nep-pub New Economics Papers
on Public Finance
Issue of 2020‒06‒15
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Inequality Aversion, Externalities, and Pareto-Efficient Income taxation By Aronsson, Thomas; Johansson-Stenman, Olof
  2. Is a dynamic approach of tax games relevant? By Nora Paulus; Patrice Pierreti; Benteng Zou
  3. The role of tax system complexity on foreign direct investment allocation By Leonzio Rizzo; Alejandro Esteller - Moré; Riccardo Secomandi
  4. Marginal Net Taxation of Americans’ Labor Supply By David Altig; Alan J. Auerbach; Laurence J. Kotlikoff; Elias Ilin; Victor Ye
  5. On the political economy of income taxation By Berliant, Marcus; Gouveia, Miguel
  6. Financial VAT May Improve Trade Openness By Julio López-Laborda; Guillermo Peña
  7. Profit taxation and royalties: evidence from gold mines in Sub-Saharan Africa By Luisito Bertinelli; Arnaud Bourgain; Skerdilajda Zanaj

  1. By: Aronsson, Thomas (Department of Economics, Umeå School of Business and Economics); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: This paper analyzes Pareto-efficient marginal income taxation taking into account externalities induced through individual inequality aversion, meaning that people have preferences for equality. In doing so, we distinguish between four different and widely used models of inequality aversion. The results show that empirically and experimentally quantified degrees of inequality aversion have potentially very strong implications for Pareto-efficient marginal income taxation. It also turns out that the type of inequality aversion (self-centered vs. non-self-centered), and the specific measures of inequality used, matter a great deal. For example, based on simulation results mimicking the disposable income distribution in the U.S., the preferences suggested by Fehr and Schmidt (1999) imply monotonically increasing marginal income taxes, with large negative marginal tax rates for low-income individuals and large positive marginal tax rates for high-income ones. In contrast, the in many respects comparable model by Bolton and Ockenfels (2000) implies close to zero marginal income tax rates for all.
    Keywords: Keywords: Pareto-efficient taxation; Inequality aversion; Self-centered inequality aversion; Non-self-centered; inequality aversion; Fehr and Schmidt preferences; Bolton and Ockenfels preferences; GINI coefficient; Coefficient of variation
    JEL: D03 D62 H23
    Date: 2020–05
  2. By: Nora Paulus (CREA, Université du Luxembourg); Patrice Pierreti (CREA, Université du Luxembourg); Benteng Zou (CREA, Université du Luxembourg)
    Abstract: In this paper we argue that static models provide an incomplete analysis of interjurisdictional tax competition. According to Wilson (1987) a static tax competition model might predict the long-run outcomes of government decision making in a dynamic setting. We show that this conjecture is only true when policymakers commit to a tax path at the start of the game without future updates (open-loop behavior), with the proviso that they are time-indifferent and/or capital is perfectly mobile. Static models however never predict future outcomes when policymarkers continuously update their tax rates (Markovian behavior). In particular, we address the following aspects. How do long-run outcomes in a dynamic setting change relative to static games? How does social welfare change accordingly? If policymakers have the choice, which strategical behavior (Markovian or open-loop) should they adopt? In light of this, which one confers the highest social advantage?
    Keywords: Dynamic Tax Competition, Differential Games, Markovian Nash Equilibrium, Open-loop Strategy
    JEL: C73 F21 H21 H87
    Date: 2019
  3. By: Leonzio Rizzo; Alejandro Esteller - Moré; Riccardo Secomandi
    Abstract: We present new cross-country empirical evidence that tax system complexity affects international investments. The evidence comes from a database of foreign direct investment (FDI) bilateral flows for all OECD countries over the 2013 2016 period. We used the dataset from the Doing Business survey, which collects several measures of tax system complexity and effective tax rates. By means of a gravity model, we considered the impact of destination and parent country characteristics on firm investment decisions. An increase in the difference between tax complexity in the home country and the destination country is related with an increase in FDI outflows from home to destination. We also found that this effect is driven by small countries. We did not observe any impact of tax rate differentials on FDI outflows.
