nep-pub New Economics Papers
on Public Finance
Issue of 2023‒01‒09
nineteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Use It or Lose It: Efficiency and Redistributional Effects of Wealth Taxation By Sergio Ocampo; Fatih Guvenen; Gueorgui Kambourov; Burhan Kuruscu; Daphne Chen
  2. How do tax technology and controversy expertise affect tax disputes? By Dyck, Daniel; Lorenz, Johannes; Sureth, Caren
  3. Dynamic scoring of tax reforms in real time By BARRIOS Salvador; REUT Adriana; RISCADO Sara; VAN DER WIELEN Wouter
  4. Taxes and the Labor Supply of the Stars By Daniel Keniston; Abigail Allison M. Peralta
  5. Dividend tax credits and the elasticity of taxable income: evidence from small businesses By Pablo Gutierrez Cubillos
  6. Population ageing and government revenue: Expected trends and policy considerations to boost revenue By David Crowe; Jörg Haas; Valentine Millot; Łukasz Rawdanowicz; Sébastien Turban
  7. Taxing Multinational Enterprises: A Theory-Based Approach to Reform By Wolfram F. Richter
  8. The Social Tax: Redistributive Pressure and Labor Supply By Carranza, Eliana; Donald, Aletheia; Grosset, Florian; Kaur, Supreet
  9. The Importance of Modeling Income Taxes Over time. U.S. Reforms and Outcomes By Margherita Borella; Mariacristina De Nardi; Michael Pak; Nicolo Russo; Fang Yang
  10. How Regressive are Mobility-Related User Fees and Gasoline Taxes? By Edward L. Glaeser; Caitlin S. Gorback; James M. Poterba
  11. Does historical fiscal capacity leave a long-lasting legacy? Evidence from TV tax evasion By Luca Bagnato
  12. Tax Holidays and the Heterogeneous Pass-Through of Gasoline Taxes By Tsvetan Tsvetanov
  13. Tax and Occupancy of Business Properties : Theory and Evidence from UK Business Rates By Lockwood, Ben; Simmler, Martin; Tam, Eddy H.F.
  14. From taxation to fighting for the nation: historical fiscal capacity and military draft evasion during WWI By Luca Bagnato
  15. Estimating the impact of the Families Package changes in financial incentives. By Lynn Riggs; Dean Hyslop; David Maré
  16. The impact of carbon taxation and revenue redistribution on poverty and inequality By Malerba, Daniele; Chen, Xiangjie; Feng, Kuishuang; Hubacek, Klaus; Oswald, Yannick
  17. An Evaluation of the French Innovation Tax Credit By Simon Bunel; Benjamin Hadjibeyli
  18. Labor Supply Responses to Income Taxation among Older Couples: Evidence from a Canadian Reform By Derek Messacar
  19. Strengthening the tax system to reduce inequalities and increase revenues in South Africa By Falilou Fall

  1. By: Sergio Ocampo (University of Western Ontario); Fatih Guvenen (University of Minnesota, Federal Reserve Bank of Minneapolis, and NBER); Gueorgui Kambourov (University of Toronto); Burhan Kuruscu (University of Toronto); Daphne Chen (Econ One)
    Abstract: How does wealth taxation differ from capital income taxation? When the return on investment is equal across individuals, a well-known result is that the two tax systems are equivalent. Motivated by recent empirical evidence documenting persistent return heterogeneity, we revisit this question. With heterogeneity, the two tax systems typically have opposite implications for both efficiency and inequality. Under capital income taxation, entrepreneurs who are more productive and therefore generate more income pay higher taxes. Under wealth taxation, entrepreneurs who have similar wealth levels pay similar taxes regardless of their productivity, which expands the tax base, shifts the tax burden toward unproductive entrepreneurs, and raises the savings rate of productive ones. This reallocation increases aggregate productivity and output. In the simulated model parameterized to match the US data, replacing the capital income tax with a wealth tax in a revenue-neutral fashion delivers a significantly higher average welfare. Turning to optimal taxation, the optimal wealth tax (OWT) is positive and yields large welfare gains by raising efficiency and lowering inequality. In contrast, the optimal capital income tax (OKIT) is negative—a subsidy—and delivers lower welfare gains than OWT, owing to the welfare losses from higher inequality. Furthermore, when the transition path is considered, the gains from OKIT turn into significant welfare losses for existing cohorts, whereas OWT continues to deliver robust welfare gains. These results suggest that moderate wealth taxation may be a more appealing alternative than capital income taxation, which can be significantly more distorting under return heterogeneity than under the equal-returns assumption.
