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on Public Finance |
| By: | Emmanuel Saez; Gabriel Zucman |
| Abstract: | This paper proposes a new framework to study the distribution of taxes and the effects of tax reforms, connecting classical tax incidence analysis to optimal tax theory. To study the distribution of current taxes, labor taxes are assigned to the corresponding workers, capital taxes to the corresponding asset owners, and consumption taxes to consumers. The tax rates are the wedges between pre-tax prices (relevant for production) and after-tax prices (relevant for the work, saving, and consumption decisions of households). In contrast to the conventional approach that shifts taxes across production factors, our approach measures actual incomes, is internally consistent, and maximizes the comparability of tax progressivity and inequality over time and across countries. Applying this methodology to the United States, we find that the effective tax rate of the top 1% has declined from about 50% in the early 1950s to 32% in 2021. It is through the corporate tax that a high degree of tax progressivity was achieved in the middle of the 20th century. To analyze the distributional effects of tax reforms, mechanical changes in tax liability by income groups and aggregate revenue effects due to household behavioral responses are sufficient statistics in neoclassical optimal tax models. The effects of taxes on pre-tax prices at the heart of classical tax incidence analysis are irrelevant. This neoclassical framework can be extended to incorporate non-standard behavioral responses uncovered by the recent empirical literature. We apply this framework by providing a distributional analysis of frequently discussed tax reforms, including replacing employer-provided health insurance contributions by a payroll tax. |
| JEL: | H20 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31912&r=pub |
| By: | Youssef Benzarti; Luisa Wallossek |
| Abstract: | This paper provides novel estimates on the cost of filing taxes over time and in different countries. First, we ran a survey of US taxpayers. We find that taxpayers perceive that tax complexity and filing costs have been increasing and that the majority would be willing to pay for simplifying the tax system and adopting pre-populated tax returns. Second, we use word counts of the tax codes in several countries dating as far back as the early 1980’s as a proxy for tax compliance costs. This measure shows that compliance costs have been steadily increasing. |
| JEL: | H0 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31944&r=pub |
| By: | Margit Schratzenstaller |
| Abstract: | Wealth inequality and concentration, together with the search for options to secure long-term sufficiency of tax systems in face of ageing societies, have recently moved the taxation of inheritances into the spotlight. The question if and to what extent behavioral responses by bequeathers may undermine the revenue potential of inheritance taxes is central for policy design. This survey of the empirical literature finds an overall moderate impact of inheritance taxation on wealth accumulation and residential choice. This holds true also for the impact of inheritance taxes on tax planning and avoidance in general as well as inter vivos transfers in particular. Tax planning, avoidance and evasion responses are more pronounced than real responses. Behavioral responses to an inheritance tax are smaller compared to a recurrent net wealth tax. Therefore, policymakers aiming at the minimization of (revenue-reducing) behavioral responses should prefer an inheritance tax over a recurrent net wealth tax. Furthermore, the containment of (illegal) tax avoidance should be a priority for policymakers in order to secure legitimacy of and public support for inheritance taxation, but also to ensure that inheritance taxes are an efficient tool to reduce inequality, considering that avoidance and evasion are highly concentrated among the rich. |
| Keywords: | Inheritance taxation, Wealth taxation, Behavioural responses, Tax elasticities, Tax avoidance |
| Date: | 2023–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:wfo:wpaper:y:2023:i:668&r=pub |
| By: | Juan Pablo Gama (Cedeplar/UFMG); Rodrigo J. Raad (Cedeplar/UFMG) |
| Abstract: | This paper analyses a three-period Ramsey’s model with heterogeneous agents and a bond offered by a central planner. We show that Ramsey’s taxation property holds, that is, tax rates are higher for markets with lower price elasticity in the social optimal allocation. Additionally, we show that a central planner optimal strategy based only on a partial default on interest payments implements the former goods allocation with taxation. Therefore, an increment on public expenditure due to a public health crisis such as the COVID-19 cannot be financed by a partial default on the public debt. Indeed, it overburdens agents who consume larger amount of inelastic goods, that is, those with lower income. We conclude that an emergency expenditure must be financed through an increase of Value-Added taxes, precautionary savings, or income taxes who do not participate directly on the emergency planning of a public health crisis. |
