nep-pub New Economics Papers
on Public Finance
Issue of 2019‒04‒29
eleven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Tax Policy for Innovation By Bronwyn H. Hall
  2. Micro-founded tax policy effects in a heterogenenous-agent macro-model By Diego d'Andria; Jason DeBacker; Richard Evans; Jonathan Pycroft; Magdalena Zachlod-Jelec
  3. "Can Redistribution Help Build a More Stable Economy?" By Dimitri B. Papadimitriou; Michalis Nikiforos; Gennaro Zezza
  4. Having it all, for all: child-care subsidies and income distribution reconciled By Barigozzi, Francesca; Cremer, Helmuth; Roeder, Kerstin
  5. Environmental Effects of Capital Income Taxation - A New Double Dividend? By Ritter, Hendrik; Runkel, Marco; Zimmermann, Karl
  6. The Determinants of Tax Revenue and Tax Effort in Developed and Developing Countries: Theory and New Evidence 1995-2015 By Marcelo Piancastelli; A.P.Thirlwall
  7. Reducing tax compliance costs through corporate tax base harmonisation in the European Union By Salvador Barrios; Diego d'Andria; Maria Gesualdo
  8. Making Carbon Taxation a Generational Win Win By Laurence J. Kotlikoff; Felix Kubler; Andrey Polbin; Jeffrey D. Sachs; Simon Scheidegger
  9. Did the 2017 Tax Reform Discriminate against Blue State Voters? By David Altig; Alan J. Auerbach; Patrick C. Higgins; Darryl R. Koehler; Laurence J. Kotlikoff; Michael Leiseca; Ellyn Terry; Yifan Ye
  10. The Swedish Fiscal Framework – The Most Successful One in the EU? By Andersson, Fredrik N. G.; Jonung, Lars
  11. Political Budget Cycles: Evidence from Swiss Cantons By Baldi, Guido; Forster, Stephan

  1. By: Bronwyn H. Hall
    Abstract: A large number of countries around the world now provide some kind of tax incentive to encourage firms to undertake innovative activity. This paper presents the policy rationale for these incentives, discusses their design and potential effectiveness, and reviews the empirical evidence on their actual effectiveness. The focus is on the two most important and most studied incentives: R&D tax credits and super deductions, and IP boxes (reduced corporate taxes in income from patents and other intellectual property).
    JEL: H25 O32 O38
    Date: 2019–04
  2. By: Diego d'Andria (European Commission - JRC); Jason DeBacker (University of South Carolina – Darla Moore School of Business); Richard Evans (University of Chicago - Becker Friedman Institute); Jonathan Pycroft (European Commission - JRC); Magdalena Zachlod-Jelec (European Commission - JRC)
    Abstract: Microsimulation models are increasingly used to calibrate macro models for tax policy analysis. Yet, their potential remains underexploited, especially in order to represent the non-linearity of the tax and social benefit system and interactions between capital and labour incomes which play a key role to understand behavioural effects. Following DeBacker et al. (2018b) we use a microsimulation model to provide the output with which to estimate the parameters of bivariate non-linear tax functions in a macro model. In doing so we make marginal and average tax rates bivariate functions of capital income and labour income. We estimate the parameters of tax functions in order to capture the most important non-linearities of the actual tax schedule, together with interaction effects between labour and capital incomes. To illustrate the methodology, we simulate a reduction in marginal personal income tax rates in Italy with a microsimulation model, translating the microsimulation results into the shock for a dynamic overlapping generations model. Our results show that this policy change affects differently households distinguished by age and ability type.
    Keywords: computable models, general equilibrium, overlapping generations, taxation, microsimulation models
    JEL: H24 H31 D58
    Date: 2019–04
  3. By: Dimitri B. Papadimitriou; Michalis Nikiforos; Gennaro Zezza
    Abstract: Although the ongoing recovery is about to become the longest in the history of the United States, it is also the weakest in postwar history, and as we enter the second quarter of 2019, many clouds have gathered. This Strategic Analysis considers the recent trajectory, the present state, and the future prospects of the US economy. The authors identify four main structural problems that explain how we arrived at the crisis of 2007-09 and why the recovery that has followed has been so weak-as well as why the prospect of a recession is increasingly likely. The US economy is in need of deep structural reforms that will deal with these problems. This report analyzes a pair of policies that begin to move in that direction, both involving an increase in the tax rate for high-income and high-net-worth households. Even if the primary justification for these policies is not economic, this report shows that if such an increase in taxes is accompanied by an equivalent increase in government outlays, the redistributive impact will have a positive macroeconomic effect while moving the US economy toward a more sustainable future.
