nep-pub New Economics Papers
on Public Finance
Issue of 2022‒01‒10
fourteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The taxation of capital gains: principles, practice, and directions for reform By Advani, Arun
  2. Pareto-Improving Minimum Corporate Taxation By Mr. Shafik Hebous; Mr. Michael Keen
  3. Efficiency-Inducing Tax Credits for Charitable Donations when Taxpayers Have Heterogeneous Behavioral Norms By Ngo Van Long
  4. Measuring the Redistributive Capacity of Tax Policies By Juan Carlos Benitez; Charles Vellutini
  5. Marketed Tax Avoidance Schemes: An Economic Analysis By Jiao Li; Duccio Gamannossi Degl'Innocenti; Matthew D. Rablen
  6. Does the “bomb crater” effect really exist? Evidence from the laboratory By Matthias Kasper; James Alm
  7. C and S corporation banks: Did Trump's tax reform lead to differential effects? By Thi, Hoang Ha Nguyen; Weichenrieder, Alfons J.
  8. How Specifications of the Reference Tax System Affect CBO’s Estimates of Tax Expenditures By Congressional Budget Office
  9. Income tax noncompliance in Germany, 2001-2014 By Fauser, Hannes; Godar, Sarah
  10. Alternatives to paying child benefit to the rich. means testing or higher tax? By Patricia Apps; Ray Rees; Thor O. Thoresen; Trine E. Vattø
  11. What Is the Substance-Based Carve-Out under Pillar 2? And How Will It Affect Tax Competition? By Michael P. Devereux; Martin Simmler; John Vella; Heydon Wardell-Burrus
  12. Small Business Tax Compliance under Third-party Reporting By Bibek Adhikari; James Alm; Timothy F. Harris
  13. Do soda taxes affect the consumption and health of school-aged children? Evidence from France and Hungary By Selina Gangl
  14. Donors for tax morale: Evidence from 34 African countries By Alessandro Belmonte; Vincenzo Bove; Jessica Di Salvatore

  1. By: Advani, Arun (University of Warwick, CAGE Research Centre, the Institute for Fiscal Studies, and the LSE International Inequalities Institute)
    Abstract: Capital gains are particularly complex to tax given their infrequency, the different ways in which they are generated, and worries about harming productivity. There are theoretical arguments in support of everything from zero rates to high rates of tax on capital. In this paper, I first discuss the impact of capital gains on inequality, which often motivates discussions about how gains should be taxed. I then set out the principles that determine how gains should be taxed, in particular how the tax rate should relate to income tax rates. I propose that capital gains tax rates be equalized with income tax rates, subject to provisions to allow gains to be ‘smoothed’ over time and to remove inflation from the tax base. I highlight key transitional issues in moving to such a tax structure. Finally, I discuss the specific lessons for Canada.
    Keywords: JEL Classification: R12, C18, C59
    Date: 2021
  2. By: Mr. Shafik Hebous; Mr. Michael Keen
    Abstract: The recent international agreement on a minimum effective corporate tax rate marks a profound change in global tax arrangements. The appropriate level of that minimum, however, has been, and remains, extremely contentious. This paper explores the strategic responses to a minimum tax, which—the policy objective being to change the rules of tax competition game--—are critical for assessing the design and welfare impact of, and prospects for, this fundamental policy innovation. Analysis and calibration plausibly suggest sizable scope for minima that are Pareto-improving, benefiting low as well as high tax countries, over the uncoordinated equilibrium.
    Keywords: Tax Competition, Minimum Taxation, Corporate Tax Reform, International Taxation; competition game; policy objective; corporate tax reform; best response; country benefit; residence country; Corporate income tax; Competition; Tax avoidance; Global
    Date: 2021–10–22
  3. By: Ngo Van Long
    Abstract: We consider an economy in which some taxpayers behave in a Kantian way in their donation behavior while others are Nash players. A Kantian taxpayer holds the norm that any suggested deviation from a proposed equilibrium profile would be adopted by him only if when all members of their community adopted the same deviation, they would all achieve a higher level of welfare. In contrast, a Nash player follows the individual rationality criterion: He would deviate if, assuming all others do not deviate, he would improve his own payoff. We show that if all taxpayers are Nash players, then there is an efficiency-inducing tax credit scheme for charitable contributions. In contrast, if all taxpayers are Kantian, the optimal tax credit for charity is zero. If both types of taxpayers co-exist, and the government does not know who is of what type, then it is not possible for the government to induce the first-best outcome, but it must rely on a second-best tax-credit scheme.
