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on Public Finance |
| By: | Jules Ducept (EU Tax Observatory, EPEE-CEPS UniversitéParis-Saclay); Sarah Godar (EU Tax Observatory, DIW Berlin) |
| 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: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:dbp:wpaper:030 |
| By: | Gagnie Pascal Yebarth |
| Abstract: | This paper provides a comprehensive review of the literature on tax policy within the framework of strategic market games (SMG). We refer to a simple prototype of SMGs called bilateral oligopoly models. The review reveals that the effects and effectiveness of redistributive tax policies depend on the preferences of individuals who behave strategically in trade. A crucial element of this analysis is the influence of strategic interactions on the price formation mechanism and, therefore, on the optimality of a tax-and-transfer policy to improve allocation efficiency. Then, we connect our findings to broader discussions in the literature, specifically regarding the effects of taxation on general and partial equilibrium (tax incidence: ad valorem versus per unit taxes; optimal taxation and market power; market imperfections, strategic interactions, and taxation). Although the comparison remains conceptually complicated, we show the complementarity of the diverse literature. |
| Keywords: | Imperfect competition, Market power, Strategic market game, Tax policy. |
| JEL: | C72 D43 D51 H22 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:drm:wpaper:2025-34 |
| By: | Hjalte Fejerskov Boas (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: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:dbp:wpaper:029 |
| By: | Francesca Barigozzi; Laura Cornelsen; Mario Mazzocchi |
| Abstract: | We propose a theoretical model in which uninformed consumers update their beliefs about the health effects of sugar in soft drinks through two sequential policies: an information campaign and a sugar tax. The information campaign is modeled as a costless signal (cheap talk), while the tax policy is modeled as a costly signal. While the information campaign conveys only partial information, we show that the tax policy can generate a fully revealing equilibrium, thereby transmitting accurate information to consumers. Our empirical analysis supports the theoretical predictions. Exploiting the announcement (on March 16, 2016) of the tiered structure of the UK Soft Drinks Industry Levy, we provide evidence consistent with the tax policy functioning as an effective signaling device. Immediately after the tax announcement and before implementation, both the purchased volumes and the sugar content of taxed soft drinks declined, while purchases of exempted sugar-sweetened beverages remained unchanged. In contrast, the preceding information campaign had a similar effect across all soft drinks, regardless of their sugar content. |
| JEL: | D82 D12 H31 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:bol:bodewp:wp1206 |
| By: | Abdoulaye Ndiaye (New York University); Zhixiu Yu (Louisiana State University) |
| Abstract: | Raising the retirement age is a common policy response when social security schemes face fiscal pressures. We develop and estimate a dynamic life cycle model to study optimal retirement and tax policy when individuals face health shocks and income risk and make endogenous retirement decisions. The model incorporates key features of Social Security, Medicare, income taxation, and savings incentives and distinguishes three channels through which health affects retirement: nonconvexities in labor supply due to health-dependent fixed costs of working, earnings reductions, and mortality risk. We estimate our model to match US microdata and show that labor supply nonconvexities play a dominant role in driving early retirement, making rigid increases in the retirement age welfare reducing. In contrast, more flexible policies, such as increasing the dependence of Social Security benefits on the claiming age, can improve welfare and pay for themselves with a fiscal surplus. We map a range of policy reforms to their marginal values of public funds (MVPFs), showing that certain incentives to delay claiming offer MVPFs of infinity while broad-based retirement age increases have negative willingness-to-pay. These findings offer novel retirement policy prescriptions and challenge the prevailing emphasis on raising the retirement age. |
| Keywords: | dynamic models, Medicare, income taxation, savings, Labor Supply, marginal value of public funds, MVPF, willingness to pay |
| JEL: | J26 H55 H21 I10 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:hka:wpaper:2025-005 |
| By: | Eva Davoine; Joseph Enguehard; Igor Kolesnikov |
| Abstract: | We examine the political costs of taxation in early modern France. We focus on efforts to enforce the salt tax, the rate of which varied across regions. Using a spatial difference-in-discontinuities design, we compare municipalities just inside the high-tax region with those just outside, before and after a reform aimed at curbing illicit salt smuggling. We find that tax enforcement led to a twenty-fold increase in conflicts between taxpayers and the state in municipalities in the high-tax region. This effect persists until the French Revolution, supporting the view that enforcing the salt tax incurred significant political costs. Finally, we document that the likelihood of conflict increases with tax differences between neighboring regions, which we use to derive an upper bound on the political costs of increased tax enforcement in this historical period. |
