nep-pub New Economics Papers
on Public Finance
Issue of 2020‒01‒20
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Taxation under Regional Inequality By Sebastian G. Kessing; Vilen Lipatov; J. Malte Zoubek
  2. Fiscal Illusion and Progressive Taxation with Retrospective Voting By Abatemarco, Antonio; Dell'Anno, Roberto
  3. A model of the optimal allocation of government expenditures By FAN Simon,; PANG Yu,; PESTIEAU Pierre,
  4. Tax evasion and unaccounted incomes: A theoretical approach. By Sapre, Amey
  5. Political Costs of Tax-Based Consolidations By Chuling Chen; Era Dabla-Norris; Jay Rappaport; Aleksandra Zdzienicka
  6. Hidden Treasure: The Impact of Automatic Exchange of Information on Cross-Border Tax Evasion By Sebastian Beer; Maria Delgado Coelho; Sebastien Leduc
  7. Evaluating State and Local Business Tax Incentives By Cailin R. Slattery; Owen M. Zidar
  8. Did Tax Cuts and Jobs Act Create Jobs and Stimulate Growth? Early Evidence Using State-Level Variation in Tax Changes By Anil Kumar
  9. Towards a progressive EMU fiscal governance By Nacho Alvarez; Catherine Mathieu; Henri Sterdyniak

  1. By: Sebastian G. Kessing; Vilen Lipatov; J. Malte Zoubek
    Keywords: Optimal taxation, redistribution, regional inequality, migration, multidimensional screening, delayed optimal control
    JEL: H11 J45 R12
    Date: 2019
  2. By: Abatemarco, Antonio; Dell'Anno, Roberto
    Abstract: We consider the tax progressivity decision of a rent‐maximizing government when voters’ perceptions of the tax price of public goods are biased by cognitive anomalies (i.e., fiscal illusion), and the electorate opts for re‐appointing or for dismissing the incumbent according to a retrospective voting logic. Given electoral and constitutional constraints, we show that the design of the tax system can be sensibly affected by fiscal illusion within the population of voters. Specifically, we find that (i) the tax system is more (less) progressive when taxes and public expenditures are perceived less (more), and (ii) an increase in the median voter’s income may positively or negatively affect tax progressivity depending on the nature (pessimistic or optimistic) of fiscal illusion. The impact of fiscal illusion on tax progressivity is validated by econometric analysis.
    Keywords: fiscal illusion; tax progressivity; median voter; cognitive anomalies
    JEL: D63 D72 E62 H23 H3
    Date: 2019–09–12
  3. By: FAN Simon, (Lingnan University); PANG Yu, (Macau University of Science and Technology); PESTIEAU Pierre, (Université de Liège, CORE, and Toulouse School of Economics)
    Abstract: Government expenditures can be used for various socio-economic objectives, including public education, consumption of public goods and services, and social protection. This paper analyzes the optimal allocation of public expenditures among these competing functions. We establish an overlapping generations model with heterogeneous individuals in which the government optimally chooses income tax, transfer payment, educational spending, and public consumption. Our model characterizes the transitional dynamics and the steady state of each function with and without a pay-as-you-go international contract. We also conduct a simulation illustrating that the presence of an intergenerational contract may raise public consumption and social welfare in the ssteady state.
    Keywords: government spending,public education,public consumption,individual heterogeneity
    JEL: H20 H31 H50
    Date: 2019–11–27
  4. By: Sapre, Amey (National Institute of Public Finance and Policy)
    Abstract: This paper analyzes the problem of tax evasion by incorporating a simple game theoretic framework wherein an individual is confronted with the decision of declaring income for taxation. The model is a re-formulation of Allingham Sandmo (1972) and Srinivasan (1973) original single period decision making problem and extends it to to a repeated game involving a tax payer and a tax authority. The game theoretic results shows that probability of audit and penalty rate are inversely related and that beyond a threshold penalty rate, the tax payer has no incentive to evade. In an infinitely repeated game setting, first, the threat of audit in all future periods acts as a deterrent to evasion and second, the result provides some intuitive understanding of the role of patience and equilibrium strategies in a long repetitive engagement that supports cooperation and prevents deviations.
    Keywords: Tax evasion ; Repeated game ; Public Finance
    JEL: C73 H26
    Date: 2019–12
  5. By: Chuling Chen; Era Dabla-Norris; Jay Rappaport; Aleksandra Zdzienicka
    Abstract: This paper studies the impact of tax-based consolidations on reelection outcomes. Using a granular database of tax-based consolidations for a panel of 10 OECD countries over the last 40 years, we find that tax reforms are politically costly but some reforms are costlier than others. Measures aimed primarily at reducing existing deficits and debt are costlier than tax consolidation policies for improving long-term growth prospects. Electoral costs are particularly high for broad-based indirect tax and corporate tax reforms. Voters tend to penalize governments less if tax consolidations are announced early in the government’s term or if the government has a strong political mandate. Favorable economic conditions increase public support for tax-based consolidations. Personal income tax reforms are electorally salient if the reforms are frontloaded, announced during recessions, and in less progressive tax systems.
