nep-pub New Economics Papers
on Public Finance
Issue of 2022‒04‒18
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. When lawmakers met progressives. Debating the American federal income tax of 1894 By Javier San Julian Arrupe
  2. Missing top incomes and tax-benefit microsimulation: evidence from correcting household survey data using tax records data By Marko Ledic; Ivica Rubil; Ivica Urban
  3. Tobacco control and optimal taxation in a changing European market landscape By Salvatore Barbaro; Nathalie Neu-Yanders
  4. INTAXMOD – Inheritance and Gift Taxation in the Context of Ageing By Alexander Krenek; Margit Schratzenstaller; Klaus Grünberger; Andreas Thiemann
  5. Welfare Effects of Fuel Tax and Feebate Policies in the Japanese New Car Market By Tatsuya Abe
  6. Are SMEs Avoiding Compliance Costs? Evidence from VAT Reforms in Japan By Takafumi Suzuki; Takafumi Kawakubo
  7. Not so sweet: The impact of the Portuguese soda tax on producers By Goncalves, Judite; Merenda, Roxanne; dos Santos, João Pereira
  8. Digitalization and Tax Compliance Spillovers: Evidence from a VAT e-Invoicing Reform in Peru By Mr. Matthieu Bellon; Salma Khalid; Jillie Chang; Pilar Villena; Juan Carlos Paliza; Ms. Era Dabla-Norris
  9. Trends and Patterns of Tax Expenditures on Union Taxes in India. By Mukherjee, Sacchidananda
  10. The Determinants of Tax Morale in India. By Korgaonkar, Chinmay N

  1. By: Javier San Julian Arrupe (University of Barcelona)
    Abstract: In 1894 the American Congress passed a 2% tax on incomes over 4,000 US dollars, as part of a bill seeking to reduce tariffs. Transformations in the American society after the Civil War triggered an increasing role of the State, calling for a tax reform. Concerned for tax justice, progressive economists sponsored a tax system grounded on ability to pay, demanding an income tax. Farmers and the working class joined this demand, feeling that American tax system was harmful to them. The decade of 1890 consolidated this opinion, leading a majority of lawmakers at the House to embrace the idea of a federal income tax. Even if struck down by the Supreme Court, the federal income tax of 1894 was an economic milestone in the Progressive Era, mirroring new social concerns. This paper examines the debates on the income tax in the House, with a twofold conclusion. First, representatives accepted the arguments of progressive economists for tax reform and used them in the discussion. Second, political economy played a central role in the debate as an instrument to confer legitimacy and reputation to representatives’ arguments for the income tax, and crucially aided in the building of consensus for the reform.
    Keywords: Tax policy, income tax, progressive era, progressivism.
    JEL: B15 H20 H71 N11
    Date: 2022
  2. By: Marko Ledic (Faculty of Economics & Business, University of Zagreb); Ivica Rubil (The Institute of Economics, Zagreb); Ivica Urban (Institute of Public Finance, Zagreb)
    Abstract: Using the microsimulation model EUROMOD for Croatia, we compare the results of simulation based on the original survey data (EU-SILC) with those based on the survey data corrected using tax records data and a recent survey correction method. We show that the correction method, although it debiases inequality estimates, may not be able to correct the in-come structure by source if some income sources are severely under-represented. In Croatia, this is the case for income from capital, property, and contractual work. As a solution, we propose to complement the correction method with an ad hoc pre-correction procedure. The corrections bring the aggregate amount, distribution, and structure of survey income closer to those in the tax data. Consequently, the simulated fiscal instruments become more like those in the tax data. Simulation of a hypothetical tax reform shows the results based on the uncorrected data may be misleading in terms of the estimated budgetary impact and the distributional incidence of the reform.
    Keywords: top incomes, survey data, tax records, tax-benefit microsimulation, EUROMOD, EU-SILC
    JEL: D31 H24
    Date: 2022–03
  3. By: Salvatore Barbaro (Johannes Gutenberg University Mainz); Nathalie Neu-Yanders (Institute for Policy Evaluation, Frankfurt)
    Abstract: A widely-supported aim of governments is to reduce the consumption of healthharming tobacco products and to increase their cessation. To reach this goal, the European Union is preparing a revision of its tobacco-related taxation. A crucial question in this revision is how to treat new (non-combustible) products like heated tobacco and e-cigarettes. The taxation of non-combustible products is two-fold: It can contribute to overall cessation since the entire market becomes less attractive or it can prevent traditional smokers from substituting for less harmful products. This paper provides evidence on European consumers’ perceptions of combustible and non-combustible products. First, we assess the reason for substituting for less harmful products. Second, we develop a theoretical framework to determine the optimal tax environment on the tobacco market. Lastly, we survey empirical evidence on US consumers’ responses to e-cigarette taxation and their impact on smoking prevalence. In addition, we apply price elasticity estimates from the US to European market data. Nearly all available data and studies indicate a positive cross-price elasticity, which has significant implications for tax policy. Our policy recommendation encourages price differentials between combustible and non-combustible products such as heated tobacco products and e-cigarettes. Additionally, we argue that smoking prevalence is not a sufficient measure for public health, since consumption of non-combustible alternatives is excluded. As an alternative, a measure for general harm level should be used.
