nep-pub New Economics Papers
on Public Finance
Issue of 2022‒09‒26
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. On the optimal design of transfers and income-tax progressivity By Axelle Ferrière; Philipp Grübener; Gaston Navarro; Oliko Vardishvili
  2. A Note on Optimal Taxation under Status Consumption and Preferences for Equality By Aronsson, Thomas; Sjögren, Tomas; Yadav, Sonal
  3. A Macroeconomic Perspective on Taxing Multinational Enterprises By Sebastian Dyrda; Guangbin Hong; Joseph B Steinberg
  4. On the macroeconomic and distributional effects of federal estate tax reforms in the United States By Pieter Van Rymenant; Freddy Heylen; Dirk Van de gaer
  5. Top Wealth in America: A Reexamination By Emmanuel Saez; Gabriel Zucman
  6. Illicit Financial Flows - Illicit drug trafficking and tax evasion By Johnny Flentø; Leonardo Santos Simao
  7. Real-Time Poverty, Material Well-Being, and the Child Tax Credit By Jeehoon Han; Bruce D. Meyer; James X. Sullivan
  8. China’s VAT Reform, Enterprises Tax Burden and Innovation By Feng, Haibo; Liu, Sheng; Xu, Fei
  9. When the Celtic Tiger relaxed its corporate tax bite: An analysis of the effects on the top and upper middle income shares in Ireland By Niklas Uliczka

  1. By: Axelle Ferrière; Philipp Grübener; Gaston Navarro; Oliko Vardishvili
    Abstract: We study the optimal design of means-tested transfers and progressive income taxes. In a simple analytical model, we demonstrate an optimally negative relation between transfers and income-tax progressivity due to efficiency and redistribution concerns. In a rich dynamic model, we quantify the optimal plan with flexible tax-and-transfer functions. Transfers should be larger than currently in the U.S. and financed with moderate income-tax progressivity. Transfers are key to implement higher progressivity in average than in marginal tax-and-transfer rates, achieving redistribution while preserving efficiency. Quantitatively, the left tail of the income distribution determines optimal transfers, whereas the right tail determines income-tax progressivity.
    Keywords: Heterogeneous Agents; Fiscal Policy; Optimal Taxation; Redistribution
    JEL: E21 E62 H21 H23 H53
    Date: 2022–08–01
  2. By: Aronsson, Thomas (Department of Economics, Umeå University); Sjögren, Tomas (Department of Economics, Umeå University); Yadav, Sonal (Department of Economics, Umeå University)
    Abstract: This note analyzes optimal taxation when (i) a fraction of people has positional preferences, and (ii) concerns for relative consumption and preferences for equality are operative simultaneously. We show that incentive compatibility motivates a regressive marginal tax structure, which in the end implies that people with positional preferences are taxed at a lower marginal rate than people without such preferences. A counteracting mechanism arises if those who are not concerned with their relative consumption have preferences for income-equality, even if people with positional preferences should still be taxed at a lower marginal rate than motivated by their contributions to externalities.
    Keywords: Optimal taxation; relative consumption; equality
    JEL: D60 D62 D90 H21
    Date: 2022–09–13
  3. By: Sebastian Dyrda; Guangbin Hong; Joseph B Steinberg
    Abstract: We develop a framework to study the macroeconomic implications of taxing multinational enterprises (MNEs) that shift profits to subsidiaries in low-tax jurisdictions by transferring ownership of non-rival intangible capital. We first prove analytically that profit shifting increases intangible investment, leading to higher profits and output at the MNE level. We then calibrate our model so that it reproduces salient country-level facts about production, trade, FDI, and, most importantly, profit shifting. We use our calibrated model to evaluate the consequences of two proposals by the OECD and G20 governments to reduce profit shifting by MNEs: allocating the rights to tax some of an MNE's profits to the countries in which it sells its products; and a 15% minimum global corporate income tax. We show that these policies would reduce profit shifting by more than two-thirds, but would also reduce intangible investment and output in high-tax regions. This highlights a key tension for policymakers: profit shifting erodes high-tax countries' tax bases, but also boosts economic activity, and thus policies that reduce profit shifting have harmful macroeconomic side effects.
