Tax compliance in post-transition: You and your friends matter, not the government

This paper contributes to the literature that seeks to assess the importance of various theories on tax evasion by individuals. The various theories can be distinguished in detail using a very fine-grained survey of Estonian residents that was collected in three rounds from 2018 to 2020. Principal component analysis shows that the survey replies are mutually consistent and form distinct clusters that match key theories on tax evasion. Logit estimations of tax compliance use the principal components and various control variables as covariates. Theories of individual rational choice do not gain support. Factors associated with personal norms and with social norms and customs are important for ..

Public Economics

Optimal Redistribution in the Presence of Signaling

We analyze optimal redistribution in the presence of labor market signaling where innate productive ability is not only unobserved by the government, but also by prospective employers. Our model features signaling in both one and two dimensions, where in the latter case firms have an informational advantage vis-a-vis the government. Focusing on signals in the context of educational attainment, we analyze the dual role of income taxation in redistributing income and affecting signaling incentives as well as the role of extended tax systems that combine income taxation with direct taxes on the signals in the form of education taxes/subsidies. We demonstrate how the government can achieve redis..

Public Economics

Optimal Unilateral Carbon Policy

We derive the optimal unilateral policy in a general equilibrium model of trade and climate change where one region of the world imposes a climate policy and the rest of the world does not. A climate policy in one region shifts activities—extraction, production, and consumption—in the other region. The optimal policy trades off the costs of these distortions. The optimal policy can be implemented through: (i) a nominal tax on extraction at a rate equal to the global marginal harm from emissions, (ii) a tax on imports of energy and goods, and a rebate of taxes on exports of energy but not goods, both at a lower rate than the extraction tax rate, and (iii) a goods-speciï¬ ..

Public Economics

Budget-neutral capital tax cuts

We revisit the canonical policy of eliminating capital taxation by increasing labor taxation in a endogenous-labor, heterogeneous-agent model with income and wealth heterogeneity, when the government is subject to a strict (per-period) balancedbudget constraint. By contrast with its non-budget neutral equivalent-associated with a constant tax rate over time and a permanent increase in the level of public debt-we show that the obtained endogenous path for the labor tax rate is sharply increasing in the initial period and decreasing over time. The policy then generates a deeper recession in the short-run and a greater expansion in the long-run, as well as a smaller decline in wealth inequality..

Public Economics

Taxes, corporate takeovers, and step transactions

Taxes affect the size of a corporate takeover market in theory; the extant empirical studies from the US data offer limited such evidence. We consider Japan after 2001, which offers an alternative setting in which a tax system implicitly subsidizes mergers that follow a particular sequence of steps ("step transactions"). We construct a novel dataset on step transactions from a list of takeover deals from 1996 through 2013 and examine their utilization rates before and after Japan's tax reform of 2001. We find a statistically and economically significant discontinuity across the two regimes. We also examine tax payments using a panel dataset of firms from 1997 through 2013 and find a strong a..

Public Economics

Are incentive effects from fiscal equalization underestimated? Evidence from a Swiss reform

This paper investigates incentive effects of fiscal equalization on local tax rates. I propose three refinements to current empirical estimations of these incentive effects. I show that local policy-makers may conceive changes in equalization transfers as stemming from discrete rather than marginal changes in the tax base, thus considering "supramarginal" equalization rates. Second, I study "effective" equalization rates which condition on the current tax rate. Third, I control for redistribution effects. I investigate the reform of an inter-municipal equalization scheme in Switzerland. My baseline estimate from supramarginal equalization rates is 2-3 times larger than found in previous stud..

Public Economics

The Distribution of Major Tax Expenditures in 2019

CBO examined how the benefits from major tax expenditures in the individual income tax and payroll tax systems were distributed among households in different income groups in 2019. The agency estimates that those tax expenditures totaled about $1.2 trillion, or 5.8 percent of gross domestic product, and accounted for roughly three-quarters of the total budgetary effects of all tax expenditures that year. The size and distribution of benefits across the income scale varied considerably among each of the major tax expenditures in 2019.

