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on Public Finance |
| By: | Marius Clemens; Werner Röger |
| Abstract: | This paper evaluates the temporary VAT reduction introduced by the German government over the third and fourth quarter of 2020 as most controversial part of the COVID-19 stimulus package. Critics argue that VAT reductions are ineffective because of limited pass-through of temporary measures to consumer prices and in presence of lockdown measures. Advocates emphasize positive effects on durables and stress that a VAT reduction can at least partly substitute for a limited monetary policy response under the ZLB. We build a DSGE model which is capable to address these channels. Our model distinguishes between sectors directly and indirectly affected by the lockdown. This allows us to trace economic spillovers of lockdown measures to the rest of the economy and the differentiated impact of VAT measures on both sectors. We disaggregate consumption into durables and non-durables for both financially constrained and unconstrained households and we allow for imperfect pass-through of VAT measures into consumer prices. In general, if we include the durable investment channel we find robust sizeable effects of VAT changes on consumption even under a limited VAT pass-through. For the specific situation in Germany, we analyze the impact of the VAT reduction in conjunction with the lockdowns in 2020 Q2 to Q4. We use non-linear solution techniques to solve the model in the presence of a ZLB, forced savings and a lockdown constraint. We find a VAT short-term multiplier of one, which reduces over the medium term. Thus, the temporary VAT reduction is an effective instrument in the short-term but not efficient with regard to medium-term budget sustainability. Furthermore, we can show that the VAT reduction is able to mimic the macroeconomic effects of a central bank reaction according to a Taylor rule in case of a lockdown shock. However, compared to the monetary policy reaction the VAT reduction has only small direct effects on private investments. |
| Keywords: | Fiscal policy, DSGE modelling, COVID-19 lockdown, tax multiplier |
| JEL: | E62 E65 H21 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1944&r= |
| By: | Raffaele Rossi (University of Manchester) |
| Abstract: | Using an estimated life-cycle model, we quantify the role of heterogeneity in wealth returns for the response of income to marginal tax changes. In our economy, agents who are sufficiently productive can obtain higher returns by choosing to be entrepreneurs. Return heterogeneity amplifies the responsiveness of total income to marginal tax changes along the entire income distribution with the top 1 percent displaying the highest elasticities. Return heterogeneity increases the incentives to invest for the richest, high-return entrepreneurs, thus amplifying their income responses to marginal tax changes. This reallocation of capital increases aggregate productivity, generating a larger boost in equilibrium wages. This in turn strengthens the income response of the bottom 90 percent, but nevertheless, their response is smaller than at the top. |
| Keywords: | risky investment, elasticity of taxable income, life-cycle, entrepreneurs, structural estimation |
| JEL: | E62 H21 H24 |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:2116&r= |
| By: | Dong, Xueqi; Liu, Shuo Li |
| Abstract: | This paper studies how investment can be influenced by common tax and monetary policies, where investment is measured by the proportion of an investor’ wealth invested in the asset that pays a random return. We further prove that all risk- uncertainty averse individuals will increase investments if and only if a type of proportional tax with full loss offset (Domar and Musgrave 1944, QJE) is imposed. This result holds: 1. under ambiguity, that is when the probability distribution of an as- set’s return is unknown; 2. when borrowing in the safe asset is allowed. |
| Keywords: | Proportional Tax with Full Loss Offset, Ambiguity, Portfolio Choice |
| JEL: | D80 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:107668&r= |
| By: | Blesse, Sebastian |
| Abstract: | Taxpayers often view tax rules and filing processes as complicated. In this paper I study whether the perceived tax uncertainty among peers leads to a reduction of voluntary tax compliance. I find strong supportive evidence for this hypothesis using a survey experiment for a large representative sample of the German population. Providing randomized information that others are uncertain about how to file their taxable income decreases individual tax morale. This suggests that subjects use negative peer signals as an excuse in order to opt-out of tax compliance. Studying related heterogeneous treatment effects, I find that both older and left-wing subjects are more responsive to tax uncertainty of others. I also show persistent treatment effects among very honest taxpayers in a follow-up survey. |
| Keywords: | Tax Complexity,Taxpayer Uncertainty,Tax Morale,Survey Experiments |
| JEL: | H26 Z13 K42 C9 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:21040&r= |