nep-pub New Economics Papers
on Public Finance
Issue of 2019‒09‒30
thirteen papers chosen by

  1. Do Corporate Tax Cuts Increase Income Inequality By Suresh Nallareddy; Ethan Rouen; Juan Carlos Suárez Serrato
  2. Capital Taxes and Redistribution: The Role of Management Time and Tax Deductible Investment By Juan Carlos Conesa; Begoña Dominguez
  3. Use It or Lose It: Efficiency Gains from Wealth Taxation By Fatih Guvenen; Gueorgui Kambourov; Burhanettin Kuruscu; Sergio Ocampo-Diaz; Daphne Chen
  4. Efficient wealth inequality and differential asset taxation with dynamic agency By Thomas Phelan
  5. Heterogeneity in Talent or in Tastes? Implications for Redistributive Taxation By Ian Fillmore; Trevor Gallen
  6. Charity as Income Redistribution: A Model with Optimal Taxation, Status, and Social Stigma By Aronsson, Thomas; Johansson-Stenman, Olof; Wendner, Ronald
  7. Early Childhood Investment and Income Taxation By Musab Kurnaz; Mehmet Soytas
  8. Tax and Spending Shocks in the Open Economy: Are the Deficits Twins? By Mathias Klein; Ludger Linnemann
  9. Tax havens, a huge cost for public and social activities By Jacques Fontanel
  10. Sovereign Debt Overhang, Expenditure Composition and Debt Restructurings By Tamon Asonuma; Hyungseok Joo
  11. Optimal Climate Policy: Making do with the taxes we have By Maria Belfiori; Armon Rezai
  12. Financial Regulation and the Federal Budget By Congressional Budget Office
  13. The Georgian Tax Lottery of 2012. A Multi-Methodological Assessment By Lotta Björklund Larsen; Rubina Arakelyan; Teimuraz Gogsadze; Mariam Katsadze; Sophiko Skhirtladze; Nino Muench

  1. By: Suresh Nallareddy; Ethan Rouen; Juan Carlos Suárez Serrato
    Abstract: We study the effects of corporate taxes on income inequality. Using state corporate taxes as a setting, we provide evidence that corporate tax cuts lead to increases in income inequality. This result is robust across regression, matching, and synthetic controls approaches, and to controlling for a host of potential confounders. We use Statistics of Income data from the IRS to explore mechanisms behind this result. We find tax cuts lead to higher income for both top and bottom earners, but the gains to capital income for top earners exceed the gains to total income for bottom earners. This result suggests that, while all earners appear to benefit from a corporate tax cut, the relation between tax cuts and inequality is positive, in part, because high income individuals shift their compensation to reduce taxes.
    Keywords: inequality, corporate tax cuts
    JEL: H25 H71 D63
    Date: 2019
  2. By: Juan Carlos Conesa (Stony Brook University); Begoña Dominguez (University of Queensland)
    Abstract: Should capital income be taxed for redistributional purposes? Judd (1985) suggests that it should not. He finds that the optimal capital tax is zero at steady state from the point of view of any agent. This paper re-examines this question in an infinitely-lived worker-capitalist model, in which capitalists devote management time to build capital. Two forms of capital taxation are considered: one for which investment is not tax deductible (corporate tax) and a second one for which investment is fully and immediately tax deductible (dividend tax). Our main results are as follows. The optimal corporate tax is zero at steady state from the point of view of any agent. However, the optimal dividend tax is in general not zero at steady state and depends on preference parameters, life-time wealth and the point of view (Pareto weights) of the benevolent policymaker. For Pareto weights that lead to Pareto-improving reforms, we find that labor tax rates should be eliminated while dividend tax rates should be increased to around 36 per cent at steady state.
