nep-pub New Economics Papers
on Public Finance
Issue of 2018‒08‒20
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Sub-Optimality of the Friedman Rule with Distorting Taxes By André C. Silva; Bernardino Adão
  2. Tax Compliance and Enforcement By Joel Slemrod
  3. Redistributing the Gains From Trade Through Progressive Taxation By Spencer G. Lyon; Michael E. Waugh
  4. Are Elasticities of Taxable Income Rising? By Alexander D Klemm; Li Liu; Victor Mylonas; Philippe Wingender
  5. Should There Be Lower Taxes on Patent Income? By Fabian Gaessler; Bronwyn H. Hall; Dietmar Harhoff
  6. Can Tax Regulation and Administration Practices Impact Foreign Direct Investments? By Gohar S. Sedrakyan
  7. The Macroeconomics of Border Taxes By Omar Barbiero; Emmanuel Farhi; Gita Gopinath; Oleg Itskhoki
  8. The U.S. Tax Program for Swiss Banks: What Determined the Penalties? By Lengwiler, Yvan; Saljihaj, Albana

  1. By: André C. Silva; Bernardino Adão
    Abstract: We find that the Friedman rule is not optimal with government transfers and distortionary taxation. This result holds for heterogeneous agents, standard homogeneous preferences, and constant returns to scale production functions. The presence of transfers changes the standard optimal taxation result of uniform taxation. As transfers cannot be taxed, a positive nominal net interest rate is the indirect way to tax the additional income derived from transfers. The higher the transfers, the higher is the optimal inflation rate. We calibrate a model with transfers to the US economy and obtain optimal values for inflation substantially above the Friedman rule.
    JEL: E52 E62 E63
    Date: 2018
  2. By: Joel Slemrod
    Abstract: This paper reviews recent economic research in tax compliance and enforcement. After briefly laying out the economics of tax evasion, it focuses on recent empirical contributions. It first discusses what methodologies and data have facilitated these contributions, and then presents critical summaries of what has been learned. It discusses a promising new development, the analysis of randomized controlled trials mostly delivered via letters from the tax authority, and then reviews recent research using various methods about the impact of the principal enforcement tax policy instruments: audits, information reporting, and remittance regimes. I also explore several understudied issues worthy of more research attention. The paper closes by outlining a normative framework based on the behavioral response elasticities now being credibly estimated that allows one to assess whether a given enforcement intervention is worth doing.
    JEL: H20 H26
    Date: 2018–07
  3. By: Spencer G. Lyon; Michael E. Waugh
    Abstract: Should a nation's tax system become more progressive as it opens to trade? Does opening to trade change the benefits of a progressive tax system? We answer these question within a standard incomplete markets model with frictional labor markets and Ricardian trade. Consistent with empirical evidence, adverse shocks to comparative advantage lead to labor income losses for import-competition-exposed workers; with incomplete markets, these workers are imperfectly insured and experience welfare losses. A progressive tax system is valuable, as it substitutes for imperfect insurance and redistributes the gains from trade. However, it also reduces the incentives for labor to reallocate away from comparatively disadvantaged locations. We find that optimal progressivity should increase with openness to trade with a ten percentage point increase in openness necessitating a five percentage point increase in marginal tax rates for those at the top of the income distribution.
    JEL: E1 F11 H21
    Date: 2018–06
  4. By: Alexander D Klemm; Li Liu; Victor Mylonas; Philippe Wingender
    Abstract: This paper assesses a possible explanation for the global downward trend in top personal income tax rates over the last decades: globalization and the related tax evasion and avoidance opportunities could have raised elasticities of taxable income, which would imply lower optimal tax rates. The paper estimates elasticities of taxable income for top income earners using a large sample of economies and years with a common method, allowing an analysis of trends in such elasticities. The paper finds that elasticities do not appear to exhibit any clear pattern over the years. The downward trend in tax rates must have other possible explanations, which are briefly discussed.
