nep-pub New Economics Papers
on Public Finance
Issue of 2019‒06‒24
fifteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The Relationship between Economic Uncertainty and Corporate Tax Rates By Matthew W. Clance; Giray Gozgor; Rangan Gupta; Chi Keung Marco Lau
  2. Optimal Positive Capital Taxes at Interior Steady States By Jess Benhabib; Bálint Szőke
  3. The Implications of Social Security’s “Missing Trust Fund” By Alicia H. Munnell; Wenliang Hou; Geoffrey T. Sanzenbacher
  4. Fiscal policy and fiscal fragility: Empirical evidence from the OECD By El-Shagi, Makram; von Schweinitz, Gregor
  5. Budget Rules, Distortionnary Taxes, and Aggregate Instability: A reappraisal By Maxime Menuet; Alexandru Minea; Patrick Villieu
  6. Heterogeneous Capital Tax Competition in a Federation with Tax Evasion By Lisa Grazzini; Alessandro Petretto
  7. The Impact of Country-by-Country Reporting on Corporate Tax Avoidance By Felix Hugger
  8. Endogenous fluctuations and the balanced-budget rule: taxes versus spending-based adjustment By Maxime Menuet; Alexandru Minea; Patrick Villieu
  9. How Does Taxation Affect Hours Worked in EU New Member States? By Agustin Velasquez; Svetlana Vtyurina
  10. The unanimity rule and corporate tax revenue in the EU By Beznoska, Martin; Hentze, Tobias
  11. Relative Income Poverty Rates and Poverty Alleviation via Tax/benefit Systems in 49 LIS-Countries, 1967-2016 By Koen Caminada; Jinxian Wang; Kees Goudswaard; Chen Wang
  12. Online Platform Operators as Sovereigns over the Ecommerce Sellers Selected by the German Legislator By Brettschneider, Jörg
  13. How to Improve Tax Compliance? Evidence from Population-wide Experiments in Belgium By Jan-Emmanuel De Neve; Clement Imbert; Maarten Luts; Johannes Spinnewijn; Teodora Tsankova
  14. Tax Bunching at the Kink in the Presence of Low Capacity of Enforcement: Evidence From Uruguay By Marcelo Bérgolo; Gabriel Burdín; Mauricio De Rosa; Matías Giaccobasso; Martín Leites
  15. Redistributive Impacts of Fiscal Policies in Mexico: Corrections for Top Income Measurement Problems By Vladimir Hlasny

  1. By: Matthew W. Clance (Department of Economics, University of Pretoria, Pretoria, South Africa); Giray Gozgor (Istanbul Medeniyet University, Turkey); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Chi Keung Marco Lau (University of Huddersfield, United Kingdom)
    Abstract: This paper investigates the relationship between economic uncertainty and corporate tax rates in the panel dataset of 126 countries over the period 2003–2018. We use the new index so-called the “World Uncertainty Index” to measure the level of economic uncertainty. We utilise various estimation techniques and find that a one-way causality that runs from economic uncertainty to corporate tax rates. Specifically, a rise in economic uncertainty leads to higher corporate tax rates. We also discuss potential implications.
    Keywords: corporate taxation, economic uncertainty, uncertainty shocks, business cycles, panel data estimation techniques
    JEL: G38 D81 F44 C23
    Date: 2019–06
  2. By: Jess Benhabib; Bálint Szőke
    Abstract: We generalize recent results of Bassetto and Benhabib (2006) and Straub and Werning (2018) in a model with endogenous labor-leisure choice where all agents are allowed to save and accumulate capital. In particular, using a neoclassical infinite horizon model with standard balanced growth preferences and agents heterogeneous in their initial wealth holdings, we provide a sufficient condition under which optimal redistributive capital taxes can remain at their allowed upper bound forever, even if the resulting equilibrium trajectory converges to a unique steady state with positive and finite consumption, capital, and labor. We first generate some simple parametric examples which satisfy our sufficient condition and for which closed form solutions exist. We then provide an interpretation of our sufficient condition for equilibria induced by general constant returns neo-classical production functions. Using recent evidence on wealth distribution in the United States, we argue that our sufficient condition is empirically plausible.
