nep-pub New Economics Papers
on Public Finance
Issue of 2022‒05‒23
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Taxation of Risky Entrepreneurial Capital By Corina Boar; Matthew P. Knowles
  2. Optimal Estate Taxation: More (about) Heterogeneity across Dynasties By Philipp Krug
  3. Capital income taxation and public debt in an endogenous fertility model By Minoru Watanabe
  4. Does Informality Deter Tax Progressivity? By Enrico Rubolino
  5. Are fiscal consolidation episodes helpful for public sector efficiency? By António Afonso; José Alves
  6. Granting Market Countries the Right to Tax Profit without Physical Nexus By Wolfram F. Richter
  7. Missing top incomes and tax-benefit microsimulation: evidence from correcting household survey data using tax records data By Marko Ledic; Ivica Rubil; Ivica Urban
  8. INTAXMOD - Inheritance and Gift Taxation in the Context of Ageing By KRENEK Alexander; SCHRATZENSTALLER Margit; GRUNBERGER Klaus; THIEMANN Andreas
  9. Tax Aversion and the Social Contract in Africa By James A. Robinson

  1. By: Corina Boar; Matthew P. Knowles
    Abstract: We study optimal taxation in a model with endogenous financial frictions, risky investment and occupational choice, where the distribution of wealth across entrepreneurs affects how efficiently capital is used. The planner chooses linear taxes on wealth, capital and labor income to maximize the steady state utility of a newborn agent. Most agents in the model are poor, leading to a redistributive motive for taxation. Optimal tax rates can be written as a closed-form function of the size of the tax bases and their elasticities with respect to tax rates. We find that it is optimal to tax capital income because financial frictions reduce the elasticity of capital income with respect to taxes and because capital income taxes prevent excessive entry into entrepreneurship. Optimal wealth taxes are positive but close to zero, since they strongly discourage capital accumulation.
    JEL: E2 E6 H2
    Date: 2022–04
  2. By: Philipp Krug
    Abstract: Standard models on optimal estate taxation do not allow for intergenerational transmission of bequest motives. However, correlation in bequest motives may exist due to genetic and cultural transmission of preferences or indirect reciprocity. I introduce such intergenerational correlation to a simple model with heterogeneously altruistic parents. I derive two insights for optimal linear estate taxation under a Utilitarian welfare measure. First, this correlation implies a higher optimal estate tax rate. Second, estate tax rates should be higher for those parents who inherited themselves.
    Keywords: estate taxation, inheritance taxation, indirect reciprocity, intergenerational preference transmission
    JEL: H21 H24 D64
    Date: 2022–05
  3. By: Minoru Watanabe (Hokusei Gakuen University / Research Fellow, Graduate School of Economics, Kobe University)
    Abstract: This study constructs an overlapping generations model with fertility choice and unemployment caused by a constant minimum wage and incorporating public debt. It shows that a higher capital income tax reduces the public debt burden and hence promot es capital accumulation, which leads to an improvement in unemployment and fertility rates.
    Date: 2022–04
  4. By: Enrico Rubolino
    Abstract: In contexts with weak enforcement and widespread informality, the threat of tax evasion may constrain policy makers’ power to set tax policies optimally. This paper studies whether reducing informality by tackling tax evasion leads policy makers to increase statutory tax progressivity. I take advantage of an Italian policy that generated cross-municipality variation in the scope for tackling income and property tax evasion through stricter tax enforcement. Combining an event study design with municipality-level panel data on statutory tax rates, I show that the ability of the government to change the size of the informal sector tips the balance in favor of higher marginal tax rates for middle and top earners, lower for the poor. The tax hike was larger in places with higher pre-program inequality and where intrinsic tax compliance attitudes were weaker. As a result of larger tax collections, municipalities hired more workers and raised public spending. These results suggest that policies enforcing legal rules and payment of taxes have not only the power to foster tax capacity, but also to enhance the ability to pursue redistributive policies.
    Keywords: tax evasion, informality, tax enforcement, local taxes, tax progressivity
    JEL: H26 H71 H72
    Date: 2022–04
  5. By: António Afonso; José Alves
    Abstract: We assess the consequences of fiscal consolidation episodes on public sector efficiency (scores) for 35 OECD countries for the 2007-2020 period. We find that fiscal consolidations improve public sector efficiency and results are robust across efficiency models. Moreover, peripheral euro-area economies and economies with debt-to-GDP ratios between 60% and 90% are those whose public sector efficiency scores improve more when fiscal consolidation episodes occur. The evidence that fiscal consolidations enhance spending efficiency is an additional argument for fiscal consolidations, from a policy perspective.
    Keywords: fiscal consolidation episodes; government spending efficiency; panel data; OECD
    JEL: C23 D61 H21 E62 H63
    Date: 2022–05
  6. By: Wolfram F. Richter
    Abstract: More than 130 countries have accepted the OECD invitation to reform the taxation of multinational enterprises (MNEs). One of two reform pillars aims at granting market countries the right to tax supernormal (“residual”) profit without requiring physical nexus. This paper examines the method of implementation proposed by the OECD and compares it with various discarded options. It concludes that intercountry tax equity, allocative efficiency, and practicality of negotiation speak against the OECD proposal to use a sales-based formula for allocating an MNE’s group profit. Simply splitting each market country’s residual profit contribution by an MNE-independent key is to be preferred.
    Keywords: BEPS Project, Pillar One, residual profit allocation/splitting, tax withholding, destination-based cash flow taxation
    JEL: H25 M48 F23
    Date: 2022
  7. By: Marko Ledic (Faculty of Economics and Business Zagreb); Ivica Rubil (The Institute of Economics, Zagreb); Ivica Urban (Institute of Public Finance)
    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 income 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
  8. By: KRENEK Alexander; SCHRATZENSTALLER Margit; GRUNBERGER Klaus (European Commission - JRC); THIEMANN Andreas (European Commission - JRC)
    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: inheritance taxation, wealth taxation, ageing, HFCS, behavioural effects
    Date: 2022–04
  9. By: James A. Robinson
    Abstract: Despite the low levels of taxation and public good provision in Africa, I provide evidence that a large proportion of Africans prefer lower taxation and fewer public goods. This cannot be explained by standard arguments about problems of accountability, governance or state capacity. Instead I argue that it reflects deeply seated ideas about the nature of the state and its potential threats to the autonomy of society. I show the historic social contracts in Africa rarely featured taxation and kept the state to limited jurisdictions. These social contracts have in many ways reproduced themselves and influence the way Africa is governed today.
    JEL: H11 O1 O11
    Date: 2022–04

This nep-pub issue is ©2022 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.