nep-pub New Economics Papers
on Public Finance
Issue of 2021‒07‒26
thirteen papers chosen by

  1. Who Should Bear the Burden of Covid-19 Related Fiscal Pressure? An Optimal Income Taxation Perspective By Mehmet Ayaz; Lea Fricke; Clemens Fuest; Dominik Sachs
  2. The Impact of Covid-19 on Economic Activity: Evidence from Administrative Tax Registers By Nikolay Angelov; Daniel Waldenström
  3. The rates matter! Assessing the credibility of international corporate tax rate harmonization via cooperative game theory By Alexandre Chirat; Guillaume Sekli
  4. Does A Wealth Tax Improve Equality of Opportunity? By Kristoffer Berg; Shafik Hebous
  5. Unemployment and Tax Design By Albert Jan Hummel
  6. Profit Shifting and Equilibrium Principles of International Taxation By Manon François
  7. Revisiting the Relationship between Trade Liberalization and Taxation By Grégoire Rota-Graziosi; Rabah Arezki; Alou Adesse Dama
  8. Externalities of extreme natural disasters on local tax capacity By Jhorland Ayala-Garcia; Sandy Dall'Erba; William C. Ridley
  9. Pricing for a Cooler Planet: An Empirical Analysis of the Effect of Taxing Carbon By Torben K. Mideksa
  10. Uncovering Retail Trading in Bitcoin: The Impact of COVID-19 Stimulus Checks By Anantha Divakaruni; Peter Zimmerman
  11. State-Dependent Effects of Tax Changes in Germany and the United Kingdom By Bernd Hayo; Sascha Mierzwa
  12. Are payroll tax cuts absorbed by insiders? Evidence from the Swedish retail industry By Seerar Westerberg, Hans
  13. Simulating personal income tax in South Africa using administrative data and survey data: A comparison of PITMOD and SAMOD for tax year 2018 By Wynnona Steyn; Alexius Sithole; Winile Ngobeni; Eva Muwanga-Zake; Helen Barnes; Michael Noble; David McLennan; Gemma Wright; Katrin Gasior

  1. By: Mehmet Ayaz; Lea Fricke; Clemens Fuest; Dominik Sachs
    Abstract: The Covid-19 pandemic has led to an increase in public debt in most countries. This will increase fiscal pressure in the future. We study how the shape of the optimal nonlinear income tax schedule is affected by this increase in fiscal pressure. We calibrate the workhorse optimal income tax model to five European countries: France, Germany, Italy, Spain and the UK. We apply the inverse-optimum approach to the pre-Covid-19 economies. We then ask how the schedule of marginal and average tax rates should be optimally adjusted to the increase in fiscal pressure. For all countries, we find that the increase in fiscal pressure leads to a less progressive optimal tax schedule both in terms of marginal and average tax rates.
    Keywords: Fiscal pressure, optimal taxation
    JEL: H21 H23
    Date: 2021
  2. By: Nikolay Angelov; Daniel Waldenström
    Abstract: We use population-wide tax register data to document the impact of the COVID-19 pandemic on firm sales, tax revenues, and sick pay in Sweden. The pandemic impact is identified using within-year, between-year, and geographical variation, and our data allows us to run placebo tests. Our findings confirm the large negative effects of the pandemic, but shed new light on their magnitudes and sensitivity to COVID-19 morbidity rates. Specifically, we find that the impact on VAT and firm sales was larger than on commonly used industrial and service production indexes, larger than the effect on electricity for industrial use, but less than the effect on excise taxes on air travel. The pandemic’s impact on short-term sick pay is large, but unlike tax payments, it does not vary with local infection rates, indicating behavioral responses to more generous rules for sickness insurance during the pandemic.
    Keywords: Covid-19 impact, VAT, excise taxes, sick pay
    JEL: H24 H25 J22 J24
    Date: 2021
  3. By: Alexandre Chirat (Université Paris Ouest Nanterre - EconomiX); Guillaume Sekli (CRESE EA3190, Univ. Bourgogne Franche-Comté, F-25000 Besançon, France)
    Abstract: This article uses the main tools of cooperative game theory, the core of a game and the Shapley value, to tackle the challenge posed by corporate tax harmonization in order to fight profit shifting. More specifically, these tools are applied to provide a counterfactual evaluation and to assess the credibility of Saez and Zucman (2019) proposal to establish a minimum rate at 25% at the G7/G20 level. Based on the empirical data of Tørsløv et al. (2020), our main results are the following. First, at the G7 level, the more countries involved in the agreement, the more efficient it would be. Second, stability of cooperation at the G7 level can be achieved without giving up fairness consideration in the distribution of the surplus. We then extend our application to the G20 and show that these results do not hold anymore. Third, from this case, we conclude that not only the target rate matters in the perspective of international tax cooperation, but also the numbers of participants and their current effective rates.
