nep-pub New Economics Papers
on Public Finance
Issue of 2018‒11‒19
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Tax Equivalences and their Implications By Alan J. Auerbach
  2. Optimal Income Taxation with Spillovers from Employer Learning By Ashley Cooper Craig
  3. Implementing corporate tax cuts at the expense of neutrality? A legal and optimisation analysis of fundamental reform in practice By Kayis-Kumar, Ann
  4. Do Household Finances Constrain Unconventional Fiscal Policy? By Scott R. Baker; Lorenz Kueng; Leslie McGranahan; Brian T. Melzer
  5. The impact of tax structure on investment: an empirical assessment for OECD countries By José Alves
  6. The Impact of Corporate Taxes on Firm Innovation: Evidence from the Corporate Tax Collection Reform in China By Jing Cai; Yuyu Chen; Xuan Wang
  7. A case study on Germany's aviation tax using the synthetic control approach By Daniel Borebly
  8. Social networks and tax avoidance: Evidence from a well-defined Norwegian tax shelter By Alstadsaeter, Annette; Kopczuk, Wojciech; Telle, Kjetil
  9. The taxation of savings: the Italian system and international comparison By Nicola Branzoli; Giovanna Messina; Elena Pisano; Giacomo Ricotti; Ernesto Zangari

  1. By: Alan J. Auerbach
    Abstract: In economic analyses of the effects of tax policies, one commonly encounters discussions of the equivalence of apparently different policies, where equivalence is defined as the policies having the same impact on fundamental economic outcomes. These related tax policies may differ in many respects, which give rise to conditions under which the equivalences may break down. This paper draws out the key issues that relate to tax equivalences, using several illustrations from important instances of such equivalences that span different areas of taxation, with many of these illustrations relating to the taxation of capital income. Recognition of equivalences and the ways in which they may fail to hold is important both for positive analysis (e.g., the political reasons for choosing one approach over another) and for normative analysis (to determine which approach may be a more effective way of implementing a policy).
    JEL: H20 H30
    Date: 2018–10
  2. By: Ashley Cooper Craig
    Abstract: I study optimal income taxation when human capital investment is imperfectly observable by employers. In my model, Bayesian employer inference about worker productivity drives a wedge between the private and social returns to human capital investment by compressing the wage distribution. The resulting positive externality from worker investment, all else being equal, calls for lower marginal tax rates. To quantify the significance of this externality for optimal taxation, I calibrate my model to match empirical moments from the United States. To inform my calibration, I provide new evidence on how the speed of employer learning about new labor market entrants varies over the worker productivity distribution. Taking into account the spillover from human capital investment introduced by employer inference reduces optimal marginal tax rates by up to 13 percentage points and produces a welfare gain equivalent to raising every worker's consumption by one percent.
    JEL: D62 D82 H2 I2 J24
    Date: 2018–11–09
  3. By: Kayis-Kumar, Ann
    Abstract: Governments and policy-makers are increasingly faced with the trade-off of protecting their tax revenue bases while maintaining their international competitiveness. This is exemplified by the international trend of jurisdictions reducing their headline corporate tax rates, which is often justified on the basis that these cuts will lead to improved efficiency and integrity outcomes. This article explores whether it is more efficient to implement corporate tax cuts or an alternative reform such as an economic rent tax which may better achieve the tax policy goals of efficiency and integrity. In doing so, this article bridges the gap between applied legal research, economic theory and practical optimisation modelling. Specifically, this research presents a simulation analysis of the behavioural responses of a tax-minimising multinational enterprise to both existing and proposed tax regimes and compares efficiency and integrity outcomes upon implementing corporate tax cuts. This is complemented by a legal comparative analysis featuring case studies of an economic rent tax; namely, the Allowance for Corporate Equity (ACE) as introduced in Belgium and Italy. These case studies will focus on the political hurdles to implementing and sustaining these reforms, which will highlight key lessons learnt from the implementation of the ACE in practice.
    Keywords: Tax neutrality, Corporate tax reform, Allowance for Corporate Equity
    JEL: C61 H2 K34
    Date: 2018–09
  4. By: Scott R. Baker; Lorenz Kueng; Leslie McGranahan; Brian T. Melzer
    Abstract: When the zero lower bound on nominal interest rate binds, monetary policy makers may lack traditional tools to stimulate aggregate demand. We investigate whether "unconventional" fiscal policy, in the form of pre-announced consumption tax changes, has the potential to meaningfully shift durables purchases intertemporally and how it is affected by consumer credit. In particular, we test whether car sales react in anticipation of future sales tax changes, leveraging 57 pre-announced changes in state sales tax rates from 1999-2017. We find evidence for substantial tax elasticities, with car sales rising by over 8% in the month before a 1% increase in the sales tax rate. Responses are heterogeneous across households and sensitive to supply of credit. Consumers with high credit risk scores are most able to pull purchases forward. At the same time, other effects such as customer composition and attention lead to an even larger tax elasticity during recessions, despite these credit frictions. We discuss policy implications and the likely magnitudes of tax changes necessary for any substantive long-term responses.
