nep-pub New Economics Papers
on Public Finance
Issue of 2021‒08‒30
thirteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Generalization of the Deaton Theorem: Piecewise Linear Income Taxation and Participation Decisions By Robin Boadway; Katherine Cuff
  2. Revisiting the Relationship between Trade Liberalization and Taxation By Rabah Arezki; Alou Adesse Dama; Gregoire Rota-Graziosi
  3. Welfare Effects of the Labor Income Tax Changes on Married Couples: A Sufficient Statistics Approach By Egor Malkov
  4. Is consistency the panacea? Inconsistent or consistent tax transfer prices with strategic taxpayer and tax authority behavior By Diller, Markus; Lorenz, Johannes; Schneider, Georg; Sureth, Caren
  5. Tax Amnesties, Recidivism, and the Need for Reform By James Alm; Jay A. Soled
  6. Cryptocurrencies: An empirical view from a Tax Perspective By Andreas Thiemann
  7. Cigarette Taxes, Smoking, and Health in the Long-Run By Andrew I. Friedson; Moyan Li; Katherine Meckel; Daniel I. Rees; Daniel W. Sacks
  8. Tax Losses and Ex-ante Offshore Transfer of Intellectual Property By Rishi R. Sharma; Joel Slemrod; Michael Stimmelmayr
  9. Fiscal Spillovers: The Case of US Corporate and Personal Income Taxes By Madeline Hanson; Daniela Hauser; Romanos Priftis
  10. Revenue and distributional modelling for a UK wealth tax By Advani, Arun; Hughson, Helen; Tarrant, Hannah
  11. Collecting the tax deficit of multinational companies simulations for the European Union By Mona Barake; Theresa Neef; Paul-Emmanuel Chouc; Gabriel Zucman
  12. Preparing for the tax reform: the risky French households' portfolio in 2018 By Luc Arrondel; Jérôme Coffinet
  13. The Tax Implications of the American Families Plan on Iowa Farmland Owners By Kristine Tidgren; Wendong Zhang

  1. By: Robin Boadway; Katherine Cuff
    Abstract: Deaton (1979) showed that if preferences are weakly separable in goods and labour and quasihomothetic in goods and the government imposes an optimal linear progressive tax, commodity taxes are redundant. Hellwig (2009) generalized the Deaton theorem by showing that the allocation obtained under differential commodity taxes and an arbitrary linear progressive income tax is Pareto-dominated by one with uniform commodity taxes and a reformed linear progressive income tax. We show that both the Deaton theorem and the Hellwig extension continue to apply if a) the government implements a piecewise linear progressive income tax and b) labour varies along both the intensive and extensive margins. Some extensions are considered.
    Keywords: optimal income taxation, commodity taxation, piecewise linear income tax
    JEL: H21 H23 H24
    Date: 2021
  2. By: Rabah Arezki; Alou Adesse Dama; Gregoire Rota-Graziosi
    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 structure, openness, liberalization, natural resources
    JEL: H20 H87 F13
    Date: 2021
  3. By: Egor Malkov
    Abstract: This paper develops a framework for assessing the welfare effects of labor income tax changes on married couples. I build a static model of couples' labor supply that features both intensive and extensive margins and derive a tractable expression that delivers a transparent understanding of how labor supply responses, policy parameters, and income distribution affect the reform-induced welfare gains. Using this formula, I conduct a comparative welfare analysis of four tax reforms implemented in the United States over the last four decades, namely the Tax Reform Act of 1986, the Omnibus Budget Reconciliation Act of 1993, the Economic Growth and Tax Relief Reconciliation Act of 2001, and the Tax Cuts and Jobs Act of 2017. I find that these reforms created welfare gains ranging from -0.16 to 0.62 percent of aggregate labor income. A sizable part of the gains is generated by the labor force participation responses of women. Despite three reforms resulted in aggregate welfare gains, I show that each reform created both winners and losers. Furthermore, I uncover two patterns in the relationship between welfare gains and couples' labor income. In particular, the reforms of 1986 and 2017 display a monotonically increasing relationship, while the other two reforms demonstrate a U-shaped pattern. Finally, I characterize the bias in welfare gains resulting from the assumption about a linear tax function. I consider a reform that changes tax progressivity and show that the linearization bias is given by the ratio between the tax progressivity parameter and the inverse elasticity of taxable income. Quantitatively, it means that linearization overestimates the welfare effects of the U.S. tax reforms by 3.6-18.1%.