    Date: 2019
  3. By: Fatih Guvenen; Gueorgui Kambourov; Burhanettin Kuruscu; Sergio Ocampo-Diaz; Daphne Chen
    Abstract: How does wealth taxation differ from capital income taxation? When the return on investment is equal across individuals, a well-known result is that the two tax systems are equivalent. Motivated by recent empirical evidence documenting persistent heterogeneity in rates of return across individuals, we revisit this question. With such heterogeneity, the two tax systems have opposite implications for both efficiency and inequality. Under capital income taxation, entrepreneurs who are more productive, and therefore generate more income, pay higher taxes. Under wealth taxation, entrepreneurs who have similar wealth levels pay similar taxes regardless of their productivity, which expands the tax base, shifts the tax burden toward unproductive entrepreneurs, and raises the savings rate of productive ones. This reallocation increases aggregate productivity and output. In the simulated model parameterized to match the US data, replacing the capital income tax with a wealth tax in a revenue-neutral fashion delivers a significantly higher average lifetime utility to a newborn (about 7.5% in consumption-equivalent terms). Turning to optimal taxation, the optimal wealth tax (OWT) in a stationary equilibrium is positive and yields even larger welfare gains. In contrast, the optimal capital income tax (OCIT) is negative—a subsidy—and large, and it delivers lower welfare gains than the wealth tax. Furthermore, the subsidy policy increases consumption inequality, whereas the wealth tax reduces it slightly. We also consider an extension that models the transition path and find that individuals who are alive at the time of the policy change, on average, would incur large welfare losses if the new policy is OCIT but would experience large welfare gains if the new policy is an OWT. We conclude that wealth taxation has the potential to raise productivity while simultaneously reducing consumption inequality.
    JEL: D31 D60 E21 E22 E23 E24 E62 H21 H25 H3 K34
    Date: 2019–09
  4. By: Thomas Phelan (Federal Reserve Bank of Cleveland)
    Abstract: This paper characterizes a class of stationary constrained-efficient allocations and optimal taxes in an economy with endogenous firm formation and dynamic moral hazard. I consider an environment in which entrepreneurs hire workers and rent capital to produce output subject to privately-observed shocks and have the ability to both divert capital to private consumption and abscond with a fraction of assets. To provide incentives to invest, high realizations of output must be accompanied by high future consumption, leading to ex-post inequality in the efficient allocation. I show that the distributions of consumption and wealth associated with the stationary efficient allocation exhibit thick right (Pareto) tails, with the degree of inequality monotonically increasing in the number of workers per entrepreneur. This constrained-efficient allocation is then implemented in a general equilibrium model using linear taxes on labour income, risk-free savings and business profits. The tax on entrepreneurs’ savings may be positive or negative, while the tax on business profits depends solely upon the degree of private information and is independent of all technological and demographic parameters.
    Date: 2019
  5. By: Ian Fillmore (Washington University in St. Louis); Trevor Gallen (Purdue University)
    Abstract: Do differences in tastes for leisure play an important role in determining income inequality? Using NLSY79 data on the joint distribution of lifecycle earnings and work hours, we fit a simple lifecycle model in which workers are heterogeneous in (i) their ability to accumulate human capital (talent), (ii) their preferences over consumption vs. leisure (taste), and (iii) their initial human capital. We find that tastes play a large role: 71\% of earnings variation at age 44 is due to tastes, rather than talent or initial human capital. These findings are driven by the high standard deviation in "permanent" work hours and a large positive correlation between work hours and earnings. Intuitively, tastes matter because they affect the path of wages via their effect on human capital investment. Finally, we show that exchanging the sources of income variation between talent and tastes changes redistributive tax rates significantly, particularly when heterogeneity is due to differences in the marginal utility of consumption, rather than leisure.
    Date: 2019
  6. By: Aronsson, Thomas; Johansson-Stenman, Olof; Wendner, Ronald
    Abstract: In light of the increasing inequality in many countries, this paper analyzes redistributive charitable giving from the rich to the poor in a model of optimal nonlinear income taxation. Our framework integrates (i) public and private redistribution, (ii) the warm glow of giving and stigma of receiving charitable donations, and (iii) status concerns emanating from social comparisons with respect to charitable donations and private consumption. Whether charity should be taxed or supported largely depends on the relative strengths of the warm glow of giving and the stigma of receiving charity, respectively, and on the positional externalities caused by charitable donations. In addition, imposing stigma on the mimicker (which relaxes the self-selection constraint) strengthens the case for subsidizing charity. We also consider a case where the government is unable to target the charitable giving through a direct tax instrument, and we examine how the optimal marginal income tax structure should be adjusted in response to charitable giving. Numerical simulations demonstrate that the quantitative effects of the aforementioned mechanisms can be substantial.
