nep-pub New Economics Papers
on Public Finance
Issue of 2020‒10‒19
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Tax Preferences and Optimal Income Taxation By Marcelo Arbex; Enlinson Mattos
  2. Rethinking the Ability-to-Pay and Equal Sacrifice Principles of Taxation: An Alternative Rationale for a Progressive Income Tax By Harashima, Taiji
  3. Redistribution and Insurance in Welfare States Around the World By , Stone Center; Bartels, Charlotte; Neumann, Dirk
  4. When do firms highlight their effective tax rate? By Flagmeier, Vanessa; Müller, Jens; Sureth, Caren
  5. Tax misperception and its effects on decision making: A literature review By Blaufus, Kay; Chirvi, Malte; Huber, Hans-Peter; Maiterth, Ralf; Sureth-Slaone, Caren
  6. Does the Wealth Tax Kill Jobs? By Bjørneby, Marie; Markussen, Simen; Røed, Knut
  7. The impact of the Pillar One and Pillar Two proposals on MNE’s investment costs: An analysis using forward-looking effective tax rates By Tibor Hanappi; Ana Cinta González Cabral
  8. Reaction to ambiguity as a signal for tax reporting aggressiveness: Evidence from German income tax return data By Kühne, Daniela
  9. Framing and loss aversion in tax reporting behavior: Evidence from German income tax return data By Diller, Markus; Kühne, Daniela

  1. By: Marcelo Arbex (Department of Economics, University of Windsor); Enlinson Mattos (São Paulo School of Economics, Getulio Vargas Foundation)
    Abstract: We develop a two-agent model where agents have preferences over consumption, leisure, independent and interdependent tax preferences - personal (own tax payments) and interpersonal (average tax payments in the economy). We characterize the optimal labor income taxation under different assumptions regarding tax preferences (tax affinity, hostility, conformity and opposition). We find that tax preferences can either amplify or reduce the marginal tax increase of the low-ability type. When individuals can hide a fraction of their earnings at a resource cost, the link between consumption and tax payments is broken. Tax evasion affects the aggregate measure of taxes and what people take into account and care about when making their optimal decisions. We find that the trade-off associated with tax preferences and consumption have their effects intensified in the optimal low-ability income tax. With evasion, the marginal income tax of high-ability types is no longer zero - it is optimal to subsidize this type and avoid the mimicking of low-ability individuals.
    Keywords: Optimal taxation, Social preferences, Tax affinity, Pro-social behavior.
    JEL: D03 D60 H21 H23
    Date: 2020–10
  2. By: Harashima, Taiji
    Abstract: Progressive income taxes have usually been justified on the basis of the ability-to-pay (ATP) and equal sacrifice principles, but how ATP and sacrifice should be measured remains unsettled. In this paper, I present an alternative rationale for progressive taxes on the basis of the concept of sustainable heterogeneity (SH). I conclude that income taxes have to be progressive for SH to be achieved, and therefore, progressive income taxes can be justified without relying on the ATP and equal sacrifice principles. In addition, for SH to be achieved, households should also be burdened with taxes to cover expenses for achieving policy objectives other than SH in proportion to their incomes, that is, roughly in relation to their consumption, such as the case with a value-added tax.
