nep-pub New Economics Papers
on Public Finance
Issue of 2023‒05‒08
twelve papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The international tax agreement of 2021: Why it's needed, what it does, and what comes next? By Kimberly A. Clausing
  2. The Optimal Taxation of Couples By Mikhail Golosov; Ilia Krasikov
  3. State Taxation of Nonresident Income and the Location of Work By David R. Agrawal; Kenneth Tester
  4. Design features of income-based tax incentives for R&D and innovation By Ana Cinta González Cabral; Pierce O’Reilly; Silvia Appelt; Fernando Galindo-Rueda; Tibor Hanappi
  5. Changes in Effective Tax Rates due to Fundamental Corporate Tax Reforms: Analysis of Financing Neutrality Using a Forward-Looking Model By Toshiyuki Uemura
  6. Deciding for Others: Local Public Good Contributions with Intermediaries By Andrej Angelovski; Praveen Kujal; Christos Mavridis
  7. Beyond Pigou: Externalities and Civil Society in the Supply-Demand Framework By Casey B. Mulligan
  8. Partial Outsourcing of Public Programs: Evidence on Determinants of Choice in Medicare By Marika Cabral; Colleen Carey; Jinyeong Son
  9. US Taxation of Gambling Winnings and Incentives to Bet By Whelan, Karl
  10. Analysys of the implementation of the Spanish Financial Transaction Tax in equity markets By Ramiro Losada, Albert Martínez Pastor
  11. Tax and sustainable development in sub-Saharan Africa: Beyond accountability and responsiveness By Alex Adegboye; Abrams M.E. Tagem
  12. The Tax Side of the Pandemic: Shifts in Compliance Attitudes and Perceptions in Rwanda By Mascagni, Giulia; Santoro, Fabrizio

  1. By: Kimberly A. Clausing (Peterson Institute for International Economics)
    Abstract: In 2021, more than 135 jurisdictions agreed on transformative new international tax rules that would establish a minimum tax rate of 15 percent on multinational corporate income regardless of where it was reported. In December 2022, the European Union unanimously moved forward to implement this minimum tax, and other countries, including South Korea, Japan, Australia, Canada, and the United Kingdom, are also either implementing the tax or taking substantial steps toward implementation. In tandem, the United States should also reform its international tax system and adopt a stronger minimum tax. While the future of the international agreement is uncertain, it has important implications for the ability of governments worldwide to create tax systems that are administrable, fair, and efficient. The agreement also demonstrates important guiding principles for the future of multilateral cooperation on global collective action problems, including efforts to protect public health from future pandemics, address nuclear proliferation, and resolve territorial conflicts. US progress on international tax reform would enhance much needed international cooperation on these issues.
    Date: 2023–04
  2. By: Mikhail Golosov; Ilia Krasikov
    Abstract: We consider optimal joint nonlinear earnings taxation of couples. We use multi-dimensional mechanism design techniques to study this problem and show that the first-order approach – that restricts attention to only local incentive constraints – is valid for a broad set of primitives. Optimal taxes are characterized by the solution to a certain second-order partial differential equation. Using the Coarea Formula, we solve this equation for various conditional averages of optimal tax rates and identify key forces that determine the optimal tax rates; show how these rates depend on earnings of each spouse, correlation in spousal earnings, and redistributive objectives of the planner; compare optimal rates for primary and secondary earners; identify both the conditions under which simple tax systems are optimal and the sources of welfare gains from more sophisticated taxes when those conditions are not satisfied. Under realistic assumptions, optimal tax rates for married individuals are increasing in correlation of spousal earnings. However, they remain lower than the tax rates for single individuals, and the marginal rates for one spouse increase (decrease) in the earnings of the other if both spouses have low (high) earnings.
    JEL: D82 H21
    Date: 2023–04
  3. By: David R. Agrawal; Kenneth Tester
    Abstract: Prior studies show that taxes matter for the residential locations of high-income earners. But, states raise a significant share of revenue from nonresidents. Using variation in state tax rates, we provide causal evidence on the effect of the net-of-tax rate on the location of labor supply for professional golfers. State taxes induce high-income earners to shift employment to low-tax states without a residence change. The elasticity of working in a state is 0.34, and consistent with superstar phenomenon, increases with earnings. Our results suggest a novel margin of mobility responses for top-earners: the spatial relocation of labor supply by nonresidents.
    Keywords: state taxes, superstars, taxing the rich, avoidance, mobility, high-frequency labor supply
    JEL: J22 J61 H26 H73 R50
    Date: 2023
  4. By: Ana Cinta González Cabral; Pierce O’Reilly; Silvia Appelt; Fernando Galindo-Rueda; Tibor Hanappi
    Abstract: Tax incentives that provide preferential tax treatment to the incomes arising from research and development (R&D) and innovation activities, such as intellectual property regimes, have become widespread in recent years. This paper describes the key design features of tax incentives available in 49 member countries of the Inclusive Framework on BEPS (IF), covering all OECD countries and EU countries. It outlines differences in the design of such incentives that may translate into differences in the tax benefits offered. The information collected and reported in this paper is a first step towards a more systematic comparison of tax support policies for R&D and Innovation.