Public Economics

Ways of taxing wealth: alternatives and interactions

In this paper, I examine the role of a wealth tax in the context of the UK's existing taxes on wealth. First, I discuss several ways in which the UK could be said to tax wealth already, and I set out two possible directions for reforming these taxes, highlighting policies that are merited under either approach. Second, I consider whether and under what circumstances a broad-based tax on the ownership of wealth – a ‘wealth tax’ – could be justified instead of or in addition to these reforms. Third, I address how a wealth tax should interact with other taxes, focusing on concerns regarding ‘double taxation’ and (conversely) proposals for an alternative minimum tax based on wealth. ..

Public Economics

Who should pay a wealth tax? Some design issues

Any wealth tax design needs to resolve the question of who should pay it it How wide should the net be cast? Setting high or low exempt thresholds affects avoidance behaviour and may influence whether one should tax by reference to the household (and if so how that should be defined) or simply on each individual who owns wealth over a certain threshold. Typically, wealth taxes in other countries have not been imposed on non-residents except in relation to real property but questions remain over whether any exempt period should be given to new arrivals, not least for administrative convenience. A one-off wealth tax would require a different design in a number of respects from an annual wealth..

Public Economics

The Effect of Unemployment Benefit Pay Frequency on UI Claimants' Job Search Behaviors

This paper presents new evidence on how UI (Unemployment Insurance) benefit pay frequencies affect the job search behaviors of UI claimants in the United States. By exploiting quasi-experimental variations in states' benefit pay schedules, I find that switching from biweekly to weekly pay significantly increases UI claimants' unemployment durations. This observed effect can be partly rationalized by the more frequent end-of-the-month positive benefit shocks under weekly pay schedules. I conclude that the previously overlooked policy parameter, benefit pay frequency, has important effects on the job search behaviors of UI claimants.

Public Economics

Interest Limitation Rules and Business Cycles: Empirical Evidence

Abstract This paper studies the performance of interest limitation rules during business cycles. It employs register data on Finnish affiliates of multinational enterprises (MNEs) to study both thin-capitalization rules (TCRs) and earnings-stripping rules (ESRs). Both types of rules are found to become tighter in economic downturns: TCRs due to higher debt-to-equity ratios and ESRs due to lower company profits. Among equally tight interest limitation rules, TCRs are found to provide less variation and less pro-cyclical outcomes by increasing the company tax burden less than ESRs in an economic downturn. While ESRs increase the tax burden of Finnish companies by 17.5%-19.3% following the 2008..

Public Economics

Can increased tax transparency curb corporate tax avoidance?

Tax avoidance among large multinational corporations has considerably increased in recent years, triggering an intense discussion about how to ensure tax justice. We propose a novel experimental design to incentive-compatibly model the firm-consumer relationship in a consumer goods market. This new paradigm allows us to analyze the effect of increased tax transparency on consumer and firm behavior in a dynamic framework. We find that absent the threat of being exposed as a tax avoiding firm, only 26% of the firms decide to pay taxes. Once tax avoiding firms are identifiable in the market, this rate rises to 58%. Providing market participants additionally with information about the social cos..

Public Economics

How Expanding EITC Will Benefit 1.5 Million Low-Income Older Workers

A popular cash transfer program credited with lifting millions out of poverty, the Earned Income Tax Credit (EITC) also reduces wages for non-college educated workers, particularly older workers. Meanwhile, eligibility rules have long prevented most older workers from receiving EITC benefits at the same rate as their younger counterparts. Expanding EITC benefits permanently would offset some of these lost earnings and help stabilize older workers’ earnings. In 2021, Congress enacted a temporary EITC expansion—and our research shows that a permanently expanded EITC would benefit millions of older low-income workers.

Public Economics

Do robots dream of paying taxes?

Robot taxes embody the more futuristic challenges of managing automation and legacy workers. As machines and artificial intelligence take on more roles that used to be performed by humans, policymakers and technologists are assessing the costs this transition imposes and what parts of society will pay them. A robot tax on companies that replace employees with automated systems is easy to dismiss in its most simplistic forms but should be...

Public Economics

Labor Supply Responses to Income Tax Free and Bracket Expansions

This paper contributes to the labor supply literature by focusing on how middle earners respond to financial incentives and whether the responses are different between men and women. We exploit substantial expansions in the level of individual income exempt from taxation and taxed at a lower marginal tax rate while the schedule of marginal tax rates remained the same. These tax revisions improved the financial incentives to work, in particular for individuals in the middle of the income distribution. We find robust evidence that the tax reforms increased significantly the wages of medium and high educated married males and females. They also had a positive impact on work participation that w..

