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on Public Finance |
| By: | Luca Micheletto; Dylan T. Moore; Daniel Reck; Joel Slemrod |
| Abstract: | Traditional optimal commodity tax analysis, dating back to Ramsey (1927), prescribes that to maximize welfare one should impose higher taxes on goods with lower demand elasticities. Yet policy makers do not stress minimizing efficiency costs as a desideratum. In this note we revisit the commodity tax problem, and show that the attractiveness of the Ramsey inverse-elasticity prescription can itself be inverted if the tax system is chosen – or at least strongly influenced – by taxpayers who are overly confident of their ability, relative to others, to substitute away from taxed goods. |
| JEL: | H20 H21 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34419 |
| By: | Massenz, Gabriella (Research Institute of Industrial Economics (IFN)) |
| Abstract: | How do corporate tax systems shape the boundaries of the firm? This paper shows that nonlinear corporate income taxation can distort firms’ organizational structures by inducing tax-motivated firm splitting. I use administrative data on corporations and their owners and exploit two reforms that altered the tax benefits and costs of dividing a firm into multiple entities. First, I show that a temporary increase in the tax advantage of splitting reduces the share of firms filing jointly for corporate income tax purposes. Second, once the benefit is perceived as permanent and minimum capital requirements for new firms are abolished, the number of firms per entrepreneur rises significantly and persistently. Finally, I show that reorganizations are primarily driven by tax motives, as I find no effect on firms’ total assets, employment, or industry diversification. These findings highlight extensive-margin responses of business organization to corporate taxation, with relevant implications for the understanding of firm dynamics and for tax design. |
| Keywords: | Firm splitting; Corporate income tax; Tax avoidance |
| JEL: | H25 H26 H32 |
| Date: | 2025–10–30 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:iuiwop:1539 |
| By: | Luca Dedola; Chiara Osbat; Timo Reinelt |
| Abstract: | We study the pass-through of corporate taxes into consumer prices, leveraging 1, 058 municipal tax rate changes affecting 4, 754 German firms. A 1 p.p. increase in a producer’s tax rate raises retail prices by 0.3% on average, consistent with imperfectly competitive producers. Product-level pass-through varies substantially, as it increases in destination-specific product and retailer-category market shares. We find little evidence linking heterogeneous passthrough to differences in retailer efficiency as reflected in relative consumer prices. Instead, our findings align with standard non-CES preferences where pass through increasing with market shares implies weaker strategic complementarities in price setting than when this relationship is reversed. |
| Keywords: | Pass-through; Markup adjustment; Market Power; Vertical interactions; Double marginalization |
| JEL: | E31 F45 H25 L11 |
| Date: | 2025–11–06 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:102055 |
| By: | Holmberg, Johan (Department of Economics, Umeå University); Selin, Håkan (Institute for Evaluation of Labour Market and Education Policy (IFAU) and UCFS) |
| Abstract: | Several papers examine how firms react to dividend tax reforms. But can tax reforms affect firm behavior without even occurring? An increase in the dividend tax on shares of Swedish closely-held corporations, scheduled for January 1, 2018, was canceled at short notice. In a difference-in-difference setting, we examine how firms reacted to the government’s announced reform plans. We find that dividend payments increased in the “pre-reform years” and declined sharply in 2018, especially for cash-rich firms. This led to a reduction in the cash holdings, with potential implications for firm activity. |
| Keywords: | Owner level taxes; tax planning; investments |
| JEL: | G35 H32 |
| Date: | 2025–10–30 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:umnees:1040 |
| By: | Rishi R. Sharma; Joel Slemrod; Michael Stimmelmayr; John D. Wilson; Peter Choi |
| Abstract: | Dual-regime business tax systems typically subject smaller firms to an output (turnover) tax and larger firms to a profit (corporate) tax. Despite their prevalence, there is little formal analysis of their optimal design. This paper addresses this gap by developing a theoretical framework to analyze the optimal tax parameters and the relative performance of two types of dual-regime systems: threshold and minimum tax systems. We show that either type of dual regime system can yield lower social costs than a single regime system. Using parameter values from recent empirical studies, we also show that a generalized minimum tax system we propose would outperform other dual regime systems under most parameter values. These findings carry important policy implications, particularly as many countries currently employ either threshold or minimum tax systems, but none have yet implemented a generalized minimum tax. |
| JEL: | H25 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34418 |
| By: | Kimiko Terai (Faculty of Economics, Keio University) |
| Abstract: | This study examines interjurisdictional tax competition aimed at attracting portfolio investments by foreign creditors in sovereign bonds and corporate loans. In each of two jurisdictions, one with lower and the other with higher capital, governments maximize workers’ utility by choosing the volume of sovereign bond issuance to finance public inputs, the tax rate on creditors’ interest income, and the degree of compliance with bilateral treaty provisions concerning information exchange on creditors’ income. Under a bilateral treaty mandating only information exchange, the jurisdiction with initially lower capital tends to set a lower tax rate and exert less compliance effort, effectively functioning as a tax haven. In contrast, the jurisdiction with higher capital imposes a higher tax rate and demonstrates greater compliance, benefiting from the residence principle due to its substantial global interest income. Alternatively, under a bilateral treaty that combines information exchange with a withholding tax at source on foreign creditors, the two jurisdictions set the same tax rate on domestic creditors. This inadvertently weakens the incentives for the jurisdiction with higher capital to exchange information. These findings suggest that the specific design of international tax cooperation agreements critically shapes jurisdictions’ fiscal behavior, leading to divergent outcomes despite their shared objective of implementing residence-based taxation. |
