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on Public Economics |
| By: | Sarolta Laczo (Bank of England and IAE-CSIC); Albert Marcet (IAE-CSIC, ICREA, UAB, MOVE, Barcelona GSE, and CEPR); Katharina Greulich (Swiss Re) |
| Abstract: | We study optimal fiscal policy in a model with agents who are heterogeneous in their labor productivity and wealth, and there is an upper bound on the capital tax rate each period. We focus on Pareto-improving plans. We show that the optimal tax reform is to cut labor taxes and leave capital taxes high in the short and medium run. Only in the very long run would capital taxes be zero. For our calibration labor taxes should be low for the first eleven to twenty-six years, while capital taxes should be at their maximum. This policy ensures that all agents benefit from the tax reform and that capital grows quickly after the reform. Therefore, the long-run optimal tax mix is the opposite of the short- and medium-run one. The initial labor tax cut is financed by deficits, which lead to a positive level of government debt in the long run, reversing the standard prediction that the government accumulates savings in models with optimal capital taxes. The welfare benefits from the tax reform are high and can be shifted entirely to capitalists or workers by varying the length of the transition. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:951&r=all |
| By: | P. Brunori (Università di Bari); F. Palmisano (U); V. Peragine (Università di Bari) |
| Abstract: | This paper addresses the problem of the normative evaluation of income tax systems and income tax reforms. While most of the existing criteria, framed in the utilitarian tradition, are uniquely based on information about individual incomes, this paper, building upon the opportunity egalitarian theory, proposes new equity criteria which take into account also the socio-economic characteristics of individuals. Suitable dominance conditions that can be used to rank alternative tax systems are derived by means of an axiomatic approach. Moreover, the theoretical results are used to assess the redistributive effects of an hypothetical tax reform in Romania through a microsimulation analysis. |
| Keywords: | income inequality; inequality of opportunity; tax reforms; microsimulation; progressivity; horizontal equity. |
| JEL: | D63 E24 O15 O40 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:bai:series:economia-series50&r=all |
| By: | Barbora Slintáková (University of Economics, Prague); Stanislav Klazar (University of Economics, Prague) |
| Abstract: | It is common that governments favour home ownership also via personal income taxation. Particularly deductibility of mortgage interest payments can stimulate households to borrow to acquire their dwellings. On the one hand the tax advantage can be effective at achieving social objectives, but on the other hand there is agreement that the housing taxation creates substantial distortion that may increase house prices and household leverage which may have adverse consequences on both micro- and macroeconomic levels. Our aim is to explore whether there is a relation between the advantageous tax treatment of housing and household indebtedness. We employ the multiple regression and pooled cross-sectional data for the former 15 EU member countries (except Greece) for the period 2004-2013. Our analysis reveals that the variable representing the extent of the tax relief on debt financing of the owner-occupied housing affected the variable reflecting indebtedness of European households between 2004 and 2013 positively. |
| Keywords: | Household indebtedness, Housing taxation, Mortgage interest deductibility |
| JEL: | G21 H24 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iacpro:2804663&r=all |
| By: | Rosella Levaggi (Università di Brescia); Francesco Menoncin (Università di Brescia) |
| Abstract: | We solve the problem of a representative agent who maximises the expected present utility of his intertemporal consumption under the as- sumption that an optimal fraction of his wealth is hidden to the tax au- thorities (we show conditions under which evasion is expedient). Evasion affects the capital dynamics in two ways: the growth rate of capital in- creases because some taxes are not paid, but when caught evading the consumer has to pay a fee (proportional to evasion). Consumption can be allocated between ordinary goods and so-called conspicuous goods. The latter are used by the Government for targeting the audit, since they are considered like an indicator of consumer's wealth. In fact, the probabil- ity to be caught is a function of the distance between the actual and the presumed consumption in conspicuous goods. We find a closed form solu- tion to the dynamic optimization problem and show how fiscal and audit parameters affect the optimal evasion and the optimal allocation between the two consumptions. |
| Keywords: | dynamic tax evasion, targeted audits, conspicuous consumption |
| JEL: | G11 H26 H42 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:ipu:wpaper:33&r=all |
| By: | Finocchiaro, Daria (Research Department, Central Bank of Sweden); Lombardo, Giovanni (Bank for International Settlements); Mendicino, Caterina (European Central Bank); Weil, Philippe (Université Libre de Bruxelles) |
