nep-pub New Economics Papers
on Public Finance
Issue of 2018‒09‒03
eleven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Progressivity with Age-Dependent Taxation By Jonathan Heathcote; Gianluca Violante; Kjetil Storesletten
  2. Income Taxation and the Equilibrium Allocation of Labor By Jesper Bagger; Mads Hejlesen; Kazuhiko Sumiya; Rune Vejlin
  3. Microsimulation Analysis of Optimal Income Tax Reforms. An Application to New Zealand By Creedy, John; Gemmell, Norman; Hérault, Nicolas; Mok, Penny
  4. International Corporate Tax Avoidance: A Review of the Channels, Magnitudes, and Blind Spots By Sebastian Beer; Ruud A. de Mooij; Li Liu
  5. Global Implications of U.S. Tax Reform By Jack Mintz
  6. Tax Spillovers from US Corporate Income Tax Reform By Sebastian Beer; Alexander D Klemm; Thornton Matheson
  7. Tax Evasion and Financial Instability By Ozili, Peterson
  8. Bribes vs. Taxes: Market Structure and Incentives By Amodio, Francesco; Choi, Jieun; De Giorgi, Giacomo; Rahman, Aminur
  9. Hidden Baggage : Behavioral Responses to Changes in Airline Ticket Tax Disclosure By Sebastien Bradley; Naomi E. Feldman
  10. Dynamic Scoring of Tax Reforms in the European Union By Salvador Barrios; Mathias Dolls; Anamaria Mafei; Andreas Peichl; Sara Riscado; Janos Varga; Christian Wittneben
  11. Environmental Taxation and Expenditure in New Zealand By Tipper, Adam; Harkness, Jane

  1. By: Jonathan Heathcote (Federal Reserve Bank of Minneapolis); Gianluca Violante (Princeton University); Kjetil Storesletten (University of Oslo)
    Abstract: This paper studies optimal taxation of labor earnings when the degree of tax progressivity is allowed to vary with age. We analyze this question in a tractable equilibrium overlapping-generations model that incorporates a number of salient trade-offs in tax design. Tax progressivity provides insurance against ex-ante heterogeneity and earnings uncertainty that missing markets fail to deliver. However, taxes distort labor supply and human capital investments. Uninsurable risk cumulates over the life cycle, and thus the welfare gains from income compression via progressive taxation increase with age. On the other hand, average labor productivity rises with age, and thus the welfare losses from progressive taxation's distortionary impact on labor supply also increase with age. The optimal age-varying system balances these distortions. In a calibrated version of the economy, we quantify the welfare gains of moving from the optimal age-invariant to the optimal age-dependent system and find that they are negligible.
    Date: 2018
  2. By: Jesper Bagger (Royal Holloway and the Dale T. Mortensen Centre); Mads Hejlesen (Department of Economics and Business Economics, Aarhus University, Denmark); Kazuhiko Sumiya (Royal Holloway); Rune Vejlin (Department of Economics and Business Economics, Aarhus University, Denmark)
    Abstract: We study the impact of labor income taxation on workers' job search behavior and the implications it has for the equilibrium allocation of heterogenous workers across heterogenous firms. The analysis is conducted within a complete markets equilibrium on-the-job search model with two-sided heterogeneity, endogenous job search effort and hiring intensity, equilibrium wage formation, and firm entry and exit. In a nutshell, by appropriating part of the gain from finding a better paid job, income taxation reduces the return to job search effort, and distorts workers' job search effort, which, in turn, distorts the equilibrium allocation of labor. The model is estimated on Danish matched employer-employee data, and is used to evaluate a series of tax reforms in Denmark in the 1990s and 2000s, to provide new insights into the elasticity of taxable labor income, and to identify a Pareto optimal income tax reform.
    Keywords: Labor reallocation, Income taxation, Tax reforms, Worker heterogeneity, Firm heterogeneity, Matched employer-employee data
    JEL: H20 J30 J64 J63
    Date: 2018–08–20
  3. 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, Money metric utility,
    Date: 2018
  4. By: Sebastian Beer; Ruud A. de Mooij; Li Liu
    Abstract: This paper reviews the rapidly growing empirical literature on international tax avoidance by multinational corporations. It surveys evidence on main channels of corporate tax avoidance including transfer mispricing, international debt shifting, treaty shopping, tax deferral and corporate inversions. Moreover, it performs a meta analysis of the extensive literature that estimates the overall size of profit shifting. We find that the literature suggests that, on average, a 1 percentage-point lower corporate tax rate will expand before-tax income by 1 percent—an effect that is larger than reported as the consensus estimate in previous surveys and tends to be increasing over time. The literature on tax avoidance still has several unresolved puzzles and blind spots that require further research.
    Date: 2018–07–23
  5. By: Jack Mintz
    Abstract: Tax reform adopted in United States for 1 January, 2018 will have a significant positive impact on the global economy in 2018. The ground-breaking corporate income tax will also substantially affect US tax competitiveness with many provisions drawing both capital and profits to the United States. With the sharply lower corporate income tax rate, dividend exemption system and new limitations on deductible interest, US companies will try to push debt and other costs onto foreign countries, reducing corporate taxes elsewhere. This paper outlines key facts on the corporate tax reform featured in the US Tax Cuts and Jobs Act, assesses the reform with respect to US investment and examines the impacts of interest and loss limitation rules, as well as new US taxes with respect to intangible income.
