nep-pub New Economics Papers
on Public Finance
Issue of 2018‒12‒17
eleven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Taxation of Robots By Uwe Thuemmel
  2. Tax Policies for Inclusive Growth: Prescription versus Practice By Robert Hagemann
  3. Unilateral Tax Reform: Border Adjusted Taxes, Cash Flow Taxes, and Transfer Pricing By Eric Bond; Thomas A. Gresik
  4. The Effect of Initial Inequality on Meritocracy: a Voting Experiment on Tax Redistribution By Natalia Jimenez; Elena Molis-Bañales; Angel Solano-Garcia
  5. What Happened to CIT Collection? Solving the Rates-Revenues Puzzle By Nicodeme Gaetan; Caiumi Antonella; Majewski Ina
  6. Tax Refunds and Income Manipulation - Evidence from the EITC By Florian Buhlmann; Benjamin Elsner; Andreas Peichl
  7. Uneven gains: the macroeconomic and welfare effects of the business tax reform By Oliver Pardo
  8. Banks, debt and risk: assessing the spillovers of corporate taxes By Fatica, Serena; Heynderickx, Wouter; Pagano, Andrea
  9. The tenuous case for an annual wealth tax By Robin Boadway; Pierre Pestieau
  10. Will Destination-Based Taxes be Fully Exploited when Available? An Application to the U.S. Commodity Tax System By David R. Agrawal; Mohammed Mardan
  11. Relocation of the rich: migration in response to top tax rate changes from Spanish reforms By David R. Agrawal; Dirk Foremny

  1. By: Uwe Thuemmel
    Abstract: I study the optimal taxation of robots and labor income. In the model, robots substitute for routine labor and complement non-routine labor. I show that while it is optimal to distort robot adoption, robots may be either taxed or subsidized. The robot tax exploits general-equilibrium effects to compress the wage distribution. Wage compression reduces income-tax distortions of labor supply, thereby raising welfare. In the calibrated model, the optimal robot tax for the US is positive and generates small welfare gains. As the price of robots falls, inequality rises but the robot tax and its welfare impact become negligible.
    Keywords: optimal taxation, input taxation, production efficiency, technological change, robots, inequality, general equilibrium, multidimensional heterogeneity
    JEL: D31 D33 D50 H21 H23 H24 H25 J24 J31 O33
    Date: 2018
  2. By: Robert Hagemann
    Abstract: Against a backdrop of the widening income distribution in most countries, OECD governments need to formulate policies that support sustainable and inclusive economic growth. Tax policies play a crucial role in this endeavour. Both tax theory and mounting empirical evidence suggest that many countries could achieve both higher and more broadly shared income growth. Many countries, however, seem hesitant to fundamentally restructure their tax systems to achieve higher and more inclusive growth. This reluctance begs a key question: Why forego tax policy reforms that hold the obvious promise of win-win outcomes of both higher and more inclusive growth? To offer some concrete answers to this question, this paper reports the findings of a synthesis of cross-country empirical work on the ranking (in terms of efficiency and distributional impact) of major tax instruments on the one hand, and, on the other, country-specific tax policy assessments reported in several dozen OECD Economic Surveys since 2008. The paper identifies a wide range of factors, some common to many countries and some country-specific, that prevent governments from adopting tax structures more favourable to inclusive growth. These include political economy forces, legal obstacles, administrative constraints, and intergovernmental fiscal arrangements.
    Keywords: inclusive growth, public finance, Tax policy
    JEL: H2 H3 I3
    Date: 2018–12–17
  3. By: Eric Bond; Thomas A. Gresik
    Abstract: We study the economic effects of unilateral adoption of corporate tax policies that include destination-based taxes and/or cash ow taxes in a heterogeneous agent model in which multinational firms can endogenously shift income between countries using transfer prices. Standard pass through arguments no longer apply because of the income shifting behavior of multinationals. Over or under- pass through will affect domestic consumer prices charged by multinational firms and will distort the decision of international businesses to outsource intermediate goods or to produce them in a foreign subsidiary. The welfare of the adopting country can decrease both with the adoption of destination-based taxes and the adoption of cash ow taxes. For a country with sufficiently large export markets that can optimally adjust its corporate tax rate on domestic earnings, unilaterally adopting cash ow taxation with full destination-based rate adjustments will reduce welfare.
