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on Public Finance |
| By: | Jacob Goldin; Sebastian Koehne; Nicholas Lawson |
| Abstract: | We study the optimal taxation of expenditures that generate income while also serving a consumption function. We characterize the Pareto optimal income tax deduction for such mixed-purpose expenditures within a generalized Atkinson-Stiglitz model. Pareto optimality requires a partial deduction for mixed-purpose expenditures, where the deduction rate depends on the fraction of an expenditure’s marginal benefits that are attributable to income-generation rather than consumption. We extend our results to account for several practical considerations, including potential constraints relating to a uniform deduction rate or a fixed income tax schedule. Our results provide a rationale for non-uniform commodity taxation, distinct from existing models of preference heterogeneity or non-separability. |
| JEL: | H20 H21 H24 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33270 |
| By: | Nicolas Ajzenman; Guillermo Cruces; Ricardo Perez-Truglia; Darío Tortarolo; Gonzalo Vazquez-Bare |
| Abstract: | This paper investigates the impact of a progressive tax reform on tax compliance. We leverage a major progressive tax reform in a large Argentine municipality. First, we use a quasi-experimental design to estimate the causal effect of changes in a household's own tax rates on its tax compliance. Second, we utilize a large-scale natural field experiment to examine whether, holding a household's own tax rates constant, tax compliance is influenced by the tax rates of poorer or richer households. We find that reducing taxes for poorer households increases their compliance, while increasing taxes for richer households decreases their compliance. When poor households learn about the tax hike on the rich, this increases their perceived fairness of the tax system and their tax compliance. When rich households learn about the tax cuts for the poor, their perceived fairness increases significantly, but their compliance, if anything, goes down. Leveraging another reform (and another field experiment) that took place a year later, we show that both the quasi-experimental and experimental findings replicate. Our evidence highlights that tax compliance depends not only on a household's own tax rate but also on its perception of the broader tax schedule. Our findings also highlight the gap between stated and revealed preferences for redistribution. Lastly, we conduct a counterfactual analysis to illustrate the implications of our findings for the design of tax policies. |
| JEL: | C93 D31 H24 H26 H71 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33286 |
| By: | Felix J. Bierbrauer; Pierre C. Boyer; Andreas Peichl; Daniel Weishaar; Felix Bierbrauer |
| 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 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11539 |
| By: | Hjalte Fejerskov Boas (Department of Economics, University of Copenhagen); Mona Barake (Skatteforsk, NMBU) |
| Abstract: | Cryptocurrencies pose substantial challenges to tax enforcement due to their anonymous and decentralized properties, undermining conventional regulatory practices. We study the impact of an ambitious new enforcement initiative aimed at addressing these challenges: domestic third-party reporting of crypto income. We estimate tax compliance and behavioral responses to this new policy by combining unique Danish microdata from domestic crypto platforms, administrative tax records, and cross-border bank transfers. Despite the introduction of domestic third-party reporting, over 90% of crypto investors do not declare crypto income. Moreover, we identify a significant and persistent evasion response to the policy as investors shift trading activity from domestic platforms, subject to third-party reporting, to foreign platforms outside regulatory reach. Our findings underscore the limits of domestic enforcement strategies in addressing tax evasion for decentralized, borderless assets like cryptocurrencies, highlighting the need for international coordination. |
| Keywords: | Cryptocurrencies, Tax compliance, Tax enforcement |
| JEL: | D31 H24 H26 H31 G5 |
| Date: | 2024–12–19 |
| URL: | https://d.repec.org/n?u=RePEc:kud:kucebi:2421 |
| By: | Damiani Genaro Martín |
| Abstract: | This paper provides new theoretical insights into the causes and consequences of indirect tax evasion. I propose a decision-making framework that contemplates biased perceptions of apprehension probabilities, which are affected by the environment where the agents operate. This microfounded formulation allows for the analysis of how taxation affects tax evasion (and vice versa) in the aggregate, emphasizing the existing relationships between the relative size of the shadow economy, tax rates, and government revenue. It is shown that a traditional Laffer curve (inversely U-shaped and with a unique maximum) can only exist under certain conditions. The maximum government revenue attainable turns out to be, in any case, lower than in the absence of tax evasion. Nevertheless, evasion control policies are proven to be always effective in increasing government revenue. |
| JEL: | H26 K42 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:aep:anales:4724 |
| By: | Rolf Aaberge; Marco Francesconi; Jørgen Modalsli; Ola L. Vestad |
