nep-pub New Economics Papers
on Public Finance
Issue of 2022‒02‒07
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. A Fair Day's Pay for a Fair Day's Work: Optimal Tax Design as Redistributional Arbitrage By Christian Hellwig; Nicolas Werquin
  2. Consumption taxation to finance pension payments By Ruppert, Kilian; Schön, Matthias; Stähler, Nikolai
  3. How Accurate Is the Kakwani Index in Predicting Whether A Tax or a Transfer Is Equalizing? An Empirical Analysis By Ali Enami; Patricio Larroulet; Nora Lustig
  4. A Modigliani-Miller Theorem for the Public Finances of Globalized Economies: Theory, Policy Implications, and Keynesian Reflections By Biagio Bossone
  5. Redistributive effect and the progressivity of taxes and benefits: evidence for the UK, 1977–2018 By Nicolas Hérault; Stephen P. Jenkins
  6. Shifting the Tax Burden away from Labour towards Inheritances and Gifts – Simulation results for Germany By Andreas THIEMANN; Diana OGNYANOVA; Edlira NARAZANI; Balazs PALVOLGYI; Athena Kalyva; Alexander LEODOLTER
  7. Using energy and emissions taxation to finance labor tax reductions in a multi-sector economy: An assessment with EMuSe By Hinterlang, Natascha; Martin, Anika; Röhe, Oke; Stähler, Nikolai; Strobel, Johannes

  1. By: Christian Hellwig; Nicolas Werquin
    Abstract: We study optimal tax design based on the idea that policy-makers face trade-offs between multiple margins of redistribution. Within a Mirrleesian economy with earnings, consumption and retirement savings, we derive a novel formula for optimal income and savings distortions based on redistributional arbitrage. We establish a sufficient statistics representation of the labor income and capital tax rates on top income earners in dynamic environments, which relies on the observed distributions of both income and consumption. Because consumption has a thinner Pareto tail than income, our quantitative results suggest that it is optimal to shift a substantial fraction of the top earners' tax burden from income to savings.
    Keywords: Capital Taxation; Income Taxation; Consumption Inequality
    JEL: D31 H21
    Date: 2022–01–06
  2. By: Ruppert, Kilian; Schön, Matthias; Stähler, Nikolai
    Abstract: This paper assesses how a permanent shift from financing a public pay-as-you-go pension by direct (labour income) taxation towards financing it by indirect(consumption) taxation affects the economy and welfare. To this end, we use anoverlapping-generations-augmented two-region general equilibrium framework withsearch frictions on the labour market. The analysed tax reform partially shifts thetax burden from domestic to foreign producers and lowers marginal costs of domes-tic production and generates positive domestic macroeconomic effects. In addition,the partial postponement of a household's tax burden to retirement leads to highersavings and increases domestic assets. However, for some time after implementationof the tax reform, the policy-induced increase in consumption costs makes retireesand households close to retirement worse off. Moreover, the increase in domesticnet foreign assets implies that consumption of foreign households eventually falls,which stands in contrast to what is commonly found in models without an endoge-nous savings motive.
    Keywords: Fiscal devaluation,OLG models,Pension system,Optimal taxation
    JEL: E24 E62 H21 H55 J26
    Date: 2021
  3. By: Ali Enami; Patricio Larroulet; Nora Lustig
    Abstract: The Kakwani index of progressivity is commonly used to establish whether the effect of a specific tax or transfer is equalizing. However, in the presence of reranking or the Lambert conundrum, a progressive tax could be unequalizing. While it is mathematically possible for counterintuitive results to occur, how common are they in actual fiscal systems? Using a novel dataset that includes fiscal incidence results for 39 countries, we find that the likelihood of the Kakwani index to be progressive (regressive) while the tax or transfer is unequalizing (equalizing) is minimal, except in the case of indirect taxes: in roughly 25 percent of our sample, regressive indirect taxes are equalizing (sign-inconsistent cases). Additionally, the likelihood that the index ranks the magnitude of the impact of a tax or a transfer wrongly exists but is also small. Finally, using regression analysis, we find that increasing the size or progressivity of a progressive tax (transfer) is equalizing and statistically robust for sign-consistent cases. For sign-inconsistent cases, the coefficient for the Kakwani index is not statistically significant. In sum, although the Kakwani index could yield interpretations that are inaccurate in actual fiscal systems, the risk seems small except for indirect taxes.
