nep-pub New Economics Papers
on Public Finance
Issue of 2023‒07‒24
eleven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. No Taxation Without Reallocation: The Distributional Effects of Tax Changes By Stephanie Ettmeier
  2. How to Design a Presumptive Income Tax for Micro and Small Enterprises By Jean-François Wen
  3. Tax Withholding and the Size of Government By Sutirtha Bagchi; Libor Dušek
  4. How does corporate taxation affect business investment?: Evidence from aggregate and firm-level data By Tibor Hanappi; Valentine Millot; Sébastien Turban
  5. De-Fueling Externalities: How Tax Salience and Fuel Substitution Mediate Climate and Health Benefits By Pier Basaglia; Sophie Behr; Moritz A. Drupp
  6. A Welfare Analysis of Tax Audits Across the Income Distribution By William C. Boning; Nathaniel Hendren; Ben Sprung-Keyser; Ellen Stuart
  7. Uniform taxation of electricity: incentives for flexibility and cost redistribution among household categories By Philipp Andreas Gunkel; Febin Kachirayil; Claire-Marie Bergaentzl\'e; Russell McKenna; Dogan Keles; Henrik Klinge Jacobsen
  8. Dynamic Causal Forests, with an Application to Payroll Tax Incidence in Norway By Evelina Gavrilova; Audun Langørgen; Floris T. Zoutman; Floris Zoutman
  9. Funding Transportation in Georgia: Vehicle Miles Travel Tax By David L. Sjoquist
  10. VAT Pass-Through and Competition: Evidence from the Greek Islands By Lydia Dimitrakopoulou; Christos Genakos; Themistoklis Kampouris; Stella Papadokonstantaki
  11. Evaluating the impact of the 2023-2024 personal income tax reform in Rwanda: An analysis using tax-benefit microsimulation modelling By Antoine de Mahieu; Jesse Lastunen; Jeannette Mukangango; Theogene Harerimana

  1. By: Stephanie Ettmeier
    Abstract: This paper quantifies the distributional effects of tax changes in the United States. A functional vector autoregression framework is used to estimate the joint dynamics of tax shocks, the cross-sectional distribution of disposable income, and macroeconomic aggregates. I distinguish between changes in personal and corporate income taxes and investigate the distributional effects on families and business owners. I document that tax changes affect incomes along the distribution unevenly and that the family status and the source of income matters. Tax reductions benefit high incomes and disadvantage lower incomes. Entrepreneurs and families benefit more from tax cuts than individuals without business income and non-families.
    Keywords: Income Distribution, Functional Vector Autoregressions, Tax Policy Shocks
    JEL: C11 C32 E32 E62
    Date: 2023–06
  2. By: Jean-François Wen
    Abstract: Turnover taxes are prevalent in developing countries as a simple form of presumptive taxation of business income. Such simplified tax regimes can reduce the relatively high compliance costs of micro and small enterprises, which might otherwise discourage entrepreneurs from formalizing their activities and paying taxes. The note addresses design issues for a turnover tax regime—which taxes it replaces, what the criteria are for eligibility, how to determine the optimal threshold, and how to set the tax rate. A key observation is that, although low turnover tax rates may incite larger firms to artificially reduce their sales, the rate should also not be so high as to discourage formalization of activities. A table of tax rates and turnover thresholds observed internationally is provided. The note concludes by suggesting analytical steps to guide practitioners in designing turnover tax regimes.
    Keywords: Presumptive tax; turnover tax; informal sector; microenterprises; taxpayer Compliance cost; turnover tax rate; turnover tax systems; IMF library; Sales tax; Income and capital gains taxes; Income tax systems; Corporate income tax; Effective tax rate; Africa; South America; Eastern Europe; West Africa; Western Europe
    Date: 2023–06–29
  3. By: Sutirtha Bagchi (Department of Economics, Villanova School of Business, Villanova University); Libor Dušek (Charles University, Faculty of Law)
    Abstract: This paper examines the hypothesis that an improvement in tax collections causally leads to bigger government. We exploit the staggered introduction of withholding of the state personal income tax by U.S. states between 1948 and 1987 and find that withholding led to an increase in tax revenues by about 28 percent. We derive a theoretical model through which we interpret the estimates distinguishing between a mechanical increase in tax collections driven by reduced noncompliance, subsequent adjustments in revenue choices in response to that reduced noncompliance, and an increase in the underlying demand for revenue that may have motivated the adoption of withholding. Governments responded to the improvement in personal income tax collections by shifting the composition of revenues towards a heavier reliance on this tax. States also increased tax rates as they implemented withholding, which suggests that a need to raise more revenue was an important motive for adopting withholding.
