nep-pub New Economics Papers
on Public Finance
Issue of 2020‒03‒09
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Incidence of Capital Income Taxation in a Lifecycle Economy with Firm Heterogeneity By Chung Tran; Sebastian Wende
  2. Optimal Redistributive Wealth Taxation When Wealth Is More Than Just Capital By Max Franks; Ottmar Edenhofer
  3. Are Large Deficits and Debt Dangerous? By Michael J. Boskin
  4. VAT Compliance Incentives By Maria-Augusta Miceli
  5. The Effects of E-Cigarette Taxes on E-Cigarette Prices and Tobacco Product Sales: Evidence from Retail Panel Data By Chad D. Cotti; Charles J. Courtemanche; Johanna Catherine Maclean; Erik T. Nesson; Michael F. Pesko; Nathan Tefft
  6. Decomposing Preference for Redistribution Beyond the Trans-Atlantic Perspective By Kambayashi, Ryo; Lechevalier, Sebastien; Jenmana, Thanasak
  7. The Distributive Impact of Taxes and Expenditures in Colombia By Jairo,Nunez; Olivieri,Sergio Daniel; Parra,Julieth; Pico,Julieth

  1. By: Chung Tran; Sebastian Wende
    Abstract: We study the incidence of capital income taxation in a dynamic general equilibrium model with heterogeneous firms and lifecycle households. In this incomplete market setting, marginal excess burdens of three capital taxes, namely corporate income, dividend and capital gains taxes, are vastly different due to heterogeneous responses of firms and households, and heterogeneous effects of general equilibrium adjustments. It is indeed important to account for firm heterogeneity in productivity and investment financing as well as household heterogeneity in age and skill. Overall, taxing capital with a corporate income tax at the firm level results in higher excess burden than taxing capital with dividend and capital gains taxes at the household level. Given the existing U.S. tax treatment for capital income, reforms that shift tax burden from the firm to household side potentially result in efficiency gains and overall welfare improving. However, the welfare benefits of the tax reforms are quite different across households and generations over transition time, depending on skill, age-cohort and budget balancing tax instruments. In particular, majority of currently alive households, especially retirees, experience welfare gains under moderate corporate income tax cuts, but suffer from welfare losses under more radical tax cuts.
    Keywords: Excess burden; Tax incidence; Distributional eects; Overlapping generations; Dynamic general equilibrium
    JEL: D21 E62 H21 H22 H25
    Date: 2020–03
  2. By: Max Franks; Ottmar Edenhofer
    Abstract: We show how normative standpoints determine optimal taxation of wealth. Since wealth is not equal to capital, we find very different welfare implications of land rent-, bequest- and capital taxation. It is mainly land rents that should be taxed. We develop an overlapping generations model with heterogeneous agents and calibrate it to OECD data. We compare three normative views. First, the Kaldor-Hicks criterion favors the laissez-faire equilibrium. Second, with prioritarian welfare functions based on money-metric utility, high land rent taxes are optimal due to a portfolio effect. Third, if society disapproves of bequeathing, bequest taxation becomes slightly more desirable.
    Keywords: optimal taxation, social welfare, wealth inequality, land rent tax, Georgism
    JEL: D31 D63 E62 H21 H23 Q24
    Date: 2020
  3. By: Michael J. Boskin
    Abstract: The Traditional View (TV) of large deficits and debt is they have large economic costs, save in a recession and early recovery, because they crowd out investment and lower future income, and taken to extremes, can cause inflation and even a financial crisis. The TV has been challenged, most fundamentally in Olivier Blanchard’s 2019 AEA Presidential Address, an elegant extension of Peter Diamond’s OLG model to account for risk in an expected utility framework. He concludes they may have no fiscal cost and increase welfare. I present evidence of looming large deficit and debt/GDP increases and their effects on recovery from recession, interest rates and long-run growth. I discuss several substantive issues with the “no fiscal cost” view that limit its applicability, including accounting neither for the effect of increasing debt on interest rates and growth nor the pre-existing primary deficit, debt and their projected evolution; disputable readings of the data; strong assumptions and parameter values driving the results; and a political economy of deficits and debt likely to lead to even larger debt ratios. Acknowledging uncertainties, the evidence still suggests that large increases in the debt ratio could lead to much higher taxes, lower future incomes and intergenerational inequity.