    Date: 2018
  6. By: Sebastian Beer; Alexander D Klemm; Thornton Matheson
    Abstract: This paper describes, and where possible tentatively quantifies, likely tax spillovers from the U.S. corporate income tax reform that was part of the broader 2017 tax reform. It calculates effective tax rates under various assumptions, showing among other findings, how the interest limitation and the Foreign Derived Intangible Income provision can raise or reduce rates. It tentatively estimates that under constant policies elsewhere, the rate cut will reduce tax revenue from multinationals in other countries by on average 1.6 to 5.2 percent. If other countries react in line with historical reaction functions, the revenue loss from multinationals rises to an average of 4.5 to 13.5 percent. The paper also discusses profit-shifting, real location, and policy reactions from the more complex features of the reform.
    Date: 2018–07–13
  7. By: Ozili, Peterson
    Abstract: This article explores the association between tax evasion and financial instability. The discussion also examines the effect of tax evasion for financial instability. The discussion shows that tax evasion can reduce the tax revenue available to governments to manage the economy and can weaken the government’s ability to promote stability in financial systems, while on the other hand, taxpayers who evade taxes feel they can use the evaded tax money to rather improve their own financial stability.
    Keywords: tax evasion, tax avoidance, financial stability, banking stability, banks, public finance,
    JEL: G21 G28 H12 H21 H24 H25 H26 H27
    Date: 2018–08–11
  8. By: Amodio, Francesco (McGill University); Choi, Jieun (World Bank); De Giorgi, Giacomo (University of Geneva); Rahman, Aminur (World Bank)
    Abstract: Firms in developing countries often avoid paying taxes by making informal payments to tax officials. These bribes may raise the cost of operating a business, and the price charged to consumers. To decrease these costs, we designed a feedback incentive scheme for business tax inspectors that rewards them according to the anonymous evaluation submitted by inspected firms. We show theoretically that feedback incentives decrease the equilibrium bribe amount, but make firms with more inelastic demand more attractive for inspectors. A tilted scheme that attaches higher weights to the evaluation of smaller firms limits the scope for targeting and decreases the bribe amount to a lesser extent. We evaluate both schemes in a field experiment in the Kyrgyz Republic and find evidence that is consistent with the model predictions. By decreasing bribes, our intervention reduces the average cost for firms and the price they charge to consumers. Since fewer firms substitute bribes for taxes, tax revenues increase. Our study highlights the role of firm heterogeneity and market structure in shaping the relationship between firms and tax inspectors, and provides clear evidence of pass-through of bribes to consumers.
    Keywords: business tax, incentives, market structure, demand elasticity
    JEL: D22 D40 H26 H71 O12
    Date: 2018–07
  9. By: Sebastien Bradley; Naomi E. Feldman
    Abstract: We examine the impact on air travelers of an enforcement action issued by the U.S. Department of Transportation in January 2012 that required U.S. air carriers and online travel agents to incorporate all mandatory taxes and fees into their advertised fares. Exploiting cross-itinerary ticket tax variation within international city market pairs, we provide evidence that the more prominent display of tax-inclusive prices is associated with a significant reduction in tax incidence on consumers and a decline in passenger volume along more heavily-taxed itineraries. Ticket revenues are commensurately reduced. These results suggest a pronounced degree of inattention to ticket taxes prior to the introduction of full-fare advertising and reinforces the theoretical predictions and experimental findings of the literature on tax salience in a quasi-experimental context where taxes average more than $100 per ticket and where firms may engage in price-setting behavior.
    Keywords: Tax salience ; Airlines ; Ticket taxes ; Tax incidence
    JEL: H22 H31 D90 D18 L5
    Date: 2018–08–14
  10. By: Salvador Barrios; Mathias Dolls; Anamaria Mafei; Andreas Peichl; Sara Riscado; Janos Varga; Christian Wittneben
    Abstract: This paper presents the first dynamic scoring exercise linking a microsimulation and a dynamic general equilibrium model for Europe. We illustrate our novel methodology by analysing hypothetical reforms of the social insurance contributions system in Belgium. Our approach takes into account the feedback effects resulting from adjustments and behavioural responses in the labour market and the economy-wide reaction to tax policy changes, essential for a comprehensive evaluation of the reforms. We find that the self-financing effect of a reduction in employers’ social insurance contribution is substantially larger than that of a comparable reduction in employees’ social insurance contributions.
    Date: 2018
  11. By: Tipper, Adam; Harkness, Jane
    Abstract: Environmental accounting aims to understand the interactions between the environment and the economy. Environmental protection expenditure and taxes are two key environmental accounts that shed light on society’s economic response to environmental change. This paper discusses the role of environmental protection expenditure and taxes in the economy and presents the findings from Statistics New Zealand’s environmental-economic accounts on the extent to which these are used in New Zealand. Preliminary analysis of the relationship between environmental taxes and expenditure, using OECD data, shows a positive and significant empirical association between these two fiscal instruments.
    Keywords: Environmental accounting, Economy, New Zealand, Environmental taxation, Expenditure,
    Date: 2018

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.