nep-pub New Economics Papers
on Public Finance
Issue of 2020‒08‒17
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal federal redistribution during the uncoordinated response to a pandemic By Jacek Rothert
  2. Implications of the Covid-19 Pandemic for State Government Tax Revenues By Jeffrey Clemens; Stan Veuger
  3. Informality, Consumption Taxes, and Redistribution By Pierre Bachas; Lucie Gadenne; Anders Jensen
  4. The Assessment Gap: Racial Inequalities in Property Taxation By Carlos Avenancio-León; Troup Howard
  5. Tax Revenue Reforms and Income Distribution in Developing Countries By Sanjeev Gupta; João Tovar Jalles
  6. Goods and Services Tax Efficiency across Indian States: Panel Stochastic Frontier Analysis. By Mukherjee, Sacchidananda
  7. Are Dutch Old-Age Pensions Taxed Fairly and Efficiently? By Bernd Genser; Robert Holzmann
  8. The participation dividend of taxation: how citizens in Congo engage more with the state when it tries to tax them By Weigel, Jonathan

  1. By: Jacek Rothert (United States Naval Academy)
    Abstract: Optimal policy during an epidemic calls for depressed economic activity to slow down the outbreak. Sometimes, these decisions are left to local authorities (e.g. states). This creates an externality, as the outbreak doesn’t respect states’ boundaries. A strategic Pigouvian subsidy that rewards states which depress their economies more than the average corrects that externality by creating a race-to-the-bottom type of response. In equilibrium nobody receives a subsidy, but the allocation is efficient. If local authorities are concerned about unequal burden of the lockdown costs but cannot easily issue new debt to finance transfer payments, then lockdowns will be insufficient in some areas and excessive in others. When that’s the case, federal stimulus checks can flatten the infection curve.
    Date: 2020–06
  2. By: Jeffrey Clemens; Stan Veuger
    Abstract: We assess the Covid-19 pandemic’s implications for state government sales and income tax revenues. We estimate that the economic declines implied by recent forecasts from the Congressional Budget Office will lead to a shortfall of roughly $106 billion in states’ sales and income tax revenues for the 2021 fiscal year. This is equivalent to 0.5 percent of GDP and 11.5 percent of our pre-Covid sales and income tax projection. Additional tax shortfalls from the second quarter of 2020 may amount to roughly $42 billion. We discuss how these revenue declines fit into several pieces of the broader economic context. These include other revenues (e.g., university tuition and fees) that are also at risk, as well as assets (e.g., pension plan holdings) that are at risk. Further dimensions of context include support enacted through several pieces of federal legislation, as well as spending needs necessitated by the public health crisis itself.
    JEL: H10 H12 H71 H79
    Date: 2020–06
  3. By: Pierre Bachas; Lucie Gadenne; Anders Jensen
    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.
    JEL: E26 H21 H23 O12 O23
    Date: 2020–06
  4. By: Carlos Avenancio-León; Troup Howard
    Abstract: We use panel data covering 118 million homes in the United States, merged with geolocation detail for 75,000 taxing entities, to document a nationwide "assessment gap" which leads local governments to place a disproportionate fiscal burden on racial and ethnic minorities. We show that holding jurisdictions and property tax rates fixed, black and Hispanic residents nonetheless face a 10-13% higher tax burden for the same bundle of public services. This assessment gap arises through two channels. First, property assessments are less sensitive to neighborhood attributes than market prices are. This generates racially correlated spatial variation in tax burden within jurisdiction. Second, appeals behavior and appeals outcomes differ by race. This results in higher assessment growth rates for minority residents. We propose an alternate approach for constructing assessments based on small-geography home price indexes, and show that this reduces inequality by at least 55-70%.
    JEL: H71 J15 R10
    Date: 2020–07–06
  5. By: Sanjeev Gupta; João Tovar Jalles
    Abstract: We explore the impact of major revenue mobilization episodes on income distribution dynamics using a new “narrative” database of major policy changes in tax and revenue administration systems, covering 45 emerging and low-income countries from 2000 to 2015. Our main finding is that after a tax reform (particularly those affecting the personal income or the operation of the revenue administration), the Gini index falls and the bottom income share rises. This result does not hold for sub-Saharan Africa, calling into question the design of tax reforms implemented in the region (mostly fragile states in the sample). In general, to reduce more rapidly income inequality (and improve the income prospects of the poorest strata of the population), it would be more effective to implement tax reforms when the economy is growing relatively slowly. Finally, the smaller the government and the smaller the tax system, the larger the beneficial impact of tax reforms on income distribution. Our results are robust to a battery of sensitivity and robustness tests.
