nep-pub New Economics Papers
on Public Finance
Issue of 2023‒02‒20
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Loss Aversion and Tax Evasion: Theory and Evidence By Sanjit Dhami; Narges Hajimoladarvish; Pavan Mamidi
  2. Should we increase or decrease public debt? Optimal fiscal policy with heterogeneous agents By François Le Grand; Xavier Ragot
  3. Macroeconomic effects of basic income funded by land holding tax By La, Jung Joo
  4. Do Household Tax Credits Increase the Demand for Legally Provided Services? By Lilith Burgstaller; Annabelle Doerr; Sarah Necker
  5. Electoral Cycles in Tax Reforms By Mr. Antonio David; Can Sever
  6. Trust and Public Policy: Lessons from the Pandemic By Mausumi Das; Ajit Mishra
  7. Digitalization and Cross-Border Tax Fraud: Evidence from E-Invoicing in Italy By Marwin Heinemann; Wojciech Stiller
  8. Determinants of the Degree of Fiscal Sustainability By António Afonso; José Alves; José Carlos Coelho
  9. Using Taxes to Attract the Creative Class in the Presence of a Region-Specific Rent By Batabyal, Amitrajeet; Yoo, Seung Jick

  1. By: Sanjit Dhami; Narges Hajimoladarvish; Pavan Mamidi
    Abstract: We consider income-source-dependent tax evasion and show that this is a generalization of the well-known endowment effect. We show that loss aversion, moral costs, mental accounting, and risk preferences play a key role in explaining key features of source-dependent tax evasion. We provide evidence of the first direct link between subject-specific loss aversion and tax evasion, which is central to most successful modern theoretical accounts of tax evasion. We provide some evidence that risk aversion strengthens the cautionary effect of loss aversion and risk loving behavior attenuates, or reverses, it. However, the underlying effect is also influenced by the source of income. Evasion is increasing in the tax rate and decreasing in the audit penalty, as predicted. Our paper provides novel theoretical insights; proposes new methods in the estimation of the underlying behavioral parameters; and confirms the central predictions of the theory, while pointing out challenges for further developments that existing theory is unable to account for.
    Keywords: tax evasion, endowment effect, loss aversion, morality, mental accounting, prospect theory, risk aversion
    JEL: C91 C92 D82 D91 G21
    Date: 2023
  2. By: François Le Grand; Xavier Ragot (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)
    Abstract: We analyze optimal fiscal policy in a heterogeneous-agent model with capital accumulation and aggregate shocks, where the government uses public debt, capital tax and progressive labor tax to finance public spending. First, he existence of a steady-state equilibrium is proven to depend on three conditions, which have different economic interpretations: a Laffer condition, a Blanchard-Kahn condition and a Straub-Werning condition. First, the equilibrium can feature both a positive level of public debt and capital tax at the steady state, to correct for non-optimal private saving. Second, the optimal public debt increases after a positive public spending shock when its persistence is low, whereas it decreases when its persistence is high, due to a tradeoff between consumption smoothing and the reduction of distortions. We show that our results hold in a quantitative heterogeneous-agent model, where the optimal dynamics of the whole set of fiscal tools is analyzed. The general model also provides new results on optimal tax progressivity and the dynamics of labor tax.
    Keywords: Heterogeneous agents optimal fiscal policy public debt JEL codes: E21 E44 D91 D31, Heterogeneous agents, optimal fiscal policy, public debt, E44, D91, D31, E21
    Date: 2023–01–04
  3. By: La, Jung Joo
    Abstract: This study examines the macroeconomic effects of the introduction of a scheme to pay a basic income of approximately $900 per year to each citizen through land holding tax. In contrast to the existing literature, this study deals with the issue of whether household members decide to sell land due to a sharp increase in the land holding tax rate to raise funds for the payment of basic income. Furthermore, this study uses the relationship between holding assets and reservation wages to solve the problem of determining whether household members supply labor in accordance with the payment of basic income. Simulation results obtained using data for Korea show that the introduction of the scheme to pay the basic income decreases the real GDP, total labor demand, and social welfare by 1.3%, 0.3%, and 0.4%, respectively.
    Keywords: Basic income; Land holding tax; Macroeconomic effects
    JEL: C61 E20 H24
    Date: 2023–01–27
  4. By: Lilith Burgstaller; Annabelle Doerr; Sarah Necker
    Abstract: We study the causal effects of household tax credits on the willingness to demand legally provided services using two survey experiments with 1.974 German homeowners. Participants choose between hypothetical offers of service providers and are randomly assigned to a policy scenario 1) without a tax credit, 2) a tax credit households can claim through the annual tax return, or 3) a tax credit granted by the seller at source. We also vary the refund rate of the tax credit (20/30%) and whether the price including the tax reduction is displayed. All tax credits increase the willingness to pay for offers with invoice as well as the probability to select an offer with invoice. The effectiveness of the tax credit is significantly higher when two attractive features (at source+30%) are combined or when the reduction is made salient. We estimate that about two thirds of respondents who would use the tax credit would have demanded an offer without invoice also without the tax credit.
