nep-pub New Economics Papers
on Public Finance
Issue of 2020‒08‒10
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Reassessing the regressivity of the VAT By Alastair Thomas
  2. Corporate Tax Avoidance and Industry Concentration By Julien Martin; Mathieu Parenti; Farid Toubal
  3. DOES PERSISTENCE IN USING R&D TAX CREDITS HELP TO ACHIEVE PRODUCT INNOVATIONS? By José M. Labeaga; Juan A. Ester Martínez-Ros; Amparo Sanchis-Llopis; Juan A. Sanchis-Llopis
  4. Could Fiscal Policies Overcome a Deep Recession at the Zero Lower Bound? By Liu, Shih-fu; Huang, Wei-chi; Lai, Ching-chong
  5. The $100 Million Nudge: Increasing Tax Compliance of Businesses and the Self-Employed using a Natural Field Experiment By Marvin Cardoza; Justin Holz; John List; Joaquin Zentner; Alejandro Zentner

  1. By: Alastair Thomas
    Abstract: This paper reassesses the often-made conclusion that the VAT is regressive, drawing on tax microsimulation models constructed for an unprecedented 27 OECD countries. The paper first assesses the competing methodological approaches used in previous distributional studies, highlighting the distorting impact of savings patterns on cross-sectional analysis when VAT burdens are measured relative to income. As argued by IFS (2011), measuring VAT burdens relative to expenditure – thereby removing the influence of savings – is likely to provide a more meaningful picture of the distributional impact of the VAT. On this basis, the VAT is found to be either roughly proportional or slightly progressive in most of the 27 OECD countries examined. Nevertheless, results for a small number of countries highlight that broad-based VAT systems that have few reduced VAT rates or exemptions can produce a small degree of regressivity. Results also show that even a roughly proportional VAT can still have significant equity implications for the poor – potentially pushing some households into poverty. This emphasises the importance of ensuring the progressivity of the tax-benefit system as a whole in order to compensate poor households for the loss in purchasing power from paying VAT. In the broader context of the COVID-19 crisis, the findings of the paper suggest there may be scope in many countries for VAT reform to help address revenue needs, as this revenue may be generated with less significant distributional effects than previously thought. While standard VAT rates are high in many countries, OECD evidence shows that scope exists to broaden VAT bases. Nevertheless, any VAT increases, including VAT base broadening measures that impact the poor, should be accompanied by compensation measures for poorer households, such as targeted tax credits or benefit payments.
    JEL: H22 H23 H24
    Date: 2020–08–10
  2. By: Julien Martin; Mathieu Parenti; Farid Toubal
    Abstract: This paper argues that tax avoidance by large corporations has contributed to the 25% increase in concentration among U.S. firms since the mid-1990s. Corporate tax avoidance gives large firms a competitive edge, which translates into larger market shares and an increase in the granularity of the economy. We develop IV and difference-in-differences strategies that show the causal impact of tax avoidance on firm-level sales. Had firms not resorted to tax avoidance in 2017, our results imply that the average industry concentration would have been 8.3% lower, which is around its early 2000 level.
    Keywords: Tax Avoidance; Industry Concentration; IRS Audit Probability
    JEL: D22 H26 L11 D40 F23
    Date: 2020–07
  3. By: José M. Labeaga (UNED); Juan A. Ester Martínez-Ros (Universidad Carlos III de Madrid); Amparo Sanchis-Llopis (University of Valencia and ERICES); Juan A. Sanchis-Llopis (University of Valencia and ERICES)
    Abstract: Despite the generosity of its tax system, Spain is far from EU neighbouring countries in terms of R&D spending, and in innovation outcomes. A policy instrument commonly used to foster firms’ investment in R&D are tax incentives. The use of this instrument is not generalized in firms spending on R&D, and only a fraction of firms are regular claimants. In this paper we investigate whether persistence in using tax credits is positively related to the achievement of product innovations, beyond R&D investments. We consider that firms investing in qualified R&D spending and making a regular use of tax credits are likely to be firms aiming at innovating. By contrast, occasional tax credit users are probably firms seeking to reduce their corporate tax burden, and not prioritizing the achievement innovations. Using a sample of Spanish manufacturing firms spanning 2001-2014, we first estimate persistence using a duration model accounting for firm observed and unobserved heterogeneity. Our results are consistent with negative duration dependence, indicating that the probability of ceasing in claiming tax credits decreases with the passage of time. Second, we estimate a count-data model and find that the number of product innovations positively depends on tax credit persistence only for SMEs.