    JEL: E62 H6 H62 H63 H68
    Date: 2020–02
  4. By: Maria-Augusta Miceli
    Abstract: In this work I clarify VAT evasion incentives through a game theoretical approach. Traditionally, evasion has been linked to the decreasing risk aversion in higher revenues (Allingham and Sandmo (1972), Cowell (1985) (1990)). I claim tax evasion to be a rational choice when compliance is stochastically more expensive than evading, even in absence of controls and sanctions. I create a framework able to measure the incentives for taxpayers to comply. The incentives here are deductions of specific VAT documented expenses from the income tax. The issue is very well known and deduction policies at work in many countries. The aim is to compute the right parameters for each precise class of taxpayers. VAT evasion is a collusive conduct between the two counterparts of the transaction. I therefore first explore the convenience for the two private counterparts to agree on the joint evasion and to form a coalition. Crucial is that compliance incentives break the agreement among the transaction participants' coalition about evading. The game solution leads to boundaries for marginal tax rates or deduction percentages, depending on parameters, able to create incentives to comply The stylized example presented here for VAT policies, already in use in many countries, is an attempt to establish a more general method for tax design, able to make compliance the "dominant strategy", satisfying the "outside option" constraint represented by evasion, even in absence of audit and sanctions. The theoretical results derived here can be easily applied to real data for precise tax design engineering.
    Date: 2020–02
  5. By: Chad D. Cotti; Charles J. Courtemanche; Johanna Catherine Maclean; Erik T. Nesson; Michael F. Pesko; Nathan Tefft
    Abstract: We explore the effect of e-cigarette taxes enacted in eight states and two large counties on e-cigarette prices, e-cigarette sales, and sales of other tobacco products. We use the Nielsen Retail Scanner data from 2011 to 2017, comprising approximately 35,000 retailers nationally. We calculate a Herfindahl–Hirschman Index of 0.251 for e-cigarette retail purchases, indicating high market concentration, and a tax-to-price pass-through of 1.6. We then calculate an e-cigarette own-price elasticity of -2.6 and a positive cross-price elasticity of demand between e-cigarettes and traditional cigarettes of 1.1, suggesting that e-cigarettes and traditional cigarettes are economic substitutes. We simulate that for every one standard e-cigarette pod (a device that contains liquid nicotine in e-cigarettes) of 0.7 ml no longer purchased as a result of an e-cigarette tax, the same tax increases traditional cigarettes purchased by 6.2 extra packs.
    JEL: I1 I12
    Date: 2020–01
  6. By: Kambayashi, Ryo; Lechevalier, Sebastien; Jenmana, Thanasak
    Abstract: There are significant differences across countries in terms of redistribution by the government. This corresponds to underlying dissimilarities in preference for redistribution. Particularly, previous literature compared the US and Europe and proposed several explanations of these differences, from aggregation of individual determinants (e.g. one's income) to more holistic ones such as shared values at the national level (i.e. social beliefs). This paper, therefore, aims to analyse the impact of socio-demographic factors and social beliefs on preference for redistribution. First, we focused on two different dimensions of preference —the government's role in reducing the difference in income and the approach of the tax system with high income. Secondly, we extended the comparison by including a developed Asian country, Japan. Based on the results, the following two attitudes are not fully compatible: many people support the governmental intervention, but not for more tax on the rich, especially in Japan. Furthermore, the difference in the attitude on the governmental intervention mainly comes from the variance in the role of social beliefs. On the other hand, the average income and wealth do not explain the difference in preference. Countries are characterized by different social beliefs, which affects the differences in sub-preferences. However, not only the distribution of social beliefs, but also their statistical relation to the sub-preferences explains the country level disparity. In addition, the US and Europe comparison under/over-estimates these statistical associations in the world, since an Asian country, such as Japan, may have a different structure.
    Keywords: government, inequality, redistribution, tax
    JEL: D31 D63 H23
    Date: 2020–02
  7. By: Jairo,Nunez; Olivieri,Sergio Daniel; Parra,Julieth; Pico,Julieth
    Abstract: Colombia has reduced extreme poverty in the past 16 years by almost half, moderate poverty by 22 percentage points, and made more than four million Colombians jump the threshold of multidimensional poverty. However, it remains one of the most unequal countries in the region, after Brazil and Panama. Fiscal policy is one of the instruments that allow governments to speed up the decline in inequality levels and reduce poverty. This study presents an exhaustive and comprehensive analysis of the distributional impacts of taxes and expenditures in Colombia in 2017. It makes a methodological comparison with the Commitment to Equity, which was previously implemented, and includes multiple improvements in the methodology. The results suggest that the combined effect of taxes and social spending in Colombia contributes to poverty reduction between 0.3 and 2.6 percentage points for US$5.5 and US$3.2 per day per person respectively, while inequality is reduced by almost one Gini point. Taxes and direct transfers, as well as indirect transfers, are progressive and pro-poor, while indirect taxes are regressive and contribute to an increase in inequality. Finally, transfers in-kind for education and health services are progressive and contribute to the reduction of inequality.
    Date: 2020–03–03

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