The Distributional Implications of Income Under‐Reporting in Hungary*

The ability and inclination of specific social groups to evade tax vary widely, and this leads to considerable variation in the actual tax burden on individuals with similar levels of income. Thus, ignoring tax evasion can be seriously misleading in terms of the distributive and fiscal effects of the tax system. This paper estimates the distributional implications of income tax evasion in Hungary, based on a random sample of the administrative tax records of nearly 230,000 individuals. Gross incomes declared in the administrative tax returns are compared with incomes stated in a nationally representative household budget survey. Our estimates show that the average rate of underreporting is 9–13 per cent, though this conceals a big difference between the self‐employed (who hide the greater part of their income) and employees. The estimates are likely to be lower bounds. These rates are used in a tax– benefit microsimulation model to calculate the fiscal and distributional implications of under‐reporting. Tax evasion reduces households' personal income tax payments by about 16–20 per cent. While the poverty rate increases only slightly, income inequality rises significantly, suggesting that high‐income households tend to evade tax proportionately more. Finally, we find that tax evasion largely reduces the progressivity of the tax system.     

Redistributive impact of indirect tax reforms: Greece, 1988–2002

This paper assesses the distributional impact of indirect taxes among Greek households between 1988 and 2002, a period that coincides with the introduction of significant reforms in the tax system due to EU membership. The highly differentiated indirect tax structure prevailing at the beginning of the period had distributional benefits over the more simplified 2002 tax structure. The overall inequality of the after‐tax welfare distribution has increased by 6–12½ per cent and changes in the indirect tax system seem to explain about half of this increase. The paper also applies a recent method of measuring the distributional impact of relative price changes caused by changes in tax rates of commodities (Newbery, 1995) and establishes that indirect tax reforms introduced since 1988 had an adverse impact on the distribution of purchasing power, which nevertheless seems to be very small.     

The marginal cost of public funds is one at the optimal tax system

This paper develops a Mirrlees framework with skill and preference heterogeneity to analyze optimal linear and nonlinear redistributive taxes, optimal provision of public goods, and the marginal cost of public funds (MCF). It is shown that the MCF equals one at the optimal tax system, for both lump-sum and distortionary taxes, for linear and nonlinear taxes, and for both income and consumption taxes. By allowing for redistributional concerns, the marginal excess burden of distortionary taxes is shown to be equal to the marginal distributional gain at the optimal tax system. Consequently, the modified Samuelson rule should not be corrected for the marginal cost of public funds. Outside the optimum, the marginal cost of public funds for distortionary taxes can be either smaller or larger than one. The findings of this paper have potentially important implications for applied tax policy and social cost–benefit analysis.     

Removing Homeownership Bias in Taxation: The Distributional Effects of Including Net Imputed Rent in Taxable Income

The income tax systems of most countries entail a favourable treatment of homeownership, compared to rental‐occupied housing. Such ‘homeownership bias’ and its consequences for a wide range of economic outcomes have long been recognised in the economic literature. Although a removal of the homeownership bias is generally advocated on efficiency grounds, its distributional implications are often neglected, especially in a cross‐country perspective. In this paper, we aim to fill this gap by investigating the first‐order effects, in terms of distribution of income and work incentives, of removing the income tax provisions favouring homeownership. We consider six European countries – Belgium, Germany, Greece, Italy, the Netherlands and the UK – that exhibit important variation in terms of income tax treatment of homeowners. Using the multi‐country tax benefit model EUROMOD, we analyse the distributional consequences of including net imputed rent in the taxable income definition that applies in each country, together with the removal of existing special tax treatments of incomes or expenses related to the main residence; thus, we provide a measure of the homeownership bias. We implement three tax policy scenarios. In the first, imputed rent is included in the taxable income of homeowners, while at the same time existing mortgage interest tax relief schemes and taxation of cadastral incomes are abolished. In the two further revenue‐neutral scenarios, the additional tax revenue raised through the taxation of imputed rent is redistributed to taxpayers, through either a tax rate reduction or a tax exemption increase. The results show how including net imputed rent in the tax base might affect inequality in each of the countries considered. Housing taxation appears to be a promising avenue for raising additional revenues, or lightening taxation of labour, with no inequality‐increasing side effects.     

