nep-pub New Economics Papers
on Public Finance
Issue of 2022‒10‒24
twelve papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Corporate Tax Shields and Capital Structure: Levelling the Playing Field in Debt vs Equity Finance By Cao, Yifei; Whyte, Kemar
  2. Corporate Taxation in Open Economies By Radek Šauer
  3. Demand Stimulus as Social Policy By Alan J. Auerbach; Yuriy Gorodnichenko; Daniel Murphy
  4. Lost in taxation By Jérome Massiani
  5. The Intended and Unintended Consequences of Taxing Waste By Tommaso Colussi; Matteo Romagnoli; Elena Villar
  6. Taxation and Migration by the Super-Rich By Advani, Arun; Burgherr, David; Summers, Andy
  7. Minimum inequality taxation, average and minimally progressive taxations and depolarization By Satya R. Chakravarty; Rama Pal; Rupayan Pal; Palash Sarkar
  8. Examining the Factors That Affect the Loss of Tax Disputes in the Tax Court By Mega Nurmala Sari
  9. Profit Taxation, R&D Spending, and Innovation By Andreas Lichter; Max Löffler; Ingo E. Isphording; Thu-Van Nguyen; Felix Poege; Sebastian Siegloch
  10. Pollution versus Inequality: Tradeoffs for Fiscal Policy By Camille Hainnaux; Thomas Seegmuller
  11. CBO’s Use of the Income and Payroll Tax Offset in Its Budget Projections and Cost Estimates By Congressional Budget Office
  12. Industrial Land Discount in China: A Public Finance Perspective By Zhiguo He; Scott T. Nelson; Yang Su; Anthony Lee Zhang; Fudong Zhang

  1. By: Cao, Yifei; Whyte, Kemar
    Abstract: A common feature within most corporate income tax systems is that the cost of debt is deductible as an expenditure when calculating taxable profits. An unintended consequence of this tax distortion is the creation of under-capitalized firms - raising default risk in the process. Using a difference-in-differences approach, this paper shows that a reduction in tax discrimination between debt and equity finance leads to better capitalized banks. The paper exploits the exogenous variation in the tax treatment of debt and equity created by the introduction of an Allowance for Corporate Equity (ACE) system in Italy, to identify whether an ACE positively impacts banks' capital structure. The results demonstrate that a move to an unbiased corporate tax environment increases bank capital ratios, driven by an increase in equity rather than a reduction in lending activities. The change also leads to a reduction in risk taking for ex-ante low capitalized banks. Overall, these results suggest that the ACE could be a valuable policy instrument for prudential bank regulators.
    Keywords: Bank capital structure, Banking regulation, Tax shields, Banking stability
    JEL: G21 G28 G32 H25
    Date: 2022–10
  2. By: Radek Šauer
    Abstract: This paper analyzes the macroeconomic impact of corporate taxation. The analysis is conducted in a quantitative two-country model. In the first step, the paper describes the long-run effects of corporate taxation. A reduction in the corporate-income tax rate increases GDP, wages, consumption, investment, and business density. The trade balance is at the same time negatively affected. Firms headquartered in a country which lowers its corporate tax become internationally less active and instead focus more on their domestic market. In the second step, the paper presents adjustment dynamics that are induced by a corporate-tax reform. The dynamic response of the economy can substantially differ when comparing shorter and longer time horizons.
    Keywords: corporate taxation, macroeconomy, heterogeneous firms, multinationals, international spillovers
    JEL: E62 F42 H25
    Date: 2022
  3. By: Alan J. Auerbach; Yuriy Gorodnichenko; Daniel Murphy
    Abstract: We exploit a panel of city-level data with rich demographic information to estimate the distributional effects of Department of Defense spending and its effects on a range of social outcomes. The income generated by defense spending accrues predominantly to households without a bachelor’s degree. These households as well as Black households tend to disproportionately benefit from this spending. Defense spending also promotes a range of beneficial social outcomes that are often targeted by government programs, including reductions in poverty, divorce rates, disability rates, and mortality rates, as well as increases in homeownership, health insurance rates, and occupational prestige. We compare the effects of defense spending with the effects of general demand shocks and explore reasons for the differential effects of the shocks.
