nep-pub New Economics Papers
on Public Finance
Issue of 2018‒10‒01
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal taxation under different concepts of justness By Jessen, Robin; Metzing, Maria; Rostam-Afschar, Davud
  2. Dynamic Corrective Taxes with Time-Varying Salience By Ben Gilbert; Joshua S. Graff Zivin
  3. Cross-border tax evasion after the common reporting standard: Game over? By Casi, Elisa; Spengel, Christoph; Stage, Barbara
  4. Tax challenges arising from digitalisation. By Tandon, Suranjali
  5. Royalty Taxation under Tax Competition and Profit Shifting By Steffen Juranek; Dirk Schindler; Andrea Schneider
  6. Labor tax reductions in Europe: The role of property taxation By Bielecki, Marcin; Stähler, Nikolai
  7. Estimated Effects of the Tax Cuts and Jobs Act on Farms and Farm Households By Williamson, James M.; Bawa, Siraj G.
  8. Higher taxes on less elastic goods? Evidence from German municipalities By Blesse, Sebastian; Doerrenberg, Philipp; Rauch, Anna
  9. Is Panama Really Your Tax Haven? Secrecy Jurisdictions and the Countries They Harm By Petr Jansky; Markus Meinzer; Miroslav Palansky

  1. By: Jessen, Robin; Metzing, Maria; Rostam-Afschar, Davud
    Abstract: A common assumption in the optimal taxation literature is that the social planner maximizes a welfarist social welfare function with weights decreasing with income. However, high transfer withdrawal rates in many countries imply very low weights for the working poor in practice. We extend the optimal taxation framework by Saez (2002) to allow for alternatives to welfarism. We calculate weights of a social planner's function as implied by the German tax and transfer system based on the concepts of welfarism, minimum absolute and minimum relative sacrifice. We find that the minimum absolute sacrifice principle is in line with social weights that decline with net income.
    Keywords: justness,optimal taxation,income redistribution,equal sacrifice,inequality,subjective preferences
    JEL: D63 D60 H21 H23 I38
    Date: 2018
  2. By: Ben Gilbert; Joshua S. Graff Zivin
    Abstract: The intermittency of payment for many goods creates a disconnect between paying and consuming such that the marginal price is not always salient when consumption decisions are made. This paper derives optimal dynamic corrective taxes when there are externalities as well as internalities from inattention and persistence in consumption across periods. Our optimal taxes address dynamic inefficiencies that are not captured in static models of inattention. We also characterize a second-best constant tax and the excess burden associated with time-invariant tax rates. We then calibrate the model to U.S. residential electricity consumption.
    JEL: D03 D11 D62 D91 H21 H23 L97 Q40 Q41 Q50
    Date: 2018–09
  3. By: Casi, Elisa; Spengel, Christoph; Stage, Barbara
    Abstract: Back in 2013, the Automatic Exchange of Information (AEOI) was endorsed as the prevailing universal solution to fight cross-border tax evasion. In this regard, the OECD launched a global standard for the AEOI, the Common Reporting Standard (CRS). Currently, around 100 jurisdictions have committed to implement it into respective national laws by 2018. In this study, we analyze the impact of the CRS on cross-border tax evasion using a difference-in-difference research design. By considering a period of four years (2014-2017), results suggest that the CRS induced a reduction of 14% in cross-border deposits parked in offshore locations for tax evasion purposes. Moreover, such wealth and related income has not been repatriated but rather a new location to avoid domestic tax obligations has emerged. More specifically, upon the CRS implementation at domestic level, the United States (U.S.), i.e. the only major economy in the world, which so far did not commit to the CRS, seems to emerge as a potentially attractive location for cross-border tax evasion.
    Keywords: Tax Evasion,Automatic Exchange of Information,Offshore Locations,Cross-Border Deposits
    JEL: F42 G21 H26 H31
    Date: 2018
  4. By: Tandon, Suranjali (National Institute of Public Finance and Policy)
    Abstract: As MNCs increasingly digitalise their operations, taxing their incomes is proving a challenge. Primarily since economic activity is no longer preconditioned on physical presence. As a result the existing international tax rules are proving insufficient. In response to this challenge, policy experts around the world are deliberating the basis for taxing profits arising from digitalised operations. The alternative measures being considered include withholding tax, equalisation levy and the test for significant economic presence. Each of these measures is being critically assessed and a more uniform approach has not yet been adopted owing to concerns that there may be reallocation of taxing rights. This paper presents evidence of base erosion and profit shifting by digitalised businesses. Using such evidence the paper discusses the adequacy and utility of the suggested tax measures and conjectures on the tax consequences for source countries. The paper finds that the test for significant economic presence may be a useful measure however its wider acceptance hinges on consensus.
    Date: 2018–08
  5. By: Steffen Juranek; Dirk Schindler; Andrea Schneider
    Abstract: The increasing use of intellectual property as a means to shift profits to low-tax jurisdictions or jurisdictions with so-called ‘patent boxes’ is a major challenge for the corporate tax base of medium- and high-tax countries. Extending a standard tax competition model for capital-enhancing technology, royalty payments, and profit shifting, this paper suggests a simple fix: It is optimal to set a withholding tax on (intra-firm) royalty payments equal to the corporate tax rate and deny any deductibility of royalties. As the tax applies to the full payment, the problem of identifying the arm’s-length component in a digital economy (OECD BEPS Action 1) does not apply. Most importantly, the denial of royalty deductions is the Pareto-efficient solution under coordination and the unilaterally optimal policy under competition for mobile capital. In the latter case, a weakened thin capitalization rule is a crucial part of the policy package in order to avoid negative investment effects. Our results question the ban of royalty taxes in double tax treaties and the EU Interest and Royalty Directive.