Public Economics

Media negativity bias and tax compliance: Experimental evidence

We study the impact of the media negativity bias on tax compliance. Through a framed laboratory experiment, we assess how the exposure to biased news about government action affects compliance in a repeated taxation game. Subjects treated with positive news are signicantly more compliant than the control group. Instead, the exposure to negative news does not prompt any significant reaction compared to the neutral condition, suggesting that participants may perceive the media negativity bias in the selection and tonality of news as the norm rather than the exception. Overall, our results suggest that biased news provision is a constant source of psychological priming and plays a vital role in..

Public Economics

The Effects of Taxes on Innovation: Theory and Empirical Evidence

Income taxes are typically set to raise revenues and redistribute income at the lowest possible efficiency costs, which result from the distortions in individual behaviors that taxes entail. Individuals can respond along many margins, such as labor supply, tax avoidance and evasion, and geographic mobility. But one margin that taxes may affect — innovation — is less frequently considered. Conceptually, taxes reduce the expected net returns to innovation inputs and can reduce innovation. Much like other margins of responses to taxes, this efficiency cost must be taken into account. Innovation is done by a relatively small number of people, but it is nevertheless likely to have widespread ..

Public Economics

Estimating the Net Fiscal Cost of a Child Tax Credit Expansion

Recent proposals to expand the Child Tax Credit (CTC) are at the center of current policy discussions in the United States. We study the fiscal cost of three such proposals that would expand refundability of the credit to low-income children, increase the maximum credit amount, and/or eliminate the income phase-out to make the credit universal. For each proposal, we use the Current Population Survey to estimate three components of the net fiscal cost: the direct cost (additional tax refunds or lower tax liability), revenue changes due to taxpayers’ labor supply responses, and long-term changes in tax revenue due to changes in children’s future earnings. We find that direct costs are by f..

Public Economics

The Anti-Poverty, Targeting, and Labor Supply Effects of the Proposed Child Tax Credit Expansion

The proposed change under the American Families Plan (AFP) to the Tax Cuts and Jobs Act (TCJA) Child Tax Credit (CTC) would increase maximum benefit amounts to $3,000 or $3,600 per child (up from $2,000 per child) and make the full credit available to all low and middle-income families regardless of earnings or income. We estimate the anti-poverty, targeting, and labor supply effects of the expansion by linking survey data with administrative tax and government program data which form part of the Comprehensive Income Dataset (CID). Initially ignoring any behavioral responses, we estimate that the expansion of the CTC would reduce child poverty by 34% and deep child poverty by 39%. The expans..

Public Economics

In search of a solution to tax digital economy.

At present the international tax system is in need of reform so as to ensure that digital corporation pay taxes in countries where they operate. The search for a global solution has resulted in divergence in approaches adopted by countries. This paper delineates the fundamental economic challenges that the tax reform seeks to address, the historical evolution of tax laws and the best possible solutions given the discord between source and residence countries. The paper finds that digital services tax, with foreign credits, can offer a final global solution amenable to developing countries.

Public Economics

A note on capital income taxation with involuntary unemployment

This study develops a standard overlapping generations model with imperfect labor markets. The results indicate that a higher capital income tax promotes not only economic growth but also employment if pension benefits exist.

Public Economics

Who Pays Sin Taxes? Understanding the Overlapping Burdens of Corrective Taxes

We find that sin good purchases are highly concentrated with 10% of households paying more than 80% of taxes on alcohol and cigarettes. Total sin tax burdens are poorly explained by demographics (including income), but are well explained by eight household clusters defined by purchasing patterns. The two most taxed clusters comprise 8% of households, pay 68% of sin taxes, are older, less educated, and lower income. Taxes on sugary beverages broaden the tax base but add to the burdens of heavily taxed households. Efforts to increase sin taxes should consider the heavy burdens borne by few households.

Public Economics

The Economic Burden of Pension Shortfalls: Evidence from House Prices

U.S. state pensions are underfunded by trillions of dollars, but their economic burden is unclear. In a model of inefficient taxation, real estate fully reflects the cost of pension shortfalls when it is the only form of immobile capital. We study the effect of pension shortfalls on real estate values at state borders, where labor and physical capital could more easily relocate to a state with a smaller shortfall. Using plausibly exogenous variation driven by pension asset returns, we find that one dollar of pension underfunding reduces house prices near state borders by approximately two dollars. Our estimates imply a deadweight loss associated with addressing pension shortfalls that is con..

