nep-pub New Economics Papers
on Public Finance
Issue of 2023‒02‒27
thirteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Should we increase or decrease public debt? Optimal fiscal policy with heterogeneous agents By François Le Grand; Xavier Ragot
  2. Let them Eat Cake? The Net Consumer Welfare Impact of Sin Taxes By Di Cosmo, Valeria; Tiezzi, Silvia
  3. Capital income taxation and trade unions in an endogenous fertility model By Minoru Watanabe
  4. Age-Dependent Risk Aversion: Re-evaluating Fiscal Policy Impacts of Population Aging By Phitawat Poonpolkul
  5. Fair Earnings Tax Reforms By Erwin Ooghe; Erik Schokkaert; Hannes Serruys
  6. Energy Tax Exemptions and Industrial Production By Andreas Gerster; Stefan Lamp
  7. The role of social protection and tax policies in cushioning crisis impacts on income and poverty in low- and middle-income countries: A rapid scoping review By Rodrigo Oliveira; Jesse Lastunen; Pia Rattenhuber; Melissa Samarin; Adnan Abdulaziz Shahir
  8. Public good or public bad? Indigenous institutions and the demand for public goods By Elizalde, Aldo; Hidalgo, Eduardo; Salgado, Nayeli
  9. Tax Planning by European Banks By Mona Barake
  10. The Redistributive Impact of Consumption Taxation in the EU: Lessons from the post-financial crisis decade By MAIER ESSINGER Sofia; RICCI Mattia
  11. Online Shopping Can Redistribute Local Tax Revenue from Urban to Rural America By David R. Agrawal; Iuliia Shybalkina
  12. A Corporate Income Tax Microsimulation Model for Italy By Chiara Bellucci; Silvia Carta; Sara De Tollis; Federica Di Giacomo; Marco Manzo; Daniela Bucci; Donato Curto; Fabrizio De Grandis; Francesca Sica
  13. Measurement of tax expenditures in Latin America By Campos Vázquez, Raymundo Miguel

  1. 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
  2. By: Di Cosmo, Valeria; Tiezzi, Silvia
    Abstract: When judging the distributional impact of a sin tax, what matters is not just how much low income people would pay but how much the tax would benefit or harm them overall. In this paper we assess the consumer welfare impact of a fat tax net of its expected benefits computed as savings from averted internalities. Using data on Italian consumers we estimate a censored Exact Affine Stone Index (EASI) incomplete demand system for food groups and simulate changes in purchases, calorie intake, consumers’ welfare and the monetary value of health benefits after the tax. Our results suggest costs from taxation larger than benefits at all income levels. As a fraction of income, the net impact would be regressively distributed.
    Keywords: sin taxes; internality benefits; welfare costs; exact affine stone index demand system; demand elasticities; micronutrients intake
    JEL: C3 H22 H23 I3 I39
    Date: 2023–01–10
  3. By: Minoru Watanabe (Hokusei Gakuen University)
    Abstract: The current study aimed to develop a standard overlapping generations model incorporating involuntary unemployment caused by the union wage setting and fertility choice within an endogenous growth framework. Our study assumes that capital income tax finances in work benefits, which is the income transfer conditioned on work. The results indicate that increasing capital income tax promotes employment and hence promotes economic growth. Further, we demonstrate that a rise in capital income tax improves fertility.
    Keywords: Capital income tax, Involuntary unemployment, Fertility
    JEL: H55 J13 J51
    Date: 2023–02
  4. By: Phitawat Poonpolkul
    Abstract: The integration of age-dependent increasing risk aversion (IRA) into an overlapping generations model (OLG) with risk-sensitive preferences provides a more comprehensive understanding of risk aversion, life-cycle behavior, and welfare under uncertainties. A quantitative analysis shows that IRA individuals accumulate more precautionary savings and adjust working hours to mitigate income shocks. However, this mitigation of uncertainty entails a cost of reduced resources, which could have otherwise been used to increase overall consumption of goods and leisures. Three alternative policies to address the challenges posed by aging are evaluated: increasing a payroll tax rate, reducing pension benefits, and extending the retirement age. The results show that individuals who expect to become more risk averse in old age may prefer the payroll tax rate increase, as the other two options results in relatively higher income uncertainty, which contradicts the results of previous studies that assumed constant risk aversion (CRA).
