nep-pub New Economics Papers
on Public Finance
Issue of 2019‒06‒17
twelve papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Taxation with Risky Human Capital and Retirement Savings By Radoslaw Paluszynski; Pei Cheng Yu
  2. The costs of taxation in the presence of inequality By Åsmund Sunde Valseth; Katinka Holtsmark; Bjart Holtsmark
  3. On the Formulation of the Alternative Scenario in Cost-Benefit Analysis By Johansson, Per-Olov; Kriström, Bengt
  4. Optimal Redistributive Taxation in Credit Markets with Adverse Selection By Anastasios Dosis
  5. Tax Reforms and Fiscal Shock Smoothing By David Amaglobeli; Laura Jaramillo; Pooja Karnane; Aleksandra Zdzienicka
  6. U.S. Investment Since the Tax Cuts and Jobs Act of 2017 By Emanuel Kopp; Daniel Leigh; Susanna Mursula; Suchanan Tambunlertchai
  7. The impacts of pollution control policies on the pollution in small open economies By Koichi Futagami; Yasuhiro Nakamoto
  8. The Macroeconomic Effects of Tax Reform: Evidence from the EU By van der Wielen, Wouter
  9. "Back-Loaded" Tax Subsidies for Saving, Asset Location and Crowd-Out: Evidence from Tax-Free Savings Accounts By Adam M. Lavecchia
  10. "Increasing Cigarette Taxes is Unfair to the Poor? Evidence from Argentina" By Martin Gonzalez-Rozada
  11. Behavioural responses to the (re)introduction of wealth taxes. Evidence from Spain By José María Durán-Cabré; Alejandro Esteller-Moré; Mariona Mas-Montserrat
  12. Will the Polish pension system go bankrupt? By Jakub Sawulski; Iga Magda; Piotr Lewandowski

  1. By: Radoslaw Paluszynski (University of Houston); Pei Cheng Yu (UNSW Business School)
    Abstract: We study optimal tax policies with human capital investment and retirement savings for present-biased agents. Agents are heterogeneous in their innate ability and make risky education investments which determines their labor productivity and affects their consumption path. We characterize the optimal wedges and show that they are different across education groups. More specifically, we demonstrate how the optimal policy encourages human capital investment with savings incentives. We show that the optimum can be implemented with income-contingent student loans, and existing retirement policies augmented by a new tax instrument that subsidizes retirement savings for college graduates. The proposed instrument takes the form of employer’s 401(k) matching contribution proportional to the repayment of student loans, and mimics the latest policy proposals that aim to incentivize college education. We show that the optimal tax system yields significant welfare gains relative to the optimal policies designed for time-consistent agents.
    Keywords: Present bias, Human capital, Retirement, Sequential screening
  2. By: Åsmund Sunde Valseth; Katinka Holtsmark; Bjart Holtsmark (Statistics Norway)
    Abstract: This paper provides a new and improved measure of the marginal cost of public funds (MCF). It is based on a benchmark tax which is distributionally neutral and non-distortive. This is in contrast to the MCF-measure used in the previous literature, that has used the regressive uniform lump-sum tax as the benchmark. Our proposed MCF-measure more precisely accounts for the distributional aspects of public funding (the tax scheme) and makes a clear distinction between this and the distributional aspects of the public good considered. Compared to the previous literature, we find a higher MCF both in the case of a uniform lump-sum tax and in the case of distortive taxes. Due to its regressive distributional consequences, we find that the MCF of a uniform lump-sum tax is always greater than one when not combined with distortive taxes. Moreover, we find that the MCF could be greater than one also with an optimal combination of a uniform lump-sum tax and distortive taxes.
    Keywords: Marginal cost of public funds; lump-sum taxes; public goods
    JEL: H20 H40 H50
    Date: 2019–06
  3. By: Johansson, Per-Olov (CERE - the Center for Environmental and Resource Economics); Kriström, Bengt (CERE - the Center for Environmental and Resource Economics)
    Abstract: In this note we discuss how a cost–benefit analysis could be formulated in a second-best world where lump-sum taxation is not available. The question is how the government’s budget is balanced. Different options are available. A value added tax or an income tax or a profit tax could be adjusted so as to balance the budget. Alternatively, expenditures on public or private goods are displaced. A variation occurs if the government has a policy target. For example, a certain number of hectares of valuable forest areas should be preserved. Then, the central part of a cost–benefit analysis is to compare the costeffectiveness of different policy instruments that can be used to achieve the target. However, there are also deadweight losses provided there are distortionary taxes. Such considerations also opens up for a broader formulation of the valuation question in willingness-to-pay experiments than one based on lump-sum taxation.
