nep-pub New Economics Papers
on Public Finance
Issue of 2022‒02‒14
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Taxation with Multiple Incomes and Types By Spiritus, Kevin; Lehmann, Etienne; Renes, Sander; Zoutman, Floris T.
  2. Optimal sin taxation and market power By Martin O'Connell; Kate Smith
  3. Rising Allowances, Rising Rates: A Tinbergen Rule for Capital Taxation By Marius Clemens; Werner Röger
  4. The global minimum tax raises more revenues than you think, or much less By Janeba, Eckhard; Schjelderup, Guttorm
  5. On the Distributional Effects of International Tariffs By Daniel R. Carroll; Sewon Hur
  6. Intertemporal income shifting and the taxation of business owner-managers By Helen Miller; Thomas Pope; Kate Smith
  7. Using Accounting Information to Predict Aggressive Tax Placement Decisions by European Groups By Matteo Borrotti; Michele Rabasco; Alessandro Santoro
  8. Financial development and small firms’ tax compliance in Sub-Saharan Africa By Balde, Racky

  1. By: Spiritus, Kevin (Erasmus School of Economics, Erasmus University Rotterdam); Lehmann, Etienne (Université Panthéon-Assas Paris II, CRED); Renes, Sander (Dept. of Business Economics, Erasmus University Rotterdam); Zoutman, Floris T. (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: We analyze the optimal nonlinear income tax schedule when taxpayers earn multiple in comes and differ along many unobserved dimensions. We derive the necessary conditions for the government’s optimum using both a tax perturbation and a mechanism design approach, and show that both methods produce the same results. Our main contribution is to propose a numerical method to find the optimal tax schedule. Applied to the optimal taxation of couples, we find that optimal isotax curves are very close to linear and parallel. The slope of isotax curves is strongly affected by the relative tax-elasticity of male and female income. We make several additional contributions, including a test for Pareto efficiency and a condition on primitives that ensures the government’s necessary conditions are sufficient and the solution to the problem is unique.
    Keywords: Nonlinear Optimal Taxation; Multidimensional Screening; Household Income Taxation
    JEL: D82 H21 H23 H24
    Date: 2022–01–24
  2. By: Martin O'Connell (Institute for Fiscal Studies and University of Wisconsin); Kate Smith (Institute for Fiscal Studies and Institute for Fiscal Studies)
    Abstract: This paper studies the design of sin taxes when ?rms exercise market power. We outline an optimal tax framework that highlights how market power impacts the e?ciency and redistributive properties of sin taxation, and quantify these e?ects in an application to sugar-sweetened beverage taxation. We estimate a detailed model of demand and supply for the UK drinks market, which we embed in our tax design framework to solve for optimal sugar-sweetened beverage tax policy. Positive price-cost margins on drinks create allocative distortions, which act to lower the optimal rate compared with a perfectly competitive setting. However, since pro?ts accrue to the rich, this is partially mitigated under social preferences for equity. Overall, ignoring market power when setting the optimal sugar-sweetened beverage tax rate leads to welfare gains that are 40% below those at the optimum. We show that moving from a single tax rate on sugar-sweetened beverages to a multi-rate system can result in further substantial welfare gains, with much of these gains realized by instead taxing sugar content directly.
    Date: 2021–09–21
  3. By: Marius Clemens; Werner Röger
    Abstract: The system of capital taxation consists of two instruments, namely a tax on profits and a depreciation allowance on investment. We will show in this paper that by acting on both instruments simultaneously it is possible to achieve both a growth and a fiscal net revenue target even in cases when a trade off prevails when each instrument is used individually. This is an application of the Tinbergen rule (Tinbergen 1952) to capital taxation. In the current context a fundamental requirement for this rule to work is that the two tax instruments imply different trade offs. As will be shown in the paper, depreciation allowances have a more favorable trade off between growth and net revenue in the long run compared to statutory profit tax rates. Thus, by increasing depreciation allowances and the statutory tax rate at the same time it is possible to both increase growth and fiscal space. In a model simulation calibrated to the German economy and tax system an increase of the tax depreciation rate for all investments from 10% to 25% leads to more than 2 percent GDP increase and more than 6 percent higher private investments in total. Whereas GDP and investment rise steadily over time, the government budget becomes negative in the short run. In the long run the sign of the fiscal budget effect is determined by the assumption about indexation of government consumption to GDP. However, according to the Tinbergen rule for capital taxation slight adjustments of the capital tax rate could balance out these deficits and generate additional fiscal space.
