nep-pub New Economics Papers
on Public Finance
Issue of 2019‒05‒27
sixteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Making Carbon Taxation A Generational Win Win By Laurence J. Kotlikoff; Felix Kubler; Andrey Polbin; Jeffrey D. Sachs; Simon Scheidegger
  2. Do fiscal rules constrain political budget cycles? By Bram Gootjes; Jakob de Haan; Richard Jong-A-Pin
  3. Fiscal Policies in Booms and Busts By De Grauwe, Paul; Foresti, Pasquale; Ji, Yuemei
  4. Public good provision financed by nonlinear income tax under reduction of envy By Takuya Obara; Shuichi Tsugawa
  5. The Motives to Borrow By Fatás, Antonio; Ghosh, Atish; Panizza, Ugo; Presbitero, Andrea
  6. Case Studies in Tax Revenue Mobilization in Low-Income Countries By Bernardin Akitoby; Jiro Honda; Hiroaki Miyamoto; Keyra Primus
  7. Financial Frictions and Stimulative Effects of Temporary Corporate Tax Cuts By William Gbohoui; Rui Castro
  8. Should We Tax Sugar-Sweetened Beverages? An Overview of Theory and Evidence By Hunt Allcott; Benjamin Lockwood; Dmitry Taubinsky
  9. Regressive Sin Taxes, With an Application to the Optimal Soda Tax By Hunt Allcott; Benjamin Lockwood; Dmitry Taubinsky
  10. Tax Audits as Scarecrows. Evidence from a Large-Scale Field Experiment By Bergolo, Marcelo; Ceni, Rodrigo; Cruces, Guillermo; Giaccobasso, Matias; Perez-Truglia, Ricardo
  11. The Optimal Turnover Threshold and Tax Rate for SMEs By Feng Wei; Jean-François Wen
  12. Efficient taxation of fuel and road use By Geir H. M. Bjertnæs
  13. Tax pass-through in the European beer market By Aria Ardolan; Sebastian G. Kessing
  14. Analysis of tax evasion methods in Russia and ways to counter them By Gromov, Vladimir (Громов, Владимир); Zakharenkova, Elena (Захаренкова, Елена); Korytin, Andrey (Корытин, Андрей); Milogolov, Nikolay (Милоголов, Николай)
  15. The Rise and Decline of Private Foundations as Controlling Owners of Swedish Listed Firms: The Role of Tax Incentives By Henrekson, Magnus; Johansson, Dan; Stenkula, Mikael
  16. Redistributive Impacts of Fiscal Policies in Mexico: Corrections for Top Income Measurement Problems By Vladimir

  1. By: Laurence J. Kotlikoff (Boston University and NBER); Felix Kubler (University of Zurich and Swiss Financial Institute); Andrey Polbin (The Russian Presidential Academy of National Economy and Public Administration and The Gaidar Institute for Economic Policy); Jeffrey D. Sachs (Columbia University and NBER); Simon Scheidegger (University of Lausanne)
    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 largescale, 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
  2. By: Bram Gootjes; Jakob de Haan; Richard Jong-A-Pin
    Abstract: We examine whether fiscal rules constrain incumbent governments to use fiscal policy for re-election purposes. Using data on fiscal rules provided by the IMF for a sample of 77 (advanced and developing) countries over the 1984-2015 period, we find that after the Global Financial Crisis political budget cycles occur only in countries with weak fiscal rules. This conclusion is robust for the inclusion of other conditioning factors for political budget cycles identified in the literature (such as media freedom, the presence of checks and balances, and the maturity of democracy) and for controlling for the potential endogeneity of fiscal rules.
    Keywords: political budget cycles; fiscal policy; fiscal rules
    JEL: E62 H62
    Date: 2019–05
  3. By: De Grauwe, Paul; Foresti, Pasquale; Ji, Yuemei
    Abstract: We introduce fiscal policies into a behavioral macroeconomic model. We show how animal spirits play an important role in the dynamics of the business cycle and of public debt. These animal spirits are able to generate different sizes of fiscal multipliers depending on the state of the economy. Depending on the interest rate regime (high or low), they affect the capacity of fiscal authorities to stabilize the economy. In the high interest rate regime the fiscal authorities face a steep trade-off between output stabilization and the stabilization of public debt, i.e. attempts to stabilize the business cycle quickly hit a limitation of debt sustainability. In the low interest rate regime, when the steady state interest rate is lower than the growth rate of the economy, the use of fiscal policy as a tool of output stabilization is made considerably stronger.