Housing policy and the progressivity of income taxation

Most countries have tax provisions and subsidies to promote homeownership. These provisions generate an asymmetry in the tax treatment of owner- and rental-occupied housing, which affects the incentives to supply tenant-occupied housing. This paper analyzes the quantitative importance of the interaction of these provisions with the progressivity of income taxation in the context of an overlapping generations model with housing and rental markets. The model replicates the key facts observed in the economy, as well as distributional patterns of ownership, house size, and landlord behavior. The model suggests that the progressivity of income taxation can amplify or mitigate the effects of the asymmetries with important implications for housing tenure, housing consumption, portfolio reallocations, and welfare that differ from those reported in the literature.     

The Effects of EU Formula Apportionment on Corporate Tax Revenues*

The European Commission proposes to replace the current system of taxing corporate income using separate accounting by a two‐step ‘consolidation and apportionment’ procedure. This paper uses a large set of unconsolidated firm‐level data to assess the likely impact on corporate tax revenues in each member state. Taking pre‐tax profit as given, overall tax revenues would be likely to drop by 2.5 per cent if companies could choose whether to participate. By contrast, if they were forced to participate, total tax revenues would be likely to increase by more than 2 per cent, leaving some European countries ‐ most notably, Spain, Sweden and the UK ‐ better off. We investigate how sensitive these results are to the apportionment factors used.     

The Evolution of the Tax Structure of a Reforming Transitional Economy: Hungary 1988–98

The paper analyses the revenue-raising, distributional and incentive effects of the personal tax system in Hungary from the start of the transitional tax reforms of 1988 to 1998, and shows that the tax structure has converged to an almost linear form similar to the more heavily taxed EU countries. The 1998 pension reform has reversed a trend increase in average and marginal tax rates but marginal rates still appear too high for a country wishing to encourage growth and employment creation.     

A SIMPLER CONSUMPTION-BASED ALTERNATIVE TO THE INCOME TAX FOR SOCIALIST ECONOMIES IN TRANSITION

The tax systems of socialist economies in transition will distortresource allocation, create inequities, and cause administrativeheadaches if not reformed. These countries have weak tax administrations,lack experience with mass taxes based on voluntary compliance,and need to encourage domestic saving and foreign investment.This article suggests an alternative to the conventional incometax that is more suited to these conditions. Attempting to tax real economic income raises complicated timingissues (when to recognize income and allow deductions) and mayrequire complex adjustments for inflation. The simplified alternativetax (SAT) avoids these complications and provides a generalincentive for saving and investment less subject to abuse ordistortions than tax holidays and other tax gimmicks in voguein countries emerging from socialism. The key elements of the SAT are separate taxes on income fromlabor and capital, immediate deduction for all business expenditures,no deduction for interest, and no taxation of interest or dividends.(Interest could be treated as under an income tax, at some cost.)Although the marginal effective tax rate is zero, the governmentshares in extraordinary returns to investment. The article discussespotential problems (including distributional implications, taxlosses, and foreign tax credits) as well as advantages of theSAT.      

Tax Competition and Tax Coordination in the European Union

This paper examines the tax competition literature and attempts to draw out its implications for the debate on corporate tax coordination within the EU. It begins with the early basic tax competition model, which derives conditions under which underprovision of public services occurs and tax harmonization unambiguously improves welfare for all states in the union. The paper then turns to a wide variety of extensions of this model, some of which reinforce its results and others that yield rather different conclusions. The analysis concludes by considering the implications of the tax competition literature for the debate on EU corporate tax coordination, drawing on some recent efforts to synthesize this vast literature by estimating the efficiency costs of tax competition and simulating the efficiency gains from various tax coordination palns.     

