nep-pub New Economics Papers
on Public Finance
Issue of 2023‒04‒24
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Capital Gains Realizations By James R. Hines, Jr.; Daniel Schaffa
  2. The Marginal Cost of Public Funds: A Brief Guide By Spencer Bastani
  3. Taxing Financial Transactions : A Mirrleesian Approach By Jean-Charles Rochet; Bruno Biais
  4. The Economics of the Global Minimum Tax By Guttorm Schjelderup; Frank Stähler
  5. BEFIT - Formulary Apportionment in the European Union By Marketa Mlcuchova
  6. Does a Progressive Wealth Tax Reduce Top Wealth Inequality? Evidence from Switzerland By Samira Marti; Isabel Martínez; Florian Scheuer; Isabel Z. Martínez
  7. The design and revenue impact of a tax receipts lottery: A lab experiment in Tanzania By Cyril Chimilila; Remidius Ruhinduka; Vincent Leyaro
  8. Strategic Investment Tax Incentives in Africa: The Case of Tax Holidays in Uganda By Waiswa, Ronald; Rukundo, Solomon

  1. By: James R. Hines, Jr.; Daniel Schaffa
    Abstract: Evidence that high tax rates significantly depress capital gains realizations is inconsistent with the implications of neoclassical investment models in unchanging economic environments. Higher tax rates reduce after-tax investment returns, thereby encouraging investors to sell capital assets earlier. For a given investment horizon, higher tax rates need not reward accumulating unrealized gains over long periods – and even if they do, longer accumulations can lead to earlier realizations. Consequently, the sizeable observed effects of capital gains taxes likely reflect investor anticipations of future tax rate changes, rather than the time value of money.
    JEL: G11 H24 H31
    Date: 2023–03
  2. By: Spencer Bastani
    Abstract: When deciding on the social desirability of public investment, the cost of a project is sometimes adjusted by a factor known as the Marginal Cost of Public Funds (MCPF) which captures the cost of raising public funds through distortionary taxation. However, there is no scholarly consensus on either its definition or its quantification. The purpose of this paper is to provide a brief up-to-date guide to the theoretical background, practical application, and empirical quantification of the MCPF, taking into account some recent developments in the public finance literature.
    Keywords: benefit-cost analysis, public investment, excess burden, distortions, public goods, taxes
    JEL: D61 H41 H53 H21
    Date: 2023
  3. By: Jean-Charles Rochet (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Bruno Biais (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CNRS - Centre National de la Recherche Scientifique)
    Abstract: Taxing financial transactions is often advocated for Pigouvian reasons, when financial speculation is supposed to generate inefficiencies. We adopt instead a Mirrleesian approach, and study the optimal taxation of financial transactions when financial markets are efficient, but the tax system is imperfect, due to asymmetric information. In our model, financial transactions are used by entrepreneurs to hedge shocks on their skills, in line with the New Dynamic Public Finance literature. Entrepreneurs privately observe their skills, but trades in financial markets are publicly observable. The optimal mechanism maximizes a convex combination of utilitarian welfare and Rawlsian criterion, subject to feasibility and incentive constraints. Entrepreneurial projects are subject to liquidity shocks, which can be smoothed by conducting financial transactions. Better skilled entrepreneurs' projects have larger expected profits, but also larger shocks. Trades therefore signal skills, implying it is optimal to tax financial transactions, in addition to capital income and wealth.
    Date: 2023–03–06
  4. By: Guttorm Schjelderup; Frank Stähler
    Abstract: This paper shows that the OECD inclusive framework of Pillar Two fails to implement the claimed 15% minimum corporate tax for all subsidiaries of multinational corporations that are not shell companies. The reason is that the Substance-based Income Exclusion of Pillar Two allows to tax-deduct payroll costs and user costs of intangible assets twice from the tax base of the top-up tax. Employing a standard multinational firm model, we show that Pillar Two changes the employment, investment and import incentives. For a sufficiently large cost share of labor and/or capital, the Substance-based Income Exclusion is equivalent to a production subsidy.
    Keywords: corporate taxation, BEPS, Pillar Two, minimum tax
    JEL: F23 F55 H25 H73
    Date: 2023
  5. By: Marketa Mlcuchova (Department of Finance, Faculty of Business and Economics, Mendel University in Brno, Zemedelska 1, 613 00 Brno, Czech Republic)
    Abstract: This paper seeks to contribute to the current debate on EU wide corporate taxation, steered by the impending BEFIT Proposal. The objective of this paper is to verify whether the inclusion of intangible assets will enhance the ability of the current proposals for Formulary Apportionment (FA) to explain variability in profitability. The research question addressed is “What is the explanatory power of the FA, for factors such as tangible assets, intangible assets, labour and sales by destination, to describe the variability in the profitability of companies active within the EU internal market?†. The research reveals that the inclusion of intangible assets fails to enhance the explanatory power of the FA and that factoring in intangible assets does not appear to have a statistically significant effect in the model.