    Date: 2018–06–13
  5. By: Fabian Gaessler; Bronwyn H. Hall; Dietmar Harhoff
    Abstract: A “patent box” is a term for the application of a lower corporate tax rate to the income derived from the ownership of patents. This tax subsidy instrument has been introduced in a number of countries since 2000. Using comprehensive data on patent filings at the European Patent Office, including information on ownership transfers pre- and post-grant, we investigate the impact of the introduction of a patent box on international patent transfers, on the choice of ownership location, and on invention in the relevant country. We find that the impact on transfers is small but present, especially when the tax instrument contains a development condition and for high value patents (those most likely to have generated income), but that invention itself is not affected. This calls into question whether the patent box is an effective instrument for encouraging innovation in a country, rather than simply facilitating the shifting of corporate income to low tax jurisdictions.
    JEL: H25 H32 K34 O34
    Date: 2018–07
  6. By: Gohar S. Sedrakyan (International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State Univeristy)
    Abstract: We examine the impacts of the indicators contributing to the effectiveness of tax regulation performances described by the topic of Paying Taxes in Doing Business report on the foreign direct investment inflows. We further focus on the effects the same determinants have on two different modes of FDI: greenfield FDI and cross-border mergers and acquisitions (M&As). This study uses panel data of one hundred fifty-six countries across all regions. The methodology applies random effects econometric tool to conduct a global investigation on the relation between the level of tax regulation and administration performances and the types of FDI, with further more focalized extraction of information applied to seventeen geographic regions. The main findings suggest that while the high degree model does not detect strong significant relations between factors of tax administration and types of FDI; however, a more scrupulous analysis by regions reveals strong correlations between effective tax regulations and levels of foreign direct investment flows to host economies. Additionally, the study suggests that differentiated factors of tax administration and regulation tools should be considered due to the regional affiliation of a potential host economy to drive foreign investments. The results of the study can be used as a guidance for country administrators in assessment of those specific determinants that could lead to improvement of targeted types of FDI in their specific country as part of a given region. Also, the investors may find the results useful for the evaluation of tax regulations and administration performances in potential host countries in terms of targeted investments. Length: 41 pages
    Date: 2018–07
  7. By: Omar Barbiero; Emmanuel Farhi; Gita Gopinath; Oleg Itskhoki
    Abstract: We analyze the dynamic macroeconomic effects of border adjustment taxes, both when they are a feature of corporate tax reform (C-BAT) and for the case of value added taxes (VAT). Our analysis arrives at the following main conclusions. First, C-BAT is unlikely to be neutral at the macroeconomic level, as the conditions required for neutrality are unrealistic. The basis for neutrality of VAT is even weaker. Second, in response to the introduction of an unanticipated permanent C-BAT of 20% in the U.S. the dollar appreciates strongly, by almost the size of the tax adjustment, U.S. exports and imports decline significantly, while the overall effect on output is small. Third, an equivalent change in VAT by contrast generates only a weak appreciation of the dollar, a small decline in imports and exports, but has a large negative effect on output. Lastly, border taxes increase government revenues in periods of trade deficit, however, given the net foreign asset position of the U.S., they result in a long-run loss of government revenues and an immediate net transfer to the rest of the world.
    JEL: E0 F0 H0
    Date: 2018–06
  8. By: Lengwiler, Yvan (University of Basel); Saljihaj, Albana (University of Basel)
    Abstract: The U.S. Tax Program for Swiss Banks is a very significant part of the recent history of the Swiss financial industry. It has accelerated the transformation of the Swiss banking industry from a system that relied on bank secrecy to a much more compliant one. It was also rather costly for the banks involved. This short paper tries to identify the determinants of the individual penalties that were levied by the DoJ.
    Keywords: tax evasion; bank secrecy
    JEL: G21 H26
    Date: 2018–06–26

This nep-pub issue is ©2018 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.