nep-pub New Economics Papers
on Public Finance
Issue of 2018‒05‒07
fifteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Labor income taxation in open economies: current trends and options for reforms By Sokolovska, Olena
  2. Corporate Taxes, Patent Shifting and Anti-Avoidance Rules: Empirical Evidence By Martina Baumann; Tobias Böhm; Bodo Knoll; Nadine Riedel
  3. Does Tax Evasion Affect Economic Crime? By Amedeo Argentiero; Bruno Chiarini; Elisabetta Marzano
  4. Wealth Taxation, Non-listed Firms, and the Risk of Entrepreneurial Investment By Schindler, Dirk
  5. Social norms and tax compliance: Experiments and theory By López Pérez, Raúl; Ramírez Zamudio, Aldo.
  6. Commitment to pay taxes: Results from field and laboratory experiments By Koessler, Ann-Kathrin; Torgler, Benno; Feld, Lars P.; Frey, Bruno S.
  7. Increasing tax transparency: Investor reactions to the country-by-country reporting requirement for EU financial institutions By Dutt, Verena K.; Ludwig, Christopher A.; Nicolay, Katharina; Vay, Heiko; Voget, Johannes
  8. The effects of official and unofficial information on tax compliance By Filomena Garcia; Luca David Opromolla; Andrea Vezzulli; Rafael Marques
  9. Idiosyncratic risk, aggregate risk, and the welfare effects of social security By Harenberg, Daniel; Ludwig, Alexander
  10. Tax Federalism and Cooperative Games: Value Approach By Emilio Calvo
  11. Do US Firms Pay Less Tax than their European Peers? On Firm Characteristics, Profit Shifting Opportunities, and Tax Legislation as Determinants of Tax Differentials By Michael Overesch; Sabine Schenkelberg; Georg Wamser
  12. Government Size, Unemployment, and Inflation Nexus in Eight Large Emerging Market Economies By António Afonso; Huseyin Sen; Ayse Kaya
  13. Tax Enforcement and Tax Policy: Evidence on Taxpayer Responses to EITC Correspondence Audits By John Guyton; Kara Leibel; Dayanand S. Manoli; Ankur Patel; Mark Payne; Brenda Schafer
  14. How Should Capital Be Taxed? Theory and Evidence from Sweden By Bastani, Spencer; Waldenström, Daniel
  15. The impact of Taxation on Economic Growth in South Africa By Dladla, Khumbuzile; Khobai, Hlalefang

  1. By: Sokolovska, Olena
    Abstract: We analyze both the theoretical framework of labor taxation in the open economy and important current reforms of labor taxation in countries worldwide including the introduction of “social VAT”. The current tax theory considers the reforms of labor income taxation related to the shifting of taxation from more mobile tax bases to the less mobile ones, taking into consideration the reduction of tax rates with simultaneous broadening of the tax base. Such a reform is intended to reduce the distortion effects of taxation, and, as a consequence, to reduce the tax burden on labor. The empirical section includes analysis of indicators of labor income taxation in OECD countries. We calculated the progressivity index of overall tax wedge and its components – personal income tax, employer’s and employee’s social security contributions. The results enabled cross-country comparisons: we found that in a most OECD members both employees’ and employers’ social security contributions systems are regressive or flat, while personal income tax systems are progressive in all countries except Hungary with flat tax schedule. Moreover, in OECD countries with highest GDP per capita the employees bear average labor tax burden with simultaneously low employers’ social security contributions rates.
    Keywords: personal income tax; social security contributions; consumption tax; social VAT; progressivity
    JEL: E20 H22 H24 P51
    Date: 2018–03
  2. By: Martina Baumann; Tobias Böhm; Bodo Knoll; Nadine Riedel
    Abstract: We empirically assess international corporate tax avoidance by strategic location of innovative output. The analysis draws on the universe of patent applications to the European Patent Office linked with data on multinational entities (MNEs) in Europe. Four findings emerge: Firstly, patent holdings are distorted towards low-tax countries. Secondly, patent location in low-tax countries is correlated with a geographic separation of R&D output and input. Thirdly, MNEs systematically sort high-value (low-value) patents to low-tax (high-tax) countries. Fourthly, the propensity to locate patent ownership in low-tax countries is significantly decreased if controlled foreign company rules are enacted in the MNE’s parent country. The tightening of transfer pricing legislations, in turn, exerts a weak negative effect on the location of patent ownership only.
