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on Public Economics |
| By: | Ravi Kanbur; Tuuli Paukkeri; Matti Tuomala (School of Management, University of Tampere) |
| Abstract: | The existing literature on optimal taxation typically assumes there exists a capacity to implement complex tax schemes, which is not necessarily the case for many developing countries. We examine the determinants of optimal redistributive policies in the context of a developing country that can only implement linear tax policies due to administrative reasons. Further, the reduction of poverty is typically the expressed goal of such countries, and this feature is also taken into account in our model. We derive the optimality conditions for linear income taxation, commodity taxation, and public provision of private and public goods for the poverty minimization case, and compare the results to those derived under a general welfarist objective function. We also study the implications of informality on optimal redistributive policies for such countries. The exercise reveals non-trivial differences in optimal tax rules under the different assumptions. |
| Keywords: | inequality; top incomes; growth; nonlinearity; longitudinal data |
| JEL: | H21 H40 O12 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:tam:wpaper:1611&r=pbe |
| By: | Monge-Naranjo, Alexander (Federal Reserve Bank of St. Louis) |
| Abstract: | Developing countries frequently offer tax incentives and even subsidize the entry and operation of foreign firms. I examine the optimality of such policies in an economy where growth is driven by entrepreneurial know-how, a skill that is continuously updated on the basis of the productive ideas implemented in the country. Openness allows foreign ideas to disseminate inside a country and can foster the country's domestic accumulation of know- how. With externalities, however, laissez-faire openness is suboptimal and can be growth-and even welfare-reducing. I examine the gains from openness under an optimal taxation program the self-funding taxes on domestic and foreign firms that maximize the welfare of the recipient country, subject to the equilibrium behavior of national and foreign firms. Under optimal taxation, openness is always welfare enhancing and leads lagging countries to catch up with the world frontier. Yet, a country may want to subsidize the entry of foreign firms only if it can also subsidize the domestic accumulation of know-how. I also consider the optimal tax program under a number of restrictions that developing countries typically face. For instance, a country must not subsidize entry of foreign firms if doing so requires taxing the concurrent cohort of domestic firms. Similarly, an international agreement that requires equal taxation of domestic and foreign firms can be welfare reducing for a country close to the knowledge frontier. |
| Keywords: | Pigou taxes; Ramsey program; Multinational firms; Gains from openness Fiscal Constraints. |
| JEL: | H21 H25 O19 O31 O33 O34 O38 |
| Date: | 2016–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2016-020&r=pbe |
| By: | Kotakorpi Kaisa; Laamanen Jani-Petri (School of Management, University of Tampere) |
| Abstract: | Despite the adoption of prefilled tax forms in many countries, little is known about their effects on taxpayers’ reporting behaviour. We estimate the effect of the income tax filing system on taxpayers’ reporting behaviour, utilising data from a Finnish policy experiment. We find that receiving a (partially) prefilled income tax return lead to a significant reduction in non-prefilled deductions and self-reported income, and an increase in deductions that were prefilled in the new system. However, we do not find effects on individuals’ total taxable income or taxes paid. We discuss complexity and compliance costs, salience effects, and changes in the opportunities for tax evasion as possible explanations for our findings. |
| Keywords: | embezzlement, permanent income, transitory income |
| JEL: | H24 H26 H31 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:tam:wpaper:1604&r=pbe |
| By: | Emmanuel Saez |
| Abstract: | This paper provides preliminary evidence on behavioral responses to taxation around the 2013 tax increase that raised top marginal tax rates on capital income by about 9.5 points and on labor income by about 6.5 points. Using published tabulated tax statistics from the Statistics of Income division of the IRS, we find that reported top 1% incomes were significantly higher in 2012 than in 2013, implying a large short-run elasticity of reported income with respect to the net-of-tax rate in excess of one. This large short-run elasticity is due to income retiming for tax avoidance purposes and is particularly high for realized capital gains and dividends, and highest at the very top of the income distribution. However, comparing 2011 and 2015 top incomes uncovers only a small medium-term response to the tax increase as top income shares resumed their upward trend after 2013. Overall, we estimate that at most 20% of the projected tax revenue increase from the 2013 tax reform is lost through behavioral responses. This implies that the 2013 tax increase was an efficient way to raise revenue. |
| JEL: | H31 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22798&r=pbe |
| By: | Chen, Daniel L.; Lind, Jo Thori |
