nep-pub New Economics Papers
on Public Finance
Issue of 2022‒01‒24
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Consolidating the Covid Debt By Keuschnigg, Christian; Johs, Julian; Stevens, Jacob
  2. The long-run effects of corporate tax reforms By Isaac Baley; Andrés Blanco
  3. The Effects of Corporate Taxes on Small Firms By Jarkko Harju; Aliisa Koivisto; Tuomas Matikka
  4. The Global Minimum Tax By Niels Johannesen
  5. Fiscal capacity in non-democratic states: the origins and expansion of income tax By Per F. Andersson
  6. The Politics of Taxing Multinational Firms in a Digital Age By Hearson, Martin; Gelepithis, Margarita
  7. Sufficient Statistics for Nonlinear Tax Systems with Preference Heterogeneity By Antoine Ferey; Benjamin Lockwood; Dmitry Taubinsky
  8. New Forms of Tax Competition in the European Union: an Empirical Investigation By Eloi Flamant; Sarah Godar; Gaspard Richard
  9. No taxation without property rights: Formalization of property rights on land and tax revenues from individuals in sub-Saharan Africa By Marina Nistotskaya; Michelle D'Arcy

  1. By: Keuschnigg, Christian; Johs, Julian; Stevens, Jacob
    Abstract: One of the main functions of public debt is to smooth taxes and spending over time. In the Covid crisis, the Maastricht deficit restrictions were temporarily suspended to allow for large temporary deficits. As recovery sets in, countries are confronted with the task of consolidating the Covid debt. This paper explores a fiscal consolidation strategy combined with growth enhancing tax and expenditure reform. We quantitatively illustrate that this reform-based strategy, by reaping substantial efficiency gains and inducing strong growth, eliminates the Covid debt, protects per capita social entitlements and yet avoids increasing tax rates. With slow consolidation, marginal tax rates are reduced right from the beginning.
    Keywords: Covid debt, fiscal consolidation, tax and expenditure reform, growth
    JEL: E62 H24 H25 H55 H63
    Date: 2021–12
  2. By: Isaac Baley; Andrés Blanco
    Abstract: We investigate the long-run effects of permanent corporate tax reforms on aggregate capital behavior. In an investment model with fixed adjustment costs and partial irreversibility, we show that corporate taxes and investment frictions jointly determine three interconnected macroeconomic outcomes: (i) capital allocation, (ii) capital valuation, and (iii) capital fluctuations around steady-state. Using corporate tax and firm-level investment data from Chile, we discover that a lower corporate income tax improves the allocation of capital, reduces capital valuation, and accelerates capital fluctuations.
    Keywords: corporate taxes, investment frictions, fixed adjustment costs, irreversibility, lumpiness, capital misallocation, Tobin’s q, transitional dynamics, inaction, propagation
    JEL: D30 D80 E20 E30
    Date: 2022–01
  3. By: Jarkko Harju; Aliisa Koivisto; Tuomas Matikka
    Abstract: We study the impact of corporate taxes on firm-level investments and business activity by exploiting a 6 percentage-point reduction in the corporate tax rate during 2012–2014 in Finland. We use detailed administrative data and a difference-in-differences method comparing small corporations (tax rate cuts) to similar partnerships (no change in taxes). We find no significant average investment responses but do observe an average increase in annual sales and variable costs. These effects are driven by more cash-constrained firms and firms where the main owner actively works in the firm.
    JEL: G31 G38 H21 H25
    Date: 2022–01
  4. By: Niels Johannesen (University of Copenhagen)
    Abstract: This paper studies how the global minimum tax shapes national tax policies and welfare in a formal model of international tax competition with heterogeneous countries. The net welfare effect is generally ambiguous from the perspective of non-havens. On the one hand, the global minimum tax raises their welfare by curbing profit shifting, which boosts government revenue. One the other hand, it lowers their welfare by increasing equilibrium tax rates in havens, which transfers real resources from non-haven firms to haven governments. The net welfare effect is unambiguously positive when the global minimum rate is so high that profit shifting ends.
    Keywords: profit shifting, international taxation, global minimum tax, tax avoidance, multinational firms
    JEL: H25 H26 H77
    Date: 2022–01–13
  5. By: Per F. Andersson
    Abstract: The origins of fiscal capacity have traditionally been linked to warfare and democratization. However, non-democratic states also invest in fiscal capacity, even in times of peace. In fact, the majority of income taxes—a cornerstone of government finance—were introduced by non-democratic states in peacetime. This paper is concerned with how autocratic politics shape fiscal capacity. Political institutions in non-democratic states help overcome a commitment problem related to investments in taxation.
    Keywords: Fiscal capacity, Autocracy, Income tax
    Date: 2021
  6. By: Hearson, Martin; Gelepithis, Margarita
    Abstract: Taxing multinationals is politically difficult because of the structural power of mobile firms within the global economy, and this structural power is expected to increase in the digital age. Recently however there has been a breakdown in the international corporate tax consensus that structured tax competition over the past century. A new norm of international taxation has emerged whereby states claim the right to tax corporate income based on presence in consumer markets. Our paper explains this unexpected reassertion of state power. Building on previous accounts of large-scale change in policy norms, we show how the emergence of digital business models led to a new tax consensus by setting in train a process of policy contestation that allowed countries to levy taxes on multinationals unilaterally, without fear of capital flight.
