nep-pub New Economics Papers
on Public Finance
Issue of 2019‒02‒18
twelve papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Corporate Taxation Under Financial Frictions By Eduardo Dávila; Benjamin M. Hébert
  2. Tax Elasticity Estimates for Capital Stocks By Fatih Yilmaz; Jean-Francois Wen
  3. Tax Policy and Local Labor Market Behavior By Daniel G. Garrett; Eric C. Ohrn; Juan Carlos Suárez Serrato
  4. Inequality, Bipolarization, and Tax Progressivity By Oriol Carbonell-Nicolau; Humberto Llavador
  5. Tax Evasion as Contingent Debt By Christos Kotsogiannis; Xavier Mateos-Planas
  6. Minimum Wage Policy with Optimal Taxes and Unemployment By Adam M. Lavecchia
  7. Salience of Inherited Wealth and the Support for Inheritance Taxation By Spencer Bastani; Daniel Waldenström
  8. A Fistful of Dollars? Foreign Sales Platforms and Profit Shifting in Tax Havens By Sébastien Laffitte; Farid Toubal
  9. Expected Effects of the US Tax Reform on Other Countries: Global and Local Survey Evidence By Dorine Boumans; Clemens Fuest; Carlo Krolage; Klaus Wohlrabe
  10. European Banks and Tax Havens: Evidence from Country-by-Country Reporting By Petr Jansky
  11. Tax Haven Investors and Corporate Profitability - Evidence of Profit Shifting by German-Based Affiliates of Multinational Firms By Sarah Godar
  12. Why the Norwegian Shareholder Income Tax is Neutral By Södersten, Jan

  1. By: Eduardo Dávila; Benjamin M. Hébert
    Abstract: We study optimal corporate taxation when firms are financially constrained. We describe a corporate taxation principle: taxes should be levied on unconstrained firms, which value resources inside the firm less than constrained firms. Under complete information, this principle completely characterizes optimal corporate tax policy. With incomplete information, the government can use payout policy to elicit whether a firm is constrained, and tax accordingly. In our static model, optimal corporate taxation can be implemented by a corporate dividend tax, and in our dynamic model, the optimal sequence of mechanisms can also be implemented by a corporate dividend tax.
    JEL: G38 H21 H25
    Date: 2019–01
  2. By: Fatih Yilmaz; Jean-Francois Wen
    Abstract: We use panel cointegration techniques to estimate the long-run user cost elasticity of capital (UCE) in a small open economy. The estimates exploit three sources of variation in Canadian tax policy: across provinces, industries, and years. The UCE is estimated to be between -1.1 and -1.3 for machinery and equipment. We also provide semi-elasticities of capital with respect to marginal effective tax rates (METR). Our construction of the user costs makes use of a detailed data set on federal and provincial tax policy variables.
    Keywords: Capital taxation, User cost of capital elasticy, Marginal effective tax rate
    JEL: H25 H32
    Date: 2019
  3. By: Daniel G. Garrett; Eric C. Ohrn; Juan Carlos Suárez Serrato
    Abstract: Since 2002, the US government has encouraged business investment using accelerated depreciation policies that significantly reduce investment costs. We provide the first in-depth analysis of this stimulus on employment and earnings. Our local labor markets approach exploits cross-industry differences in policy generosity interacted with county-level variation in industry concentration. Places that experience larger decreases in investment costs see a level increase in employment that implies a $53,000 cost-per-job. We find no positive effects on average earnings. In contrast, we document a persistent growth in capital. These results imply a capital-labor substitution elasticity that grows over time and can exceed unity.
    JEL: E62 H25 H32 J23 J38
    Date: 2019–02
  4. By: Oriol Carbonell-Nicolau; Humberto Llavador
    Abstract: The steady rise in income and wealth inequality in the last four decades, together with the evolution of a vanishing middle class, has raised concerns about potentially pernicious effects of these trends on social stability and economic growth. This paper evaluates the possibility of designing tax systems aimed at reducing income inequality and bipolarization. Using two fundamentally different metrics, the relative Lorenz preorder popularized by Atkinson (1970) to measure inequality, and the relative bipolarization preorder put forth in Chakravarty (2009, 2015) to measure bipolarization, we provide a unified foundation of tax progressivity whereby, roughly, taxes are progressive if and only if they are inequality reducing if and only if they are bipolarization reducing. The details of this characterization vary depending on whether or not labor supply is responsive to taxation.
    Keywords: shrinking middle class, Progressive Taxation, income bipolarization, Income inequality, incentive effects of taxation
    JEL: D63 D71
    Date: 2019–02
  5. By: Christos Kotsogiannis (Tax Administration Research Centre (TARC); University of Exeter); Xavier Mateos-Planas (Centre for Macroeconomics (CFM); Queen Mary University of London)
    Abstract: This paper studies income-tax evasion in a quantitative incomplete-markets setting with heterogeneous agents. A central aspect is that, realistically, evaded taxes are a form of contingent debt. Since evasion becomes part of a portfolio decision, risk and credit considerations play a central part in shaping it. The model calibrated to match estimated average levels of evasion does a good job in producing observed cross-sectional average evasion rates that decline with age and with earnings. The model also delivers implications for how evasion varies in the cross sectional distribution of wealth and tax arrears. Evasion has substantial effects on macroeconomic variables and welfare, and agent heterogeneity and general equilibrium are very important elements in the explanation. The analysis also considers the response of evasion to a flat-tax policy reform. In spite of the direct incentives to evade less under a flat tax rate, the reform causes households to save more, rendering the change in overall evasion modest.