    JEL: E62 H21 H23
    Date: 2019–05
  3. By: Alicia H. Munnell; Wenliang Hou; Geoffrey T. Sanzenbacher
    Abstract: As policymakers consider restoring financial balance to Social Security, understanding the reason for the shortfall is important. If the cost of currently scheduled benefits simply exceeds what today’s workers are paying into the system, the traditional proposals to reduce benefits or raise payroll taxes would be most relevant. However, the cause of the shortfall lies elsewhere. Specifically, the program’s “pay-as-you-go” approach – with the exception of the recent build-up and spend-down of a modest trust fund in anticipation of the baby boom – makes the program expensive. This financing approach is the result of a policy decision in the late 1930s to pay benefits far in excess of contributions for the early cohorts of workers. The decision essentially gave away the trust fund that would have accumulated and, importantly, gave away the interest on those contributions. This brief, based on a recent paper, explores the implications of the “Missing Trust Fund.” The discussion proceeds as follows. The first section discusses the origin of the Missing Trust Fund and its cost implications for current workers. The second section discusses how the Missing Trust Fund relates to Social Security’s Legacy Debt and the pattern of net transfers over the generations. The third section lays out alternative paths forward – funding vs. pay-as-you-go and payroll taxes vs. income taxes. The final section highlights three implications. First, Social Security costs are high, not because the program is particularly generous, but because the trust fund is missing. Second, the beneficiaries of the trust fund giveaway were early generations; in contrast, the much-maligned baby boomers are scheduled to pay for their full benefits. Finally, if policymakers choose to maintain Social Security benefits at current-law levels, little rationale exists for placing the entire burden of the Missing Trust Fund on today’s workers through higher payroll taxes; that component could be financed more equitably through the income tax.
    Date: 2019–06
  4. By: El-Shagi, Makram; von Schweinitz, Gregor
    Abstract: In this paper, we use local projections to investigate the impact of consolidation shocks on GDP growth, conditional on the fragility of government finances. Based on a database of fiscal plans in OECD countries, we show that spending shocks are less detrimental than tax-based consolidation. In times of fiscal fragility, our results indicate strongly that governments should consolidate through surprise policy changes rather than announcements of consolidation at a later horizon.
    Keywords: fiscal multipliers,fiscal consolidation,local projections
    JEL: E62 H63
    Date: 2019
  5. By: Maxime Menuet (CERDI - Centre d'Études et de Recherches sur le Développement International - UdA - Université d'Auvergne - Clermont-Ferrand I - CNRS - Centre National de la Recherche Scientifique); Alexandru Minea (CERDI - Centre d'Études et de Recherches sur le Développement International - UdA - Université d'Auvergne - Clermont-Ferrand I - CNRS - Centre National de la Recherche Scientifique); Patrick Villieu
    Abstract: In a seminal contribution, Schmitt-Grohé and Uribe (JPE, 1997), showed that the balanced-budget rule (BBR) produces aggregate instability in an exogenous growth model with labor tax-based adjustment. The present paper challenges this result in an endogenous growth framework with a more general budget rule, involving deficit and debt in the long-run and making the BBR a special case. We show that the emergence of aggregate instability dramatically depends on the level of public spending. In particular, low public spending ensures determinacy. However, in the case of high public spending, multiplicity arises, with four potential equilibria: two high-growth BGPs, a low-growth trap, and a "catastrophic" equilibrium where the economy asymptotically collapses. In addition, when the ratio of public spending is sufficiently large, a subcritical Hopf bifurcation appears around the low-growth trap, giving rise to a homoclinic orbit going around the neighborhood of the catastrophic equilibrium. A calibration exercise confirms that these results are obtained for realistic values of parameters.
    Keywords: Distortionary taxation,Indeterminacy,Budget rules,Public Debt,Endogenous growth,Bifurcation
    Date: 2019–06–12
  6. By: Lisa Grazzini; Alessandro Petretto
    Abstract: In a federal country with two regions, consumers can decide not only the region where to invest, but also the type of capital investment. We analyse how such decision is affected by two sources of asymmetry: a first type of capital is taxed at a regional level while a second one is taxed at a federal level, and for the latter a different degree of tax evasion may arise across regions. We show how tax evasion arising at a federal level affects not only the federal tax policy but also the regional tax policies both directly and indirectly because of vertical tax competition. In particular, we show under which conditions a decrease in the level of tax compliance on the second type of capital can lead to a reduction in its federal tax rate, and simultaneously to an increase in the regional tax rate on the other type of capital investment.
    Keywords: Fiscal federalism; Tax Competition, Tax evasion.
