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on Public Finance |
| By: | Aronsson, Thomas (Department of Economics, Umeå University); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, University of Gothenburg) |
| Abstract: | A substantial body of empirical and theoretical research suggests that individuals care about, and derive instrumental benefits from, their rank in society. This paper extends the Mirrleesian model of optimal income taxation to a framework where individuals derive utility from their perceived ability rank. Such concerns generate externalities that tend to increase the optimal marginal tax rates for both corrective and redistributive reasons. While empirical evidence on the magnitude of these concerns is limited, their potential impact on optimal income taxation could be substantial, with top marginal income tax rates potentially exceeding 90%. |
| Keywords: | Redistributive taxation; ability; ordinal comparisons; externalities |
| JEL: | D62 D82 D90 H21 H23 |
| Date: | 2024–12–17 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:umnees:1031 |
| By: | James R. Hines Jr. |
| Abstract: | Minimum tax rules constrain only the lowest-tax jurisdictions. Because higher minimum tax rates expand the circle of affected countries and therefore the impact of any further changes, there can be dominated regions over which no parameter values would make a minimum tax efficient. Applying a Taylor approximation to the distribution of statutory corporate tax rates in 2020, the range 4%-27% is a dominated region: there may be an efficient minimum rate below 4%, or higher than 27%, but there is no efficient world minimum tax rate between 4% and 27%. Minimum taxes set at popular rates are particularly inefficient – a minimum tax rate of 15% yields value that, when positive, is equivalent to offsetting less than one percent of the effect of tax competition. |
| JEL: | H21 H25 H87 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33140 |
| By: | Kind, Hans Jarle (Dept. of Business and Management Science, Norwegian School of Economics); Schjelderup, Guttorm (Dept. of Business and Management Science, Norwegian School of Economics) |
| Abstract: | Many of the largest and most influential industries in the global economy operate digitally as multi-sided platforms, catering to different groups who are connected through intergroup network effects. This paper provides a survey of the theoretical literature on the effects of taxing these firms via indirect and corporate taxes. It seeks to establish an understanding of why traditional insights from taxation in one-sided markets may not apply to firms in multi-sided markets. Indeed, governments risk implementing counterproductive tax policies in multi-sided markets if they base their strategies on what constitutes efficient taxation in traditional markets. |
| Keywords: | Multisided platforms; taxation; imperfect competition |
| JEL: | D40 D43 H21 H22 L13 |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:nhhfms:2024_012 |
| By: | James Alm (Tulane University); Jay A. Soled (Rutgers University); Kathleen DeLaney Thomas (University of North Carolina School of Law) |
| Abstract: | While attaining perfect tax compliance is unachievable, more can and must be done. In the past, the country has relied primarily on a traditional system of sticks (e.g., audits and penalties) and carrots (e.g., refunds and whistleblower awards) to help narrow the âtax gap, â or the difference between what taxpayers owe in taxes and what they actually pay. Now, in the social media era, Congress and the Internal Revenue Service (IRS) should look beyond these traditional enforcement mechanisms. To achieve an even higher voluntary compliance rate, this article advocates for policymakers to invest greater resources to enhance the social norm related to tax compliance. While scholars have long suggested that social norms play a role in tax compliance, this article suggests a revolutionary approach, one that attempts to foster a social norm of compliance by employing the use of social media influencers. The internet and other electronic media have revolutionized and amplified the stunning impact that influencers can have. Virtually everyone, particularly the younger generation, is keenly aware of the dramatic impact that influencers can have in shaping social norms. Now is thus the time for Congress and the IRS to capitalize on this power by strategically employing social media influencers. A well-crafted influencer campaign could educate taxpayers on how to fulfill their tax obligations, remind taxpayers of the laudatory impact of the tax system, and foster a positive social norm of compliance. Such a change in compliance orientation could help policymakers narrow the tax gap, yielding billions of dollars of additional tax revenue without the need to raise tax rates. |
| Keywords: | Tax compliance, tax gap, social norms, social media, influencers, nudges |
| JEL: | H2 H26 D91 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:tul:wpaper:2413 |
| By: | Felix J. Bierbrauer (University of Cologne); Pierre C. Boyer (École Polytechnique, Palaiseau); Andreas Peichl (Ludwig-Maximilians-Universität München); Daniel Weishaar (Ludwig-Maximilians-Universität München) |
| Abstract: | We develop a theory of tax reforms for a setting with multi-dimensional heterogeneity amongst taxpayers and multiple economic decisions that are all subject to fixed and variable costs. The theorems in this paper provide a complete characterization of the conditions under which Pareto- or welfare-improving tax reforms exist. We focus on one application, the taxation of couples, and present a detailed analysis of the behavioral responses to taxation in this setting. Squaring the theorems with this analysis yields sufficient statistics for the existence of Pareto- or welfare-improving tax reforms. In the empirical part, we apply them to US data. Our findings include the following: Tax rates on secondary earnings are inefficiently high when secondary earnings are close to primary earnings. Also, reducing the tax system's degree of jointness is not Pareto-improving. Whether it raises welfare depends on a trade-off between poverty alleviation and gender balance. |