    Keywords: Political economy of taxation; Size of government; Third-party reporting; Withholding
    JEL: H11 H21 H26 H71 N42
    Date: 2023–07
  4. By: Tibor Hanappi; Valentine Millot; Sébastien Turban
    Abstract: Business investment in OECD countries has remained weak, in particular since the 2008 global financial crisis. At the same time, the cost of capital has significantly and steadily decreased over the last thirty years, reflecting a fall in both interest rates and corporate tax rates. This raises the question of whether business investment still responds to the cost of capital and thus whether corporate tax policy can support investment. This paper analyses trends in business investment and in the cost of capital in OECD countries over the past three decades. Then, it investigates empirically the sensitivity of business investment to corporate taxation, and how this sensitivity varies across firm, investment and tax-design characteristics. Panel regressions at the firm and industry levels confirm that business investment rates are negatively related to corporate taxation, measured by country-level forward-looking effective tax rates. However, the tax sensitivity of business investment has fallen significantly since the global financial crisis. It also differs significantly across firms, assets, and corporate tax design characteristics. Overall, the estimation results suggest that a nuanced and granular approach to corporate tax policy, accounting for heterogeneity in tax sensitivity, is needed to support investment effectively. The paper discusses possible policy options, including the reduction of non-profit taxes, the use of targeted corporate income tax instruments, and the use of more generous capital allowances where they may induce strong investment responses.
    Keywords: capital allowances, corporate taxation, fiscal policy, investment, non-profit taxes
    JEL: D22 D24 E22 E62 H25 H32
    Date: 2023–07–19
  5. By: Pier Basaglia; Sophie Behr; Moritz A. Drupp
    Abstract: This paper is the first to investigate the effectiveness of fuel taxation to jointly deliver climate and health benefits in a quasi-experimental setting. Using the synthetic control method, we compare carbon and air pollutant emissions of the actual and synthetic German transport sector following the 1999-2003 German eco tax reform. We demonstrate sizable average reductions in CO2 (12%), PM2.5 (10%) and NOX (6%) emissions between 1999 and 2009 across a range of specifications. Using official cost estimates, we find that the eco-tax saved more than 40 billion euros of external damages. More than half of the reductions in external damages are health benefits, highlighting the importance of accounting for co-pollution impacts of carbon pricing. Our fuel and emission specific tax elasticity estimates suggest much stronger demand responses to eco tax increases than to market price movements, primarily due to increases in tax salience, which we measure using textual analysis of newspapers. We further show that gasoline-to-diesel substitution substantially mediates the trade-off between climate and health benefits. Our results highlight the key roles of tax salience and fuel-substitution in mediating the effectiveness of fuel taxes to reduce climate and health externalities.
    Keywords: Environmental policy, carbon tax, eco tax, tax elasticity, tax salience, fuel consumption, fuel substitution, externalities, climate, pollution, health
    JEL: Q51 Q58 Q41 H23
    Date: 2023
  6. By: William C. Boning; Nathaniel Hendren; Ben Sprung-Keyser; Ellen Stuart
    Abstract: We estimate the returns to IRS audits of taxpayers across the income distribution. We find an additional $1 spent auditing taxpayers above the 90th income percentile yields more than $12 in revenue, while audits of below-median income taxpayers yield $5. We draw upon comprehensive internal accounting information and audit-level enforcement logs to quantify the average costs and revenues associated with each audit. We begin by estimating the average initial return to all audits of US taxpayers filing in 2010-2014. On average, $1 in audit spending raises $2.17 in initial revenue. Audits of high-income taxpayers are more costly, but the additional revenue raised more than offsets the costs. Audits of the 99-99.9th percentile have a 3.2:1 return; audits of the top 0.1% return 6.3:1. We then exploit the 40% audit reduction between tax years 2010 and 2014 to examine the returns to marginal audits. We find they exceed the returns to average audits. Revenues remain relatively unchanged but marginal costs fall below average costs due to economies of scale. Next, we use randomly selected audits to examine the impact of an initial audit on future revenue. This specific deterrence effect produces at least three times more revenue than the initial audit. Deterrence effects are relatively consistent across the income distribution. This results in the 12:1 return above the 90th percentile. We conclude by estimating the welfare consequences of audits using the MVPF framework and comparing audits to other revenue raising policies. We find that audits raise revenue at lower welfare cost.