    Keywords: corporate patents, patent taxation, profit shifting, anti-avoidance rules
    JEL: H30 H70 J50
    Date: 2018
  3. By: Amedeo Argentiero; Bruno Chiarini; Elisabetta Marzano
    Abstract: This paper examines the impact of tax evasion on criminal activities in Italy. Specifically, we consider three types of crime that are related to economic determinants: property crimes (including robbery, theft and car theft), fraud and usury. We estimate a dynamic panel using annual data from the Italian provinces (NUTS-3) for the 2006-2010 period and show that tax evasion positively affects economic crimes. Notably, the elasticity of tax evasion to fraud is related to the size of the tax burden; in addition, these crimes demonstrate different levels of persistence over time, reflecting different adjustment costs. Finally, we find that property crimes, fraud and usury are not influenced by deterrence or clearing-up variables.
    Keywords: property crime, usury, fraud, tax evasion, deterrence effect
    JEL: C33 H26 K42
    Date: 2018
  4. By: Schindler, Dirk (Dept. of Accounting, Auditing and Law, Norwegian School of Economics)
    Abstract: How to incorporate hard-to-value assets into the wealth tax? We analyze the effect of an optimal wealth tax on risk-taking behavior and welfare when investors do not only have the standard portfolio choice with a well-diversified market portfolio, but can alternatively choose to invest all their wealth into a non-diversifiable, indivisible project. The latter is interpreted as entrepreneurial investment into a small, nonlisted firm for which the actual value is hard to measure and non-verifiable. For such firms, real-world wealth tax systems base the wealth tax on deterministic book values. We show that this tax treatment does not distort the choice of projects if the tax is set optimally with an imputed interest rate on book values, actually larger than the risk-free market rate of return. The market equilibrium and a proportional tax on the market portfolio will ensure an efficient risk allocation between private and public consumption and across projects. Failing to apply an imputed inflation of book values, instead, gives rise to an implicit subsidy on entrepreneurial activity and distorts investment. Our findings also have implications for taxation of hard-to-value assets under capital-gains and inheritance taxation.
    Keywords: Wealth taxation; portfolio choice; non-listed firms; risk diversification; hard-to-value assets
    JEL: D14 G11 H21
    Date: 2018–04–27
  5. By: López Pérez, Raúl (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid.); Ramírez Zamudio, Aldo. (Center for Economics, Banking and Finance Studies, Department of Economics, Universidad de Lima.)
    Abstract: We report data from an experiment in Peru where subjects anonymously decide how much of their endowment they donate to the Peruvian Government. The standard rational choice model and several well-known models of non-selfish preferences predict zero giving. Yet we observe that around 75% of the subjects give something (N = 164), with substantial heterogeneity. Our data is consistent with an account based on social norms: If compliance is not too costly, people comply with norms if (i) they perceive that such behavior sufficiently promotes social welfare and (ii) others are expected to respect norms as well (peer effects). Our paper contributes to a recent literature on tax morale emphasizing the importance of non-standard motivations on tax compliance and suggests that taxpayers are willing to give money to the government (e.g., paying taxes) if they believe that enough others give as well and that taxes are not wasted or ‘stolen’ by the government, but used to promote social welfare.
    Keywords: corruption, evasion, peer effects, social norms, tax compliance, tax morale
    JEL: C92 D91 H21 H26 H3
    Date: 2018–04
  6. By: Koessler, Ann-Kathrin; Torgler, Benno; Feld, Lars P.; Frey, Bruno S.
    Abstract: The ability of a tax authority to collect taxes successfully depends on both its relationship with taxpayers and how strongly these taxpayers are committed to contributing to the common good. We present field and laboratory experimental evidence on a new non-intrusive approach aimed at fostering the commitment to pay taxes. Using a between-subject design in a unique field setting, we analyze whether tax compliance changes if taxpayers receive an offer to promise paying their taxes on time. Taxpayers who complied with the promise entered into a lottery with the chance of winning either a financial or a non-financial reward. Rewards were also offered in response to compliance only (i.e., without being asked to make a formal promise) allowing us to disentangle a pure reward effect from the commitment effect. As potential legal obstacles prevented us from developing a treatment that allowed for identifying whether the promise itself changes behavior, we designed and conducted a laboratory experiment to test this proposition. In the field experiment, taxpayers with a history of being compliant are more likely to make a promise. Similarly, the laboratory experiment indicates that individuals with higher tax morale are more compliant and more likely to make the promise. In addition, for all promise schemes, compliance is significantly higher for the promise-makers as compared to subjects in the control group and to those who did not make a promise. The field experiment indicates that commitment can improve payment behavior. This effect, however, is strongly dependent on the type of reward to which the promise is linked. Compliance increases only if the reward is non-financial. A no compliance effect is observed if cash is offered in return for promise fulfilment. A strong compliance effect for pure non-financial rewards was also obtained in the laboratory experiment.
