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on Public Finance |
| By: | Nicola Curci (Bank of Italy); Marco Savegnago (Bank of Italy) |
| Abstract: | We assess how a tax shift from labour to consumption affects the Italian tax-benefit system in terms of the efficiency-equity trade-off. We designed three budget-neutral scenarios, where the revenues generated by increasing VAT rates are used to finance some alternative cuts in direct taxes. In all the scenarios, the trade-off is confirmed: efficiency increases but equity decreases. However, the scenario best positioned in the trade-off is the one providing an increase in labour income tax credits: in this case, the increase in efficiency is the highest and the decrease in equity is the lowest. We also account for the distribution of winners and losers following this reform. We show that, even if the losers are mostly concentrated in the lowest part of the equivalent income distribution, the recently introduced minimum income schemes provide these households with a benefit that is much higher than the loss generated by the tax shift. |
| Keywords: | microsimulation model, redistribution, efficiency, taxation, progressivity |
| JEL: | H22 H23 H31 C15 C63 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1244_19&r=all |
| By: | Jackson, Laura E. (Bentley University); Otrok, Christopher (University of Missouri ; Federal Reserve Bank of St. Louis); Owyang, Michael T. (Federal Reserve Bank of St. Louis) |
| Abstract: | We propose a method to decompose changes in the tax structure into a component measuring the level of taxes and a component orthogonal to the level that measures progressivity. While our focus is on the progessivity results, we find that the level shock is similar to standard tax shocks found in the empirical literature in that a rise in the level is contractionary. An increase in tax progressivity sets off an economic boom. Those at the bottom of the income distribution (who are constrained hand-to-mouth consumers) set off a consumption boom that expands the overall economy. Those at the top of the income distribution benefit disproportionately from expansions, and their income gains more than offset the increases in tax from higher marginal rates. The net result is that an increase in progressivity leads to an increase in inequality, not a decrease as conventional wisdom would suggest. We interpret these results as evidence in favor of trickle-up, not trickle-down, economics. |
| Keywords: | Taxes; Gini coefficient; income and consumption inequality |
| JEL: | C32 E62 |
| Date: | 2019–11–14 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2019-034&r=all |
| By: | Phelan, Tom (Federal Reserve Bank of Cleveland) |
| Abstract: | How should a utilitarian government balance redistributive concerns with the need to provide incentives for business creation and investment? Should they tax business profits, the (risk-free) savings of owners, or some combination of both? To address this question, this paper presents a model in which the desirability of differential asset taxation emerges endogenously from the presence of agency frictions. 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, the wealth of an agent must depend on the performance of his/her firm, leading to ex-post inequality in all efficient allocations. I show that the efficient stationary distribution of wealth exhibits a thick right (Pareto) tail, with the degree of inequality monotonically increasing in the number of workers per entrepreneur. The efficient allocation is then implemented in a general equilibrium model using history-independent linear taxes on risk-free savings and (reported) 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 preference parameters. |
| Keywords: | Optimal taxation; moral hazard; optimal contracting; entrepreneurship; |
| JEL: | D61 D63 E62 |
| Date: | 2019–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwq:191700&r=all |
| By: | Petr Jansky (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic); Jan Laznicka (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic) |
| Abstract: | Much of the foreign direct investment worldwide is affected by one of more than 3000 bilateral tax treaties. There is an agreement that dividend and interest payments respond to these tax treaties’ provisions, but evidence is scarce as to the magnitude of this response. We aim to fill in this gap for as many countries as possible by estimating the elasticities of dividend and interest income with respect to withholding tax rates, and the associated revenue foregone, exploiting the best available cross-country datasets. We collect information on withholding tax rates from the International Bureau of Fiscal Documentation; this includes information on EU directives, which imply zero withholding rates among all the EU member states and Switzerland, in addition to standard bilateral tax treaties. We combine this detailed information on withholding tax rates with foreign direct investment data from the International Monetary Fund, which we use to approximate bilateral dividend and interest flows; this results in a large panel data set of around 65,000 annual country-pair observations. While also observing heterogeneity in elasticities across countries, we estimate dividend flows to be highly elastic in a cross-country regression: a 1% increase in the applicable withholding tax is associated with a 2.3% - 2.6% decrease in dividend flows. We apply the elasticities to estimate potential tax revenue foregone. We estimate the largest annual revenue foregone for the United States (2.3 - 2.9 billion USD) and Canada (1.4 - 3.2 billion USD), while the investor country behind the largest revenue foregone is the Netherlands (2.9 – 3.3 billion USD). We arrive at somewhat lower and less robust estimates for interest income. Although our headline revenue estimates are, as expected, lower than static estimates that do not reflect elasticities, we nevertheless show that the revenue foregone of tax treaties remain non-negligible for some countries. |
