nep-pub New Economics Papers
on Public Finance
Issue of 2022‒06‒20
fifteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Income Tax Policy in Europe between Two Crises: From the Great Recession to the COVID-19 Pandemic By Myck, Michal; Trzciński, Kajetan
  2. Optimal Taxation of Risky Entrepreneurial Capital By Corina Boar; Matthew Knowles
  3. Top Income Inequality and Tax Policy By Isaac Delestre; Wojciech Kopczuk; Helen Miller; Kate Smith
  4. Top Earners: a Labor Productivity Process By Campanale Claudio; Rocio Fernandez-Bastidas
  5. Sovereign Spreads and Corporate Taxation By Hayley Pallan
  6. Preferences and Perceptions in Provision and Maintenance Public Goods By Gächter, Simon; Kölle, Felix; Quercia, Simone
  7. Earnings responses to even higher taxes By Miao, Dingquan; Selin, Håkan; Söderström, Martin
  8. The revenue potential of inheritance taxation in light of ageing societies By KRENEK Alexander; SCHRATZENSTALLER Margit; GRUNBERGER Klaus; THIEMANN Andreas
  9. Estimating beneficiaries of the child tax credit: past, present, and future By Ashley Nunes; Chung Yi See; Lucas Woodley; Nicole A. Divers; Audrey L. Cui
  10. Till Taxes Keep Us Apart? The Impact of the Marriage Tax on the Marriage Rate By Nadia Myohl
  11. The 2003 Tax Reform and Corporate Payout Policy in the US By Danilo Stojanovic
  12. Local taxes on economic activity in municipalities in EU Member States By HERRMANN Benedikt
  13. Withholding Matters: The Impact of Act 32 on Compliance with the Earned Income Tax By Sutirtha Bagchi
  14. Income Tax Evasion Estimation in Hungary By Palma Filep-Mosberger; Adam Reiff
  15. Does climate change concern alter tax morale preferences? Evidence from an Italian survey By Cascavilla, Alessandro

  1. By: Myck, Michal (Centre for Economic Analysis, CenEA); Trzciński, Kajetan (Centre for Economic Analysis, CenEA)
    Abstract: We examine the revenue and redistributive effects of tax policy reforms in twelve European countries over the decade between the financial crisis and the outbreak of the COVID-19 pandemic, setting them against the implications of a hypothetical system reflecting the extent of fiscal drag resulting from nominal wage increases. We show that the combination of wage growth and progressivity of the tax system determined the fiscal leeway which governments could use to reduce income inequality. Despite significantly faster wage growth in the examined post-communist countries of Central and Eastern Europe, their much lower degree of progressivity implied limited additional scope for fiscal changes. While decisions taken in most of the examined countries in the CEE region led to increases in tax progressivity, their income tax systems continue to be far less redistributive in comparison with such countries as Ireland, the Netherlands, or Portugal. This not only has direct implications for income inequality but also translates into limitations of automatic fiscal drag effects on government revenues, which could offer additional resources, in particular at a time of high inflation.
    Keywords: income tax, tax reforms, fiscal drag
    JEL: H24 D31
    Date: 2022–05
  2. By: Corina Boar (New York University); Matthew Knowles (University of Cologne)
    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.
    Keywords: Entrepreneurship; Financial Frictions; Taxation
    JEL: E2 E6 H2
    Date: 2022–05
  3. By: Isaac Delestre; Wojciech Kopczuk; Helen Miller; Kate Smith
    Abstract: The share of pre-tax income flowing to the top of the UK income distribution increased continually and substantially in the three decades leading up to the financial crisis, but has changed little since 2013. Using microdata sampled from UK tax records, we describe the nature of top incomes in the UK and how they are taxed. We show that wage income is the dominant source of pre-tax income, even for highest-income 0.1% of UK adults. But, ‘active’ business income – derived from self-employment or closely-held incorporated businesses – is considerably more important for the top 1% than for those with lower incomes. High-income wage earners work disproportionately in financial services. The high-income self-employed are predominately working in partnerships in professions such as accountancy and legal services. Overall, UK income taxes are progressive: average tax rates rise with income. Taxes on top incomes have been increased since 2010, with the result that the post-tax share of income flowing to the top has fallen. But average tax rates vary significantly within the top and depend on how income is received. Incomes from business ownership and investment are taxed at lower rates than employment income. We discuss options for reforming the taxation of top incomes.
    JEL: D31 H2 H24 H25
    Date: 2022–05
  4. By: Campanale Claudio (Depatment of Economics and Statistics (ESOMAS) University of Torino, Italy); Rocio Fernandez-Bastidas (Departamento de Fundamentos del Analisis Economico (FAE), Universidad de Alicante, Spain)
    Abstract: In the present paper we confront standard wage processes used in the quantitative literature on the optimal tax progressivity and a process with heterogeneous life-cycle profiles that we propose against the data. We find that the former fail to capture several features of the earnings dynamics at the very top of the distribution while our proposed model improves along some of these dimensions.