| Abstract: | This paper revisits the equilibrium and welfare effects of long-run inflation in the presence of distortionary taxes and financial constraints. Expected inflation interacts with corporate taxation through the deductibility of i) capital expenditures at historical value and ii) interest payments on debt. Through the first channel, inflation increases firms’ taxable profits and further distorts their investment decisions. Through the second, expected inflation affects the effective real interest rate negatively, relaxes firms’ financial constraints and stimulates investment. We show that, in the presence of collateralized debt, the second effect dominates. Therefore, in contrast to earlier literature, we find that when the tax code creates an advantage of debt financing, a positive rate of long-run inflation is beneficial in terms of welfare as it mitigates the financial distortion and spurs capital accumulation. |
| Keywords: | optimalmonetary policy; Friedman rule; credit frictions; tax benefits of debt |
| JEL: | E31 E43 E44 E52 G32 |
| Date: | 2015–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0311&r=all |
| By: | Henrekson, Magnus (Research Institute of Industrial Economics (IFN)); Sanandaji, Tino (Institute for Economic and Business History Research (EHFF)) |
| Abstract: | In some classes of models, taxes at the owner level are “neutral” and have no effect on firm activity. However, this tax neutrality is sensitive to assumptions and no longer holds in more complex models. We review recent research that incorporates greater complexity in studying the link between taxes and business activity – particularly entrepreneurship. Dividend taxes on owners of large firms affect firm activity in models that include agency conflicts between owners and managers. Similarly, after incorporating entrepreneurs’ occupational choice into the model, taxes are no longer neutral. By forsaking lucrative alternative careers, skilled entrepreneurs tend to have high opportunity costs, which make the choice of attempting to start a business of first order importance. Moreover, in models where it is assumed that capital flows across borders without cost, taxes on domestic business owners do not alter business activity because foreign capital seamlessly compensates for tax-induced declines in investments. This theoretical notion is contradicted by the strong “home bias” observed in business ownership, in particular for small firms and startups without easy access to international capital markets. Recent empirical work has emphasized that taxes have heterogeneous effects on mature firms, entrepreneurial startups, and owner-managed small firms. Lowering dividend taxes on firms with dispersed ownership has been shown to shift capital from mature firms into rapidly growing firms. Moreover, capital gains taxation tends to reduce the number of innovative startups and diminish venture capital activity, while high owner-level taxes encourage small business activity and non-entrepreneurial self-employment because such firms have more opportunities to avoid or evade taxes. To obtain efficient incentives in entrepreneurial startups, contractual terms are required that ex ante guarantee that all providers of critical inputs, especially equity constrained entrepreneurs, are entitled to a share of the resulting capital value firm. Unless properly designed, owner-level taxes prevent such ex ante contracting and thus lower the likelihood of eventual success. |
| Keywords: | Business taxation; Capital income taxation; Corporate governance; Entrepreneurship; Institutions; Tax policy |
| JEL: | H25 H26 H32 L26 |
| Date: | 2015–10–05 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:1086&r=all |
| By: | Cremer, Helmuth; Goulão, Catarina; Roeder, Kerstin |
| Abstract: | A fat and a healthy good provide immediate gratification, and cause health costs or benefits in the long run, which are misperceived. Additionally, the fat good (healthy good) increases (decreases) health care costs by increasing (decreasing) the probability of suffering from a chronic disease in the future. Individuals differ in income and in their degree of misperceptions concerning the health effects of the consumption of fat and of healthy goods. The level of the fat tax is determined through majority voting. Individuals vote according to their misperceived utility function. Consequently, excessive fat consumption is not due to a self-control problem but due to information deficiencies or cognitive inability to process information. A fraction of the fat tax proceeds is “earmarked” to reduce health insurance premiums while the remaining fraction finances a subsidy on the healthy good. This earmarking rule is determined at a constitutional stage to maximize utilitarian or Rawlsian welfare, anticipating the induced political equilibrium. We show that the fat tax in the political equilibrium is always lower than the utilitarian fat tax. This is no longer necessarily true with a Rawlsian objective. The determination of the optimal earmarking rule is quite complex. Even in the utilitarian case, it is not just used to boost political support for the fat tax. Instead, it may involve a tradeoff between the fat tax and the healthy good subsidy. |
| Keywords: | Obesity, Fat tax, Misperception, Voting, Earmarking |
| JEL: | D72 I12 I18 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:29616&r=all |
| By: | Réquillart, Vincent; Soler, Louis-Georges; Zang, Yu |