    Keywords: Governance,
    Date: 2021
  7. By: Antoine Ferey; Benjamin Lockwood; Dmitry Taubinsky
    Abstract: This paper provides general and empirically implementable sufficient statistics formulas for optimal nonlinear tax systems in the presence of preference heterogeneity. We study unrestricted tax systems on income and savings (or other commodities) that implement the optimal direct-revelation mechanism, as well as simpler tax systems that impose common restrictions like separability between earnings and savings taxes. We characterize the optimum using familiar elasticity concepts and a sufficient statistic for across-income preference heterogeneity: the difference between the cross-sectional variation of savings with income, and the causal effect of income on savings. The Atkinson-Stiglitz Theorem is a knife-edge case corresponding to zero difference, and a number of other key results in optimal tax theory are subsumed as special cases. Our formulas also apply to other sources of across-income heterogeneity, including heterogeneity in rates of return on savings, inheritances, and the ability to shift income between tax bases. We provide tractable extensions of these results that include multidimensional heterogeneity, additional efficiency rationales for taxing heterogeneous returns, and corrective motives to encourage more saving. Applying these formulas in a calibrated model of the U.S. economy, we find that the optimal savings tax is positive and progressive.
    JEL: D61 H21 H24
    Date: 2021–12
  8. By: Eloi Flamant (EU Tax - EU Tax Observatory); Sarah Godar (EU Tax - EU Tax Observatory); Gaspard Richard (EU Tax - EU Tax Observatory)
    Abstract: This report provides an empirical analysis of personal and corporate tax competition in the European Union. We find that tax competition increasingly takes the form of preferential or narrowly targeted tax regimes on top of general rate cuts. We provide a ranking of the most harmful regimes targeting foreign, primarily highincome or high-wealth individuals. We also discuss several options to address these trends. The evolution of tax competition in the European Union may be summarized as follows. While corporate tax rates are still on a downward trend, the decline of top statutory personal income tax rates has stopped since the financial crisis of 2008–2009. In the meantime, many new preferential regimes have been introduced into the personal income tax systems of member states. Many base-narrowing measures also contribute to lowering corporate tax burdens. By targeting the most mobile parts of the tax base - high-income earners and multinational enterprises - these tax incentives undermine effective revenue collection in the European Union and weaken the horizontal and vertical equity of tax systems. The most striking trend in EU tax competition is the increase in the number of personal income tax schemes targeting foreign individuals. The number of such regimes has increased from 5 in 1995 to 28 today. A tentative ranking suggests that the most harmful ones are the Italian and Greek high-net-worth individual regimes, Cyprus' high-income regime and the pension regimes of Cyprus, Greece and Portugal. These regimes exhibit long periods of duration, provide significant tax advantages, specifically target very high-income individuals or do not require any real economic activity in a given member state. At present, preferential regimes apply to over 200,000 beneficiaries. A lower-bound estimation suggests that the total fiscal costs for the European Union amount to EUR 4.5 billion per year. This sum is equivalent e.g. to the annual budget of the entire Erasmus programme. Member states also apply numerous base-narrowing measures which have the potential to significantly lower the effective tax rate of multinationals. Public financing of corporate research and development has increased in recent decades and has increasingly taken the form of tax incentives. A total of 14 intellectual property regimes in the EU are currently designed to tax income associated with patents, software and similar intangible assets at rates of 15% or less (10% or less in half of these cases). Six countries have adopted regimes of notional interest deduction; the Maltese and Cypriot regimes seem exceptionally generous. Approximately 1,348 unilateral tax rulings concerning multinationals' tax arrangements were in force in 2019. The implications of these rulings for revenue collection are still unknown to the public. The trends uncovered by this report may be addressed in several ways, e.g. by reforming the Code of Conduct and transforming it into a binding instrument – and extending its mandate to personal income taxation as well as to non-preferential corporate tax regimes that lead to generally low levels of taxation of multinationals. In the absence of a coordinated approach (which is always the ideal solution), member states might consider unilaterally taxing their expatriates, which, under some conditions, may mitigate the effects of preferential personal income tax regimes. A comprehensive implementation of the global corporate minimum tax agreed in October 2021, with minimal carveouts and limited deductions for research and development, could provide an effective floor for the EU's race to the bottom in corporate taxation.
    Date: 2021–12
  9. By: Marina Nistotskaya; Michelle D'Arcy
    Abstract: The arguments that property rights and taxation positively affect development are well established in separate literatures, but the link between property rights and taxation is under-studied. To address this gap, we theorize that formalization of individual property rights facilitates economic exchange at scale, providing a viable opportunity for individuals to improve their economic standing, in exchange for which property owners assent to pay taxes. We illustrate the argument by comparing the historical evolution of tax states in early modern Europe and colonial Africa.
    Keywords: Property rights, Taxation, Sub-Saharan Africa, Afrobarometer
    Date: 2021

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