    Keywords: Formulary Apportionment, BEFIT, Separate Accounting, EU corporate taxation
    JEL: F23 H25 K34
    Date: 2023–03
  6. By: Samira Marti; Isabel Martínez; Florian Scheuer; Isabel Z. Martínez
    Abstract: Like in many other countries, wealth inequality has increased in Switzerland over the last fifty years. By providing new evidence on cantonal top wealth shares for each of the 26 cantons since 1969, we show that the overall trend masks striking differences across cantons, both in levels and trends. Combining this with variation in cantonal wealth taxes, we then estimate an event study model to identify the dynamic effects of reforms to top wealth tax rates on the subsequent evolution of wealth concentration. Our results imply that a reduction in the top marginal wealth tax rate by 0.1 percentage points in-creases the top 1% (0.1%) wealth share by 0.9 (1.2) percentage points five years after the reform. This suggests that wealth tax cuts over the last 50 years explain roughly 18% (25%) of the increase in wealth concentration among the top 1% (0.1%).
    Keywords: wealth tax, inequality, top wealth shares
    JEL: H23 H24 D31
    Date: 2023
  7. By: Cyril Chimilila; Remidius Ruhinduka; Vincent Leyaro
    Abstract: Most sub-Saharan African countries are characterized by low tax compliance and low tax productivity. This study tests the effects of a tax lottery under alternative reward designs on compliance as an alternative policy option for addressing the problem of low tax receipts in Tanzania. The lab experiment involved the purchase of goods with a sample of 313 undergraduate students recruited from courses with and without tax specialization. The experiment participants were randomly assigned in control and treatment groups and thereafter assigned random endowment incomes. In the treatment groups two treatments were administered: a lottery of high probability and low rewards, and a lottery of low probability and high rewards, where eligibility for the lottery was restricted to those who paid VAT on the purchase (which would be cheaper otherwise). The results of the experiment revealed a lottery of high reward has a higher impact on compliance and revenue. Our estimates show that the net revenue effects of these lotteries differ by 27 percent. Hence, the design of a tax lottery is important. Further, tax lotteries have the potential to improve taxpayer compliance and increasing revenue collection.
    Keywords: VAT compliance, tax lottery experiment, rewards design, Tanzania
    Date: 2023
  8. By: Waiswa, Ronald; Rukundo, Solomon
    Abstract: Tax incentives to attract foreign direct investment are common around the world, especially in Africa. Even though many commentators remain sceptical regarding their effectiveness, tax incentives remain popular policy tools for governments in low-income countries seeking to attract investors. Like many other countries in Africa, Uganda has attempted to use tax incentives to attract investors for decades. For many years these incentives took the form of statutory discretionary tax holidays issued by the Executive branch of government. These discretionary tax holidays were abolished in 1997 with the amendment of the Investment Code Act and the introduction of the Income Tax Act. However, over the years, non-statutory tax holidays issued by the Executive re-emerged taking the form of private agreements between the government and specific investors. In 2018 Parliament introduced an extensive non-discretionary statutory tax incentives regime which included a ten-year tax holiday for investors meeting criteria set out in statute. Discretionary tax holidays issued by the Executive were now supposed to be a thing of the past. Recent revelations that the country’s debt to GDP ratio had exceeded 50 per cent, pressure from the donor community and wider press coverage of tax holidays has led to greater scrutiny and public debate about tax incentives. This paper examines the statutory and non-statutory tax holidays in Uganda and generates recommendations for the way forward and for how the tax holiday regime can be improved. The research employed a mixture of methods including textual analysis, secondary data analysis, and interviews. The textual analysis covered both primary and secondary literature including court rulings, Parliament Hansards, the reports of Parliamentary committees, tax laws, newspaper reports, and tax expenditure reports. Lastly, we engaged in detailed interviews/discussions with officials from the Ministry of Finance, Planning and Economic Development and the Uganda Revenue Authority. The research found that tax holiday provisions in Ugandan statutes are ambiguous. They are applied in a discriminatory manner and generally lack transparency. Further, although Parliament has attempted to play an oversight role regarding tax holidays, this has largely been limited to making recommendations which have been ignored by the Executive. It is only in recent years that Parliament has taken positive steps to limit tax holidays by rejecting proposed amendments. The research recommends the elimination of tax holidays as the most suitable solution to the challenges posed. However, other recommendations include the use of non-discretionary holidays, making tax holidays more transparent, using reduced rates in lieu of tax holidays and vigilant monitoring by Parliament and civil society organisations.
    Keywords: Finance,
    Date: 2023

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