nep-pub New Economics Papers
on Public Finance
Issue of 2019‒09‒23
seventeen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Multiple equilibria in Lucas (1990)'s optimal capital taxation model with endogenous learning By Li, Fanghui; Wang, Gaowang
  2. The Demand for Status and Optimal Capital Taxation By Li, Fanghui; Wang, Gaowang
  3. Health Risk, Insurance and Optimal Progressive Income Taxation By Juergen Jung; Chung Tran
  4. Income Taxation and the Equilibrium Allocation of Labor By Jesper Bagger; Kazuhiko Sumiya; Mads Hejlesen; Rune Majlund Vejlin
  5. Consumption Taxes and Corporate Investment By Martin Jacob; Roni Michaely; Maximilian A. Müller
  6. Multi-part Tariffs and Differentiated Commodity Taxation By Anna D’Annunzio; Mohammed Mardan; Antonio Russo
  7. Cumulative analysis of dependence government tax behaviour on economy’s efficiency factors for totality the world countries By Sokolovskyi, Dmytro
  8. Tax audits as scarecrows. Evidence from a large-scale field experiment By Marcelo Bérgolo; Rodrigo Ceni; Guillermo Cruces; Matías Giaccobasso; Ricardo Pérez-Truglia
  9. Contribution to a Public Good under Subjective Uncertainty By Anwesha Banerjee; Nicolas Gravel
  10. Social Security Reform in the Presence of Informality By Kathleen McKiernan
  11. Rational Illiquidity and Excess Sensitivity: Theory and Evidence from Income Tax Withholding and Refunds By Michael Gelman; Dan Silverman; Matthew Shapiro; Shachar Kariv
  12. Explaining Hours Worked Across and Within Countries: Income Effects vs. Taxes and Transfers By Alexander Bick; David Lagakos; Hitoshi Tsujiyama; Nicola Fuchs-Schündeln
  14. Homeownership Investment and Tax Neutrality: a joint assessment of income and property taxes in Europe By Figari, Francesco; Verbist, Gerlinde; Zantomio, Francesca
  15. The Role of the Fiscal Administrative Act in the Romanian Tax System By Alice Cristina Maria Zdanovschi
  16. Tax Evasion and Missing Imports: Evidence From Transaction-Level Data By Mengistu, Andualem T.; Molla, Kiflu G.; Mascagni, Giulia
  17. Assessing the Performance of African Tax Administrations: A Malawian Puzzle By Ligomeka, Waziona

  1. By: Li, Fanghui; Wang, Gaowang
    Abstract: In the paper we solve the general case of the Lucas (1990) optimal capital taxation model with endogenous growth driven by endogenous learning. We prove Lucas (1990)'s conjecture on zero limiting capital tax and display the possibility of multiple equilibria (i.e., multiple BGPs) in the model.
    Keywords: Multiple Equilibria; Capital Income Tax; Endogenous Growth; Endogenous Learning
    JEL: E62 H21
    Date: 2019–09–10
  2. By: Li, Fanghui; Wang, Gaowang
    Abstract: The paper examines the famous Chamley-Judd zero capital tax theorem in model economies where agents care about their social status. We show that the limiting capital income tax is not zero in general and its sign depends only on the utility specifications. Our conclusion is robust to several important extensions: the model with multiple physical capitals, the model with both human and physical capitals, and the one with heterogeneous agents.
    Keywords: Demand for Status; Capital Income Tax; Human Capital; Heterogeneous Agents
    JEL: H21 H24
    Date: 2019–09–18
  3. By: Juergen Jung (Towson University); Chung Tran (Australian National University)
    Abstract: We study the optimal progressivity of personal income taxes in an environment where individuals are exposed to idiosyncratic shocks to health and labor productivity over the lifecycle. Our analysis is based on a large-scale overlapping generations general equilibrium model that is calibrated to the US economy. Our results indicate that the presence of health risk and health insurance has a strong effect on the amount of redistribution and social in- surance provided by progressive income taxes. In an environment with a non-universal health insurance system, such as the US system, the optimal income tax system is highly progressive in order to provide a sufficient level of redistribution to unhealthy low income individuals. The total welfare gain from optimizing the progressivity level is 5.6 percent in compensating lifetime consumption. More inclusive health insurance systems, such as Medicare for all, lead to large decreases in the optimal level of tax progressivity. When health expenditure risk is eliminated, the optimal income tax code becomes more similar to the findings of previous studies that used models without health risk. Our findings highlight the quantitative importance of accounting for the interdependence of health insurance and income taxes when designing optimal income tax policies.