    Date: 2019–12–27
  6. By: Sebastian Beer; Maria Delgado Coelho; Sebastien Leduc
    Abstract: We analyze the impact of exchange of information in tax matters in reducing international tax evasion between 1995 and 2018. Based on bilateral deposit data for 39 reporting countries and more than 200 counterparty jurisdictions, we find that recent automatic exchange of information frameworks reduced foreign-owned deposits in offshore jurisdictions by an average of 25 percent. This effect is statistically significant and, as expected, much larger than the effect of information exchange upon request, which is not significant. Furthermore, to test the sensitivity of our findings, we estimate countries’ offshore status and the impact of information exchange simultaneously using a finite mixture model. The results confirm that automatic (and not upon request) exchange of information impacts cross-border deposits in offshore jurisdictions, which are characterized by low income tax rates and strong financial secrecy.
    Date: 2019–12–20
  7. By: Cailin R. Slattery; Owen M. Zidar
    Abstract: This essay describes and evaluates state and local business tax incentives in the United States. In 2014, states spent between $5 and $216 per capita on incentives for firms in the form of firm-specific subsidies and general tax credits, which mostly target investment, job creation, and research and development. Collectively, these incentives amounted to nearly 40% of state corporate tax revenues for the typical state, but some states' incentive spending exceeded their corporate tax revenues. States with higher per capita incentives tend to have higher state corporate tax rates. Recipients of firm-specific incentives are usually large establishments in manufacturing, technology, and high-skilled service industries, and the average discretionary subsidy is $178M for 1,500 promised jobs. Firms tend to accept subsidy deals from places that are richer, larger, and more urban than the average county, and poor places provide larger incentives and spend more per job. Comparing “winning” and runner-up locations for each deal in a bigger and more recent sample than in prior work, we find that average employment within the 3-digit industry of the deal increases by roughly 1,500 jobs. While we find some evidence of direct employment gains from attracting a firm, we do not find strong evidence that firm-specific tax incentives increase broader economic growth at the state and local level. Although these incentives are often intended to attract and retain high-spillover firms, the evidence on spillovers and productivity effects of incentives appears mixed. As subsidy-giving has become more prevalent, subsidies are no longer as closely tied to firm investment. If subsidy deals do not lead to high spillovers, justifying these incentives requires substantial equity gains, which are also unclear empirically.
    JEL: H2 H25 H71 R11 R3 R5
    Date: 2020–01
  8. By: Anil Kumar
    Abstract: The Tax Cuts and Jobs Act (TCJA) of 2017 is the most extensive overhaul of the U.S. income tax code since the Tax Reform Act of 1986. Existing estimates of TCJA’s economic impact are based on economic projections using pre-TCJA estimates of tax effects. Following recent pioneering work of Zidar (2019), I exploit plausibly exogenous state-level variation in tax changes and find that an income tax cut equaling 1 percent of GDP led to a 1 percentage point higher nominal GDP growth and about 0.3 percentage point faster job growth in 2018.
    Keywords: Taxes and Economic Growth; Tax Cuts and Jobs Act
    JEL: E62 H30
    Date: 2020–01–03
  9. By: Nacho Alvarez; Catherine Mathieu (Observatoire français des conjonctures économiques); Henri Sterdyniak (Observatoire français des conjonctures économiques)
    Abstract: The fi scal governance of the EMU is in dire need of reform. Its current arrangements suff er from several shortcomings, most notably, the limitations they impose on national fi scal policies, steering them towards too restrictive or pro-cyclical stances; the absence of an unconditional lender of last resort for governments and the consequent doubts over the ‘safe asset’ status of national government bonds that this absence creates; the underdevelopment of an economic (policy) union, resulting in the dominance of public defi cit and debt considerations over considerations of well-being, full employment and broader economic objectives in guiding the conduct of fi scal policies; and last but not least, the fact that, under the EMU institutional architecture, there are fewer opportunities for democratic participation and scrutiny of the conduct of fi scal policies. Starting from the view that the crises in the euro zone were basically triggered by fi nancial markets and reinforced by a lack of instruments for eff ective economic policy at the EMU level, we contribute to the ongoing debate on how to reform the Eurozone. We propose a focus on general principles for fi scal governance reform aiming at a better economic, social and environmental performance on the part of EMU. As the main principles for progressive governance, we identify a need for: – a much more active and prominent role for fi scal policy; – ‘safer’ government bonds; – more and better coordination between fi scal and other economic, social and environmental policies, as well as between member states, to foster sustainable well-being; and – more democratic participation and scrutiny.
    Date: 2019–12

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