nep-pub New Economics Papers
on Public Finance
Issue of 2022‒06‒27
fourteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. On the Political Economy of Nonlinear Income Taxation By Berliant, Marcus; Gouveia, Miguel
  2. Optimal threshold taxation: an empirical investigation for developing economies By Lucas Menescal; José Alves
  3. Optimal cooperative taxation in the global economy By Pedro Teles; V. V. Chari; Juan Pablo Nicolini
  4. Property Tax Reform: Implications for Housing Prices and Economic Productivity By Jason Nassios; James Giesecke
  5. The Effects of Alcohol Excise Tax Increases by Drinking Level and by Income Level By Saffer, Henry; Gehrsitz, Markus; Grossman, Michael
  6. Explaining the Decline in the US Labor Share: Taxation and Automation By Burkhard Heer; Andreas Irmen; Bernd Süssmuth
  7. Durable Consumption, Limited VAT Pass-Through and Stabilization Effects of Temporary VAT Changes By Marius Clemens; Werner Röger
  8. Safety Nets and Social Welfare Expenditures in World Economic History By Price V. Fishback
  9. Proposed alcohol tax reform in the UK: Implications for wine-exporting countries By Kym Anderson; Glyn Wittwer
  10. Tax-Based Marriage Incentives in the Affordable Care Act By Isaac, Elliott; Jiang, Haibin
  11. The Excess Profits during COVID-19 and Their Tax Revenue Potential By Evgeniya Dubinina; Javier Garcia-Bernardo; Petr Jansky
  12. The Likely Fiscal and Public Health Effects of an Excise Tax on Sugar sweetened Beverages in Kenya By van Walbeek, Corné; Mthembu, Senzo
  13. Mandating Digital Tax Tools as a Response to Covid: Evidence from Eswatini By Santoro, Fabrizio; Amine, Razan; Magongo, Tanele
  14. Bunching and Adjustment Costs: Evidence from Cypriot Tax Reforms By Panos Mavrokonstantis; Arthur Seibold

  1. By: Berliant, Marcus; Gouveia, Miguel
    Abstract: The literatures dealing with voting, optimal income taxation, implementation, and pure public goods are drawn on here to address the problem of voting over income taxes and a public good. In contrast with previous articles, general nonlinear income taxes that affect the labor-leisure decisions of consumers who work and vote are allowed. Uncertainty plays an important role in that the government does not know the true realizations of the abilities of consumers drawn from a known distribution, but must meet the realization-dependent budget; the tax system must be robust. Even though the space of alternatives is infinite dimensional, conditions on primitives are found to assure existence of a majority rule equilibrium when agents vote over both a public good and income taxes to finance it.
    Keywords: Voting; Income taxation; Public good; Robustness
    JEL: D72 D82 H21 H41
    Date: 2022–05–20
  2. By: Lucas Menescal; José Alves
    Abstract: In this empirical study we assess both linear and nonlinear relationship between total taxation and several tax items with real per capita GDP growth rates for 43 developing countries between 1990 and 2019. We use panel data techniques to evaluate the effects of taxation on economic growth for both short and long run perspectives, and to find optimal tax threshold values. We obtain evidence of nonlinear relationships between all tax items, except for corporate income taxation, as well as an optimal value for total tax burden around 23,5% of GDP for the whole sample. When the sample is subdivided by countries’ income levels, we find threshold values for all tax items and an optimal tax burden around 23,6% of GDP for high income countries and 21,3% of GDP for low income. Our results provide support regarding the existence of nonlinearities and about policies focused on raising certain tax revenues, as a percentage of GDP, without hampering economic growth.
    Keywords: Economic Growth; Fiscal Policy; Optimal taxation; Tax thresholds
    JEL: E62 H21 O47
    Date: 2022–06
  3. By: Pedro Teles; V. V. Chari; Juan Pablo Nicolini
    Abstract: How should countries cooperate in setting fiscal and trade policies when government expenditures must be financed with distorting taxes? We show that even if countries cannot make explicit transfers to each other, every point on the Pareto frontier is production efficient, so that international trade and capital flows should be effectively free. Trade agreements must be supplemented with fiscal policy agreements. Residence-based income tax systems have advantages over source-based systems. Taxing all household asset income at a countryspecific uniform rate and setting the corporate income tax to zero yield efficient outcomes. Value-added taxes should be adjusted at the border.