Distributional Implications of Environmental Taxation in Denmark

Environmental taxes have been introduced in many countries. However, few countries have reached the level of environmental taxation that is seen in Denmark today. This paper analyses the individual taxes as well as the combination of all these taxes and duties related to environmental concerns, including taxes on heating, transport fuels, electricity, water, waste, plastic bags, registration of cars, annual car use and pesticides. The distributional effect of taxes is examined in relation to household income, socio‐economic class, residential location and family status. The shifting of the tax structure from high marginal income tax to consumption‐based taxes, especially environmental taxes, might have distributional impacts that have not been considered part of the tax policy. The results suggest that in Denmark taxes on petrol and registration duties for cars are progressive, whereas most other environmental taxes are regressive, especially the green taxes on water, retail containers and CO2 emissions.     

Reduced Tax Progressivity in Norway in the Nineties: The Effect from Tax Changes

The inequality in pre-tax income increased in Norway in the 1990s, while the concentration of taxes remained largely unaltered. This means that tax progressivity has decreased in the period, as measured by summary indices of tax progressivity. In this paper I analyze individual income data to ascertain whether tax changes in the period can explain the observed decrease in tax progressivity. As marginal tax rates at high income levels have been substantially reduced in the period, for instance through the tax reform of 1992, it is expected that tax changes may have influenced the degree of inequality in pre-tax incomes. This behavioral effect is examined by deriving estimates of the elasticity of gross income with respect to the net-of-tax rate, obtained from various panel data regressions. The tax changes may also have shifted the distributional burden of taxes for unaltered level of pre-tax income inequality. In order to identify this (direct) effect of tax-law alterations, the same fixed distribution of pre-tax income is exposed to various tax-laws in the period.     

Distributional Effects of Price Reforms in the Italian Utility Markets*

In this paper, we analyse some distributional effects of the reforms to water and energy services in Italy. We first document the new regulation setting in these services, illustrating the dynamics of utility prices and of household expenditure in the period 1998‐2005. We then propose a way to measure the affordability of public utilities, in order to investigate how many households would incur a potentially excessive burden if they consumed a minimum quantity of utility services. Finally, we calculate this index on data from the Survey on Family Budgets (Indagine sui consumi delle famiglie). Our results show how the affordability of utility bills varies from region to region depending on climate, income, family endowment and family size. The analysis ‐ also based on a counterfactual exercise ‐ finds that so far, utility reforms do not seem to have produced any negative effects on weaker households.     

The Elasticity of Marginal Utility of Consumption: Estimates for 20 OECD Countries*

In social project appraisal, the policy profile of both distributional welfare weights and the social discount rate has risen considerably in recent years. This fact has important implications for the allocation of funds to social projects and policies in countries, and in unions of countries such as the EU. A key component in the formulae for both welfare weights and the social discount rate is the elasticity of marginal utility of consumption, e. A critical review of existing evidence on e suggests that the UK Treasury's preferred value of unity is too low. New evidence presented in this paper, based on the structure of personal income tax rates, suggests that, on average, for developed countries e is close to 1.4. This particular approach to the estimation of e has previously been under‐utilised by researchers.     

The Distributional Impact of the Greek Crisis in 2010*

The severe economic crisis affecting Greece is widely thought to be having a significant social impact in terms of greater inequality and increased poverty. We provide an early assessment of whether (and to what extent) this was the case in 2010, the first year of the Greek crisis. We distinguish between two interrelated factors: on the one hand, the austerity policies taken to reduce fiscal deficits; on the other hand, the wider recession. Using a tax–benefit model, we attempt to quantify the distributional implications of both. With respect to the austerity policies, we focus on the changes affecting taxation, pension benefits and public sector pay. With respect to the wider recession, we model the effects of rising unemployment and inflation, as well as of lower earnings for self-employed workers and for employees of private firms. In simulating the impact of these changes on the distribution of incomes (and in estimating how the total burden of the crisis is shared across income groups), we take into account tax evasion and benefit non-take-up. We conclude by discussing the main findings, methodological pitfalls and policy implications of our research.     