    Date: 2019
  4. By: Jesper Bagger (Royal Holloway, University of London); Kazuhiko Sumiya (Royal Holloway, University of London); Mads Hejlesen (Aarhus University); Rune Majlund Vejlin (Aarhus University)
    Abstract: We study the impact of labor income taxation on workers' job search behavior and the implications it has for the equilibrium allocation of labor in a complete markets equilibrium on-the-job search model with two-sided heterogeneity, endogenous job search effort and hiring intensity, equilibrium wage formation, and firm entry and exit. By appropriating part of the gain from finding a better paid job, income taxation reduces the return to job search effort, and distorts workers' job search effort, which, in turn, distorts the equilibrium allocation of labor. The model is estimated on Danish matched employer-employee data, and is used to evaluate a series of tax reforms in Denmark in the 1990s and 2000s. We find that these income tax reforms increased aggregate productivity by 2.2% through improved labor allocation, provide a novel structural decomposition of the elasticity of taxable labor income, and to identify a Pareto optimal income tax reform.
    Date: 2019
  5. By: Martin Jacob (WHU - Otto Beisheim School of Management); Roni Michaely (University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute); Maximilian A. Müller (WHU - Otto Beisheim School of Management)
    Abstract: While consumers nominally pay the consumption tax, theoretical and empirical evidence is mixed on whether corporations partly shoulder this burden, thereby, affecting corporate investment. Using a quasi-natural experiment, we show that consumption taxes decrease investment. Firms facing more elastic demand decrease investment more strongly because they bear more of the consumption tax. We corroborate the validity of our findings using 86 consumption tax changes in a cross-country panel. We document two mechanisms underlying the investment response: reduced firms’ profitability and lower aggregate consumption. Importantly, the magnitude of the investment response to consumption taxes is similar to that of corporate taxes.
    Keywords: Consumption Tax, Investment, Tax Policy
    JEL: G31 H24 H25
    Date: 2019–08
  6. By: Anna D’Annunzio (TBS Business School and CSEF); Mohammed Mardan (Norwegian School of Economics, CESifo and NoCeT); Antonio Russo (ETH Zürich)
    Abstract: We study commodity taxation in markets where firms, such as Internet Service Providers, energy suppliers and payment card platforms, adopt multi-part tariffs. We show that ad valorem taxes can correct underprovision and hence increase welfare, provided the government applies differentiated tax rates to the usage and access parts of the tariff. We obtain this result in different settings, including vertically interlinked markets, markets where firms adopt menus of tariffs to screen consumers and where they compete with multi-part tariffs. Our results suggest that exempting these markets from taxation may be inefficient.
    Keywords: Commodity taxation, multi-part tariffs, price discrimination
    JEL: D42 D61 H21
    Date: 2019–09–13
  7. By: Sokolovskyi, Dmytro
    Abstract: The article deals with an investigation of principles, factors, and conditions of the government tax behaviour by changing the tax rate. The research base is all countries in the world for which statistics are available. We define a set of potential indicators of the economic efficiency, based on GDP and FDI, nominal and per capita, as well as the ratio of FDI to GDP. By using the statistical analysis techniques we found a correlation between government behaviour and each of the selected indicators. In order to reduce the randomness of the results, we carry out cumulative testing of the hypothesis of independence of government tax behaviour from the efficiency of the economy for all possible partitions of the countries' totality with different interrelations of the countries’ sets behaviour with different economic efficiency levels. Based on the research, it can be argued that government tax behaviour, in general, is not maximizer behaviour. We argue that the factors GDP, FDI, and GDP per capita have the biggest impact on the government tax decisions. The obtained results allow to understand the principles of governments’ decision-making, and, therefore, to forecast in some way their behaviour in certain economic conditions. In particular, partitions accumulations can help identify behavioural trends. The present paper differs from previous studies both by the topic, studying the relations between government’s tax behavior and efficiency of countries' economies and by the approach to define this dependence, since the latest can be observed only when each variant of government’s tax reaction is analyzed separately.
    Keywords: economic efficiency; tax rate; government tax behaviour; CIT; GDP; FDI; per capita
    JEL: C12 E22 H30
    Date: 2019–09–02
  8. By: Marcelo Bérgolo (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economí­a); Rodrigo Ceni (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economí­a); Guillermo Cruces (Universidad Nacional de La Plata (Argentina). Facultad de Ciencias Económicas. Centro de Estudios Distributivos, Laborales y Sociales.); Matías Giaccobasso (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economí­a); Ricardo Pérez-Truglia (Universidad de California en Los Angeles (EEUU))
    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: 2019–06
  9. By: Anwesha Banerjee (Aix-Marseille Univ, CNRS, EHESS, Ecole Centrale, AMSE, Marseille, France.); Nicolas Gravel (Centre de Sciences Humaines, 2, Dr APJ Abdul Kalam Road, 11 0011 Delhi, India. & Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE)
    Abstract: This paper examines how voluntary contributions to a public good are affected by the contributors' heterogeneity in beliefs about the uncertain impact of their contributions. It assumes that contributors have Savagian preferences that are represented by a two-state-dependent expected utility function and different beliefs about the benefit that will result from the sum of their contributions. We establish general comparative statics results regarding the effect of specific changes in the distribution of beliefs on the (unique) Nash equilibrium provision of the public good, under certain conditions imposed on the preferences. We specifically show that the equilibrium public good provision is increasing with respect to both first and second order stochastic dominance changes in the distribution of beliefs. Hence, increasing the contributors' optimism about the uncertain benefit of their contributions increases aggregate public good provision provision, as does any homogenization of these beliefs around their mean.