    Keywords: Overlapping generations model; Fiscal sustainability; Demographic changes; Increasing risk aversion; Non-expected utility
    JEL: D15 D81 E62 J11
    Date: 2023–02
  5. By: Erwin Ooghe; Erik Schokkaert; Hannes Serruys
    Abstract: We characterize a measure of social welfare for linear production economies in which individuals differ in productive skills and preferences. The key feature of our measure is that it aggregates fairness gaps, defined as the difference between the money-metric utility that the individual currently obtains and the money-metric utility that the individual should obtain in a fair society. Social welfare depends on two normative parameters: society’s aversion to unfairness and the degree to which society wants to compensate individuals for productivity differences. The latter parameter makes it possible to accommodate a whole range of ethical perspectives, from libertarianism to resource-egalitarianism. As an illustration, we use our social welfare measure to evaluate four hypothetical earnings tax reforms for Belgian singles. The degree of compensation for productivity differences turns out to be the most important normative choice for the overall evaluation, while allowing for involuntary unemployment is the most important empirical choice.
    Keywords: fairness, money-metric utility, excess burden, unfair inequality, earnings tax reforms, involuntary unemployment
    JEL: D30 D60 D70 H20 I30 J20
    Date: 2023
  6. By: Andreas Gerster; Stefan Lamp
    Abstract: Environmental policies are often accompanied by exemptions for energy-intensive and trade-exposed industrial firms to avoid leakage from regulated to unregulated jurisdictions. This paper investigates the impact of a large electricity tax exemption on production levels, employment, and input choices in the German manufacturing industry. For two different policy designs, we show that exempted plants significantly increase their electricity use. This effect is considerably larger under a notched exemption policy, where passing an eligibility threshold yields infra-marginal benefits, compared to a revised policy where these benefits have been largely removed. We de-tect no significant impact of the exemptions on production levels, export shares, and employment. Using counterfactual simulations, we document substantial distortive effects of notched exemption policies when financial stakes are high and compliance cost for firms are low.
    Keywords: environmental policy, leakage, energy taxes, manufacturing industry
    JEL: D22 H23 L60 Q41
    Date: 2023
  7. By: Rodrigo Oliveira; Jesse Lastunen; Pia Rattenhuber; Melissa Samarin; Adnan Abdulaziz Shahir
    Abstract: In the wake of the COVID-19 pandemic, several countries enacted tax and social protection measures to help mitigate the economic hardship faced by individuals and households. This experience underscores the need to better understand the impact of such programmes on incomes and poverty during crises, especially in low- and middle-income countries (LMICs) where they are most needed. This paper reviews existing empirical literature on the subject, conducting a scoping review on quantitative studies published between 2000 and 2022.
    Keywords: Social protection, Taxation, Crisis, Shocks, Developing countries
    Date: 2023
  8. By: Elizalde, Aldo; Hidalgo, Eduardo; Salgado, Nayeli
    Abstract: This paper argues that the underprovision of public goods can be partly explained by lower demand from Indigenous groups with high preferences for Indigenous identity and a high capacity for coordination. Examining the post-Mexican Revolution period (1920s-1950s), when the state used the first road network for nation-building, our diff-in-diff analysis shows that pre-colonial political centralisation is associated with less road infrastructure. This is attributed to stronger capacity for collective action and stronger Indigenous identity preferences. Finally, we show that poor road infrastructure today is linked to lower economic performance.
    Keywords: Indigenous institutions, public good provision, collective action, Indigenous identity
    JEL: H41 H79 N7 O18
    Date: 2023
  9. By: Mona Barake (EU Tax - EU Tax Observatory)
    Abstract: This paper explores profit shifting behaviour by European banks through a newly available data source. Financial institutions as of 2014 started disclosing their activity on a country-by-country level following the CRDIV EU Directive. The country-by-country reporting (CbCR) requires European banks to file their revenues, profits, number of employees and taxes paid in all countries where they operate including tax haven countries. In this paper, I construct the database for bank CbCR from the banks filings and annual reports. The database includes 51 European banks headquartered in 18 different European countries between 2014 and 2020. I use the database to study profit shifting arising from international tax differences between countries. I find that the banks' profits are sensitive to the tax rate suggesting that banks lower their tax burden through their affiliates. The size of banks seems to have an effect, the larger the bank group, the more it might engage in tax planning. Profit shifting is estimated by using the tax differential methodology. The findings show that profit shifting by the top European banks is around 4-3% percent of the total profits booked abroad. This implies tax revenue losses of up to 3-2%. The introduction of a global minimum tax of 15% would generate between 300 to 2 billion euros depending on the final rules implemented.