Is a flat tax reform feasible in a grown-up democracy of Western Europe? A simulation study for Germany

The success of the flat rate income tax in eastern Europe suggests that this concept could also be a model for countries of western Europe. The present paper uses a simulation model to analyze the effects of revenue neutral flat rate tax reforms on equity and efficiency for the case of Germany. We find that a flat rate tax with a low tax rate and a low basic allowance yields positive static welfare effects amounting to approximately 1.8% of income tax revenue but increases income inequality. The increase in income inequality can be avoided by combining a higher tax rate with a higher basic allowance. But in this case, the efficiency gains vanish. We conclude that due to their limited efficiency effects and their problematic distributional impact, flat tax reforms are unlikely to spill over to the grown-up democracies of western Europe.      

Indirect tax reform and the role of exemptions

This paper examines the question of whether indirect tax rates should be uniform, using four different modelling strategies. First, marginal tax reform is examined. This is concerned with the optimal direction of small changes in effective indirect tax rates and requires considerably less information than the calculation of optimal rates. Second, the welfare effects of a partial shift from the current indirect tax system in Australia towards a goods and services tax (GST) are considered, with particular emphasis on differences between household types and the role of exemptions. Third, in view of the stress on a distributional role for exemptions of certain goods from a GST, the potential limits to such redistribution are considered. The fourth approach examines the extent of horizontal inequity and reranking that can arise when there are non‐uniform tax rates. These inequities arise essentially because of preference heterogeneity.     

Indirect Taxation in Greece: Evaluation and Possible Reform

The paper assesses the distributional and efficiency/disincentive aspects of the Greek indirect tax system, which provides 60% of total tax revenue. The marginal welfare costs of broad commodity groups were computed to identify welfare-improving directions of reform. The disincentive effects were estimated from marginal indirect tax rates using Household Expenditure Survey data. The indirect tax structure is shown to be unnecessarily complicated and inefficient, without achieving any redistributive goals. The UK indirect tax structure was shown to be simpler, more equitable and more efficient to implement and administer when simulated on Greek consumers.     

Long‐Term Effects of Fiscal Policy on the Size and Distribution of the Pie in the UK*

This paper provides a joint analysis of the output and distributional long‐term effects of various fiscal policies in the UK, using a vector autoregression (VAR) approach. Our findings suggest that the long‐term impact on GDP of increasing public spending and taxes is negative, and especially strong in the case of current expenditure. We also find significant distributional effects associated with fiscal policies, indicating that an increase in public spending reduces inequality while a rise in indirect taxes increases income inequality.     

Indirect Taxes on International Aviation*

There has recently been much discussion of the possible use of internationally coordinated indirect taxes, or equivalent charges, on international aviation, whether as a source of finance for development or as part of a response to heightened concerns with climate change. This paper considers the strengths and weaknesses of the leading candidate instruments of this kind. It argues that, on both policy and administration grounds, the case for increasing indirect taxes on international aviation is strong: the indirect tax burden on international aviation is very low, yet aviation contributes significantly to border-crossing environmental damage, is just as proper an object of taxation as any other commodity, and incipient tax competition is likely to result in these taxes being set at inefficiently low levels. But the form(s) in which such taxes are levied matters: a tax on aviation fuel would address the key border-crossing externalities most directly; a tax on final ticket values would have greater revenue potential, and perhaps some distributional advantage; departure/arrival taxes face the least legal obstacles, but are much blunter instruments. Optimal policy, it is shown, typically requires deploying both a fuel tax and a ticket tax, and the paper explores, both in principle and by simulation, the key considerations and trade-offs involved in designing a suitable indirect tax regime for international aviation.     

The political economy of implementing environmental taxes

This paper considers the problems that countries have encountered in three areas: technical design issues, the treatment of the distributional effects of environmental taxes arising as a result of intramarginal transfers, and defining the purpose of the tax. It concludes that it would have been possible to predict and often avoid many of the reasons for failure to successfully implement ecotaxes. The paper draws on work of the OECD Joint Sessions on Taxation and the Environment in looking at strategies for the successful implementation of environmental taxes.