    Keywords: categorical imperative, Kantian behaviour, Kantian equilibrium, Kant-Nash equilibrium, voluntary contributions to a public good, tax credits
    JEL: H21 H31 H41
    Date: 2021
  4. By: Juan Carlos Benitez; Charles Vellutini
    Abstract: This paper presents a novel technique to measure and compare the redistributive capacity of observed tax (or transfer) policies. The technique is based on income distribution simulations and controls for differences in pre-tax income distributions. It assumes that the only information on the pre-tax distribution available in each country-year is the Gini coefficient and the mean (GDP per capita). We illustrate the technique with an application to the personal income tax, using a dataset of 108 countries over the 2007-2018 period.
    Keywords: Income distribution, redistribution, progressivity, personal income tax; novel technique; PIT redistribution; TRANSPLANT-AND-COMPARE method; PIT Progressive; market income Gini Coefficients; Income distribution; Income; Personal income tax; Progressive taxation; Income inequality; Global
    Date: 2021–10–22
  5. By: Jiao Li; Duccio Gamannossi Degl'Innocenti; Matthew D. Rablen
    Abstract: Recent years have witnessed the growth of mass-marketed tax avoidance schemes aimed at the middle (not top) of the income distribution, with significant implications for tax revenue. We examine the consequences, for the structure of income tax, and for tax authority anti-avoidance efforts, of tax avoidance of this type. In a model that allows for both demand- and supply-side considerations, we find that (1) there is an endogenous threshold income below which taxpayers do not avoid, and above which they avoid maximally; (2) the per-dollar price of tax avoidance is decreasing in income under progressive taxation; (3) endogenous adjustments in the price of avoidance make supply less responsive to anti-avoidance activity than thought previously; and (4) that avoidance may drive a non-monotone (Laffer) relationship between tax rates and tax revenue. The findings suggest that new approaches to anti-avoidance, beyond legal enforcement, may be needed.
    Keywords: tax avoidance, marketed avoidance schemes, progressive taxation, anti-avoidance
    JEL: H26 D85 K42
    Date: 2021
  6. By: Matthias Kasper (University of Vienna); James Alm (Tulane University)
    Abstract: This study uses a laboratory experiment to investigate two behavioral explanations for taxpayers’ tendency to reduce their compliance after an audit (the “bomb crater effect”): the tendency to make up for losses incurred in the past (loss repair), and the incorrect assumption that experiencing an audit decreases the risk of a future audit (misperception of risk). Our findings suggest that audits do not have a strong effect in the aggregate. However, behavioral responses depend on the audit outcome. While taxpayers who were found to report all income correctly are substantially less compliant in their subsequent tax declaration, taxpayers who were found to evade their entire income show the opposite response. These results suggest that audits do not induce a general tendency for loss repair or a general misperception of the risk of a subsequent audit. Moreover, when comparing these changes in reporting behavior to the behavior of taxpayers who did not experience an audit, we find that audits do in fact not induce strong behavioral responses in general, and they do not induce a “bomb crater effect” in particular. Rather, our findings suggest that taxpayers reporting compliance in the laboratory is volatile, even absent any audits. We conclude that experimental studies should use control groups of unaudited taxpayers to identify the causal effect of audits on post-audit tax compliance.
    Keywords: Tax compliance; Bomb crater effect; Laboratory experiments
    JEL: C9 H26 H83
    Date: 2021–12
  7. By: Thi, Hoang Ha Nguyen; Weichenrieder, Alfons J.
    Abstract: The US Tax Cuts and Jobs Act (TCJA) led to a drastic reduction in the corporate tax and improved the treatment of C corporations compared to S corporations. We study the differential effect of the TCJA on these types of corporations using key economic variables of US banks, such as the number of employees, average salaries and benefits, profit/loss before taxes, and net income. Our analysis suggests that the TCJA increased the net-of-tax profits of C corporation banks compared to S corporations and, to a lesser extent, their pre-tax profits. At the same time, the reform triggered no significantly differential effect on the employment and average wages.
    Keywords: Tax Cuts and Jobs Act,corporate taxation,S corporations,C corporations,banks
    JEL: H2 G2
    Date: 2021
  8. By: Congressional Budget Office
    Abstract: To measure tax expenditures, the normal tax structure—the reference tax system—in which they represent special treatment must be defined. This report outlines how the reference tax system used by CBO affects its estimates of tax expenditures.
    JEL: H20
    Date: 2021–12–15
  9. By: Fauser, Hannes; Godar, Sarah
    Abstract: This paper estimates income tax underreporting for the case of Germany, by income category and along the income distribution. Comparing weighted samples of survey and tax data, we find patterns that are in line with the literature: Average income from self-employment and from rent and lease in the survey is higher than in the tax data, increasing in upper quintiles. Income underreporting to the tax authorities may be one of several possible explanations for these descriptive findings. We therefore expand our analysis with the Pissarides & Weber (1989) approach that has been applied to a range of countries and data sources before. We use the German Socioeconomic Panel and the Taxpayer Panel, estimating food, housing cost and donation regressions. Results indicate that self-employment is associated with higher housing cost but not with higher food expenditure in the SOEP. In the TPP we find more robust indication of underreporting as self-employment and business incomes are significantly associated with higher donations and even more so for the top-income decile. We use our results to derive tentative estimates of aggregate tax revenue losses due to underreporting of self-employment and other non-wage incomes.
