nep-pub New Economics Papers
on Public Finance
Issue of 2020‒11‒09
eleven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Redistributive Capital Taxation Revisited By Özlem Kina; Ctirad Slavik; Hakki Yazici
  2. Attracting Profit Shifting or Fostering Innovation? On Patent Boxes and R&D Subsidies By Andreas Haufler; Dirk Schindler
  3. Optimal Income Taxation with Labor Supply Responses at Two Margins: When Is an Earned Income Tax Credit Optimal? By Emanuel Hansen
  4. How Should Tax Progressivity Respond to Rising Income Inequality? By Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
  5. Quantifying Uncertainties in Estimates of Income and Wealth Inequality By Marta Boczon
  6. Taxation of Household Capital in EU Member States Impact on Economic Efficiency, Revenue and Redistribution By Savina Princen; Athena Kalyva; Alexander Leodolter; Cécile Denis; Adriana Reut; Andreas Thiemann; Viginta Ivaskaite-Tamosiune
  7. Age-Related Taxation of Bequests in the Presence of a Dependency Risk By Marie-Louise Leroux; Pierre Pestieau
  8. Optimal fuel taxation with suboptimal health choices By Sulikova, Simona; van den Bijgaart, Inge; Klenert, David; Mattauch, Linus
  9. Estimating the Costs of Filing Tax Returns and the Potential Savings from Policies Aimed at Reducing These Costs By Youssef Benzarti
  10. Continuous-time Optimal Pension Indexing in Pay-as-You-Go Systems By Oriol Roch

  1. By: Özlem Kina; Ctirad Slavik; Hakki Yazici
    Abstract: This paper shows that capital-skill complementarity provides a quantitatively significant rationale to tax capital for redistributive governments. The optimal capital income tax rate is 60%, which is significantly higher than the optimal rate of 48% in an identically calibrated model without capital-skill complementarity. The skill premium falls from 1.9 to 1.67 along the transition following the optimal reform in the capital-skill complementarity model, implying substantial indirect redistribution from skilled to unskilled workers. These results show that a government that cares about redistribution should take into account capital-skill complementarity in production when setting the tax rate on capital income.
    Keywords: capital taxation, capital-skill complementarity, inequality, redistribution
    JEL: E25 J31
    Date: 2020
  2. By: Andreas Haufler; Dirk Schindler
    Abstract: Many countries have introduced patent box regimes in recent years, offering a reduced tax rate to businesses for their IP-related income. Patent boxes are supposed to increase innovative activity, but they are also suspected to aim at attracting inward profit shifting from multinational firms. In this paper, we analyze the effects of patent box regimes when countries can simultaneously use patent boxes and R&D subsidies to promote innovation. We show that when countries set their tax policies unilaterally, innovation is fostered, at the margin, only by the R&D subsidy. The patent box tax rate is instead targeted at attracting international profit shifting, and it is optimally set below the corporate tax rate. With cooperative tax setting, the optimal royalty tax rate is instead equal to, or even above, the statutory corporation tax. Hence, patent box regimes emerge in the decentralized policy equilibrium, but never under policy coordination. Enforcing a nexus principle, as proposed by the OECD, is helpful to mitigate harmful competition for paper profits, but it comes at the price of increased strategic competition in direct R&D subsidies to attract physical R&D units instead of intangible patents.
    Keywords: R&D investment, patent boxes, investment tax credits, profit shifting, tax competition
    JEL: H25 H87 F23
    Date: 2020
  3. By: Emanuel Hansen
    Abstract: This paper studies optimal non-linear income taxation in a model with labor supply responses at the intensive (hours, effort) and extensive (participation) margins. It shows that an Earned Income Tax Credit (EITC) with negative marginal taxes and negative participation taxes at the bottom is optimal if, first, semi-elasticities of participation are decreasing along the income distribution and, second, social concerns for redistribution from the poor to the very poor are sufficiently weak. This result is driven by a previously neglected trade-off between distortions at the intensive margin and distortions at the extensive margin, i.e., between two aspects of efficiency. Numerical simulations suggest that a strong expansion of the EITC for childless singles in the US could be welfare-increasing.