    Keywords: Profit shifting, Tax planning, Banks, Country-by-country reporting
    Date: 2023–01
  10. By: MAIER ESSINGER Sofia (European Commission - JRC); RICCI Mattia (European Commission - JRC)
    Abstract: During the 2010-2019 decade, consumption taxes have risen in the vast majority of the EU Member States as a result of austerity measures, tax shifts as well as taxing transport and housing-related energy consumption. The redistributive impact of these policy changes remains mostly unexplored. In this paper, we provide new empirical evidence on the redistributive effect of changes in VAT and excises over this period, along with other developments in the broader tax-benefit system including tax shift reforms. Our results indicate that the consumption tax systems in the EU have become more unequalizing in most countries as a result of an increase in the tax burden and of its regressivity. While the taxation of transport is the component that has increased the most, the highest inequality impact was driven by the taxation of housing-related energy consumption. Only in a few countries these policy changes were accompanied by an increase in social transfers sufficient to compensate the poorest households.
    Keywords: Consumption taxation, Tax shift, Austerity, Inequality, Microsimulation
    Date: 2022–12
  11. By: David R. Agrawal; Iuliia Shybalkina
    Abstract: What is the effect of e-commerce on the geographic distribution of local sales tax revenues? Using COVID-19 as a shock to online shopping and hand-collected high-frequency data on local sales tax revenue, we document an important shift in the state and local public finance landscape. As e-commerce increases, a destination basis for remote sales taxes results in higher growth in local sales tax collections in smaller, generally more rural jurisdictions. This increase comes at the expense of larger urban retail centers, which previously enjoyed an origin basis for sales tax collections. As households replace in-person commerce with online shopping, sales taxes no longer accrue to urban centers with large concentrations of retail establishments and instead expand the tax base of smaller jurisdictions. State-level reforms that enforce sales compliance generally mitigate the revenue falls in larger jurisdictions and amplify the increases in smaller jurisdictions.
    Keywords: sales tax, online shopping, e-commerce, COVID-19, tax revenue
    JEL: H25 H71 L81 R51
    Date: 2023
  12. By: Chiara Bellucci (Ministry of Economy and Finance); Silvia Carta (Ministry of Economy and Finance); Sara De Tollis (Ministry of Economy and Finance); Federica Di Giacomo (Ministry of Economy and Finance); Marco Manzo (Ministry of Economy and Finance); Daniela Bucci (Soluzioni per il Sistema Economico S.p.A. - Sose); Donato Curto (Soluzioni per il Sistema Economico S.p.A. - Sose); Fabrizio De Grandis (Soluzioni per il Sistema Economico S.p.A. - Sose); Francesca Sica (Soluzioni per il Sistema Economico S.p.A. - Sose)
    Abstract: The CITSIM-DF is the corporate tax microsimulation model developed by the Department of Finance in order to estimate the heterogeneous impact of changes in fiscal regulation on average effective tax rates, both in terms of financial and distributional effects. One of the main innovations of the model is the inclusion of forecasts on future economic trends into the simulations, by projecting forward the main fiscal and financial variables. Currently projections are based, at macro level, on national accounts and official projections reflected in the documents of economy and finance. In the next future, the model will be further developed in a now-casting perspective, incorporating in the projections, at micro level, the most recent administrative data available. The model proposes also a new methodology for disentangling investments and historical cost broken by type of asset (buildings, machinery and equipment). CITSIM-DF is based on a unique dataset that integrates administrative data derived from tax returns and financial statements for corporations.
    Keywords: Tax treatment of losses; Allowance for corporate equity; Corporate taxation; Microsimulation
    JEL: C63 H25
    Date: 2023–02
  13. By: Campos Vázquez, Raymundo Miguel
    Abstract: The tax system is one of the main instruments used by the State to finance the provision of public goods and services. In the tax system, there are preferential treatments that seek to promote economic activity or support certain sectors. The public revenues forgone by these preferential treatments are known as tax expenditures. The volume of tax expenditures in Latin America is considerable. On average, they were equivalent to 3.8% of GDP and accounted for 20.6% of tax revenues in 2020. Given the need to promote a transformative recovery and finance the implementation of the Sustainable Development Goals, methodologies for quantifying tax expenditures in order to assess their efficiency, effectiveness and equity must be improved. This paper analyses reports on tax expenditures in countries of the region in order to provide a guide for estimating their costs. Based on the best practices identified in these reports, it proposes a set of elements to be taken into account for estimating, analysing and reporting on tax expenditures, with emphasis on the features of the most complete reports.
    Date: 2022–12–01

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