    Keywords: Ability-to-pay principle; Benefit principle; Equal sacrifice principle; Progressive tax; Social welfare; Sustainable heterogeneity
    JEL: D63 H21 H24
    Date: 2020–09–16
  3. By: , Stone Center (The Graduate Center/CUNY); Bartels, Charlotte; Neumann, Dirk
    Abstract: Redistribution across individuals in a one-year-period framework is an empirically intensely studied question. However, a substantial share of annual redistribution might turn out to serve individual insurance in a longer perspective, reducing the level of actual redistribution across individuals. This paper investigates to what extent long-run redistribution diverges from annual redistribution in welfare states of different types. Exploiting panel data from the Cross-National Equivalent File (CNEF) for Australia, Germany, South Korea, Switzerland, the United Kingdom, and the United States, we find that welfare states like Germany that are assumed to engage in a high level of redistribution actually achieve relatively less redistribution between individuals in the long run than the United Kingdom or the United States. Regression results show that a higher share of elderly in a country is associated with more annual redistribution, but with less long-run redistribution between individuals. The results suggest that, in welfare states with aging populations, we might expect growing annual redistribution that, to a substantial extent, is in fact income smoothing for the elderly. (Stone Center on Socio-Economic Inequality Working Paper Series)
    Date: 2020–09–17
  4. By: Flagmeier, Vanessa; Müller, Jens; Sureth, Caren
    Abstract: This study examines the visibility of the GAAP effective tax rate (ETR) in firms' financial statements as a distinct disclosure choice. Applying a game-theory disclosure model for voluntary disclosure strategies of firms to a tax setting, we argue that firms face a trade-off in their ETR disclosure decisions. On the one hand, firms have an incentive to enhance their ETR disclosure when the ratio offers shareholders "favourable conditions", for example in terms of higher expected after-tax cash-flows. On the other hand, the disclosure of a favourable low ETR could attract the attention of tax auditors and the public and ultimately result in disclosure costs. We empirically test disclosure behaviour by examining the relation between disclosure visibility and different ETR conditions that reflect different stakeholder-specific costs and benefits. While we find that unfavourable ETR conditions are not highlighted, we observe higher disclosure visibility for favourable ETRs (smooth, close to the industry average, decreasing). Additional analyses reveal that this high visibility is characteristic of firm-years with only moderately decreasing ETRs at usual ETR levels, while extreme ETRs are not highlighted. Interestingly and in contrast to our main results, a subsample of family firms do not seem to highlight favourable ETRs.
    Keywords: Effective tax rate,Cost-benefit trade-off,Disclosure decision,Reputational costs,Tax disclosure
    Date: 2020
  5. By: Blaufus, Kay; Chirvi, Malte; Huber, Hans-Peter; Maiterth, Ralf; Sureth-Slaone, Caren
    Abstract: Previous accounting research shows that taxes affect decision making by individuals and firms. Most studies assume that agents have accurate perception regarding their tax burden. However, there is a growing body of literature analyzing whether taxes are indeed perceived correctly. We review 124 studies on the measurement of tax misperception and its behavioral implications. The review reveals that many taxpayers have substantial tax misperceptions that lead to biased decision making. We develop a Behavioral Taxpayer Response Model on the impact of provided tax information on tax perception. Besides individual traits, characteristics of the tax information and the decision environment determine the extent of tax misperception. We discuss opportunities for future research and methodological limitations. While there is much evidence on tax misperception at the individual level, we hardly find any research at the firm level. Little is known about the real effects of managers' tax misperception and on how tax information is strategically managed to impact stakeholders. This research gap is surprising as a large part of the accounting literature analyzes decision making and disclosure of firms. We recommend a mixed-method approach combining experiments, surveys, and archival data analyses to improve the knowledge on tax misperception and its consequences.
    Keywords: Behavioral Taxation,Business Taxation,Misperception,Real Effects,Tax Perception,Tax Policy
    JEL: M41 H24 H25 D91
    Date: 2020
  6. By: Bjørneby, Marie (The Norwegian University of Life Sciences); Markussen, Simen (Ragnar Frisch Centre for Economic Research); Røed, Knut (Ragnar Frisch Centre for Economic Research)
    Abstract: Fueled by increasing inequality and rising fiscal deficits, the interest in wealth taxation has increased over the last years, both in the public debate and in academia. Yet, knowledge about the behavioral effects of a wealth tax is limited. We utilize rich Norwegian register data and a series of tax reforms implemented between 2007 and 2017 to study how a net wealth tax imposed on owners of small and medium sized businesses affects their firms' investment and employment decisions. Identification of causal effects is based on a generalized difference-in-differences strategy. We find no empirical support for the claim that a moderate wealth tax adversely affects investments and employment in firms controlled by the taxpayers. To the contrary, our results indicate a positive causal relationship between the level of a household's wealth tax and subsequent employment growth in the firm it controls. The rationale behind this result appears to be that the tax value of a given wealth can be reduced by being invested in a non-traded firm, and that this incentive becomes stronger the higher is the wealth tax.