| Keywords: | Optimal taxation, General equilibrium, Default, Public expenditure shocks, COVID-19 |
| JEL: | D50 D52 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:cdp:texdis:td665&r=pub |
| By: | James R. Hines Jr. |
| Abstract: | Tax harmonization entails a uniform rate that may not suit all governments. Harmonization can advance collective governmental objectives only if the standard deviation of tax rates is less than the average downward effect of tax competition on rates. Since an efficient harmonized tax rate undoes the effect of competition, an efficient rate equals or exceeds the sum of the observed average tax rate and the standard deviation of rates. In 2020, the mean world corporate tax rate was 25.9%, and the standard deviation 4.5%, so if there is an efficient harmonized world tax rate, it must be 30.4% or higher. |
| JEL: | H21 H25 H71 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31900&r=pub |
| By: | Andrey Timofeev (International Center for Public Policy, Georgia State University) |
| Abstract: | For over 50 years, the IMF and other international organizations have compared tax performance across countries. Over this time, both data availability and sophistication of statistical methods have improved considerably. However, these new tools cannot eliminate the fundamental problem of imperfect information, as the observed tax outcome is a joint product of unobservable tax effort and tax capacity. This paper aims to serve as a refresher on the purposes and assumptions underlying this kind of empirical study and to reassess the best technical solutions of currently available modeling approaches, given the improvements in the availability of longitudinal data and advances in dynamic panel analysis made over these 50 years. Using an error-correction model in this paper, I attempt to disentangle the long-run relationship between tax capacity and economic development from short-run adjustments in response to economic cycles and other transient shocks. |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:ays:ispwps:paper2321&r=pub |
| By: | Patrick Macnamara (University of Manchester); Myroslav Pidkuyko (Banco de España); Raffaele Rossi (University of Birmingham) |
| Abstract: | This paper shows that linear consumption taxes are a powerful tool to implement efficient redistribution. We derive this result in a quantitative life-cycle model that reproduces the distribution of income and wealth in the United States. Optimal policy calls for raising all fiscal revenues from consumption, and providing redistribution via a highly progressive wage tax schedule. Capital income and wealth should not be taxed. This policy reduces inequality and increases productivity, and brings large welfare gains relative to the status quo. Around two-thirds of these gains are due to redistribution. Finally, our reform is also welfare improving in the short-run. |
| Keywords: | optimal policy, inequality, consumption taxation, life-cycle, entrepreneurs |
| JEL: | E62 H21 H24 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:2331&r=pub |
| By: | Nezih Guner (CEMFI, Centro de Estudios Monetarios y Financieros); Martin Lopez-Daneri (Virginia Commonwealth University); Gustavo Ventura (Arizona State University) |
| Abstract: | How should the U.S. confront the growing revenue needs driven by higher spending requirements? We investigate the mix of potential tax increases that generate a given revenue need at the minimum welfare cost and evaluate its macroeconomic impact. We do so in the context of a life-cycle growth model that captures key aspects of the earnings and wealth distributions and the non-linear shape of taxes and transfers in place. Our findings show that a proportional consumption tax combined with a lump-sum transfer to all households and a reduction in income tax progressivity consistently emerges as the best alternative to minimize welfare costs associated with a given increase in revenue. A 30% long-run increase in Federal tax revenue requires a consumption tax rate of 27.8%, a transfer of about 12% of mean household income to all households, and a reduction of top marginal income tax rates of more than 5 percentage points—output declines by 7.9% in the long run. While transfers are substantial, smaller transfers can accomplish most of the reduction in welfare costs. We find no role for wealth taxes in increasing revenues or minimizing welfare costs. |
| Keywords: | Taxation, progressivity, tax revenue. |
| JEL: | E6 H2 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2023_2305&r=pub |
| By: | Mathilde Muñoz |