Public Economics

Effects of the Expanded Child Tax Credit on Employment Outcomes: Evidence from Real-World Data

Early studies have established that the expanded Child Tax Credit (CTC), which provides monthly cash payments to most families with children in the United States, has substantially reduced poverty and food hardship since its introduction in July 2021. Some researchers posit, however, that the CTC payments may generate negative employment effects that could offset its potential poverty-reduction effects. Scholars have simulated various employment scenarios using different assumed labor supply elasticities, but no study to date has empirically assessed how the CTC payments to date have affected employment outcomes using real-world data. To evaluate actual employment effects, we follow previous..

Public Economics

Redistributive policies in general equilibrium

We develop a general equilibrium OLG model to evaluate a wide menu of popular redistributive policies in a unified context. We work in two steps: First, we study how initial conditions in human and financial capital, as inherited from family background, shape individuals' human capital, and hence their work opportunities, income and wealth, and eventually macroeconomic outcomes. Second, we study which policies can reduce this type of inequality without, hopefully, damaging macroeconomic efficiency.

Public Economics

The Impact of Corporate Tax Reform since the 2000s―An Analysis Using Firm-Specific Forward-Looking Effective Tax Rates (Japanese)

Many developed countries have lowered their statutory corporate tax rate, along with the expansion of the tax base. In examining the future of corporate taxation, it is important to examine the impact on corporations of the reductions in statutory corporate tax rate and the expansion of the tax base that have been implemented to date. Corporate tax reform in Japan has been implemented in a unique way, by expanding the size-based business taxation while lowering the statutory tax rate, and it is important from both academic and policy perspectives to examine the implications of these reforms. In this paper, we analyze the impact of the corporate tax reform in Japan since the 2000s by using fi..

Public Economics

Determinants of tax morale: Cross-sectional evidence from Africa

The article provides a comparative analysis of the determinants of tax morale in South Africa and Zimbabwe, as neighbouring countries. In this quantitative research, data were collected using questionnaires from the 2010?2014 and 2017?2020 World Values Survey. For Zimbabwe, Wave 6 and Wave 7 had a sample size of 1 500 and 1 200, respectively. The study concludes that governments must understand tax morale and its determinants to boost voluntary compliance. Despite their lower standards of living, Zimbabweans have higher tax morale than South Africans. The determinants of tax morale differ between economic situations and countries. Corruption, prevalent in both countries, influences tax moral..

Public Economics

Democracy or Optimal Policy: Income Tax Decisions without Commitment

How do differences in the government’s political and commitment structure affect the aggregate economy, inequality, and welfare? I analyze this question, using a calibrated Aiyagari’s (1994) economy with wealth effects of labor supply wherein a flat tax rate and transfers are endogenously determined according to its political and commitment structure. I compare four economies: a baseline economy, an economy with the optimal tax with commitment in all steady states, an economy with the optimal tax without commitment, and a political economy with sequential voting. I obtain two main findings. First, the commitment structure shifts the government’s weighting between redistribution and eff..

Public Economics

The start-up decision under default risk

This study introduces a real option model to investigate how fiscal policy affects a representative firm's investment decision and to measure its welfare effects. On the one hand, the effects of financial instability on the optimal investment timing and on the probability of default are studied. On the other hand, it is shown how the net present value of an investment project, the tax revenue generated and the welfare are influenced by financial instability. Then, a comparison of welfare effects of tax policy on start-ups, mature and obliged firms is provided. This comparison provides policy-makers a tool to shape their tax systems according to the characteristics of their firms. All present..

Public Economics

Windfalls? Costs and Benefits of Investment Tax Incentives due to Financial Constraints

We find that financially unconstrained firms claimed temporary investment tax incentives more often than their constrained counterparts. The former, however, did not necessarily increase their investments. We consider a 2014 tax reform in Japan which introduced both an investment tax credit and bonus depreciation, using confidential tax return survey data. Our data show low adoption rates, only 25%, in line with the recent literature. Many of them claimed the tax credit, which brings direct monetary benefits. Our finding is most prominent for a comparison between public and private firms among various constrained measures: the former claimed the tax credit more often and the bonus depreciati..

Public Economics