nep-pub New Economics Papers
on Public Finance
Issue of 2019‒05‒06
thirteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. A strategic tax mechanism By Stamatopoulos, Giorgos
  2. Aligning profit taxation with value creation By Wolfram F. Richter
  3. Long-Run Tax Incidence in a Human Capital-based Endogenous Growth Model with Labor-Market Frictions By Been-Lon Chen; Hung-Ju Chen; Ping Wang
  4. Does progressivity always lead to progress? The impact of local redistribution on tax manipulation By Tommaso Giommoni
  5. Fragility in modeling consumption tax revenue By Kazuki Hiraga; Kengo Nutahara
  6. Death and Taxes: Does Taxation Matter for Firm Survival? By Serhan Cevik; Fedor Miryugin
  7. Tax Mechanisms and Gradient Flows By Stefan Steinerberger; Aleh Tsyvinski
  8. Optimal Cooperative Taxation in the Global Economy By Chari, V. V.; Nicolini, Juan Pablo; Teles, Pedro
  9. Transparency and Tax Evasion: Evidence from the Foreign Account Tax Compliance Act (FATCA) By De Simone, Lisa; Lester, Rebecca; Markle, Kevin
  10. Property Tax Reform and Land Use: Evidence from Japan By Tomomi Miyazaki; Motohiro Sato
  11. Tax Bunching at the Kink in the Presence of Low Capacity of Enforcement: Evidence from Uruguay By Bergolo, Marcelo; Burdín, Gabriel; De Rosa, Mauricio; Giaccobasso, Matias; Leites, Martin
  12. Are the South African fiscal authorities serious about tax base broadening? By Estian Calitz
  13. Presumptive Income Tax Assessment of SME's in Addis Ababa, Ethiopia By Mekonnen Workneh, Amanuel; Mulugeta Baileyegn, Endalkachew; Stewart-Wilson, Graeme

  1. By: Stamatopoulos, Giorgos
    Abstract: We introduce a novel commodity tax mechanism in oligopolies that improves upon the standard tax policies. The government (i) announces an excise tax rate $\tau$ and (ii) auctions-off a number of tax exemptions. Namely, it invites the firms in a market to acquire the right to be exempted from the excise tax. The highest bidders are exempted paying the government their bids; and all other firms remain subject to $\tau$. Depending on the characteristics of the market, the mechanism we suggest has a number of desirable features. First, it allows the government to collect more revenues than the standard commodity tax policies (this is due to the competition among the firms to acquire the exemptions). Second, for markets where firms have informational advantage over the government, the mechanism allows for information revelation (via the firms' bids in the auction). Third, it impedes collusive activities in the market (as the mechanism creates an artificial asymmetry among the firms, which hinders collusion). Lastly, the mechanism is voluntary, namely the firms participate in the auction only if they wish and hence they are free to choose how to be taxed.
    Keywords: excise tax; tax exemption; auction; asymmetric information; collusion
    JEL: H21 H25 L1
    Date: 2019–05–01
  2. By: Wolfram F. Richter
    Abstract: The OECD seeks to align transfer pricing and profit taxation with value creation but fails to provide a clear definition. This paper argues that value creation requires international cooperation and that the profit tax base should therefore be allocated according to standards commonly considered as fair when distributing the surplus of cooperation. The claim that current rules of international profit taxation are aligned with value creation is rejected. If anything, the OECD’s objective suggests a tax system in which profits are split between the involved jurisdictions. This result triggers the question of possible implementation which is discussed in some detail.
    Keywords: international corporate income taxation, intellectual property, value creation, Shapley value, profit splitting
    JEL: H25 F23 M48
    Date: 2019
  3. By: Been-Lon Chen; Hung-Ju Chen; Ping Wang
    Abstract: In a second-best optimal growth setup with only factor taxes, it is in general optimal to fully replace capital by labor income taxation in the long run. We revisit this important issue by developing a human capital-based endogenous growth model with frictional labor search, allowing each firm to create multiple vacancies and each worker to determine market participation. We find that the conventional efficient bargaining condition is necessary but not sufficient for achieving constrained social optimality. We then conduct tax incidence exercises in balanced growth by calibrating to the U.S. economy with a pre-existing 20% flat tax on capital and labor income. Our quantitative results suggest that, due to a dominant channel via the interactions between vacancy creation and market participation, it is optimal to switch only partially from capital to labor taxation in a benchmark economy where human capital formation depends on both physical and human capital stocks. This main finding is robust even along the transition with time-varying factor tax rates. Moreover, our quantitative analysis under alternative setups suggest that while endogenous human capital and labor market frictions are essential for obtaining a positive optimal capital tax, endogenous leisure, nonlinear human capital accumulation and endogenous growth are not crucial.