    Date: 2019–04
  4. By: Barigozzi, Francesca; Cremer, Helmuth; Roeder, Kerstin
    Abstract: This paper studies the design of child-care policies when redistribution matters. Traditional mothers provide some informal child care, whereas career mothers purchase full time formal care in the market. The sorting of women across career paths is endogenous and shaped by a social norm about gender roles in the family. Via this social norm traditional mothersinformal child care imposes an externality on career mothers, so that the market outcome is inefficient. Informal care is too large and the group of career mothers is too small so that inefficiency and gender inequality go hand in hand. In a first-best, full information word redistribution across couples and efficiency are separable. Redistribution is performed via lump-sum transfers and taxes which are designed to equalize utilities across all couples. The efficient allocation of child care is obtained by subsidizing formal care at a Pigouvian rate. However, in a second-best settings, we show that a trade-off between the reduction of gender inequality and redistributive considerations emerge. The optimal uniform subsidy is lower than the Pigouvianlevel. Under a nonlinear policy the first-best Pigouvianrule for the (marginal) subsidy on informal care is reestablished. While the share of high career mothers continues to be distorted downward for incentive reasons, this policy is effective in reconciling the objectives of reducing the child care related gender inequalities and achieving a more equal income distribution across couples.
    Keywords: Child care; womens career choices; child care subsidies; redistribution; social norms
    JEL: D13 H23 J16 J22
    Date: 2019–04–15
  5. By: Ritter, Hendrik; Runkel, Marco; Zimmermann, Karl
    Abstract: We analyze a n-country, two-period Nash tax competition game to evaluate Sinn’s proposal to use capital income taxation as a means to decelerate fossil fuel ex- traction (Sinn, 2008). The interest and discount rate is determined on a perfectly competitive consumer loan market on which the resource extractor acts as the loan supplier. Our first result is that, with perfectly identical countries, tax rates are inefficiently low in the Nash equilibrium of the tax competition game since the tax distortion and the environmental externality are not taken into account. The sec- ond result is that, in an asymmetric setting with resource-exporting and -importing countries, the tax can turn into a subsidy in the exporting country. Moreover, we show that partial cooperation of the importers is always beneficial to them, but can be harmful to the exporter. Finally, we identify cases where full cooperation is self-enforcing.
    Keywords: Capital taxation,Green paradox,Non-renewable resources
    JEL: H21 H23 Q38 Q54
    Date: 2019
  6. By: Marcelo Piancastelli; A.P.Thirlwall
    Abstract: This paper measures the tax effort of a sample of fifty-nine developed and developing countries over the period 1995-2015 by comparing a country’s actual tax/GDP ratio with the ratio predicted derived from an international tax function which relates tax revenue to various measures of a country’s taxable capacity such as the level of per capita income; the share of trade in GDP; the productive structure, and the level of financial deepening. The tax function is estimated using cross section data; pooled time series/cross section data, and panel data using a fixed effects estimator. The results are compared and show a range of tax effort from South Africa with the highest effort and Switzerland with the lowest effort. Implications for policy are drawn.
    Keywords: Tax ratios; tax effort
    JEL: H2
    Date: 2019–04
  7. By: Salvador Barrios (European Commission - JRC); Diego d'Andria (European Commission - JRC); Maria Gesualdo (European Commission - JRC)
    Abstract: The reform proposal of the European Commission for a Common Consolidated Corporate Tax Base, the so-called CCCTB, is expected to significantly reduce the cost of doing business by lowering tax compliance costs for cross border operations within the European Union. However, to date the scarcity of comparable estimates on tax compliance costs has limited the assessment of such reduction. We exploit recently released and unique survey data designed to provide comparable information on corporate tax compliance costs in order to assess the impact of the CCCTB, using a general equilibrium modelling approach. Our results suggest that the reduction in tax compliance costs implied by the CCCTB would be associated with greater economic efficiency, including increases in both welfare and GDP. Member States resulting with the lowest compliance costs before the reform and having large inward foreign investment stock would benefit more from the CCCTB. Cross-border business operations would also benefit more from the CCCTB compared to domestic ones. The impact of the CCCTB on non-EU countries such as the US and Japan would be limited.
    Keywords: CCCTB, tax compliance costs, European Union
    JEL: H20 H30 C68
    Date: 2019–04
  8. By: Laurence J. Kotlikoff; Felix Kubler; Andrey Polbin; Jeffrey D. Sachs; Simon Scheidegger
    Abstract: Carbon taxation has been studied primarily in social planner or infinitely lived agent models, which trade off the welfare of future and current generations. Such frameworks obscure the potential for carbon taxation to produce a generational win-win. This paper develops a large-scale, dynamic 55-period, OLG model to calculate the carbon tax policy delivering the highest uniform welfare gain to all generations. The OLG framework, with its selfish generations, seems far more natural for studying climate damage. Our model features coal, oil, and gas, each extracted subject to increasing costs, a clean energy sector, technical and demographic change, and Nordhaus (2017)’s temperature/damage functions. Our model’s optimal uniform welfare increasing (UWI) carbon tax starts at $30 tax, rises annually at 1.5 percent and raises the welfare of all current and future generations by 0.73 percent on a consumption-equivalent basis. Sharing efficiency gains evenly requires, however, taxing future generations by as much as 8.1 percent and subsidizing early generations by as much as 1.2 percent of lifetime consumption. Without such redistribution (the Nordhaus “optimum”), the carbon tax constitutes a win-lose policy with current generations experiencing an up to 0.84 percent welfare loss and future generations experiencing an up to 7.54 percent welfare gain. With a six-times larger damage function, the optimal UWI initial carbon tax is $70, again rising annually at 1.5 percent. This policy raises all generations’ welfare by almost 5 percent. However, doing so requires levying taxes on and giving transfers to future and current generations ranging up to 50.1 percent and 10.3 percent of their lifetime consumption. Delaying carbon policy, for 20 years, reduces efficiency gains roughly in half.