| Abstract: | Up to now, most nutritional policies have been set up to inform consumers about the health benefits induced by more balanced diets. Reviews of the impacts of these policies show that the effects are often modest. This has led governments to implement, in more recent times, policies focused on the market environment, especially on the characteristics of the food supply. The goal of this paper is to deepen the analysis of firms' strategic reactions to nutritional policies targeting food quality improvements and to derive a set of optimal policies. To reach this goal, we propose a theoretical model of product differentiation taking into account both the taste and health characteristics of products, and use it to assess the health and welfare impacts of taxation and MQS-based policies. The model studies how a duopoly of mono-product firms reacts to three alternative policies: an MQS policy, linear taxation of the two goods on the market, and finally taxation of the low-quality good. We find that only the MQS policy and the linear excise tax on the low-quality product are welfare increasing. The choice, however, between the two depends on the priorities of the regulator. On the one hand, for a given moderate level of improvement in health, we show that social welfare increases more with the tax policy than the MQS policy. On the other hand, for a larger increase in the health status of the population, a MQS-based policy may be preferred. Moreover, the policies have distributional effects that must be taken into account, in particular for reasons related to their social acceptability. Finally we show that policies aiming at changing the food market environment allow getting greater health benefits and welfare than policies only based on information campaigns. |
| Keywords: | Taxation, MQS, Product differentiation, Strategic pricing, Nutritional policies |
| JEL: | I18 L13 Q18 |
| Date: | 2015–09–03 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:29587&r=all |
| By: | Cremer, Helmuth; Pestieau, Pierre; Roeder, Kerstin |
| Abstract: | This paper studies the design of a social long-term care (LTC) insurance when altruism is two-sided. The laissez-faire solution is not efficient, unless there is perfect altruism. Under full information, the rst-best can be decentralized by a linear subsidy on informal aid, a linear tax on bequests when the parent is dependent and state specic lump-sum transfers which provide insurance. We also study a second-best scheme comprising a LTC benet, a payroll tax on childrens earnings and an inheritance tax. This scheme redistributes resources across individuals and between the states of nature and the tax on childrens labor enhances informal care to compensate for the childrens possible less than full altruism. |
| Keywords: | Long-term care, Two-sided altruism |
| JEL: | H2 H5 |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:29576&r=all |
| By: | Picchio, Matteo (Università Politecnica delle Marche, Ancona); Valletta, Giacomo (Maastricht University) |
| Abstract: | This paper evaluates the welfare effects of the 1986 Tax Reform Act (TRA86). In thirty years since its introduction, several studies have analysed the effects of TRA86. However, preference heterogeneity and non-market dimensions of welfare have not been taken into account. We propose an evaluation of the impact of TRA86 on well-being using different welfare metrics which fully retain preference heterogeneity. We estimate utility functions with preference heterogeneity on the basis of structural models of family labor supply. Then, by way of these estimated preferences, we compute several welfare rankings corresponding to different ethical priors. Finally, we identify the losers and the winners of TRA86 under different ethical priors. |
| Keywords: | welfare measures, tax reform, preference heterogeneity, discrete model, labor supply |
| JEL: | C25 D63 H22 H31 J22 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp9378&r=all |
| By: | Markus Poschke (McGill University, Montreal); Baris Kaymak (Universite de Montreal) |
| Abstract: | Over the last 50 years, the US economy saw significant changes in its fiscal structure. Notable among these are the introduction and expansion of social security programs and Medicare, and the transformation of the tax system. These institutional changes took place against a backdrop of developments in the technology of production that increasingly favored skilled workers.In this paper, we analyze how the interplay between these institutional and technological factors might have shaped the distributions of income, wealth, consumption and welfare. We find that while changes in income inequality are mostly attributable to technological factors, the increase in wealth inequality has further been compounded by the expansion of social security and Medicare, which have reduced saving incentives for retirement, in particular for low and middle income groups. As a result, they have substantially increased wealth concentration in US. Results suggest that approximately 25% of the rise in the share of wealth held by the wealthiest 1% is explained by larger transfers to senior population. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:967&r=all |
| By: | Giuseppe Di Liddo (University of Bari (Italy)); Ernesto Longobardi (University of Bari (Italy)); Francesco Porcelli (University of Exeter (U.K.)) |
| Abstract: | In the literature on fiscal federalism, vertical fiscal imbalances have been widely studied, while the theme of horizontal fiscal imbalances and inequality between local governments’ fiscal capacities is still less explored. This paper contributes to fill the gap. A new method to compute fiscal capacities based on regression analysis is proposed, which can overcome some of the drawbacks of traditional methods such the representative tax system. This new approach is then employed to evaluate the fiscal capacities of Italian municipalities over the period 2002-2010. Finally two global measures of the horizontal fiscal imbalance are then used to evaluate the equity implication of a major policy change occurred in 2008 in Italian municipal finance. |
