nep-pub New Economics Papers
on Public Finance
Issue of 2020‒07‒20
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Taxation of Capital Income with Heterogeneous Rates of Return By Aart Gerritsen; Bas Jacobs; Alexandra V. Rusu; Kevin Spiritus
  2. Informality, Consumption Taxes and Redistribution By Bachas, Pierre; Gadenne, Lucie; Jensen, Anders
  3. Taxation, Social Welfare, and Labor Market Frictions By Brendan Epstein; Ryan Nunn; Musa Orak; Elena Patel
  4. Inequality Measurement and Tax/Transfer Policy By Apps, Patricia; Rees, Ray
  5. Salience and Taxation with Imperfect Competition By Kory Kroft; Jean-William P. Laliberté; René Leal Vizcaíno; Matthew J. Notowidigdo
  6. Tec(h)tonic Shifts: Taxing the “Digital Economy” By Aqib Aslam; Alpa Shah
  7. The Fiscal State-Dependent Effects of Capital Income Tax Cuts By Alexandra Fotiou; Wenyi Shen; Shu-Chun Susan Yang
  8. Top Wealth in America: New Estimates and Implications for Taxing the Rich By Matthew Smith; Owen Zidar; Eric Zwick
  9. Tax Elasticity Estimates for Capital Stocks in Canada By Jean-François Wen; Fatih Yilmaz; Danea Trejo

  1. By: Aart Gerritsen (Erasmus University Rotterdam); Bas Jacobs (Erasmus University Rotterdam); Alexandra V. Rusu (European Commission); Kevin Spiritus (Erasmus University Rotterdam)
    Abstract: There is increasing empirical evidence that people systematically differ in their rates of return on capital. We derive optimal non-linear taxes on labor and capital income in the presence of such return heterogeneity. We allow for two distinct reasons why returns are heterogeneous: because individuals with higher ability obtain higher returns on their savings, and because wealthier individuals achieve higher returns due to scale effects in wealth management. In both cases, a strictly positive tax on capital income is part of a Pareto-efficient dual income tax structure. We write optimal tax rates on capital income in terms of sufficient statistics and find that they are increasing in the degree of return heterogeneity. Numerical simulations for empirically plausible return heterogeneity suggest that optimal marginal tax rates on capital income are positive, substantial, and increasing in capital income.
    Keywords: Optimal taxation, capital taxation, heterogeneous returns
    JEL: H21 H24
    Date: 2020–06–29
  2. By: Bachas, Pierre (World Bank Research); Gadenne, Lucie (University of Warwick, Institute for Fiscal Studies and CEPR); Jensen, Anders (Harvard Kennedy School and NBER)
    Abstract: Can consumption taxes reduce inequality in developing countries? We combine household expenditure data from 31 countries with theory to shed new light on the redistributive potential and optimal design of consumption taxes. We use the type of store in which purchases occur to proxy for informal (untaxed) consumption. This enables us to characterize the informality Engel curve: we find that the budget share spent in the informal sector steeply declines with income, in all countries. The informal sector thus makes consumption taxes progressive: households in the richest quintile face an effective tax rate that is twice that of the poorest quintile. We extend the standard optimal commodity tax model to allow for informal consumption and calibrate it to the data to study the effects of different tax policies on inequality. Contrary to consensus, we show that consumption taxes are redistributive, lowering inequality by as much as personal income taxes. Once informality is taken into account, commonly used redistributive policies, such as reduced tax rates on necessities, have a limited impact on inequality. In particular, subsidizing food cannot be justified on equity or efficiency grounds in several poor countries.
    Keywords: Household Budget Surveys ; Inequality ; Informality ; Redistribution ; Taxes JEL codes: E26 ; H21 ; H23 ; 023
    Date: 2020
  3. By: Brendan Epstein; Ryan Nunn; Musa Orak; Elena Patel
    Abstract: Taking inefficiencies from taxation as given, a well-known public finance literature shows that the elasticity of taxable income (ETI) is a sufficient statistic for assessing the deadweight loss (DWL) from taxing labor income in a static neoclassical framework. Using a theoretical approach, we revisit this result from the vantage point of a general equilibrium macroeconomic model with labor search frictions. We show that, in this context, and against the backdrop of inefficient taxation, DWL can be up to 38 percent higher than the ETI under a range of reasonable parametric assumptions. Externalities arising from market participants not taking into account the impact of changes in their search- and vacancy-posting activities on other market participants can amplify this divergence substantially. However, with theoretical precision, we show how the wedge between the ETI and DWL can be controlled for, using readily observable variables.
    Keywords: Social welfare; Deadweight loss from taxation; Search frictions; Elasticity of taxable income; Endogenous amenities
    JEL: H20 J32
    Date: 2020–06–17
  4. By: Apps, Patricia (University of Sydney); Rees, Ray (University of Munich)
    Abstract: We provide a critique of the standard methodology which bases welfare comparisons between households on deflating household income and consumption by an equivalence scale. We argue that this leads to support for tax/transfer policies that significantly disadvantage low to middle income households and women as second earners. We base the critique both on a theoretical model of the family household and a detailed analysis of Australian income and employment data.