    Keywords: Top earners, Earnings Dynamics, Heterogeneous Income Growth
    JEL: D31 E24 J24 J31
    Date: 2022–05
  5. By: Hayley Pallan (IHEID, Graduate Institute of International and Development Studies, Geneva)
    Abstract: Do sovereign bond investors care about taxation in the countries where they invest? In this paper, I examine the response of sovereign spreads to changes in tax revenues, bases and rates. In simple OLS regressions there is a negligible relationship between sovereign spreads and taxation. However, there are stronger relationships in emerging markets, specifically for corporate taxation. There is a particularly important role of corporate tax base changes in emerging markets for sovereign spreads - this contemporaneous relationship holds using both annual and daily datasets. Additionally, an assessment of how sovereign spreads respond to tax changes under various fiscal environments highlights the role of initial fiscal space in how sovereign spreads respond to aspects of corporate taxation. Finally, I estimate local projections in order to assess the dynamic response of sovereign spreads to corporate taxation. These results are consistent with the finding that corporate tax base expansion (rather than corporate tax rate hikes) are associated with lower borrowing costs for governments in fiscal precarity - most strongly for countries with low levels of fiscal space in the medium term.
    Keywords: Sovereign Spreads, Fiscal Space, Corporate Tax Reform
    JEL: E62 H87 H63
    Date: 2022–06–11
  6. By: Gächter, Simon (University of Nottingham); Kölle, Felix (University of Cologne); Quercia, Simone (University of Verona)
    Abstract: We study two generic versions of public goods problems: in Provision problems, the public good does not exist initially and needs to be provided; in Maintenance problems, the public good already exists and needs to be maintained. In five lab and online experiments (n=2,584), we document a robust asymmetry in preferences and perceptions in two incentive-equivalent versions of these public good problems. We find fewer conditional cooperators and more free riders in Maintenance than Provision, a difference that is replicable, stable, and reflected in perceptions of kindness. Incentivized control questions administered before gameplay reveal dilemma-specific misperceptions but controlling for them neither eliminates game-dependent conditional cooperation, nor differences in perceived kindness of others' cooperation. Thus, even when sharing the same game form, Maintenance and Provision are different social dilemmas that require separate behavioral analyses. Despite some inconsistencies, a theory of revealed altruism comes closest to explaining our results.
    Keywords: maintenance and provision social dilemmas, conditional cooperation, kindness, misperceptions, experiments, revealed altruism
    JEL: C92 H41
    Date: 2022–05
  7. By: Miao, Dingquan (Linnaeus University); Selin, Håkan (IFAU - Institute for Evaluation of Labour Market and Education Policy); Söderström, Martin (IFAU - Institute for Evaluation of Labour Market and Education Policy)
    Abstract: We exploit a recent Swedish tax reform, implying higher marginal tax rates for the top 5% of the earnings distribution, to learn about earnings responses in an economy where taxes already are high. Using a simple and graphical cross sectional method, we estimate earnings elasticities in the range 0.13-0.16. We interpret the response using a simulation model in which people face uncertain marginal tax rates due to earnings dynamics. The tax response is surprisingly sharp given the earnings variability at the top of the earnings distribution.
    Keywords: Earnings supply; Income taxation
    JEL: H24 J22
    Date: 2022–05–30
  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. 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: 2022–05
  9. By: Ashley Nunes; Chung Yi See; Lucas Woodley; Nicole A. Divers; Audrey L. Cui
    Abstract: Government efforts to address child poverty commonly encompass economic assistance programs that bolster household income. The Child Tax Credit (CTC) is the most prominent example of this. Introduced by the United States Congress in 1997, the program endeavors to help working parents via income stabilization. Our work examines the extent to which the CTC has done so. Our study, which documents clear, consistent, and compelling evidence of gender inequity in benefits realization, yields four key findings. First, stringent requisite income thresholds disproportionally disadvantage single mothers, a reflection of the high concentration of this demographic in lower segments of the income distribution. Second, married parents and, to a lesser extent, single fathers, are the primary beneficiaries of the CTC program when benefits are structured as credits rather than refunds. Third, making program benefits more generous disproportionally reduces how many single mothers, relative to married parents and single fathers, can claim this benefit. Fourth and finally, increasing credit refundability can mitigate gender differences in relief eligibility, although doing so imposes externalities of its own. Our findings can inform public policy discourse surrounding the efficacy of programs like the CTC and the effectiveness of programs aimed at alleviating child poverty.
    Date: 2022–05
  10. By: Nadia Myohl
    Abstract: Married couples often face a different tax burden than cohabitating couples with the same income. I study the effect of joint income taxation of married couples on the marriage rate in Switzerland, where tax differentials between married and cohabitating couples vary considerably across cantons. I construct a dataset containing sociodemographic and -economic variables on every individual living in Switzerland, and use household-level information to identify cohabitating couples. Using a simulated instrumental variable approach, I find a negative impact of joint income taxation on the marriage rate for couples married between 2012 and 2019. The effect is driven by households without children and from the lower end of the income distribution.