    Keywords: wealth tax, capital income tax, optimal taxation, rate of return heterogeneity, power law models, Pareto tail, wealth inequality
    JEL: E21 E22 E62 H21
    Date: 2022
  2. By: Dyck, Daniel; Lorenz, Johannes; Sureth, Caren
    Abstract: Given the rising number, magnitude, and harshness of tax disputes between firms and tax authorities, firms increasingly call on tax technology and controversy expertise to try to resolve these disputes. This study investigates how tax technology embedded in the firm's Tax Risk Management System (TRMS) and the expertise of tax controversy managers affect dispute outcomes and compliance incentives. Using a game-theoretic model, we derive equilibrium strategies for a tax manager's compliance effort, a controversy manager's dispute resolution effort, and a tax authority's litigation decision. Absent a controversy manager, we find that improving a firm's TRMS quality unambiguously decreases the litigation probability. However, in the presence of a controversy manager, we surprisingly find that improving TRMS quality crowds out compliance efforts and can increase litigation probability. Overall we find that a high-quality TRMS is essential to take advantage of the dispute resolution function of a controversy manager.
    Keywords: tax dispute resolution,tax risk management,tax technology,controversy expertise,litigation
    JEL: H25 H26 C72 K34
    Date: 2022
  3. By: BARRIOS Salvador (European Commission - JRC); REUT Adriana; RISCADO Sara; VAN DER WIELEN Wouter
    Abstract: In this paper, we propose a novel approach for the ex-ante assessment of tax reforms accounting for second-round effects, i.e. the dynamic scoring of tax reforms. We combine a microsimulation model for selected European countries with VAR estimates of macro responses and, exploiting a unique database of tax reforms in the EU, compare our estimates with the real-time assessment of tax reforms conducted by the EU Member States as well as with ex-post realisations. This is the first time dynamic scoring of tax reforms is conducted in real-time and compared to ex-post realizations in a systematic way. The novelty of our approach hinges on the use of a macro-econometric model combined with a microsimulation model which represents a more flexible tool than (computable) general equilibrium models in order to conduct real-time dynamic scoring analysis. Our results suggest that on average personal income tax cuts resulted in medium-term increases in output and employment; however, the second-round revenue impact is found to be small relative to the first-round microsimulation results.
    Keywords: Fiscal policy, tax reforms, real-time, microsimulation, EUROMOD, VAR models
    Date: 2022–12
  4. By: Daniel Keniston; Abigail Allison M. Peralta
    Abstract: Do high taxes cause superstars to work less? We test this hypothesis using complete data on Hollywood movie stars' labor supply from 1927 to 2014. Changes to marginal tax rates in high tax brackets have no significant effect on the number of films a movie star makes each year. However, in years with high taxes, stars produce more highly rated movies with award-winning directors, potentially substituting prestigious films for pecuniary gains
    JEL: H24 J22 J32 L82
    Date: 2022–12
  5. By: Pablo Gutierrez Cubillos (University of Chile)
    Abstract: We assess firms’ taxable income response to a dividend tax credit increase whencorporate and personal taxes are integrated. First, we theoretically show that, in anintegrated tax system, welfare changes stemming from a rise in corporate taxes dependon two parameters: the elasticity of taxable income with respect to the corporate taxrate and with respect to the dividend tax credit. Second, to estimate both parameters, we propose an identification strategy that relies on the bunching methodology and theexcess bunching difference before and after a tax reform that increased the dividendtax credit. Using Canadian administrative tax data and the presence of a kink inthe corporate tax system, we estimate these elasticities and empirically show that theincrease in the dividend tax credit reduced the deadweight loss associated with anincrease in the corporate tax by more than 50%. Our results are robust to a battery ofrobustness checks, including nonparametric estimates of the counterfactual densityin the bunching procedure.