| Abstract: | This paper presents estimates of income concentration and inequality for Norway using a new comprehensive measure of income, which identifies business income as it is earned by companies rather than when it is paid out as dividends to owners. We assemble several sources of high quality register data that allow us to account for multiple layers of business ownership across all companies between 2001 and 2018. Compared to official statistics, the new measure implies that the share of income attributable to the top 1% of the distribution more than doubles and the Gini coefficient estimates increase by about 40%. Our new measure identifies substantial tax regressivity for individuals in the top percentile, a feature that cannot be detected by standard income measures. For instance, while the share of gross income paid in taxes by individuals at the 99th percentile is about 36% in 2016, the corresponding share paid by individuals in the top 1% is 19%. |
| Keywords: | income distribution, top income shares, Gini coefficient, dividends, retained earnings, tax burden |
| JEL: | D31 D63 E01 H24 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11496 |
| By: | David R. Agrawal; Laura V. Zimmermann |
| Abstract: | This paper studies the effects of transitioning from a system of sales taxes to a value-added tax (VAT) on firm-level outcomes. We construct a dataset of product- and state-specific tax rates before and after India gradually switched from a sales tax to a VAT. Exploiting staggered state-level adoptions, we first show that following the transition, effective tax rates declined substantially and complexity as measured by various proxies generally also fell. We then show that sales increased by 57% in the medium run. The reform resulted in increased earnings for workers and higher amounts of capital and digital accounting. |
| Keywords: | value added tax, sales tax, production efficiency, firms |
| JEL: | H21 H25 H26 H71 O17 O23 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11469 |
| By: | Bächli, Mirjam (University of Lausanne); Glitz, Albrecht (Universitat Pompeu Fabra) |
| Abstract: | Immigration may affect income inequality not only by changing factor prices but also by inducing policy makers to adjust the prevailing income tax system. We assess the relative importance of these economic and political channels using administrative data from Switzerland where local authorities have a high degree of tax autonomy. We show that immigrant inflows not only raise gross earnings inequality but also reduce the progressivity of local income taxes, further increasing after-tax inequality. Our estimates suggest that around 10 percent of the impact of immigration on the net interquartile and interdecile earnings gaps can be attributed to the political channel. |
| Keywords: | immigration, income taxes, earnings inequality |
| JEL: | H23 H24 H71 J31 J61 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17523 |
| By: | Audrey Guo (Santa Clara University); Melanie Wallskog (Duke University) |
| Abstract: | How costly are taxes for young firms? In this paper, we demonstrate that even small payroll taxes significantly distort entry, growth, and hiring decisions. First, leveraging cross-sectional variation in the taxes faced by new employers, we find that higher taxes discourage new firms from hiring their first workers, with an elasticity of the number of new employers to taxes of -0.1. Second, studying changes in taxes after entry, we find that higher taxes lead more firms to exit, while also reducing employment for those who survive and leading some firms to avoid taxes by using non-taxable contract labor. |
| Keywords: | firm entry, young firms, labor costs, unemployment insurance |
| JEL: | H25 H71 L26 M13 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:upj:weupjo:24-410 |
| By: | Geoffrey Gee; Jacob Goldin; Joseph Gray-Hancuch; Ithai Lurie; Vedant Vohra |
| Abstract: | Tax benefits tied to children form a central component of the social safety net in the United States. To participate in these programs, taxpayers must claim a child on their tax return. We study the claiming of children on tax returns by drawing on health insurance information returns to establish the presence of children in the United States. We estimate that the vast majority of insured children (approximately 95 percent) and a significant majority (between 88 and 97 percent) of all U.S. children are claimed on tax returns. Unclaimed children are disproportionately concentrated in lower income households and are more likely to live in Black and Hispanic neighborhoods. |
| JEL: | H20 H24 H53 I13 I32 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33277 |
| By: | Hiroko Okajima (School of Economics, Nagoya University) |
| Abstract: | In this study, we examine how ordinary taxes and earmarked taxes influence tax passthrough in a market experiment. We hypothesize that tax pass-through is lower for earmarked taxes than for ordinary taxes and that this difference depends on market conditions, specifically the balance between the trade surpluses for sellers and buyers. Our findings confirm that ordinary taxes result in full tax pass-through, whereas earmarked taxes result in less pass-through. Under earmarked taxes, sellers adjust the level of pass-through based on their trade surplus relative to the buyers’ trade surplus. These results underscore the need to distinguish between tax types. The results of our study provide novel insights into the resource allocation effects of different tax types, offering significant implications for policymakers seeking to regulate goods with externalities through taxation. |