    JEL: I18
    Date: 2022–03–30
  4. By: Alexander Krenek (WIFO); Margit Schratzenstaller; Klaus Grünberger (Austrian Institute of Economic Research); Andreas Thiemann
    Abstract: Based on the most recent data from the ECB's Household Finance and Consumption Survey, the project models the future household-level wealth distribution in five selected EU member countries (Finland, France, Germany, Ireland, and Italy) to derive inheritances based on different demographic and wealth projection scenarios. On this basis, various inheritance tax scenarios are simulated to estimate potential inheritance tax revenues for a projection period of 30 years. Our results indicate that multiple factors coincide in favouring a growing revenue potential for inheritance taxation in the medium-term. Wealth accumulation and appreciation lead to higher average wealth levels. The shift of the baby boomer generation out of the labour force results in an increase of the older population both in absolute and relative terms. Eventually, this will lead to a rise in the number of deaths and the number of inheritances. Additionally, low fertility rates lead to a reduction of the average number of successors and thereby decrease the importance of exemption thresholds, as individual inheritances become larger. Overall, our simulations show that the future revenue potential of inheritance taxes may be substantial. In practice, it can be expected that the theoretical revenue potential demonstrated by our simulations will be reduced by tax avoidance, real responses, and general equilibrium effects on other taxes. A review of the empirical evidence shows that behavioural responses to inheritance taxes are less pronounced compared to a net wealth tax.
    Keywords: TP_Europa, inheritance taxation, wealth taxation, ageing, HFCS, behavioural effects
    Date: 2022–04–07
  5. By: Tatsuya Abe
    Abstract: This paper examines the efficiency and distributional effects of the fuel tax and feebate policies. I employ a model with households' two-stage decisions on car ownership and utilization and estimate model parameters by combining micro-level data from a household survey and macro-level aggregate data for the Japanese new car markets from 2006 through 2013, with a car price endogeneity being dealt with. Counterfactual analyses show that the Japanese feebate results in a significant increase in social welfare while augmenting environmental externalities. In particular, the rebound effect induced by the feebate cancels out about 7% of the reduction in CO2 emissions that would originally have been attained by the fuel economy improvement. In addition, I find that the fuel tax at the current tax rate in Japan is 1.7 times less costly than the product tax, an alternative feebate scheme considered in the counterfactuals, in all income classes to reduce environmental externalities by the same amount, with no difference between the regressivity of the two policies.
    Date: 2022–03
  6. By: Takafumi Suzuki; Takafumi Kawakubo
    Abstract: This study disentangles the motives behind enterprises' responses to size-dependent tax regulations by exploiting value-added tax (VAT) reforms in Japan. Tax threshold and tax rate in Japan have changed over the past three decades since the introduction of VAT. We build on the model of Harju et al. (2019) to incorporate various tax reforms and conducted bunching estimation. By using a novel panel of Japanese Census of Manufacture covering the periods of VAT introduction and reforms, we find from the local estimates that the observed output response by enterprises is mainly caused by compliance costs rather than tax rates for small enterprises in Japan. The results suggest that the authorities are encouraged to ease compliance costs while enhancing tax revenue to improve the efficiency of tax design.
    Date: 2022–03
  7. By: Goncalves, Judite; Merenda, Roxanne; dos Santos, João Pereira
    Abstract: In February 2017, Portugal implemented a tax on sugar-sweetened beverages (SSBs), under which producers were to be taxed according to the amount of sugar contained in the drinks they manufactured. We exploit administrative accounting data covering the universe of Portuguese firms between 2012 and 2019 to assess the causal impact of this tax on the behavior and performance of producers of SSBs. Our identification strategy relies on event study specifications, using producers of bottled water as counterfactual. Our findings indicate that SSBs producers became significantly less profitable in the post-tax period, vis-à-vis water bottlers, which was driven by a significant decrease in domestic sales. The soda tax hindered firms' capacity to convert receivables into cash and financial health deteriorated as liabilities grew. SSBs producers did not respond to this negative shock by cutting jobs or modifying their labor force towards relatively more skilled labor or higher R&D capacity.