    Keywords: Multinational enterprise; transfer pricing; profit shifting; base erosion; intangible capital; corporate tax
    JEL: E6 F23 H25 H27
    Date: 2022–09–01
  4. By: Pieter Van Rymenant; Freddy Heylen; Dirk Van de gaer (-)
    Abstract: This paper studies the effects of the sharp decline since 1980 in U.S. federal estate taxes on the past and future evolution of per capita growth, labor supply, the wealth-to-GDP ratio (capital-output ratio), the real interest rate, and cross-sectional wealth inequality and concentration. To do so, we construct, calibrate, and simulate a dynamic general equilibrium model featuring firms, a fiscal government, and overlapping generations of heterogeneous households connected via bequests and inter-vivos transfers. The model includes crucial elements in the debate on the effects of estate tax changes and accounts for structural developments in recent decades, such as demographic change and ‘skill-biased’ technological progress. It replicates key U.S. data since the 1960s quite well. We find that the studied estate tax reforms have not generated the desired positive effects on labor supply, private capital formation, and economic activity. Rather, they have contributed considerably to rising aftertax wealth inequality and concentration and explain a fraction of the long-term decline in the real interest rate. The key underlying result from our simulations is that the aggregate stocks of pre-tax wealth and pre-tax bequests are insensitive to changes in the estate tax, even when all households have an after-tax bequest motive. As a result, the foregone estate tax revenues are large.
    Keywords: Wealth inequality, economic growth, bequests, estate tax, OLG model
    JEL: E17 E21 E27 E62
    Date: 2022–09
  5. By: Emmanuel Saez; Gabriel Zucman
    Abstract: Recent estimates of US top wealth shares obtained by capitalizing income tax returns (Saez and Zucman, 2020; Smith, Zidar and Zwick, 2022) are close in both levels and trends except for the top 0.01% where a large discrepancy remains. We examine this difference and, using public data, quantify three main issues in Smith et al. (2022). First, Securities and Exchange Commission data at the shareholder firm level show that billionaires' equity wealth is underestimated by a factor of 2.1. Second, interest-bearing assets at the top are under-estimated by a factor of 1.6, because of an extrapolation from a small and unrepresentative sample of investment funds. We quantify this issue using mandatory filings of US hedge funds. Third, issues involving tiered partnerships and the measurement of business profits suggest that large S-corporations are undervalued by a factor of 1.2 and top-owned partnerships by up to 2.2. After incorporating these results, the top 0.01% wealth share of Smith et al. (2022) is close to the one found in Saez and Zucman (2020) and estimates of US wealth inequality are reconciled.
    JEL: D31 H25
    Date: 2022–08
  6. By: Johnny Flentø (Development Economics Research Group, University of Copenhagen); Leonardo Santos Simao (Former Minister of Health, Former Minister of Foreign Affairs & Cooperation, Government of Mozambique)
    Abstract: The discourse about illicit financial flows (IFFs) repeatedly stresses promoting development and equality in the world, but the links between them are much more difficult to ascertain. As defined in relation to Sustainable Development Goal (SDG) 16, the concept of what is illicit rests on definitions of terror and crime, on which there is no universal agreement, and it contains too many and too different types of flows to be of operational use in policy formulation. Combined with the difficulties and weaknesses in estimating the aggregate volume of illicit flows, this broad umbrella definition of the term lends itself to the harbouring of various political agendas and instrumentalizations of the concept for other political ends. The discourse that illicit flows undermine development seems widely accepted, as long as one does not have to be specific. However, to address questions about the effects of anti-IFF initiatives and which anti-IFF initiatives actually work, we need much more sector-specific and granular analysis, as some researchers are already pursuing. In this paper we argue that there is large potential for stemming illicit flows if some drugs are legalized and the fencing of stolen money in tax havens and secrecy jurisdictions is effectively outlawed. Important and potentially strong initiatives which could change the tax landscape are under way. However, they are geared more towards corporations and less towards trusts and individuals, and they stop short of criminalizing the fencers of illicit money. In relation to inequality, the reforms will mainly assist governments in the rich countries, primarily OECD countries, to tax and redistribute income from very large and wealthy corporations. Taxation tools that could effectively redistribute income from the large tech giants and other multinational enterprises to the world’s poor are not really on the table. At the same time, the rich countries insist on globally outlawing many drugs that would make excellent cash crops for farmers in poor countries, primarily because they anticipate a public health problem at home. In curbing illicit flows with a development effect, legalizing cannabis should be high on the agenda.
