nep-pub New Economics Papers
on Public Finance
Issue of 2019‒03‒04
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Don’t Tax Capital — Optimal Ramsey Taxation in Heterogeneous Agent Economies with Quasi-Linear Preferences By Chien, YiLi; Wen, Yi
  2. Optimal Capital Taxation in an Economy with Innovation-Driven Growth By Chen, Ping-ho; Chu, Angus C.; Chu, Hsun; Lai, Ching-Chong
  3. The Political Economy of an Optimal Congestion Tax: An Empirical Investigation By Claudio R. Lucinda; Rodrigo Moita
  4. On the Principles of Commodity Taxation under Interregional Externalities By Fabio Antoniou; Panos Hatzipanayotou; Michael S. Michael; Nikos Tsakiris
  5. Market Power and Income Taxation By Louis Kaplow
  6. A psychometric investigation of the personality traits underlying individual tax morale By Nicolas Jacquemet; Stephane Luchini; Antoine Malézieux; Jason Shogren
  7. Voluntary Disclosure Schemes for Offshore Tax Evasion By Matthew Gould; Matthew D. Rablen
  8. Tax Evasion on a Social Network By Duccio Gamannossi degl’Innocenti; Matthew D. Rablen
  9. Norms, Enforcement, and Tax Evasion By Timothy Besley; Anders Jensen; Torsten Persson
  10. Demand Shocks Change the Excess Burden From Carbon Taxes By Schaufele, Brandon

  1. By: Chien, YiLi (Federal Reserve Bank of St. Louis); Wen, Yi (Federal Reserve Bank of St. Louis)
    Abstract: We build a tractable infinite-horizon Aiyagari-type model with quasi-linear preferences to address a set of long-standing issues in the optimal Ramsey taxation literature. The tractability of our model enables us to analytically prove the existence of Ramsey steady states and establish several strong and novel results: (i) Depending on the government’s capacity to issue debts, there can exist different types of Ramsey steady state and their existence depends critically on model parameter values. (ii) The optimal capital tax is exclusively zero in a Ramsey steady state regardless of the modified golden rule and government debt limits. (iii) Along the transition path toward a Ramsey steady state, optimal capital tax depends positively on the elasticity of intertemporal substitution. (iv) When a Ramsey steady state (featuring a non-binding government debt limit) does not exist but is erroneously assumed to exist, the modified golden rule always “holds” and the implied “optimal” long-run capital tax is strictly positive, reminiscent of the result obtained by Aiyagari (1995). (v) Whether the modified golden rule holds depends critically on the government’s capacity to issue debts, but has no bearing on the planner’s long-run capital tax scheme. (vi) The optimal debt-to-GDP ratio in the absence of a binding debt limit, however, is determined by a positive wedge times the modified-golden-rule saving rate; the wedge is decreasing in the strength of the individual self-insurance position and approaches zero when the idiosyncratic risk vanishes or markets are complete. The key insight behind our results is the Ramsey planner’s ultimate concern for self-insurance. Since taxing capital in the steady state permanently hinders individuals’ self-insurance positions, the Ramsey planner prefers (i) issuing debt rather than imposing a steady-state capital tax to correct the capital-overaccumulation problem under precautionary saving motives, and (ii) taxing capital only in the short run regardless of its debt positions. Thus, in sharp contrast to Aiyagari’s argument, permanent capital taxation is not the optimal tool to achieve aggregate allocative efficiency despite overaccumulation of capital, and the modified golden rule can fail to hold in a Ramsey equilibrium whenever the government encounters a debt-limit.
    Keywords: Optimal Capital Taxation; Ramsey Problem; Incomplete Markets
    JEL: E13 E62 H21 H30
    Date: 2019–02–22
  2. By: Chen, Ping-ho; Chu, Angus C.; Chu, Hsun; Lai, Ching-Chong
    Abstract: This paper examines whether the Chamley-Judd result of a zero optimal capital tax rate is valid in an innovation-driven growth model. We examine how the optimal capital tax rate varies with externalities associated with R&D and innovation. Our results show that the optimal capital tax rate is higher when (i) the "stepping on toes effect" is smaller, (ii) the "standing on shoulders effect" is stronger, or (iii) the extent of creative destruction is greater. By calibrating our model to the US economy, we find that the optimal capital tax rate is positive, at a rate of around 11.9 percent. We also find that a positive optimal capital tax rate is more likely to be the case when there is underinvestment in R&D.
    Keywords: Optimal capital taxation; R&D externalities; innovation
    JEL: E62 O31 O41
    Date: 2019–02
  3. By: Claudio R. Lucinda; Rodrigo Moita
    Abstract: Despite widely prescribed by economists, a congestion tax is seldom used in practice. Why? This paper combines a structural econometric model with a simulation algorithm to estimate an optimal congestion tax and investigate its political acceptance. Results for Sao Paulo show the tax to be 2 USD per trip. Policy simulations indicate that (i) commuters that switch to the public transportation bears the largest share of the tax burden and (ii) revenue recycling is essential for the policy to be accepted. Skepticism about the use of tax revenues is the likely cause for the low use of the congestion tax.
    Keywords: pigouvian tax; urban transportation; congestion; urban toll
    JEL: L92 R41 L91
    Date: 2019–02–19
  4. By: Fabio Antoniou; Panos Hatzipanayotou; Michael S. Michael; Nikos Tsakiris
    Abstract: We examine the efficiency of decentralized commodity taxation where consumption tax revenue finances public sector activities related to interregional externalities. We consider two cases; tax revenue finances (i) public pollution abatement in the presence of consumption generated transboundary pollution, and (ii) the provision of an interregional public consumption good, in the absence of pollution. The key result of our study is that in either case, non-cooperative equilibrium origin-based consumption taxes are efficient, while destination-based taxes are not. When consumption tax revenue is lump-sum distributed, neither type of consumption taxes is efficient.
