nep-pub New Economics Papers
on Public Finance
Issue of 2022‒09‒12
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Estimating the Laffer Tax Rate on Capital Income: Cross-Base Responses Matter! By Marie-Noëlle Lefebvre; Etienne Lehmann; Michaël Sicsic
  2. Negative Tax Incidence with Multiproduct Firms By Anna D'Annunzio; Antonio Russo
  3. Recurrent property taxes and house price risks By O'Brien, Martin; Staunton, David; Wosser, Michael
  4. Taxing Externalities: Revenue vs. Welfare Gains with an Application to U.S. Carbon Taxes By Matthew Kotchen

  1. By: Marie-Noëlle Lefebvre; Etienne Lehmann; Michaël Sicsic
    Abstract: We theoretically express the Laffer tax rate on capital income as a function of the elasticities of capital income (the “direct” elasticity) and of labor income (the “cross” elasticity) with respect to the net-of-tax rate on capital income. We estimate these elasticities using salient capital tax reforms that took place in France between 2008 and 2017. Graphical evidence and Instrumental variables (IV) estimates confirm the existence of significant responses of both capital and labor income to capital tax reforms. Both approaches lead to positive cross responses, in contrast to the prediction of income-shifting models but in line with the two-period “working and saving” model. Cross responses are, however, about ten times lower than direct ones. We obtain a direct elasticity around 0.5 which is robust across specifications. Ignoring the cross elasticity leads to a Laffer rate around 68%. However, since labor incomes are much larger than capital incomes, the Laffer tax rate is especially sensitive to the cross elasticity. Using our estimated positive cross elasticity dramatically reduces the Laffer tax rate on capital income to around 57%, taking only income tax on labor income into account, and down to 35% when we also take payroll taxes into account.
    Keywords: capital income taxation, optimal tax, Laffer tax rate, instrumental variables
    JEL: H21 H24 H31 C23 C26
    Date: 2022
  2. By: Anna D'Annunzio; Antonio Russo
    Abstract: A fundamental result in the theory of commodity taxation is that taxes increase consumer prices and reduce supply, aggravating the distortions caused by market power. This result hinges on the assumption that each firm provides a single product. We study the effects of commodity taxes in presence of multiproduct firms that have market power. We consider a monopolist providing two goods and obtain simple conditions such that an ad valorem tax reduces the prices and increases the supply of both goods, thereby increasing total surplus. We show that these conditions can hold in a variety of settings, including add-on pricing, multiproduct retailing with price advertising, intertemporal models with switching costs and two-sided markets.
    Keywords: commodity taxation, tax incidence, multi-product firms, monopoly
    JEL: D42 H21 H22
    Date: 2022
  3. By: O'Brien, Martin (Central Bank of Ireland); Staunton, David (Central Bank of Ireland); Wosser, Michael (Central Bank of Ireland)
    Abstract: Recurrent property taxes form part of the tax system in most advanced economies. In this Letter we examine whether these taxes have broader benefits in terms of reducing down-side risk to house prices, and the volatility of potential house price outcomes overall. The results suggest that such benefits do exist. Combined with the steadiness of these tax revenues through the economic cycle, fiscal authorities could benefit from appropriately calibrated recurrent property taxes while also contributing to wider economic and financial stability.
    Date: 2022–07
  4. By: Matthew Kotchen
    Abstract: This paper asserts that reporting of the ratio of welfare gains to tax revenue should be standard protocol in economic analyses of externality correcting taxes. That this comparison might matter is somewhat of a “blind spot” in most economic analyses, for it plays virtually no role when economists recommend taxes to internalize externalities. A simple model illustrates how the ratio of welfare gains to tax revenue plays a central role in a political economy and efficiency framing of Pigouvian type taxes. The analysis also shows intuitive results about how the ratio is increasing in the marginal external costs and the equilibrium elasticity to a tax. The second part of the paper illustrates the wide range of potential results with application of carbon taxes to different fuels in the United States. For example, assuming a social cost of carbon (SCC) and a carbon tax equal to $50 per tonne, the central estimates imply ratios of 12.1 for coal, 0.36 for natural gas, and very close to zero for diesel and gasoline. When all four fuels are combined, the ratios indicate a more proportional balance between welfare gains and tax revenue, with overall estimates ranging between 0.7 and 2.8. The paper concludes with a general appeal for economists to pay more attention to the relative magnitudes of efficiency gains and tax revenue when analyzing and advocating for externality correcting taxes.
    JEL: H2 H21 H23 Q38 Q4
    Date: 2022–08

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