| Abstract: | Why are religious groups with greater within-group charitable giving more socially conservative and opposed to the welfare state? We propose and test a theory where religious provision of social insurance explains why fiscal and social conservatism align. The alignment disappears when there is a state church and reverses for members of a state church. This reversal is unlikely to be driven by omitted environmental variables: exogenous increases in church-state separation precede increases in the alignment between fiscal and social conservatism. The theory provides a novel explanation for religious history: as elites gain access to alternative social insurance, they judiciate increasing church-state separation to create a constituency for lower taxes. This holds if religious voters exceed non-religious voters, otherwise, elites prefer less church-state separation in order to curb the secular left, generating multiple steady states where some countries sustain high church-state separation, high religiosity, and low welfare state, and vice versa. We use this framework to explain the changing nature of religious movements, from Social Gospel to the Religious Right, and why church-state separation arose in the U.S. but not in many European countries. |
| Keywords: | Voting, Religion, Ideology, Church-State Separation, Welfare State |
| JEL: | D31 D71 D78 I38 Z12 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:tse:iastwp:31143&r=pbe |
| By: | Bardey, David; Mejía, Daniel |
| Abstract: | This article tackles the feature of optimal public policy such as the level of enforcement and the supply of public goods in an economy characterized by a huge informal sector. We consider informality as the group of productive activities which,before hand, do not comply (totally or partially) with government regulations. The Government intervenes as a Stackelberg leader and has to decide how to allocate public expenditures, collected through the tax system, between the provision of a public good, which can only be used for formal activties, and enforcement effort, aimed at detecting informal firms that evade taxes. Taking the public policy as given, a representative family, owner of a representative ?rm, decides how to split a ?x amount of labour supply between formal and informal activities. Our results show that the greater are the distortions in the process of tax collection, the larger is the size of the informal sector. Finally, we derive the properties of the optimal public policy. In particular, we show that the shadow cost of public fund represent the rationale of enforcement spending. We also point out that the size of the tax distortion (e.g. the shadow cost of public funds) is inversely related to total income, the tax rate and the provision of the public good. Our calibration results reveal that higher values of the shadow cost of public funds call for more stick (more enforcement) and less carrot (public goods). |
| Keywords: | Informality, public good and enforcement. |
| JEL: | K10 K20 K42 O17 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:31126&r=pbe |
| By: | Marcelo Arbex (Department of Economics, University of Windsor); Sydney Caetano (Faculdade de Economia, Universidade Federal de Juiz de Fora) |
| Abstract: | The Automatic Exchange of Information (AEoI) is a tax standard that governs how tax authorities of participating countries exchange information related to taxpayers’ foreign investments. We quantify the mismatch between costs and benefits of information exchange agreements and investigate the impact of foreign investment taxation and costs associated with information reporting requirements on the welfare of compliant countries. This paper shows that AEoI-abiding economies would entail substantial welfare losses. For any combination of interest rate, foreign earnings taxation and compliance cost, the welfare costs of AEoI are larger for the source (small open) economy than the revenue is for the residence country. Without commitment and enforcement, countries might be tempted to deviate from such agreements and share information only partially. The paper’s result provides a rationale for sharing of AEoI infrastructure costs among jurisdictions. |
| Keywords: | cross-border tax evasion, information exchange, international standards of transparency. |
| JEL: | F21 H26 H87 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:wis:wpaper:1608&r=pbe |
| By: | George-Marios Angeletos; Fabrice Collard; Harris Dellas |
| Abstract: | We study the Ramsey policy problem in an economy in which public debt contributes to the supply of assets that private agents can use as buffer stock and collateral, or as a vehicle of liquidity. Issuing more debt eases the underlying financial friction. This raises welfare by improving the allocation of resources; but it also tightens the government budget by raising the interest rate on public debt. In contrast to the literature on the Friedman rule, the government’s supply of liquidity becomes intertwined with its debt policy. In contrast to the standard Ramsey paradigm, a departure from tax smoothing becomes desirable. Novel insights emerge about the optimal long-run quantity of public debt; the optimal policy response to shocks; and the sense in which a financial crisis presents the government with an opportunity for cheap borrowing. |
| JEL: | D52 D53 E13 E32 E51 E60 H21 H63 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22794&r=pbe |
| By: | Seppo Kari; Olli Ropponen |
