nep-pub New Economics Papers
on Public Finance
Issue of 2018‒06‒18
eleven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Progressive Income Taxation in a Bewley-Grossman Framework By Juergen Jung; Chung Tran
  2. On the Generalised Anti-inverse Elasticity Rule: An Existence Result By Junichi Minagawa; Thorsten Upmann
  3. Deferred Taxation under Default Risk By Cristian Carini; Michele Moretto; Paolo Panteghini; Sergio Vergalli
  4. Smooth Income Tax Schedules: Derivation and Consequences By Estévez Schwarz, Diana; Sommer, Eric
  5. Effective tax rates, endogenous mark-ups and heterogeneous firms By Irlacher, Michael; Unger, Florian
  6. Are Moderate Leviathans Harmful to Tax Coordination? By Itaya, Jun-ichi; Chikara, Yamaguchi
  7. Tax Evasion on a Social Network By Duccio Gamannossi degl'Innocenti; Matthew D. Rablen
  8. Taxation, Work and Gender Equality in Ireland By Doorley, Karina
  9. The Incidence of Soft-Drink Taxes on Consumer Prices and Welfare: Evidence from the French " Soda Tax" By Fabrice Etilé; Sebastien Lecocq; Christine Boizot-Szantai
  10. Local Taxation and Tax Base Mobility: Evidence from a business tax reform in France By Tidiane Ly; Sonia Paty
  11. Microsimulation Analysis of Optimal Income Tax Reforms. An Application to New Zealand By Creedy, John; Gemmell, Norman; Hérault, Nicolas; Mok, Penny

  1. By: Juergen Jung; Chung Tran
    Abstract: We study optimal income tax progressivity in an environment where individuals are exposed to idiosyncratic income and health risks over the lifecycle. Our results, based on a calibration for the US economy, indicate that the presence of health risk combined with incomplete insurance markets amplies the social insurance role of progressive income taxes. The government is required to set higher optimal levels of tax progressivity in order to provide more social insurance for unhealthy low income individuals who have limited access to health insurance. The optimal progressive income tax system includes a tax break for income below $36; 400 and high marginal tax rates of over 50 percent for income above $200; 000: The tax progressivity (Suits) indexa Gini coecient for income tax contributions by incomeof the optimal tax system is around 0:53, compared to 0:17 in the benchmark tax system. Yet, the optimal tax system in our model is more progressive than the optimal tax systems in models abstracting from health risk (e.g., Conesa and Krueger (2006) and Heathcote, Storesletten and Violante (2017)). Importantly, the optimal level of tax progressivity is strongly aected by the design of the health insurance system. When health expenditure risk is reduced or removed from the model, the optimal tax system becomes less progressive and thus more similar to the optimal progressivity levels reported in the previous literature.
    Keywords: Health and income risks, Inequality, Social insurance, Tax progressivity, Suits index, Optimal taxation, General equilibrium.
    JEL: E62 H24 I13 D52
    Date: 2018–06
  2. By: Junichi Minagawa; Thorsten Upmann
    Abstract: We consider an optimal commodity taxation problem under a consumption target and prove the existence of an optimal solution for the problem. This optimal solution obeys taxation rules that are contrary to standard taxation rules such as the inverse-elasticity rule. We also verify the necessary and sufficient condition for the optimal solution to exhibit uniform pricing.
    Keywords: anti-inverse elasticity rule, consumption target, existence of an optimal solution, optimal commodity taxation, uniform pricing
    JEL: H21
    Date: 2018
  3. By: Cristian Carini; Michele Moretto; Paolo Panteghini; Sergio Vergalli
    Abstract: In this article, we have used a continuous EBIT-based model to study deferred taxation under default risk. Quite surprisingly, default risk has been disregarded in research on deferred taxation. In order to underline its importance, we first calculated the probability of default, over a given time period, together with the contingent value of tax deferral. We then applied our theoretical model to a sample of 27,749 OECD companies. We showed that, when accounting for both firms with a negative EBIT and firms with a probability of default higher than 50% (over a 10-year period), a relevant percentage of firms were close enough to default. Hence, these taxpayers should not consider deferred taxation in their financial statements, for the sake of prudence. Moreover, under default, the expected present value of deferred taxes was much lower than that obtained in a deterministic context. Hence, if we look at deferred taxes from the Government’s point of view, we must consider them as being risk-free loans. However, only a portion are subsequently repaid, due to default. This implies that, when a Government allows accelerated tax depreciation it should be aware of future losses due to default. So far, these estimates have been missing, although techniques do exist and are quite practical.