    Keywords: Conspicuous consumption, conspicuous charitable giving, social status, optimal income taxation, warm glow, stigma
    JEL: D03 D62 H21 H23
    Date: 2019–09–24
  7. By: Musab Kurnaz (University of North Carolina at Charlotte); Mehmet Soytas (Ozyegin University)
    Abstract: We study the impact of the income taxation on parental investment for children and its consequence on intergenerational income correlation. We estimate a life-cycle dynastic model of households and conduct counterfactual analysis to observe the effects of various tax regimes. Comparing to a no tax environment, we find that the flat taxes reduce the correlation only by one percentage points. The reduction is, however, much significant (seven percentage points) if the taxes are progressive, the average tax rate is increasing in income. The increase in income mobility is due to the increase in the fertility rate (quantity) and the decrease in the educational outcome of children (quality). We also show that when the taxes are flat within same size households but provide child benefits, which is an important component of the US income taxation, the intergenerational income correlation is four percentage points less compared to the correlation under the flat tax regime. This reduction occurs because parents with lower education invest more time in children’s human capital comparing to a flat tax regime which increases their children’s educational outcome and increases income mobility.
    Date: 2019
  8. By: Mathias Klein; Ludger Linnemann
    Abstract: We present evidence on the open economy consequences of US fiscal policy shocks identified through proxy-instrumental variables. Tax shocks and government spending shocks that raise the government budget deficit lead to persistent current account deficits. In particular, the negative response of the current account to exogenous tax reductions through a surge in the demand for imports is among the strongest and most precisely estimated effects. Moreover, we find that the reduction of the current account is amplified when the tax reduction is due to lower personal income taxes and when the government increases its consumption expenditures. Historically, a much larger share of current account dynamics has been due to tax shocks than to government spending shocks.
    Keywords: Tax policy, government spending, proxy-vector autoregressions, current account, twin deficits
    JEL: E32 E62 F41
    Date: 2019
  9. By: Jacques Fontanel (CESICE - Centre d'études sur la sécurité internationale et les coopérations européennes - UPMF - Université Pierre Mendès France - Grenoble 2 - UGA - Université Grenoble Alpes)
    Abstract: Economic globalization has favored the rise of tax havens and offshore centers, which allow powerful economic actors to escape at the new tax levies necessary to reduce public debt. At the same time, criminal activities benefit from money laundering. Money laundering circuits were so opaque that very few banks knew whether or not they had dirty or terrorist money in their books. It thus favored the policies of "beggar-thy-neighbor" with impunity for countries. There is no consensual definition of tax havens, judicial, financial and judicial. The term tax haven is often used to define all "non-cooperative territories", with resources of unknown origin. Since 2014, the United States has enacted a Foreign Account Tax Compliance Act (FATCA), which requires financial institutions around the world to disclose the transactions of US nationals. Tax havens still cultivate the secret, they protect all their operations, and they distract most activities to make more complex reading from outside. Capitalism has become difficult to control, politicians no longer control the economic situation, and worst solutions are possible because greed and foolishness of men have no limit.
    Keywords: Tax havens,money laundering,“beggar-thy-neighbor”,public budget,inequalities,public debt,GDP,banking activities,FATCA
    Date: 2019–09–11
  10. By: Tamon Asonuma (International Monetary Fund); Hyungseok Joo (University of Surrey)
    Abstract: Sovereigns' public capital influences sovereign debt crises and resolution. We compile a dataset on public expenditure composition around restructurings with private external creditors. We show that during restructurings, public investment (i) experiences severe decline and slow recovery, (ii) differs from public consumption and transfers, (iii) reduces share in public expenditure, and (iv) relates with restructuring delays. We develop a theoretical model of defaultable debt that embeds endogenous public capital accumulation, expenditure composition, production and multi-round debt renegotiations. The model quantitatively shows severe decline and slow recovery in public investment – “sovereign debt overhang” – delay debt settlement. Data support these theoretical predictions.
