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on Public Finance |
| By: | Jacob Goldin; Sebastian Koehne; Nicholas Lawson |
| Abstract: | Optimal tax policy frequently prescribes different tax treatments for activities that are difficult in practice for tax administrators to distinguish, such as expenditures undertaken for business versus personal purposes. We study the optimal design of income tax deductions for such expenditures under the assumption that a common deduction rate must be applied to both forms of the expenditure. The Pareto optimal common deduction turns on the relative compensated spending response for each margin, weighted by the income tax wedge. We also characterize the welfare gain from distinguishing between the two expenditure forms as a harmonic mean of the compensated responses. We illustrate both results with an application to air travel expenses. |
| Keywords: | optimal taxation, tax deductions, indistinguishable expenditures, tax administration, business and personal expenses |
| JEL: | D82 H21 H24 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_13077 |
| By: | António Afonso; José Alves; Kakoum Eudes Somda |
| Abstract: | Independent fiscal institutions, or fiscal councils, have no authority to set or collect taxes, yet their scrutiny of fiscal policy may shape governments’ incentives to mobilize revenue. This paper examines whether fiscal council adoption helps close the tax gap, defined as the share of estimated revenue potential that remains uncollected. Using a panel of 159 countries over 1990–2021, we estimate revenue potential with a stochastic frontier and exploit the staggered adoption of fiscal councils using a difference-in-differences estimator robust to heterogeneous treatment effects. On average, countries leave about 36% of their estimated revenue potential uncollected, with a mean tax gap of 0.38 in emerging and developing economies compared with 0.30 in advanced economies. We find that fiscal council adoption reduces the tax gap by 5.0 percentage points, or roughly 15% of its pre-adoption level. The effect builds up gradually after adoption and holds across a range of robustness checks, including alternative frontier specifications and estimators. It is concentrated in emerging and developing economies, where the scope for improving revenue mobilization is greatest, and remains significant across pre adoption fiscal conditions, whether or not a fiscal rule is in place and whether public debt and deficits are high or low. The adjustment operates on the revenue side rather than the expenditure side, mainly through VAT, trade and property taxes, consistent with governments mobilizing revenue sources that were available but left untapped. Overall, the findings suggest that fiscal councils can support domestic revenue mobilization by strengthening fiscal scrutiny. |
| Keywords: | fiscal councils, domestic revenue mobilization, tax gap, stochastic frontier analysis, staggered difference-in-differences |
| JEL: | E62 H11 H20 H26 O23 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_13081 |
| By: | Lukyanov, Georgy; Ly, Hengrina |
| Abstract: | A government may ask for a high tax because it faces a genuine expense. The same demand can also be made by a government that intends to keep the proceeds. We study this ambiguity in a two-period reputation model with privately observed spending needs and an endogenous tax base. The opportunist chooses between outright confiscation and levies that an honest government might impose. We characterize the three possible regimes through a single equilibrium equation. A mean-preserving spread of legitimate needs weakly raises the opportunist’s lifetime value, with a strict increase precisely when the spread changes the upper tail relevant for mimicry. We then give a necessary and sufficient curvature condition for this ordering to extend to a general reputational continuation prize. Verification reduces the value of concealment, but also changes how the opportunist extracts. In the benchmark economy, greater auditing weakly lowers current citizen welfare, even before audit costs, while improving the future allocation through better information. The welfare case for verification consequently depends on the balance between these two effects. Examples yield no auditing, an optimum within a regime, and an optimum at the boundary between regimes. |
| Keywords: | government reputation; hidden fiscal needs; taxation; convex order; audits; political agency |
| JEL: | D82 D83 H11 H21 H61 |
| Date: | 2026–10–21 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:132310 |
| By: | Palacios, Robert J. |
| Abstract: | Public pension schemes that rely on payroll deductions have failed to achieve adequate coverage in low and middle-income countries, and population aging in many countries will outpace coverage expansion with serious social consequences. Policy responses must address the twin objectives of poverty alleviation and consumption smoothing. An integrated social pension financed with general revenues can reduce old age poverty while limiting the distortions caused by minimum pensions within contributory schemes. Consumption smoothing requires a new approach to replace wage-based contributions. Technological advances in tax administration that make individualized VAT payments possible facilitate a shift from wage to consumption-financed pensions (CFPs). Such a shift would automatically increase coverage and reduce reliance on increasingly problematic labor taxes. |
| Date: | 2026–09–30 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:hdnspu:215545 |
| By: | Tu Ho (Osaka School of International Public Policy, The University of Osaka, 1-31 Machikaneyamacho, Toyonaka, Osaka, Japan) |
| Abstract: | This study uncovers the effect of corporate tax on FDI in Vietnam. We use GMM and fixed effects models with national and provincial databases between 2011 and 2023. At the provincial level, we use firm-level microdata from the annual Vietnam Enterprise Survey to calculate the effective corporate tax rate. We utilize statutory corporate tax rate differences between Vietnam and foreign countries obtained from national databases. This study finds a negative relationship between corporate tax and FDI. The negative association between the bilateral corporate tax difference and inward FDI is weaker for tax-haven countries than for non-tax-haven countries, although there is insufficient evidence of a statistically significant association for tax-haven countries. Our findings suggest that the government should maintain corporate tax incentives for disadvantaged provinces to promote a more balanced distribution of FDI. Moreover, the effective design of corporate tax policy to attract inward FDI should take into account not only domestic tax conditions but also the tax policies and tax systems of foreign countries. |
| Keywords: | corporate tax, foreign direct investment, effective corporate tax rate, tax havens, tax incentives, Vietnam |
| JEL: | F21 H25 H26 O53 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:dpc:wpaper:0206 |