    JEL: E62 H22 J24 O41
    Date: 2019–04
  4. By: Tommaso Giommoni
    Abstract: The goal of this paper is to study the effects of introducing income redistribution at the municipal level, with the adoption of local tax progressivity. In particular, we analyse whether this complex fiscal tool modifies the incentives of local politicians to be strategic leading to higher tax manipulation, in the form of political budget cycle. We exploit an Italian reform of the local personal income tax (PIT), which was flat before the intervention, that allows mayors to introduce progressive schemes. First, we make use of the staggered timing of local elections to estimate a Difference-in-Differences model and we find that the reform consistently amplifies political budget cycle of local PIT. In terms of mechanism, progressivity allows mayors to target diverse income groups and to play different strategies: high income rates, indeed, are subject to larger manipulation than the moderate ones. Second, we exploit the fact that income concentration level is a valid predictor for the introduction of progressivity. The main results are confirmed in a Triple-Differences analysis. And finally, we show that manipulation is rewarding from an electoral point of view. These results reveal a negative side of decentralizing income redistribution as it may lead to consistent tax manipulation and large distortions in fiscal policy.
    Keywords: tax progressivity, personal income tax, political budget cycle, tax manipulation, fiscal federalism
    JEL: D72 E62 H71 P16
    Date: 2019
  5. By: Kazuki Hiraga; Kengo Nutahara
    Abstract: This study shows that the shape of the tax revenue curve for consumption tax and its boundedness are sensitive to (i) the functional form of utility and (ii) the use of tax revenue in a neoclassical general equilibrium model. The tax revenue curve for consumption tax cannot be hump-shaped if the utility function is King- Plosser-Rebelo utility with constant labor supply elasticity. Conversely, the curve can be hump-shaped if the utility function is additively separable in consumption and labor supply or if the utility function is Greenwood-Hercowitz-Huffman, both of which are popular in the literature. The use of tax revenue also has significant effects on the tax revenue curve for consumption tax. If the tax revenue is mainly used as a lump-sum transfer to households, Then the tax revenue is likely to be unbounded, whereas it is likely to be bounded and the tax revenue curve is likely to be hump-shaped if the tax revenue is mainly used as government consumption.
    Date: 2019–02
  6. By: Serhan Cevik; Fedor Miryugin
    Abstract: This paper investigates the impact of taxation on firm survival, using hazard models and a large-scale panel dataset on over 4 million nonfinancial firms from 21 countries over the period 1995–2015. We find ample evidence that a lower level of effective marginal tax rate improves firms’ survival chances. This result is not only statistically but also economically important and remains robust when we partition the sample into country subgroups. The effect of taxation on firms’ survival probability is found to exhibit a non-linear pattern and be stronger in developing countries than advanced economies. These findings have important policy implications for the design of corporate tax systems. The challenge is not simply reducing the statutory tax rate, but to level the playing field for all firms by rationalizing differentiated tax treatments across sectors, asset types and sources of financing.
    Date: 2019–04–19
  7. By: Stefan Steinerberger; Aleh Tsyvinski
    Abstract: We demonstrate how a static optimal income taxation problem can be analyzed using dynamical methods. Specifically, we show that the taxation problem is intimately connected to the heat equation. Our first result is a new property of the optimal tax which we call the fairness principle. The optimal tax at any income is invariant under a family of properly adjusted Gaussian averages (the heat kernel) of the optimal taxes at other incomes. That is, the optimal tax at a given income is equal to the weighted by the heat kernels average of optimal taxes at other incomes and income densities. Moreover, this averaging happens at every scale tightly linked to each other providing a unified weighting scheme at all income ranges. The fairness principle arises not due to equality considerations but rather it represents an efficient way to smooth the burden of taxes and generated revenues across incomes. Just as nature wants to distribute heat evenly, the optimal way for a government to raise revenues is to distribute the tax burden and raised revenues evenly among individuals. We then construct a gradient flow of taxes -- a dynamic process changing the existing tax system in the direction of the increase in tax revenues -- and show that it takes the form of a heat equation. The fairness principle holds also for the short-term asymptotics of the gradient flow, where the averaging is done over the current taxes. The gradient flow we consider can be viewed as a continuous process of a reform of the nonlinear income tax schedule and thus unifies the variational approach to taxation and optimal taxation. We present several other characteristics of the gradient flow focusing on its smoothing properties.
    Date: 2019–04
  8. By: Chari, V. V. (Federal Reserve Bank of Minneapolis); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis); Teles, Pedro (Banco de Portugal)
    Abstract: We use the Ramsey and Mirrlees approaches to study how fiscal and trade policy should be set cooperatively when governments must raise revenues with distorting taxes. Free trade and unrestricted capital mobility are optimal. Efficient outcomes can be implemented with taxes only on final consumption goods and labor income. We study alternative tax systems, showing that uniform taxation of household asset returns, and not taxing corporate income yields efficient outcomes. Border adjustments exempting exports from and including imports in the tax base are desirable. Destination and residence based tax systems are desirable compared to origin and source based systems.