| Keywords: | tax haven, interest income tax, home bias, Tax Information Exchange Agreement, Double Taxation Agreement |
| JEL: | H26 H54 H63 H73 |
| Date: | 2025–10–27 |
| URL: | https://d.repec.org/n?u=RePEc:keo:dpaper:dp2025-024 |
| By: | Priya Manwaring; Tanner Regan |
| Abstract: | Public disclosure of tax behavior is potentially promising for raising compliance in low-capacity states. This paper provides evidence on the social determinants of tax compliance through two cross-randomized experiments in Kampala, Uganda. We estimate effects of reporting delinquents and recognizing compliers. Compliance increases 17% for those subject to reporting but falls 16% for those promised recognition. Results support a model where being publicly known as tax-liable is costly but social sanctions for delinquency are limited. Further, disseminating tax behavior causes recipients to update compliance beliefs downward and reduces actual compliance by 20%. Overall, simple enforcement reminders raise more revenue. |
| Keywords: | property tax; tax morale; public disclosure; social image; Africa. |
| JEL: | H26 H30 D91 O18 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:gwc:wpaper:2025-010 |
| By: | Alessandra Fenizia; Nicholas Y. Li; Luca Citino |
| Abstract: | This paper studies the cost-effectiveness of targeted payroll taxes for stimulating labor demand. It uses rich administrative data to study the effects of an Italian reform that raised social security contributions for apprenticeship contracts but granted a substantial discount for firms with 9 employees or less. The discount does not increase demand for apprenticeship contracts. Instead, it subsidizes inframarginal hiring. This reform is not cost-effective. Point estimates imply that each million euros of foregone social security contributions supports the employment of 29 apprentices for one year and no permanent contracts (these estimates are not statistically different from zero). |
| JEL: | H20 H32 J23 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34437 |
| By: | Bruno Paolo Bosco (Department of Economics, Management and Statistics, University of Milano-Bicocca); Carlo Federico Bosco (Independent Researcher); Paolo Maranzano (Department of Economics, Management and Statistics, University of Milano-Bicocca and Fondazione Eni Enrico Mattei) |
| Abstract: | Ignoring the possible hierarchical clustering of the data that frequently characterises the structure of labour markets implies that studies of the effects of income tax changes on labour supply use less than necessary information on the variability of the labour response. Estimation efficiency is reduced and relevant relationships affecting the agents’ reaction to net wage changes remain undetected. Motivated by the desire to implement an estimation procedure that accommodates a nested hierarchical statistical structure of labour supply macro data into of a causal-effect framework, we propose a novel multilevel DiD model that can estimate labour responses to exogenous tax hikes taking the above hierarchical structure into consideration. Using Italy as a case study, we examine the labour response to exogenous income tax changes using a hierarchical DiD model modified to account for the existence of different sources of variation of the data (regional and provincial labour markets) as well as for various possible clustering of the data (territorial, age and gender). We compare results obtained from various nested and non-nested procedures and show that our multilevel variant of the DiD model generates gains in efficiency with respect to approaches that ignore the clustering nature of the labour data. The hierarchical multilevel DiD procedure permits to qualify labour response in terms of cluster membership and to shed light on aspects of the tax issues not highlighted by current literature. |
| Keywords: | Income Taxation and Labour Supply, Tax Treatment Effect, Hierarchical Multilevel Panel Data DiD model, Linear mixed models for policy evaluation |
| JEL: | C21 C32 H24 H31 J38 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:fem:femwpa:2025.20 |
| By: | Katinka Kristine Holtsmark; Åsmund Sunde Valseth |
| Abstract: | To evaluate the marginal welfare effects of taxation and of public spending, we must account for both distortionary and distributional effects. The distributional consequences of taxation, in terms of welfare, cannot be fully captured in in the measures currently used in the literature, such as the Marginal Costs of public Funds (MCF) or the the Marginal Value of Public Funds (MVPF). We propose a measure for these welfare effects and define the Marginal Equity-Adjusted Cost of Public Funds (MECF). The MECF can be applied to any tax instrument and for any set of welfare weights. The MECF enables comparison of the marginal welfare effects of tax instruments with different tax incidence. We derive the MECF in a stylized model with linear taxation and provision of a public good. Finally, we define the analogous measure for the marginal welfare effects of public spending, and derive the Marginal Equity-Adjusted Value of Public Funds (MEVF). The MEVF enables comparison of the value of spending with different beneficiaries. |
| Keywords: | marginal cost of public funds, income inequality, lump-sum taxes, public good provision |
| JEL: | H20 H40 H50 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12228 |