    Keywords: voluntary provision, public good, uncertainty, beliefs, optimism, consensus
    JEL: C72 H41
    Date: 2019–09
  10. By: Kathleen McKiernan (Vanderbilt University)
    Abstract: As populations age, countries across the globe are dealing with the issue of how to fund retirement consumption for their workers. The design of Social Security programs is more difficult when the country also exhibits an informal economy in which workers avoid the taxation of the government and are not entitled to its benefits. In this paper, I study the example of Chile–a country that transitioned from a pay-as-you-go Social Security system to a system of private, individual retirement accounts in 1981 and also exhibits a significant informal sector– in order to quantify the transitional welfare impact of Social Security privatization when workers have the option to evade the public system through informality. I construct an OLG model which allows households to split working time between a taxed formal sector, an un-taxed informal sector, and home production. I find large long-run welfare gains of roughly 10 and 15 percent for low and high-productivity workers, respectively. However, these gains come at the expense of losses for two groups: those low-productivity workers who are retired at the time of the reform and those high-productivity workers within 5 years of retirement at the time of the reform. The presence of informality has two conflicting impacts: (1) including an outside option to formal work leads to smaller long-run transfers as government revenue is lower due to substitution from the formal to the informal sector, and (2) the privatization of the Social Security system causes wage growth that informal workers can receive without facing the distortions of any remaining taxation. Quantitative results indicate that these conflicting effects roughly cancel one another out and lead to long-run welfare gains that are similar to those in an economy without informality.
    Date: 2019
  11. By: Michael Gelman (Claremont McKenna College); Dan Silverman (Arizona State University); Matthew Shapiro (University of Michigan); Shachar Kariv (University of California, Berkeley)
    Abstract: Nearly a third of all personal income tax collected by the US, government is later returned in the form of tax refunds; and households tend to spend disproportionately from those refunds. This paper develops a theory of liquid assets management that explains why households voluntarily reduce liquidity by overwitholding, but then spend in response to the liquidity provided by tax refunds. Liquidity constraints that arise endogenously when income is uncertain and when adjusting tax payments is not frictionless explain these behaviors. Tax refunds tend to arrive in circumstances where income is lower than expected, so liquidity is low and the MPC is endogenously high. The average amount of income not subject to withholding and the average annual fluctuations in that income are more than sufficient to explain the size of tax refunds, and microevidence supports central mechanisms of the model.
    Date: 2019
  12. By: Alexander Bick (Arizona State University); David Lagakos (University of California, San Diego); Hitoshi Tsujiyama (Goethe University Frankfurt); Nicola Fuchs-Schündeln (Goethe University Frankfurt)
    Abstract: Why are aggregate hours worked per adult lower in rich countries than in poor countries? Why is the individual hours-wage gradient positively sloped within rich countries and negatively sloped within poor countries? To answer these questions we build a model in which hours worked at the individual and aggregate level are shaped primarily by two distinct forces. The first force is preferences in which income effects dominate substitution effects in labor supply. The second force is the larger tax-and-transfer systems of richer countries, which lowers labor supply of all workers, particularly those with the lowest earning ability. In spite of its simplicity, the model performs well in quantitatively explaining the cross-country patterns of hours worked at the individual and aggregate level. Counterfactual exercises using the model predict that income effects are the most relevant factor for understanding how aggregate hours worked vary with GDP per capita across countries. Both income effects and tax-and-transfer systems are necessary to explain why individual hours-wage gradients turn from negative to positive with a country’s development level. These conclusions hold in an extended model that includes capital accumulation, self-employment, transitory income shocks and extensive and intensive labor supply decisions. We conclude that ignoring either one of the two forces in models of aggregate labor supply could lead to misleading inferences about the importance of income effects or taxation in determining aggregate hours worked.