    Keywords: Capital income tax; Free trade; Value-added taxes; Border adjustment; Origin- and destination-based taxation; Production efficiency
    JEL: E60 E61 E62
    Date: 2019–04–18
  9. By: De Simone, Lisa (Stanford University); Lester, Rebecca (Stanford University); Markle, Kevin (University of Iowa)
    Abstract: We examine how U.S. individuals respond to regulation intended to reduce offshore tax evasion. Specifically, we study investment responses to the Foreign Account Tax Compliance Act (FATCA), which requires foreign financial institutions to report information to the U.S. government regarding U.S. account holders. We document a $15.3 billion decrease in equity foreign portfolio investment to the U.S. from tax haven countries after FATCA implementation, consistent with a decrease in “round-tripping†investment activity attributable to U.S. investors’ offshore tax evasion activities. When testing total worldwide investment out of financial accounts in havens post-FATCA, we find a decline of $56.6-$78.0 billion. We also provide evidence of other important consequences of this regulation, including increased expatriations of U.S. citizens and greater investment in alternative assets not subject to FATCA reporting, such as residential real estate and artwork. Our study contributes to both the academic literature on regulation and crime and to the policy analysis of regulation to reduce tax evasion.
    Date: 2019–02
  10. By: Tomomi Miyazaki (Graduate School of Economics, Kobe University); Motohiro Sato (Graduate School of Economics, Hitotsubashi University)
    Abstract: It is often said that farmland conservation in urban areas (i.e., cities and inner suburbs) is not desirable because it hinders converting farmland into residential areas, thereby deterring urbanization. If the preferential treatment of property taxes on farmland is rectified, these problems can be solved. In this paper, we study two property tax preferential treatment reforms that took place in Japan during the 1990s. We examine the effects of these reforms by theoretical and empirical investigation. The econometric results are consistent with our theoretic model’s main predictions; the proportion of farmland in the major cities in the three metropolitan areas (Tokyo, Chubu, and Kansai) decreased following the reforms. However, since landlords did not replace all the farmland with housing lots, the problem of obstructed urbanization remains to be solved.
    Keywords: Property tax; Land use in urban area; preferential treatment on farmland; urbanization
    JEL: H22 H71 R52 R58
    Date: 2019–04
  11. By: Bergolo, Marcelo (IECON, Universidad de la República); Burdín, Gabriel (Leeds University Business School); De Rosa, Mauricio (Universidad de la República, Uruguay); Giaccobasso, Matias (University of California, Los Angeles); Leites, Martin (Universidad de la República, Uruguay)
    Abstract: By using a bunching design on rich administrative tax records from Uruguay's tax agency we explore how individual taxpayers respond to personal income taxation in a context with high sheltering opportunities. We estimate a moderated elasticity of taxable income in the first kink point (0.16) driven by a combination of gross labor income and deductions responses. Taxpayers use personal deductions more intensively close to the kink point and undereport income unilaterally or through employer-employee collusion. Our results suggest that policy efforts should be directed at broadening the tax base and improving the enforcement capacities rather than eroding tax progressivity.
    Keywords: deductions behavior, elasticity of labor income, tax bunching, personal income taxation, misreporting, developing economies
    JEL: H21 H24 H30 J22
    Date: 2019–04
  12. By: Estian Calitz (Emeritus Professor, Department of Economics, Stellenbosch University)
    Abstract: Developing countries are often advised to broaden their tax base. The South African fiscal authorities have at various times claimed to do so, inter alia in order to reduce tax rates. The paper explores whether they have been serious about base broadening. Various conceptual issues are raised in defining base broadening and base erosion. Drawing on budget documentation, tax measures of base broadening and erosion from 1994 to 2018 were tabulated. A selection of the most salient nonquantified measures and all quantified measures are presented. Net budgeted base broadening (2018 prices) of R1.7 billion is reported, in the process of which various tax increases and decreases were also implemented. The need for a much more systematic quantification of all base-broadening and base-erosion tax measures in South Africa is indicated. This should not only occur at the time of announcement but especially to track and report the actual outcome of all such measures in subsequent years.
    Keywords: Tax base broadening, Tax efficiency, Tax base erosion, Tax evasion and avoidance, Tax measures, South African fiscal authorities
    JEL: H20 H21 H26
    Date: 2019
  13. By: Mekonnen Workneh, Amanuel; Mulugeta Baileyegn, Endalkachew; Stewart-Wilson, Graeme
    Abstract: At their most general, presumptive taxes seek to use indirect means to assess the liability of a specific taxpayer, which differ from the usual rules based on taxpayer accounts. Many countries use some form of presumptive taxation to simplify the rules for businesses and individuals that frequently escape taxation. Ethiopia uses presumptive taxation as a simplified method of revenue collection from small informal sector firms. To implement its presumptive tax, the Ethiopian Revenue and Customs Authority (ERCA) carries out an assessment process to estimate the income earned by small informal sector firms. Defined as ‘Category C’ taxpayers—those with an estimated annual turnover less than 500,000 birr (US$17,500)—such firms are subject to a ‘turnover-based’ or ‘indicator-based’ presumptive assessment. Annual tax bills are then levied on the assessed income of Category C taxpayers.
    Keywords: Finance, Governance,
    Date: 2019

This nep-pub issue is ©2019 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.