nep-pub New Economics Papers
on Public Finance
Issue of 2022‒11‒21
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal fiscal policy in the automated economy By Nakatani, Ryota
  2. Household Indebtedness and the Macroeconomic Effects of Tax Changes By Sangyup Choi; Junhyeok Shin
  3. Nonlinear Taxation of Income and Education in the Presence of Income-Misreporting By Spencer Bastani; Firouz Gahvari; Luca Micheletto
  4. Increasing Inequality and Voting for Basic Income: Could Gender Inequality Worsen? By Creina Day
  5. Climate uncertainty, financial frictions and constrained efficient carbon taxation By Felix K\"ubler
  6. Emission effects of Germany's vehicle taxation: Recent empirical evidence By Flintz, Joschka; Frondel, Manuel; Horvath, Marco; Vance, Colin
  7. Behavioural responses to income taxation in Norway By Graber, Michael; Mogstad, Magne; Torsvik, Gaute; Vestad, Ola
  8. The Effects of Introducing Withholding on Tax Compliance: Evidence from Pennsylvania’s Local Earned Income Tax By Sutirtha Bagchi

  1. By: Nakatani, Ryota
    Abstract: Adding (1) the endogenous labor supply of workers, (2) fiscal policy instruments, and (3) monopolistic competition to Berg et al.’s (2018) general equilibrium model of automation, we study how automation (i.e., robots and artificial intelligence) affects the efficacy of redistribution policy. Using the consumption equivalent welfare gain developed by Domeij and Heathcote (2004) and assuming a 50 percent increase in robot-augmented technology shock, we derive the optimal tax rates for various tax policy instruments in the steady state of the model economy calibrated for the United States. We find that the optimal capital income tax rate is 20 percent. Another finding is that the zero tax rate on the wage income of unskilled workers is an optimal tax policy. We also find that the optimal tax rates on robots and consumption are dependent on the preference of the government. Finally, we find that the Pareto-efficient optimal tax system is characterized as a combination of a 15.9 percent rate on capital income tax and a zero tax rate on unskilled workers’ income. Our analysis contributes to the literature on optimal taxation in the automated age.
    Keywords: Automation; Fiscal Policy; Optimal Taxation; Capital Income Tax; Labor Income Tax; Consumption Tax; Robot Tax; Social Welfare; Dynamic General Equilibrium
    JEL: C68 E25 H21 H24 H25 H30 O30 O40
    Date: 2022–10–16
  2. By: Sangyup Choi; Junhyeok Shin
    Abstract: This study investigates whether household indebtedness influences the macroeconomic effects of U.S. tax changes. By applying a state-dependent local projection method to the exogenous tax shock series, we find that a tax cut is more effective in stimulating output when the economy is characterized by higher household indebtedness. The household debt-dependent tax policy is primarily driven by (i) the response of private consumption, not private investment; (ii) changes in personal income tax, not corporate income tax, suggesting the relevance of a higher MPC of constrained households in understanding the documented state dependence. In response to a tax cut, labor supply also increases more during a high-debt state, which is consistent with the micro-level evidence on the labor supply of constrained households, thereby contributing to higher tax multipliers. Our findings are robust to a battery of sensitivity checks, especially controlling for the additional states of the economy considered in the literature.
    Keywords: Tax policy, Household debt, Borrowing constraints, Marginal propensity to consume, Nonlinearity, Local projections
    JEL: E32 E62 G51 H30
    Date: 2022–09
  3. By: Spencer Bastani; Firouz Gahvari; Luca Micheletto
    Abstract: We study the joint design of nonlinear income and education taxes when the government pursues redistributive objectives. A key feature of our setup is that the ability type of an agent can affect both the costs and benefits of acquiring education. Market remuneration of agents depends on both their innate ability type and their educational choices. Our focus is on the properties of constrained efficient allocations when educational choices are publicly observable at the individual level, but earned income is subject to misreporting. We find that income-misreporting (IM) affects the optimal distortions on income and education and shed light on the reasons for it and mechanisms through which it is done. We show how and why IM strengthens the case for downward distorting the educational choices of low-ability agents. Finally, we find that IM provides another mechanism that makes commodity taxation useful.