    Keywords: tax credits; persistence; duration dependence; count-data
    JEL: C41 H25 H32
    Date: 2020–07
  4. By: Liu, Shih-fu; Huang, Wei-chi; Lai, Ching-chong
    Abstract: This paper sets up a New Keynesian model in which the monetary authority implements a zero lower bound interest rate policy, and uses it to explore whether the supportive fiscal instruments (including expansionary government spending, a payroll tax cut, and a financial assets tax cut) are effective in overcoming a deep recession. The salient feature of this study is that it provides a new dynamic viewpoint of regime switching by evaluating each of several supportive fiscal policies in terms of their performance in alleviating a deep recession. Two main findings emerge from the analysis. First, when the monetary authority implements the zero lower bound interest rate policy to dampen the negative natural rate shock, the economy will sink into a deep recession with deflation. Second, to overcome the deep recession, of the three supportive fiscal tools (i.e., expansionary government spending, a payroll tax cut, and a financial assets tax cut), only expansionary government spending is effective in alleviating the deep recession. More specifically, the implementation of fiscal policy in the form of either the payroll tax cut or the financial assets tax cut will only further deepen the recession.
    Keywords: Zero lower bound, New Keynesian model, fiscal stimulus, regime switching
    JEL: E62 E63 H20
    Date: 2020–06–22
  5. By: Marvin Cardoza; Justin Holz; John List; Joaquin Zentner; Alejandro Zentner
    Abstract: This paper uses a natural field experiment to examine the effectiveness of specific nudges on tax compliance amongst firms and the self-employed in the Dominican Republic. In collaboration with the Dominican Republic's tax authority, we designed messages for more than 28,000 self-employed workers and over 56,000 firms. Leveraging administrative tax data, we find evidence that our nudges (increasing the salience of prison sentences or public disclosure of tax evaders) have large effects on increasing tax compliance, primarily working through the channel of decreasing claimed tax exemptions. Interestingly, we find that firms are more impacted than the self-employed, and that firm size is critically linked to nudge effectiveness: larger firms are considerably more influenced by nudges than smaller firms. We find this latter result noteworthy given the paucity of evidence showing significant behavioral impacts of nudges amongst the largest players in a market. Overall, our messages increased tax revenue by $193 million (roughly 0.23% of the Dominican Republic's GDP in 2018), with over $100 million constituting income that the government would not have received without our field experimental nudges.
    Date: 2020
  6. By: Baptiste Souillard
    Abstract: This paper examines the effect of import competition on corporate tax avoidance. I exploit the rapid surge of China’s exports as a competition shock and balance sheets and income statements to measure tax avoidance of US-headquartered publicly listed manufacturing firms. The baseline results reveal that a 1 percentage point increase in the penetration ratio of US imports from China entails, on average, a 0.20 percentage point decrease in the effective tax rate. They are supported by a series of sensitivity tests and robust to using the US conferral of the Permanent Normal Trade Relations status on China in late 2000 as a quasi-natural experiment. Furthermore, the results are entirely driven by multinational firms. In response to the China shock, these firms invested in intangible assets, and these intangibles allowed them to shift more profits towards low-tax countries. These findings shed light on the determinants of corporate tax avoidance. More generally, they help understand the decline in the average effective tax rate of US publicly listed firms and the recent backlash against large firms and globalization.
    Keywords: Corporate tax avoidance; multinational firms; import competition; intangibles; profit shifting
    JEL: F14 F60 H25 H26 L60
    Date: 2020–07

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