| Abstract: | This paper quantifies the unequal welfare effects of tax competition. I derive the optimal tax and transfer schedules in a free mobility union composed of countries that can either compete or set a uniform federal tax rate. In the absence of fiscal coordination, governments internalize that any decentralized tax reform can lead to the out-migration of taxpayers at the top of the income distribution while increasing the in-migration of transfer recipients. As a result, the optimal level of redistribution is always lower in the tax competition equilibrium. Numerical calibrations show that being in a competition union rather than in a federal union decreases poorer individuals’ welfare by up to -20 percent. In contrast, the rich experience higher welfare in the tax competition equilibrium due to lower tax rates. |
| JEL: | H31 H73 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31920&r=pub |
| By: | Javier D. Donna (University of Florida) |
| Abstract: | The conflicting views that agents and voters have about redistributive taxation have been broadly studied. The literature has focused on situations where the counterfactual outcomes that would have occurred had other actions been chosen are observable or point identified. I analyze this problem in a context of ambiguity. The extent to which individuals are responsible for their own fate is partially identified. Agents have partial knowledge of the relative importance of effort in the generation of income inequality and, therefore, the magnitude of the incentive costs. I present a simple model of redistribution and show that multiple equilibria might arise even in the presence of ambiguity: One where the rate of redistribution is high, agents are pessimistic, and exert low effort (Pessimism/Welfare State), and another where the redistribution tax rate is low, agents are optimistic, and exert high effort (Optimism/Laissez Faire). |
| Keywords: | Redistributive Politics, Taxes, Ambiguity, Beliefs, Effort, Luck, Multiple Equilibria. |
| JEL: | D80 H10 H30 P16 E62 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:aoz:wpaper:295&r=pub |
| By: | James Alm (Tulane University); Lilith Burgstaller (University of Freiburg, Walter Eucken Institute); Arrita Domi (Walter Eucken Institute); Amanda März (Walter Eucken Institute); Matthias Kasper (Walter Eucken Institute) |
| Abstract: | This paper discusses current developments in tax compliance research, with a focus on three aspects. First, we summarize empirical evidence on the traditional deterrence or enforcement approach, suggesting that tax audits and fines for noncompliance are critical in taxpayersâ compliance decisions. However, recent research indicates that the effects of deterrence are more nuanced than initially thought, suggesting that other interventions are needed to improve tax compliance. Second, therefore, we discuss research on behavioral approaches to increase tax compliance, starting with research that analyzes the effects of "nudges", or interventions that use behavioral economics to alter the ways in which the choice architecture facing individuals is communicated to them by the tax administration. As applied to tax compliance, we conclude that nudges have had mixed effects on increasing tax compliance, suggesting that the specific design and implementation of these interventions determines their effectiveness. Third, we extend our discussion to other behavioral economics interventions that have not yet been studied widely in tax compliance research. These include "sludge", or institutional features that complicate compliance, and "boosts", or initiatives that target individualsâ competences and thereby help them to make better decisions. Our central argument is that all three of these behavioral interventions should be utilized in the design of tax policies. However, for these methods to effectively complement traditional deterrence approaches, tax administrations should evaluate them before implementing them in the field. Closer cooperation between administrators and academics should thus be facilitated and encouraged. |
| Keywords: | Tax compliance, deterrence theory, behavioral economics, nudges, boosts, sludge |
| JEL: | H2 H26 D91 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:tul:wpaper:2308&r=pub |
| By: | Dhammika Dharmapala |
| Abstract: | The 2017 US tax legislation - widely referred to as the Tax Cut and Jobs Act (TCJA) - fundamentally transformed the US system of international taxation. It ostensibly ended worldwide taxation but introduced, for instance, a new tax on “Global Intangible Low-Taxed Income” (GILTI). This paper surveys the emerging empirical literature on the impact of the TCJA’s international provisions. It documents five robust findings in this empirical literature. First, the TCJA led to a general decline in US MNCs’ foreign acquisitions. Second, the TCJA increased US MNCs’ investment in routine foreign tangible assets. Third, the reform did not lead to any change in profit shifting by US MNCs beyond the magnitude that would be expected based on the TCJA’s tax rate reduction. Fourth, The TCJA appears to have reduced the market value of US MNCs relative to domestic US firms. Fifth, the TCJA does not appear to have had any detectable impact on domestic US investment and wages (although there are some contrary results for capital expenditures). The welfare implications of these findings depend crucially on whether US MNCs’ are viewed as having engaged in too much or too little foreign activity prior to the TCJA. This depends on the choice of theoretical framework and the relevant normative benchmark, and cannot readily be resolved empirically. |