    Keywords: tax compliance,field experiment,commitment,promise,supportive incentives,psychological contract
    JEL: H26 C93 C91 A13
    Date: 2018
  7. By: Dutt, Verena K.; Ludwig, Christopher A.; Nicolay, Katharina; Vay, Heiko; Voget, Johannes
    Abstract: We employ an event study methodology to investigate the stock price reaction around the day of the political decision to include a country-by-country reporting obligation for EU financial institutions. We do not find significant abnormal returns for the banks affected. Sample splits according to the effective tax rate and the degree of B2C orientation do not reveal a more pronounced negative investor response for banks engaging more strongly in tax avoidance or being potentially more concerned about reputational risks, respectively. We conclude that the implementation of a CbCR requirement for EU financial institutions did not trigger a noticeable investor response. Contrary prior findings regarding other public tax disclosure obligations might be driven by the distinct motivation of the rules and the way the information is presented. We contend that capital market reactions to an upcoming increase in tax transparency are not generalizable to other industries and settings, but that consideration must be given to the context and the exact design of the rule.
    Keywords: Tax Avoidance,Profit Shifting,Country-by-Country Reporting,Financial Institutions,Market Reaction
    JEL: H25 H26 G21 G28
    Date: 2018
  8. By: Filomena Garcia; Luca David Opromolla; Andrea Vezzulli; Rafael Marques
    Abstract: The administration of tax policy has shifted its focus from enforcement to complementary instru- ments aimed at creating a social norm of tax compliance. In this paper we provide an analysis of the effects of the dissemination of information regarding the past degree of tax evasion at the social level on the current individual tax compliance behavior. We build an experiment where, for given levels of audit probabilities, fines and tax rates, subjects have to declare their income after receiving either a communication of the official average tax evasion rate or a private message from a group of ran- domly matched peers about their tax behavior. We use the experimental data to estimate a dynamic econometric model of tax evasion. The econometric model extends the Allingham–Sandmo–Yitzhaki tax evasion model to include self-consistency and endogenous social interactions among taxpayers. We find four main results. First, tax compliance is very persistent. Second, the higher the official past tax evasion rate the higher the degree of persistence: evaders are more likely to evade again, and compli- ant individuals are more likely to comply again. Third, when all peers communicate to have evaded (complied) in the past, both evaders and compliant individuals are more likely to evade (comply). Fourth, while both treatments, and especially the unofficial information treatment, are associated, in the context of our experiment, with a significantly larger growth in evasion intensity, the aggregate effect depends on the characteristics of the population. In countries with inherently low levels of tax evasion, official information can have beneficial effects by consolidating the behavior of compliant in- dividuals. However, in countries with inherently high levels of tax evasion, official information can have detrimental effects by intensifying the behavior of evaders. In both cases, the impact of official information is magnified in the presence of strong peer effects.
    Keywords: Tax morale, Information, Tax evasion, Experiment, Peer Effects
    JEL: H26 D63 C24 C92 Z13
    Date: 2018–04
  9. By: Harenberg, Daniel; Ludwig, Alexander
    Abstract: We ask whether a pay-as-you-go financed social security system is welfare improving in an economy with idiosyncratic productivity and aggregate business cycle risk. We show analytically that the whole welfare benefit from joint insurance against both risks is greater than the sum of benefits from insurance against the isolated risk components. One reason is the convexity of the welfare gain in total risk. The other reason is a direct risk interaction which amplifies the utility losses from consumption risk. We proceed with a quantitative evaluation of social security's welfare effects. We find that introducing an unconditional minimum pension leads to substantial welfare gains in expectation, even net of the welfare losses from crowding out. About 60% of the welfare gains would be missing when simply summing up the isolated benefits.
    Keywords: social security,idiosyncratic risk,aggregate risk,welfare
    JEL: C68 E27 E62 G12 H55
    Date: 2018
  10. By: Emilio Calvo (Universidad de Valencia. ERI-CES)
    Abstract: We model the problem of how to distribute the public spending between the different regions of a country once all taxes are collected as a cooperative game in coalitional form. A tax game is built, specifying how much tax is collected in every region and coalition of regions in the country under secession. In this paper we propose two tax rules: the balanced tax rule, and the redistributive balanced tax rule. Both rules have the property of being stable for every tax problem, as they belong to the core of the tax game. The Spanish case is considered as example. We compare their redistributive behavior with the present Spanish financial system, with the population egalitarian, and with the optimistic secession tax rules.