    JEL: E60 E61 E62
    Date: 2022
  4. By: Jason Nassios; James Giesecke
    Abstract: Australia has high housing prices by world standards. Australian state and local governments also have a high reliance on a variety of property taxes. This has generated calls for state tax reform. However, with property prices high, a concern of policy makers is that property tax reform might push house prices higher still. We investigate the effects of seventeen property tax reform options, with a particular focus on potential trade-offs between efficiency benefits and house price impacts.
    Keywords: CGE modelling, Immovable property tax, Recurrent property tax, Housing prices, Excess burden
    JEL: C68 E62 H2 H71 R38
    Date: 2022–06
  5. By: Saffer, Henry (National Bureau of Economic Research); Gehrsitz, Markus (University of Strathclyde); Grossman, Michael (CUNY Graduate Center)
    Abstract: The alcohol industry argues that alcohol excise taxes do not reduce heavy drinking because of substitutions to lower-cost products and that these taxes disproportionately burden low-income drinkers. Alternatively, some economists have argued that increases in alcohol excise taxes reduce heavy alcohol consumption. Using data from the Nielsen Homescan we investigate the effects of a large excise tax increase that raised alcohol prices. The results show that heavy drinkers reduce purchases, and this reduction is no different than the reductions by other drinkers. The results also show that only low-income drinkers pay more for ethanol after the tax increase.
    Keywords: alcohol, excise tax, heavy drinking, low income
    JEL: I18 H20
    Date: 2022–05
  6. By: Burkhard Heer; Andreas Irmen; Bernd Süssmuth
    Abstract: This study provides evidence for the US that the secular decline in the labor share is not only explained by technical change or globalization, but also by the dynamics of factor taxation, automation capital (robots), and population growth. First, we empirically find indications of co-integration for the period from the last quarter of the 20th to the first decade of the 21st century. Permanent effects on factor shares emanate from relative factor taxation. The latter also have a lasting effect on the use of robots. Variance decompositions reveal that taxing contributes to changes in the two income shares and in automation capital. Second, we analyse and calibrate a neoclassical growth model extended to include factor taxation, automation capital, and capital adjustment costs. Labor and automation capital are perfect substitutes whereas labor and traditional capital are complements. The model replicates the dynamics of the observed functional income distribution in the US during the 1965-2015 period. Counterfactual experiments suggest that the fall in the labor share would have been significantly smaller if labor and capital income tax rates had remained at their respective level of the 1960s.
    Keywords: functional income distribution, labor income share, income taxes, automation capital, demography, growth
    JEL: D33 E62 O41 J11 J20
    Date: 2022
  7. By: Marius Clemens; Werner Röger
    Abstract: This paper revives the question of whether a temporary VAT change is an adequate instrument for crisis stabilization. In empirical assessments, we find that durable goods consumption fluctuates strongly over the business cycle and that VAT rate changes affect durable goods in particular. Therefore, we build a dynamic stochastic general equilibrium (DSGE) model that is capable of addressing this major channel through which temporary VAT changes affect the economy. Furthermore, we allow for an imperfect pass-through of VAT measures to consumer prices via VAT-specific price adjustment costs. We compare the general VAT policy in the crisis with alternative stabilization policies, such as interest rate cuts, spending policies and a VAT cut only for durable goods. First, we find that considering durable goods in the model generates sizeable stabilization effects of VAT changes on consumption over a broad set of parameter ranges. Second, we find that the VAT policy can mimic monetary policy with minor exceptions. Third, the VAT rate cut has the highest short-term multiplier compared with government spending policies, but not in the medium-term. Fourth, a VAT rate reduction only on durable goods will generate strong GDP effects and even be self-financing in the first year. In contrast, a VAT reduction only on non-durables has small effects on GDP and is not self-financing. In view of our results, we conclude that a temporary VAT cut, when applied to durable goods, is an effective stabilization instrument.