    Keywords: optimal taxation, education, human capital, income-misreporting, redistribution
    JEL: H21 H26 J31
    Date: 2022
  4. By: Creina Day
    Abstract: This paper examines the link between political support for basic income funded by linear income taxation and income inequality by household and gender. We develop a model with an increasingly right-skewed distribution of skill across households and a gender wage gap within households. Household preference for basic income decreases as skill level increases and female labour supply decreases with time spent rearing children. Majority voting supports the basic income scheme as mean relative to median household skill increases. Household fertility and skill level are inversely related under the scheme. An increase in the marginal tax rate to fund required government revenue could excacerbate gender inequality by reducing female labour supply. Quantitative illustrations suggest that the recent peak in the mean to median wage gap would provide voting support for basic income from the majority of households in the United States. Basic income of $12,000 conditional on below-median wages would increase government spending by 10.8% which, if funded by progressive income taxation, could reduce the adverse effects on gender inequality.
    Keywords: Basic income, Taxation, Gender inequality, Fertility
    JEL: C60 H24 H53 J13 J16
    Date: 2022–09
  5. By: Felix K\"ubler
    Abstract: In this paper, I consider a simple heterogeneous agents model of a production economy with uncertain climate change and examine constrained efficient carbon taxation. If there are frictionless, complete financial markets, the simple model predicts a unique Pareto-optimal level of carbon taxes and abatement. In the presence of financial frictions, however, the optimal level of abatement cannot be defined without taking a stand on how abatement costs are distributed among individuals. I propose a simple linear cost-sharing scheme that has several desirable normative properties. I use calibrated examples of economies with incomplete financial markets and/or limited market participation to demonstrate that different schemes to share abatement costs can have large effects on optimal abatement levels and that the presence of financial frictions can increase optimal abatement by a factor of three relative to the case of frictionless financial market.
    Date: 2022–10
  6. By: Flintz, Joschka; Frondel, Manuel; Horvath, Marco; Vance, Colin
    Abstract: In 2021, Germany adjusted its vehicle taxation scheme, resulting in a disproportionate increase in the tax burden for vehicles with high carbon emission intensity. This article presents empirical evidence on the impact of Germany's vehicle taxation and its reforms on automobile emissions. To this end, we refer to a series of recent studies by Klier and Linn (2015), Malina (2016), Alberini and Horvath (2021), and Flintz, Frondel, and Horvath (2022) on the reforms of Germany's motor vehicle taxation since 2009, when an emissions-differentiated vehicle tax scheme came into force. The empirical results unanimously indicate that Germany's vehicle taxation does not have the steering effect that is needed to substantially reduce greenhouse gas emissions.
    Keywords: Registration tax,circulation tax,greenhouse gas emissions
    JEL: D12 H23
    Date: 2022
  7. By: Graber, Michael (SSB); Mogstad, Magne (University of Chicago); Torsvik, Gaute (Dept. of Economics, University of Oslo); Vestad, Ola (SSB)
    Abstract: In this report, we combine theory and empirical estimates for how labor earnings respond to changes in tax rates and non-earned income. We use lottery winnings to obtain variation in non-earned income and tax reforms to obtain variation in the net of tax rate. Combining this information with measures of extensive margin responses and the progressivity of the Norwegian income tax schedule, we are able to point identify uncompensated and compensated behavioral responses to income taxes and therefore to calculate efficiency losses and optimal income tax rates (for given welfare weights).
    Keywords: income effect; labor supply elasticities; lottery winnings; efficiency loss; optimal income taxation
    JEL: D15 H21 H31 H53 J22
    Date: 2022–10–27
  8. 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. I find that the act resulted in increased compliance with the EIT of about 14 percent, with the increased compliance driven entirely by an increase in revenues as opposed to changes to the tax base or rates. I confirm this result using a differences-in-differences analysis that contrasts tax compliance for school districts in Pennsylvania with those in Iowa – the only other state where a majority of school districts levy a local income tax. Falsification exercises examining compliance with the property tax confirm that Act 32 did not impact the property tax in either the event study or the differences-in-differences analysis.
    Keywords: Earned income tax; Tax compliance; Withholding; Event Study
    JEL: H26 H71 R51
    Date: 2022–11

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