nep-pub New Economics Papers
on Public Finance
Issue of 2020‒12‒14
twelve papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Taxing Goods and Services in a Digital Era By David R. Agrawal; William F. Fox
  2. A Note on Optimal Taxation, Status Consumption, and Unemployment By Aronsson, Thomas; Johansson-Stenman, Olof
  3. Who truly bares (bank) taxes? Evidence from just shifting statutory incidence By Martínez-Miera, David; Jiménez, Gabriel; Peydró, José-Luis
  4. Tax multipliers across the business cycle By Dennis Bonam; Paul Konietschke3
  5. Payroll Tax Reductions for Minimum Wage Workers: Relative Labor Cost or Cash Windfall Effects? By Sophie Cottet
  6. Labor Supply Responses to Learning the Tax and Benefit Schedule By Kostol, Andreas Ravndal; Myhre, Andreas S.
  7. The Effects of the Child Care Tax Credit on Maternal Labor Supply By Haibin Jiang
  8. Financing Costs and the Efficiency of Public-Private Partnerships By Besart Avdiu; Alfons Weichenrieder
  9. It takes two to tango: Labour responses to an income tax holiday in Argentina By Dario Tortarolo; Guillermo Cruces; Victoria Castillo
  10. Can Unearned Income Make Us Fitter? Evidence from Lottery Wins By Costa-Font, Joan; Gyori, Mario
  11. The Size of the Digital Economy in Finland and Its Impact on Taxation By Ali-Yrkkö, Jyrki; Koski, Heli; Kässi, Otto; Pajarinen, Mika; Valkonen, Tarmo; Hokkanen, Marja; Hyvönen, Noora; Koivusalo, Elina; Laaksonen, Jarno; Laitinen, Juha; Nyström, Enni
  12. Inequality in Public Good Provision and Attitude Towards Taxation: Sub-national Evidence from Africa By Lisa CHAUVET; Siyavash ESLAMI; Marin FERRY; Laure PASQUIER-DOUMER

  1. By: David R. Agrawal; William F. Fox
    Abstract: Taxing consumption in the digital economy poses unique challenges for fiscal authorities. Recent institutional reforms, such as states changing remittance rules for the sales and use tax following the Supreme Court decision in South Dakota v. Wayfair, were enacted in order to increase tax revenue collections and create a more neutral tax system. Although these reforms induced more remote vendors to remit taxes on a destination basis, the revenue gains were modest, consistent with most large online vendors remitting taxes prior to the reforms. Instead, following the recent large shock to online shopping from the Covid-19 pandemic, the shift to destination-based taxation has redistributed revenues between large and small local jurisdictions. Increased online shopping raises revenue growth in small jurisdictions while contracting revenues in large jurisdictions. But, Wayfair is not the end of the story: technological changes that induce new consumption patterns, promise new challenges for fiscal authorities. Critical challenges for the next decades include limiting administrative and compliance costs of enforcing taxes in a digital world, determining filing thresholds, dealing with online marketplaces and facilitators, and taxing the consumption of digital services from two-sided platforms. With respect to digital services, we discuss whether consumption taxes should be imposed on both monetized platforms and non-monetized platforms such as social media, and the mechanisms for doing so.
    Keywords: sales tax, e-commerce, online shopping, enforcement, compliance, South Dakota v. Wayfair, consumption tax, digital services, platforms
    JEL: H20 H70 K30 L80 R50
    Date: 2020
  2. By: Aronsson, Thomas (Department of Economics, Umeå University); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, University of Gothenburg)
    Abstract: Existing research on optimal taxation in economies with status-driven relative consumption assumes that the labor market is competitive, despite the fact that real world labor markets are typically characterized by involuntary unemployment. We show how the marginal tax policy ought to be modified to simultaneously account for positional consumption externalities and equilibrium unemployment, and find that interaction effects between these two market failures are crucial determinants of the marginal tax structure. In certain cases, the policy incentive to tax away positional externalities vanishes completely, and negative positional externalities may even lead to lower marginal taxation, under involuntary unemployment.
    Keywords: Optimal taxation; relative consumption; externalities; unemployment
    JEL: D62 D90 H21 H23 J64
    Date: 2020–12–03
  3. By: Martínez-Miera, David; Jiménez, Gabriel; Peydró, José-Luis
    Abstract: We show strong overall and heterogeneous economic incidence effects, as well as distortionary effects, of only shifting statutory incidence (i.e., the agent on which taxes are levied), without any tax rate change. For identification, we exploit a tax change and administrative data from the credit market: (i) a policy change in 2018 in Spain shifting an existing mortgage tax from being levied on borrowers to being levied on banks; (ii) some areas, for historical reasons, were exempt from paying this tax (or have different tax rates); and (iii) an exhaustive matched credit register. We find the following robust results: First, after the policy change, the average mortgage rate increases consistently with a strong – but not complete – tax pass-through. Second, there is a large heterogeneity in such pass-through: larger for borrowers with lower income, a smaller number of lending relationships, not working for the lender, or facing less banks in their zip-code, thereby suggesting a bargaining power mechanism at work. Third, despite no variation in the tax rate, and consistent with the non-full tax pass-through, the tax shift increases banks’ risk-taking. More affected banks reduce costly mortgage insurance in case of loan default (especially so if banks have weaker ex-ante balance sheets) and expand into non-affected but (much) ex-ante riskier consumer lending, experiencing even higher ex-post defaults within consumer loans.