| Keywords: | Taxation of couples, Pareto efficiency, tax reforms, optimal taxation, non-linear income taxation |
| JEL: | C72 D72 D82 H21 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:ajk:ajkdps:349 |
| By: | Isabel Micó-Millán (BANCO DE ESPAÑA) |
| Abstract: | This paper demonstrates that family firms act as vehicles for inheritance tax avoidance among wealthy individuals. By leveraging a major tax reform in Catalonia, which widened the tax rate differential between tax-favored and non-tax-favored assets, I study asset-shifting responses to the change in inheritance taxation. To identify causal effects, I use the universe of inheritance tax returns and a difference-in-difference design comparing wealthy descendants to other wealthy heirs who were minimally affected by the policy change. After the tax reform, wealthy descendants inherit substantially more wealth through tax-favored assets. This effect is driven entirely by the top 0.5% of descendants, whose inheritances strongly shift towards equity in family firms. This change in the composition of inheritances is consistent with wealthy testators transferring assets to their firms as capital contributions before their passing. My estimates suggest that Catalonia forgoes 27% of current inheritance and gift tax revenues due to the reclassification of private wealth as business wealth via family firms. |
| Keywords: | inheritance tax, tax avoidance, tax reform, top wealth |
| JEL: | H24 H26 O23 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2446 |
| By: | Anastasios G. Karantounias (University of Surrey) |
| Abstract: | This paper extends the dynamic theory of optimal fiscal policy with a representative agent in several environments by using a generalized version of recursive preferences. I allow markets to be complete or incomplete and study optimal policy under commitment or discretion. The resulting theories are interpreted through the excess burden of taxation, a multiplier, whose evolution gives rise to different notions of “tax-smoothing.†Variants of a law of motion in terms of the inverse excess burden emerge when we allow for richer asset pricing implications through recursive preferences. I highlight a common unifying principle of taxation and debt issuance in all environments that revolves around interest rate manipulation: issue new debt and tax more in the future if this can lead to lower interest rates today. |
| JEL: | D80 E62 H21 H63 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:sur:surrec:0524 |
| By: | Eddy Zanoutene (CY Cergy Paris Université, THEMA) |
| Abstract: | I study an economy where a government and heterogeneous individuals can dedicate part of their resources to the funding of public goods. What is the optimal combination between government and voluntary contributions? When individuals make different donation choices only because they have different income, relying on voluntary contributions is Pareto-improving. This is true independently of the efficiency and redistributive properties of the public goods to be funded. When donation choices are influenced by unobserved characteristics (e.g., altruism, ideology), I provide simple policy rules for deciding whether governments or private contributions should be the marginal funding source, based on the price elasticity of giving and the redistributive preferences of the government. In particular, I show that the commonly applied unit-elasticity rule can align with Rawlsian preferences. I study how these policy rules adapt in presence of a market failure (leaky donations) and a government failure (uniform tax subsidies for different causes). Numerical simulations using French data reveal that limiting tax discrimination across causes significantly increases government funding, as direct government contributions compensate for the lack of flexibility of the tax system. These funding rules apply for both optimal and arbitrary provision of public goods. |
| Keywords: | Public good; pptimal taxation; charitable giving; grants; multidimensional heterogeneity |
| JEL: | H21 H41 D64 |
| URL: | https://d.repec.org/n?u=RePEc:ema:worpap:2024-12 |
| By: | Junttila, Juho; Koivisto, Aliisa; Nivala, Annika |
| Abstract: | Many countries use a reverse charge mechanism (RC) in value added tax (VAT) to combat tax evasion in specific high-risk sectors. The RC shifts the liability to remit VAT from the seller to the buyer. We study the adoption of RC in 2011 in the construction sector in Finland using tax return data on the universe of Finnish firms. Using a difference-in-differences design, we find that reported net VAT liabilities in the construction sector increased by 5% compared to unaffected firms. The results show that the remittance policy can be effective in decreasing VAT evasion by subcontractors that provide services for large firms. |
| Keywords: | tax compliance, value added tax, reverse charge mechanism, firm behavior, Business taxation and regulation, H25, H26, L74, O17, Z18, fi=Verotus|sv=Beskattning|en=Taxation|, |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:fer:wpaper:170 |
| By: | Alessandro Turrini; Julien Guigue; Áron Kiss; Alexander Leodolter; Kristine Van Herck; Frank Neher; Chrysa Leventi; Andrea Papini; Fidel Picos; Mattia Ricci; Federica Lanterna |