| Keywords: | ordinary taxes; earmarked taxes; statutory incidence; market experiment |
| URL: | https://d.repec.org/n?u=RePEc:wap:wpaper:2410 |
| By: | Anthony Chuo; Chad D. Cotti; Charles J. Courtemanche; Johanna Catherine Maclean; Erik T. Nesson; Joseph J. Sabia |
| Abstract: | Electronic nicotine delivery systems (ENDS) use among lesbian, gay, bisexual, and questioning (LGBQ) teenagers is over 30 percent higher than among their heterosexual counterparts. Yet little is known about how recent efforts to curb nicotine vaping through ENDS taxes impact sexual minorities. This study explores this question using data from the 2015-2021 State Youth Behavior Surveys. We find that a one-dollar (in 2021$) per mL of e-liquid increase in ENDS taxes reduces the likelihood of any prior-month ENDS use among heterosexual teens by about four percentage points and the likelihood of habitual vaping (as measured by frequent and everyday use) by about two percentage points. In sharp contrast, we find no evidence that ENDS taxes reduce any of the vaping measures for queer youths. The coefficient estimates are consistently less strongly negative for LGBQ than heterosexual youths, and the differences in effects on frequent and everyday vaping are statistically significant. Therefore, taxes widen disparities in vaping between queer and straight teens. The estimated effect of ENDS taxes on LGBQ teens who do not report being depressed, suicidal, or bullied is similar to the effect among heterosexuals, suggesting that LGBQ youths’ tax insensitivity may be explained by their dependence on e-cigarettes to cope with unique stress-related psychological challenges. |
| JEL: | I0 I12 I14 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33326 |
| By: | Ali Enami (The University of Akron); Nora Lustig (Tulane University) |
| Abstract: | Income redistribution through taxes and transfers varies significantly across countries and time. This study re-examines the determinants of redistribution using a novel dataset of 100 observations from 77 mostly low- and middle-income countries. The analysis addresses key econometric challenges, incorporates a broader range of fiscal interventions than previous studies, and decomposes redistribution into three channels: progressivity, size, and reranking. A stronger rule of law, higher ethnic fractionalization, a larger old-age population, greater female parliamentary representation, higher unemployment, a higher income ratio between middle and top deciles, and federal systems are linked to greater redistribution. Conversely, democracy and larger population size correlate with lower redistribution. Size and progressivity of direct transfers and indirect taxes emerge as the primary mechanisms driving these outcomes. |
| Keywords: | income redistribution, Gini, progressivity and size of fiscal interventions, reranking |
| JEL: | D63 H22 H23 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:inq:inqwps:ecineq2025-680 |
| By: | Håkan Selin |
| Abstract: | In a dual income tax (DIT) system, labor income is taxed progressively, while capital income is subject to a lower proportional tax. DIT systems were introduced in Sweden, Norway, and Finland in the early 1990s. In the absence of rules restricting capital income distributions, owners of closely-held corporations would easily be able to circumvent the progressive tax on earned income by withdrawing an appropriate amount of dividends instead of wages. The Nordic countries adopted very different income splitting models, with immediate implications for the tax treatment of dividends. In this article I first review the principles of the income splitting rules of Sweden, Norway, and Finland. I then discuss some of the trade-offs involved in the design of such rules. |
| Keywords: | income taxation, Nordic comparison, dividend taxation |
| JEL: | H32 G35 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11491 |
| By: | Syed Mainul Ahsan; Syed M. Ahsan |
| Abstract: | This paper, originally designed to focus on discovering a suitable tax structure that befits an aspiring LMIE as it advances toward the UMIE status. On reflection, it becomes evident that it is hard to meaningfully deliberate on the composition of taxes without focussing in equal measure on the issue of the size of tax revenue at stake, namely the tax effort. The transition to UMIE must embrace public’s demand for a healthcare system fully in compliance with the WHO criteria of UHC, for quality human capital, and for both a physical and IT infrastructure consistent with faster growth over the next decade or so. We explore the probable causes of low revenue effort and an unchanged structure of taxes and their persistence over the recent decades. Finally, we delve into the issues of fundamental reforms of the tax system as well as of the softer aspects of tax reform, namely that of tax administration, evasion and compliance. |
| Keywords: | tax structure, taxable capacity, tax handles, tax compliance, tax evasion, informal economy, inheritance and property taxation |
| JEL: | B12 H21 H22 H24 H25 H26 H27 H55 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11484 |