    JEL: E6 H30 H50
    Date: 2022–09
  4. By: Jérome Massiani
    Abstract: Cost-Benefit Analysis (CBA) was developed to assess the net socioeconomic benefits of a wide variety of projects in many fields. In this context, it is relevant to investigate how this method is actually used for project evaluation, and whether its merits and limitations are properly understood by a wider community of economists. In this study, we showcase a debate that took place in Italy in 2019 about an important high-speed rail project, following the publication of a CBA that received much criticism. To learn from this episode, we find it useful to set up a meta-model of CBA that allows the formalisation of a large number of CBA calculations (including potentially ill-funded calculations) and to verify their validity. With this meta model, we review the criticisms formulated during the 2019 CBA debate focusing on two salient topics; whether CBA should include taxation and whether the Rule-of-Half measure of users’ surplus is valid. Our analysis suggests: (1) That the proposed meta-equation can help in structuring the scientific debate regarding CBA and the relevant economic discussion about a given project; (2) with few exceptions, the criticisms formulated regarding the 2019 CBA on these topics were incorrect, mostly incoherent from an axiomatic point of view. This indicates that ill-founded methods are at risk of becoming well-accepted in the larger community of economists, with the risk of lowering the general quality of policy recommendations formulated by economists. This underlines the need for economists to revise the misguided views of CBA.
    Keywords: Cost-Benefit Analysis, transport infrastructure, welfare function.
    Date: 2022–08
  5. By: Tommaso Colussi; Matteo Romagnoli; Elena Villar
    Abstract: This paper investigates the economic and environmental effects of pay-as-you-throw (PAYT) waste programs. Using a newly constructed longitudinal dataset of Italian municipalities and a staked-by-event design, we obtain three main findings: (i) PAYT programs significantly reduce total waste production; (ii) they further decrease waste management costs and leave municipal finances unaffected; (iii) they generate positive spillover effects on pro-environmental behaviors not directly targeted by the program. Survey evidence suggests that PAYT increases environmental awareness and concerns of the population in treated municipalities.
    Keywords: waste management, taxation, difference-in-differences, variation in treatment timing
    JEL: C21 H23 Q53
    Date: 2022
  6. By: Advani, Arun (University of Warwick, CAGE, the Institute for Fiscal Studies (IFS), and the LSE International Inequalities Institute (III)); Burgherr, David (LSE III.); Summers, Andy (London School of Economics, III, and CAGE)
    Abstract: Using administrative data on the globally connected super-rich in the UK, we study the effect of a large tax reform on migration behaviour. Prior to 2017, o shore investment returns for `non-doms' - individuals tax resident in the UK but with connections to other countries - were untaxed. Average off shore investment returns for these individuals exceeded £420,000; even without considering other types of income, this puts them in the top 0.2% of the population. A reform in 2017 brought long-stayers and UK-born non-doms into the standard tax system, reducing their effective net of average tax rate by between 8.8% and 13.0%. We nd that migration responses were limited : our central estimate of the migration elasticity is 0.02, and across a range of specifications we can rule out elasticities larger than 0.5. Using reforms for the UK-born super-rich who were living abroad, we find that migration elasticities are limited even for recent arrivals, for whom our central estimate is 0.18. Assuming similar elasticities for all non-doms, abolition of the preferential regime would increase tax revenue collected from non-doms by £3.2bn (84%).
    Keywords: taxation; migration; capital income; inequality; mobility JEL Codes: F22 ; H31 ; J61
  7. By: Satya R. Chakravarty (Indian Statistical Institute, Kolkata); Rama Pal (Indian Institute of Technology, Mumbai); Rupayan Pal (Indira Gandhi Institute of Development Research); Palash Sarkar (Indian Statistical Institute, Kolkata)
    Abstract: An inequality minimizing taxation (IMT) policy addresses the problem of procuring a certain amount of tax from a given set of persons in an inequality minimizing manner by maintaining rank orders of the individuals in the pre- and post-tax situations and without imposing any notion of inequality invariance. In this article we demonstrate analytically that the newly introduced IMT policy is sufficient but not necessary for average progressive and minimally progressive taxation principles. Using a recent result from the literature we then show that an IMT scheme also implies but is not implied by depolarizing (bipolarization reducing) and bipolarization minimizing taxation policies. An empirical illustration of our results is provided using income data collected by the Center for Monitoring Indian Economy.