    Date: 2023–04–20
  5. By: Toshiyuki Uemura (School of Economics, Kwansei Gakuin University)
    Abstract: While the current corporate tax system in Japan allows interest expense on debt to be deductible, no such mechanism exists for other financing, leading to a "debt bias." Therefore, the Comprehensive Business Income Tax (CBIT), Allowance for Corporate Equity (ACE), and Allowance for Corporate Capital (ACC) have been proposed. According to international comparisons by the OECD, the marginal effective tax rates in ACE-adopting countries are low, and these countries have reformed their corporate tax systems toward financing neutrality. This study conducts a comprehensive survey of empirical analyses of Japan's effective corporate tax rates and classifies them into four effective corporate tax rates. Further, fundamental corporate tax reform proposals using forward-looking effective tax rates are analyzed in line with Hanappi (2018), OECD (2020), and Spengel et al. (2020), who conducted international comparative studies of effective corporate tax rates. This study makes improvements to Japan's 2020 parameters in Spengel et al. (2020) to obtain the cost of capital (user cost of capital), marginal effective tax rate, and average effective tax rate values by financing and assets. The parameters of the proposed reforms are then incorporated into a model of the effective corporate tax rate to conduct a simulation analysis under a constant statutory tax rate. First, a simple CBIT that does not allow deductions of interest expenses increases the cost of capital, marginal effective tax rate, and average effective tax rate for debt financing. Second, a simple ACE that allows the deduction of opportunity cost at the notional interest rate on equity lowers the cost of capital, the marginal effective tax rate, and the average effective tax rate for retained earnings and new equity. Third, a simple ACC that allows all financing to deduct opportunity costs at the notional interest rate lowers the cost of capital, marginal effective tax rate, and the average effective tax rate for all financing. However, these results are difficult to compare due to different average effective tax rates. Therefore, conducting similar simulations under a constant average effective tax rate results in statutory tax rates of 25.57% for CBIT, 42.33% for ACE, and 42.62% for ACC, compared with 31.30% for the base case. Thus, CBIT reduces its tax rate by five percentage points from the current rate, but ACE/ACC requires a ten percentage point increase. It is also indicated that CBIT increases the cost of capital and the marginal effective tax rate while ACE/ACC reduces these rates. The above simulations are conducted assuming a simple CBIT with no deductible interest expense, a simple ACE/ACC where the notional interest rate matches the nominal interest rate, and the rate at which ACE/ACC is applied matches the statutory corporate income tax rate. Simulations that relax these conditions are conducted under a constant average effective tax rate. First, under CBIT, varying the deductibility of interest expenses has a limited effect on the cost of capital and the marginal effective tax rate. Second, when the notional interest rate is set lower than the nominal interest rate or when the tax rate to which ACE/ACC is applied is set lower than the statutory tax rate, the effect on the marginal effective tax rate is significant. These results have some implications: CBIT can ensure financing neutrality, but it increases the cost of capital and the marginal effective tax rate, which may negatively affect investment. On the contrary, ACE/ACC decreases the cost of capital and marginal effective tax rate, which can positively affect investment. In particular, the ACE has been introduced in many countries and is considered a promising proposal for future corporate tax reform in Japan.
    Keywords: Financing Neutrality, Forward-Looking Effective Tax Rates, Fundamental Corporate Tax Reform
    JEL: H25 H32
    Date: 2023–04
  6. By: Andrej Angelovski (Middlesex University); Praveen Kujal (Middlesex University and Chapman University); Christos Mavridis (Gabriele d’Annunzio University of Chieti-Pescar)
    Abstract: Given the prevalence of local public goods, whose broader use is often limited by distance and borders, we propose a potential solution to the free-riding problem by having each participant/beneficiary delegate the public good contribution decision to a non-local intermediary who neither puts in own endowment into the public good nor benefits from it. Intermediaries make decisions under two compensation mechanisms where the incentives for the intermediary are either non-aligned (fixed) or aligned (variable) with those of the beneficiary. We find that the use of intermediaries, regardless of whether their compensation is aligned or not with that of the beneficiary, significantly increases contributions to the provision of the public good. We conclude that individuals behave differently when they (formally) make decisions for someone else even if their incentive structures are identical.