    Keywords: Bunching Estimation, Corporate taxation, Dividend taxation, Elasticity of taxable income, Small business, Tax integration
    JEL: H25
    Date: 2022–12
  6. By: David Crowe; Jörg Haas; Valentine Millot; Łukasz Rawdanowicz; Sébastien Turban
    Abstract: Population ageing is expected to result in significantly higher government spending in many OECD countries in the coming decades. This paper sheds light on the macroeconomic consequences of population ageing for government revenue in a framework consistent with the OECD long-term model. If the labour and capital income shares in GDP remain constant and pension income increases in relation to GDP, the tax revenue-to-GDP ratio will increase slightly. However, this will not be enough to cover the total increase in government spending due to population ageing. If governments do not mitigate spending pressures by structural reforms or cuts in pension entitlements, they will have to boost tax revenue significantly to prevent public debt from expanding. In many countries, it will not be possible, nor advisable, to completely finance the increase in long-term spending with only one tax instrument as it would require a massive rise in the tax rate, with risks of ensuing distortions. Thus, governments will have to choose mixes of tax increases, accounting for growth, equity and political considerations. This paper reviews these considerations for several specific tax categories.
    Keywords: pensions, population ageing, public finances, tax policy, tax revenue
    JEL: H21 H23 H24 H55 I38 J14 E17
    Date: 2022–12–13
  7. By: Wolfram F. Richter
    Abstract: Almost 140 countries have agreed to reallocate the rights to tax international corporate profits and to introduce minimum tax rates. The agreed plan is the product of pragmatism and a search for consensus, but ambitious. It includes steps towards unitary taxation to be established by a multilateral convention that the world has not yet seen in comparable format. This paper argues for a reform that retains separate entity accounting and addresses the flaws in the current system of corporate taxation at their root rather than merely fixing symptoms. To this end, a reform aimed specifically at the rules governing the taxation of intangible assets is recommended.
    Keywords: OECD/G20 BEPS Project, formula apportionment, separate entity accounting, Shapley assignment of taxing rights, residual profit allocation/splitting
    JEL: H25 F23 M48
    Date: 2022
  8. By: Carranza, Eliana (World Bank); Donald, Aletheia (World Bank); Grosset, Florian (Columbia University); Kaur, Supreet (University of California, Berkeley)
    Abstract: In low-income communities in both rich and poor countries, redistributive transfers within kin and social networks are frequent. Such arrangements may distort labor supply—acting as a "social tax" that dampens the incentive to work. We document that across countries, from Cote d'Ivoire to the United States, social groups that undertake more interpersonal transfers work fewer hours. Using a field experiment, we enable piece-rate factory workers in Côte d'Ivoire to shield income using blocked savings accounts over 3-9 months. Workers may only deposit earnings increases, relative to baseline, mitigating income effects on labor supply. We vary whether the offered account is private or known to the worker's network, altering the likelihood of transfer requests against saved income. When accounts are private, take-up is substantively higher (60% vs. 14%). Offering private accounts sharply increases labor supply— raising work attendance by 10% and earnings by 11%. Outgoing transfers do not decline, indicating no loss in redistribution. Our estimates imply a 9-14% social tax rate. The welfare benefits of informal redistribution may come at a cost, depressing labor supply and productivity.
    Keywords: kin tax, informal insurance, illiquid savings, transfers, labor supply
    JEL: J22 J24 H24 D61 O12
    Date: 2022–11
  9. By: Margherita Borella; Mariacristina De Nardi; Michael Pak; Nicolo Russo; Fang Yang
    Abstract: While "'Tis impossible to be sure of any thing but Death and Taxes" (Bullock, 1716), the structure of taxes and their burden has undergone large and frequent changes over time. We provide a brief history of the U.S. federal income tax reforms since the 1960s, we calculate effective federal income tax rates for each wave of the Panel Study of Income Dynamics, and we discuss how effective taxation has changed over time from 1969 to 2016. We show that most tax regimes are short-lived and that the variation in taxes over time and across groups is large. We also use an estimated dynamic model of couples and singles to show that the various tax regimes that we estimate imply very different labor market and saving behavior. This stresses the importance of studying and modeling tax changes over time and across groups.