    Keywords: Tax evasion, Contingent debt, Incomplete markets with heterogeneous agents, Portfolio choice, Risk sharing, Tax progressivity
    JEL: E2 E62 H3
    Date: 2019–01
  6. By: Adam M. Lavecchia
    Abstract: Using a search model, I derive formula that links the welfare gains from the minimum wage to its effect on low-skilled labor force participation and employment. This formula shows that the minimum wage is welfare improving if pushing the low-skilled labor market tightness downwards brings it closer to its efficient level. I estimate the causal effect of the minimum wage on low-skilled labor force participation and employment using federal and state minimum wage variation. I discuss the policy implications of my estimates when viewed through the lens of the marginal welfare gain formula.
    Keywords: Minimum wage, Sufficient statistics, Optimal policy, Labor force participation
    JEL: H21 H23 J21 J38 J64
    Date: 2019–02
  7. By: Spencer Bastani; Daniel Waldenström
    Abstract: We study how attitudes to inheritance taxation are influenced by information about the role of inherited wealth in society. Using a randomized experiment in a register-linked Swedish survey, we find that informing individuals about the large aggregate importance of inherited wealth and its link to inequality of opportunity significantly increases the support for inheritance taxation. The effect is almost uniform across socio-economic groups and survives a battery of robustness tests. Changes in the perceived economic importance of inherited wealth and altered views on whether luck matters most for economic success appear to be the main driving factors behind the treatment effect. Our findings suggest that the low salience of inherited wealth could be one explanation behind the relatively marginalized role of inheritance taxation in developed economies.
    Keywords: capital taxation, tax attitudes, equality of opportunity, randomized experiment
    JEL: D31 H20 H31
    Date: 2019
  8. By: Sébastien Laffitte; Farid Toubal
    Abstract: Using public macro-level data on activities of multinationals, we document that U.S. firms geographically disconnect sales and production to avoid paying corporate taxes. We revisit both theoretically and empirically the location determinants of foreign platforms and show that market access motives are far less relevant when considering tax havens. We characterize these countries and shed light on the attractiveness of different tax havens for specific sectors of activity. Our quantification shows that profit shifting by foreign sales platforms in tax havens amounts to about $80bn in 2013. Our findings contribute to the recent policy debate on the reform of international taxation.
    Keywords: International Taxation;Tax avoidance;Foreign platforms;Tax havens;Profit shifting; Firms' organization
    JEL: F23 H26 H73
    Date: 2019–01
  9. By: Dorine Boumans; Clemens Fuest; Carlo Krolage; Klaus Wohlrabe
    Abstract: The Tax Cuts and Jobs Act constitutes the largest change to the US tax system since the 1980s and thoroughly alters the way in which multinational companies are taxed. Cur-rent assessments on the reform’s international impact vary widely. This article sheds light on the tax reform’s expected effects on other countries. We first use representative German business survey data to analyse the impact of the reform on German firms. Many firms with substantial US revenues or production capacities in the US intend to expand US investment in response to the reform, in particular large firms and manufacturing companies. The effects on investment in Germany are ambiguous: While some firms substitute between investment locations, others expand in both countries. We subsequently extend our analysis to the global level using worldwide survey data. The results suggest a negative impact on tax revenues and investment in countries with close economic ties to the US.
    Keywords: US tax reform, corporate tax, firm responses, survey, Germany
    JEL: H25 H32 H71 E62
    Date: 2019
  10. By: Petr Jansky (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic)
    Abstract: Banks in the European Union recently started publicly reporting data on profit, number of employees, turnover and tax on a country-by-country basis. I introduce the largest, hand-collected data set of its kind, which covers almost 50 banks for up to 5 years between 2013 and 2017. I identify the main locations of European bank's profits, which include the largest European economies as well as tax havens. I focus on answering the question of how geographically aligned these profits are with economic activity. I find that some of the tax havens have maintained high shares of profits in contrast with their much lower shares of employees. These results indicate that banks are likely shifting their profits to tax havens, but for the profit shifting to be directly observed, regulators will need to ask banks to publish even better data.
    Keywords: country-by-country reporting; banks; tax havens; profit shifting; financial transparency; European Union
    JEL: F21 F23 G21 G28 H25 H87
    Date: 2018–12
  11. By: Sarah Godar (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Berlin School of Economics and Law)
    Abstract: This paper uses confidential firm-level panel data to provide new estimates on the extent of corporate profit shifting by German-based affiliates of multinational corporations. The estimated semi-elasticity of reported profits with regard to statutory foreign tax rates is 3.6, or 4.8 when allowing for a non-linear relationship. This is higher than most of the previous estimates of around 1. The case for a non-linear relationship is even stronger when average effective tax rates are used instead of statutory rates. In addition, the paper develops an alternative identification strategy suggesting that the first-time appearance of a tax-haven investor in the ownership chain reduces the reported profits of German-based affiliates by 61 percent if a majority of the affiliate is held by a single investor. The estimated effects are used to extrapolate the amount of shifted profits and associated revenue losses for all German-based foreign affiliates. The results suggest moderate but non-negligible revenue losses between 2.9 and 10.7 percent of corporate income tax revenues (or EUR 1.5-5.6 bn in 2015).
    Date: 2018–12
  12. By: Södersten, Jan (Department of Economics)
    Abstract: This note extends the work by Sørensen (2005) and others by demonstrating why the Norwegian Shareholder Income Tax may be neutral between the two sources of equity funds, i.e. new share issues and retained earnings, despite the fact that the retention of earnings to finance new investment does not add to the tax benefits. The analysis crucially relies on the assumption that the deduction for the imputed rate of return is capitalized into the market prices of corporate shares. Absent capitalization, the shareholder tax is rather likely to leave the distortions caused by the double taxation of corporate source income unaffected.
    Keywords: Corporate and shareholder taxation; tax neutrality; cost of capital
    JEL: H24 H25 H32
    Date: 2019–01–29

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