    Date: 2019
  13. By: Sarah Clifford; Panos Mavrokonstantis
    Abstract: We study behavioural responses to a widely-used tax enforcement policy that combines ele¬ments of self- and third-party reporting. Taxpayers self-report to the tax authority but must file documentation issued by a third-party to corroborate their claims. Exploiting salary-dependent cutoffs governing documentation requirements when claiming deductions for charitable contribu¬tions in Cyprus, we estimate that deductions increase by £0.7 when taxpayers can claim £1 more without documentation. Second, using a reform that retroactively shifted a threshold activating documentation requirements, we estimate that at least 64% of the response is purely a reporting adjustment. Finally, reporting thresholds affect the responsiveness to tax subsidies.
    Keywords: Tax enforcement, Tax compliance, Charitable giving, Tax design
    Date: 2019–08–14
  14. By: Figari, Francesco; Verbist, Gerlinde; Zantomio, Francesca
    Abstract: Western countries’ income tax systems exempt the return from investing in owner-occupied housing. Returns from other investments are instead taxed, thus distorting households’ portfolio choices, although it is argued that housing property taxation might act as a counterbalance. Based on data drawn from the Statistics of Income and Living Conditions and the UK Family Resources Survey, and building on tax-benefit model EUROMOD, we provide novel evidence on the interplay of income and property taxation in budgetary, efficiency and equity terms in eight European countries. Results reveal that, even accounting for recurrent housing property taxation, a sizeable ‘homeownership bias’ i.e. a lighter average and marginal taxation for homeownership investment, is embedded in current tax systems, and displays heterogeneous distributional profiles across different countries. Housing property taxation represents only a partial correction towards neutrality.
    Date: 2019–09–16
  15. By: Alice Cristina Maria Zdanovschi (“Dimitrie Cantemir†Christian University, Bucharest, Romania)
    Abstract: Through this article we want to present the role of the fiscal administrative act in the Romanian tax system. Thus, we will define the fiscal administrative act and other institutions specific to the Romanian tax system, such as the administration of fiscal burdens by the tax authorities or the procedure for communicating the fiscal administrative act. Also, we will present the legal effects produced by this act, its traits and its conditions of form and substance, as well as its role in the Romanian tax system.
    Keywords: fiscal administrative act, fiscality, Romanian tax system, legal effects, tax authorities
    Date: 2019–04
  16. By: Mengistu, Andualem T.; Molla, Kiflu G.; Mascagni, Giulia
    Abstract: It is well documented in the literature that developing countries raise less tax revenue as a share of their economy than their developed counterparts. Part of this gap can be explained by the relatively higher tax evasion in the former. Recent literature shows that increasing the availability of information reduces evasion, by increasing the probability of detection. However, there is little evidence to show how tax evasion responds to changes in tax rates. Using highly disaggregated trade data, we show that there is more tax evasion when tax rates increase. However, this relationship only holds when we use the de facto effective tax rate, rather than the de jure effective tax rate. We also find that evasion takes place through under-reporting of the value of imports, as well as mislabelling highly-taxed products as similar lower-taxed products. Finally, we show that when trade costs are ignored, the level of evasion is underestimated; the degree of underestimation in the elasticity estimate depends on the way the trade cost is included in the estimation.
    Keywords: Economic Development, Finance, Governance,
    Date: 2019
  17. By: Ligomeka, Waziona
    Abstract: We lack good indicators of the quality of national tax administrations, especially for low-income countries. The situation is, however, improving. Through the relatively new TADAT process (Tax Administration Diagnostic Assessment Tool), an increasing number of national tax administrations are receiving scores from teams of peer reviewers on how well they perform in nine key functions. That scoring process is intended primarily to serve management purposes, i.e. to indicate areas for potential performance improvement. But the TADAT scores are, inevitably, widely viewed as performance rankings. A revenue administration with a higher average TADAT score will be viewed as ‘better’ than one with a lower score. But how accurate are these implicit rankings? An analysis of the case of the Malawi Revenue Authority raises important questions about both the rankings and the broader question of how to identify good tax administration. The authority’s TADAT scores are very low. But its actual revenue collection performance is relatively good: compared to other countries in sub-Saharan Africa, it collects a relatively high proportion of GDP in tax, and is particularly successful in collecting direct taxes, especially from larger companies. A very high proportion of revenues are collected by the small Large Taxpayers Unit. Yet the unit uses only very basic digital technology to keep records on those companies. This is a puzzle. The likely explanation is that a small number of staff successfully monitor larger companies for revenue collection purposes using relatively informal, low-tech methods. There are two broader implications. One is that performance can vary considerably between different parts of the same organisation, and performance indicators intended to apply to the organisation as a whole may be misleading. The other is that we still have some way to go in both understanding and measuring the factors that lead to good tax administration.
    Keywords: Economic Development, Finance, Governance,
    Date: 2019

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