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on Public Finance |
| By: | Alexander M. Gelber; Damon Jones; Ithai Lurie; Daniel W. Sacks |
| Abstract: | Budget set kinks are much studied in economics, including in the context of “bunching” estimators that assume individuals react to the true marginal tax rate. We document that individuals disproportionately “left-bunch” below kinks in the context of the Social Security Earnings Test where incentives from its actuarial adjustments should instead push many rational agents to bunch above the kink. We show that the left bunching in this case cannot be explained through standard, rational reactions to the incentives. We demonstrate that these patterns represent the first empirical evidence consistent with “spotlighting, ” wherein individuals misperceive the local marginal tax rates as applying throughout the tax schedule and therefore treat the kink as a notch. In the context of the Earnings Test, this misperception provides an explanation for why literature has found large earnings responses despite the fact that the Earnings Test typically creates weak incentives for rational agents to adjust earnings. More generally, if individuals perceive kinks as notches, then elasticities estimated from bunching at kinks where this misperception may be at play may be significantly over-estimated. |
| JEL: | H20 H24 H55 J14 J22 J26 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33496 |
| By: | Glenn P. Jenkins (Department of Economics Queen’s University, Canada, and Cambridge Resource International Inc.); Abdallah Othman (Cambridge Resources International Inc.); Edna Armendariz (Inter-American Development Bank (IDB)); Anastasiya Yarygina (Inter-American Development Bank (IDB)) |
| Abstract: | This report provides a systematic review of the impact of tax incentives on investment and economic growth in Latin American and Caribbean (LAC) countries. While tax incentives are widely used to attract foreign direct investment (FDI), stimulate employment, and promote sectoral development, empirical evidence on their effectiveness remains mixed. The analysis reveals that although some incentives have successfully increased investment in targeted sectors, many fail to deliver significant economic benefits, often leading to substantial revenue losses. A critical gap in this report is the lack of comprehensive ex-ante evaluations, with most studies focusing on ex-post assessments. Cost-benefit analyses indicate that broad-based tax incentives are less efficient than targeted schemes, particularly in research and development (R&D) and export-oriented industries. The findings highlight the need for improved evaluation frameworks, better governance, and more strategic tax incentive policies to ensure sustainable economic growth. |
| Keywords: | Corporate Income Tax, Cost-Benefit Analysis (CBA), Economic Growth, Investment Policy, Fiscal Policy, Public Finance, Foreign Direct Investment (FDI), Latin America and the Caribbean (LAC), Special Economic Zones (SEZs), Tax Incentives |
| JEL: | F21 H20 H25 H32 O23 |
| Date: | 2025–02–05 |
| URL: | https://d.repec.org/n?u=RePEc:qed:dpaper:4630 |
| By: | Aris A. Avgousti (Central Bank of Cyprus) |
| Abstract: | This paper presents updated estimates of short-run elasticities for the fiscal variables that depend upon the economic cycle for Cyprus. First, we construct a ‘policy-neutral’ time-series dataset, adjusting fiscal data for the estimated or assumed impact of discretionary policy measures. Then, for each fiscal variable, we estimate various specifcations using different macro bases and control variables (year dummies, structural breaks, or tax reforms), applying two econometric models (first differences and error correction model) to annual data for the period 1995-2023. In addition, we employ rolling-window regressions to detect possible trends in the fiscal-to-base elasticities. For each fiscal variable, we select the specifcations that satisfy the pre-specifed model-selection criteria and identify the most suitable specification. Based on the estimation results, we propose the use of updated fiscal elasticities for our forecasts. The proposed changes to the fiscal elasticities involve adjustments to the macro bases for three main revenue categories – personal income tax, social security contributions, and value added tax – but most importantly, they generally suggest the use of higher elasticities compared to those previously applied, particularly for revenue from direct taxes (personal and corporate income taxes). The impact of these changes on the June 2024 fiscal projections of the CBC is signifcant. All else equal (i.e. without any changes in judgment), public revenue would rise by 0.1 percent of GDP in 2024, 0.3 percent of GDP in 2025 and 0.7 percent of GDP in 2026. The largest impact would stem from the changes in the elasticities of personal and corporate income taxes, with average annual impacts of 0.12 percent of GDP and 0.10 percent of GDP, respectively. The updated estimates of fiscal elasticities could improve the accuracy of our fiscal projections and provide a clearer understanding of the factors driving government revenue and unemployment-related expenses. |
| Keywords: | Fiscal elasticities, Public revenue, Fiscal Projections, Public fnances |
| JEL: | H68 H30 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:cyb:wpaper:2025-1 |
| By: | Osaid Alshamleh (Vienna University of Economics and Business, Cyprus International University, North Cyprus, and Cambridge Resources International Inc.); Glenn P. Jenkins (Department of Economics Queen’s University, Canada, and Cambridge Resource International Inc.); Mikhail Miklyaev (Department of Economics Queen’s University, Canada, and Cambridge Resource International Inc.) |
| Abstract: | This report analyses the revenue generation and distributional impact of excise taxes in Ethiopia. Using the Ethiopian Household Consumption-Expenditure Survey (HCE), the study examines 10 categories of excisable goods, including alcohol, cigarettes, cosmetics, and motor fuel. The findings reveal that the top 40% of households account for over 84% of expenditures on excisable goods and 81.4% of total excise tax revenues. The most significant revenue sources are clothing, textiles, and garments (31.02%), motorized vehicles (20.79%), and cigarettes (14.88%). The excise tax system is mildly regressive, with lower-income households bearing a slightly higher burden relative to their total expenditures. Taxes on cosmetics and non-alcoholic beverages are the most regressive, while taxes on motor fuels and cigarettes are progressive due to higher consumption by wealthier households. The report also identifies five major items currently exempt from excise taxes, including edible oils, sugar, and kerosene. If these items were taxed, excise revenues could increase by 33%. Notably, taxing kerosene would be progressive, with 92.6% of the burden falling on the top 40% of households. The study suggests that revising exemptions and adjusting tax rates could make Ethiopia’s excise tax system more efficient and equitable. For example, taxing kerosene could generate significant revenue while targeting higher-income households, and revising exemptions on edible oils and sugar could reduce regressivity. Overall, the report highlights opportunities to enhance revenue collection and improve the equity of Ethiopia’s excise tax system by aligning policies with international best practices. |
| Keywords: | Ethiopia, Excise Taxes, Household Expenditure, Progressive Taxation, Regressive Taxation, Tax Incidence, Tax Revenue |
| JEL: | D31 H22 H23 H24 H25 O3 |
| URL: | https://d.repec.org/n?u=RePEc:qed:dpaper:4631 |