    Keywords: Firm-level impacts,policy evaluation,Portugal,public health,sugar-sweetened beverages tax
    JEL: D22 H25 I18 L66
    Date: 2022
  8. By: Mr. Matthieu Bellon; Salma Khalid; Jillie Chang; Pilar Villena; Juan Carlos Paliza; Ms. Era Dabla-Norris
    Abstract: Our study uses administrative data on firm-to-firm transactions and quasi- experimental variation in the rollout of electronic invoicing reforms in Peru to study the diffusion of e-invoicing through firm networks and its effect on tax compliance. We find that voluntary e-invoicing adoption is higher amongst firms with partners who are mandated to adopt e-invoicing, implying positive technology adoption spillovers. Spillovers are stronger from downstream partners and from export-oriented firms. Firms are less likely to continue transacting with a partner who has been mandated into e-invoicing, with the effect only partially reversed if both firms adopt e-invoicing, suggesting that network segmentation may occur. Smaller firms who transact with partners mandated into e-invoicing report 11 percent more sales and pay 17 more VAT in the year that their partner is mandated to adopt e-invoicing, suggesting positive spillovers in tax compliance behavior for this subset of firms.
    Keywords: VAT, tax compliance, technology spillovers, firm transaction data
    Date: 2022–03–18
  9. By: Mukherjee, Sacchidananda (National Institute of Public Finance and Policy)
    Abstract: The Union government foregoes revenue on account of various tax exemption/incentive schemes promoted for various purposes. The Constitution of India assigns power of taxation of broad-based taxes to the Union (Federal) government (e.g., Corporate Income Tax, Personal Income Tax, Union Excise Duty, Customs duty). Like the Union government, provincial (or State) governments also provide tax incentives (within the scope and coverage of their taxation power) but revenue impacts (or foregone) of those tax exemption schemes at the state level are not assessed yet. Comprehensive assessment of tax expenditures is important especially after the introduction of Goods and Services Tax (GST). Given the data limitations, the present paper assesses the trends and patterns (structure) of tax expenditures of Union taxes during 2005-06 to 2019-20. Overall tax expenditures of the Union government declined from 8.15 per cent of GVA (Gross Value Added) in 2008-09 to 1.69 per cent in 2019-20. It was possible mainly on account of continuous reduction of tax expenditures on indirect taxes. Tax expenditures on direct taxes (on account of CIT and PIT only) also declined from 32.7 per cent of direct tax (CIT PIT only) collection in 2008-09 to 22.4 per cent in 2019-20. The tax expenditures related to Union Excise Duty (UED) and Customs Duty (CD) declined from 152 per cent in 2008-09 to 12.6 per cent of tax collection on account of UED and CD in 2019-20. Post Global Financial Crisis (GFC) successive Union budgets raised standard rate of excise duty gradually to pre-GFC level, pruned down the exemption list and consolidated rate structure of excise duty (or CenVAT) to prepare for introduction of GST. This helped the government to contain tax expenditures on indirect taxes.
    Keywords: Tax Expenditures ; Tax Incentives ; Tax Policy ; Federal Government ; Union Taxes ; India
    JEL: H25 H24 H61 H11 D72
    Date: 2022–04
  10. By: Korgaonkar, Chinmay N (Indian Revenue Service (Income Tax))
    Abstract: This is a study of tax morale in India. The concept of tax morale or the citizens' attitude towards tax compliance is vital for the design and implementation of fiscal policy. Tax morale can foster voluntary compliance and hence support the enforcement and deterrence-driven approaches of the tax agencies. However, limited literature regarding the tax morale of Indian citizens is available. The present paper tries to bridge the gap by analyzing the available data for India from the 5 waves of the World Values Survey (1990-2014). Treating tax morale as a dependent variable, this study estimates the factors influencing it. We show that the trust in government, parliament, and civil services positively affects the tax morale of Indian citizens. The correlation between trust in the legal system and tax morale was also positive but not significant. Among the socio-economic variables, education improves the intrinsic motivation of individuals towards tax compliance. Interestingly, the full-time/salaried persons have lower tax morale as compared to the self-employed employees. This finding has important policy implications, given that the full-time/salaried class contributes a significant share of the total taxes paid by the individual taxpayers in India.
    Keywords: Tax Morale ; Tax Compliance ; India ; Fiscal Policy ; Self-employed ; Salaried
    Date: 2022–04

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