    Keywords: optimal income taxation, extensive margin, intensive margin, earned income tax credit
    JEL: H21 H23 D82
    Date: 2020
  4. By: Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
    Abstract: We address this question in a heterogeneous-agent incomplete-markets model featuring exogenous idiosyncratic risk, endogenous skill investment, and flexible labor supply. The tax and transfer schedule is restricted to be log-linear in income, a good description of the US system. Rising inequality is modeled as a combination of skill-biased technical change and growth in residual wage dispersion. When facing shifts in the income distribution like those observed in the US, a utilitarian planner chooses higher progressivity in response to larger residual inequality but lower progressivity in response to widening skill price dispersion reflecting technical change. Overall, optimal progressivity is approximately unchanged between 1980 and 2016. We document that the progressivity of the actual US tax and transfer system has similarly changed little since 1980, in line with the model prescription.
    Keywords: Optimal taxation; Income distribution; Skill-biased technical change; Tax progressivity; Incomplete markets; Labor supply; Redistribution; Inequality
    JEL: J22 H20 E20 J24 I22 D30
    Date: 2020–10–19
  5. By: Marta Boczon
    Abstract: I measure the uncertainty affecting estimates of economic inequality in the US and investigate how accounting for properly estimated standard errors can affect the results of empirical and structural macroeconomic studies. In my analysis, I rely upon two data sets: the Survey of Consumer Finances (SCF), which is a triennial survey of household financial condition, and the Individual Tax Model Public Use File (PUF), an annual sample of individual income tax returns. While focusing on the six income and wealth shares of the top 10 to the top 0.01 percent between 1988 and 2018, my results suggest that ignoring uncertainties in estimated wealth and income shares can lead to erroneous conclusions about the current state of the economy and, therefore, lead to inaccurate predictions and ineffective policy recommendations. My analysis suggests that for the six top-decile income shares under consideration, the PUF estimates are considerably better than those constructed using the SCF; for wealth shares of the top 10 to the top 0.5 percent, the SCF estimates appear to be more reliable than the PUF estimates; finally, for the two most granular wealth shares, the top 0.1 and 0.01 percent, both data sets present non-trivial challenges that cannot be readily addressed.
    Date: 2020–10
  6. By: Savina Princen; Athena Kalyva; Alexander Leodolter; Cécile Denis; Adriana Reut; Andreas Thiemann; Viginta Ivaskaite-Tamosiune
    Abstract: Taxation of capital, including the taxation of capital income and stocks, could play an important role in increasing revenue efficiency and making the tax system fairer. Recent international tax developments on automatic exchange of information and administrative co-operation have increased the capacity of Member States to raise taxes from mobile tax bases such as capital income. This paper first analyses the tax treatment of household capital income. It presents the theoretical features of the optimal taxation of capital income and describes the tax treatment of income from different capital assets in EU Member States. The paper then focusses on the taxation of owner-occupied housing and measures the impact of specific tax features on the cost of home ownership by using an indicator-based analysis. Then, it analyses specific issues in capital gains taxation and their macroeconomic effects. Finally, the paper explores the possibilities of increasing revenue efficiency through wealth transfer taxes, i.e. inheritance and gift taxes. It provides an up-to-date review of the theoretical arguments and the practical implementation of such taxes in EU Member States and tries to shed light on the reasons why these taxes contribute only little to raising revenues.