| Keywords: | Inter-governmental grants, horizontal and fiscal imbalances, equalisation, fiscal capacityLength: 277 |
| JEL: | H73 H77 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:bai:series:economia-series49&r=all |
| By: | Navicke, Jekaterina; Lazutka, Romas |
| Abstract: | The aim of this paper is to evaluate the impact of cash social benefits on work incentives at the bottom of the income distribution and among selected model family types in Lithuania. The analysis of the work incentives in Lithuania is carried out for the period of 2005-2013 based on a combination of measures estimated using tax-benefit microsimulation model EUROMOD and official OECD/EC indicators. The analysis revealed high disincentives to work at the bottom of the Lithuanian income distribution, dominated by the effect of cash social benefits compared to taxes or social insurance contributions. A strong trade-off between benefit adequacy and work incentives is built into the design of the Lithuanian cash benefit system, that of social assistance in particular. The challenge for policy design is thus to encourage and promote active labour market participation among low earners without eroding the minimum income protection floor. |
| Date: | 2015–09–30 |
| URL: | http://d.repec.org/n?u=RePEc:ese:emodwp:em14-15&r=all |
| By: | Bernardo Maggi (Sapienza Universita' di Roma) |
| Abstract: | In this study we focus on the dynamics of taxation, debt, and monetary stability in a currency union area. We specifically adapt our theoretical set up to the Euro zone with special emphasis on the countries affected by critical conditions of public debt. We deal with such a problem in a dynamic optimization perspective by referring to the optimal control literature and find the optimal taxation and composition by maturity of the debt as it follows from the Stability and Growth Pact (SGP). Critical results depend upon the accumulation over time of the past decisions on public expenses and the consequent high level of taxation rate according to which a probability of failure to comply the SGP is evaluated. |
| Keywords: | Euro, Stability and Growth Pact, public debt. |
| JEL: | H63 H21 F40 C61 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:sas:wpaper:20151&r=all |
| By: | Rosella Levaggi (Università di Brescia); Francesco Menoncin (Università di Brescia) |
| Abstract: | In this study, we argue that the rules set by a central government to allocate interregional equalization grants may induce richer regions to ask for devolution, even when centralized provision is more efficient. We model a local public good with spillovers in a framework in which devolution is socially inefficient. Nevertheless, we show that the de- centralized solution may be preferred by the richer regions if it implies a reduction in solidarity. We define a threshold for regional income disparity above which claims for more devolution may be driven by a reduction in solidarity. Finally, the relative strength of this effect is computed for a sample of countries. |
| Keywords: | devolution; equalization grant; regional income distribution |
| JEL: | H7 H4 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:ipu:wpaper:32&r=all |
| By: | Jean Luc Erero and Elizabeth Gavin |
| Abstract: | This paper analyses the economy-wide impact of the dividend tax (DT) on the South African economy, which was increased from 10% to 15% by the government in 2012. The analysis was conducted using a dynamic computable general equilibrium (CGE) model of South Africa, which captured the observed structure of South Africa’s economy. The parameters of the CGE equations were calibrated to observed data from a social accounting matrix (SAM) for 2010. One policy option was considered. Our simulation results show that the impact of increasing the DT will have a minute but positive impact on the reported macro-economic variables in the immediate year of implementing the DT rate increases. GDP increases by 0.0585% and 0.5085% in 2013 and 2018 will be seen respectively. This change was small in 2013 but will be significant in 2018. The key finding is that at the macro level, the implementation of the policy shock on its own had a positive macroeconomic impact. |
| Keywords: | dividend tax, secondary tax on companies, CGE model, South Africa |
| JEL: | D33 D58 H25 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:544&r=all |
| By: | Yonas Alem; Jonathan Colmer |
| Abstract: | When agents are unable to smooth consumption and have distorted beliefs about the likelihood of future income realisations, uncertainty about future states of the world has a direct effect on individual welfare. However, separating the effects of uncertainty from realised events and identifying the welfare effects of uncertainty both present a number of empirical challenges. Combining individual-level panel data from rural and urban Ethiopia with high-resolution meteorological data, we estimate the empirical relevance of uncertainty on objective consumption and subjective well-being. While negative income shocks affect both objective consumption measures and subjective well-being, greater income uncertainty only has an affect on subjective well-being. A one standard deviation change in income uncertainty is equivalent to a one standard deviation change in realised consumption. These results indicate that the welfare gains from further consumption smoothing are substantially greater than estimates based solely on consumption fluctuations. |