    JEL: F0 F20 H0 H2 H3 J20
    Date: 2019–04
  9. By: David Altig; Alan J. Auerbach; Patrick C. Higgins; Darryl R. Koehler; Laurence J. Kotlikoff; Michael Leiseca; Ellyn Terry; Yifan Ye
    Abstract: The Tax Cut and Jobs Act of 2017 (TCJA) made significant changes to corporate and personal federal income taxation, including limiting the SALT (state and local property, income and sales taxes) deductibility to $10,000. States with high SALT tend to vote Democratic. This paper estimates the differential effect of the TCJA on red- and blue-state taxpayers and investigates the importance of the SALT limitation to this differential. We calculate the effect of permanent implementation of the TCJA on households using The Fiscal Analyzer: a life-cycle, consumption-smoothing program incorporating all major federal and state fiscal policies. We find that the average percentage increase in remaining lifetime spending under the TCJA is 1.6 percent in red states versus 1.3 percent in blue states. Among the richest 10 percent of households, this differential is larger. Rich households in red states enjoyed a 2.0 percent increase compared to a 1.2 percent increase among the rich in blue-state households. This gap is driven almost entirely by the limitation on the SALT deduction. Excluding the SALT limitation from the TCJA results in a spending gain of 2.6 percent for rich red-state households compared to 2.7 percent for rich blue-state households.
    JEL: D31 D72 E62 H20 H22 H71
    Date: 2019–04
  10. By: Andersson, Fredrik N. G. (Department of Economics, Lund University); Jonung, Lars (Department of Economics, Lund University)
    Abstract: This paper discusses the history and future of the Swedish fiscal framework. First, we claim that the fiscal framework has contributed to a sharp decline in the debt-to-GDP ratio, from one of the highest to one of the lowest in the European Union. Next, we focus on the future. Despite its success, we argue that the framework is unsustainable. Running large surpluses over the long run is not a steady-state solution. We recommend two changes to the framework. First, that the public pension system is excluded, and second that the Swedish fiscal authorities shift attention from maintaining a budget surplus of 1/3 percent of GDP over the business cycle to sustaining a stable debt-to-GDP ratio of 25 percent of GDP +/- 5 percentage points. A debt anchor at this level will provide sufficient insurance in case of a future major economic crisis judging from recent cross-country evidence. In addition, a debt anchor around 25 percent of GDP would contribute to political stability in time of crises. In a world, where populism and austerity fatigue are rampant, we stress the importance of a fiscal framework allowing successful consumption and tax smoothing in case of major negative shocks to the fiscal space. We conclude with a set of recommendations for the fiscal governance of the EU.
    Keywords: Fiscal policy; fiscal framework; fiscal policy council; financial crisis; debt crisis; consumption smoothing; Sweden; EU
    JEL: E61 E62 E63 G02 H12 H30 N14 O52
    Date: 2019–04–10
  11. By: Baldi, Guido; Forster, Stephan
    Abstract: Models of political budget cycles assume that politicians use fiscal policy to increase their chances of re-election. However, empirical results for advanced economies provide ambiguous support for the existence of such electoral cycles. Also, studies focusing on the regional or local level of advanced economies have found a variety of different results. In this paper, we use data at the sub-federal level of Switzerland from 1978 through 2015 to test for the presence of political budget cycles. Swiss regions called cantons are highly autonomous with regard to budgetary policy and have established direct democratic systems with frequent referendums that often affect budgetary issues. In most cantons, there are fiscal policy rules that restrict the budgetary leeway of governments. Overall, the system of government is designed to foster consensus seeking and gradual adjustment. These features should make the short-run opportunistic or partisan use of fiscal policy less likely in Swiss cantons. Rather surprisingly, however, we find at least some evidence for an electoral cycle in government spending. For government revenue or the overall budget, our empirical results do not point to an electoral cycle.
    Keywords: Political budget cycle,fiscal policy,direct democracy
    JEL: D72 E62 H62
    Date: 2019

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