    Keywords: Fiscal Multiplier; Fiscal policy; low and high interest rate regimes; public debt sustainability; tradeoffs
    Date: 2019–05
  4. By: Takuya Obara; Shuichi Tsugawa
    Abstract: We examine optimal taxation and public good provision by a government that considers reduction of envy as a constraint. We adopt the extended envy-freeness proposed by Diamantaras and Thomson (1990), called λ-equitability. We derive the modified Samuelson rule under an optimal nonlinear income tax and show, using a constant elasticity of substitution utility function, that the direction of distorting the original Samuelson rule to relax the λ envy-free constraint is crucially determined by the elasticity of substitution. Furthermore, we numerically show that the optimal level of provision increases (decreases) in the degree of envy-freeness when the original Samuelson rule is upwardly (downwardly) distorted.
    Date: 2019–02
  5. By: Fatás, Antonio; Ghosh, Atish; Panizza, Ugo; Presbitero, Andrea
    Abstract: Governments issue debt for good and bad reasons. While the good reasons-intertemporal tax-smoothing, fiscal stimulus, and asset management-can explain some of the increases in public debt in recent years, they cannot account for all of the observed changes. Bad reasons for borrowing are driven by political failures associated with intergenerational transfers, strategic manipulation, and common pool problems. These political failures are a major cause of overborrowing. Budgetary institutions and fiscal rules can play a role in mitigating governments' tendencies to overborrow. While it is difficult to establish a clear causal link from high public debt to low output growth, it is likely that some countries pay a price-in terms of lower growth and greater output volatility-for excessive debt accumulation.
    Keywords: Fiscal policy; political economy; public debt
    JEL: E62 H62 H63 P16
    Date: 2019–05
  6. By: Bernardin Akitoby; Jiro Honda; Hiroaki Miyamoto; Keyra Primus
    Abstract: How can Low-Income Countries (LICs) enhance tax revenue collection to finance their vast development needs? We address this question by analyzing seven tax reform experiences in LICs (Burkina Faso, The Gambia, Maldives, Mauritania, Rwanda, Senegal, and Uganda). Three lessons stand out, although reforms must be tailored to individual circumstances: (i) Tax reforms require first and foremost political commitment and buy-in from key stakeholders; (ii) Countries that pursue both revenue administration and tax policy reforms tend to see much larger and persistent gains; and (iii) A successful strategy often starts with fiscal reform measures with immediate effect to build momentum. These can include: simplifying the tax system; curbing exemptions; reforming indirect taxes on goods and services (e.g., excises); and better managing compliance risks through strengthening taxpayer segmentation (often beginning with strengthening the Large Taxpayers Office). A comprehensive reform strategy (e.g., a medium-term revenue strategy) can help to properly sequence reform measures and facilitate their implementation.
    Date: 2019–05–10
  7. By: William Gbohoui; Rui Castro
    Abstract: This paper uses an industry equilibrium model where some firms are financially constrained to quantify the effects of a transitory corporate tax cut funded by a future tax increase on the U.S. economy. It finds that by increasing current cash-flows tax cuts alleviate financing frictions, hereby stimulating current investment. Per dollar of tax stimulus, aggregate investment increases by 26 cents on impact, and aggregate output by 3.5 cents. The average effect masks heterogeneity: multipliers are close to 1 for constrained firms, especially new entrants, and negative for larger and unconstrained firms. The output effects extend well past the period the policy is reversed, leading to a cumulative multiplier of 7.2 cents. Multipliers are significantly larger when controlling for the investment crowding-out effect among unconstrained firms.
    Date: 2019–05–07
  8. By: Hunt Allcott; Benjamin Lockwood; Dmitry Taubinsky
    Abstract: Taxes on sugar-sweetened beverages are growing in popularity and have generated an active public debate. Are they a good idea? If so, how high should they be? Are such taxes regressive? People in the U.S. and some other countries consume remarkable quantities of sugar-sweetened beverages, and the evidence suggests that this generates significant health costs. Building on recent work by Allcott, Lockwood, and Taubinsky (Forthcoming) and others, we review the basic economic principles that determine the socially optimal SSB tax. The optimal tax depends on (1) externalities: uninternalized health system costs from diseases caused by sugary drink consumption; (2) internalities: costs consumers impose on themselves by consuming too many sugary drinks due to poor nutrition knowledge or lack of self-control; and (3) regressivity: how much the financial burden and the internality benefits from the tax fall on the poor. We summarize the empirical evidence about the key parameters affect how large the tax should be. In the theoretical framework of Allcott, Lockwood, and Taubinsky (Forthcoming), our calculations imply that sugar-sweetened beverage taxes are welfare enhancing, and indeed that the optimal nationwide SSB tax rate may be higher than the one cent per ounce rate most commonly used in U.S. cities. Using our theoretical framework, we end by deriving seven concrete implications for optimal SSB tax structure.