    JEL: H2 H30
    Date: 2022–12
  10. By: Edward L. Glaeser; Caitlin S. Gorback; James M. Poterba
    Abstract: Pigouvian taxes and user fees can address environmental externalities and efficiently fund transportation infrastructure, but these policies may place burdens on poorer households. This paper presents new evidence on the distributional consequences of the gasoline tax, bus and light rail charges and a vehicle miles traveled (VMT) tax. Gas taxes have become more regressive over time, partially because of environmentally-oriented technological change, although the share of expenditures on gas taxes declines with expenditures much less than the share of income spent on gas taxes declines with income. Replacing the gasoline tax with a household-level VMT tax would increase the average tax burden on households in the top income and expenditure deciles, because of their greater use of hybrid-electric and battery-electric vehicles. This progressive shift would be small given current levels of hybrid and electric vehicle ownership, but will be larger in the future if such vehicles continue to be more common among higher than lower income households. An expanded commercial VMT would place a larger burden, as a share of expenditures, on lower income or expenditure households, because better-off households consume more non-tradable goods that do not require transportation. User charges for airports, subways and commuter rail are progressive, while bus fees loom much larger for lower income households.
    JEL: H23 R48
    Date: 2022–12
  11. By: Luca Bagnato
    Abstract: In this paper I study whether citizens’ tax morale (and, more broadly, citizens’ attitudes towards the state) can be affected by past institutions, focusing on the role of historical fiscal capacity. Exploiting the features of the tax collection system of a pre-unification state in XIX Century Italy I identify differences in local historical fiscal capacity (as proxied by geographical proximity to a tax collector) and map them into contemporary tax morale, as measured by evasion of the TV Tax in 2014. Exploiting only variation in historical fiscal capacity that arises within matched pairs of neighbouring towns on the border of tax districts, I find imprecisely estimated and arguably small differences in tax morale today between towns where fiscal capacity was different. Investigating the mechanisms of transmission, I provide evidence that phenomena associated with structural transformation are likely to have halted the persistence of the historical fiscal capacity effect.
    Keywords: Fiscal capacity, tax collection, tax evasion, tax morale, TV tax, Italy
    JEL: D73 D91 N43 H26
    Date: 2022–12
  12. By: Tsvetan Tsvetanov (Department of Economics, University of Kansas, Lawrence, KS 66045)
    Abstract: The pass-through of gasoline taxes to retail prices plays a vital role in determining whether a fuel tax suspension policy is effective at providing financial relief to consumers. Given the increased interest in utilizing such “tax holidays†to mitigate the rise of gasoline prices, it is important to obtain updated and precise location-specific pass-through estimates that will inform the ongoing policy efforts. Using daily city-level data from a sample of 108 cities in 15 East Coast states and the District of Columbia during the period February 1, 2022-June 30, 2022, I estimate an average pass-through rate of gasoline taxes of 79%. My subsequent analysis reveals considerable heterogeneity across locations, with less than full pass-through in most “tax holiday†states. Consistent with the prior literature, I find evidence that gasoline content regulations, refinery capacity constraints, and wholesale storage constraints may have contributed to this heterogeneity.
    Keywords: gasoline prices; gasoline tax; tax incidence; tax holiday
    JEL: H22 H71 Q41 Q48
    Date: 2022–12
  13. By: Lockwood, Ben (University of Warwick and Oxford University Centre for Business Taxation); Simmler, Martin (Oxford University Centre for Business Taxation and Thuenen Institute of Rural Economics); Tam, Eddy H.F. (King's College London and Oxford University Centre for Business Taxation)
    Abstract: We study the impact of commercial property taxation on vacancy rates and rents in the UK, using a new data-set, and exploiting exogenous variations in property tax rates from reliefs in the UK system: small business rate relief (SBRR), retail relief and empty property relief. We estimate that the retail relief reduces vacancies by 85%, and SBRR relief by up to 49%, while empty property exemption increases them by up to 89%. The effect of retail relief on clusters of urban properties (the "High St") is no different to its overall effect. SBRR increases (decreases) the likelihood that a property is occupied by a small (large) business. We also use data on asking prices for rental properties to study the effect of reliefs on rental rates. Rental rates move in the opposite direction to vacancy rates, except in the case of empty property relief. All these findings are consistent with a novel model of directed search in the commercial property market, also presented in the paper.