    Date: 2021–08
  4. By: Diller, Markus; Lorenz, Johannes; Schneider, Georg; Sureth, Caren
    Abstract: This study investigates how strategic tax transfer pricing of a multinational company (MNC) and two tax authorities in different countries affects production and tax avoidance decisions at the firm level and tax revenues at the country level. We employ a game-theoretical model to analyze the costs and benefits of two tax transfer pricing regimes (consistency vs. inconsistency) under asymmetric information. Though tax transfer pricing harmonization is considered a promising instrument to fight undesired tax avoidance, the implications are largely unclear. We find tax avoidance in equilibrium in both countries under inconsistency. Surprisingly, we identify conditions under which low-tax countries benefit from consistency while high-tax countries benefit from inconsistency. This explains how the strategic interaction of taxpayer and tax authorities under firm-level heterogeneity challenges the implementation of consistent regimes. Understanding the implications of (in)consistent transfer pricing rules is crucial when reforming transfer pricing regulations to fight tax avoidance and double taxation.
    Keywords: transfer pricing,transfer pricing inconsistency,tax avoidance,tax harmonization,strategic behavior,real effects
    JEL: H20 H26 C72 K34 F53
    Date: 2021
  5. By: James Alm (Tulane University); Jay A. Soled (Rutgers University)
    Abstract: For years, governments have instituted and administered tax amnesty programs of various forms. At least as measured by the metric of revenue collections, some of these programs have proven successful and others have not. However, none of these many programs properly accounts for the issue of recidivism in a meaningful manner. To address this problem and to enhance long-term tax compliance outcomes, this analysis advocates that legislative governing bodies make tax amnesty programs a one-time option: taxpayers who participate in one tax amnesty program would be barred from subsequent tax amnesty participation offered by the same taxing jurisdiction involving the same type of tax.
    Keywords: Tax amnesty, tax compliance, recidivism
    JEL: H26 H31 H71 K42
    Date: 2021–08
  6. By: Andreas Thiemann (European Commission - JRC)
    Abstract: This paper sheds light on the scarce empirical evidence on cryptocurrency users and use types. Based on the only available empirical estimate (shared by Chainalysis), this paper simulates the revenue potential from taxing Bitcoin capital gains in the EU. Total estimated Bitcoin capital gains in the EU amount to 12.7 billion EUR in 2020, including 3.6 billion EUR of realized gains. Applying national tax rules on capital gains from shares to those from Bitcoin yields a simulated tax revenue of about 850 million EUR in 2020. This paper is the first to empirically assess the tax revenue potential of capital gains from Bitcoin in the EU. While most of the empirical cryptocurrency literature is based on time-series data, this paper relies on dis-aggregated country-level data. The findings show that revenue from taxing cryptocurrencies is non-negligible and will be if the market of cryptocurrencies continues to grow.
    Keywords: Capital gains taxation, cryptocurrencies, Bitcoin.
    JEL: G19 G23 H24
    Date: 2021–08
  7. By: Andrew I. Friedson; Moyan Li; Katherine Meckel; Daniel I. Rees; Daniel W. Sacks
    Abstract: Medical experts have argued forcefully that using cigarettes harms health, prompting the adoption of myriad anti-smoking policies. The association between smoking and mortality may, however, be driven by unobserved factors, making it difficult to discern the underlying long-term causal relationship. In this study, we explore the effects of cigarette taxes experienced as a teenager, which are arguably exogenous, on adult smoking participation and mortality. A one-dollar increase in teenage cigarette taxes is associated with an 8 percent reduction in adult smoking participation and a 6 percent reduction in mortality. Mortality effects are most pronounced for heart disease and lung cancer.
    JEL: H2 I10 I12
    Date: 2021–08
  8. By: Rishi R. Sharma; Joel Slemrod; Michael Stimmelmayr
    Abstract: We develop a positive model of multinational firm behavior and analyze a firm’s incentive to transfer an intellectual property (IP) right of uncertain value offshore ex ante, i.e. before its success or failure is realized. With an asymmetric treatment of losses in the home country, the multinational firm will transfer its IP to a foreign low-tax country to avoid potentially negative profits at home. In addition, similar incentives exist to transfer the IP to a jurisdiction where tax rates are comparable or even higher than at home if the foreign jurisdiction offers a more symmetric treatment of losses.
    Keywords: intellectual property, corporate taxation, loss-offset, tax avoidance
    JEL: H25 H26 D21 F23
    Date: 2021
  9. By: Madeline Hanson; Daniela Hauser; Romanos Priftis
    Abstract: This paper extends the identification of unanticipated changes in average federal corporate and personal income tax rates in the United States, as proposed in Mertens and Ravn (2013), to the end of 2019, and assesses their propagation to economies with tight links to the US economy. While cuts in both taxes lead to significant short-run expansions in the US economy, their spillover effects on other countries differ markedly. A cut in corporate taxes can produce negative spillovers, indicating that the contractionary effects associated to the reallocation of investment and jobs by multinational firms outweigh the potential positive effects of increased demand for country-specific goods through trade with the US. The spillover effects of lower personal income taxes are more heterogeneous across countries but are, on average, expansionary, depending on the country-specific monetary policy stance.