    Keywords: source tax on royalties, tax competition, multinationals, profit shifting
    JEL: H25 F23
    Date: 2018
  6. By: Bielecki, Marcin; Stähler, Nikolai
    Abstract: We use a New Keynesian DSGE model with search frictions on the housing market to evaluate how financing a labor tax reduction by higher property taxation affects the real economy and welfare. Search on the housing market enables us to explicitly model stocks and flows, which is necessary to differentiate between recurrent property taxes (levied on stocks) and property transaction taxes (levied to flows). We find that using recurrent property taxation as financing instrument outperforms other instruments although all policy measures increase aggregate economy-wide welfare. Our simulations suggest that using property transaction taxation as financing instrument is the least favorable measure.
    Keywords: Search Frictions in Housing Markets,Property Taxation,Tax Reform,General Equilibrium
    JEL: E51 E6 R31 K34
    Date: 2018
  7. By: Williamson, James M.; Bawa, Siraj G.
    Abstract: Federal tax policy has the potential to affect the economic behavior and well-being of farm households, as well as the management and profitability of farms. Because the overwhelming majority of U.S. farms are organized as passthrough entities—sole proprietorships, partnerships, and S corporations—farm households are affected by individual income tax rates and preferences, in addition to deductions, credits, deferrals, and other tax provisions that pertain to businesses. The recently passed Tax Cuts and Jobs Act (TCJA) of 2017 made significant changes to the Federal income tax system. The TCJA eliminates or modifies many itemized deductions and tax credits, while lowering tax rates on individual and business income. At the same time, the TCJA expands some business provisions, in particular those that relate to capital cost recovery. It also doubles the estate tax exclusion by raising the amount to almost $11.2 million for an individual. This report uses published and special tabulation data obtained from the Internal Revenue Service and farm-level data from USDA’s Agricultural Resource Management Survey to analyze the impact the TCJA could have on family farms. We estimate that as a result of the changes made by the TCJA, family farm households would have faced an estimated average effective income tax rate of 13.9 percent if the TCJA had been in place in 2016. Under the previous tax law, family farm households faced an estimated average effective income tax rate of 17.2 percent. Although average tax rates are estimated to decline across all farm sizes and commodity specializations, the effects of the TCJA on farm households vary by farm size. Estimates also suggest 0.1 percent of farm estates will be subject to the estate tax under the new law, down from the 0.86 percent under previous law.
    Keywords: Financial Economics
    Date: 2018–09
  8. By: Blesse, Sebastian; Doerrenberg, Philipp; Rauch, Anna
    Abstract: German municipalities have substantial autonomy in setting taxes on two distinct tax bases: business profits and property values. We use this setting and a two-step approach to explore whether implemented tax policy is consistent with the seminal inverse-elasticity rule. First, we estimate the tax elasticity of the two tax bases using event-study and generalized differences-in-differences methods based on the universe of municipalities in 1995-2010. Second, we compare the ratio of the observed tax rates for the two tax bases to the ratio of their estimated elasticities. We find that property is not very responsive to variation in tax rates, whereas business profits respond significantly. While this would suggest that property should be taxed at a higher rate, the data show that this not the case: most municipalities impose relatively higher rates on business profits. This suggests that municipality-level taxation in Germany is inconsistent with the inverse-elasticity rule. We provide suggestive evidence that this finding is explained by politician's imprecise expectations about revenue elasticities as well as re-election concerns.
    Keywords: Inverse-elasticity rule,Property taxes,Business taxes,Municipality-level taxation,Elasticity of Corporate Taxable Income
    JEL: H2 H3 H7 R5
    Date: 2018
  9. By: Petr Jansky (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic); Markus Meinzer (Tax Justice Network); Miroslav Palansky (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic)
    Abstract: Secrecy jurisdictions provide services that enable the residents of other countries to escape the laws and regulations of their home economies, evade tax, or hide their legally or illegally obtained assets. Recent offshore leaks offer only a limited and biased view of the world of financial secrecy. In this paper we quantify which secrecy jurisdictions provide secrecy to which countries and assess how successful countries are in targeting these jurisdictions with their policies. To that objective we develop the Bilateral Financial Secrecy Index (BFSI) and estimate it for 86 countries by quantifying the financial secrecy supplied to them by up to 100 secrecy jurisdictions. We then evaluate two major recent policy efforts by comparing them with the results of the BFSI. First, we focus on the blacklisting process of the European Commission and find that most of the important secrecy jurisdictions for EU member states have been identified by the lists. Second, we link the results to data on active bilateral automatic information exchange treaties to assess how well-aimed are the policymakers’ limited resources. We argue that while low-secrecy jurisdictions’ gains are maximized if a large share of received secrecy is covered by automatic information exchange, tax havens aim not to activate these relationships with countries to which they supply secrecy. Our results show that so far, some major secrecy jurisdictions successfully keep their most prominent relationships uncovered by automatic information exchange, and activating these relationships may thus be an effective tool to curb secrecy.
    Keywords: tax havens; secrecy jurisdictions; financial secrecy; financial transparency; offshore finance; automatic exchange of information; global development
    JEL: F36 H26 O16
    Date: 2018–09

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