| Keywords: | international taxation, multinational firms, Tax Cut and Jobs Act (TCJA), repatriation taxes, global intangible low-taxed income tax |
| JEL: | H25 F23 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10802&r=pub |
| By: | Herault, Nicolas; Jenkins, Stephen P. |
| Abstract: | We decompose the redistributive effect of direct taxes into vertical, horizontal, and reranking components applying the methods of Urban and Lambert (Public Finance Review, 2008). In the first such application to the UK, and using yearly data covering 1977–2020, we find that redistributive effect increased over the period. However, there is no clear trend in horizontal inequity and this component forms a very small fraction of total redistributive effect by comparison with reranking and especially vertical components. It is also the vertical component that best tracks trends in redistributive effect. We give specific attention to the choice of the bandwidth used to define ‘close equals’ in terms of pre-tax income. We also show that implausible estimates of the horizontal inequity component arise for some years regardless of bandwidth used. |
| Keywords: | redistributive effect; redistribution; horizontal inequity; reranking; urban-Lambert decomposition; income tax |
| JEL: | D31 H24 H50 I38 |
| Date: | 2023–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:120996&r=pub |
| By: | Jules Linden; Cathal O’Donoghue; Denisa M. Sologon |
| Abstract: | This paper decomposes and compares the distributional impact of uniform national carbon taxes across six EU countries. We quantify the contribution of the key determinants of the carbon tax burden to its impact on inequality and regressivity indicators. We identify large cross-country differences in carbon tax burdens, their composition, and the drivers of the within-country distributional impact. A carbon tax is regressive in all countries, but carbon tax burdens and their impact on income inequality are larger in poorer countries of our sample. Cross-country differences in the primary driver of carbon tax regressivity suggest that the most effective policy lever to mitigate carbon tax regressivity differs across countries. Differences in the composition of the consumption basket play an important role in most countries, but not all. Differences in savings rates play the most important role in the wealthier countries of our sample. The carbon intensity of consumption plays a larger role in the poorer countries of our sample. Overall, this article suggests that differences in the structure of carbon tax incidence and the drivers of its distributional impact across countries pose a challenge to cross-country policy learning, and highlights the need for in-depth country-level and comparative analysis. |
| Keywords: | Distributional effect; Carbon pricing; Energy; Decomposition; Income inequality; Carbon Intensity |
| JEL: | D12 D31 H22 H23 Q48 Q50 Q52 Q58 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:irs:cepswp:2023-10&r=pub |
| By: | Derrick, Fossong; Mc Moi Ndi, Ashu |
| Abstract: | Cameroon adopted a digital tax policy some eight years ago. Before full implementation of the digital tax policy in 2016, councils in Cameroon, especially local councils, reported many challenges due to delays and irregularities in central government revenue-sharing (shared taxes). The direct taxes and fees collected by the councils were felt to be low, given the effort needed to collect them. It is important to understand whether adoption of the digital tax policy has increased the much-needed tax revenue for local council projects, and enhanced general tax revenue. General tax revenue refers to compulsory transfers to the central government for public purposes, and is made up of resource rent, direct and indirect taxes, and trade taxes. This study examines the impact of the digital tax policy on tax revenue collection in Cameroon using quarterly data from 2010 to 2021, employing an autoregressive distributed lag (ARDL) estimation technique. The results reveal that the digital tax policy put in place in 2016 had a positive and significant long-term impact on general tax revenue, but a negative and significant short-term impact on general tax revenue. The impact was positive but insignificant on council tax revenue in both the long and short term. Findings indicate that full positive gains from the digital tax policy in Cameroon have not yet been achieved due to local constraints in rural areas. Based on our findings, we recommend that business owners should be trained to use the online declaration and payment system. This will improve ease of use, reduce dependence on agents, and boost collection of general and council tax revenue. |
| Keywords: | Finance, Technology, |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:idq:ictduk:18205&r=pub |