nep-pub New Economics Papers
on Public Finance
Issue of 2023‒09‒18
six papers chosen by
Kwang Soo Cheong, Johns Hopkins University

  1. Redistributive Income Taxation with Directed Technical Change By Jonas Loebbing
  2. Evaluating Fiscal Policy Reforms using the Fiscal Frontier By CHEN Xiaoshan; LEITH Campbell; RICCI Mattia
  3. International Tax Spillovers and Tangible Investment, with Implications for the Global Minimum Tax By Mr. Michael Keen; Ms. Li Liu; Hayley Pallan
  4. CORTAX 2019 Updated calibration and baseline results By BRATTA Barbara; PYCROFT Jonathan; STOEHLKER Daniel
  5. Technology Evolution and Tax Compliance: Evidence from Rwanda By Hakizimana, Naphtal; Santoro, Fabrizio
  6. How to Fund Unemployment Insurance with Informality and False Claims: Evidence From Senegal By Abdoulaye Ndiaye; Kyle F. Herkenhoff; Abdoulaye Cisse; Alessandro Dell'Acqua; Ahmadou Aly Mbaye

  1. By: Jonas Loebbing (LMU Munich)
    Abstract: What are the implications of (endogenous) directed technical change for the design of redistributive income taxes? I study this question in a Mirrleesian economy augmented to include endogenous technology development and adoption choices by firms. Under certain conditions, any progressive tax reform induces technical change that compresses the pre-tax wage distribution. The key intuition is that progressive tax reforms tend to increase labor supply of less skilled relative to more skilled workers, which induces firms to develop and use technologies that are more complementary to the less skilled. These directed technical change effects make the optimal tax scheme more progressive, raising marginal tax rates at the right tail of the income distribution and lowering them at the left tail. For reasonable calibrations, the impact of directed technical change on the optimal tax is quantitatively important: optimal marginal tax rates are reduced substantially for incomes below the median and increase monotonically over the bulk of the income distribution instead of being U-shaped (as in most of the previous literature).
    Keywords: optimal taxation; directed technical change; endogenous technical change; wage inequality;
    JEL: H21 H23 H24 J31 O33
    Date: 2023–08–25
  2. By: CHEN Xiaoshan; LEITH Campbell; RICCI Mattia (European Commission - JRC)
    Abstract: We develop a Fiscal Frontier which traces out the maximum government debt level that can be sustained at a given welfare cost. Through duality, the intertemporal policy mix underpinning the Frontier mirrors standard Ramsey policy and defines an upper limit on the welfare gains that can be achieved by any fiscal reform. The Frontier is then used to evaluate a variety of fiscal reforms: (1) one-off changes in tax instruments considered in Laffer curve calculations, (2) a gradual reduction in capital taxation proposed by Lucas (1990), and (3) fiscal consolidation strategies akin to those considered by the Congressional Budget Office. Conventional Laffer curve calculations significantly under-estimate the sustainable debt of the US. The desirable pace of capital tax abolition has slowed since the 1970s, but the reform remains close to the Frontier. Achieving debt reduction targets considered by the Congressional Budget Office is typically very costly, especially when the fiscal consolidation is large and must be achieved quickly, but a simultaneous capital tax reform can more than offset those costs in all cases we consider.
    Keywords: Laffer Curve, Optimal Policy, Debt Sustainability, Fiscal Limit, Duality
    JEL: E62 H30 H60
    Date: 2023–07
  3. By: Mr. Michael Keen; Ms. Li Liu; Hayley Pallan
    Abstract: This paper articulates and, using newly-assembled data, explores how international taxation affects aggregate tangible cross-border investment. Spillovers from statutory tax rates abroad seem: As sizable as effects from the host’s rate; larger than previous consensus values (attributed to a systematic bias from FDI data); and consistent with ‘implicit’ profit shifting through real investment (rather than ‘paper’ profit shifting). Contrary to much policy discussion, the results also imply that: Host countries’ marginal effective tax rates have at best a weak effect on real investment; those elsewhere have none; and, applied to the prospective global minimum tax, inward tangible investment in most sample countries will increase.
    Keywords: Corporate Taxation; International Tax; Multinational Investment; Foreign Direct Investment
    Date: 2023–08–04
  4. By: BRATTA Barbara; PYCROFT Jonathan; STOEHLKER Daniel (European Commission - JRC)