    JEL: H0
    Date: 2023–06
  7. By: Philipp Andreas Gunkel (Section for Energy Economics and Modelling, DTU Management, Technical University of Denmark, 2800 Kongens Lyngby, Denmark); Febin Kachirayil (Chair of Energy Systems Analysis, Institute of Energy and Process Engineering, ETH Zuerich, 8092 Zuerich, Switzerland); Claire-Marie Bergaentzl\'e (Section for Energy Economics and Modelling, DTU Management, Technical University of Denmark, 2800 Kongens Lyngby, Denmark); Russell McKenna (Chair of Energy Systems Analysis, Institute of Energy and Process Engineering, ETH Zuerich, 8092 Zuerich, Switzerland; Paul Scherrer Institute, Laboratory for Energy Systems Analysis, Forschungsstrasse 111, 5232 Villigen PSI, Switzerland); Dogan Keles (Section for Energy Economics and Modelling, DTU Management, Technical University of Denmark, 2800 Kongens Lyngby, Denmark); Henrik Klinge Jacobsen (Section for Energy Economics and Modelling, DTU Management, Technical University of Denmark, 2800 Kongens Lyngby, Denmark)
    Abstract: Recent years have shown a rapid adoption of residential solar PV with increased self-consumption and self-sufficiency levels in Europe. A major driver for their economic viability is the electricity tax exemption for the consumption of self-produced electricity. This leads to large residential PV capacities and partially overburdened distribution grids. Furthermore, the tax exemption that benefits wealthy households that can afford capital-intense investments in solar panels in particular has sparked discussions about energy equity and the appropriate taxation level for self-consumption. This study investigates the implementation of uniform electricity taxes on all consumption, irrespective of the origin of the production, by means of a case study of 155, 000 hypothetical Danish prosumers. The results show that the new taxation policy redistributes costs progressively across household sizes. As more consumption is taxed, the tax level can be reduced by 38%, leading to 61% of all households seeing net savings of up to 23% off their yearly tax bill. High-occupancy houses save an average of 116 Euro per year at the expense of single households living in large dwellings who pay 55 Euro per year more. Implementing a uniform electricity tax in combination with a reduced overall tax level can (a) maintain overall tax revenues and (b) increase the interaction of batteries with the grid at the expense of behind-the-meter operations. In the end, the implicit cross-subsidy is removed by taxing self-consumption uniformly, leading to a cost redistribution supporting occupant-dense households and encouraging the flexible behavior of prosumers. This policy measure improves economic efficiency and greater use of technology with positive system-wide impacts.
    Date: 2023–06
  8. By: Evelina Gavrilova; Audun Langørgen; Floris T. Zoutman; Floris Zoutman
    Abstract: This paper develops a machine-learning method that allows researchers to estimate heterogeneous treatment effects with panel data in a setting with many covariates. Our method, which we name the dynamic causal forest (DCF) method, extends the causal-forest method of Wager and Athey (2018) by allowing for the estimation of dynamic treatment effects in a difference-in-difference setting. Regular causal forests require conditional independence to consistently estimate heterogeneous treatment effects. In contrast, DCFs provide a consistent estimate for heterogeneous treatment effects under the weaker assumption of parallel trends. DCFs can be used to create event-study plots which aid in the inspection of pre-trends and treatment effect dynamics. We provide an empirical application, where DCFs are applied to estimate the incidence of payroll tax on wages paid to employees. We consider treatment effect heterogeneity associated with personal- and firm-level variables. We find that on average the incidence of the tax is shifted onto workers through incidental payments, rather than contracted wages. Heterogeneity is mainly explained by firm-and workforce-level variables. Firms with a large and heterogeneous workforce are most effective in passing on the incidence of the tax to workers.
    Keywords: causal forest, treatment effect heterogeneity, payroll tax incidence, administrative data
    JEL: C18 H22 J31 M54
    Date: 2023
  9. By: David L. Sjoquist (Center for State and Local Finance, Andrew Young School of Policy Studies, Georgia State University)
    Abstract: In this report, we explore the mileage tax (i.e., a vehicle miles traveled (VMT) tax) to provide a basic understanding of what a milage tax is, to describe the options for how it might be implemented, and to explore many of the issues associated with switching from a motor fuel tax to a mileage tax. Such a switch would likely be implemented over time, with some vehicles continuing to pay the motor fuel tax for a protracted period and with an increasing number of other vehicles paying a tax based on miles driven. A tax based on miles driven is alternatively referred to as a vehicle-miles traveled (VMT) tax or fee, a mileage-based user fee (MBUF), or a road user charge (RUC).
    Date: 2023–07
  10. By: Lydia Dimitrakopoulou; Christos Genakos; Themistoklis Kampouris; Stella Papadokonstantaki
    Abstract: We examine how competition affects VAT pass-through in isolated oligopolistic markets as defined by the Greek islands. Using daily gasoline prices and a difference-in-differences methodology, we investigate how changes in VAT rates are passed through to consumers in islands with different market structure. We show that pass-through increases with competition, going from 50% in monopoly to around 80% in more competitive markets, but remains incomplete. We also discover a rapid rate of adjustment for VAT changes, as well as a positive relationship between competition and the rate of price adjustment. Finally, we document higher pass-through for products with more inelastic demand.
    Keywords: Pass-through, tax incidence, gasoline, Value added tax (VAT), market structure, competition, Greek islands
    JEL: H22 L1
    Date: 2023
  11. By: Antoine de Mahieu; Jesse Lastunen; Jeannette Mukangango; Theogene Harerimana
    Abstract: Establishing an equitable and efficient tax system is essential for reducing poverty, combating inequality, and fostering sustainable economic growth. Rwanda's government has recognized this and implemented significant changes to the personal income tax schedule for 2023 and 2024 as part of broader tax reforms set forth in its Medium-Term Revenue Strategy. This study examines the fiscal and distributional effects of the personal income tax changes, employing a newly-created tax-benefit microsimulation model for Rwanda.
    Keywords: Income tax, Rwanda, Microsimulation
    Date: 2023

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