nep-pub New Economics Papers
on Public Finance
Issue of 2020‒08‒31
twelve 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 Victoria Rusu; Kevin Spiritus
  2. Inequality Measurement and Tax/Transfer Policy By Patricia Apps; Ray Rees
  3. The impacts of alcohol taxes: A replication review By David Roodman
  4. Corporate Profit Tax and Strategic Corporate Social Responsibility under Foreign Acquisition By Xu, Lili; Lee, Sang-Ho
  5. Playing Easy or Playing Hard to Get: When and How to Attract FDI By Thomas A. Gresik; Dirk Schindler; Guttorm Schjelderup
  6. Taxation of Families and “Families of Taxation”? Inequality Modification Between Family Types Across Welfare States By Manuel Schechtl
  7. The Impact of Taxes and Wasteful Government Spending on Giving By Sheremeta, Roman; Uler, Neslihan
  8. Sovereign Default, Taxation, and the Underground Economy By Almuth Scholl; Liang Tong
  9. Tax competition in EU and USA: A comparative analysis of the automotive and telecommunication industries By METAXAS, THEODORE; NIKOU, RANIA
  10. Using Tax Data to Better Capture Top Incomes in Official UK Income Inequality Statistics By Dominic Webber; Richard P. Tonkin; Martin Shine
  11. Optimal Car-related Taxes and Pricing in Beijing Considering the Marginal Cost of Public Funds By Yoshida, Jun; Kono, Tatsuhito
  12. The distributional impact of recurrent immovable property taxation in Greece By Andriopoulou, Eirini; Kanavitsa, Eleni; Leventi, Chrysa; Tsakloglou, Panos

  1. By: Aart Gerritsen; Bas Jacobs; Alexandra Victoria Rusu; Kevin Spiritus
    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
  2. By: Patricia Apps; Ray Rees
    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 in-come 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
  3. By: David Roodman
    Abstract: This paper reviews the research on the impacts of alcohol taxation outcomes such as heavy drinking and mortality. Where data availability permits, reviewed studies are replicated and reanalyzed. Despite weaknesses in the majority of studies, and despite seeming disagreements among the more credible one--ones based on natural experiments--we can be reasonably confident that taxing alcohol reduces drinking in general and problem drinking in particular. The larger and cleaner the underlying natural experiment, the more apt a study is to detect impacts on drinking. Estimates from the highest-powered study settings, such as in Alaska in 2002 and Finland in 2004, suggest an elasticity of mortality with respect to price of -1 to -3. A 10% price increase in the US would, according to this estimate, save 2,000-6,000 lives and 48,000-130,000 years of life each year.
    Date: 2020–07
  4. By: Xu, Lili; Lee, Sang-Ho
    Abstract: This study investigates government public policies facing competing firms’ strategic corporate social responsibility (CSR) activities and finds that the choice of CSR crucially depends on corporate profit tax. We demonstrate that strategic CSR decreases while social welfare increases with corporate tax. When the government grants uniform output subsidies, we show that bilateral CSR leads to a lower CSR level than under unilateral CSR but bilateral CSR is always beneficial to society. However, when the government grants discriminatory output subsidies which yield different levels of unilateral CSR, we show that domestic CSR leads to a lower CSR level than under foreign CSR. In an endogenous CSR choice game, domestic CSR (no CSR) is a Nash equilibrium when corporate tax is low (high) under the uniform subsidy, while foreign CSR could be a Nash equilibrium when corporate tax is low under the discriminatory subsidy.
    Keywords: corporate profit tax; corporate social responsibility; endogenous CSR choice game
    JEL: D43 H21 L21
    Date: 2020–08
  5. By: Thomas A. Gresik; Dirk Schindler; Guttorm Schjelderup
    Abstract: We study the link between a country’s institutional quality in tax collection and its optimal corporate tax policies in a model of heterogeneous multinationals that can shift income using both debt and transfer prices. Countries with weak institutional quality can be made worse off adopting policies that attract FDI as the benefits from higher wages and production are more than offset by tax base erosion. Countries with moderate institutional quality can gain from under-utilizing their ability to collect taxes, since the benefit of attracting more FDI outstrips the benefit of increased tax revenue. Countries with very strong institutions benefit from FDI and should utilize their full ability to collect taxes.
    Keywords: FDI, thin capitalization rules, transfer pricing, institutional quality
    JEL: F23 H26 H32 F68
    Date: 2020
  6. By: Manuel Schechtl
    Abstract: Previous sociological research has overlooked the fact that a welfare state’s tax system does not solely redistribute from rich to poor (vertical) but also between family types (horizontal). Different types of families are treated differently due to (de-)familialization policies in the tax code, such as joint filing for spouses or single-parent relief. In this study I aim to examine the tax system’s modification of horizontal income inequality between the six most prevalent family types of non-retiree households. To answer my research aim I draw on harmonized data from 30 countries provided by the Luxembourg Income Study (LIS). I estimate pre- and post-fiscal income inequality measured as between-family-type Theil indices. Using linear regression, I examine the association of the percentage change in inequality and the prevalence of family type-related tax characteristics. I apply hierarchical cluster analysis to evaluate the congruence of welfare state classification and family tax policy. The results show that welfare states with familialization tax policies reduce less horizontal income inequality compared to welfare states without familialization tax policies. Nevertheless, the prevalence and outcomes of familialization policies in the tax code do not correspond to welfare state classifications.