    Keywords: Public goods, intermediaries, delegation
    JEL: H4 C91 D90
    Date: 2023
  7. By: Casey B. Mulligan
    Abstract: The extent of voluntary cooperation in the presence of externalities is shown as an equilibrium outcome in the supply and demand framework. The analysis uses familiar ingredients to provide a new way of understanding the results of the extensive literature beginning with Buchanan, Coase, Ostrom, Shapley, Telser, Tullock, and Williamson showing that a Pigouvian tax is not the only alternative to independently acting individuals who are coordinated merely through distorted market prices. Voluntary cooperation can have a far different incidence than Pigouvian taxes and subsidies while changing the character of the costs resulting from externalities. The paper discusses applications including forest management, volume discounts, residential associations, energy policy, the scope of planning of household activities, and the role of workplaces in preventing infectious disease.
    JEL: D62 D71 H23 L25
    Date: 2023–03
  8. By: Marika Cabral; Colleen Carey; Jinyeong Son
    Abstract: Many public programs let individuals choose between publicly provided benefits and a subsidized private alternative. We investigate the determinants of health insurance choice in Medicare—a setting with vast geographic variation in the share of individuals selecting the public option versus private alternative. We analyze insurance decisions among individuals who move to quantify the relative importance of individual-specific factors (such as preferences or income) and place-specific factors (such as local health insurance options) on insurance decisions. We find roughly 40% of the geographic variation in the share selecting private coverage is due to place-based factors, while the remainder is explained by individuals. Our findings highlight the importance of individual factors in these decisions and may inform discussions about the use of policy to address geographic disparities.
    JEL: H51 I11 I13
    Date: 2023–04
  9. By: Whelan, Karl
    Abstract: Sports betting is growing rapidly in the US after its legalization by the Supreme Court in 2018. This paper describes the treatment of gambling winnings and losses in the federal tax code and shows how the system may incentivize some gamblers to substantially increase the scale of their betting in order to have a chance to win. This incentive stems from the fact that gambling losses can only be deducted if taxpayers are filing for itemized deductions, meaning the scale of gambling losses has to be large enough to push a taxpayer’s eligible deductions over the standard deduction. This incentive to engage in large-scale betting applies mostly to lower and middle-income households.
    Keywords: Taxation; risk taking
    JEL: D81 H24 L83
    Date: 2023–02–06
  10. By: Ramiro Losada, Albert Martínez Pastor
    Abstract: This paper evaluates the effect of the introduction of the ITF on Spanish shares in secondary markets, focusing on the potential costs. For this purpose, it considers several dimensions of liquidity (measured through the bid-ask spread and the Amihud ratio), volatility (both intraday and historical) and trading volume of the secondary markets in which Spanish shares are traded. The paper uses two models: one based on difference-in-differences and another wich relies on a regression discontinuity design. This approach tries to capture two types of effects: firstly, the impact of the introduction of the tax by comparing the evolution of the variables of Spanish shares subject to the FTT with those of other countries with similar characteristics and not subject to the FTT. Secondly, the evolution of the variables linked to the trading of shares of Spanish companies subject to tax whith those are not. The paper reveals that the effect of the tax on the trading of Spanish shares have been limited in absolute terms and were mostly temporary. Two opposing effects are detected: on the one hand, the trading of taxed Spanish shares decreased after the introduction of the tax. On the other hand, these shares recovered part of the trading volume that was carried out in OTC markets. With respect to volatility, it increased in the short term, and tended to decrease in the long term.
    Keywords: Spanish Financial Transaction Tax, equity markets, data analysis.
    JEL: G18 E52 E62 E63
    Date: 2023
  11. By: Alex Adegboye; Abrams M.E. Tagem
    Abstract: This paper establishes how accountability quality might mediate the effect of tax revenue on sustainable development in 41 sub-Saharan African countries for the period 1990-2019. The empirical evidence is based on three empirical strategies: generalized method of moments, instrumental variable Tobit, and quantile regressions. The following findings are revealed. First, accountability dynamics influence tax revenue in ways that have favourable net effects on sustainable development.
    Keywords: Sub-Saharan Africa, Accountability, Revenue mobilization, Tax revenue, Sustainable development
    Date: 2023
  12. By: Mascagni, Giulia; Santoro, Fabrizio
    Abstract: While much knowledge is being generated on the impact of the pandemic, we still know very little on its implications on taxation in lower-income countries. Yet, tax is crucial to fund crisis response and recovery, in addition to broader development plans and expanded government expenditure. This paper starts addressing this gap using an unique dataset of survey data from Rwanda. We document two significant shifts in taxpayers’ views during the pandemic: perceptions about the fairness of the tax system improve by 40 per cent, and their attitudes to compliance become more conditional on the provision of public services of sufficiently good quality. We put these results in the broader context of crisis response. We show that they are not simply linked to individual experiences of the crisis or access to relief, but they are more likely linked to generalised improvements in solidarity and patriotism.
    Keywords: Finance,
    Date: 2023

This nep-pub issue is ©2023 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.