    Keywords: income distribution; Gini; fiscal policy; impulse response functions; endogeneity;nonlinearities; government size
    JEL: C33 C36 D63 E32 E62 H20
    Date: 2020–07
  6. By: Mukherjee, Sacchidananda (National Institute of Public Finance and Policy)
    Abstract: In public finance, estimation of tax potential of a government - either federal or provincial - has immense importance to understand future streams of tax revenue. Tax potential depends on tax capacity and tax effort (TE) and therefore joint estimation of both the functions is desirable. There are several frameworks to estimate tax capacity and tax efficiency (tax effort); in the present paper time variant truncated panel sochastic Frontier Approach (SFA) is adopted to estimate the functions jointly for the period 2012-13 to 2019-20. The findings of the study could be useful for policy and especially for the sitting Fifteen Finance Commission. The results of the study show that GST capacity of states depends on size and structural composition of the economy. Introduction of GST has reduced states' GSTcapacity and the impact is restricted to scale only. The study has used data from GST Network (GSTN) database for the post-GST period and given all other factors at their levels, GSTN data shows lower GST capacity for high income states and higher capacity for low income states. The relationship between per capita income (PCI) of states and tax efficiency is non-linear and as PCI rises TE falls and thereafter it rises. Minor states (special category states and UTs with legislative assembly) have lower tax efficiency. Delhi and Goa have the highest GST gap and on average major states could increase their GST collection by 0.52 percent of GSVA and minor states by 1.15 percent if they increase their tax efforts.
    Keywords: Tax capacity ; Tax efficiency ; Goods and Services Tax (GST) ; Value Added Tax (VAT) ; Stochastic Frontier Approach ; Panel Data Analysis ; States of India
    JEL: H21 H71 H77
    Date: 2020–07
  7. By: Bernd Genser; Robert Holzmann
    Abstract: The Dutch pension system is internationally top-ranked as a well-designed three-pillar system. Moreover, almost all forms of pension benefits are expenditure taxed in line with the European Commission’s recommendations. Consequently, the Dutch pension policy approach could be regarded as a welcome blueprint for pension policy reform, currently on the agenda of all EU member countries. This paper focuses on the taxation of Dutch pensions and identifies two classes of problems that challenge the suitability of deferred pension taxation. First, cash flow taxation of pensions erodes the tax equity objectives of a progressive income tax. Second, deferred pension taxation generates a double fairness dilemma in a world with free cross-border migration and double taxation treaties in accordance with the OECD Model Tax Convention. The paper argues that these problems, as well as other minor problems in Dutch pension taxation, could be solved by replacing the Netherlands’ current system of deferred income taxation of pensions with a frontloaded expenditure tax system.
    Keywords: pension taxation, front-loaded expenditure taxation, progressivity erosion, international migration, OECD model tax convention
    JEL: H24 H55 H87 F22
    Date: 2020
  8. By: Weigel, Jonathan
    Abstract: This paper provides evidence from a fragile state that citizens demand more of a voice in the government when it tries to tax them. I examine a field experiment randomizing property tax collection across 356 neighborhoods of a large Congolese city. The tax campaign was the first time most citizens had been registered by the state or asked to pay formal taxes. It raised property tax compliance from 0.1% in control to 11.5% in treatment. It also increased political participation by about 5 percentage points (31%): citizens in taxed neighborhoods were more likely to attend townhall meetings hosted by the government or to submit evaluations of its performance. To participate in these ways, the average citizen incurred costs equal to their daily household income, and treated citizens spent 43% more than control. Treated citizens also positively updated about the provincial government, perceiving more revenue, less leakage, and a greater responsibility to provide public goods. The results suggest that broadening the tax base has a ‘participation dividend,’ a key idea in historical accounts of the emergence of inclusive governance in early modern Europe and a common justification for donor support of tax programs in weak states.
    JEL: D73 H20 P48
    Date: 2020–05–21

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