    Keywords: fiscal federalism; fiscal stability; secessionism; coalitional
    JEL: H72 H77 C71
    Date: 2018–04
  11. By: Michael Overesch; Sabine Schenkelberg; Georg Wamser
    Abstract: Using pairs of similar US and European firms listed on the S&P500 or StoxxEurope600, we examine effective tax differentials between US multinational corporations (MNCs) and their European peers. We show that statutory tax rates and profit shifting opportunities are important determinants of effective tax rates. Our findings suggest substantially lower total tax payments of US MNCs after the 2017 US tax reform. Based on past reforms of Controlled Foreign Company (CFC) rules and of the principle of worldwide taxation, we confirm that international tax legislation affects effective tax expenses. We also provide evidence for heterogeneity in firm responses: MNCs with profit shifting opportunities benefit most from more-lenient CFC rules.
    Keywords: effective tax rate, tax avoidance, tax reform, CFC rule, international taxation, pair matching, difference-in-differences analysis
    JEL: H26 H32 F23
    Date: 2018
  12. By: António Afonso; Huseyin Sen; Ayse Kaya
    Abstract: Using a panel of eight large emerging market economies from 1980 to 2015, this paper seeks to assess the causal linkages between government size, unemployment, and inflation. Overall, our results suggest that the government size is positively associated with both unemployment and inflation. The Granger causality runs from the government size to unemployment and to inflation. From our analysis, two aspects stand out. First, the effects of government size on unemployment and inflation depend essentially on how the government size is measured. As long as government consumption spending is considered as the proxy measure of the government size, the government size is significantly and positively correlated with unemployment, and with inflation. Second, indirect taxes, like government consumption spending, have a positive as well as statistically significant association with unemployment. However, the direct taxes solely exert a strong effect on inflation in the countries considered.
    Keywords: Government Size, Unemployment, Inflation, Emerging Market Economies
    JEL: H10 E61 E63
    Date: 2018–05
  13. By: John Guyton; Kara Leibel; Dayanand S. Manoli; Ankur Patel; Mark Payne; Brenda Schafer
    Abstract: Each year, the United States Internal Revenue Service (IRS) sends notices to selected taxpayers who claim Earned Income Tax credit (EITC) benefits to request additional documentation to verify those claims. This paper uses administrative tax data to examine the impacts of these correspondence audits on taxpayer behavior. The quasi-experimental research design compares randomly-selected audited taxpayers to taxpayers with similar risk scores who were not selected for a correspondence audit. The results indicate that, in the years following an audit, there are decreases in the likelihoods of claiming EITC benefits and filing returns. Taxpayers with self-employment income at the time of audit appear likely to increase wage employment following a correspondence audit, while taxpayers with wage income at the time of audit appear likely to decrease labor force participation following disallowance of EITC benefits. The results for wage earners indicate labor force participation elasticities of roughly 0.03.
    JEL: H24 J20
    Date: 2018–03
  14. By: Bastani, Spencer; Waldenström, Daniel
    Abstract: This paper presents a comprehensive analysis of the role of capital taxation in advanced economies with a focus on the Swedish experience. We synthesize the existing theoretical literature, present facts about the capital stock and its distribution, review current capital tax practices and empirical findings regarding their effects on economic activity. The paper also examines the political feasibility of capital taxation by presenting results from a unique attitude survey targeted to a large representative sample of the Swedish population. Finally, we tie together our findings and discuss their implications for tax policy.
    Keywords: Capital taxation; corporate tax; Income inequality; Inheritance tax; optimal taxation; political economy; Preferences for Redistribution; Wealth Inequality; Wealth tax
    JEL: D31 H21 H24
    Date: 2018–04
  15. By: Dladla, Khumbuzile; Khobai, Hlalefang
    Abstract: This paper investigates the impact of taxation on economic growth in South Africa. Yearly data for South Africa for the period 1981 – 2016 was used to develop the Auto-Regressive Distribution Lag (ARDL) approach. The empirical results confirm that there is a negative relationship between taxes and economic growth in South Africa. The findings of the study include that economic growth, trade and openness, capital and taxes are co-integrated. This paper suggests that fiscal policy is very important to force sustainable economic growth in South Africa
    Keywords: Taxation, Economic growth, Auto-regression Distribution Lag Model (ARDL), Co-integration, South Africa
    JEL: C2 E27 H2
    Date: 2018–04–15

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