    Keywords: Business fluctuations and cycles; Econometric and statistical methods; Exchange rate regimes; Fiscal policy; International topics
    JEL: H20 E62 F44
    Date: 2021–08
  10. By: Advani, Arun (University of Warwick, CAGE, the Institute for Fiscal Studies (IFS), and the LSE International Inequalities Institute (III)); Hughson, Helen (London School of Economics III); Tarrant, Hannah (London School of Economics III)
    Abstract: In this paper we model the revenue that could be raised from an annual and a one-off wealth tax of the design recommended by Advani, Chamberlain and Summers (2020b). We examine the distributional effects of the tax, both in terms of wealth and other characteristics. We also estimate the share of taxpayers who would face liquidity constraints in meeting their tax liability. We find that an annual wealth tax charging 0.17% on wealth above £500,000 could generate £10 billion in revenue, before administrative costs. Alternatively, a one-off tax charging 4.8% (effectively 0.95% per year, paid over a five-year period) on wealth above the same threshold, would generate £250 billion in revenue. To put our revenue estimates into context, we present revenue estimates and costings for some commonly-proposed reforms to the existing set of taxes on capital.
    Keywords: JEL Classification:
    Date: 2021
  11. By: Mona Barake (EU Tax - EU Tax Observatory); Theresa Neef (EU Tax - EU Tax Observatory); Paul-Emmanuel Chouc (EU Tax - EU Tax Observatory); Gabriel Zucman (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, EU Tax - EU Tax Observatory)
    Abstract: This study estimates how much tax revenue the European Union could collect by imposing a minimum tax on the profits of multinational companies. We compute the tax deficit of multinational firms, defined as the difference between what multinationals currently pay in taxes, and what they would pay if they were subject to a minimum tax rate in each country. We then consider three ways for EU countries to collect this tax deficit. First, we simulate an international agreement on a minimum tax of the type currently discussed by the OECD, favored by a number of European Union countries, and by the United States. In this scenario, each EU country would collect the tax deficit of its own multinationals. For instance, if the internationally agreed minimum tax rate is 25% and a German company has an effective tax rate of 10% on the profits it records in Singapore, then Germany would impose an additional tax of 15% on these profits to arrive at an effective rate of 25%. More generally, Germany would collect extra taxes so that its multinationals pay at least 25% in taxes on the profits they book in each country. Other nations would proceed similarly. We find that such a 25% minimum tax would increase corporate income tax revenues in the European Union by about €170 billion in 2021. This sum represents more than 50% of the amount of corporate tax revenue currently collected in the European Union and 12% of total EU health spending. The revenue potential of a coordinated minimum tax is thus large. However, revenues significantly depend on the commonly agreed minimum tax rate. With a 21% minimum rate, the European Union would collect about €100 billion in 2021. Moving from 21% to 15% would reduce the potential revenue by a factor of two to about €50 billion. Second, we simulate an incomplete international agreement in which only EU countries apply a minimum tax, while non-EU countries do not change their tax policies. In this scenario, each EU country would collect the tax deficit of its own multinationals (as in our first scenario), plus a portion of the tax deficit of multinationals incorporated outside of the European Union, based on the destination of sales. For instance, if a British company makes 20% of its sales in Germany, then Germany would collect 20% of the tax deficit of this company. We find that that in such a scenario, using a rate of 25% to compute the tax deficit of each multinational, the European Union would increase its corporate tax revenues about €200 billion. Out of this total, €170 billion would come from collecting the tax deficit of EU multinationals; an additional €30 billion would come from collecting a portion of the tax deficit of non-EU multinationals. For the European Union, there is thus a much higher revenue potential from increasing taxes on EU companies than from taxing non-EU companies. To improve the fairness of its tax system and generate new government revenues (e.g., to pay for the cost of Covid-19), it is essential that the European Union polices its own multinationals. Last, we estimate how much revenue each EU country could collect unilaterally, assuming all other countries keep their current tax policy unchanged. This corresponds to a "first-mover" scenario, in which one country alone decides to collect the tax deficit of multinational companies. This first mover would collect the full tax deficit of its own multinationals, plus a portion (proportional to the destination of sales) of the tax deficit of all foreign multinationals, based on a reference rate of 25%. We find that a first mover in the European Union would increase its corporate tax revenues by close to 70% relative to its current corporate tax collection. Although international coordination is always preferable, a unilateral move of a single EU member state (or a group of member states) would encourage other EU countries to also collect the tax deficit of multinationals—as not doing so would mean leaving tax revenues on the table for the first movers to grab. This could pave the way for an ambitious agreement on a high minimum tax, within the European Union and then globally. This analysis shows that unilateral action can play a transformative role and that refusing international coordination is not a sustainable solution, since other countries can always choose to collect the taxes that tax havens choose not to collect. Our estimates are based on a transparent methodology that combines newly available macroeconomic data on the location and effective tax rates of multinational profits. We illustrate and validate our approach by applying it to firm-level data publicly disclosed by all European banks and 16 large non-bank multinationals. We find that European banks would have to pay 41% more in taxes if they were subject to a 25% country-by-country minimum tax. This estimate is in line with our finding that EU multinationals as a whole (all sectors combined) would have to pay around 50% more in taxes, thus suggesting that this number is indeed the correct order of magnitude. Companies such as Shell, Iberdrola, and Allianz—who voluntarily disclose their country-by-country profits and taxes—would also have to pay 35%-50% more in taxes if they were subject to a 25% minimum tax. This report is supplemented by a pioneering interactive website, This new tool allows policy makers, journalists, members of civil society, and all citizens in each EU country to assess the revenue potential from minimum taxation on both domestic and foreign firms. Users can select various scenarios (e.g., international coordination or unilateral action), and a full range of minimum tax rates from 10% to 50%. All the data and computer code are available online, making our estimates fully reproducible. We plan to regularly update our findings, as improved and more comprehensive macroeconomic data sources become available, refined estimation techniques are designed, and more companies publicly disclose their country-by-country reports.