| Abstract: | This paper reconsiders the income-splitting rules of the Nordic dual income tax system, introduced to address the incentives to shift income between labor and capital income tax bases. These rules impute a return on equity, categorized as capital income, and tax the residual roughly at the rates levied on labor income. There are broadly two ways to calculate the capital income part. One is to impute a return on the acquisition price of shares (Sweden and Norway) and the second is to calculate a return on the net book assets of the firm (Finland). This paper addresses the economic effects of the net asset-based splitting method, which has not been studied thoroughly in earlier literature. Using a dynamic investment model, we show that at appropriately chosen parameter values the net assets-based split exhibits the key properties of the reportedly neutral ACE corporation tax. Our analysis, therefore, implies that the incentive problems of Finnish taxation of closely held companies, found in some earlier studies, derive from wrong parameter values rather than from wrong principles. |
| Keywords: | dual income tax, income-splitting, neutral taxation, investment, depreciation allowances |
| JEL: | H32 H24 H21 H25 |
| Date: | 2016–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:fer:wpaper:81&r=pbe |
| By: | Andrea Bonfatti (University of Padova); Lorenzo Forni (University of Padova) |
| Abstract: | The paper provides evidence that fiscal rules can limit the political budget cycle. It uses data on Italian municipalities during the early 2000 and shows that: 1) municipalities are subject to political budget cycles in capital and total spending; 2) the Italian sub-national fiscal rule introduced in 1999 has been enforced by the central government; 3) municipalities subject to the fiscal rule show more limited political budget cycles than municipalities not subject to the rule. In order to identify the effect, we rely on the fact that the domestic fiscal rule does not apply to municipalities below 5,000 inhabitants. We find that the political budget cycle increases real capital spending by about 15 percent on average, and total spending by 5 percent, in the years prior to municipal elections and that the sub-national fiscal rule reduces these figures by about one third. A regression discontinuity analysis around the 5,000 threshold reinforces these results, as the reduction in capital spending in pre-electoral years for municipalities subject to the fiscal rule is about two-thirds as compared to the municipalities not subject to the rule. |
| Keywords: | fiscal rules, local government finance, difference-in-difference. |
| JEL: | C21 C23 H62 H72 H77 |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0208&r=pbe |
| By: | Hayley Reynolds; Thomas Neubig |
| Abstract: | This paper explores the practical challenges tax policy analysts face when trying to apply differential taxation to “normal” and “excess” returns. The distinction between these two elements is being increasingly used in tax policy. The problem is that there is no clear definition for a “normal” return. While it is often equated to a risk-free return, or the return available on a ten-year government bond, many commentators agree that it should incorporate a risk element. The typical rationale for applying differential taxation stems from the desire to achieve neutral taxation, i.e. minimise the real economic responses of taxpayers due to the wedge taxation imposes between before-tax and after-tax returns. A set of important questions are raised for tax policy analysts to consider. Two crucial factors that make the distinction challenging are heterogeneity and uncertainty. Given the potential for unintended consequences, this is an important issue that warrants more discussion and thought. Politique fiscale : distinguer entre rendements « normaux » et « excessifs » Le présent document est consacré aux difficultés pratiques auxquelles les analystes de la politique fiscale sont confrontés lorsqu’ils essaient d’appliquer une imposition différenciée aux rendements selon qu’ils sont considérés comme « normaux » ou « excessifs ». Cette distinction est de plus en plus utilisée en politique fiscale. Le problème est qu’il n’existe pas de définition précise de ce qu’est un rendement « normal ». S’il est souvent assimilé à un rendement sur un actif sans risque, ou au rendement d’une obligation d’État à dix ans, nombre de commentateurs conviennent qu’il conviendrait d’y adjoindre un élément de risque. Le raisonnement ordinairement utilisé pour appliquer une imposition différenciée vient de la volonté d’assurer la neutralité de l’imposition, c’est-à-dire de minimiser les réponses économiques réelles des contribuables au coin fiscal qu’une imposition différenciée produit entre les rendements avant et après impôt. Ce point soulève plusieurs questions importantes que les analystes de la politique fiscale se doivent de prendre en compte. Ainsi, l’hétérogénéité et l’incertitude sont deux facteurs cruciaux qui rendent cette distinction difficile à manier. Étant donné les risques de conséquences non souhaitées, il s’agit là d’une question importante qui mérite que l’on en discute et que l’on y réfléchisse de manière plus approfondie. |
| Date: | 2016–11–11 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ctpaaa:28-en&r=pbe |
| By: | Marjit, Sugata; Sarkar, Sandip |
| Abstract: | The well known Pareto criterion used in the context of efficiency and welfare has to do with absolute changes whereas in every domain of economic behavior inequality or relative changes has become a major concern. We propose an inequality-preserving or distribution neutral Pareto criterion-the strong Pareto superior or SPS allocation which preserves the initial distribution and makes everyone better off. Our main result is that whenever there is a gain in the aggregate value of the relevant attribute, there exists a unique counterfactual allocation which is SPS. |
| Keywords: | Strong Pareto Superiority, Inequality, Trade |
| JEL: | D61 D63 F10 |
| Date: | 2016–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:74928&r=pbe |