| Keywords: | taxation, protest, conflict |
| JEL: | D74 H26 H39 K42 N43 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11945 |
| By: | Nicos Koussis; Francesco Menoncin; Paolo M. Panteghini; Paolo Panteghini |
| Abstract: | We extend Trade-Off Theory (TOT) by assuming that EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), rather than EBIT (Earnings Before Interest and Taxes), follows a Geometric Brownian Motion (GBM), and we thus consider the role of tax depreciation allowances (TDA) in firms’ leverage decisions. Our model also accounts for the possibility of a sudden stop in a firm’s operations and thus incorporates the impact of finite firm and depreciation tax allowances on leverage. We show that TDA act as a complement to debt leverage, generating a negative leverage-profitability relationship over a wide range of plausible parameters, consistent with empirical evidence. However, our model also predicts that this relationship may weaken in low-tax environments or at moderate levels of volatility, and may even turn positive under very high volatility. The model retains the standard TOT predictions regarding the sensitivity of leverage to volatility, taxes, growth, and bankruptcy costs, while incorporating the effects of TDA and a finite firm horizon. Furthermore, our analysis highlights that policymakers can influence corporate capital structure through both tax rates and TDA. To implement effective policy, they should also account for the volatility of the business environment. |
| Keywords: | capital structure, contingent claims, corporate taxation, profitability, trade-off model |
| JEL: | G32 H25 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11937 |
| By: | Michael P. Keane; Xiangling Liu |
| Abstract: | We present a dynamic life-cycle model of demand for owner-occupied housing, investment property and liquid assets. Households face transaction costs, downpayment requirements, liquidity constraints, and tax preferences for owner-occupied housing. The model replicates key facts about home ownership, liquid assets, debt and consumption. It predicts taxing imputed rent would raise enough revenue to fund a 9.15% income tax rate cut, and increase ex ante welfare of all agents. Eliminating the mortgage interest deduction (MID) also gives a Pareto improvement. Replacing MID with a refundable 24.6% mortgage interest credit would increase the ownership rate by 5.9%. Gains are concentrated among low to middle income households and young households, as housing becomes more affordable for them. |
| JEL: | G11 G51 H20 H31 R21 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33809 |
| By: | Piero Basaglia; Sophie M. Behr; Moritz A. Drupp |
| Abstract: | We investigate how fuel taxation reduces climate and pollution externalities by evaluating the world’s largest environmental tax reform. Using spatially detailed emissions data from more than 1, 000 European regions in a synthetic difference-in-differences framework, we evaluate the impact of Germany’s 1999 ecological tax reform on transport-related carbon and air pollutant emissions. We document sizable aggregate reductions for all emissions, exceeding 10 percent on average per year relative to synthetic baselines. Using official damage valuations, we estimate avoided external costs of more than €100 billion, two-thirds of which stem from health benefits due to reduced air pollution. Emission reductions and associated monetized benefits are larger in lower-income regions, contrasting with a slightly regressive distribution of fuel costs. These findings underscore the importance of incorporating air quality co-benefits when evaluating the efficiency and distributional effects of fuel and carbon pricing. |
| Keywords: | environmental policy, externalities, fuel tax, carbon tax, synthetic difference-in-differences, tax elasticity, climate, pollution |
| JEL: | Q58 H23 I18 R48 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11949 |
| By: | Lysle Boller; Clare M. Doyle; Juan Carlos Suárez Serrato |
| Abstract: | We use administrative corporate tax data from the IRS to study a particular form of tax avoidance for US multinational corporations (MNCs). This strategy relies on cost sharing agreements (CSAs), which govern joint R&D efforts conducted with foreign affiliates and allow US MNCs to shift profits by moving intellectual property abroad. We analyze an unexpected 2005 Tax Court ruling that additionally allowed MNCs with CSAs to engage in cost shifting: by excluding employee stock option compensation costs from CSAs, the ruling allowed MNCs to allocate these formerly-shared costs entirely to their US parent corporations. This in turn increased the domestic tax deduction associated with R&D expenses, generating a tax shield that lowered the after-tax cost of domestic R&D. We show that the regulatory change increased market value, R&D investment, and cost shifting margins among US MNCs with CSAs following the ruling. Our results demonstrate how tax minimization strategies can translate into real changes in innovative economic activity. |
| JEL: | D22 H25 H26 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33805 |
| By: | Sébastien Laffitte (EU Tax Observatory); Edoardo Montagner (EU Tax Observatory) |