    Keywords: capital structure, contingent claims, corporate taxation and tax depreciation allowances
    JEL: H25 M41
    Date: 2018
  4. By: Estévez Schwarz, Diana (Beuth University of Applied Sciences); Sommer, Eric (IZA)
    Abstract: Existing tax schedules are often overly complex and characterized by discontinuities in the marginal tax burden. In this paper we propose a class of progressive smooth functions to replace personal income tax schedules. These functions depend only on three meaningful parameters, and avoid the drawbacks of defining tax schedules through various tax brackets. Based on representative micro data, we derive revenue-neutral parameters for four different types of tax regimes (Austria, Germany, Hungary and Spain). We then analyze possible implications from a hypothetical switch to smoother income tax tariffs. We find that smooth tax functions eliminate the most extreme cases of bracket creep, while the impact on income inequality is mostly negligible, but uniformly reducing.
    Keywords: personal income taxation, income distribution, nonlinear smooth tax tariff, microsimulation
    JEL: H24 C63
    Date: 2018–04
  5. By: Irlacher, Michael; Unger, Florian
    Abstract: We provide a new explanation why effective tax rates are smaller for larger firms even in the absence of common channels like profit shifting and lobbying. This result emerges in a heterogeneous firms model with endogenous mark-ups. Our framework features imperfect tax pass-through into prices and partial deductibility of production costs. Corporate taxes reduce mark-ups and hence pre-tax profits, especially for high cost firms. As production costs are only partially deductible, high cost producers are affected most by taxes. We further show that shocks which affect mark-ups through competition, like globalization, reinforce the heterogeneity in effective tax rates across firms.
    Keywords: Heterogeneous firms; Corporate taxation; Effective tax rate; Linear demand; Endogenous mark-ups
    JEL: H25 F12 L11
    Date: 2018–05–24
  6. By: Itaya, Jun-ichi; Chikara, Yamaguchi
    Abstract: This paper investigates how the sustainability of partial tax coordination between several governments is affected when the governments' objective function is moderate Leviathan in that policymakers are neither entirely benevolent nor fully self-interested. We show that partial tax coordination is more likely to prevail when moderate Leviathan-type governments become more revenue-maximizing Leviathans. In this case, the increased intensity of fiscal externality due to different tax rates makes partial tax coordination more sustainable at the cost of the tax union member countries' well-being.
    Keywords: Tax coordination, moderate Leviathan, tax competition,
    Date: 2018–05
  7. By: Duccio Gamannossi degl'Innocenti; Matthew D. Rablen
    Abstract: We relate tax evasion behavior to a substantial literature on self and social comparison in judgements. Tax payers engage in tax evasion as a means to boost their expected consumption relative to others in their “local” social network, and relative to past consumption. The unique Nash equilibrium of the model relates optimal evasion to a (Bonacich) measure of network centrality: more central taxpayers evade more. The indirect revenue effects from auditing are shown to be ordinally equivalent to a related Bonacich centrality. We generate networks corresponding closely to the observed structure of social networks observed empirically. In particular, our networks contain celebrity taxpayers, whose consumption is widely observed, and who are systematically of higher wealth. In this context we show that, if the tax authority can observe the social network, it is able to raise its audit revenue by around six percent.
