nep-pub New Economics Papers
on Public Finance
Issue of 2019‒12‒02
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The Optimal Taxation of Business Owners By Phelan, Tom
  2. Consumption Insurance Against Wage Risk: Family Labor Supply and Optimal Progressive Income Taxation By Chunzan Wu; Dirk Krueger
  3. Forward-looking effective tax rates in the banking sector By Ernesto Zangari; Elena Pisano
  4. Local taxation on households: an analysis at municipal level By Laura Conti; Daniela Mele; Vanni Mengotto; Eugenia Panicara; Roberto Rassu; Valentina Romano
  5. Taxes and Turnout By Bierbrauer, Felix; Tsyvinski, Aleh; Werquin, Nicolas
  6. Corruption and tax morale in Africa By Boly, Amadou; Konte, Maty; Shimeles, Abebe

  1. By: Phelan, Tom (Federal Reserve Bank of Cleveland)
    Abstract: Business owners in the United States are disproportionately represented among the very wealthy and are exposed to substantial idiosyncratic risk. Further, recent evidence indicates business income primarily reflects returns to the human (rather than financial) capital of the owner. Motivated by these facts, this paper characterizes the optimal taxation of income and wealth in an environment where business income depends jointly on innate ability, luck, and the accumulated past effort exerted by the owner. I show that in (constrained) efficient allocations, more productive entrepreneurs typically bear more risk and that the associated stationary distributions of income, wealth, and firm size exhibit the thick right (Pareto) tails observed in the data. Finally, when owners may save in a risk-free bond and trade shares of their business, I show that the optimal linear taxes in this environment call for double taxation of firm profits, at both the firm and the personal income level, and for a tax/subsidy on wealth that may assume either sign.
    Keywords: Optimal taxation; moral hazard; optimal contracting; human capital;
    JEL: D61 D63 E62
    Date: 2019–11–19
  2. By: Chunzan Wu; Dirk Krueger
    Abstract: We show that a calibrated life-cycle two-earner household model with endogenous labor supply can rationalize the extent of consumption insurance against shocks to male and female wages, as estimated empirically by Blundell, Pistaferri and Saporta-Eksten (2016) in U.S. data. In the model, 35% of male and 18% of female permanent wage shocks pass through to consumption, compared to the empirical estimates of 32% and 19%. Most of the consumption insurance against permanent male wage shocks is provided through the presence and labor supply response of the female earner. Abstracting from this private intra-household income insurance mechanism strongly biases upward the welfare losses from idiosyncratic wage risk as well as the desired extent of public insurance through progressive income taxation. Relative to the standard one-earner life cycle model, the optimal degree of tax progressivity is significantly lower and the welfare gains from implementing the optimal system are cut roughly in half.
    JEL: E21 H21 H31
    Date: 2019–11
  3. By: Ernesto Zangari (Bank of Italy); Elena Pisano (Bank of Italy)
    Abstract: The paper extends to the banking sector the Boadway-Bruce-Mintz framework used to compute marginal and average effective tax rates for non-financial firms. The model focuses on loans and considers the interactions between taxation, accounting, company law and regulation for the Italian banking sector, following the Nordic view of corporate taxation. It allows to disentangle the tax components of loan price, namely tax rates, deductibility of the cost of equity under partial and full ACE systems, taxes on net worth, and limits to the deductibility of interests and loan loss provisions (LLPs), also highlighting the role played by deferred tax assets. The effective tax rates on loans indicate, among other things, that the ACE introduced in 2011 has been effective in reducing the debt bias, and that until 2015 the deductibility limits on LLPs could have generated several distortions, discriminating between borrowers, economic sectors and geographical areas, inducing a pro-cyclical increase in the cost of credit during downturns, and providing disincentives to the timely setting aside of sufficient provisions for non-performing loans.
    Keywords: taxation, banks, effective tax rates, EMTR, EATR, allowance for corporate equity, Basel III, loan loss provisions, deferred tax assets.
    JEL: H25 G21
    Date: 2019–10
  4. By: Laura Conti (Bank of Italy); Daniela Mele (Bank of Italy); Vanni Mengotto (Bank of Italy); Eugenia Panicara (Bank of Italy); Roberto Rassu (Bank of Italy); Valentina Romano (Bank of Italy)
    Abstract: This paper provides an analysis of the local taxation on households in Italian provincial capitals between 2012 and 2015, the period immediately before a ceiling was imposed on the main local rates, relating it to a set of indicators available at the same geographical level. We provide information on regional, provincial and municipal duties imposed on a representative household, whose characteristics (regarding income, number and age of members, real estate holdings and consumption) remain unchanged throughout the country. The results show that taxation is higher for households living in the South, in regions under ordinary statutes (RSO) compared with those under special statutes (RSS), and in larger cities. Moreover, there is evidence of heavier taxation in places where local governments are (or have been) in financial distress or appear to be less efficient. In these areas, local taxation on households rose at a higher rate during the period covered by the analysis.
    Keywords: taxation on households, local taxation
    JEL: H31 H71
    Date: 2019–10
  5. By: Bierbrauer, Felix; Tsyvinski, Aleh; Werquin, Nicolas
    Abstract: We develop a model of political competition with endogenous platform choices of parties and endogenous turnout. A main finding is that a party that is leading in the polls has an incentive to cater primarily to the core voters of the opposing party. A party that is lagging behind, by contrast, has an incentive to cater to its own base. We analyze the implications for redistributive taxation and characterize the political weights that competing parties assign to voters with different incomes. Finally, we relate the comparative statics predictions of our model to the asymmetric demobilization strategy in the German elections in the era of Merkel.
    Keywords: Political competition, Income Taxation, Turnout.
    JEL: D72 D82 H21
    Date: 2019–11
  6. By: Boly, Amadou (African Development Bank); Konte, Maty (UNU-MERIT); Shimeles, Abebe (African Development Bank)
    Abstract: This paper analyses the effect of the quality of governance (proxied by perceived corruption) on attitude towards paying tax. Using the Afrobarometer surveys from 36 African countries over the period 2011-2015, we find that low perception of corruption of different levels of the Executive branch (President Office, Government Officials or Tax Authorities) has a significant and positive impact on tax morale. To account for possible reverse causality between a citizen's perception of governance quality and attitude towards tax payment, we also propose an IV approach, using the ethnicity of the country's leader as instrument for perceived level of corruption. The IV results confirm that an individual's positive perception of governance has a positive impact on its willingness to pay tax.
    Keywords: Corruption, Taxation, Governance, Africa
    JEL: D73 H71 O23 O55
    Date: 2019–10–31

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