| Abstract: | This report examines the evolution of harmful corporate tax practices in recent years, as well as the development of blacklists intended to identify such practices. First, it shows that harmful tax practices are no longer confined to easily identifiable jurisdictions known for aggressive tax policies. Second, it finds that current blacklists—although they may be linked to potentially effective sanctions—are generally too limited in scope to produce significant economic effects. Finally, the report proposes enhanced criteria for constructing blacklists of harmful tax regimes. In particular, it argues that introducing a quantitative criterion based on effective tax rates is essential to account for the recent evolution of harmful tax competition. |
| Keywords: | Harmful tax practices, tax competition, blacklists |
| JEL: | H26 H87 F38 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:dbp:report:008 |
| By: | Yohei KOBAYASHI; Yasuo BAMBA; Motohiro SATO |
| Abstract: | Many countries have reduced their statutory tax rates (STRs) on corporate income while broadening their tax bases. Japan presents an intriguing case study in this context. It has reduced its STR while expanding its pro forma standard tax primarily based on companies' value-added. This study analyzes the impact of Japan's corporate tax reforms since the mid-2010s on firm dynamics using forward-looking effective tax rates (ETRs) that incorporate pro forma standard taxation. Our observations indicate that these corporate tax reforms lowered the ETR and narrowed the disparities between companies. Although the reduction in ETRs stimulated increased investment and employment, the positive impacts were partially offset for large firms owing to the expansion of pro forma standard taxation, which effectively increased the labor costs. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:eti:dpaper:25062 |
| By: | Naoki Tani (Institute of Economic Research, Kyoto University and Ministry of Finance); Taro Ohno (Faculty of Economics and Law, Shinshu University) |
| Abstract: | This study investigates the benefits and caveats of using tax agency data through a descriptive analysis, and estimates the robust Gini coefficient for individuals’ earned income by applying statistical tools combining household survey and tax agency data. We show that the advantage of the tax agency data is that it captures top incomes, while its weak coverage of female non-regular workers can be complemented by combining it with the household survey data. Further, the descriptive results show that the Gini coefficient computed using the household survey is larger than that from using tax agency data, despite not covering top incomes. This indicates that capturing the distribution of the middle and low incomes is more important to estimate the inequality level than capturing the top incomes in Japan. Moreover, the robust estimate of the Gini coefficient indicates that combining top incomes does not substantially affect the overall Gini index computed solely from the household survey data, which is distinct from the results for other countries in the literature. However, when we decompose the Gini coefficient into between- and within-group components of gender and employment status, combining the tax agency and household survey data is important. Although both data show an increase in the between-group component from 2014 to 2019, the integrated data indicate that the between-group contribution actually decreases from 2014 to 2019, reflecting the increases in the incomes of regular female workers. |
| Keywords: | Gini coefficient, Pareto distribution, top incomes, Lorenz curves, tax agency data |
| JEL: | C46 C81 D31 H24 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:kyo:wpaper:1119 |
| By: | Toshiyuki Uemura (School of Economics, Kwansei Gakuin University) |
| Abstract: | This study develops a theoretical model based on the optimization behaviors of households and local governments for the hometown tax donation (Furusato Nozei) system in Japan, which has garnered attention as a new means of obtaining financial resources for local governments. Further, it conducts theoretical, numerical simulation, and empirical analyses. This study is the first to apply the Krugman model, which focuses on brand power and the transportation cost of reciprocal gifts and addresses differentiated goods and spatial trade. The empirical analysis targets municipalities in Hokkaido because of (1) the brand power of Hokkaido products and (2) the fact that transport to Honshu is almost exclusively limited to airports and ports; thus, transportation costs can be analyzed. This study is also the first to use the transportation distance of reciprocal gifts measured using a road network. Comparative statics analysis based on the theoretical model revealed the following trends: Higher reciprocal gift prices reduce reciprocal gift consumption but have an indeterminate impact on donation amounts; stronger brand power increases both donation amounts and reciprocal gift consumption; and higher transportation costs reduce reciprocal gift consumption. Reciprocal gift ratio, brand power, and transportation costs also affect the optimal reciprocal gift price. Finally, the empirical analysis based on municipal data for Hokkaido confirms that the price of reciprocal gifts does not significantly affect donation amounts and negatively affects reciprocal gift consumption, whereas the number of reciprocal gift types (a proxy variable for brand power) positively affect both donation amounts and reciprocal gift consumption. Transportation distance to airports and ports negatively affects both, which is consistent with the results of the theoretical model. |
| Keywords: | Hometown tax donation system (Furusato Nozei), Brand power of reciprocal gifts, Transportation costs |
| JEL: | H71 H72 H77 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:kgu:wpaper:294 |