    JEL: H2 H41 H71 H77
    Date: 2019
  7. By: Felix Hugger
    Abstract: Within the framework of its BEPS initiative, the OECD introduced a requirement for non-public country-by-country reporting (CbCR) applying to multinational companies with revenues above EUR 750m. The reports provide data on the global activities and financial structure of multinationals at a country level to tax authorities. This paper investigates the effectiveness of this measure against corporate tax avoidance using a difference-in-difference approach. The analysis is based on financial data both at the group and the subsidiary level. By testing several hypotheses, this paper provides limited support for the effectiveness of CbCR. While the effective tax rates of multinational groups with a reporting requirement increase by about 0.8 percentage points as compared to companies in the control group, the growth rate of total tax payments is unaffected. This seems to be due to a reduction of the tax base which is also due to a rise in leverage and resulting tax-deductible interest payments. At the same time, shifting of profits out of high tax jurisdictions is reduced by CbCR, but not at the expense of low tax OECD countries. CbCR therefore seems to primarily reduce profits located in tax haven affiliates of multinational groups. Lastly, there is little evidence for a distribution of profits closer aligned with frequently suggested apportionment factors.
    Keywords: Corporate tax avoidance, multinational firms, country-by-country reporting, profit shifting,
    JEL: H20 H26 F23 K34
    Date: 2019
  8. By: Maxime Menuet (CERDI - Centre d'Études et de Recherches sur le Développement International - UdA - Université d'Auvergne - Clermont-Ferrand I - CNRS - Centre National de la Recherche Scientifique); Alexandru Minea (CERDI - Centre d'Études et de Recherches sur le Développement International - UdA - Université d'Auvergne - Clermont-Ferrand I - CNRS - Centre National de la Recherche Scientifique); Patrick Villieu (LEO - Laboratoire Economie Orléans - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The present paper develops a simple theoretical setup to examine the role of the tax-spending mix of fiscal adjustments on aggregate (in)stability in indebted economies. To this end, we build an AK endogenous growth model with public debt dynamics. If the adjustment of the government's budget constraint is based on a single instrument (taxes or public spending), the economy converges towards a high-growth path. With mixed adjustment, however, another equilibrium appears (the no-growth path) that can be locally over-determine (unstable) or under-determined (stable). A hopf bifurcation can occurs at the border between the last two cases, which leads to cyclical dynamics. We also show that global indeterminacy is likely to emerge if fiscal adjustment is mainly based on public spending. A calibration of the model shows that area of indeterminacy covers reasonable values for parameters.
    Keywords: hopf bifurcation,balanced-budget rules,indeterminacy,Endogenous growth
    Date: 2019–06–12
  9. By: Agustin Velasquez; Svetlana Vtyurina
    Abstract: Hours worked vary widely across countries and over time. In this paper, we investigate the role played by taxation in explaining these differences for EU New Member States. By extending a standard growth model with novel data on consumption and labor taxes, we assess the evolution of trends in hours worked over the 1995-2017 period. We find that the inclusion of tax rates in the model significantly improves the tracking of hours. We also estimate the elasticity of hours (and its different margins) to quantify the deadweight loss introduced by consumption and labor taxes. We find that these taxes explain a large share of labor supply differences across EU New Member States and that the potential gains from policy actions are noteworthy.
    Date: 2019–06–17
  10. By: Beznoska, Martin; Hentze, Tobias
    Abstract: Politicians accuse corporations of sneakily shifting their profits to tax havens. In fact, tax revenues in low-tax countries such as Ireland and Malta have risen sharply over the past 20 years. However, revenue growth in large countries like Germany and France is not slow. Interestingly, EU countries which favor the unanimity rule in tax issues show higher growth rates in tax revenue than countries preferring a qualified majority system.
    Date: 2019
  11. By: Koen Caminada; Jinxian Wang; Kees Goudswaard; Chen Wang
    Abstract: Most welfare states design their tax/benefit system to combat income poverty. Some countries are more effective in poverty alleviation than others. What can explain these variations in outcomes and effectiveness? And has the redistributive power of different social programs changed over time and across countries? This paper analyzes the effectiveness of social transfers and income taxes in alleviating poverty. We focus on 49 LIS-countries for the period 1967-2016. We compare relative income poverty rates at the levels of market incomes and disposable incomes, that is before and after social transfers and income taxes, in order to analyze the effect of tax and transfer policies in reducing income poverty, i.e. to determine the target efficiency of social transfers. We perform several tests with the most recent data. Finally, we perform several partial analyses by disaggregating poverty rates to socioeconomic and demographic conditions in order to investigate to what extent variations at the social program level (such as old age pensions, child benefits) affect the measured effectiveness of the welfare state in alleviating income poverty. We use micro-data from the Luxembourg Income Study (LIS) to examine household market income poverty and disposable income poverty, the antipoverty effect of social transfers and income taxes, and the underlying social programs that drive the changes. LIS data are detailed enough to allow us to measure both overall poverty reduction, and the partial effects of poverty reduction by several taxes or transfers. We elaborate on the work of Caminada et al (2017, 2018 and 2019). LIS data also allow us to decompose the trajectory of the market income poverty to disposable income poverty in several parts (i.e. 9 different benefits and income taxes and social contributions). The Leiden LIS Budget Incidence Fiscal Redistribution Dataset on Relative Income Poverty (LLBIFR Dataset on Relative Income Poverty 2019) allows researchers and public policy analysts to compare antipoverty effects across developed countries and middle income countries over the last five decades. Research may employ these data in addressing several important issues. Changes (in the generosity) of welfare states can be linked to changes in the antipoverty effects. Best-practices among countries can be identified and analyzed in detail. The LLBIFR on Relative Income Poverty 2019 with its detailed data on income taxes and a large number of individual social benefits offers a rich source of information which may be used by scholars and policy analysts to study the effects of different social programs on economic well-being.