    JEL: H23 H24 I38
    Date: 2020–08
  7. By: Sheremeta, Roman; Uler, Neslihan
    Abstract: We examine how taxes impact charitable giving and how this relationship is affected by the degree of wasteful government spending. In our model, individuals make donations to charities knowing that the government collects a flat-rate tax on income (net of charitable donations) and redistributes part of the tax revenue. The rest of the tax revenue is wasted. The model predicts that a higher tax rate increases charitable donations. Surprisingly, the model shows that a higher degree of waste decreases donations (when the elasticity of marginal utility with respect to consumption is high enough). We test the model’s predictions using a laboratory experiment with actual donations to charities and find that the tax rate has an insignificant effect on giving. The degree of waste, however, has a large, negative and highly significant effect on giving.
    Keywords: charitable giving, tax, waste, redistribution, experiment, public goods provision, neutrality, income inequality
    JEL: C93 D64 H21
    Date: 2020–07–22
  8. By: Almuth Scholl (Department of Economics, University of Konstanz); Liang Tong (Department of Economics, University of Konstanz)
    Abstract: This paper studies the dynamic interaction between sovereign default risk, taxation, and the un-derground economy. For a large sample of countries, we find that the size of the underground economy is positively correlated with sovereign debt and interest spreads. We rationalize these empirical regularities within a quantitative model of sovereign default that explicitly accounts for underground activities. We highlight a vicious circle: Higher sovereign risk premia tighten the endogenous borrowing constraint and force the government to raise taxes. Tax hikes, however, induce the private sector to invest less and to evade taxes by producing in the underground sector. Eventually, falling tax revenues force the government to either implement further tax hikes or to default. Our quantitative findings suggest that the underground economy fosters sovereign default risk and deepens debt crises.
    Keywords: sovereign debt, default, fiscal policy, underground economy, tax evasion
    JEL: E62 F34 H26
    Abstract: The aim of this article is to define the meaning of tax competition. More specifically, it carries out a comparative analysis between the European Union and the United States of America studying two key sectors of their economies, the motor industry and telecommunications with the aim of featuring which of these is more tax competitive. The comparison criteria are VAT and sales tax, excise duties, corporate income tax, wage costs and in particular the tax burden on labor, taxing savings and duties on trade. In some cases, the EU seems to be more competitive, and in other cases, the USA does so. With regard to motor industry and telecommunications, it seems that in most of the criteria featured, they are affected according to the rest areas of economy. We conclude that the issue of tax competition, and in particular the comparison between the EU and the USA, needs further investigation. Finally, substantial tax reforms as a means of promoting healthy tax competition, seems to be desiderata by both parties.
    Keywords: Tax competition; EU; USA; Automotive Industry; Telecommunications
    JEL: H25 L62 L86
    Date: 2020
  10. By: Dominic Webber; Richard P. Tonkin; Martin Shine
    Abstract: It is widely recognised that household surveys do not fully capture the incomes of the very richest individuals and households, particularly those among the so-called “top 1%”, for reasons including non-response and under-reporting. As a consequence, estimates based on survey data alone typically understate true levels of inequality. This paper presents new research and analysis to develop a methodology for improving the measurement of the upper tail of the distribution, which is suitable for use in ONS’s official statistics on household income, in terms of being methodologically sound and based on robust academic research; transparent and understandable by users; and an approach where adjustments are made to underlying microdata rather than aggregates. The methods presented in the paper build upon the work of both the UK Department for Work and Pensions (DWP) and Burkhauser et al. (2018a) in employing methods in which survey-based mean incomes for quantile groups at the top of the distribution are replaced by equivalent figures from tax data. The analysis examines two sets of methods developed from these approaches, with variants of each tested to determine the most appropriate methodology to apply in future official statistical releases by ONS.
    JEL: D31 H31
    Date: 2020–07
  11. By: Yoshida, Jun; Kono, Tatsuhito
    Abstract: This paper optimizes fuel tax, car ownership tax, highway tolls, and peak-time area pricing in Beijing with explicit consideration of marginal costs of public funds arising from these taxes and pricing. We establish two scenarios: scenario 1 optimizes the two taxes, tolls, and area pricing simultaneously; scenario 2 optimizes the two taxes and tolls without area pricing. Using Beijing’s parameters obtained from previous studies, our calculation results show that 1) the optimal area pricing is 50 CNY/entry; 2) Scenario 1 reduces the number of cars in peak time by more than 50%, but scenario 2 reduces it by 10%; 3) regardless of area pricing, fuel tax should be higher and car ownership tax lower. We do some sensitivity analyses to demonstrate the possible ranges of the tax and pricing instruments.
    Keywords: Optimal taxation, Marginal cost of public funds, Externality, Area pricing
    JEL: H2 R4
    Date: 2020–07–07
  12. By: Andriopoulou, Eirini; Kanavitsa, Eleni; Leventi, Chrysa; Tsakloglou, Panos
    Abstract: During the last decade, Greece faced one of the most severe debt crises among developed countries, leading to Economic Adjustment Programs in order to avoid a disorderly default. Public expenditure was cut, tax rates were increased and new taxes were introduced aiming at restoring public finances. Prominent among the latter were recurrent property taxes that were playing a very minor role before the crisis. These taxes helped boosting public revenues but were hugely unpopular. The paper examines in detail their distributional impact and finds that they led to increases in inequality and (relative) poverty. The result is stronger in the case of inequality indices that are relatively more sensitive to changes close to the bottom of the distribution and poverty indices that are sensitive to the distribution of income among the poor.
    Keywords: property taxation; inequality; poverty; progressivity; Greece
    JEL: D31 H22
    Date: 2020–07

This nep-pub issue is ©2020 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.