    Keywords: Fiscal Policy, Capital Allowance, Capital Tax
    JEL: E61 E62 H25
    Date: 2021
  4. By: Janeba, Eckhard (Dept. of Economics, University of Mannheim); Schjelderup, Guttorm (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: The OECD's proposal for a global minimum tax (GMT) of 15% aims for a reversal of a decades-long race to the bottom of corporate tax rates driven by competition over real investments and profit shifting to low-tax jurisdictions. We study the revenue effects of the GMT by focusing on the induced strategic tax setting effects. The direct effect of the GMT is a reduction in profit shifting, which has a positive effect on revenues in high-tax countries as their tax base grows, and makes higher taxes attractive. A secondary effect, however, is that the value of attracting real foreign investments increases, which intensifies tax competition. We argue that the revenue effects of the GMT depend on the instruments governments use to attract firms. With endogenous corporate tax rates, revenues in non-havens increase if initially tax competition among non-havens is fierce. By contrast, when governments compete via lump sum subsidies, the revenue gains from less profit shifting are exactly offset by higher subsidies.
    Keywords: Global Minimum Tax; Tax Competition; OECD BEPS; Pillar II
    JEL: F23 F55 H25 H73
    Date: 2022–02–07
  5. By: Daniel R. Carroll; Sewon Hur
    Abstract: We provide a quantitative analysis of the distributional effects of the 2018 increase in tariffs by the U.S. and its major trading partners. We build a trade model with incomplete asset markets and households that are heterogeneous in their age, income, wealth and labor skill. When tariff revenues are used to reduce labor and capital income taxes and increase transfers, the average welfare loss from the trade war is equivalent to a permanent 0.1 percent reduction in consumption. Much larger welfare losses are concentrated among retirees and low-wealth and low-income workers, while only wealthy households experience a welfare gain.
    Keywords: tariffs; inequality; consumption; welfare; taxation
    JEL: E21 F10 F62 H21
    Date: 2022–01–29
  6. By: Helen Miller (Institute for Fiscal Studies and Institute for Fiscal Studies); Thomas Pope (Institute for Fiscal Studies and Institute for Fiscal Studies); Kate Smith (Institute for Fiscal Studies and Institute for Fiscal Studies)
    Abstract: We use newly linked tax records to show that the large responses of UK company owner-managers to personal taxes are due to intertemporal income shifting and not to reductions in real business activity. Around half of this shifting is short-term and helps prevent volatile incomes being taxed more heavily under progressive personal taxes. The remainder re?ects systemic pro?t retention over long periods to take advantage of lower tax rates, including preferential treatment of capital gains. We ?nd no evidence that this tax-induced retention increases business investment. It does, however, substantially reduce the tax revenue raised from high income business owners.
    Date: 2021–12–13
  7. By: Matteo Borrotti; Michele Rabasco; Alessandro Santoro
    Abstract: Aggressive tax planning (ATP) consists in taxpayers’ reducing their tax liability through arrangements that may be legal but are in contradiction with the intent of the law. In particular, ATP by multinational groups (MNE) is a source of major concern. In this paper we consider the MNE’s decision to locate or to maintain a company in a tax haven as a relevant symptom of ATP. The research question we want to address is whether this decision can be predicted using publicly available accounting information. We use ORBIS database and we focus on European MNEs. We observe that, in 2021, slightly less than 40% of European MNEs have a company located in a tax haven. Thus, for a tax authority it would be difficult, without a specific analysis, to identify riskier MNEs. We find that a random forest model that uses accounting information for years between 2015 and 2019 predicts reasonably well the decision to locate (or maintain) a company in a tax haven in 2021. Using this model in 2019, a tax authority could have identified almost 80% of European MNEs that were going to locate or maintain a company in a tax haven in 2021. We observe that the most important variables for prediction are those associated to the size of the group, to its positive profitability and to its financial structure, while individual time-invariant features are less relevant. We also find that the predictive performance of the model is maximized when the information is taken from the time subset 2017-2019 and that most important predictors for the risk of using tax havens are also good predictors for the level of intensity of such a use, as measured by the share of subsidiaries located in tax havens. The main policy implication of these results is that (European) non-tax havens could effectively anticipate (and prevent) the decision to locate (or maintain) companies in tax havens, and shape their policies accordingly, with particular reference to cooperative compliance schemes. These policies are more credible in the context of renewed international cooperation in the design of corporate tax rules, and in particular, of the implementation of Pillar Two within the European Union.
    Keywords: Tax Planning, European Multinationals, Machine Learning
    Date: 2022–02
  8. By: Balde, Racky (UNU-MERIT, Maastricht University)
    Abstract: Lack of fiscal space in sub-Saharan Africa is a major preoccupation, particularly in the context of shocks. The majority of firms in the region are primarily in the informal sector and consequently do not pay taxes. This paper explores the effect of financial development on small firms’ compliance with value-added tax, profit tax and local tax. It equally explores the mitigating impact of informal finance on financial development’s role in driving small firms’ tax compliance. To demonstrate this, we estimate a recursive trivariate probit model. The results show that financial development increases the likelihood of firms being tax compliant. In contrast, access to informal finance decreases that likelihood. It also emerges that the lower the taxes, the greater the effects of low costs of banks on tax compliance. Another finding is that informal finance mitigates the effect of financial development on small firms’ tax compliance.
    Keywords: taxation, Africa, financial development, informal finance, informal economy
    JEL: D22 E26 H26
    Date: 2021–11–01

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