    Keywords: Commercial Property ; Vacancy ; Occupancy ; Property Taxation JEL Codes: H25 ; H32 ; R30 ; R38
    Date: 2022
  14. By: Luca Bagnato
    Abstract: Do strong states affect the culture and actions of their citizens in a persistent way? And if so, can the capacity to tax, by itself, have a role in driving this effect? I study how the historical capacity of a state to collect taxes affects the decision of citizens to evade the mandatory military draft. I look at Italy during World War I and identify quasi-exogenous variation in tax collection induced by the administrative structure of Piedmont during the 1814-1870 period. Using newly collected and digitised individual data on nearly all the men of the 1899 cohort drafted in the province of Turin, I find that citizens born in towns with lower historical fiscal capacity are more likely to evade the military draft, and that the effect transmits through changes in culture. Results are consistent with fiscal capacity spurring norms of rule-following able to persist in the long run. Placebo estimates from other Italian territories confirm that the effect I estimate can be attributed to fiscal capacity, and it is not confounded by legal capacity.
    Keywords: Fiscal capacity, tax collection, culture, military draft, Italy, World War I
    JEL: D73 D74 D91 H20 N43
    Date: 2022–12
  15. By: Lynn Riggs (Motu Economic and Public Policy Research); Dean Hyslop (Motu Economic and Public Policy Research); David Maré (Motu Economic and Public Policy Research)
    Abstract: In this paper we analyse behavioural responses to changes in financial incentives associated with the 2018 Families Package. For this analysis, we followed the methods pioneered by Saez (2010) and Chetty et al. (2013), which use bunching around kink points in the income schedule to estimate the degree of behavioural response. In general, the role of financial incentives in labour supply behaviour has been the subject of investigation for many decades, and although there is considerable concern about adverse labour supply responses to increased generosity of benefits, the available evidence on labour supply responses is mixed and surprisingly muted. We find no evidence of response around the salient kink points related to the policy changes; however, in contrast to the lack of bunching around the policy points, we see clear evidence of bunching around the top two marginal tax rate (MTR) thresholds, as well as at twice these amounts by coupled parental units. This suggests the methodology is able to identify such behavioural responses if they exist. Moreover, according to the theoretical model established in Saez (2010), the degree of bunching around the MTR thresholds should be similar if not less than that around the Families Package policy points we examine. The results in that respect are surprising, though Saez (2010), Chetty et al. (2013), and others find that bunching tends to occur around high visibility, easily understood kink points which have large impacts on disposable income.
    Keywords: Financial incentives; income support policies; Families Package; New Zealand
    JEL: H24 H31 H53 I38
    Date: 2022–12
  16. By: Malerba, Daniele; Chen, Xiangjie; Feng, Kuishuang; Hubacek, Klaus; Oswald, Yannick
    Abstract: The global policy debate on just transitions is concerned with how to achieve a socially just and acceptable transition toward a climate-neutral and climate-resilient global economy. At the core of this debate is the assumption that efforts to combat environmental threats will not succeed unless combined with measures to reduce poverty and inequality. Our research explores the potential of carbon fiscal reforms, combining a carbon tax of levels deemed appropriate to achieve climate targets and the transfer of the revenues raised to vulnerable households. The current energy and cost-of-living crisis shows the importance of protecting the poorest and most vulnerable households from price increases. It also shows the difficulty of achieving short- and long-term policy priorities. Despite the current spikes in energy prices, carbon fiscal reforms can achieve both social and environmental goals through simultaneously decreasing emissions and reducing poverty and inequality. They should act as an effective enabler of just transitions. Carbon fiscal reform can avoid some environmental impacts by incentivising reductions in emissions. Carbon pricing has been increasingly advocated and is now at the centre of policy debates, including the UNFCCC Conference of the Parties (COP) and the recent German presidency of the world's leading industrial nations (G7). But carbon fiscal reforms can also be used to raise revenue from carbon pricing instruments to offset the negative effects of higher prices on poorer households as well as further reaching distributional targets and poverty alleviation. Climate targets are negotiated every year, including at COP, hence it is critical to re-evaluate and improve estimates of the distributional impacts of climate policies such as carbon pricing. Public acceptability of climate policies is key to their implementation, but it depends to a large extent on the perceived fairness of such policies. Recycling revenues from carbon taxes directly back to vulnerable households is likely to gain the approval of a large number of people, especially in low-income countries where the high proportion of the population involved in the informal economy means that lowering income tax does not benefit the poorest and most vulnerable sections of society. But the targeting of these direct transfers needs careful consideration. Here, we assess the impact on poverty and inequality of a global carbon tax and national redistribution of revenues to vulnerable households. We look at different options for such redistribution, including a lump sum payment, the use of current social assistance programmes, and an expansion of social assistance following COVID-19. We find that a carbon tax of US$50/tCO2 without revenue redistribution could increase global extreme poverty, but the redistribution of revenue from such a carbon tax could substantially reduce poverty by between 16% and 27% (110 to 190 million people), and reduce inequality (the average Gini coefficient would decline by between 4% and 8%), depending on the scenario. This shows that the way in which revenue from a carbon tax is redistributed greatly affects its impact, underlining the importance of policy design and targeting mechanisms. The recycling of revenues should also take into account the specific political economy of a country and consider international transfers. These findings provide policy makers with a strong basis for informing discussions, starting off with those at COP27, in which ambitious climate targets and just transition should both remain central goals in the context of the ongoing international energy crisis.