    Keywords: inequality, equivalence scales, tax/transfer policy, families
    JEL: D13 D31 H21 H24 H31
    Date: 2020–06
  5. By: Kory Kroft; Jean-William P. Laliberté; René Leal Vizcaíno; Matthew J. Notowidigdo
    Abstract: This paper studies commodity taxation in a general model featuring imperfect competition and tax salience. We derive new formulas for the incidence and marginal excess burden of commodity taxation, and we estimate the necessary inputs to the formulas by combining Nielsen Retail Scanner data from grocery stores in the US with detailed sales tax data. We calibrate our new formulas and conclude that the incidence of sales taxes on consumers is increasing in tax salience, and the marginal excess burden of taxation is larger than standard formulas that ignore imperfect competition and tax salience.
    JEL: D12 H2 H25 H71
    Date: 2020–06
  6. By: Aqib Aslam; Alpa Shah
    Abstract: The ever-increasing digitalization of businesses has accelerated the need to address the many shortcomings and unresolved issues within the international corporate income tax system. In particular, the customer or “user”—through their online activities—is now considered by many as being a critical driving force behind the value of digital services. Furthermore, the rapid growth of digital service providers over the last decade has made them an increasingly popular target for special taxes—similar to wealth and solidarity taxes—which can also help mobilize much-needed revenues in the wake of a crisis. This paper argues that a plausible conceptual case can be made to tax the value generated by users under the corporate income tax. However, a number of issues need to be tackled for user-based tax measures to become a reality, which include agreement among countries on whether user value justifies a reallocation of taxing rights, establishing the legal right to tax income derived from user value, as well as an appropriate metric for valuing user-generated data if it is ever to be used as a tax base. Furthermore, attempting to tax only certain types of business is ill-advised, especially as user data is now being exploited widely enough for it to be recognized as an input for almost all businesses. Several options present themselves for consideration—from a modified permanent establishment definition combined with taxation by formulary apportionment, to user-based royalty-type taxes—each with their own merits and misdemeanors.
    Date: 2020–05–29
  7. By: Alexandra Fotiou; Wenyi Shen; Shu-Chun Susan Yang
    Abstract: Using the post-WWII data of U.S. federal corporate income tax changes, within a Smooth Transition VAR, this paper finds that the output effect of capital income tax cuts is government debt-dependent: it is less expansionary when debt is high than when it is low. To explore the mechanisms that can drive this fiscal state-dependent tax effect, the paper uses a DSGE model with regime-switching fiscal policy and finds that a capital income tax cut is stimulative to the extent that it is unlikely to result in a future fiscal adjustment. As government debt increases to a sufficiently high level, the probability of future fiscal adjustments starts rising, and the expansionary effects of a capital income tax cut can diminish substantially, whether the expected adjustments are through a policy reversal or a consumption tax increase. Also, a capital income tax cut need not always have large revenue feedback effects as suggested in the literature.
    Date: 2020–05–29
  8. By: Matthew Smith (U.S. Treasury Department); Owen Zidar (Princeton University and NBER); Eric Zwick (University of Chicago and NBER)
    Abstract: This paper uses administrative tax data to estimate top wealth in the United States.We build on the capitalization approach in Saez and Zucman (2016) while accounting for heterogeneity within asset classes when mapping income flows to wealth. Our approach reduces bias in wealth estimates because wealth and rates of return are cor-related. We find that the top 0.1% share of wealth increased from 7% to 14% from1978 to 2016. While this rise is half as large as prior estimates, wealth is very concentrated: the top 1% holds nearly as much wealth as the bottom 90%. However, the“P90-99†class holds more wealth than either group after accounting for heterogeneity.Private business and public equity wealth are the primary sources of wealth at the top, and pension and housing wealth account for almost all wealth of the bottom 90%. Our approach substantially reduces estimates of mechanical wealth tax revenue and top capital income in distributional national accounts, which depend on well-measured estimates of top wealth. From 1980 to 2014, capital income accounts for 2.4 out of 8.1percentage points of the rise of the top 1% income share.
    JEL: D31 H22 H23 H24
    Date: 2020–05
  9. By: Jean-François Wen; Fatih Yilmaz; Danea Trejo
    Abstract: The paper provides estimates of the long-run, tax-adjusted, user cost elasticity of capital (UCE) in a small open economy, exploiting three sources of variation in Canadian tax policy: across provinces, industries, and years. Estimates of the UCE with Canadian data are less prone to the endogeneity problems arising from the effects of tax policy changes on the interest rate or on the price of capital equipment. Reductions in the federal corporate income tax rate during the early 2000s for service industries but not for manufacturing, which already benefited from a preferential tax rate, contribute to the identification of the UCE. To capture the long-run relationship between the capital stock and the user cost of capital, an error correction model (ECM) is estimated. Supplementary results are obtained from a distributed lag model in first differences (DLM). With the ECM, our baseline UCE for machinery and equipment (M&E) is -1.312. The corresponding semi-elasticity of the stock of M&E with respect to the METR is about -0.2, suggesting, for example, that a 5 percentage point reduction in the METR, say from 15 to 10 percent, would in the long run generate an increase of 1.0 percent in the stock of M&E. The UCE for non-residential construction is statistically insignificantly different from zero.
    Date: 2020–05–29

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