nep-pub New Economics Papers
on Public Finance
Issue of 2020‒04‒06
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Gini and Optimal Income Taxation by Rank By Laurent Simula; Alain Trannoy
  2. The Mainstream Notion of ‘Deadweight Loss of Taxation’ Is Based on Too Stringent (Misleading) Assumptions By Cristian Sepulveda
  3. Progressive Taxation as an Automatic Stabilizer under Nominal Wage Rigidity and Preference Shocks By Miroslav Gabrovski; Jang-Ting Guo
  4. Lifestyle Taxes in the Presence of Profit Shifting By Rosella Levaggi; Carmen Marchiori; Paolo Panteghini
  5. What drives consumption tax revenues?: Disentangling policy and macroeconomic drivers By Hannah Simon; Michelle Harding
  6. Taxation and Global Spillovers in the Digital Advertising Market. Theory and Evidence from Facebook By Andrea Lassmann; Federica Liberini; Antonio Russo; Ángel Cuevas; Rubén Cuevas
  7. How do Taxpayers Respond to Public Disclosure and Social Recognition Programs? Evidence from Pakistan By Joel Slemrod; Obeid Ur Rehman; Mazhar Waseem

  1. By: Laurent Simula; Alain Trannoy
    Abstract: We solve the non-linear income tax program for a rank-dependent social welfare function à la Yaari, expressing the trade-off between size and inequality using the Gini or related families of positional indices. The key idea is that when agents optimize and absent bunching, ranks in the actual and optimal allocations become an invariant dimension. This allows us to obtain optimal marginal tax rates as a function of ranks, and numerically illustrate the relationship between ranks and taxes. For singles without children, the actual US tax schedule seems to indicate a distaste for differences in the upper part of the distribution.
    Keywords: Gini, optimal taxation, income taxation, ranks
    JEL: D63 D82 H21
    Date: 2020
  2. By: Cristian Sepulveda (Farmingdale State College, SUNY, USA)
    Abstract: Mainstream optimal tax theory considers the lump-sum tax as the only efficient or non-distortionary tax instrument, and as such, the only tax instrument that is never associated with a deadweight loss. This paper challenges this notion, which is shown to depend on the assumption that public expenditure has no effect on taxpayers’ budget constraints. When this assumption is relaxed, the combined use of labor income and lump-sum taxes may allow taxpayers to reach greater levels of welfare than the use of a lump-sum tax alone. In that case, the labor income tax would be part of the (first best) welfare maximization solution and its effect on the relative price of leisure would therefore correspond to a price correction, not a distortion.
    Date: 2020–03
  3. By: Miroslav Gabrovski (University of Hawaii at Manoa); Jang-Ting Guo (Department of Economics, University of California Riverside)
    Abstract: Previous research has shown that in the context of a prototypical New Keynesian model, more progressive income taxation may lead to higher volatilities of hours worked and total output in response to a monetary disturbance. We analytically show that this business-cycle destabilization result is overturned within an otherwise identical macroeconomy subject to impulses to the household's utility formulation. Under a continuously or linearly progressive fiscal policy rule, an increase in the tax progressivity will always raise the degree of equilibrium nominal-wage rigidity, and thus serve as an automatic stabilizer that mitigates cyclical fluctuations driven by preference shocks. Our analysis illustrates that whether a more progressive tax schedule (de)stabilizes the business cycle depends crucially on the underlying driving source.
    Keywords: Progressive Income Taxation, Automatic Stabilizer, Nominal Wage Rigidity, Preference Shocks.
    JEL: E12 E32 E62
    Date: 2020–03
  4. By: Rosella Levaggi; Carmen Marchiori; Paolo Panteghini
    Abstract: Non-communicable diseases (NCDs) cause about 71% of all deaths globally and a considerable increase in health care costs. To tackle this problem, several Governments have designed “sin taxes”, i.e, extra payments related to the quantity of unhealthy contents of specific goods. However, unhealthy food and soda drinks are often produced by multinational companies for which also profit shifting is a serious issue. The international dimension of these markets may have a dramatic impact on the actual implementation of sin taxes. This article contributes to the literature by analysing the effectiveness of sin taxes levied on a good produced by a multinational company. Our analysis shows that a trade off between profit shifting and lifestyle taxes may exist. In general, the First Best sin tax cannot be levied if Governments are also interested in corporate tax revenue. This is a quite interesting policy issue: countries that today benefit from profit shifting may find it harder to impose significant lifestyle taxes. We also provide some insights about the effects that the international effort to fight profit shifting may have on lifestyle taxes.
    Keywords: optimal lifestyle tax, multinational industry, profit shifting, health care costs, tax competition
    JEL: H21 H32 D11 D62 I18
    Date: 2020
  5. By: Hannah Simon; Michelle Harding
    Abstract: This paper decomposes consumption tax revenues in OECD countries into the implicit tax rate (ITR) and consumption relative to GDP, to identify how economic downturns affect consumption tax revenues. It further considers the impact of changes in VAT efficiency and VAT rates on ITRs. The analysis finds that the observed stability in consumption tax revenues results from offsetting changes in the ITRs and in consumption as a share of GDP, arising from both macroeconomic changes and intentional policy changes. During the economic crisis in 2007-2009, lasting changes in consumption patterns, notably increases in government spending and in private consumption of necessity goods, adversely affected the efficiency of VAT systems. These changes have not since been reversed, suggesting that consumption tax revenues are now less robust to economic shocks. Broadening the VAT base and narrowing the scope of reduced rates can help to stabilise consumption tax revenues during economic downturns.
    Keywords: Consumption Taxes, Economic crisis, Implicit Tax Rates, Macroeconomic changes, Tax Revenue Stability, Tax Revenues, Value-Added Tax, VAT efficiency
    JEL: H24 H29
    Date: 2020–04–02
  6. By: Andrea Lassmann; Federica Liberini; Antonio Russo; Ángel Cuevas; Rubén Cuevas
    Abstract: We study the effects of taxation on the international online advertising market, using data on Facebook ad prices, Facebook users product preferences and international trade. Our data encompass a de facto increase in the platform’s corporate tax rate in several countries. We show that, due to international trade linkages, tax changes produce global spillovers. Yet, advertisers experience higher prices in countries that directly face the tax increases compared to advertisers in countries that do not. This result is consistent with a theoretical model, which shows that the platform reduces the supply of ads to advertisers from countries where taxation increases.
    Keywords: tax incidence, online advertising, Facebook
    JEL: H22 H25 F23
    Date: 2020
  7. By: Joel Slemrod; Obeid Ur Rehman; Mazhar Waseem
    Abstract: We examine two Pakistani programs to see if the public disclosure of tax information and social recognition of top taxpayers promote tax compliance. Pakistan began revealing income tax paid by every taxpayer in the country from 2012. Simultaneously, another program began recognizing and rewarding the top 100 tax paying corporations, partnerships, self-employed individuals, and wage-earners. We find that both programs induced strong compliance responses. The public disclosure caused on average a 9 log-points increase in the tax paid by individuals exposed to the program. The increase was even larger for the social recognition program, around 17 log-points. Our results suggest that such programs can be important policy levers to mobilize resources, especially in weak-enforcement-capacity economies.
    Keywords: tax evasion, income tax, social norms
    JEL: H24 H25 H26
    Date: 2020

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