nep-pub New Economics Papers
on Public Finance
Issue of 2020‒05‒04
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Does the Winner Take It All? Redistributive Policies and Political Extremism By Gianmarco Daniele; Amedeo Piolatto; Willem Sas
  2. Estimating the elasticity of taxable income when earnings responses are sluggish By Trine Engh Vattø
  3. The Ability Gradient in Bunching By Waldenström, Daniel; Bastani, Spencer
  4. Neither Punishments nor Rewards: Fostering Tax Compliance through the Rawlsian Veil of Ignorance in a Laboratory Experiment By Klaudijo Klaser; Luigi Mittone
  5. The marginal (opportunity) cost of public funds By Geir H. M. Bjertnæs
  6. Real Estate Taxes and Home Value: Winners and Losers of TCJA By Wenli Li; Edison Yu

  1. By: Gianmarco Daniele; Amedeo Piolatto; Willem Sas
    Abstract: We show that regional heterogeneity of underlying fundamentals (e.g. economic history, geography, social capital) can lead to extreme voting in federations. When the outcome of federal policies – such as transfer schemes, market regulation or migration laws – depends on these fundamentals, the set of regions that wins or loses from a given policy is fixed. This gives voters a strategic incentive to distort the policy magnitude, by electing federal representatives that are extremely protective of regional interests. Interestingly, the benefits of selecting tough negotiators outweigh those of belonging to the ruling coalition. We test our predictions by looking at parties’ performances at national and European Parliament elections from 1990 onwards, and find that strategic voting is indeed U-shaped: winning and losing member states vote more extremely than those in the middle. Our online survey provides further evidence.
    Keywords: political extremism, interregional redistribution, federalism, strategic delegation, bargaining, coalitions, EU elections, Euroscepticism, populism
    JEL: D72 H60 H71 H77
    Date: 2020
  2. By: Trine Engh Vattø (Statistics Norway)
    Abstract: Estimates of the elasticity of taxable income (ETI) is conventionally obtained by “stacking” three-year overlapping differences in the estimation. In effect, this means that the ETI estimate is an average of first-, second-, and third-year effects. The present paper draws attention to this implication and suggests that if there is gradual adjustment the analyst should rather estimate the ETI by a dynamic panel data model. When using Norwegian income tax return data for wage earners over a 14-year period (1995−2008) in the estimation, an ETI estimate of 0.15 is obtained from the dynamic specification, compared to 0.11 for the conventional approach. Importantly, the conventional approach fails to render a long-term elasticity estimate by increasing the time span of each difference.
    Keywords: elasticity of taxable income; time frame; tax reform; earnings dynamics
    JEL: H24 H31 J22
    Date: 2020–04
  3. By: Waldenström, Daniel (Research Institute of Industrial Economics (IFN)); Bastani, Spencer (Department of Economics and Statistics)
    Abstract: We analyze the relationship between cognitive ability and bunching in the context of a large and salient kink point of the Swedish income tax schedule. Using population-wide register data from the Swedish military enlistment and administrative tax records, we find that high-ability individuals bunch more than low-ability individuals. This ability gradient is stronger for the self-employed, but is also present among wage earners. We also use high-school GPA and math grades to analyze gender differences, finding a stronger ability gradient among men.
    Keywords: Bunching; Ability; Skills; Complexity; Optimal Taxation
    JEL: H21 H24 J22 J24
    Date: 2020–04–22
  4. By: Klaudijo Klaser; Luigi Mittone
    Abstract: It is well known that different deterministic mechanisms (like formal audits and material punishments) can stem free riding behaviour in social dilemmas. The behaviouralist literature identified then several other environmental and psychological variables which can influence agents’ attitude to cooperate. By means of a repeated tax compliance game run in an experimental laboratory, our study measures the effects of a Rawlsian veil of ignorance on cooperation over time. In particular we found that in our experimental design the (laboratory) veil of ignorance has an effect both on the ex-ante distribution of votes concerning the adoption of a specific tax regime and on the ex-post tax compliance level between treatments, but not on compliance across rounds, which shows to be decreasing.
    Keywords: Experimental Economics, Inequality, John Rawls, Tax Compliance, Veil of Ignorance
    JEL: D63 C91 H26
    Date: 2020
  5. By: Geir H. M. Bjertnæs (Statistics Norway)
    Abstract: Several studies show cases where the Samuelson rule holds, or where the marginal cost of public funds (MCF) equals one within optimized tax systems. The conditions for the original Samuelson rule to hold in these studies are quite restrictive, and MCF measures employed are not consistent with MCF measures employed within real-world cost-benefit tests. The aim of the present study is to remove such restrictive conditions, and to construct a MCF measure designed for real-world costbenefit tests. The study shows that such a MCF exceeds one within optimized tax systems. Hence, the optimal supply of public goods is below the supply obtained by the Samuelson rule. The study further shows that income taxation below optimum requires an even higher MCF to prevent that public goods provision crowd out social security transfers with a higher marginal welfare gain
    Keywords: Marginal cost of public funds; The Samuelson rule; Optimal taxation; Social security transfers
    JEL: H21 H23 H41
    Date: 2020–04
  6. By: Wenli Li; Edison Yu
    Abstract: In this paper, we examine the impact of changes in the federal tax treatment of local property taxes stemming from the implementation of the Tax Cuts and Jobs Act (TCJA) in January 2018 on local housing markets. Using county-level house price information and IRS tax data, we find that capping the federal tax deduction of real estate taxes at $10,000 has caused the growth rate of home value to decline by an annualized 0.8 percentage point, or 15 percent, in areas where real estate taxes as shares of taxable income exceeded the national median. Additionally, these areas with a high real estate tax burden suffered from reductions in market liquidity after the reform. Fewer houses were transacted either in absolute numbers or as shares of total listings, houses stayed on the market longer before being sold, and more houses were listed with price cuts. Importantly, we find that the housing market slowdown was accompanied by declines in local construction employment growth as well as multi-family building permits. Furthermore, on net more people moved out of these areas after the reform. Finally, we show that the act has already had political consequences. In the 2018 midterm Senate elections, more voters voted for Democratic candidates in areas with high real estate tax burden than they did for Republican candidates.
    Keywords: real estate tax; home value; housing liquidity
    JEL: G1 R2 R0
    Date: 2020–04–01

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