    Keywords: border adjustments, destination-based taxes, source-based taxes, cash flow taxes, income taxes, transfer pricing, unilateral tax reform
    JEL: F23 H21 H25 H26
    Date: 2018
  4. By: Natalia Jimenez (Department of Economics, Universidad Pablo de Olavide & Middlesex University); Elena Molis-Bañales (Departamento de Teoria e Historia Economica, University of Granada & Globe); Angel Solano-Garcia (Departamento de Teoria e Historia Economica, University of Granada & Globe)
    Abstract: According to Alesina and Angeletos (2005), societies are less redistributive but more efficient when the median voter believes that effort and talent are much more important than luck to determine income. We test these results through a lab experiment in which participants vote over the tax rate and their pre-tax income is determined according to their performance in a real effort task with leisure time. Subjects receive either a high or a low wage and this condition is either obtained through their talent in a tournament or randomly assigned. We compare subjects' decisions in these two different scenarios considering different levels of wage inequality. In our framework, this initial income inequality turns out to be crucial to support the theoretical hypothesis of Alesina and Angeletos (2005). Overall, we find that, only if the wage inequality is high, subjects choose a lower level of income redistribution and they provide a higher effort level in the scenario in which high-wage subjects are selected based on their talent through a tournament (than when it is randomly). Thus, we confirm almost all theoretical results in Alesina and Angeletos (2005) when the wage inequality is high enough. The big exception is for efficiency (measured as the sum of total payoffs), since theoretical results only hold for the scenario in which wage inequality is low.
    Keywords: income redistribution, voting, taxation, real-effort task, leisure.
    JEL: C92 D72 H30 J41
    Date: 2018–12
  5. By: Nicodeme Gaetan; Caiumi Antonella; Majewski Ina
    Abstract: Despite sharp reductions in corporate income tax (CIT) rates worldwide, CIT revenues have not fallen dramatically in the last two decades. This paper investigates the recent developments in CIT in the European Union, by taking a closer look at the potential driving forces behind this puzzle. Using a unique dataset of national sectoral accounts, we decompose the CIT revenue to GDP ratio for the EU and find that while the decrease in the statutory rates has driven down tax collection, the effect was more than offset by a broadening of the taxable base and a slight increase in the size of the corporate sector. However, this result holds for the period 1995-2015 but not for the last decade where base broadening has not been able to match further cuts in rates.
    Keywords: Corporate Tax, Implicit Tax Rate, Tax Reforms, Incorporation, European Union
    JEL: E62 H25 O52
    Date: 2018–12
  6. By: Florian Buhlmann; Benjamin Elsner; Andreas Peichl
    Abstract: Welfare programs are important in terms of reducing poverty, although they create incentives for recipients to maximize their income by either reducing their labor supply or manipulating their taxable income. In this paper, we quantify the extent of such behavioral responses for the Earned Income Tax Credit (EITC) in the US. We exploit the fact that US states can set top-up rates, which means that at a given point in time, workers with the same income receive different tax refunds in different states. Using event studies as well as a border pair design, we document that raising the state EITC leads to more bunching of self-employed tax filers at the first kink point of the tax schedule. While we document a strong relationship up until 2007, we find no effect during the Great Recession. These findings point to important behavioral responses to the largest welfare program in the US.
    Keywords: EITC; Bunching; Income manipulation
    JEL: H20 H24
    Date: 2018–06
  7. By: Oliver Pardo
    Abstract: This paper assess the macroeconomic and welfare effects of the 2017 tax reform in the US. This assessment is carried out by simulating the enacted business tax cuts in a dynamic general equilibrium model calibrated to replicate the household income distribution in the US. The simulation suggests that the cuts will lead to increases in investment, wages and output, although the welfare gains are quite unevenly distributed across households. Long-run investment increases by one percentage point of the baseline GDP, leading to a 1.3% increase in the steady-state wages and a 1.7% increase in the steady-state output. However, there is a sudden and permanent drop in tax revenue equivalent to 0.5% of the baseline GDP. The necessary cuts in government spending imply that households in the poorest quintile may face a welfare loss equivalent to 1.6% of the GDP. Mean-while, households in the richest quintile can expect a gain of 4.4% of the GDP. Overall, the welfare gains of all households add up 4.7% of the GDP. Hence, the aggregated welfare gains from all but the richest quintile is barely positive.