    Keywords: tax evasion, social networks, network centrality, optimal auditing, social comparison, self comparison, habit, indirect effects, relative consumption
    JEL: H26 D85 K42
    Date: 2018
  8. By: Doorley, Karina (Economic and Social Research Institute, Dublin)
    Abstract: In most developed countries, economies are facing population ageing, falling fertility rates and stagnating labour force participation. The ability of governments to fund future pension and health-care expenditure relies to a large extent on income tax and social security receipts from workers. Policymakers are generally in agreement that increasing the labour force participation of women, without reducing the fertility rate, is needed. In the year 2000, with the aim of increasing women's labour market participation, a partial individualisation of the Irish income tax system was initiated. Using the Living in Ireland survey and a difference-in-differences framework, I investigate whether this reform had any effect on female labour supply and caring duties. I find that the labour force participation rate of married women increased by 5-6 percentage points in the wake of the reform, hours of work increased by two per week and hours of unpaid childcare decreased by approximately the same margin.
    Keywords: individual taxation, labour supply, Ireland
    JEL: J08 J20 H31
    Date: 2018–04
  9. By: Fabrice Etilé (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics, ALISS - Alimentation et sciences sociales - INRA - Institut National de la Recherche Agronomique); Sebastien Lecocq (ALISS - Alimentation et sciences sociales - INRA - Institut National de la Recherche Agronomique); Christine Boizot-Szantai (ALISS - Alimentation et sciences sociales - INRA - Institut National de la Recherche Agronomique)
    Abstract: The behavioural impact and acceptability of soft-drink taxes depend crucially on their incidence on consumer prices and welfare across socio-economic groups and markets. We use KantarWorldpanel homescan data to analyse the incidence of the 2012 French soda tax on Exact Price Indices (EPI) measuring consumer welfare from the availability and consumption of Sugar-Sweetened Beverages (SSB) and Non-Calorically Sweetened Beverages (NCSB) at a local geographical level. The soda tax has had significant, similar but small impacts on the EPI of SSB and NCSB (+4%), corresponding to an aggregate pass-through of about 40%. Tax incidence was slightly higher for low-income and high-consuming households. Retailers set higher pass-throughs in low-income, less-competitive and smaller markets. They did not change their product assortments. The lack of horizontal competition in low-income markets had a sizeable effect on tax regressivity. Finally, the negative income gradient in tax incidence was offset by a positive gradient in expected health benefits.
    Keywords: Market structure,Tax incidence,Soft drink,Exact price index,Regressivity
    Date: 2018–06
  10. By: Tidiane Ly (Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824, F-69130 Ecully, France); Sonia Paty (Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824, F-69130 Ecully, France)
    Abstract: This paper investigates the impact of tax base mobility on local taxation. We first develop a theoretical model in order to examine the connection between local business property taxation and tax base mobility within a metropolitan area. We find that decreasing capital intensity in the tax base increases the business property tax rates unambiguously. We then test this result using a French reform, which changes the composition of the main local business tax base in 2010. Estimations using Difference-in-Differences show that the reduction in the mobility of the tax base indeed results in higher business property tax rates. Housing tax rates were not affected by the reform.
    Keywords: Local taxation, Tax base mobility, Tax competition, Difference-in-Differences
    JEL: H71 H72 R50 R51
    Date: 2018
  11. By: Creedy, John; Gemmell, Norman; Hérault, Nicolas; Mok, Penny
    Abstract: This paper examines the optimal direction of marginal income tax reform in the context of New Zealand, which recently reduced its top marginal income tax rate to one of the lowest in the OECD. A behavioural microsimulation model is used, in which social welfare functions are defined in terms of either money metric utility or net income. The model allows for labour supply responses to tax changes, in which a high degree of population heterogeneity is represented along with all the details of the highly complex income tax and transfer system. The implications of the results for specific combinations of tax rate or threshold changes, that are both revenue neutral and welfare improving, are explored in detail, recognising the role of distributional value judgements in determining an optimal reform.The potential impact of additional income responses is also examined, using the concept of the elasticity of taxable income. Results suggest, under a wide range of parameter values and assumptions, that raising the highest income tax rate and/or threshold, would be part of an optimal reform package.
    Keywords: Optimal taxation,tax reform,behavioural microsimulation,social welfare function,money metric utility
    JEL: D63 H21 H31 I31 J22
    Date: 2018

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