nep-pub New Economics Papers
on Public Finance
Issue of 2020‒02‒17
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Capital income taxation under full loss offset provisions of a prospect theory investor By Hlouskova, Jaroslava; Tsigaris, Panagiotis
  2. Money for Nothin’ – Digitalization and Fluid Tax Bases By Blix, Mårten
  3. Model of endogenous welfare stigma: Statistical discrimination view By Kurita, Kenichi; Hori, Nobuaki; Katafuchi, Yuya
  4. Automatic Stabilizers in the Federal Budget: 2020 to 2030 By Congressional Budget Office
  5. Tax-induced earnings management and book-tax conformity: International evidence from unconsolidated accounts By Eichfelder, Sebastian; Jacob, Martin; Kalbitz, Nadine; Wentland, Kelly
  6. Reducing the income tax burden for households with children: An assessment of the child tax credit reform in Austria By Christl, Michael; De Poli, Silvia; Varga, Janos

  1. By: Hlouskova, Jaroslava (Institute for Advanced Studies, Vienna, Austria and Thompson Rivers University, Kamloops,BC, Canada); Tsigaris, Panagiotis (Thompson Rivers University, Kamloops,BC, Canada)
    Abstract: In this paper we examine capital income taxation of a reference dependent sufficiently loss averse investor in a two period portfolio choice model under full loss offset provisions. Capital income taxation with loss offset provisions has been found to stimulate risk taking in expected utility models under certain assumptions about attitudes towards risk but would such effect be found under prospect theory type of preferences? We observe that the impact of capital income taxation depends on investors’ reference levels relative to their endowment income and thus we explore capital income taxation for different types of loss averse investors in terms of their ambition. We consider the less ambitious investors to be the ones with relatively low reference levels (they avoid relative losses in both periods) and more ambitious investors to be those with relatively high reference levels. We analyze two types of more ambitious investors: investors with higher time preference (who experience relative losses only in the second period under the bad state of nature) and investors with lower time preference (who experience relative losses only in the first period). We observe that capital income taxation stimulates current consumption in most cases which encourages risk taking, although the final outcome would depend on the investors’ degree of risk aversion, the rate of time preference and the tax rate in relation to certain thresholds. Current consumption could be discouraged for some ambitious type of investors that have relatively high second period reference levels but not necessary first period reference levels. In summary, to determine the impact of capital income taxation on the decision variables the reference levels in relation to endowment income play the most significant role. Ignoring reference depended preferences can lead to different conclusions for investors reaction to capital income taxation. We also find certain type of investors whose happiness level increases with capital income taxation under full loss offset provisions.
    Keywords: Prospect theory, loss aversion, consumption-savings decision, capital income tax
    JEL: G02 G11 H2 E20
    Date: 2020–01
  2. By: Blix, Mårten (Research Institute of Industrial Economics (IFN))
    Abstract: Technology and digitalization are transforming economic activity, but tax policies are lagging behind. The development also encompasses a broad shift in value-creation, with less emphasis on physical production and more on soft knowledge/intangibles, notably copyrights, firm-specific processes, data and software. We discuss what these changes imply, and we outline the economic factors of scale- and network effects that magnify existing economic trends. A key concern is that the distortionary effects of taxation will become more severe and that tax bases will erode. As factors of production are becoming more fluid and mobile, multinational corporations have been able to shift their profits to low-tax jurisdictions, so called base erosion profit shifting (BEPS). To counter this possibility, a number of governments in 2019 began to unilaterally impose taxes aimed specifically at digital firms. Unless a broad agreement can be reached within the nexus of the more than 130 countries in the OECD/BEPS framework, the existing multinational rule-based order for corporate tax could begin to crumble. On the domestic front, the tax challenges for labour income are, if possible, even more extensive. Although the labour market changes are slower, their key role in public finances imply that even minor reductions result in significant funding challenges. To ensure we get money for somethin’, we conclude that a new comprehensive tax reform is urgent.​
    Keywords: Digital tax; OECD/BEPS; Digitalization; Taxation
    JEL: H21 H25 H26 H27 O33
    Date: 2020–02–05
  3. By: Kurita, Kenichi; Hori, Nobuaki; Katafuchi, Yuya
    Abstract: This paper tries to challenge two puzzles in the welfare benefit program. The first puzzle is non-take-up welfare which means poor people do not take-up welfare even though they are approved to take-up. Second, empirical evidence suggests that there may exist the inverse U-shaped relationship between benefit level and beneficiary ratio. We present a model of welfare stigma as a hypothesis to explain the above puzzles. Specifically, we investigate the statistical discrimination view model. Results are summarized as the relationship between two types of elasticity.
    Keywords: Stigma, Take-up, Minimum income guarantee, OECD panel data, Poverty
    JEL: H31 H53 I38
    Date: 2019–02–01
  4. By: Congressional Budget Office
    Abstract: Federal revenues and outlays regularly respond to cyclical movements in the economy in ways that tend to dampen those movements; the budget mechanisms that drive that process are known as automatic stabilizers. Those mechanisms help stabilize the economy automatically, without any legislated changes in tax or spending policies.
    JEL: H50 H60 H61
    Date: 2020–02–06
  5. By: Eichfelder, Sebastian; Jacob, Martin; Kalbitz, Nadine; Wentland, Kelly
    Abstract: We quantify the degree of tax-induced earnings management associated with statutory tax rates and examine whether greater book-tax conformity alters this particular type of earnings management. We first validate a new empirical approach for examining tax-induced earnings management using European unconsolidated financial and ownership information over 2005-2013. We provide robust evidence of significant tax-induced earnings management in both domestic and multinational firms. In particular, the results suggest that a 10 percentage point increase in the corporate tax rate relates to an 8.2 percent decrease in pre-tax book income. We then document that firms in countries with greater book-tax conformity engage in additional tax-induced earnings management. This is important given that it contrasts with prior literature, which does not find an effect for book-tax conforming transactions with a change in conformity.
    Keywords: tax-induced earnings management,book-tax conformity,conforming tax avoidance
    JEL: H25 H26 M41
    Date: 2020
  6. By: Christl, Michael; De Poli, Silvia; Varga, Janos
    Abstract: This paper analyses the impact of the implementation of a child tax credit in Austria in 2019, not only on micro, but also on macro level by using a dynamic scoring methodology. First, we assess the fiscal and distributional impact of this reform using the microsimulation model EUROMOD. Second, we estimate labour supply impacts of the reform based on a structural discrete choice framework. Third, we evaluate the macroeconomic impacts of the reform, by calibrating and shocking QUEST, the DSGE model of the European Commission, with the micro-based results for the implicit tax rate, the non-participation and the labour supply elasticities. We show that the child tax credit reform in Austria reduces inequality, lowers the poverty rate in general, but by definition only for households with children. Overall the reform has a positive impact on labour supply, both on the extensive and on the intensive margin, especially for women. On the macro-level (and in the long-run), our model suggests a positive impact on employment. Additionally, we find that parts of the tax decrease can be potentially captured by the employer, meaning that gross wages would fall slightly. However, we find small but positive effects on GDP, investment and consumption, although the longrun macroeconomic effects depend crucially on how the government compensates the missing tax revenues after the reform. Accounting for these feedback effects at the micro level with a new methodology, we show that the second round effects are important to take into account, because they provide insights into the medium-term distributional impact of the reform.
    Keywords: EUROMOD,tax credit,reform,DSGE,labour supply,microsimulation,discrete choice
    JEL: H24 H31 I38
    Date: 2020

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