nep-pub New Economics Papers
on Public Finance
Issue of 2018‒04‒23
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Capital Taxation with Incomplete Markets and Schumpeterian Growth By Marco Cozzi
  2. On The Volume of Redistribution: Across Income Levels and Across Groups By Kanbur, Ravi
  3. Tax Competition - An intertemporal perspective By Nora Paulus; Patrice Pieretti; Benteng Zou
  4. Evaluating the Aggregate Effects of Tax and Benefit Reforms By Michal Horvath; Matus Senaj; Zuzana Siebertova; Norbert Svarda; Jana Valachyova
  5. Expenditure imputation and microsimulation of VAT By Zuzana Siebertova; Jana Valachyova; Norbert Svarda; Matus Senaj
  6. Should CBA’s include a correction for the marginal excess burden of taxation? By Frits Bos; Thomas van der Pol; Gerbert Romijn
  7. Optimal Taxation of Secondary Earners in the Netherlands: Has Equity Lost Ground? By Henk-Wim de Boer; Egbert Jongen; Patrick Koot

  1. By: Marco Cozzi (Department of Economics, University of Victoria)
    Abstract: This paper characterizes quantitatively the optimal capital income tax rate in an OLG economy with uninsurable income risk, incomplete markets and endogenous Schumpeterian growth. Contrary to the most recent literature, it is found that it is virtually never optimal to tax capital: under the optimal scheme, in a series of cases, the highest proportional tax rate on capital is found to be less than 0.2%. The reason for this result lies in the reduced GDP (and wage) growth rate stemming from a higher capital tax rate. In General Equilibrium, the interest rate rises, and the increased cost of capital reduces the endogenous rate of innovation, leading to a negative response of the growth rate. Although the equilibrium effect on the growth rate is found to be quantitatively modest (approximately half a percentage point), it still has a first order consequence on welfare. The results show that moving to the optimal income tax schedule entails large welfare gains, approximately 5% in consumption equivalent. The results are robust along a number of dimensions, including the specification of preferences. An alternative formulation of the utility function,taken from a class consistent with a Balanced Growth Path, is calibrated to obtain an empirically plausible value for the Frisch elasticity of 0.5, and confirms all the results, both qualitatively and quantitatively. JEL Classification: D15, E21, H21, O41
    Keywords: Capital and Income Taxation, Heterogeneous Agents, Incomplete Markets,Endogenous Growth, Welfare.
    Date: 2018–04–17
  2. By: Kanbur, Ravi
    Abstract: The optimal income taxation literature focuses on the tradeoff between the equity gains of higher progressivity versus its greater incentive costs at the individual level. This paper highlights a neglected aspect of redistribution-greater progressivity requires a higher volume of gross redistributive flows, across income levels. If these flows are costly to manage, administratively or politically, then progressivity will be lower. Moreover if redistribution across income levels implies redistribution across socio-politically salient groups because of the way in which these groups line up relative to the income distribution, this can be an added cost in the objective function and progressivity is further disadvantaged. The paper develops a simple framework in which these questions can be addressed. Among the many interesting results is that when the capacity for the volume of redistributive flows, across income levels or across socio-political groups, is reached, an increase in market inequality can lead to a fall in progressivity in the tax-transfer regime without any change in the government's preferences for equity. A focus on the volume of redistribution thus opens up an important set of theoretical and empirical questions for analysis and for policy.
    Date: 2018–03
  3. By: Nora Paulus (CREA, Université du Luxembourg); Patrice Pieretti (CREA, Université du Luxembourg); Benteng Zou (CREA, Université du Luxembourg)
    Abstract: The paper focuses on intertemporal tax competition between jurisdictions that differ in size. Given that the existing literature is mainly based on static models, it is in- teresting to investigate which new insights tax competition in an intertemporal setting may provide. In this respect, how does the fact that agents anticipate possible future changes, once they moved capital abroad, modify their behavior and the tax policy of the competing jurisdictions? Does tax competition become more intense? Are capital outflows and tax losses incurred by high tax jurisdictions exacerbated ? To answer these questions, we assume that a small and a large country compete for internationally mobile capital within a two-period model. We demonstrate that tax competition is less fierce in an intertemporal setting relative to a static one. It also appears that the tax loss of the large country induced by tax competition is higher relative to a static model. This means that tax competition becomes more deleterious for the country that suffers from capital outflows.