    Keywords: Illicit Financial Flows, Tax Evasion, Drug Trafficking, Extractives, Tech Giants,
    JEL: F10 F18 F23 F51 H23 H26
    Date: 2022–08–07
  7. By: Jeehoon Han; Bruce D. Meyer; James X. Sullivan
    Abstract: In response to the COVID-19 pandemic two new timely poverty measures have been developed to monitor fast-changing economic conditions for the most deprived. The Han et al. near real-time poverty measure uses responses to a global income question on the Monthly Current Population Survey (CPS) that is available for a subsample of those surveyed. The CPSP monthly poverty measure, widely cited in the media, uses data from the Annual Social and Economic Supplement to the CPS and other sources to impute poverty in the Monthly CPS sample based on demographic and employment variables. This paper evaluates the two measures and their estimates of child poverty around the 2021 temporary changes to the Child Tax Credit (CTC). We argue that conceptually the measure based on responses rather than the one based on imputations is preferable, though both measures suffer from important drawbacks. We also conclude that widely publicized claims that child poverty fell by 25 percent when the Advance CTC payments started and subsequently rose by 41 percent when they ended are based on weak evidence and are overstated. The best evidence, though still imperfect, suggests poverty was relatively stable in 2021 and the first half of 2022. Part of the explanation for the lack of change appears to be a compensating decline in employment among low-skilled workers with children. Other evidence tying changes in well-being to the tax credit is confounded by other policy changes.
    JEL: C42 C81 H2 I32 I38 J20
    Date: 2022–08
  8. By: Feng, Haibo (Jinan University, College of Economics); Liu, Sheng (Guangdong University of Foreign Studies, School of Economics and Trade); Xu, Fei (Department of Economics, Umeå University)
    Abstract: The impact of China’s VAT reform on enterprise innovation is the result of the combination of tax cuts and endogenous incentives. We find evidence that China’ VAT reform generally reduced the tax burden of firms but had a different impact on the manufacturing and the service industry. The tax burden of the manufacturing dropped significantly, but that of the service industry did not change markedly. Furthermore, we show that China’s VAT reform had also a significant positive impact on corporate innovation for both the service industry and the manufacturing. However, these effects were significantly greater in the manufacturing. Meanwhile, China’s VAT reform did not alleviate the tax burden of all the enterprises. For the enterprises facing the increased burden of tax, the reform can still stimulate the enterprise innovation if it has sufficient own capital, whereas the impact coefficient and significant level reduced significantly compared with the enterprises that the burden of tax reduced. If the enterprise’s own capital is insufficient, VAT reform has little effect on enterprise innovation. Finally, we show that China’s VAT reform exerted different influences on the innovative behavior of heterogeneous enterprises.
    Keywords: China’s VAT reform; Tax Burden; Innovation
    JEL: H25 H32 O31
    Date: 2022–09–06
  9. By: Niklas Uliczka
    Abstract: In 1997, the Irish government introduced reforms to revolutionize corporate taxation, with focus on creating opportunities for tax neutrality and on reducing the standard corporate tax rate. This paper studies the relationship between this Irish corporate tax reform and income shares at the top and the upper middle of the distribution. Using the synthetic control method, findings suggest that the reforms had large positive effects on the income share of the top 1% and sizeable negative effects on the upper middle 40% of income earners. Such heterogenous effects indicate increasing income inequality due to targeted corporate tax incentives.
    Date: 2022–09

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