| Keywords: | foreign direct investment, multinational enterprise, tax treaty, double taxation agreement, elasticity, withholding tax |
| JEL: | F21 F23 H25 H26 H32 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2019_33&r=all |
| By: | SERSE Valerio, (Université catholique de Louvain, CORE, Belgium) |
| Abstract: | Sugar taxes are often considered as a possible tool to tackle excessive sugar consumption. This paper estimates a dynamic multinomial Logit model of cola demand on a novel supermarket scanner dataset in order to study preference heterogeneity and state dependence in product choice. The model estimates allow evaluating the effectiveness of taxation in reducing demand for sugary colas across different consumer types. The results show that a sugar tax would be less effective among the targeted population of heavy sugar consumers. This policy, however, would be more effective among low-income households. Tax policy simulations show that a specific tax on sugar should be preferred to an ad-valorem tax on sugary colas on both corrective and equity grounds. This is because ad-valorem taxes can lead low-income households and heavy sugar consumers to substitute from expensive to cheaper sugary brands. Lastly, because households exhibit state dependence in cola choice, sugar taxes would be more effective in reducing sugar consumption in the long-run. |
| Keywords: | heterogeneity in preferences, state dependence, sugar taxes, discrete choice models |
| JEL: | D12 H31 I18 Q18 |
| Date: | 2019–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2019017&r=all |
| By: | Rai da Silva Chicoli; Siegfried Bender |
| Abstract: | Through a fiscal reaction function that verifies the hypothesis of fiscal fatigue, for a group of 19 emerging countries over the period 2003-2016, and with hypothesis about the difference between interest rate and economic growth, this article seeks to obtain the debt limit for this group of countries. As a result, we confirm the hypothesis of fiscal fatigue, even for robustness exercises, with a reduction of marginal primary result to levels of debt around 70% of GDP and negative marginal primary result around 110% of GDP, well below the results for advanced economies around 100% and 150% of GDP, respectively. In addition, we observed average debt limit around 154% and 128% of GDP for deterministic and stochastic cases, with a significant fiscal space for most countries, except for Croatia, Brazil and Hungary, where a fiscal adjustment must be done to reduce current debt. |
| Keywords: | Debt Limit; Fiscal Fatigue; Fiscal Policy |
| JEL: | H63 H62 E62 |
| Date: | 2019–11–05 |
| URL: | http://d.repec.org/n?u=RePEc:spa:wpaper:2019wpecon44&r=all |
| By: | Salvador Barrios (European Commission - JRC); Cecile Denis; Viginta Ivaskaite-Tamosiune (European Commission - JRC); Adriana Reut; Estefania Vazquez Torres (European Commission - JRC) |
| Abstract: | Tax incentives favouring homeownership are widely used in developed economies. Homeownership is often thought to bring a number of positive contributions, from the promotion of households´ saving to enhanced community engagement. However, housing tax incentives are also considered as a major source of distortions for households´ decisions, especially in absence of taxation of in-kind services related to housing consumption (i.e. imputed rents) and in presence of mortgage interest payment deductibility. These distortions can have wide-ranging consequences for investment, consumption and public finances. Housing tax distortions have rarely been analysed from a cross-country perspective over time, however, not least because of the absence of comparable data and the difficulty to gather detailed information on the specific tax treatment of homeownership. In this paper we aim to fill this gap by providing comparable time series on the main features of housing taxation in European countries. Our database includes information on transfer taxes incurred when buying a house, implicit recurrent property taxes owed by households, capital gain taxes, imputed rent taxation and mortgage interest tax reliefs. The data is provided for the period 1995-2017 by the time of writing this paper and will be updated annually and made available at the following website: https://ec.europa.eu/jrc/en/thematic-research-fiscal-policy/housing-taxation. We use this data to estimate the user cost of owner-occupied housing (UCOH) following the approach proposed by Poterba, (1992) and Poterba and Sinai (2008), which provides a synthetic indicator on the distortions exerted by the tax system on households´ housing investment choices. A number of additional data used to calculate the UCOH indicator, such as maximum loan to value ratio and maximum loan duration, interest rate for long-term government bonds, interest income tax and house price are also provided. |
| Keywords: | Housing taxation, database, user costs of housing, transfer tax, capital gains tax, mortgage interest tax relief, recurrent property tax, imputed rent taxation |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:ipt:taxref:201908&r=all |
| By: | Christofzik, Désirée I.; Schneider, Benny |
| Abstract: | We study the fiscal policy reactions of municipalities in the German state of North Rhine-Westphalia to an unanticipated spending shock. The implementation of a horizontal transfer system led to additional contributions for selected municipalities. Using the quasi-random assignment, we examine whether these contributing municipalities adjust their tax setting behavior, respond by adapting expenditures, or incur debt in the short run. We find a sizable increase of net borrowing. This increase is even higher than the expansion of spending. Municipalities additionally refrain from increasing tax rates. The results point to delayed fiscal adjustments. We conclude that the design and the predictability of transfer systems have significant implications on the behavior of municipalities within decentralized systems. |
| Keywords: | local public finance,local taxation,public debt,fiscal shocks |
| JEL: | H71 H72 H77 R50 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:svrwwp:102019&r=all |