    Keywords: Value added tax, durable consumption, multiplier, business cycle, zero lower bound
    JEL: E62 E63 H21
    Date: 2022
  8. By: Price V. Fishback
    Abstract: The safety nets in high-income countries before 1900 and in low-income countries today were based on savings and aid from extended family, friends, charities, churches, and small amounts from local governments. Mutual societies and eventually insurance companies offered insurance against lost earnings from sickness, injury, death, and old age. Germany led the way in mandating that employers provide benefits. Since 1900 higher income nations have sharply increased public and private social welfare expenditures to well over 20 percent relative to GDP. A large share of this rise has come in increases in aid to the elderly and health care expenses, often in the form of contributory social insurance financed by payroll taxes on workers and employers. Meanwhile, noncontributory transfer programs for the poor have risen relatively little. In most countries, the employer’s share of payroll taxes are higher than the worker’s share. There are some major countries who have followed a path of reliance on private programs, which are largely financed by employers. Probably the most striking feature of social welfare programs world-wide is the very large variation in expenditures relative to GDP, in the categories of spending, and in the mix of taxation, private programs, and government programs.
    JEL: H53 H55 I38 N40
    Date: 2022–05
  9. By: Kym Anderson (Wine Economics Research Centre, School of Economics and Public Policy, University of Adelaide, Australia, and Arndt-Corden Dept of Economics, Australian National University, Canberra ACT 2601, Australia); Glyn Wittwer (Centre of Policy Studies, Victoria University, Australia)
    Abstract: A proposal to reform the United Kingdom’s excise duty on alcohol is under consideration during 2022. The proposal would change the tax base from volume of product to volume of alcohol, which would see a fall in the tax on sparkling wine (by about one-fifth), a rise in the tax on fortified wines of 18% ABV (by about one-sixth), and table wines with more (less) than 11.5% ABV would become dearer (cheaper). With taxes on most beers to be unchanged and taxes on spirits to be lowered slightly, the pattern of UK wine consumption and imports would alter considerably. This article draws on a global model of national alcoholic beverage markets to estimate the likely bilateral trade effects of this proposed reform to UK excise duties. It compares them with the trade effects of the UK’s first two bilateral free trade agreements (FTAs), following the post-Brexit EU–UK Trade and Cooperation Agreement, which allow Australian and New Zealand vignerons tariff-free access to the UK wine market. Those two FTAs are estimated to cause the UK to import far more wine than is lost by the proposed changes in UK excise duties.
    Keywords: Alcohol excise duty, global beverage market modelling, wine alcohol levels, wine export competition
    JEL: F14 F17 H21 Q18
    Date: 2022–05
  10. By: Isaac, Elliott (Tulane University); Jiang, Haibin (Tulane University)
    Abstract: The Affordable Care Act (ACA) introduced a premium tax credit to help low-income families purchase insurance and an individual mandate penalty to encourage purchasing insurance, but a couple’s total tax credit and mandate penalty may differ depending on whether they are married. We use a sample of married and cohabiting couples in the 2012–2017 American Community Surveys and leverage variation in the marriage subsidy created by the ACA’s premium tax credit, individual mandate, and Medicaid expansion. Using an instrumental variables approach, we estimate a significant though small positive marriage response that is robust to extensive controls and a placebo sample.
    Keywords: marriage, affordable care act, premium tax credit, individual mandate
    JEL: J12 I18 H24
    Date: 2022–05
  11. By: Evgeniya Dubinina (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Javier Garcia-Bernardo (Department of Methodology and Statistics, Utrecht University, Utrecht, Netherlands); Petr Jansky (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: The COVID-19 pandemic has affected most companies´ profits negatively, but other companies did exceptionally well, recording excess profits during the pandemic. In this paper we estimate the scale of these excess profits, their determinants, and the revenue potential of excess profits tax. To estimate excess profits, we develop a trend-adjusted average earnings methodology. We apply the methodology to the consolidated Orbis data to estimate that large multinational corporations (MNCs) with subsidiaries in the EU made excess profits of $447 billion in 2020 (41.7% of their total profits in 2020). We show that primary business activities is a key determinant of MNCs´ excess profits made during the COVID-19 pandemic. We show that manufacturing, information, and financial sectors are responsible for the majority of excess profits. With country-by-country reporting data we estimate the excess profits arising from each EU member state and find that EU member states could together raise $6 billion with an excess profits tax of 10%, an additional tax levied by governments on corporations’ excess profits. The research findings may be useful for policymakers in addressing the question of financing economic recovery from the COVID-19 pandemic.
