|
on Public Finance |
|
Issue of 2024‒07‒22
ten papers chosen by |
| By: | Lundberg, Jacob (Research Institute of Industrial Economics (IFN)) |
| Abstract: | This paper develops a comprehensive framework for analyzing the revenue, efficiency and social welfare implications of top income taxation. It generalizes the Saez (2001) formula for the optimal top tax rate by deriving analytical expressions for the Laffer curve and excess burden. Applied to the 2021 U.S. top federal tax bracket, assuming a taxable income elasticity of 0.25, the study finds an excess burden of $101 billion and a maximum potential revenue increase of $111 billion. In contrast, other English-speaking countries and Germany are positioned closer to their Laffer curve peaks, incurring greater efficiency losses, whereas the Nordic countries studied are on the downward-sloping part of the Laffer curve. Additionally, the paper endogenizes the marginal social welfare weight on high-income earners and, following an inverse optimal taxation approach, concludes that in none of the studied countries does the observed top marginal tax rate appear consistent with a conventional welfarist social welfare function. |
| Keywords: | Income taxation; Optimal taxation; Laffer curve; Excess burden |
| JEL: | H21 H24 |
| Date: | 2024–06–18 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:iuiwop:1492 |
| By: | Lucas Menescal |
| Abstract: | Given the contrasting evidence on the redistributive role of taxation, this study seeks to isolate the redistribution process performed through the tax and transfers system and address the effects of several taxes on the difference between pre- and post-tax and transfers Gini coefficients, commonly referred as the Reynolds-Smolensky Index (RSI), in a panel of 107 advanced and developing economies for the period between 1990 to 2020. Contrary to previous evidence, obtained results showed little evidence that direct taxation had significant redistributive effects, whereas indirect taxation only presented negative impacts on developed economies. Still, robust redistributive effects of social security contributions were observed for both groups, while property taxes seem to be associated with higher redistribution in the long run. Finally, the importance of investment and employment levels is underlined and policy recommendations for higher income redistribution are proposed. |
| Keywords: | Taxation; Income redistribution; Reynolds-Smolensky Index; Panel Data. |
| JEL: | C23 C26 H23 H55 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:ise:remwps:wp03282024 |
| By: | Fatih Guvenen; Gueorgui Kambourov; Burhan Kuruscu; Sergio Ocampo-Diaz |
| Abstract: | When is a wealth tax preferable to a capital income tax? When is the opposite true? More generally, can capital taxation be structured to improve productivity, incentivize innovation, and ultimately increase welfare? We study these questions theoretically in an infinite-horizon model with entrepreneurs and workers, in which entrepreneurial firms differ in their productivity and are subject to collateral constraints. The stationary equilibrium features heterogeneous returns and misallocation of capital. We show that increasing the wealth tax increases aggregate productivity. The gains result from the “use-it-or-lose-it” effect of wealth taxes when returns are heterogeneous, which causes a reallocation of capital from entrepreneurs with low productivity to those with high productivity. Furthermore, if the capital income tax is adjusted to balance the government's budget, aggregate capital, output, and wages also increase. We then study the welfare maximizing combination of wealth and capital income taxes and show that the optimal mix shifts towards a higher wealth tax and a lower capital income tax as the capital intensity of production increases. For a range of plausible parameter values, the optimal wealth tax is positive, whereas the capital income tax can be positive or negative (a subsidy). We then endogenize the entrepreneurial productivity distribution by introducing either ex ante innovation or entrepreneurial effort in production and show that this strengthens our results: by allowing entrepreneurs to keep more of the upside relative to a capital income tax, a wealth tax incentivizes more innovation and entrepreneurial effort, leading to larger increases in productivity, output, and welfare. |
| JEL: | E21 E25 E60 H21 H24 J31 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32585 |
| By: | Hirofumi Takikawa (Faculty of Economics and Business Administration, Goethe University Frankfurt, GERMANY and Junior Research Fellow, Research Institute for Economics & Business Administration (RIEB), Kobe University, JAPAN) |
| Abstract: | The United Nations' "2030 Agenda for Sustainable Development" highlights the importance of formalizing the informal economy, which could potentially increase tax revenues in developing countries. This paper investigates the impact of formalization on optimal tax schedules, emphasizing the need for redistributive incentives alongside formalization. Extending the Mirrlees model to incorporate government intervention against the informal economy, we propose an optimal tax formula. Quantitative analysis shows that aligning the tax schedule with formalization increases tax revenue and income transfers while maintaining social welfare. The result can be interpreted as an implicit cost of welfare-neutral formalization in terms of tax revenues and income transfers. Conversely, leaving the tax schedule unchanged undermines these benefits. This research provides insights into the design of optimal tax policies that incorporate formalization. |
| Keywords: | Informal economy; Formalization; Income tax; Redistribution |
| JEL: | E26 H21 H26 J46 O17 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:kob:dpaper:dp2024-18 |
| By: | Berliant, Marcus; Gouveia, Miguel |
| Abstract: | The literatures dealing with voting, optimal income taxation, implementation, and pure public goods are drawn on here to address the problem of voting over income taxes to finance a public good. In contrast with previous articles, general nonlinear income taxes that affect the labor-leisure decisions of consumers who work and vote are allowed. Uncertainty plays an important role in that the government does not know the true realizations of the abilities of consumers drawn from a known distribution, but must meet the realization-dependent budget; the tax system must be robust. Even though the space of alternatives is infinite dimensional, conditions on primitives are found to assure existence of a majority rule equilibrium. |