    Keywords: average progressivity, minimal progressivity, depolarization, inequality minimization
    JEL: D31 D63 H24
    Date: 2022–08
  8. By: Mega Nurmala Sari (Faculty of Economics and Business, Universitas Indonesia, Indonesia Author-2-Name: Riatu Mariatul Qibthiyyah Author-2-Workplace-Name: Faculty of Economics and Business, Universitas Indonesia, Indonesia Author-3-Name: Author-3-Workplace-Name: Author-4-Name: Author-4-Workplace-Name: Author-5-Name: Author-5-Workplace-Name: Author-6-Name: Author-6-Workplace-Name: Author-7-Name: Author-7-Workplace-Name: Author-8-Name: Author-8-Workplace-Name:)
    Abstract: " Objective - The high tax administration loss rate sparked various speculations in Society. This study aims to determine the factors that led to the defeat of the tax administration in the Indonesian Tax Court. Methodology/Technique - Simple random sampling is used to obtain 1,000 samples of decisions on appeal disputes which is three times the minimum sample size. The logit model is used to find out whether the independent variable affects the dependent variable. The linear probability model is also used to test whether the Logit Model is robust. Findings - The estimation of results shows that the interaction between the tax dispute resolution period and the type of tax, as well as the number of representatives of the tax authorities, had a positive and significant impact on the loss of the tax administration in the prosecution. Novelty - No economic study has comprehensively analyzed the determinants of administrative defeat in the Indonesian Tax Court. This study uses data that have not been used in previous studies. The information includes evidence at audits/objections and appeals, types of taxes, tax dispute resolution periods, interactions between dispute resolution periods and evidence at audits/objections and requests, interactions between dispute resolution periods and types of taxes, interactions between periods dispute resolution, types of taxes and evidence at examination/objection and appeal, initial value, gender of judges, representatives of taxpayers and representatives of tax authorities in court. Type of Paper - Empirical."
    Keywords: Tax dispute; appeal decision; influencing factors; Tax Authorities defeat; Tax Court.
    JEL: G18 K41
    Date: 2022–09–30
  9. By: Andreas Lichter (DICE and HHU Düsseldorf); Max Löffler (Maastricht University); Ingo E. Isphording (IZA – Institute for Labor Economics); Thu-Van Nguyen (Stifterverband Essen); Felix Poege (Technology & Policy Research Initiative, Boston University and Max Planck Institute for Innovation and Competition); Sebastian Siegloch (University of Cologne)
    Abstract: We study how business taxes affect establishments’ R&D activities. Relying on geocoded panel data targeting the universe of R&D-active establishments in Germany, we exploit around 7,300 changes in the local business tax rate over the period 1987 2013 for identification. Using event study techniques, we find a sizable negative and statistically significant effect of an increase in the local business tax on establishments’ total R&D spending and patents filed. Zooming into the process of innovation production, we uncover substantial heterogeneity in the impact of business taxation for various R&D inputs, among establishment characteristics, and for different types of research projects.
    Keywords: corporate taxation, firms, R&D, innovation, patents
    JEL: H25 H32 O31 O32
    Date: 2022–09
  10. By: Camille Hainnaux (Aix Marseille Univ, CNRS, AMSE, Marseille, France.); Thomas Seegmuller (Aix Marseille Univ, CNRS, AMSE, Marseille, France.)
    Abstract: In this paper, we investigate the impact of redistribution and polluting commodity taxation on inequality and pollution in a dynamic setting. We build a two-sector Ramsey model with a green and a polluting good. Households are heterogeneous, which allows for income inequality, and have a level of subsistence consumption for the polluting commodity, modeled by non-homothetic preferences. Increasing the tax rate has a mixed effect depend on the level of subsistence consumption. A low level allows to tackle both the pollution and inequality issues. Under a high level of it, pollution increases: if inequality can be reduced through redistribution, taxation does not allow to solve for environmental degradation. Looking at the stability properties of the economy, we find that the level of subsistence consumption and the externality matter. A high subsistence level of polluting consumption leads to instability or indeterminacy of the steady-state, while the environmental externality plays a stabilizing role in the economy. This leaves room for taxation and redistribution: increasing the tax rate and redistributing more towards workers play a key role in the occurrence of indeterminacy and instability.
    Keywords: externalities; heterogeneous agents; inequality; pollution; redistribution; taxation
    JEL: E62 H23 Q52
    Date: 2022–09
  11. By: Congressional Budget Office
    Abstract: Excise taxes and other types of “indirect†taxes reduce the revenues derived from individual and corporate income taxes and payroll taxes. When CBO and the Joint Committee on Taxation estimate the budgetary effects of changes in indirect taxes, they generally reduce the estimated change in indirect tax revenues by applying an income and payroll tax offset.
    JEL: H20 H24 H25
    Date: 2022–10–04
  12. By: Zhiguo He; Scott T. Nelson; Yang Su; Anthony Lee Zhang; Fudong Zhang
    Abstract: China’s land market features a substantial industrial discount: industrial-zoned land is an order of magnitude cheaper than residential land. In contrast to explanations centered on subsidies to industry or promoting industry growth, we emphasize the importance of future tax revenues from the land and find that local public finance incentives can largely rationalize this price gap. Under the "land finance" system, land sales are an important source of revenues for Chinese local governments. We show that local governments, who serve as monopolistic land sellers in China, face a trade-off between supplying residential or industrial land that is determined by the different time profiles of revenues from industrial and residential land sales, local governments’ financial constraints, and the extent of local governments’ tax revenue sharing with other levels of government.
    JEL: G31 H70 R14 R38
    Date: 2022–09

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