    JEL: D12 E21 G01 G11 H2 H31
    Date: 2018–11
  5. By: José Alves
    Abstract: In the present empirical analysis we try to assess the impact of taxation on investment growth. In particular, and by using gross fixed capital formation as a proxy for investment, we intend to evaluate the impact of the taxation structure in investment dynamics, in a short and a long-run perspectives. This empirical exercise was conducted for all OECD countries, during the 1980-2015 period. Through panel data econometric techniques, we find optimal tax-investment threshold values, specially higher for short-term than for long-term evolution. Also, we find optimal income taxation rounding 9%, in percentage of GDP, an average optimal value 12.7% for consumption taxes to promote annual investment growth.
    Keywords: Investment Growth; Tax systems; Fiscal Policy; Optimal taxation
    JEL: E62 H21 O47
    Date: 2018–11
  6. By: Jing Cai; Yuyu Chen; Xuan Wang
    Abstract: This paper exploits a tax reform on manufacturing firms in China to study the impact of taxes on firm innovation. The reform switched the corporate income tax collection from the local to the state tax bureau and reduced the effective tax rate by 10%. The reform only applied to firms established after January 2002, allowing us to use regression discontinuity design as the identification strategy. The results show that lower taxes improved both quantity and quality of firm innovation. Moreover, the reform has a bigger impact on firms that are financially constrained and firms that engage more in tax evasion.
    JEL: H25 O31
    Date: 2018–10
  7. By: Daniel Borebly (Department of Economics, University of Strathclyde)
    Abstract: The German Aviation Tax (AT) is a tax levied on departing passengers from German airports. The synthetic control method is used to generate counterfactual passenger numbers for German airports. The synthetic control method is used to generate counterfactual passenger numbers for German airports, and for airports outside Germany but near the German border. The results presented are consistent with cross-border substitution of passenger demand in response to AT. Most AT exempt airports near the borders have made sizable, significant, gains in passenger numbers since Germany introduced AT. Within Germany, there appears to be a clear distinction in the impact on small/regional airports and that on larger hubs.
    Keywords: aviation taxes, passenger demand, synthetic control
    JEL: H26 H30 L93
    Date: 2018–10
  8. By: Alstadsaeter, Annette; Kopczuk, Wojciech; Telle, Kjetil
    Abstract: In 2005, over 8% of Norwegian shareholders transferred their shares to new (legal) tax shelters intended to defer taxation of capital gains and dividends that would otherwise be taxable in the aftermath of 2006 reform. Using detailed administrative data we identify family networks and describe how take up of tax avoidance progresses within a network. A feature of the reform was that the ability to set up a tax shelter changed discontinuously with individual shareholding of a firm and we use this fact to estimate the causal effect of availability of tax avoidance for a taxpayer on tax avoidance by others in the network. We find that take up in a social network increases the likelihood that others will take up. This suggests that taxpayers affect each other's decisions about tax avoidance, highlighting the importance of accounting for social interactions in understanding enforcement and tax avoidance behavior, and providing a concrete example of "optimization frictions" in the context of behavioral responses to taxation.
    JEL: D22 H25 H26 H32
    Date: 2018–10
  9. By: Nicola Branzoli (Bank of Italy); Giovanna Messina (Bank of Italy); Elena Pisano (Bank of Italy); Giacomo Ricotti (Bank of Italy); Ernesto Zangari (Bank of Italy)
    Abstract: After a brief review of the economic literature, the paper offers a comparative analysis of the main features of capital income taxation in Italy, the EU and the US. The paper also analyses the recent evolution of capital taxation and portfolio allocation in Italy. The findings point to high heterogeneity in the choice of the type of tax system, taxation level and forms of preferential taxation, suggesting no convergence towards a single model of taxation among countries. However, a common feature of most systems is that capital income is taxed more lightly than labour income. The heterogeneity in the tax treatment of households’ savings is likely to persist in the future; recent developments at international level concerning the transparency of taxation are expected to increase governments’ degrees of freedom in choosing their preferred tax system. Empirical evidence for Italy suggests that the tax burden on financial assets has increased in recent years but the evolution of financial assets over time is not particularly sensitive to tax changes.
    Keywords: capital income, taxation, savings
    JEL: E21 H24 K34
    Date: 2018–10

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