    Keywords: International taxation, Tax cooperation, Profit shifting, Tax havens, Shapley value
    JEL: E62 C71 F42
    Date: 2021–07
  4. By: Kristoffer Berg; Shafik Hebous
    Abstract: Does parental wealth inequality impact next generation labor income inequality? And does a tax on parental wealth affect the labor income distribution of the next generation? We tackle both questions empirically using detailed intergenerational data from Norway, focusing on effects on wages rather than capital income. Results suggest that a net wealth of NOK 1 million increases wages of the children by NOK 14,000. Children of wealthy parents also have a higher labor income mobility. The estimated hypothetical wage distribution without the wealth tax is more unequal. Moreover, suggestive evidence indicates parental wealth is associated with higher labor risk taking.
    Keywords: wealth tax, equality of opportunity, parental wealth, income mobility, inequality, redistribution
    JEL: D31 D63 H24
    Date: 2021
  5. By: Albert Jan Hummel
    Abstract: This paper studies optimal income taxation in an environment where matching frictions generate a trade-off for workers between high wages and low unemployment risk. A higher marginal tax rate shifts the trade-off in favor of low unemployment risk, whereas a higher tax burden or unemployment benefit has the opposite effect. Changes in unemployment generate fiscal externalities, which modify optimal tax formulas. I show that optimal employment subsidies (such as the EITC) phase in with income and that the provision of unemployment insurance justifies a positive marginal tax rate even without income heterogeneity. A calibration exercise to the US economy suggests that optimal transfers for low-income individuals are larger if unemployment risk is taken into account.
    Keywords: directed search, optimal taxation, unemployment insurance
    JEL: H21 J64 J65 J68
    Date: 2021
  6. By: Manon François (PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 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: We study the choice between source-based and destination-based corporate taxes in a twocountry model, allowing multinational firms to use transfer pricing to allocate profits across tax jurisdictions. We show that source-based taxation is a Nash equilibrium for tax revenue maximizing jurisdictions if domestic and/or foreign firms generate large revenues. We also show that destination-based taxes are a Nash equilibrium when firms generate low revenues, which implies the presence of multiple equilibria. Both the source and the destination principle coexist in equilibrium when domestic and foreign corporate revenues are average. However, the source principle always Pareto-dominates the destination principle.
    Keywords: Corporate taxes,Multinational firms,Tax competition,Transfer pricing
    Date: 2021–06
  7. By: Grégoire Rota-Graziosi (CERDI - Centre d'Études et de Recherches sur le Développement International - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne); Rabah Arezki; Alou Adesse Dama (CERDI - Centre d'Études et de Recherches sur le Développement International - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne)
    Abstract: This paper explores the dynamic effects of trade liberalization on tax revenue using a worldwide panel dataset. Results point to statistically significant negative effect of liberalization on (non- resource) tax revenues in the short term and no significant effect in the medium term. Liberalization also alter the tax structure tilting revenues toward indirect taxes away from direct ones. Economies which have implemented value added taxes prior to liberalization have mitigated its negative effects on tax revenues. The evidence is supportive of the complementarity role of state capacity to reap the benefits of liberalization.
    Keywords: Tax,Tax structures,Openness,Liberalization,Natural resources
    Date: 2021–06
  8. By: Jhorland Ayala-Garcia; Sandy Dall'Erba; William C. Ridley
    Abstract: This paper studies the impact of extreme weather events on the local tax revenue across Colombian municipalities. We follow a two-step approach to evaluate to what extent a municipality's tax revenue depends on natural disasters taking place both locally and in its trade partners. In the first step, we estimate a gravity model of bilateral trade and construct a trade flow matrix allowing us to measure the strength of the economic relationships between cities. To do so, we build a novel dataset describing the inter-city trade flows for road transported goods in Colombia for the period 2015–2019. In the second step, we use spatial models to estimate the externalities of extreme weather events. Our results reveal that natural disasters in the destination cities increase the tax revenue in the origin city. We provide evidence of the capacity of trade to mitigate the negative effects of natural disasters. **** RESUMEN: Este artículo estudia el impacto de los eventos climáticos extremos en los ingresos fiscales locales en los municipios colombianos. Seguimos un enfoque de dos pasos para evaluar en qué medida los ingresos fiscales de un municipio dependen de los desastres naturales que ocurren tanto a nivel local como en sus socios comerciales. En el primer paso, estimamos un modelo gravitacional de comercio bilateral y construimos una matriz de flujo comercial que nos permite medir la fuerza de las relaciones económicas entre ciudades. Para hacerlo, creamos una nueva base de datos que describe los flujos comerciales entre ciudades de bienes transportados por carretera en Colombia para el período 2015-2019. En el segundo paso, utilizamos modelos espaciales para estimar las externalidades de los fenómenos meteorológicos extremos. Nuestros resultados revelan que los desastres naturales en las ciudades de destino aumentan los ingresos fiscales en la ciudad de origen. Este documento aporta evidencia de la capacidad del comercio para mitigar los efectos negativos de los desastres naturales.