    JEL: D00 D6 D9 H0
    Date: 2019–05
  9. By: Hunt Allcott; Benjamin Lockwood; Dmitry Taubinsky
    Abstract: A common objection to “sin taxes”—corrective taxes on goods that are thought to be overconsumed, such as cigarettes, alcohol, and sugary drinks—is that they often fall disproportionately on low-income consumers. This paper studies the interaction between corrective and redistributive motives in a general optimal taxation framework and delivers empirically implementable sufficient statistics formulas for the optimal commodity tax. The optimal sin tax is increasing in the price elasticity of demand, increasing in the degree to which lower-income consumers are more biased or more elastic to the tax, decreasing in the extent to which consumption is concentrated among the poor, and decreasing in income effects, because income effects imply that commodity taxes create labor supply distortions. Contrary to common intuitions, stronger preferences for redistribution can increase the optimal sin tax, if lower-income consumers are more responsive to taxes or are more biased. As an application, we estimate the optimal nationwide tax on sugar-sweetened beverages in our model, using Nielsen Homescan data and a specially designed survey measuring nutrition knowledge and self-control. Holding federal income tax rates constant, we find an optimal federal sugar-sweetened beverage tax of 1 to 2.1 cents per ounce in our model, although optimal city-level taxes could be as much as 60% lower due to cross-border shopping.
    JEL: D9 H0 I1
    Date: 2019–05
  10. By: Bergolo, Marcelo (IECON, Universidad de la República); Ceni, Rodrigo (IECON, Universidad de la República); Cruces, Guillermo (CEDLAS-UNLP); Giaccobasso, Matias (University of California, Los Angeles); Perez-Truglia, Ricardo (University of California, Los Angeles)
    Abstract: The canonical model of Allingham and Sandmo (1972) predicts that firms evade taxes by optimally trading off between the costs and benefits of evasion. However, there is no direct evidence that firms react to audits in this way. We conducted a large-scale field experiment in collaboration with Uruguay's tax authority to address this question. We sent letters to 20,440 small- and medium-sized firms that collectively paid more than 200 million dollars in taxes per year. Our letters provided exogenous yet nondeceptive signals about key inputs for their evasion decisions, such as audit probabilities and penalty rates. We measured the effect of these signals on their subsequent perceptions about the auditing process, based on survey data, as well as on the actual taxes paid, based on administrative data. We find that providing information about audits had a significant effect on tax compliance but in a manner that was inconsistent with Allingham and Sandmo (1972). Our findings are consistent with an alternative model, risk-as-feelings, in which messages about audits generate fear and induce probability neglect. According to this model, audits may deter tax evasion in the same way that scarecrows frighten off birds.
    Keywords: tax, evasion, audits, penalties, frictions
    JEL: C93 H26 K34 K42 Z13
    Date: 2019–05
  11. By: Feng Wei; Jean-François Wen
    Abstract: Presumptive income taxes in the form of a tax on turnover for SMEs are pervasive as a way to reduce the costs of compliance and administration. We analyze a model where entrepreneurs allocate labor to the formal and informal sectors. Formal sector income is subjected either to a corporate income tax or a tax on turnover, depending on whether their turnover exceeds a threshold. We characterize the private sector equilibrium for any given configuration of tax policy parameters (corporate income tax rate, turnover tax rate, and threshold). Given private behavior, social welfare is optimized. We interpret the first-order conditions for welfare maximization to identify the key margins and then simulate a calibrated version of the model.
    Date: 2019–05–07
  12. By: Geir H. M. Bjertnæs (Statistics Norway)
    Abstract: This study calculates efficient taxes on fuel and road use designed to combat driving related externalities. The study shows that the efficient road user charge on fuel is below the marginal mileage-related damage to prevent tax avoidance due to an excessive economic driving-style. The current US tax rate on gasoline is way below the efficient tax rate while the current UK rate is slightly above the efficient rate in this case. The efficient tax on fuels exceeds the marginal damage of CO2- emissions to promote an economic driving-style when the tax is combined with a GPS-based tax on road use. The efficient GPS-based tax rate on road use is reduced below the marginal damage of mileage-related externalities in this case.
    Keywords: Transportation; optimal taxation; environmental taxation; global warming
    JEL: H2 H21 H23 Q58 R48
    Date: 2019–04
  13. By: Aria Ardolan; Sebastian G. Kessing
    Abstract: We study the pass-through of indirect taxes on beer prices in the European Union (EU). Exploiting the variation of value added tax rates, beer excise tax rates, and beer prices in a panel of monthly data from 1996 to 2016 of all current 28 EU member states, we estimate the tax pass-through of specific beer excise taxes and ad valorem value added taxes (VAT). VAT is under-shifted at a rate of approximately 70%. Specific excise taxes are almost fully shifted to prices in the EU, but, in contrast to the empirical findings for the US, there is no evidence of over-shifting. The difference between the two tax pass-through rates points towards the importance of imperfect competition in the European beer market. Excise tax increases are passed through faster and at a higher rate than excise tax decreases.