    Keywords: taxes,incidence,banks,inequality,risk-taking,mortgages
    JEL: E51 G21 G28 G51 H22
    Date: 2020
  4. By: Dennis Bonam; Paul Konietschke3
    Abstract: We estimate the impact of tax shocks on output across different stages of the business cycle. We do this for a panel of nine advanced economies using a harmonized dataset of narratively identified exogenous tax changes and a smooth transition local projection model. The output response to an exogenous tax shock is significant, but only during economic expansions. In recessions, the tax multiplier is insignificant, both in the short- and long run. We also find that, during booms, output only responds to tax hikes and is unresponsive to tax cuts. The results on the state-dependent and asymmetric effects of tax shocks are robust to a number of alternative model specifications and definitions of the business cycle.
    Keywords: tax multiplier; state-dependent effects of fiscal policy; local projection method
    JEL: E32 E62
    Date: 2020–12
  5. By: Sophie Cottet (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: This paper uses administrative employer-employee data to uncover the effects of a large payroll tax reduction for minimum-wage workers in France in the 1990s. Exploiting the change in labor costs both at the job level and at the firm level, I find that the number of minimum-wage jobs increases but that these additionnal jobs stem exclusively from firms which had previously very few, or none, minimum wage workers. On the contrary, firms which already employed workers at minimum-wage levels, and thus benefit ex ante from a cash windfall, increase employment irrespective of wage levels. Overall, these results suggest that targeting cash-contrained firms, and not only groups of workers, is key for employment growth.
    Keywords: Payroll taxes,Firm behavior,Rent sharing,Minimum wage
    Date: 2020–11
  6. By: Kostol, Andreas Ravndal (Arizona State University); Myhre, Andreas S. (Statistics Norway)
    Abstract: While optimization frictions have been shown to attenuate earnings responses to financial incentives, less is understood about the individual factors shaping the response. The main contribution of this paper is to separately quantify the role of learning the tax and benefit schedule versus other kinds of frictions. A unique combination of notches in the tax and benefit schedule and an information policy in a Norwegian welfare reform facilitate our study. The presence of notches allows us to measure overall frictions. Quasi-random assignment of a letter targeting misperceptions about the slope and locations of benefit phase-out regions allows us to pin down the role of information. Our analysis delivers two main findings. First, about 50% do not behave as predicted by standard labor supply models, and optimization frictions are particularly prevalent when financial incentives change. Without adjusting for these overall frictions, estimated elasticities would be attenuated by at least 70%. Second, the observed elasticity among those who receive the information letter is at least twice as large as among the non-informed, suggesting governments can partly offset the attenuation with information policy. Our calculations suggest misperceptions of the tax and benefit schedule account for two-thirds of the attenuation in earnings responses to financial work incentives. The findings have important implications for the effectiveness of tax and transfer policy.
    Keywords: labor supply, information, optimization frictions, social security, disability insurance
    JEL: H20 H31 H55 J22 J26
    Date: 2020–11
  7. By: Haibin Jiang (Tulane Economics and Murphy Institute)
    Abstract: The Child Care Tax credit (CCTC) is a child care subsidy pro- gram that allows working parents to claim a tax credit for their child care expenses. I document a comprehensive legislative history of the CCTC at both federal and state levels. Using the exogenous CCTC law changes and focusing on working-age mothers from the Panel Study of Income Dynamics, I use differences-in-differences, triple-differences, and instrumental variables methods to estimate the effects of the CCTC on maternal labor supply. I find that the CCTC significantly increases maternal labor force participation and the effects are more pronounced in married mothers than single mothers.
    Keywords: The Child Care Tax Credit; Maternal Labor Supply; Differences-in-differences; Instrumental Variables.
    JEL: J13 J22 H24
    Date: 2020–11
  8. By: Besart Avdiu; Alfons Weichenrieder
    Abstract: The paper compares provision of public infrastructure via public-private partnerships (PPPs) with provision under government management. Due to soft budget constraints of government management, PPPs exert more effort and therefore have a cost advantage in building infrastructure. At the same time, hard budget constraints for PPPs introduce a bankruptcy risk and bankruptcy costs. Consequently, if bankruptcy costs are high, PPPs may be less efficient than public management, although this does not result from PPPs’ higher interest costs.