    Keywords: Tax revenue, natural disasters, gravity, externalities, ingresos fiscales, desastres naturales, modelo gravitacional, externalidades
    JEL: H0 H71 Q54
    Date: 2021–07
  9. By: Torben K. Mideksa
    Abstract: Finland introduced the planet’s first carbon tax in 1990 to experiment with, to most economists, the best policy to reverse carbon emissions. I estimate the causal effect of taxing carbon on Finnish emissions using the Synthetic Control Approach (Abadie, 2021). The results suggest that taxing carbon reduces emissions by big margins. Finnish emissions are 16% lower in 1995, 25% lower in 2000, and 30% lower in 2004 than emissions in the counterfactual consistent with carbon taxes whose value increasing by 20 fold in 1990 - 2005. The estimates suggest that the carbon tax’s abatement elasticity is about 9%.
    JEL: C21 C23 H23 L91 Q54 Q58
    Date: 2021
  10. By: Anantha Divakaruni; Peter Zimmerman
    Abstract: In April 2020, the US government sent economic impact payments (EIPs) directly to households, as part of its measures to address the COVID-19 pandemic. We characterize these stimulus checks as a wealth shock for households and examine their effect on retail trading in Bitcoin. We find a significant increase in Bitcoin buy trades for the modal EIP amount of $1,200. The rise in Bitcoin trading is highest among individuals without families and at exchanges catering to nonprofessional investors. We estimate that the EIP program has a significant but modest effect on the US dollar–Bitcoin trading pair, increasing trade volume by about 3.8 percent. Trades associated with the EIPs result in a slight rise in the price of Bitcoin of 7 basis points. Nonetheless, the increase in trading is small compared to the size of the stimulus check program, representing only 0.02 percent of all EIP dollars. We repeat our analysis for other countries with similar stimulus programs and find an increase in Bitcoin buy trades in these currencies. Our findings highlight how wealth shocks affect retail trading.
    Keywords: Bitcoin; COVID-19; economic impact payments; stimulus checks
    JEL: E42 G11 G41 H31
    Date: 2021–07–16
  11. By: Bernd Hayo (University of Marburg); Sascha Mierzwa (University of Marburg)
    Abstract: We study state-dependent effects of narratively identified tax shocks in Germany and the UK over the period 1974Q1–2018Q4 using local projections. In addition, we distinguish between aggregated and disaggregated tax types (direct and indirect taxes) as well as look for possible asymmetries between tax hikes and tax cuts. We find a number of differences across the business cycle, and between sample countries, tax types, and direction of tax changes. For instance, aggregated tax cuts initially have a larger effect during times of nonrecession in Germany, whereas we find no state-dependent effects for the UK. When disaggregating tax types, German indirect tax cuts only appear expansionary during downturns, whereas the effect is positive throughout the business cycle in the UK. Furthermore, we find different reactions when considering tax cuts and hikes individually: tax hikes can be expansionary in Germany (UK) when implemented during non-recessionary (recessionary) periods whereas they are contractionary during recessions (non-recessions). When considering tax cuts, German GDP rises only when cuts are enacted in times of non-recession, whereas in the UK, the reactions is positive in either case and mostly symmetric. All these findings are robust to various changes in the econometric setup.
    Keywords: Fiscal policy, tax policy, legislated tax changes, state dependence, direct taxes, indirect taxes, asymmetric effects, Germany, United Kingdom, local projections, narrative approach
    JEL: E62 E63 H20 H30 K34
    Date: 2021
  12. By: Seerar Westerberg, Hans (Institute of Retail Economics (Handelns Forskningsinstitut))
    Abstract: It is commonly argued that payroll tax cuts are inefficient for increasing employment among outsiders because insiders will use their power to bargain for higher wages at the expense of outsiders’ possibility of becoming employed. The extent to which insiders or outsiders reap the rewards of payroll tax cuts is a longstanding issue, and previous literature has largely focused on the employment effects of outsiders. Using wage statistics of employees in the Swedish retail sector, we investigate the effects of a youth payroll tax cut in 2007 on insiders’ wage earnings and the number of hours worked. In accordance with earlier studies, the results show that the payroll tax cut increased insiders’ total wage earnings. However, only 21 percent of the increase in wage earnings was a result of higher bargained wages, 57 percent of the wage increase corresponds to a higher intensive margin of employment, and the rest was attributed to the number of hours worked by insiders with a higher hourly wage rate. There is, thus, little to suggest that insiders can absorb large amounts of payroll tax cuts in the form of higher bargained wages, even in the case of a small number of workers with the most bargaining power.
    Keywords: Retail; labor market; wage; payroll tax; DiD; employment; inconvenience allowance
    JEL: D24 L25 L26
    Date: 2021–07–17
  13. By: Wynnona Steyn; Alexius Sithole; Winile Ngobeni; Eva Muwanga-Zake; Helen Barnes; Michael Noble; David McLennan; Gemma Wright; Katrin Gasior
    Abstract: In this paper we explore South Africa's personal income tax system using two microsimulation models. The first, SAMOD, simulates personal income tax and social benefits using a dataset derived from the nationally representative National Income Dynamics Study survey. The second, PITMOD, simulates the personal income tax system and is underpinned by a dataset comprising a full extract of anonymized individual-level administrative tax data especially constructed for this purpose.
    Keywords: Microsimulation, Personal income tax, Income distribution, South Africa
    Date: 2021

General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.