, Spatial Panels, Spanish Municipalities.
    JEL: H11 H72 H77 R12
    Date: 2018–02
  11. By: James Alm (Department of Economics, Tulane University)
    Abstract: This paper assesses the viability of introducing a new personal income tax (PIT), focusing on the administrative costs of new tax. I first present a methodology for calculating the one-time start-up costs and the ongoing administrative costs of a new PIT. I then apply this methodology to the specific case of Kuwait. I estimate that the first-year total administrative costs of a new PIT tax administration in Kuwait range from Kuwaiti dinars (KWD) 46.8 million to KWD 90.9 million (or from USD 154.4 million to USD 300.0 million), depending on how the construction costs are financed. However, after the initial construction costs are incurred, I find that the annual total administrative costs of a PIT fall significantly to about KWD 50 million (or about USD 164 million), regardless of specific financing methods, and then rise at an annual rate of less than 6 percent per year to reach KWD 82.0 million (or USD 270.6 million) by year 2020, driven mainly by labor force growth. I also estimate that the likely revenues of a new PIT far exceed these administrative costs, even if the PIT is imposed at low rates.
    Keywords: Public administration, tax administration, administrative costs.
    JEL: H2 H5 H83
    Date: 2018–03

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