    Keywords: excess profits; covid-19; multinational corporations; excess profits tax; european union
    JEL: H25 L11 L25
    Date: 2022–06
  12. By: van Walbeek, Corné; Mthembu, Senzo
    Abstract: Historically, non-communicable diseases (NCDs) have typically been associated with tobacco and alcohol use. However, in recent decades increased levels of overweightness and obesity, mostly caused by poor eating habits and a sedentary lifestyle, have increased diabetes, cancers, and cardiovascular diseases. There is a general agreement that sugar sweetened beverages (SSBs) are bad for one’s health. As such, measures to reduce their consumption would be expected to positively impact population health. In this working paper, we develop and report on an Excel-based model, in which we simulate the impact of an SSB tax on the prevalence of overweightness and obesity. The model starts with a baseline scenario, which takes cognisance that a 10 KES specific tax already exists on all soft drinks. A sugar-based SSB tax is then introduced. The tax is levied as an amount per gram of sugar, with or without a tax-free threshold. Other than reducing the demand for SSBs, a sugar-based SSB also creates strong incentives for manufacturers to reformulate their products to reduce the sugar content. The model predicts that the average BMI would decrease across all age groups decreasing the prevalence of overweightness and obesity. The magnitude of the decrease in the prevalence of overweightness and obesity depends on the size of the SSB tax. For realistic and politically feasible values of the SSB tax, the prevalence of overweightness and obesity is expected to decrease by between 5 per cent and 10 per cent. Should Kenya implement a sugar-based tax on SSBs, over and above the current excise tax on soft drinks, the government should clarify that such a tax aims to enhance public health; raising additional revenue should be a secondary consideration. Also, implementing a sugar based SSB tax should be part of a more comprehensive strategy to reduce overweightness and obesity, because by itself the impact of the tax is modest.
    Keywords: Finance, Health,
    Date: 2022
  13. By: Santoro, Fabrizio; Amine, Razan; Magongo, Tanele
    Abstract: Many tax authorities changed the mode of interacting with taxpayers from physical to online as a response to the Covid-19 pandemic, to diminish the spread of the virus. Eswatini, the country under study, mandated the use of online tax filing through the e-Tax system for all income tax payers, coupled with a zero-cash-handling policy for tax payment. By means of a difference-in-difference (DID) strategy, reinforced by a propensity score matching (PSM), this paper offers an impact evaluation of the mandate on taxpayer filing and payment behaviour. We present three sets of results. First, we describe which firms are most likely to register for e-Tax – mostly large firms and those in the primary and tertiary sectors. Second, we show that e-Tax uptake significantly improves filing behaviour, as well as payment behaviour. E-Tax registered taxpayers are less likely to file nil (by 60 per cent), declare more turnover and taxable income, and are 70 per cent more likely to pay conditional on filing. Third, we shed light on the mechanisms behind our main findings, showing that the technology improved accuracy and reduced compliance costs. E-Tax-registered treated taxpayers are more likely to file on time, file for VAT, report more accurately, and, on the payment side, to pay their liabilities in full.
    Keywords: Governance,
    Date: 2022
  14. By: Panos Mavrokonstantis; Arthur Seibold
    Abstract: We study adjustment costs in behavioral responses to income taxes, exploiting tax reforms that create and subsequently eliminate income tax kinks in Cyprus. Reduced-form evidence reveals substantial adjustment frictions attenuating bunching and de-bunching responses. Combining the empirical bunching moments with a structural model of frictional earnings supply, adjustment costs are estimated between EUR 93 and EUR 238 for wage earners. Moreover, we uncover important asymmetries in adjustment frictions, where bunching at a kink is costlier than de-bunching away from the kink. Finally, we find that self-employed individuals face considerably lower adjustment costs than wage earners.
    Keywords: income taxation, taxable income responses, bunching, adjustment frictions
    JEL: H24 J22
    Date: 2022

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