    JEL: F34 F41 H63
    Date: 2019–07
  11. By: Maria Belfiori (Universidad Catolica Argentina); Armon Rezai (WU Vienna University of Economics and Bu)
    Abstract: This paper studies the optimal climate policy in an economy that faces constraints on the availability of policy instruments. In a standard macro-climate growth model that includes a carbon emissions externality, the optimal policy is the introduction of a global carbon tax. After years of climate negotiations and no success in the introduction of a carbon price, this paper suggests an alternative approach which is to look for the best policies that the global economy can seek constrained by the fact that a global carbon tax is not an available tool. We show that standard fiscal instruments – not often included in the climate negotiations - are capable of achieving the optimal outcome. We theoretically characterize and quantitatively estimate the optimal tax rates, and we find that they are well within existing tax rates. These results suggest that there is value in broadening the discussion on climate policies by exploring the role that standard taxes, such as income and consumption taxes, can play in tackling the climate problem. Politicians might be keener on recalibrating the tax rate on existing taxes than on introducing new taxes.
    Date: 2019
  12. By: Congressional Budget Office
    Abstract: Financial regulation affects the federal budget directly through spending for programs that support the stability of financial institutions and through the taxes and fees that those institutions pay. Regulation also affects the budget indirectly through its effects on the economy. Those effects generate a trade-off: Increased financial regulation may lower the likelihood of a financial crisis and mitigate the severity of any crisis that occurred, but it may also raise the cost of financing for investments.
    JEL: G01 G18 G28 H50 H60 H68
    Date: 2019–09–19
  13. By: Lotta Björklund Larsen (TARC (Tax Administration Research Centre) at University of Exeter Business School); Rubina Arakelyan (ISET - International School of Economics at Tbilisi State University); Teimuraz Gogsadze (ISET - International School of Economics at Tbilisi State University); Mariam Katsadze (ISET - International School of Economics at Tbilisi State University); Sophiko Skhirtladze (ISET - International School of Economics at Tbilisi State University); Nino Muench
    Abstract: Tax lotteries are seen as ways to relatively easily augment public revenue while also increasing compliance. Tax lotteries are constructed so that consumers are nudged to ask for a receipt when making a purchase. This receipt contains information so that it can also be used as a lottery ticket with the possibility of winning prizes. Such tickets also leave traces of transaction records so that revenue authorities can audit vendors. Given this background, the aim of this paper is to provide a broad, multi-methodological and socio-economic assessment of Georgia’s tax lottery experience in 2012. Our assessment aims to describe the design of the lottery and its functioning in practice, to evaluate how the introduction of the tax lottery influenced the effectiveness of tax administration in Georgia at the country, regional, and firm level and to investigate Georgian citizens’ views of the Georgian Revenue Service (GRS) and if tax compliance was improved by the tax lottery. Economic assessment, based on data from 2012 and 2013 on weekly transactions per cash register, using three econometric specifications show that during the lottery weeks, there is a significant increase in the aggregate weekly sales compared to the non-lottery weeks. The number of cash registers reporting their income and the average weekly sales are also higher in lottery weeks. Thus, there are proper foundations to argue that the lottery propelled the increase in reported income. But this tax lottery also aimed to popularize the cash registers as well as to improve citizens’ attitude towards the GRS. Following our qualitative investigation and assessment into the Georgian Tax Lottery we would like to add the following points. GRS achieved its purpose, at least in the short term. More revenue was collected and vendors became very conscious and aware of printing and giving receipts to customers. However, what the impact became in the long run, is harder to say. Strategies of “love and fear” are difficult to make work in combination, and we find it hard to say that citizens’ views of the GRS improved. Perhaps even the contrary could be proposed.
    Keywords: Tax Lottery, Tax Evasion, Interdisciplinary Tax Study
    Date: 2019

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