    Keywords: tax credit, financial rewards for compliance, tax evasion, tax compliance, third-party reporting, survey experiment, discrete choice experiment
    JEL: H26 C93 E26 J22 O17
    Date: 2023
  5. By: Mr. Antonio David; Can Sever
    Abstract: We examine electoral cycles in tax reforms using monthly data over the period of 1990-2018 for 22 advanced economies and emerging markets. We show that governments tend to avoid announcing tax reforms during the months running up to elections. In addition, they become more likely to announce those reforms in the first few months following elections, indicating that “political capital” plays a role in the timing of reforms. These patterns are broad-based regarding the changes in tax base and rate, and for various types of taxes. We also find that the pre-election decrease in the likelihood of tax reform announcements is stronger in emerging markets, and weaker in the countries with relatively better institutional quality. Finally, our results indicate that neither fiscal rules nor IMF programs appear to have differential effects on electoral cycles in tax reforms.
    Keywords: Tax Reforms; Electoral Cycles; Political Economy; Institutional Quality; reform announcement; elections in the sample; announcements decrease; election dummy; election variable; Fiscal rules; Probit models; Personal income tax; Social security contributions; Emerging and frontier financial markets; Global
    Date: 2022–11–04
  6. By: Mausumi Das (Department of Economics, Delhi School of Economics); Ajit Mishra (Department of Economics, University of Bath, UK)
    Abstract: This paper examines the importance of mutual conÖdence or trust between a government and its citizens on the e§ectiveness of public policies.We develop a theoretical framework where the designing of government policies and the concomitant actions of the citizens are meditated by the degree of social trust. We introduce a short term aggregative health shock - a pandemic - which is novel: its charateristics are not fully known at the onset. This creates scope for government intervention in the form of framing of the policy announcement and its information content. We use this framework to examine the relationship between government communication, social trust and compliance. For any given level of trust, we analyse the equilibrium framing of the policy as well as the corresponding response and examine the degree of policy e§ectiveness as a function of the existing level of trust. JEL Codes: H11, I12, I18
    Date: 2023–01
  7. By: Marwin Heinemann; Wojciech Stiller
    Abstract: The digitalization of transaction processes through tools such as electronic invoicing (e-invoicing) aims to improve tax compliance and reduce administrative costs. Another important aspect of digitalization is its potential to reduce tax evasion. We analyze the impact of the widely introduced e-invoicing in Italy on cross-border value-added tax fraud. As a proxy for this tax fraud, we make use of the discrepancy in trade data that is double-reported in both the importing and exporting country (trade gap). We calculate trade gaps based on product flows on the most detailed level between Italy and the remaining countries of the European Union. Our results suggest a significant decline in cross-border fraud in response to the introduction of mandatory e-invoicing, providing an important rationale for the application of this measure by other countries. Furthermore, we estimate that e-invoicing decreased the Italian revenue loss by €0.6 billion to €1 billion in 2019. This is in line with the statements of the Italian Ministry of Finance, which are probably based mainly on the revenue development. In this context, we underpin the suitability of the trade gap as an approach for the study of anti-fraud measures and provide a more accurate estimate of cross-border fraud. In addition, our study suggests that fraudsters shift their activities to similar products and drive honest traders out of the market.
    Keywords: e-invoicing, digitalization, international trade, VAT fraud, trade gap
    JEL: F14 H21 H26 K34 K40
    Date: 2023
  8. By: António Afonso; José Alves; José Carlos Coelho
    Abstract: We assess the link between fiscal sustainability coefficients, namely the responses of the primary government balance and the global government balance to the debt-to-GDP ratio, and the response of government revenues to government expenditures. For 22 OECD developed countries we use annual data between 1950 and 2019. Other determinants of fiscal responses are also studied in the context of quantile regressions. We find that the output gap contributes to increasing fiscal sustainability by positively influencing the responsiveness of the primary and global government balances; the responses of the primary and global government balances to the debt ratio and the response of government revenues to government expenditures depend on the level of the debt ratio. In addition, from the quantile analysis, the influence of the response of government revenues to government expenditures is negative and increasing over the deciles, confirming the existence of a negative cross-relationship between the fiscal sustainability coefficients.
    Keywords: fiscal reaction function, fiscal determinants, panel data, quantile regressions
    JEL: C23 H61 H63 E62
    Date: 2023
  9. By: Batabyal, Amitrajeet; Yoo, Seung Jick
    Abstract: We analyze interregional competition between two regions A and B that use taxes to attract a representative creative class member (the entrepreneur). This entrepreneur establishes a firm in either region A or B and this action guarantees her profit. However, if the entrepreneur locates in region A then she also obtains a stochastic, location-specific rent that is either high with positive probability or low with positive complementary probability. In this setting, we accomplish three tasks. First, given values of the two tax rates, we determine the payoff to the entrepreneur in the two regions for the two possible values of the location-specific rent in A. Second, we ascertain when the entrepreneur will locate in A for both values of the rent and when she will locate in B. Finally, we compute the tax rate that B will set and then specify a condition which ensures that the entrepreneur locates in B.
    Keywords: Creative Class, Entrepreneur, Interregional Competition, Region-Specific Rent, Tax
    JEL: H25 R11
    Date: 2022–11–10

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