    Keywords: tax incidence, pass-through, VAT, excise taxes, EU, beer
    JEL: H22 H23
    Date: 2019
  14. By: Gromov, Vladimir (Громов, Владимир) (The Russian Presidential Academy of National Economy and Public Administration); Zakharenkova, Elena (Захаренкова, Елена) (The Russian Presidential Academy of National Economy and Public Administration); Korytin, Andrey (Корытин, Андрей) (The Russian Presidential Academy of National Economy and Public Administration); Milogolov, Nikolay (Милоголов, Николай) (The Russian Presidential Academy of National Economy and Public Administration)
    Abstract: The paper deals with various aspects of one of the most important problems of present day – tax evasion. The desire to minimize taxes often encourages taxpayers to look for ways to circumvent tax legislation in order to get tax benefits without being liable for that. Tax schemes are the challenge for any state, but to overcome this problem we need a comprehensive approach that includes institutional and technological, tax and legal solutions.
    Date: 2019–04
  15. By: Henrekson, Magnus (Research Institute of Industrial Economics (IFN)); Johansson, Dan (Örebro University School of Business); Stenkula, Mikael (Research Institute of Industrial Economics (IFN))
    Abstract: Private foundations became a vehicle for the corporate control of large listed firms in Sweden during the post-war era, but in the 1990s, they were replaced by wealthy individuals who either directly own controlling blocks or who own them through holding companies. We study potential explanations for this change and pro­pose two taxation-related candidates: shifts in the relative effective taxation across owner types and the dismantling of the inheritance taxation that prevented the genera­tional transfer of the ownership of large controlling blocks. Our analysis exploits newly computed marginal effective capital income tax rates across capital owners, accounting for all relevant factors, including rules governing tax exemptions. We show that the 1990–91 tax reform, abolition of the wealth tax for controlling owners in 1997, 2003 tax exemption of dividends and capital gains on listed stock for holding companies with a voting or equity share of at least 10 percent, and abolition of the inheritance and gift taxes in 2004 reversed the rules of the game. Recently, control has largely been wielded through direct ownership, and the role of foundations is rapidly declining. These find­ings point to the importance of tax incentives for the use of foundations as the control vehicles of listed firms.
    Keywords: Corporate governance; Entrepreneurship; Family firms; Foundations; Owner-level taxation
    JEL: H20 K34 L26 N44
    Date: 2019–05–20
  16. By: Vladimir
    Abstract: This study assesses the redistributive impacts of fiscal instruments in a 2014 Mexican household budget survey (ENIGH) correcting for potential top-income measurement problems. We use two correction methods based on within-survey information to re-estimate the redistributive impacts of contributory pensions and cash-like transfers; direct taxes; indirect taxes and subsidies; and in-kind transfers. The two methods are: survey-sample reweighting for households’ nonresponse probability, and replacing of top incomes using synthetic values from the Pareto distribution. This replacing is implemented either on all core income concepts, or on net market income from which it is passed onto other incomes through fiscal rules. These corrections yield higher inequality as measured by the Gini (0–9 increase) and the top 1%- and 10%-income shares (0–5, and 1–5 increases), consistently between the reweighting and replacing methods, and consistently across all income concepts. Moving from pre-fiscal market income to post-fiscal final income, corrections for nonresponse fall slightly, while corrections for mismeasurement rise. Taxable income is subject to the highest inequality, which further undergoes the highest upward correction for top income problems, potentially consistent with evidence of earnings misreporting among the rich. Conversely, nontaxable income has a strong equalizing impact of 3.3–4.5 points of the Gini further accentuated under the top-income corrections. The corrections confirm the inequality-neutral impact of pensions in Mexico, and equalizing impacts of transfers, direct taxes, indirect taxes and subsidies, and in-kind transfers. In-kind transfers, cash-like transfers and direct taxes have the strongest equalizing impacts of 4.7–5.7, 1.6–1.9, and 1.2–2.2 points of the Gini, respectively. Indirect taxes and subsidies are weakly equalizing, by 0.4-0.6 points. Finally, top-income measurement challenges retain their magnitude across the 2010, 2012 and 2014 ENIGH, but household nonresponse becomes more positively selected over time, causing more serious biases.
    Keywords: fiscal incidence; redistribution; inequality; top income measurement problems; Pareto distribution; Mexico; ENIGH
    JEL: D31 D63 H22 I38 N36
    Date: 2019–03

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.