nep-pub New Economics Papers
on Public Finance
Issue of 2023‒09‒25
three papers chosen by
Kwang Soo Cheong, Johns Hopkins University

  1. Dynamic Tax Evasion and Capital Misallocation in General Equilibrium By Francesco Menoncin; Andrea Modena; Luca Regis
  2. Can Policy Packaging Help Overcome Pigouvian Tax Aversion? A Lab Experiment on Combining Taxes and Subsidies By Gøril L. Andreassen; Steffen Kallbekken; Knut Einar Rosendahl
  3. Corporate Tax Increases and Shareholder-Level Capital Income Tax Neutrality in Japan -An Analysis of Fundamental Reforms Using Effective Tax Rates- By Toshiyuki Uemura

  1. By: Francesco Menoncin; Andrea Modena; Luca Regis
    Abstract: We study tax evasion in a dynamic macroeconomic model where utility-maximizing entrepreneurs use capital to produce or buy bonds, depending on their firm’s stochastic productivity. The government provides productivity-enhancing public goods financed through taxes and bond issuance. Entrepreneurs can increase their income by evading taxes at the risk of being audited and fined. Lower productivity boosts evasion incentives, exacerbating capital misallocation because unproductive entrepreneurs accumulate wealth at their peers’ expense. Consistently with OECD data, the model predicts a negative relation between tax evasion and productivity in the aggregate but heterogeneous signs and magnitudes across productivities. Public goods provision affects these outcomes ambiguously.
    Keywords: dynamic tax evasion, financial frictions, general equilibrium, misallocation
    JEL: E25 E26 H23 H26
    Date: 2023–08
  2. By: Gøril L. Andreassen; Steffen Kallbekken; Knut Einar Rosendahl
    Abstract: Tax aversion makes it politically challenging to introduce Pigouvian taxes. One proposed solution to overcome this resistance is to package policies. Using an online lab experiment, we investigate whether combining a tax and a subsidy is perceived as more acceptable than the tax or the subsidy alone. The purpose of the policies is to reduce demand for a good with a negative externality to the socially optimal level. We find that support for a combination of a tax and a subsidy equals the simple average of support for the two instruments alone. Combining a tax and a subsidy therefore does not reduce tax aversion, other than through lower tax rates in the combinations. We also examine potential mechanisms behind the tax aversion. Participants hold more pessimistic beliefs about what share of the tax revenue they will receive when the tax is implemented alone than when it is combined with a subsidy. Furthermore, we find that the participants expect the tax to be more effective in reducing demand for the good with a negative externality than both the subsidy alone and the combinations of tax and subsidy. This belief does not, however, translate into support for the tax.
    Keywords: Pigouvian taxes, policy packaging, public support, lab experiment, tax aversion
    JEL: D72 H23 Q54 Q58
    Date: 2023
  3. By: Toshiyuki Uemura (School of Economics, Kwansei Gakuin University)
    Abstract: Although Japan is considering increasing the corporate income tax rate, the tax base requires reforms to maintain or lower the effective tax rate from an economic perspective. In this case, capital income tax at the shareholder and corporate levels is important. This study focuses on financing neutrality and analyzes it using forward-looking effective tax rates. The reform proposals are the Comprehensive Income Business Tax (CBIT), Allowance for Corporate Equity (ACE), and Allowance for Corporate Capital (ACC). This study reveals that the CBIT ensures financing neutrality at both the corporate and shareholder levels but raises the cost of capital, effective marginal tax rate (EMTR), and effective average tax rate (EATR). In contrast, ACE/ACC lowers the costs of capital, EMTR, and EATR. At the corporate level, the ACC is more financing neutral than the ACE, though these policies have similar financing neutrality at the shareholder level. Therefore, whether to adopt the ACE or ACC depends on the practical perspective. In this regard, many countries adopt the ACE, and there is room for consideration as tax rates in Japan increase.
    Keywords: corporate tax, shareholder-level capital income tax neutrality, fundamental tax reforms, forward-looking effective tax rates
    JEL: H25 H32
    Date: 2023–09

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