    JEL: H53 H55 I32
    Date: 2019–02
  12. By: Brettschneider, Jörg
    Abstract: The German law to combat VAT fraud and other tax regulations went into force recently. The German legislator aims to enforce German VAT law via a liability of platform operators (like Amazon and eBay). The consequences of this regulatory approach are a) that platform operators enforce the law more strictly in relation to the ecommerce sellers than required by the law, b) that legal uncertainty occurs and c) that the legal protection of ecommerce sellers is not clear. Background of the more strict enforcement is that platform operators want to avoid liability risks. The situation from the ecommerce sellers’ perspective is described and discussed.
    Keywords: VAT,VAT fraud,Umsatzsteuer,ecommerce,online-Handel,Amazon,ebay,Steuerbetrug,Mehrwertsteuer,Gesetz zur Vermeidung von Umsatzsteuerausfällen beim Handel mit Waren im Internet,China,Germany,Haftung,Liability,UStG,Umsatzsteuergesetz,Finanzamt Neukölln,legal enforcement,electronic marketplace,Fulfillment by Amazon,Value Added Tax,Fulfillment,e-commerce,Marktplatzhaftung
    JEL: K34 H25 H26
    Date: 2019
  13. By: Jan-Emmanuel De Neve; Clement Imbert; Maarten Luts; Johannes Spinnewijn; Teodora Tsankova
    Abstract: We study the impact of deterrence, tax morale, and simplifying information on tax compliance. We ran _ve experiments spanning the tax process which varied the communication of the tax administration with all income taxpayers in Belgium. A consistent picture emerges across experiments: (i) simplifying communication increases compliance, (ii) deterrence messages have an additional positive effect, (iii) invoking tax morale is not effective. Even tax morale messages that improve knowledge and appreciation of public services do not raise compliance. In fact, heterogeneity analysis with causal forests shows that tax morale treatments backfire for most taxpayers. In contrast, simplification has large positive effects on compliance, which diminish over time due to follow-up enforcement. A discontinuity in enforcement intensity, combined with the experimental variation, allows us to compare simplification with standard enforcement measures. Simplification is far more cost-effective, allowing for substantial savings on enforcement costs, and also improves compliance in the next tax cycle.
    Keywords: tax compliance, field experiments, simplification, enforcement
    JEL: C93 D91 H20
    Date: 2019–05
  14. By: Marcelo Bérgolo (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía); Gabriel Burdín (The University of Leeds); Mauricio De Rosa (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía); Matías Giaccobasso (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía); Martín Leites (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía)
    Abstract: A first-order policy issue in low and middle income countries is how to design optimal tax systems in order to improve the state’s potential of supporting economic development. Although information regarding behavioral responses to taxation is a key input for tax design, the evidence in developing contexts is still scarce. In this paper we contribute to fill this gap by exploring in detail how individual taxpayers respond to personal income taxation in Uruguay. To do this, we rely on rich administrative tax records covering the universe of Uruguayan taxpayers and implement a bunching design. First, we find a moderate implied elasticity of taxable income (0.16) in the first kink point of the tax schedule. Second, we investigate the mechanisms driving these responses extensively. We find that the observed responses are a combination of both gross labor income and deductions responses. In particular, we document a more intensive use of personal deductions for taxpayers close to the kink point, and suggestive evidence of evasion responses through unilateral and employer-employee collusion labor income misreporting. Our results suggest that policy efforts should be directed at broadening the tax base and improving the enforcement capacities of tax authorities rather than eroding tax progressivity.
    Keywords: Personal income taxation, tax bunching, elasticity of labor income, deductions behavior, misreporting, developing economies
    JEL: H21 H24 H30 J22
    Date: 2019–02
  15. By: Vladimir Hlasny
    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.
    JEL: D31 D63 H22 I38 N36
    Date: 2019–06

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.