    Date: 2021–07
  12. By: Luc Arrondel (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); Jérôme Coffinet (Banque de France - Banque de France - Banque de France, UP1 - Université Paris 1 Panthéon-Sorbonne)
    Abstract: Between 2004 and 2014, the number of shareholders in France fell by approximately 50%. The over-cautiousness of savers observed after the crisis now seems less topical, especially since 2017 was marked in France by a tax reform designed to support shareholding: the implementation of a flat tax and the abolition of wealth tax, replaced by property wealth tax. We therefore analyze the risky portfolios of French households from the last two waves (2014-2015 and 2017-2018) of the INSEE's "Life History and Wealth" survey, which have the advantage of being panelized. Although the 2017-2018 survey comes a little early to analyze the full impact of these reforms, this paper provides an original analysis of the dynamics of households' risky portfolios over the last three years, just before (and shortly after) the implementation of these policies. We show first that the demand for risky assets depends strongly on the level of household wealth and expectations of returns on the stock market, two variables that have likely been affected by the recent reforms. These data also make it possible to assess the extent to which the announcement of the recent tax reform has led to changes in securities holdings.
    Keywords: Portfolio choice,equity demand,risk premium puzzle,household finance
    Date: 2021–08
  13. By: Kristine Tidgren; Wendong Zhang (Center for Agricultural and Rural Development (CARD))
    Abstract: President Biden proposed the American Families Plan (AFP) on April 28, 2021, to provide new social programs to millions of Americans. To pay for this $1.8 trillion benefits package, the AFP proposes significantly changing the way capital gain is taxed. The Administration has explained that "reforms to the taxation of capital gains and qualified dividends will reduce economic disparities among Americans and raise needed revenue." Specifically, the AFP proposes increasing the top marginal tax rate, taxing some capital gain at ordinary income tax rates, and subjecting more gain to the 3.8% Medicare tax. The AFP would thus boost the top federal rate at which some capital gain is taxed to 43.4% in 2022 and beyond. In addition to increasing tax rates, the AFP proposes taxing previously unrealized capital gain upon the transfer of appreciated property at death or by gift. This new tax-never before implemented in the United States-would generally apply to gain exceeding $1 million per person. It would supplement, not replace, the current estate and gift tax, which-because of a current exclusion of $11.7 million per person-impacts very few estates. As proposed, the AFP would generally eliminate the tax-free step up in basis for capital gain exceeding $1 million. This would apply to gain arising from investment assets such as stocks or commercial real estate, as well as gain arising from farmland or other business property. The AFP proposes applying the current $250,000 per person exclusion for capital gain on a principal residence. To determine the potential impact of these proposals on the owners of Iowa farmland, we analyze statistically representative data of farmland and landowners in Iowa, collected through the 2017 Iowa Farmland Ownership and Tenure Survey (IFOTS). We determine the basis of the farmland based upon its location and how and when it was acquired. We then calculate potential gain based upon estimated county-level fair market value (FMV) in 2021, which is assumed to be 5% higher than the average county farmland value estimates reported in the ISU Land Value Survey as of November 1, 2020. Because the AFP would treat entities differently from individuals, we exclude entity-owned farmland from our analysis and only consider acres owned by sole owners, joint tenants, tenants in common, or revocable living trusts. As such, our study examines the potential impact of the AFP on 22 million acres of Iowa farmland, which is 72% of the 31 million-acre total. Our study also considers the AFP's potential impact on 217,548 owners or 80% of the 272,906 farmland owners in Iowa (please see PDF for full summary).
    Date: 2021–08

This nep-pub issue is ©2021 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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.