    Keywords: Cost–effectiveness; cost–benefit analysis; second best; policy targets; deadweight losses; forestry; conservation; contingent valuation; choice experiments.
    JEL: H41 I39 Q23 Q57
    Date: 2019–06–10
  4. By: Anastasios Dosis (ESSEC Business School - Essec Business School)
    Abstract: I study optimal redistributive taxation in credit markets with adverse selection. Under symmetric information, the tax system is non-distortionary and unambiguously benefits high-risk types at the expense of low-risk types. Under asymmetric information, a range of taxes exists that creates Pareto improvements relative to the (zero-tax) market allocation by increasing aggregate investment. For sufficiently high taxes, an increase in the safe interest rate can be accompanied by an increase in investment.
    Keywords: Credit market,Adverse selection,Taxation,Redistribution,Welfare
    Date: 2019–04–30
  5. By: David Amaglobeli; Laura Jaramillo; Pooja Karnane; Aleksandra Zdzienicka
    Abstract: This paper examines the role of tax policy reforms in enhancing fiscal shock smoothing in a panel of 13 OECD economies during the period 1980-2017. The results suggest that tax reforms, in particular those that broaden the tax base, significantly enhance the ability of fiscal policy to mitigate the impact of growth shocks on disposable income. We find that the magnitude of shock smoothing increases from an average of 2 percent to 3-3½ percent following the reform. The effects are considerably higher for tax base than tax rate changes, and also higher for indirect tax than direct tax changes. The effects are symmetric—that is, the increase in shock smoothing following a reform expanding the tax base (rate) is similar to the decline in shock smoothing after a reform narrowing the tax base (rate). Tax elasticity, collection efficiency, and the progressivity of the tax system are important channels through which tax reforms affect fiscal stabilization.
    Date: 2019–05–23
  6. By: Emanuel Kopp; Daniel Leigh; Susanna Mursula; Suchanan Tambunlertchai
    Abstract: There is no consensus on how strongly the Tax Cuts and Jobs Act (TCJA) has stimulated U.S. private fixed investment. Some argue that the business tax provisions spurred investment by cutting the cost of capital. Others see the TCJA primarily as a windfall for shareholders. We find that U.S. business investment since 2017 has grown strongly compared to pre-TCJA forecasts and that the overriding factor driving it has been the strength of expected aggregate demand. Investment has, so far, fallen short of predictions based on the postwar relation with tax cuts. Model simulations and firm-level data suggest that much of this weaker response reflects a lower sensitivity of investment to tax policy changes in the current environment of greater corporate market power. Economic policy uncertainty in 2018 played a relatively small role in dampening investment growth.
    Date: 2019–05–31
  7. By: Koichi Futagami (Graduate School of Economics, Osaka University); Yasuhiro Nakamoto (Faculty of Informatics, Kansai University,)
    Abstract: We examine the effects of tax policies on pollution in a small open economy. There are two pollution causes: consumption activities of households and production activities of rms. In this setup, we examine how tax policies affect pollution and the small open economy. Considering that pollution control policies are undertaken only for temporary periods in countries, we mainly focus on duration of governments' pollution control poli- cies; that is, permanent and temporary policies. The main nding is that the government in the small open economy need to tackle pollution problems from a long-term perspective in order to decrease the level of pollution.
    Keywords: Pollution, Pollution control policies, Temporary and permanent policies, Small open economy
    JEL: F41 H21 Q52
    Date: 2019–05
  8. By: van der Wielen, Wouter (European Commission - JRC)
    Abstract: This paper examines the macroeconomic effects of tax changes in the EU between 2000 and 2016. The novelty of our approach hinges on the use of real-time estimates of discretionary fiscal adjustments, covering personal income taxes, social insurance contributions, corporate income taxes and value added taxes. In particular, exploiting a unique database covering anticipated and unanticipated tax reforms in the EU, we provide the first narrative estimates of output and employment multipliers for tax reforms in the EU. Our results suggest that medium-term revenue-based output multipliers are in the range of -1.8 for unanticipated and -2.3 for anticipated reforms. Preannounced reforms, moreover, portray larger labour supply responses (by 0.7 percentage points) and temporarily impact economic activity inversely upon announcement. Finally, we find evidence of asymmetry between the effects of revenue increasing and decreasing measures in the EU. On average, revenue-based consolidations resulted in a 1.2 percentage point larger medium-term output multiplier in absolute terms.