| Abstract: | Tax expenditures are tax relief measures targeted at some socially desirable activities or specific groups of taxpayers. This paper reviews issues related to tax expenditures in the EU and presents some stylised facts related to tax expenditures in personal income taxation (PIT), value-added taxation (VAT), and corporate taxation. Like spending programmes, tax expenditures can be used for allocative or redistributive purposes. At the same time, tax expenditures can make the tax system more complex, less transparent, may have adverse distributional impacts, and they can result in substantial revenue loss. They may also, in some cases, result in harmful tax competition among Member States. The tax-benefit microsimulation model EUROMOD is employed to simulate the fiscal and distributional impacts of two specific sets of tax expenditures. Tax expenditures in PIT that are covered by this study are estimated to represent about 16% of tax revenues from PIT in the EU27 (corresponding to about 1.2% of GDP on average). Reduced VAT rates represent a similar magnitude at about 16% of VAT paid by households in the EU27 (corresponding to about 1.1% of GDP on average). Regular reporting, monitoring and assessment of tax expenditures is crucial as it allows Member States to review and revise their tax policies. Eliminating or reducing (ineffective or cost-ineffective) tax expenditures can, in some cases, create crucial fiscal space that allows for stronger fiscal consolidation, a revenue-neutral reduction in statutory tax rates, or growth-friendly tax shifts. |
| JEL: | H23 H24 H25 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:euf:dispap:212 |
| By: | Miguel Pecho; Stoyan E Markov; Philip R Wood; Ms. Rachel Auclair; Fernando Velayos |
| Abstract: | This technical note sets out the essential elements to effectively manage tax incentives in developing countries, emphasizing the important role that revenue authorities must play in preventing abuses and revenue leakages. The note presents considerations for a risk-based compliance program on tax incentives that combines various supportive, preventative, and corrective practices and approaches. It also delineates key enablers, such as a whole-of-government approach, robust transparency and accountability practices, and a modern compliance risk management framework. |
| Keywords: | Tax incentive risks; revenue authorities; whole-of-government approach; governance; transparency and accountability; policy design and legislation; compliance risk management; risk differentiation framework; managing tax incentives; due diligence; Policy design; views ofthe IMF; reporting obligation; Customs authorities; Tax incentives; Semi-autonomous revenue bodies; Special economic zones; Global |
| Date: | 2024–11–21 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imftnm:2024/007 |
| By: | Christopher Mantzaris; Ajda Fo\v{s}ner |
| Abstract: | Tax administrative cost reduction is an economically and socially desirable goal for public policy. This article proposes total administrative cost as percentage of total tax revenue as a vivid measurand, also useful for cross-jurisdiction comparisons. Statistical data, surveys and a novel approach demonstrate: Germany's 2021 tax administrative costs likely exceeded 20% of total tax revenue, indicating need for improvement of Germany's taxation system - and for the many jurisdictions with similar tax regimes. In addition, this article outlines possible reasons for and implications of the seemingly high tax administrative burden as well as solutions. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2411.12543 |
| By: | DE POLI Silvia; ONRUBIA Jorge; PICOS Fidel (European Commission - JRC) |
| Abstract: | Assortative mating can exacerbate household income inequality within and between generations. While previous studies have shown that it raises income inequality, its effects on wealth inequality remain less explored due to data limitations. This study uses Spanish administrative microdata to assess how assortative mating influences income and wealth inequality, and to what extent taxes and benefits mitigate these disparities. We find a strong tendency for assortative mating, especially among couples at the top of the income and wealth distribution, which amplifies income and wealth inequality. Our analysis shows that the entire Spanish tax-benefit system reduces inequality to the (pre-tax) level of a hypothetical scenario of random mating. Our findings highlight the need to consider wealth, taxes, and benefits in addition to income to understand the full impact of assortative mating on household well-being and inequality. While wealth accounts only for 18.5% of the joint income-wealth at the time of marriage, it explains about 25% of the pre-tax inequality and 34% of the post-tax inequality. This is driven both by the high concentration of wealth at the top of the distribution and the low level of progressivity of wealth taxes compared to labour income taxes. |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:ipt:taxref:202412 |
| By: | Luisito Bertinelli (DEM, Université du Luxembourg, LU); Arnaud Bourgain (DEM, Université du Luxembourg, LU); Seydi Ababacar Dieng (University Cheikh Anta Diop, Dakar, SN); (University Cheikh Anta Diop, Dakar, SN) |
| Abstract: | Based on a very large number of Senegalese companies representing the quasi-universe of the formal sector, this study identifies the main drivers of the effective tax rates (ETR) at the firm level, which is a standard way to assess the extent of tax avoidance. We mainly find that ETR tends to decline with firm size and that the 2013 reform generated a general increase of ETR but a ETR reduction for large firms. This result is robust even after accounting for a few unobservable time, industry and firm characteristics. |
| Keywords: | Effective Tax Rate; Tax avoidance; Corporate income Tax; Taxation in Sub-Saharan Africa; Tax exemption. |
| JEL: | H25 O17 O55 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:luc:wpaper:24-10 |