    Keywords: public-private partnerships, infrastructure, financing costs, default
    JEL: H11 H54 G33
    Date: 2020
  9. By: Dario Tortarolo; Guillermo Cruces; Victoria Castillo
    Abstract: We exploit a large, quasi-randomized, 2.5-year-long income tax holiday to identify intertemporal labor responses of high-wage earners to net wage changes. In August 2013, the Argentine government exempted a group of wage earners from the income tax for 2.5 years while leaving in place the tax on other high-wage earners. Eligibility was based on whether past wage earnings were below a fixed threshold, thus levying sharply different marginal and average tax rates—effectively 0% for workers below the threshold. Using rich population-wide administrative data and a regression discontinuity design, we estimate a precise and very small wage earnings elasticity of 0.017 for this large, salient, and temporary income tax change. Responses are larger for more flexible outcomes (overtime hours) and for more elastic groups (job switchers and managers). We also find avoidance responses from new entrants who faced no tax if their first monthly wage was below the fixed threshold. This strategic entry below the threshold to dodge taxes required coordination with employers. Our findings indicate rigidities in the labor market that require employer-employee cooperation to be overcome for wage earners to be able to respond to tax changes.
    Keywords: tax credits, family allowances, means-tested transfers, incidence, event study
    Date: 2020
  10. By: Costa-Font, Joan (London School of Economics); Gyori, Mario (London School of Economics)
    Abstract: Although lower income is associated with overweight (and obesity), such an association is explained by a number of other confounding effects such as omitted variables (e.g., time preferences) explaining that income effect on overweight. We study the effect of unearned income shocks resulting from a lottery win (windfall income) on both overweight (alongside obesity and body mass index) distribution. We draw upon longitudinal data from the United Kingdom, a country where about half of a population plays the lottery. Our results suggest no evidence of contemporaneous effects of income on overweight, but a significant lagged effect. We find a reduction in overweight 12 months after a lottery win. A 10,000-sterling win reduces overweight by 2-3 percentage points. Furthermore, we document a nonlinear effect up to 36 months after the lottery win, suggesting that small wins increase overweight and large wins reduce it. The effect of a lottery win varies depending on an individual's working hours and educational attainment. A lottery win among low education individuals decreases the risk of overweight.
    Keywords: obesity, overweight, income, windfall income, lottery wins, body mass index (BMI)
    JEL: I12 I18 J30
    Date: 2020–11
  11. By: Ali-Yrkkö, Jyrki; Koski, Heli; Kässi, Otto; Pajarinen, Mika; Valkonen, Tarmo; Hokkanen, Marja; Hyvönen, Noora; Koivusalo, Elina; Laaksonen, Jarno; Laitinen, Juha; Nyström, Enni
    Abstract: Abstract This report sheds light on the size and composition of the digital economy in Finland and its impact on the tax gap and tax system. No generally agreed definition of digital economy exists, and only a few prior studies have assessed the size of the digital economy quantitatively. We measured the size of the digital economy by the value added generated by digitally produced goods and services. We first replicated the analysis of the US Bureau of Economic Analysis (BEA) using Finnish data by assessing the value added of fully digital products. Secondly, we also took into account in our calculations the value added of partly digital products. Our analysis shows that the share of value added generated by the digital economy in Finland has grown at a relatively slow pace during the 2010s. Our calculations indicate that the digital economy comprised 10.9% of the GDP in Finland in 2017, or over EUR 21 billion euros. We further aimed at assessing the size of the corporate income tax (CIT), the value added tax (VAT) and the personal income tax (PIT) gaps generated by the digital economy in Finland. An attempt to make a full CIT gap analysis failed due to the unavailability of industry-level national accounts data. Data on the accrued VAT from the most recent years was not available but the observations from the earlier years did not reveal tax gaps. Our data collected via a survey targeted at digital freelance workers hints that, in general, Finnish digital freelancers comply with taxation rather well and no notable PIT tax gap is generated.
    Keywords: Digitalization, Digital economy, Taxation, Tax gap
    JEL: H2 H26 O33 O5
    Date: 2020–12–01
  12. By: Lisa CHAUVET; Siyavash ESLAMI; Marin FERRY; Laure PASQUIER-DOUMER
    Abstract: This paper investigates the relationship between inequality in public good provision and attitude towards taxation in the context of sub-Saharan African countries. Individuals’ attitude towards taxation is measured using the sixth round of the Afrobarometer geo-coded data, and inequality is measured with a Gini index computed using data on night light intensity around individuals. Our identification strategy relies on an IV estimation where the instrument is a Gini index computed on predicted pixels’ light intensity based on the initial distance of each pixel from its closest enlightened pixel. Results suggest that inequality is positively associated with more pro-tax attitude. However, this association depends on the size of the area over which Gini indexes are computed: inequality in the immediate surrounding of individuals (in 20 up to 50km buffer areas) has a positive effect on their attitude towards taxation that we interpret as a higher demand for redistribution in more unequal context. In line with this interpretation, we also find that when facing high inequality, individuals in the bottom of wealth distribution or far away from economic centers have a more favorable attitude towards taxation.
    Keywords: Afrique
    JEL: Q
    Date: 2020–11–27

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