    Keywords: income taxation, marriage penalty, taxation of married couples
    JEL: H24 H31 J12
    Date: 2022
  11. By: Danilo Stojanovic
    Abstract: This study explores the hypothesis that the 2003 tax cuts on dividends and capital gains generated an increase in aggregate dividends and aggregate share repurchases in the US after 2003. I find that the 2003 tax reform leads to a rise in both types of payouts in the General Equilibrium setting with sticky wages after incorporating two financial frictions, including the adjustment costs on dividends and endogenous constraint on repurchases. Two motives lie behind the results. First, the 2003 tax reform generates a tax motive for dividends due to higher tax cuts on dividends than tax cuts on capital gains. Second, the 2003 tax reform activates a flexibility motive for repurchases because paying dividends in the current period induces a commitment of firms to future dividend payments. Since any deviation from such a commitment might be costly for firms, those with low excess cash prefer to choose repurchases as a buffer to protect against extra penalties related to higher dividend volatility. Sticky wages in the General Equilibrium aim to provide firms with excess cash.
    Keywords: payout flexibility; capital reallocation; tax reform; heterogeneous firms;
    JEL: D21 E62 G35 H25 H32
    Date: 2022–04
  12. By: HERRMANN Benedikt (European Commission - JRC)
    Abstract: Revenues from taxes on local economic activities to local budgets can work as a reward for municipalities, which pursue local policies conducive for development of the local business. The variety of taxes generating revenues from local economy to local budgets is very large within Europe. This survey reviews the structure of taxes and their share in revenues of municipalities’ budgets in 2019 across Member States. There are substantial differences across EU Member States in the share of revenues from taxes on local economic activities to local budgets, which work as an award for efforts of municipalities to increase productivity of local business. Shares range from 0 % to 66 %. EU Member States with such shares equal or higher EU-average had stronger economic growth in the period 2015-2019 than EU Member States with shares below EU average, indicating that these shares could play an important role for sustainable economic development at national level.
    Keywords: Municipalities, tax revenues, economic growth
    Date: 2022–04
  13. By: Sutirtha Bagchi (Department of Economics, Villanova School of Business, Villanova University)
    Abstract: This paper examines Act 32 of the Pennsylvania state legislature which mandated the introduction of withholding for the local earned income tax (EIT) for all employees and the consolidation of a fragmented collection system to one collector per county effective January 1, 2012. The estimates I obtain suggest that the act resulted in increased compliance with the EIT of about 13 percent. A falsification exercise examining compliance with the property tax for the identical municipalities confirms that Act 32 did not impact the property tax. Both findings are robust to the inclusion of municipality fixed effects or municipality-specific time trends.
    Keywords: Earned income tax; Tax compliance; Withholding; Event Study
    JEL: H26 H71 R51
    Date: 2022–05
  14. By: Palma Filep-Mosberger (Magyar Nemzeti Bank (Central Bank of Hungary)); Adam Reiff (Magyar Nemzeti Bank (Central Bank of Hungary))
    Abstract: This paper studies labour market tax avoidance in the 2010s in Hungary, following major labour market tax reforms in the beginning of the decade. First we show that aggregate time series are broadly consistent with a †whitening†process, in which a higher fraction of incomes are declared. However, as aggregate developments are driven by several, often unobservable factors, we cannot conclude that the observed phenomena are indeed caused by a whitening process in the labor market. Therefore in the second part of the paper we use several micro datasets to shed light on the nature of the whitening process. By comparing the consumption pattern of entrepreneurs (who might have undeclared incomes) and state sector employees (who are unlikely to have undeclared income), we show that income underreporting of entrepreneurs did decline in the 2010s. On the other hand, we find that the number of illegal employees – e.g. of those who work without any work contract – only temporarily declined in the aftermath of the financial crisis and seems to follow a procyclical pattern.
    Keywords: labour market tax avoidance, illegal employment, income underreporting.
    JEL: H26 J21 J31
    Date: 2022
  15. By: Cascavilla, Alessandro
    Abstract: Given the increasing relevance of sustainability debates, this paper investigates the relationship between the climate change concern and the willingness to pay an environmental tax, considering the interplay with the general level of individual tax morale. By employing a survey among Italian economics students, we show that the climate change concern affects the attitude towards paying an environmental tax both directly and indirectly, via a change in the preferences between the general and the specific tax morale. We find that also tax immoral subjects are significantly willing to pay an environmental tax as their awareness of climate change increases. Given the goal to increase the public acceptance of an environmental tax, we provide three main policy implications: i) carry on campaigns to increase the general level of tax morale, following the guidelines given by the OECD (2019); ii) raise the climate change awareness among people, for instance through investments in sensibilization campaigns on environmental-related topics; iii) increase awareness about climate change in particular among individuals who show lower attitude towards paying taxes. The evidence about an inconsistent tax preference made us recommend a policy addressed to a specific target group rather than to individuals and based on non-monetary incentives, such as nudging and moral suasion tools.
    Keywords: Energy survey; Carbon tax; Climate change; Tax evasion and avoidance; Environmental Taxes and Subsidies
    JEL: H23 Q40 Q50
    Date: 2022–05

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