    Keywords: wealth tax, capital taxation, labor demand, investment
    JEL: H21 J23 G11
    Date: 2020–10
  7. By: Tibor Hanappi; Ana Cinta González Cabral
    Abstract: This working paper presents the analytical framework used by the Secretariat to estimate the direct effects of the Pillar One and Pillar Two proposals on MNE’s investment costs. The analysis builds on the standard ETR framework and extends it in two important respects. First, ETRs are calculated for an investment performed by an entity belonging to an MNE group and account for the possibility that MNEs use their organisational structure to shift profits to low tax jurisdictions. Second, the model incorporates a stylised version of the tax provisions introduced under Pillar One and Pillar Two. The results, covering over 70 jurisdictions, account for differences in tax bases and rates, and are empirically calibrated to map MNE activities, i.e., the location of their profits, turnover and assets as well as the impact of the proposals. Overall, the results suggest that the Pillar One and Pillar Two proposals would lead to modest increases on global weighted ETRs. This paper feeds into the broader analysis of the investment impacts of the Pillar One and Pillar Two proposals.
    JEL: H32 F21 H25
    Date: 2020–10–12
  8. By: Kühne, Daniela
    Abstract: This study introduces and tests the applicability of a signal for individual tax reporting aggressiveness using German income tax return data. Tax aggressiveness is often defined as dealing with uncertainty - or more precisely: ambiguity - in an exploitative manner. In other words, firms and individuals are considered tax aggressive if they interpret ambiguous regulations in their favor. It is empirically assessed whether the way individual taxpayers deal with ambiguity in the tax system may serve as a valid indicator for more or less aggressive reporting behavior using a specificity in the German income tax system leading to uncertainty about taxable income. The decision whether to exploit ambiguity or not is attributed to differences in an intrinsic motivation to comply. It is investigated whether and to what extent taxpayers interpreting ambiguity in their favor arrive at a lower tax burden. The results show that taxpayers exploiting ambiguity in the investigated field arrive at a significantly lower effective tax rate than comparable taxpayers not exploiting ambiguity. It is concluded that the former incur lower psychic costs when using tax positions with uncertain consequences and that exploiting ambiguity can serve as an indicator for more aggressive reporting behavior. More aggressive reporting behavior is analyzed as a dependent variable to study the factors shaping it.
    Keywords: tax aggressiveness,nonbusiness tax
    JEL: H24 H26 D91
    Date: 2020
  9. By: Diller, Markus; Kühne, Daniela
    Abstract: This paper investigates the presence of framing effects and loss aversion in tax reporting behavior of wage earners using a balanced panel of German income tax return data. Reference dependence and loss aversion suggest that individuals in a perceived loss situation attribute higher value to a given amount of positive change in outcome than individuals in a perceived gain situation do. Applied to tax reporting behavior, taxpayers who perceive their tax situation as unfavorable compared to a given reference point are expected to make greater effort or accept higher costs to prevent or reduce that perceived loss than taxpayers perceiving themselves to be in a favorable situation. Greater effort can in turn be associated with higher reporting aggressiveness. We identify a potential reference point in taxpayers' previous year's outcome and examine whether taxpayers claim higher additional tax deductions in a loss situation than in a gain situation. We use a difference-in-difference approach with a one-on-one matching strategy to analyze reporting behavior. We find that taxpayers in a loss situation claim higher income-related deductions than taxpayers in a gain situation.
    Keywords: loss aversion,framing,tax avoidance,nonbusiness tax
    JEL: D91 H24 H26
    Date: 2020

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.