| Keywords: | Uncertainty; consumption smoothing; subjective well-being |
| JEL: | D8 I3 O12 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:63816&r=all |
| By: | Fessler, Pirmin; Schürz, Martin |
| Abstract: | Using microdata from the Household Finance and Consumption Survey (HFCS), this study examines the role of inheritance, income and welfare state policies in explaining differences in household net wealth within and between euro area countries. First, about one third of the households in the 13 European countries we study report having received an inheritance, and these households have considerably higher net wealth than those which did not inherit. Second, regression analyses on households' relative wealth position show that, on average, having received an inheritance lifts a household by about 14 net wealth percentiles. At the same time, each additional percentile in the income distribution is associated with about 0.4 net wealth percentiles. These results are consistent across countries. Third, multilevel cross-country regressions show that the degree of welfare state spending across countries is negatively correlated with household net wealth. These findings suggest that social services provided by the state are substitutes for private wealth accumulation and partly explain observed differences in levels of household net wealth across European countries. In particular, the effect of substitution relative to net wealth decreases with growing wealth levels. This implies that an increase in welfare state spending goes along with an increase - rather than a decrease - of observed wealth inequality. JEL Classification: D30, D31 |
| Keywords: | Household microdata, intergenerational transfers, wealth distribution, welfare state |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20151847&r=all |
| By: | Torój, Andrzej (Warsaw School of Economics) |
| Abstract: | We develop a framework for assessing the welfare implications of the new European Union's (EU) Macroeconomic Imbalance Procedure (MIP) implemented in 2012, with a special focus on the current account (CA) constraint, real effective exchange rate (REER) constraint and nominal unit labour cost (ULC) constraint. For this purpose, we apply a New Keynesian 2-region, 2-sector DSGE model, using the second order Taylor approximation of the households' utility around the steady state as a measure of welfare. The compliance with the CA criterion is ensured by modifying the policymakers' loss function in line with Woodford's (2003) treatment of the zero lower bound of nominal interest rates. The introduction of MIP threshold on CA balance results in a welfare loss equivalent to steady-state decrease in consumption of 0.0274% after the euro adoption or 0.0152% before that. If we consider the 4% threshold on current plus capital account (rather than current account alone), this cost decreases to equivalent to 0.0117% steady-state consumption under the euro and approximately a half of that without the euro. The welfare cost for the converging economies is higher due to persistent, but equilibrium-consistent CA deficits, as well as REER appreciation. MIP can also be seen as a factor augmenting the cost of euro adoption. This working paper is an updated version of the working paper Excessive Imbalance Procedure in the EU: a Welfare Evaluation. |
| Keywords: | Macroeconomic Imbalance Procedure; EMU; DSGE; welfare; constrained optimum policy |
| JEL: | C54 D60 E42 F32 |
| Date: | 2015–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:ris:mfplwp:0022&r=all |
| By: | Nezih Guner (Universitat Autonoma de Barcelona) |
| Abstract: | The existing general equilibrium models that economists use to evaluate social insurance policies largely rely on models populated by single-earner households. In such models a single decision maker, given government policies, decides how much to work and how much to save. Today's household structure, however, should force us to think beyond single-earner household models. The role of social insurance policies for an economy in which every household has only one worker can be very different than for an economy in which both household members work. Similarly, the role of social insurance policies can also be very different for an economy with low degree of assortative matching in which agents from different educational backgrounds mix with each other by marriage than for an economy with more segregation in marriages. Social policy can also play a very different role for an economy with low gender wage gap than one with high-gender wage gap. Finally, thinking beyond single-earner households should also force us to consider very diverse social insurance policies, such as income maintenance programs and parental leave policies, under the same light. Despite this background, we are unaware of systematic attempts to study public policies in environments that allow for heterogeneous two-earner households that face uninsurable idiosyncratic risk, an explicit consideration of labor supply responses in extensive and intensive margins, and a rich description of marital status of population (who is married with whom). We fill this void in this paper. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:923&r=all |