    Keywords: tax reform, welfare, dynamic general equilibrium, heterogeneousagents, distribution.
    JEL: C6 E6 H2
    Date: 2018–11–06
  8. By: Fatica, Serena (European Commission – JRC); Heynderickx, Wouter (European Commission – JRC); Pagano, Andrea (European Commission – JRC)
    Abstract: Using bank balance sheet data, we find evidence that leverage and asset risk of European multinational banks in the crisis and post-crisis period is affected by corporate taxes in their host country as well as by the tax rates in all the jurisdictions where the banking group operates. Then, we evaluate the effects that establishing tax neutrality between debt and equity finance has on systemic risk. We show that the degree of coordination in implementing the hypothetical tax reform matters. In particular, a coordinated elimination of the tax advantage of debt would significantly reduce systemic losses in the event of a severe banking crisis. By contrast, uncoordinated tax reforms are not equally beneficial. This is because national tax policies generate spillovers through cross-border bank activities and tax-driven strategic allocation of debt and asset risk across group affiliates.
    Keywords: Corporate tax, Debt bias, Debt shifting, Multinational banks, Leverage
    JEL: E32 F41 F44
    Date: 2018–11
  9. By: Robin Boadway (Queen’s University); Pierre Pestieau (University of Liège)
    Abstract: We explore the case for and against an annual wealth tax as part of the overall tax mix. Few countries now use wealth taxes, and those that do adopt narrow tax bases. Taxes on inheritances or bequest are more common, but they generate limited revenue and apply to relatively few taxpayer. In principle, annual wealth taxes are roughly equivalent to capital income taxes on the assets to which they apply, although there are some assets for which wealth taxes might be simpler to implement than capital income taxes. Annual wealth taxes are distinct in purpose from inheritance taxes which are useful adjuncts to income taxes even if capital income is exempt. We recount the persuasive arguments for taxing capital income, albeit at different rates than for other income, and for taxing inheritances regardless of whether capital income is taxed. We argue that if the desire to tax asset income and wealth transfers is appropriately addressed by capital income and inheritance taxation, the additional need for an annual wealth tax is minimal and its benefits do not outweigh its administrative costs.
    Keywords: Wealth tax, capital income tax, inheritance tax
    Date: 2018
  10. By: David R. Agrawal; Mohammed Mardan
    Abstract: We develop a tax competition model that allows for the setting of both an origin-based and a destination-based commodity tax rate in the presence of avoidance and evasion. In the presence of evasion, jurisdictions will give cross-border shoppers tax preferential treatment, thus not fully exploiting the potential of destination-based taxation. Moreover, the divergence between origin-based and destination-based taxes is stronger when the incentives for consumers’ tax-arbitrage opportunities increase. The United States is one example of many such systems. While sales taxes are due at the point of sale, use taxes are due on goods purchased out-of-state. We document that when able to set both rates, a majority of jurisdictions levy destination-based use taxes at a lower rate than origin-based sales taxes. In response to changes in state-level policies that increase tax avoidance opportunities, the results of the empirical model broadly confirm our theory.
    Keywords: tax evasion, tax avoidance, destination taxation, origin taxation, tax competition, use tax, sales tax
    JEL: C72 H21 H25 H26 H77 P16 R51
    Date: 2018
  11. By: David R. Agrawal (University of Kentucky & CESifo); Dirk Foremny (Universitat de Barcelona & Institut d’Economia de Barcelona (IEB))
    Abstract: A recent Spanish tax reform granted regions the authority to set income tax rates, resulting in substantial tax differentials. We use individual-level information from Social Security records over a period of one decade. Conditional on moving, taxes have a significant effect on location choice. A one percent increase in the net of tax rate for a region relative to others increases the probability of moving to that region by 1.7 percentage points. Focusing on the stock of top-taxpayers, we estimate an elasticity of the number of top taxpayers with respect to net-of-tax rates of 0.85. Using this elasticity, a theoretical model implies that the mechanical increase in tax revenue due to higher tax rates is larger than the loss in tax revenue from the out-flow of migration.
    Keywords: Migration, Taxes, Mobility, Rich, Fiscal Decentralization
    JEL: H24 H31 H73 J61 R23
    Date: 2018

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