    Keywords: Commodity taxation, Origin principle, Destination principle, Interregional externalities, Efficiency, Public goods
    JEL: H21 H23 H41
    Date: 2019–02
  5. By: Louis Kaplow
    Abstract: Does significant market power or the presence of large rents affect optimal income taxation, calling for greater redistribution due to tainted gains? Or perhaps less because of an additional wedge that distorts labor effort? Do concerns about inequality have implications for antitrust, regulation, trade, and other policies that influence market power, which contributes to inequality? This article addresses these questions in a model with heterogeneous abilities and hence a concern for distribution, markups, multiple sectors, ownership that is a function of income, allowance for any share of profits to be recoveries of investments (including rent-seeking efforts), endogenous labor supply, and a nonlinear income tax. In this model, proportional markups with no profit dissipation have no effect on the economy, and a policy that reduces a nonproportional markup raises (lowers) welfare when it is higher (lower) than a weighted average of other markups. With proportional (partial or full) profit dissipation, proportional markups are equivalent to a downward shift of the distribution of abilities, and the welfare effect of correcting nonproportional markups associated with nonproportional profit dissipation now depends also on the degree of dissipation and how that is affected by the policy. In all cases, optimal policies maximize consumer plus producer surplus, without regard to a policy’s distributive effects on consumers and profits or how markups and income taxation distort labor effort.
    JEL: D42 D61 H21 H23 K21 L12 L40
    Date: 2019–02
  6. By: Nicolas Jacquemet (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Stephane Luchini (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université - EHESS - École des hautes études en sciences sociales); Antoine Malézieux (BETA - Bureau d'Économie Théorique et Appliquée - INRA - Institut National de la Recherche Agronomique - UNISTRA - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique); Jason Shogren (Departement Economy and Finance, University of Wyoming - UW - University of Wyoming)
    Date: 2019–02–05
  7. By: Matthew Gould (Brunel University, UK); Matthew D. Rablen (University of Sheffield, UK)
    Abstract: Tax authorities worldwide are implementing voluntary disclosure schemes to recover tax on offshore investments. The US and UK, in particular, have implemented such schemes in response to bulk acquisitions of information on o¤shore holdings, recent examples of which are the Paradise and Panama papers. Schemes oter affected investors the opportunity to make a voluntary disclosure, with reduced ne rates for truthful disclosure. Might such incentives, once anticipated by investors, simply encourage evasion in the rst place? We characterize the investor/tax authority game with and without a scheme, allowing for the possibility that some o¤shore investment has legitimate economic motives. We show that a scheme increases net expected tax revenue, decreases illegal o¤shore investment, increases onshore investment, but could either increase or decrease legal o¤shore investment. The optimal disclosure scheme o¤ers maximal incentives for truthful disclosure by imposing the minimum allowable rate of ne.
    Keywords: voluntary disclosure; offshore tax evasion; tax amnesty; third party information
    JEL: H26 D85
    Date: 2019–02
  8. By: Duccio Gamannossi degl’Innocenti (University of Exeter, UK); Matthew D. Rablen (University of Sheffield, UK)
    Abstract: We relate tax evasion behavior to a substantial literature on social comparison in judgements. Taxpayers engage in tax evasion as a means to boost their expected consumption relative to others in their social network. The unique Nash equilibrium of the model relates optimal evasion to a (Bonacich) measure of network centrality: more central taxpayers evade more. Given that tax authorities are now investing heavily in big-data tools that aim to construct social networks, we investigate the value of acquiring network information. We do this using networks that allow for celebrity taxpayers, whose consumption is widely seen, and who are systematically of higher wealth. We show that there are pronounced returns to the initial acquisition of network information, albeit targeting audits with highly incomplete knowledge of social networks may be counterproductive.
    Keywords: Tax Evasion; Social Networks; Network centrality; Optimal Auditing; Social Comparison; Relative Consumption
    JEL: H26 D85 K42
    Date: 2019–02
  9. By: Timothy Besley; Anders Jensen; Torsten Persson
    Abstract: This paper studies individual and social motives in tax evasion. We build a simple dynamic model that incorporates these motives and their interaction. The social motives underpin the role of norms and is the source of the dynamics that we study. Our empirical analysis exploits the adoption in 1990 of a poll tax to fund local government in the UK, which led to widespread evasion. The evidence is consistent with the model's main predictions on the dynamics of evasion.
    JEL: H26 H3
    Date: 2019–02
  10. By: Schaufele, Brandon
    Abstract: Two basic propositions underlying the economics of taxation -- that excess burdens increase in elasticities and tax rates -- are shown to cause the stringency of a Pigouvian tax to vary nonlinearly with output prices. This varying stringency of carbon taxation contributes to unfavorable competitiveness consequences following shocks to demand. Empirically, this paper measures the change in carbon tax stringency by structurally recovering the supply schedule for a particular industry such that elasticities and carbon tax rates change according to the distribution of output prices. Based on this supply function, the relationship between marginal excess burden, a measure of policy stringency from the industry's perspective, and product prices is estimated. Results for the Canadian cattle industry show that with moderately high output prices, supply elasticities are small, tax rates are low and the efficiency cost of a carbon tax (gross of environmental benefits), such as the one introduced in Canada, is less than \$0.01 per dollar tax revenue. As prices decline, supply curves become increasingly elastic, tax rates rise and marginal excess burdens grow rapidly.
    Keywords: Carbon pricing; cattle; marginal excess burden; production function
    JEL: H23 Q1 Q5
    Date: 2019–02–08

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