    Keywords: tax evasion,income misreporting,personal income tax,self-employment,distributional effects
    JEL: D12 D31 H24 H26
    Date: 2021
  10. By: Patricia Apps; Ray Rees; Thor O. Thoresen; Trine E. Vattø (Statistics Norway)
    Abstract: The American Rescue Plan Act of 2021 implies that the US is effectively moving towards a general child benefit. However, the amount paid out is dependent on income, similar to schemes in several other countries. In the present paper, we argue that instead of suppressing the labour supply of middle income parents through withdrawing the transfer as a function of income, one should consider the obvious alternative of financing a generous universal child benefit by changing the overall income tax system. Implications of means testing relative to a tax financed universal alternative are discussed analytically in a piece-wise linear schedule. Moreover, we provide empirical illustrations of effects of child benefit design by combining information from behavioral and non-behavioral microsimulation models, representing the universe of Norwegian households. Results from both the analytical discussion and the simulations question the case for letting the child benefit be means tested.
    Keywords: Child benefit design; Labour supply; Income distribution; piecewise linear tax schedule
    JEL: C25 J13 J22
    Date: 2021–11
  11. By: Michael P. Devereux; Martin Simmler; John Vella; Heydon Wardell-Burrus
    Abstract: Key messages: The success of the recently agreed international tax reform hinges on a technical issue in the design of the Pillar 2 global minimum tax Pillar 2 ensures the minimum taxation of ‘residual’ (e.g. non-routine) profts at 15%. ‘Routine’ proft is not subject to Pillar 2. The effects depend on which of two possible options is used: Option 1 removes the incentive to compete below a liability of 15% of residual profts and puts a floor to tax competition Option 2 still maintains an incentive for governments to compete by reducing their taxes – possibly all the way to zero. Consequences for tax competition depend on the technical details to be revealed. Announcement containing more details of the proposal are expected shortly.
    Date: 2021
  12. By: Bibek Adhikari (Illinois State University); James Alm (Tulane University); Timothy F. Harris (Illinois State University)
    Abstract: How does third-party income reporting affect tax compliance? We use confidential administrative data from tax returns and information reports to estimate the impact of third-party income reporting on small business tax compliance. Since 2011, payment settlement entities (e.g., American Express) were required to report payment card transactions to both the firm and the Internal Revenue Service using Form 1099-K. This requirement made businesses’ receipts from payment cards—but not their cash receipts—third-party reported. Consequently, businesses located in higher payment card use areas experienced greater levels of third-party reporting than businesses located in lower credit card use areas. We construct an index of payment card use at the commuting zone level and we use this variation to identify the effect of Form 1099-K on reported receipts and deductions by small businesses. Overall, we find that the legislation modestly increased reported receipts without significantly increasing deductions. We also find substantial heterogeneity, with smaller firms, firms in business-to-consumer industries, and partnerships reporting a relatively large increase in receipts and a partially offsetting increase in deductions, implying a modest increase in tax compliance.
    Keywords: Tax enforcement, Information reporting, Tax evasion, Small businesses, Administrative data
    JEL: H25 H26 H32
    Date: 2021–12
  13. By: Selina Gangl
    Abstract: This paper examines the effect of two different soda taxes on consumption behaviour and health of school-aged children in Europe: Hungary imposed a Public Health Product Tax (PHPT) on several unhealthy products in 2011. France introduced solely a soda tax, containing sugar or artificial sweeteners, in 2012. In order to exploit spatial variation, I use a semi-parametric Difference-in-Differences (DID) approach. Since the policies differ in Hungary and France, I analyse the effects separately by using a neighbouring country without a soda tax as a control group. The results suggest a counter-intuitive positive effect of the tax on soda consumption in Hungary. The reason for this finding could be the substitution of other unhealthy beverages, which are taxed at a higher rate, by sodas. The effect of the soda tax in France is as expected negative, but insignificant which might be caused by a low tax rate. The body mass index (BMI) is not affected by the tax in any country. Consequently, policy makers should think carefully about the design and the tax rate before implementing a soda tax.
    Date: 2021–11
  14. By: Alessandro Belmonte; Vincenzo Bove; Jessica Di Salvatore
    Abstract: Do aid projects affect citizens' motivation to pay taxes? We address this question by combining fine-grained data on aid projects from AidData and survey data from the Afrobarometer for 34 African countries. We first employ a subnational analysis, where the treatment varies by administrative unit, and then move to an individual-level analysis, which exploits the occurrence of a project during the Afrobarometer fieldwork.
    Keywords: Foreign aid, Tax morale, State capacity, Public goods, Africa
    Date: 2021

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