    JEL: D1 D2 D3 E6 H2 H21 J08 J2
    Date: 2020–08
  7. By: Marie-Louise Leroux; Pierre Pestieau
    Abstract: This paper studies the design of the optimal linear taxation of bequests when individuals differ in wage as well as in their risks of both mortality and old-age dependence. We assume that the government cannot distinguish between bequests motives, that is whether bequests resulted from precautionary reasons or from pure joy of giving reasons. Instead, we assume that it only observes the timing of bequests, that is whether they are made early in life or late in life. We show that, if the government is utilitarian, whether the taxation of early bequests should be given priority over the taxation of late bequests depends on the magnitude of insurance and redistributive concerns. While the efficiency concern unambiguously recommends taxation of early bequests, redistributive concerns yield ambiguous results. This indeterminacy comes from the fact that, in case of late death, the government cannot observe the health status of the deceased. Whether the taxation of early bequests should be given priority depends on the specific relationships between wages and both risks of early death and of old-age dependence, as well as on the concavity of the joy of giving utility function. If the government is Rawlsian, it is optimal to tax early bequests if the survival chances of the poorest agents are very low. If they survive, but their chances to remain autonomous are very low, it is then optimal to tax early bequests if the poorest agents contribute relatively less to the taxation of early bequests than to the taxation of late bequests or if the joy of giving utility is extremely concave.
    Keywords: bequest taxation, long term care, utilitarianism, Rawlsian welfare criterion, old-age dependency
    JEL: H21 H23 I14
    Date: 2020
  8. By: Sulikova, Simona (University of Oxford); van den Bijgaart, Inge (Department of Economics, School of Business, Economics and Law, Göteborg University); Klenert, David (Joint Research Centre, European Commission,); Mattauch, Linus (University of Oxford)
    Abstract: Transport has a large number of significant externalities including carbon emissions, air pollution, accidents, and congestion. Active travel such as cycling and walking can reduce these externalities. Moreover, public health research has identified additional social gains from active travel due to health benefits of increased physical exercise. In fact, on a per mile basis, these benefits dominate the external social costs from car use by two orders of magnitude. We introduce health benefits and active travel options into an optimal taxation model of transport externalities to study appropriate policy responses. We characterise the optimal second-best fuel tax analytically: when physical exercise is considered welfare-enhancing, the optimal fuel tax increases. Under central parameter assumptions it rises by 49% in the US and 36% in the UK. This is due to the low fuel price elasticity of active travel. We argue that fuel taxes should be implemented jointly with other policies aimed at increasing the uptake of active travel to reap its full health benefits.
    Keywords: Transport Externalities; Congestion; Active travel; Fuel; Health Behaviour; Optimal Taxation
    JEL: H23 I12 Q58
    Date: 2020–10
  9. By: Youssef Benzarti
    Abstract: This paper estimates the cost of filing taxes and assesses several policy proposals aimed at reducing these costs. Using US tax returns, a quasi-experimental method and additional extrapolations based on survey evidence, I uncover three main findings. First, filing costs are large and have been steadily increasing over time. Second, part of this increase in filing costs can be attributed to an increase in the number of schedules filed per taxpayer. Third, pre-populating tax returns and offering free filing options can result in substantial cost savings for taxpayers.
    JEL: H0 H20
    Date: 2020–10
  10. By: Oriol Roch (Universitat de Barcelona)
    Abstract: Ageing population and economic crisis have placed pay-as-you-go pension systems in need of mechanisms to ensure its financial stability. In this paper, we consider optimal indexing of pensions as an instrument to cope with the financial imbalances typically found in these systems. Using dynamic programming techniques in a stochastic continuous-time framework, we compute the optimal pension index and portfolio strategy that best target indexing and liquidity objectives determined by the government. A numerical example is provided to illustrate the results.
    Keywords: Social Security, pension indexing, pay-as-you-go, public pensions.
    JEL: H55
    Date: 2020
  11. By: Ilya A. Vaskin (National Research University Higher School of Economics)
    Abstract: The paper investigates the impact of an electoral support for president for short- and long-term transfers between national and provincial governments in tutelary regimes. The research uses the case of Iran; the database covers 330 observations for 30/31 provinces for 2005-2015. The results show that Iranian presidents target short-term transfers for disloyal provincial elites, while long-term transfers do not show political connection with voting patterns. The results also allow for assuming that the key factor for the logic of distribution is a political competition
    Keywords: voting alignment, intergovernmental transfers, tutelary regime, regional elites, Iran
    JEL: D72 H77 R50
    Date: 2020

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