    Keywords: fiscal multipliers, narrative approach, discretionary tax reform
    Date: 2019–06
  9. By: Adam M. Lavecchia
    Abstract: This paper presents estimates of the causal effect of Canadian Tax-Free Savings Accounts (TFSAs) balances on household saving and portfolio asset location choices. Contributions to TFSAs are not tax-deductible but capital income earned in the account accrues tax-free and withdrawals are not taxed. Using a difference-in-differences research design that exploits the sharp change in a family’s cumulative TFSA contribution room that arises when a family member turns 18 years old, I find that a 10 percent increase in TFSA balances reduces taxable financial asset holdings by 2.5 percent with no statistically significant effect on holdings in traditional tax-deferred accounts. I also find that the crowd-out in taxable asset holdings is driven by families reducing the share of their taxable financial assets held in fixed income securities
    Keywords: Tax-preferred savings accounts; back-loaded versus front-loaded subsidies; Tax-Free Savings Accounts; crowd-out
    JEL: D14 H31
    Date: 2019–06
  10. By: Martin Gonzalez-Rozada
    Abstract: Raising cigarette taxes is an important public policy to reduce the use of tobacco. The appeal of increasing cigarette taxes is obvious. Since smoking is bad for one’s health and for that of others as well, increasing prices, via taxes, will induce people to quit or cut back smoking improving their health. However, increasing cigarette taxes could also have bad consequences: they can be regressive. Increasing taxes could result in poor people paying a higher percentage of their income in taxes than do the rich. How much the increment in taxes reduces consumption and if it’s regressive are empirical questions. This paper investigates those issues for Argentina estimating total demand price elasticity for the whole sample and by income groups and then simulating an increase in cigarette taxes. The main results are, (1) total demand price elasticity estimation is around -0.28 implying that increasing prices by 10 percent, via taxes, induce a reduction of consumption of about 2.8 percent; (2) demand price elasticity estimations by income groups suggest that richer individuals are more price sensitive, in absolute value, than poorer ones with respect to consumption but they are less price sensitive with respect to prevalence; (3) increasing taxes on tobacco consumption is unfair to the poor since their welfare loss, measured by the change in consumer surplus, is 61 percent larger than the loss experienced by the richer individuals in the sample; (4) overall, the main policy recommendation is that the increment in taxes should be complemented with public health policies targeted towards the poor.
    Keywords: Tobacco taxes, consumption of cigarettes, demand price elasticity of cigarettes consumption, regresivity.
    JEL: C25 C26 H23 I18
    Date: 2019–06
  11. By: José María Durán-Cabré (Universitat de Barcelona, Institut d’Economia de Barcelona (IEB)); Alejandro Esteller-Moré (Universitat de Barcelona, Institut d’Economia de Barcelona (IEB)); Mariona Mas-Montserrat (Universitat de Barcelona, Institut d’Economia de Barcelona (IEB))
    Abstract: In the throes of economic crisis, the Spanish government decided to reintroduce the Wealth Tax, appealing to redistributive motives and its need for greater revenues. This paper studies how individuals reacted to the reintroduction of this tax by drawing on the universe of wealth tax returns submitted to the Catalan Tax Agency between 2011 and 2015. Thus, we exploit the variation in treatment exposure to analyse taxpayers' responses, in terms not only of wealth accumulation, but also of the potential avoidance strategies adopted. Indeed, our results reflect avoidance rather than real responses. They show that while facing higher wealth taxes did not have a negative effect on taxpayers' savings, it did encourage them to change their asset and income composition to take advantage of wealth tax exemptions (mostly business-related) and the existence of a limit on wealth tax liability. This translates into an elasticity of taxable wealth with respect to the net-of-tax rate of return of 0.64, or, put differently, a 0.1 percentage point increase in the average wealth tax rate leads to a reduction in taxable wealth of 3.24% over 4 years. Overall, these avoidance responses are quite marked in terms of tax revenues: they represent a 4-year accumulated revenue loss of 2.6 times the 2011 estimated wealth tax revenues. The existence of such responses mostly related to the design of the wealth tax has relevant policy implications not only in terms of revenues but also insofar as it undermines the tax's redistributive role.
    Keywords: Spanish wealth tax, behavioural responses to taxation, elasticity of taxable wealth, tax avoidance and evasion
    JEL: H24 H26
    Date: 2019
  12. By: Jakub Sawulski; Iga Magda; Piotr Lewandowski
    Abstract: How will the rapid ageing of the population affect pension expenditure in Poland? Jakub Sawulski, Iga Magda and Piotr Lewandowski show that pension expenditure will remain at a level similar to now until 2060. The most important factor preventing an increase in pension expenditure will be a drop in the level of pension benefits. The average replacement rate (the ratio between a person’s first pension and their last salary) will fall by more than double in Poland, which will be the largest fall among all EU countries.
    Keywords: pension system, pensions, public finance
    JEL: H50 H55
    Date: 2019–05

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