    Keywords: Poverty,inequality,climate change,taxation
    Date: 2022
  17. By: Simon Bunel; Benjamin Hadjibeyli
    Abstract: The Innovation tax credit (crédit d’impôt innovation, CII) is an extension of the Research tax credit (crédit d’impôt recherche, CIR) intended to boost the incentive effect of the latter on SMEs to encourage them to engage in the creation of new products via the development of prototypes or pilot plants. Introduced in 2013, it amounted to €120 million of tax credit in 2014 for some 5,300 recipients. This article seeks to measure the impact of the introduction of this scheme on its beneficiaries over the period from 2013 to 2016. Using a difference-in-differences method following propensity score matching, we find a greater increase in employment in the short term for firms benefiting from the scheme, along with a more pronounced increase in their sales turnover in the medium term. A greater increase in the number of new products produced by the beneficiaries is also observed. Finally, the introduction of the CII went along with a reduction in the research expenditure reported under the CIR.
    Keywords: Innovation, Tax credit, Evaluation, Products
    JEL: C21 D22 H32 L25 O31
    Date: 2022
  18. By: Derek Messacar
    Abstract: This paper estimates real and avoidance responses to income taxation among older couples in Canada. Using administrative data and exploiting a unique reform affecting tax on pension income, I observe large effects on labor supply using an instrumental variables approach. However, workers respond to compensated changes in their average rather than marginal tax rates, consistent with ‘schmeduling’ behavior. Further, I show that taxable incomes vary with the availability of deductions, offering credible evidence of tax planning within couples. These findings provide new insights into the black box of intra-household labor supply and have implications for estimating excess burden of taxation.
    Keywords: Elasticity of taxable income; tax avoidance; unitary model; collective model; schmeduling; empirical density design; instrumental variables
    JEL: D13 H24 H26
    Date: 2022
  19. By: Falilou Fall
    Abstract: The Covid-19 crisis has exacerbated the already deteriorating fiscal situation in South Africa. The current consolidation strategy, based on spending cuts and reprioritisation of spending items, has reached its limits and is insufficient to stabilise the debt ratio in the medium term and fund unmet public services needs. The tax-benefit system needs to be redesigned to create fiscal space in the years to come to finance growth-enhancing reforms and to reduce inequalities. The challenge is to generate additional revenues without generating inefficiencies or exacerbating inequality. Income taxes represent around half of total tax revenues, but are levied on small tax bases, partly reflecting the unequal distribution of income. Only the value-added tax has a relatively broad basis combined with a moderate tax rate. There is some scope to raise revenues further while reducing existing tax distortions, notably by broadening the base of corporate and personal income taxes, as well as consumption taxes. Taxes with a less harmful impact on growth, such as property taxes, are limited by the inefficient municipal rates system. There remains scope to further increase environmentally-related taxes.
    Keywords: Business tax, Goods and services tax, government revenues, Personal Income tax, Tax
    JEL: H23 H24 H25 H26 H27
    Date: 2022–12–22

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