nep-pub New Economics Papers
on Public Finance
Issue of 2021‒04‒26
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal taxation and market power By Jan Eeckhout; Chunyang Fu; Wenjian Li; Xi Weng
  2. Optimal Taxes and Transfers with Household Heterogeneity By Boris Chafwehé; François Courtoy
  3. Age and Health Related Inheritance Taxation By Marie-Louise Leroux; Pierre Pestieau
  4. Tax-induced Investments in Tax Havens by Spanish Multinationals By Ángela Castillo-Murciego; Julio López-Laborda

  1. By: Jan Eeckhout; Chunyang Fu; Wenjian Li; Xi Weng
    Abstract: Should optimal income taxation change when firms have market power? The recent rise of market power has led to an increase in income inequality and a deterioration in efficiency and welfare. We analyze how the planner can optimally set taxes on labor income of workers and on the profits of entrepreneurs to induce a constrained efficient allocation. Our results show that optimal taxation in the presence of market power can substantially increase welfare, but it also highlights the severe constraints that the Planner faces to correct the negative externality from market power, using the income tax as a Pigouvian taxes. Pigouvian taxes compete with Mirrleesian incentive concerns, which generally leads to opposing forces. Overall, we find that due to incentive concerns, market power tends to lower marginal tax rates on workers, whereas it increases the marginal tax rate on entrepreneurs.
    Keywords: Optimal taxation, optimal profit tax, market power, market structure, markups
    JEL: D3 D4 J41
    Date: 2021–04
  2. By: Boris Chafwehé (European Commission (Joint Research Center)); François Courtoy (IRES/LIDAM, UCLouvain)
    Abstract: We investigate the properties of optimal fiscal policy in a framework where householdheterogeneity is accounted for. The Ramsey planner chooses (distortionary) labor taxes andtransfers to maximize aggregate welfare in a two-agent economy. We contrast the propertiesof optimal labor taxes in our model to the ones obtained in the representative agent counter-part. We first show that the presence of household heterogeneity introduces an additionalsource of fluctuations in the optimal tax rate, as varying taxes allows the planner to use trans-fers for redistributive purposes. We then show that, depending on the assumptions that aremade on how transfer receipts are distributed among households, and the type of shockshitting the economy, the structure of government bond markets becomes more or less im-portant in shaping the dynamics of the Ramsey allocation. In some cases, the presence oftransfers brings the incomplete markets allocation close to the one in which the planner hasaccess to state-contingent claims. We finally show that the presence of heterogeneity andoptimal transfers helps bring the behaviour of fiscal variables in the Ramsey model closer totheir counterpart in US data.
    Keywords: Fiscal policy, Household heterogeneity, Optimal taxation, Transfers
    JEL: E32 E62 H21 H23 H31
    Date: 2021–04–16
  3. By: Marie-Louise Leroux; Pierre Pestieau
    Abstract: This paper studies the design of an optimal non linear inheritance taxation when individuals differ in wage as well as in their risks of both mortality and old-age dependance. We assume that the government cannot distinguish between bequests motives, that is whether bequests result from precautionary reasons or from pure joy of giving reasons. Instead, we assume that it only observes whether bequests are made early in life or late in life, and in the latter case, whether the donor is autonomous or not. The main result is that, under asymmetric information, in addition to labour income taxation, early bequests of the low-productivity agent should be distorted downward, that is, they should be taxed so as to relax incentive constraints.
    Keywords: bequest taxation, long term care, utilitarianism, old-age dependency, non linear taxation
    JEL: H21 H23 I14
    Date: 2021
  4. By: Ángela Castillo-Murciego (Departamento de Economía y Empresa, Universidad de La Rioja); Julio López-Laborda (Departamento de Estructura e Historia Económica y Economía Pública, Universidad de Zaragoza)
    Abstract: Tax havens may play a key role in the profit-shifting activity of multinational companies (MNCs), since, among other characteristics, they are the territories with the most beneficial taxes for foreign investors. This paper shows that Spanish MNCs with higher average foreign non-haven tax rates are more likely to invest in tax havens. This outcome is robust to at least two different tax haven lists and various definitions of the average non-haven tax rate. The size of the foreign and domestic activity of the Spanish MNCs, as well as their use of intangible assets and the fact of belonging to the Ibex 35 index, also positively affect the probability of investing in tax havens. By economic sectors, once the endogeneity problem is controlled for, the incentive of third countries’ high taxes on investments in tax havens is greater for manufacturers than for service firms, but this effect is especially high for financial firms. Moreover, within the Ibex 35 index of companies, only the financial firms exert a positive effect on the likelihood of investing in these low-tax territories. Additionally, it seems that while foreign non-haven taxes positively influence the number of different tax havens used by Spanish firms, they have no effect on the number of affiliates located within them. The paper also estimates that Spanish MNCs have been able to save about 4 billion euros per year in corporate income tax in the period 2013-2018 as a result of these practices.
    Date: 2021–04

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