nep-pub New Economics Papers
on Public Finance
Issue of 2020‒11‒23
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Tax preferences and optimal income taxation By Arbex, Marcelo Aarestru; Mattos, Enlinson
  2. Redistributive Income Taxation with Directed Technical Change By Loebbing, Jonas
  3. The Incidence of VAT Evasion By Zareh Asatryan; David Gomtsyan
  4. The Structure of Business Taxation in China By Zhao Chen; Yuxuan He; Zhikuo Liu; Juan Carlos Suárez Serrato; Daniel Yi Xu

  1. By: Arbex, Marcelo Aarestru; Mattos, Enlinson
    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.
    Date: 2020–11
  2. By: Loebbing, Jonas
    Abstract: This paper studies the implications of (endogenously) directed technical change for the design of non-linear labor income taxes in a Mirrleesian economy augmented to include endogenous technology development and adoption choices by firms. First, I identify conditions under which any progressive tax reform induces technical change that compresses the pre-tax wage distribution. The key intuition is that progressive tax reforms tend to increase labor supply of less skilled relative to more skilled workers, which induces firms to develop and use technologies that are more complementary to the less skilled. Second, I provide conditions under which the endogenous response of technology raises the welfare gains from progressive tax reforms. Third, I show that directed technical change effects make the optimal tax scheme more progressive, raising marginal tax rates at the right tail of the income distribution and lowering them (potentially below zero) at the left tail. For reasonable calibrations, the directed technical change effects of actual tax reforms on wage inequality appear to be small, but the impact of directed technical change on optimal taxes is considerable. Optimal marginal tax rates increase monotonically over the bulk of the income distribution instead of being U-shaped (as in most of the previous literature) and marginal tax rates on incomes below the median are reduced substantially
    Keywords: Optimal Taxation,Directed Technical Change,Endogenous Technical Change,Wage Inequality.
    JEL: H21 H23 H24 J31 O33
    Date: 2020
  3. By: Zareh Asatryan; David Gomtsyan
    Abstract: Who benefits from the evasion of value added taxes (VAT)? Using a reform that enforced VAT on previously non-compliant large retailers in Armenia, we estimate a one-third passthrough of the tax burden on prices. This suggests that pre-enforcement evasion rents were broadly shared with consumers through lower prices. Our theoretical and empirical results explain this low passthrough rate by the supply-chain effects and second-order compliance responses of firms to VAT enforcement. Our distributional analysis shows that households at the bottom of the income distribution benefit more from the rents of evasion.
    Keywords: value added tax, incidence, passthrough, evasion, enforcement, distributional effects
    JEL: D11 H22 H26
    Date: 2020
  4. By: Zhao Chen; Yuxuan He; Zhikuo Liu; Juan Carlos Suárez Serrato; Daniel Yi Xu
    Abstract: This paper documents facts about the structure of business taxation in China using administrative tax data from 2007 to 2011 from the State Taxation Administration. We first document the importance of different business taxes across industries. While corporate income taxes play an important role for manufacturing firms, these firms also remit a large share of their tax payments through the value-added tax system, through the excise tax system and through payroll taxes. Gross receipts taxes play an important role for firms in other industries, leading to spillovers that may affect the overall economy. Second, we evaluate whether the structure of China’s tax revenue matches its stage of development. A cross-country comparison of sources of government revenue shows that China collects a high share of tax revenue from taxes on goods and services and a high share of income tax on corporations. Finally, we study whether firm-level differences in effective tax rates can be an important source of allocative inefficiencies. Decomposing the variation in effective tax rates across firms, we find that government policies, including loss carry-forward provisions and preferential policies for regional, foreign, small, and high-tech firms, have significant explanatory power. Nonetheless, while effective tax rates vary along a number of dimensions, tax policy does not explain the large dispersion in the returns to factors of production across firms.
    JEL: E22 H25
    Date: 2020–11

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