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on Public Finance |
| By: | Alan J. Auerbach |
| Abstract: | This paper considers questions about the implications of rising inequality for the theory and practice of public finance. It begins by addressing fundamental reasons why the distribution of income or wealth on an annual basis before taxes and transfers offers insufficient information: (1) it does not tell us what resources are actually available to households for consumption; and (2) in providing a snapshot of the resources available to individuals of different ages at a given moment in time, without controlling for life-cycle related differences or income dynamics, it can provide a misleading estimate of the underlying degree of inequality. The paper then considers the implications of high and perhaps rising economic inequality for the design of government policy: top marginal tax rates, phase-outs of government policies for those with higher incomes, the political economy of inequality, and other subjects. |
| JEL: | H21 H22 H23 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33691 |
| By: | Dirk Krueger; Chunzan Wu |
| Abstract: | Household consumption and welfare are more strongly associated with lifetime income, but most countries base income taxes on current income and use progressive taxes to reduce inequality and provide social insurance. Is lifetime income a better tax base for a government seeking to provide social insurance and redistribution? To answer this question, we build a quantitative life-cycle model of heterogeneous households with endogenous labor supply and idiosyncratic wage risks, and calibrate it to the U.S. economy. We document that switching to a lifetime income tax leads to a more efficient distribution of hours worked over time and across states of the world. This benefit rises with tax progressivity under a lifetime income tax, whereas the opposite is true under an annual income tax. Consequently, the optimal lifetime income tax is more progressive and achieves larger ex-ante welfare for a cohort of households than the optimal annual income tax. |
| JEL: | E60 H20 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33664 |
| By: | Floris Zoutman |
| Abstract: | This paper extends the sufficient statistics approach to study international tax policy. International policy differs from domestic policies because i.) from the perspective of domestic policy makers the welfare weight on foreign agents lies below that of domestic agents, and ii.) behavioral changes by foreign agents have (general equilibrium) spillover effects on the domestic economy that are welfare relevant. I develop a tax model in which a domestic firm produces output by combining domestic and foreign inputs. Production also depends on the aggregate level of the foreign input, thereby generating a production externality. Factor prices are determined in general equilibrium by the interplay between the firm’s demand for factors and the supply provided by foreign and domestic private agents. The firm is taxed based on its factor inputs and factor prices but can avoid taxation using a costly tax avoidance technology. The cost of avoidance partly depends on investment in tax administration. Welfare is defined as a weighted sum of tax revenue and the surpluses of private domestic and foreign agents. I examine the welfare effects of marginal increases in both the tax rate and tax administration. These effects decompose into contributions to the production and fiscal externality and to transfers between domestic agents and the government, as well as between foreign and domestic agents. The sufficient statistics needed for welfare analysis are the elasticity of taxable income, the elasticity of factor prices, and the elasticity of the foreign input with respect to the policy variable of interest. |
| Keywords: | international tax policy, sufficient statistics, welfare effects, withholding tax. |
| JEL: | H26 F23 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11810 |
| By: | Conor J. Clarke; Wojciech Kopczuk |
| Abstract: | Income inequality is important, but attempts to measure it arrive at strikingly different conclusions. Why? We use recent disputes over measuring United States income inequality to return to first principles about both the income concept and inequality measurement. We emphasize two broad points. First, no measure of the income distribution is truly comprehensive, or could attempt to be comprehensive without making controversial choices. We document the practical and conceptual problems that the standard ideal—comprehensive Haig-Simons income—raises. Second, much of the controversy in this area turns on the many tradeoffs between starting with individual tax data versus attempting to match more expansive income concepts. Individual tax data reflects only a shrinking subset of a more comprehensive income concept—but it is individual data. Broader alternatives, on the other hand, are harder to allocate to individuals. We document some of the most important and contestable assumptions that allocating national income requires. |
| JEL: | D31 H20 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33678 |
| By: | Jules Ducept; Sarah Godar |
| Abstract: | This paper documents the rise of corporate tax-base narrowing measures in the EU using a novel dataset covering both tax rate and tax base reforms implemented between 2014 and 2022. Our findings indicate a shift away from the ’cut rate – broaden base’ approach, as governments increasingly align corporate taxation with industrial policy objectives. We show that EU tax competition exerts downward pressure on high-tax countries, while the likelihood of tax cuts also varies with the political orientation of governments. Using financial accounts from more than 40, 000 affiliates, we find that the average effective tax rate of multinational enterprises in the EU has declined more rapidly than the statutory rate and estimate that tax base reforms account for 24% of this decline. The estimated revenue cost of all reforms combined amounts to 3.5% of total corporate tax revenue collected from the sample firms. These revenue losses should be carefully weighed against the anticipated benefits of tax reforms. |
| Keywords: | Effective Tax Rates, Multinationals, Tax Competition, Corporate Income Tax, Tax Reform, Political Orientation, European Union |
| JEL: | F23 H25 H26 P11 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2117 |
| By: | Xavier Dufour; Pierre-Carl Michaud; Michael Smart |