| Keywords: | Voting; Income taxation; Public good; Robustness |
| JEL: | D72 D82 H21 H41 |
| Date: | 2024–06–20 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121260 |
| By: | Jarkko Harju (Tampere University); Kaisa Kotakorpi (Tampere University); Tuomas Matikka (VATT Institute for Economic Research); Annika Nivala (VATT Institute for Economic Research) |
| Abstract: | We analyze firm responses to risk-based tax audits – a central tool in regular tax enforcement – using full-population data on tax audits and tax returns in Finland. We find an immediate and persistent increase in reported profits by the audited firms after being audited compared to matched non-audited firms with a similar development in key outcomes before the audit. This is an indication of significant non-compliance in the baseline. We also examine the anatomy of non-compliance and find that both revenue and labor costs increase after audits, suggesting that some firms may follow a strategy of under-reporting their overall scale of operation. We use novel data on bankruptcy petitions and court decisions to investigate whether stricter tax enforcement has implications for real economic activity. We find a large increase in the likelihood of bankruptcy after audits among non-compliant firms, but no increase in bankruptcies for compliant firms. |
| Keywords: | tax compliance; tax evasion; tax enforcement; firm behavior |
| JEL: | H26 H32 H83 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:fit:wpaper:22 |
| By: | Schanzenbach, Diane Whitmore (Northwestern University); Strain, Michael R. (American Enterprise Institute for Public Policy Research) |
| Abstract: | The 2021 Child Tax Credit (CTC) expansion increased government benefits to families, and especially to families with the lowest incomes. Economic theory predicts that this policy intervention would have led to a reduction in labor supply among adults in those families. Our review of available research suggests that employment within broadly defined demographic groups was not reduced by the 2021 CTC changes. However, we present evidence that employment was reduced among mothers with relatively low levels of education - the demographic group that was most affected by the CTC expansion. For the 2021 CTC expansion, theory and evidence were in the strongest alignment when the research design that produced the evidence was most focused on the demographic groups most likely to be affected by the expansion. |
| Keywords: | employment, labor supply, cash transfers, maternal employment, child tax credit |
| JEL: | H31 J08 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17041 |
| By: | Jiwan Lee; Katherine Michelmore; Natasha Pilkauskas; Christopher Wimer |
| Abstract: | In 2021, the U.S. Congress temporarily expanded the Earned Income Tax Credit for workers without a qualifying child (childless EITC), to help counteract the impact of the COVID-19 pandemic on lower-wage working adults. This expansion roughly tripled the maximum benefits for qualifying filers and lowered the minimum age to claim the credit from 25 to 19, providing new benefits to low-income young adults. Using data from the Census Bureau’s Household Pulse Survey and a difference-in-differences design, this study is among the first to examine the impact of the expanded childless EITC on young adults’ material hardship (food, housing, and expenses). We find that the temporary expansion led to a significant decrease in housing hardship among low-income, childless, young adults, and suggestive evidence that it also reduced food insufficiency and difficulty with expenses. Overall our findings show that the temporary expansion of the childless EITC helped reduce material hardship among young adults. |
| JEL: | H20 I32 J08 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32571 |
| By: | Katherine Michelmore; Anna Wiersma Strauss; Emily E. Wiemers |
| Abstract: | Families provide substantial care to older adults with functional limitations. Policies that incentivize work have the potential to reduce this valuable care. This study uses the Health and Retirement Study (HRS) and a simulated instrument approach to examine the consequences of increases in the generosity of the Earned Income Tax Credit (EITC), a work-contingent cash benefit, for the care that parents receive from their EITC-eligible daughters. We find that increases in EITC generosity reduce the care that parents receive from their EITC-eligible daughters, especially older parents and those with functional limitations. To assess the full effect of this reduction in caregiving, we examine whether financial transfers increase as a substitute for reduced care, whether other adult children fill the care gap left by EITC-eligible daughters, and whether paid caregiving increases in response to declines in family care. We find no evidence of increased financial transfers and care gaps remain for older parents that are not filled by other children or paid care providers. We conclude that an unintended consequence of the EITC is that the older parents of EITC recipients receive less care from their children overall in response to increased EITC benefit generosity. |
| JEL: | H24 I38 J22 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32583 |
| By: | Robin J. Döttling; Doron Y. Levit; Nadya Malenko; Magdalena A. Rola-Janicka |
| Abstract: | We study the interplay between a "one person-one vote" political system and a "one share-one vote" corporate governance regime. The political system sets Pigouvian subsidies, while corporate governance determines firm-specific public good investments. Our analysis highlights a two-way feedback effect. In a frictionless economy, shareholder democracy is irrelevant: the political system fully offsets any effects of shareholder influence. With frictions in public policy provision, pro-social corporations fill the void of a dysfunctional regulatory system and increase the provision of public goods-demonstrating the benefit of shareholder democracy. Nevertheless, shareholder democracy can hurt a typical citizen because of the representation problem: it favors the preferences of the wealthy. If shareholders have extreme views, there can be a backlash against ESG initiatives, and the political system may undo or tax corporate social responsibility measures. Advancements in financial technologies that increase investor diversification or enable pass-through voting have important implications for these trade-offs of shareholder democracy. |
| JEL: | D62 D72 G28 G34 H23 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32605 |