    Keywords: Kakwani index, fiscal redistribution, reranking, progressivity, marginal contribution, taxes, transfers, Lambert
    JEL: D31 D63 H22 H23
    Date: 2022–01
  4. By: Biagio Bossone
    Abstract: This article is about the economics of the power of global finance to enforce its own interests over national economies. In line with the capital structure irrelevance principle of Modigliani and Miller (1958) as applied to corporate finance, the article shows that the value of the public sector claims (money and debt) of a financially globalized economy is independent of the capital structure of the government’s finances. In particular, the article transposes the Modigliani-Miller approach (enhanced as needed) to public finances and proves a new "neutrality theorem" (and two important related corollaries) whereby, in an economy that is internationally highly financially integrated, the cost of the capital needed by governments to finance their deficits is independent of whether: i) financing originates from debt or money, ii) debt is denominated in domestic or foreign currency, and iii) money and debt are issued under floating or fixed exchange rates. The two corollaries show that governments seeking to monetize their deficits must remunerate money holdings with a return that vary inversely with credibility is lower and directly with the stock of money (eventually defying the original policy objective). The article discusses the options available for countries to approach financial globalization.
    Keywords: capital structure; credibility; debt, equity, and money; global financial investors; credibility; policy space; public sector claims
    Date: 2022–01
  5. By: Nicolas Hérault (Melbourne Institute: Applied Economic & Social Research, the University of Melbourne); Stephen P. Jenkins (London School of Economics and Political Science)
    Abstract: We apply the Kakwani approach to decomposing redistributive effect into average rate, progressivity, and reranking components using yearly UK data covering 1977–2018. We examine cash and in-kind benefits, and direct and indirect taxes. In addition, we highlight an empirical implementation issue – the definition of the reference (‘pre-fisc’) distribution. Drawing on an innovative counterfactual approach, our empirical analysis shows that trends in the redistributive effect of cash benefits are largely associated with cyclical changes in average benefit rates. In contrast, trends in the redistributive effects of direct and indirect taxes are mostly associated with changes in progressivity. For in-kind benefits, changes in the average benefit rate and progressivity each played the major roles at different times.
    Keywords: Kakwani decomposition, inequality, redistributive effect, progressivity, reranking, benefits, taxes
    JEL: D31 H24 H50 I38
    Date: 2021–11
  6. By: Andreas THIEMANN (European Commission – JRC); Diana OGNYANOVA (European Commission – DG ECFIN); Edlira NARAZANI (European Commission – JRC); Balazs PALVOLGYI (European Commission - DG ECFIN); Athena Kalyva (Greek Ministry of Finance); Alexander LEODOLTER (European Commission – DG ECFIN)
    Abstract: Germany’s tax system places a relatively strong emphasis on direct taxes, particularly on labour. At the same time, revenues from the inheritance and gift tax are relatively low. This points towards a large-scale transfer of wealth from one generation to the next that is largely untaxed and thereby maintaining the high degree of wealth inequality observed in Germany. This is due mainly to the wide-ranging tax exemptions for business assets, which make the system complex, inefficient and regressive. This paper presents three hypothetical budget-neutral scenarios of broadening the inheritance and gift tax base while reducing the tax burden on labour income. Keeping the current progressive rates but abolishing tax exemptions would lead to about EUR 9-12 billion additional annual inheritance and gift tax revenue. Replacing the current tax regime by a flat rate of 10% or 15% could yield about EUR 0.5-2.3 billion or EUR 4-6.5 billion. Using EUROMOD, the microsimulation model of the EU, we show that these additional revenues could be used to reduce the tax burden on labour, which would improve income equality. Furthermore, estimations of labour supply responses to these reforms, based on the EUROLAB labour supply model, indicate that lowering the tax burden on labour may also lead to a slight increase in labour supply in particular for low-income earners.
    Keywords: tax shift, inheritance and gift tax, tax wedge on labour, wealth inequality.
    JEL: D31 H2 J2
    Date: 2021–12
  7. By: Hinterlang, Natascha; Martin, Anika; Röhe, Oke; Stähler, Nikolai; Strobel, Johannes
    Abstract: In this paper, we introduce a closed-economy version of the dynamicenvironmental multi-sector general equilibrium modelEMuSeto analyze the effects of financing a labor tax reduction through higher consumption, energy or emissions taxation.We find that, for sufficiently high environmental damage, using energy and emission taxes as the financing instrument eventually outperforms the use of consumption taxes due to a positive productivity-like shock. However, it takes time for the positive effects to materialize. Manufacturing, transportation and energy production sectors tend to lose (or gain only a little) while administration, services and research sectors tend to benefit from the implementation of an environmental taxation as a financing instrument. As demand shifts towards sectors less affected by the tax shift, the aggregate economic effects are different in the multi-sector economy compared to a conventional one-sector-economy framework.
    Keywords: EMuSe,Dynamic General Equilibrium Model,Sectoral Heterogeneity,Environmental Tax Policy,Input-Output Matrix
    JEL: E32 E50 E62 H32 Q58
    Date: 2021

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