| Abstract: | We use variation in marginal tax rates and in tax bracket thresholds at which they apply in order to identify the substitution and income effects of tax reforms. We use a triple-difference estimator that exploits variation from subnational tax reforms, for which behavioral responses to taxes are identified even in the presence of unobservable shocks to the income distribution. While high-income taxpayers respond more to tax changes, our results suggest this reflects much more the income or salience effects of tax reforms, rather than inherent heterogeneity in substitution effects. We discuss the implications for optimal redistributive tax policies. |
| Keywords: | income and substitution effects, tax salience, optimal progressivity |
| JEL: | D31 H21 H24 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11693 |
| By: | Mara Faccio; Jin Xu |
| Abstract: | Using limitations to the deductibility of interest payments triggered by the introduction of interest ceiling rules globally, we show that affected private firms reduce leverage relative to unaffected firms. In support of a causal effect of taxes on corporate capital structure choices, we show that the results hold for firms near the thresholds triggering the limitations, in a propensity score matched sample, and in countries required to adopt the interest ceiling rules. In contrast, falsification tests show no reduction in leverage for affected firms around pseudo-reform years. Furthermore, within a country, firms with a higher fraction of nondeductible interest payments are less responsive to tax rate changes. More broadly, across 93 countries, we document that private firms tend to decrease leverage in response to tax rate cuts and increase leverage in response to corporate tax rate hikes. |
| JEL: | F30 G30 G32 G38 H2 H25 H26 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33685 |
| By: | Olivier J. Blanchard |
| Abstract: | Most of the focus of recent stabilization policy research and practice has been on monetary rather than fiscal policy. This paper explores how, given the limits on monetary policy, fiscal policy could play a larger role. It explores the use of quasi-automatic stabilizers, i.e. changes in taxes or transfers triggered by an aggregate variable. It discusses design issues, in particular how to make such stabilizers truly debt neutral, and what aggregate variable to use as a trigger. It then focuses on a specific stabilizer, a variable VAT rate. It shows its effect in a minimalist NK model, and then discusses a number of analytical issues, both within and out of the minimalist model, such as the implications for inflation, the choice of the tax base, the implications of liquidity constraints, the implication of anticipation effects. It ends by reviewing the empirical evidence on passthrough of VAT changes, and the effects on demand of VAT changes, permanent or temporary. |
| JEL: | E62 E63 E65 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33698 |
| By: | Nicolas Djob Li Ngue Bikob (CY Cergy Paris Université, THEMA) |
| Abstract: | This paper is a model of an open economy in two countries in which we answer the question of whether the non-cooperative indirect tax should be in the country of consumption or the country of production. In this paper, each country has skilled and unskilled labor used in the production of differentiated goods in a monopolistically competitive economy. When a country raises its tax level, this causes both cross-border movement of firms and changes in labor and capital income, influencing welfare at home and abroad. We show that if in a country skilled labor is used more intensively than unskilled labor in the production of differentiated goods, the non-cooperative tax levied in the country of production leads to higher welfare than that levied in the country of consumption. The opposite is true if the country uses unskilled labor more intensively in the production of differentiated goods. |
| Keywords: | tax competition, origin principle, destination principle, monopolistic competition |
| JEL: | F10 H20 H25 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ema:worpap:2025-07 |
| By: | Cabral, Sónia (Banco de Portugal); Garcia, Joana (Banco de Portugal); Miranda, Raquel (Banco de Portugal); Peralta, Susana (Nova School of Business and Economics); Pereira dos Santos, João (Queen Mary University of London) |
| Abstract: | What type of employment exists in low-tax jurisdictions? How are employment and individual workers affected by reforms aimed at better aligning profits with real activities? Using a unique employer-employee dataset for Zona Franca da Madeira, a tax paradise on a Portuguese island, we show that workers are highly educated, perform specialized tasks, and benefit from a wage gap, particularly at the top. A reform designed to link profits more closely with real substance resulted in worker exits, while those who remained experienced wage increases and a higher likelihood of working for multiple firms simultaneously. New hires faced more precarious conditions, earning, on average, 30% less than incumbents, often working under temporary contracts. These results offer insights into policies promoting economic substance in low-tax jurisdictions. |
| Keywords: | substance requirements, labor market, corporate tax avoidance, matched employer-employee data |
| JEL: | J08 H26 F23 J31 J38 J48 H30 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17799 |
| By: | Gillitzer, Christian (University of Sydney); Landersø, Rasmus (Rockwool Foundation Research Unit); Skov, Peer Ebbesen (Auckland University of Technology); Søgaard, Jakob Egholt (University of Copenhagen) |
| Abstract: | We show how tax kinks can be used to estimate the marginal propensity to consume (MPC). Tax kinks create discrete changes in the relationship between taxable income and disposable income, which – under a set of testable assumptions – enables causal identification of the spending response to changes in disposable income. We apply our new approach using administrative data from Denmark. Using a regression kink design (RKD), we estimate a MPC of 0.6 (s.e. 0.1) for taxpayers at the top tax kink. We show theoretically the conditions under which tax kinks provide variation in transitory or permanent income and deduce that the RKD exploits predominately transitory variation in income. Our implementation addresses threats to the research design from manipulation of taxable income through labor supply and other behavioral responses. Our findings inform the targeting of fiscal stimulus and social insurance programs to high income earners. |
| Keywords: | marginal propensity to consume, tax kinks, regression-kink-design |
| JEL: | E21 H24 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17766 |