    Abstract: CORTAX is a macroeconomic model that focuses on corporate taxation and is used extensively for European Commission policy assessments. As a macroeconomic model, it simulates variables such as GDP, investment and employment, while being especially notable for its focus on corporate income taxation (CIT). It models the key aspects of CIT, such as multinational profit shifting, investment decisions, loss compensation, and debt-equity financing. CORTAX is versatile and can be used to examine different aspects of CIT, such as adjusting or harmonizing the CIT rate or base, addressing debt bias in CIT, and consolidation of the multinational CIT base. CORTAX is a multi-country model, covering all EU Member States, selected partner countries, and a tax haven. The general equilibrium framework of the model captures the interactions between different economic actors, including those between multinational headquarters and foreign subsidiaries. This calibration updates the model to 2019. This paper outlines the model structure, and explains the methodology used to arrive at the new baseline, including explaining the choices of data sources and parameters. The paper provides key summary results that serve as both a description and a validation of the model, and also serves as a reference for future work carried out using CORTAX 2019.
    Keywords: Cortax
    Date: 2023–07
  5. By: Hakizimana, Naphtal; Santoro, Fabrizio
    Abstract: Information technology (IT) has great potential to help increase taxpayer compliance and revenue collection. Despite the increasing use of IT solutions by African tax administrations, evidence on its effectiveness remains limited. In Rwanda, the Revenue Authority introduced a more advanced version of its electronic billing machines (EBM) to enhance its ability to track business transactions remotely and to improve taxpayers’ experience of using the machines. Using a wealth of administrative data collected by the Revenue Authority, this paper evaluates the impact of the adoption of EBM2 on the ways in which firms file their tax returns. In particular, we are able to compare first-time users of EBM2, who are mostly new taxpayers, with ‘shifters’, who moved from the old EBM1 to EBM2. We looked first at value added tax (VAT). Overall, the adoption of EBM2 resulted in significant increases in reported business turnover, non-taxable sales, taxable sales, VAT inputs and VAT due. There was also a reduction in the proportion of completed VAT returns that implied zero VAT liabilities. Unsurprisingly, there was no significant overall change in the VAT returns from ‘shifters’. They had probably internalised the benefits of electronic billing machines when using the earlier EBM1 version. The effects of the adoption of EBM2 on income tax returns are less positive. Overall, no increase in income tax liability is reported. These results suggest that taxpayers do not believe that the Revenue Authority will attempt to reconcile their (separate) VAT and income tax returns. Taxpayers probably provide more reliable VAT returns because they believe, on the basis of the installation of electronic billing machines, with upgrades, that the Revenue Authority is focusing more on VAT. The main policy implication is that the Revenue Authority should make more effort to reconcile firms’ separate VAT and income tax returns, so that the positive effects of the new electronic billing machines on VAT compliance will spillover into income tax compliance.
    Keywords: Finance, Technology,
    Date: 2023
  6. By: Abdoulaye Ndiaye; Kyle F. Herkenhoff; Abdoulaye Cisse; Alessandro Dell'Acqua; Ahmadou Aly Mbaye
    Abstract: This paper studies the welfare effects of unemployment insurance (UI) in low-income countries characterized by high levels of informality, weak enforcement of UI claims, and job search frictions. We assess the impact of UI on workers’ welfare in the presence of moral hazard and liquidity constraints. Our analysis highlights the significance of the UI scheme design on workers’ welfare and identifies potential funding constraints in implementing UI in imperfect labor markets. Using a custom labor force survey conducted in Senegal, we estimate the key parameters of an extended Chetty (2006) model incorporating an informal sector, and we evaluate the welfare implications of three different UI schemes with varying degrees of enforcement and funding sources. Our results demonstrate that workers respond to UI benefits and that welfare gains depend on the design of the UI system. We find that broad-based taxation through a VAT, inflation tax, or external funding can compensate for weak enforcement (i.e., high false UI claim rates), leading to substantial and quantifiable welfare gains. Moreover, safety net expansions reduce loan default rates, potentially fostering greater credit access. This study suggests that increasing the prevalence of UI in low-income countries could raise standard measures of consumer welfare.
    JEL: E0 E24 H21 J65 O10 O55
    Date: 2023–08

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