    Keywords: Intertemporal tax competition, Mobile capital, Home attachment, Country size asymmetry
    JEL: F21 H21 H73
    Date: 2018
  4. By: Michal Horvath (University of York); Matus Senaj (Council for Budget Responsibility); Zuzana Siebertova (Council for Budget Responsibility); Norbert Svarda (Council for Budget Responsibility); Jana Valachyova (Council for Budget Responsibility)
    Abstract: The paper introduces a new way of linking microsimulation models with dynamic general equilibrium frameworks to obtain an evaluation of the impact of detailed tax and benefit measures on the aggregate economy. The approach involving polynomial approximation to aggregated output from behavioural microsimulation permits the solution for the long-run steady state and the transition path in one numerical simulation of the dynamic aggregate economy. The practical usefulness of the approach is demonstrated by evaluating actual and hypothetical tax reforms in the context of Slovakia.
    Keywords: microsimulation, dynamic general equilibrium, unemployment, labour supply elasticity, tax reform
    JEL: E24 H24 H31 J22
    Date: 2018–04
  5. By: Zuzana Siebertova (Council for Budget Responsibility); Jana Valachyova (Council for Budget Responsibility); Norbert Svarda (Council for Budget Responsibility); Matus Senaj (Council for Budget Responsibility)
    Abstract: In this paper, we document the development process of the microsimulation model for the analysis of the indirect value-added tax liabilities of households in Slovakia. This simulation module can be directly integrated into the framework of SIMTASK, the Slovak microsimulation model of income taxes, health and social security contributions and transfers. In the first step, a combined micro-level dataset that integrates information on disposable income and expenditures of Slovak households has been created. Households’ expenditures reported in HBS dataset have been imputed to SK-SILC dataset by estimating parametric Engel curves. Validation of the imputation procedure of households’ consumption and simulation of VAT has been discussed.
    Keywords: value added tax, tax and transfer system, income distribution, microsimulation
    JEL: C81 D12 D31 H31
    Date: 2018–03
  6. By: Frits Bos (CPB Netherlands Bureau for Economic Policy Analysis); Thomas van der Pol (CPB Netherlands Bureau for Economic Policy Analysis); Gerbert Romijn (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: According to economic theory, taxation drives a wedge between private and public benefits, which distorts labour supply, consumption and investment and leads to loss of welfare. One would therefore expect that in cost-benefit analysis (CBA) of public expenditure a correction is made for the costs of taxation, i.e. for the marginal excess burden of taxation (MEB). However, looking at CBA practice all over the world, textbooks on CBA and various specific CBA guidelines no consensus exists about such a correction. This paper provides for the first time an overview of the theoretical, empirical and practical arguments in favor or against a MEB correction. It argues that in general the best approach for CBA’s is to assume that the MEB is broadly counterbalanced by the benefits of redistribution of these taxes. This assumption is consistent with the preferences for equality in a country’s current tax system and is a simple, pragmatic and politically neutral assumption. This assumption does not imply that the tax system is optimal or that CBA’s should be distributionally weighted. As a consequence, the preferred approach is to assume in general that the marginal cost of public funds is equal to one and then no correction is needed in CBAs for the MEB. Choosing an alternative source of financing, i.e. other than general tax revenues, should be regarded as a separate policy measure that should be analysed separately in a CBA.
    JEL: D61 H20 H43
    Date: 2018–01
  7. By: Henk-Wim de Boer (CPB Netherlands Bureau for Economic Policy Analysis); Egbert Jongen (CPB Netherlands Bureau for Economic Policy Analysis); Patrick Koot (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: The Netherlands witnessed major reforms in the taxation of (potential) secondary earners over the past decade. Using the inverse-optimal method of optimal taxation we recover the implicit social welfare weights of single- and dual-earner couples over time. The social welfare weights are grosso modo well-behaved before the reforms. However, after the reforms, they are no longer monotonically declining in income and sometimes negative, suggesting that Pareto-improving reforms are possible. Taken at face value, these results suggest an imbalance between equity and efficiency. However, other considerations may rationalize these fi ndings, like differences in preferences over formal income and informal care.
    JEL: C63 H21 H31
    Date: 2018–02

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