    Keywords: FDI flows; tax complexity; gravity model
    JEL: H32 H29 H25
    Date: 2020–05–29
  4. By: David Altig; Alan J. Auerbach; Laurence J. Kotlikoff; Elias Ilin; Victor Ye
    Abstract: The U.S. has a plethora of federal and state tax and benefit programs, each with its own work incentives and disincentives. This paper uses the Fiscal Analyzer (TFA) to assess how these policies, in unison, impact work incentives. TFA is a life-cycle, consumption-smoothing program that incorporates household borrowing constraints and all major federal and state fiscal policies. We use TFA in conjunction with the 2016 Federal Reserve Survey of Consumer Finances to calculate Americans’ remaining lifetime marginal net tax rates. Our findings are striking. One in four low-wage workers face marginal net tax rates above 70 percent, effectively locking them into poverty. Over half face remaining lifetime marginal net tax rates above 45 percent. The richest 1 percent also face a high median lifetime marginal tax rate – roughly 50 percent. Double taxation matters. The overall median lifetime marginal net tax rate is 43.2 percent compared with an overall current-year marginal net tax rate of 37.6 percent. We also find remarkable dispersion in both lifetime and current-year marginal net tax rates, particularly among the poor, and major differences in marginal and average net taxation across states, providing typical households a large incentive to relocate to another state.
    JEL: H2 H20 H21 H3 H31
    Date: 2020–05
  5. By: Berliant, Marcus; Gouveia, Miguel
    Abstract: The literatures dealing with voting, optimal income taxation, implementation, and pure public goods are integrated here to address the problem of voting over income taxes and public goods. In contrast with previous articles, general nonlinear income taxes that affect the labor-leisure decisions of consumers who work and vote are allowed. Uncertainty plays an important role in that the government does not know the true realizations of the abilities of consumers drawn from a known distribution, but must meet the realization-dependent budget. Even though the space of alternatives is infinite dimensional, conditions on primitives are found to assure existence of a majority rule equilibrium when agents vote over both a public good and income taxes to finance it.
    Keywords: Voting; Income taxation; Public good
    JEL: D72 D82 H21 H41
    Date: 2020–05–31
  6. By: Julio López-Laborda (Department of Public Economics, University of Zaragoza, Spain); Guillermo Peña (Department of Public Economics, University of Zaragoza, Spain)
    Abstract: This paper theoretically and empirically analyzes the influence on the rate of trade openness of the taxation of financial services under VAT. The empirical analysis is carried out using data from the OECD and 36 European Union countries for the period 1961-2012. Dynamic panel data techniques are used, concretely the GMM System, and an unbalanced panel is handled. The results corroborate that financial VAT, and in particular the “option-to-tax” method applied by some countries in the European Union, have a positive impact on a country’s rate of trade openness.
    Date: 2020–06
  7. By: Luisito Bertinelli (CREA, Université du Luxembourg); Arnaud Bourgain (CREA, Université du Luxembourg); Skerdilajda Zanaj (CREA, Université du Luxembourg)
    Abstract: In this paper, we analyze theoretically and empirically the effects of tax changes on firms’ profits in extractive industries. In the theoretical part, we assume a country that levies a profit tax and a royalty on the profits of extractive firms to maximize its tax revenues. The mining companies may reduce their taxable income by cost manipulation. By analyzing the optimal choice of the government and of the firms, we first establish the optimal tax policy and then we investigate the impact of the optimal fiscal policy on firms’ profits. In the empirical part of the paper, we estimate the effect of the profit tax and royalty on the extracting firms’ profit in African countries during the period spanning from 2007 to 2018. We use the Mining Intelligence database to constitute a panel of annual individual data on 363 gold mines located in 21 Sub-Saharan countries. We obtain an inverse relationship between the tax rate change of the two tax instruments and the profit of the firms.
    Keywords: Resource countries, Resource taxation, Royalties, Cost misreporting, Extractive industries.
    JEL: H25 H32 O13
    Date: 2019

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