Macro‐Fiscal Volatility and the Composition of Public Spending*

Earlier empirical literature has examined some long‐ and medium‐term aspects of macro‐fiscal volatility while leaving its short‐term fiscal impact unexplored. To help fill that gap, we examine the impact of macro‐fiscal volatility on the composition of public spending. To that end, we analyse a panel of 10 EU countries during 1991–2007. Our results suggest that increases in the volatility of regularly‐collected and cyclical revenues such as the VAT and income taxes tend to tilt the expenditure composition in favour of public investment. In contrast, increases in the volatility of ad hoc taxes such as capital taxes tend to favour public consumption spending, albeit only a little. We interpret such volatility innovations as conveying news to the fiscal policymaker about the underlying economic conditions, with especially regularly‐collected and cyclical taxes prompting short‐term cyclical fine‐tuning.     

The income elasticity of tax revenue: estimates for income and consumption taxes in the United Kingdom

This paper provides estimates of individual and aggregate revenue elasticities of income and consumption taxes in the UK over the period 1989–2000. It shows how budgetary changes, including changes to income‐related deductions, have substantially affected income elasticities. The estimates of consumption tax revenue elasticities show that changes in consumption patterns over time are important. A merit of the approach used here is that elasticity estimates can be calculated readily from official published sources.     

中国资本所得经济税负的定性研究——基于当前税制结构和经济环境的分析

在当前税制结构下,中国资本所得经济税负大小主要由增值税、消费税、营业税、企业所得税和个人所得税决定,并受到经济环境及由其决定的税负转嫁状况的影响。增值税、消费税、营业税税负会向前转嫁,企业所得税短期很难转嫁但长期可以,个人所得税税负转嫁依不同情况而有差别。长期看,在取得环节个人资本所得可能直接承担个人所得税,企业资本却不会直接承担企业所得税,在最终消费或积累环节,个人和企业的资本所得资本所得都承担了经过转嫁的增值税、消费税、营业税、企业所得税。     

Taxpayers' Behavioural Responses and Measures of Tax Compliance ‘Gaps’: A Critique and a New Measure

The work of Feldstein (1995 and 1999) has stimulated substantial conceptual and empirical advances in economists' approaches to analysing taxpayers' behavioural responses to changes in tax rates. Meanwhile, a largely independent literature proposing and applying alternative measures of tax compliance has also developed in recent years, which has sought to provide tax agencies with tools to identify the extent of tax non‐compliance as a first step to designing policies to improve compliance. In this context, measures of ‘tax gaps’ – the difference between actual tax collected and the potential tax collection under full compliance with the tax code – have become the primary measures of tax non‐compliance via (legal) avoidance and/or (illegal) evasion. In this paper, we argue that the tax gap as conventionally defined is conceptually flawed because it fails to incorporate behavioural responses by taxpayers. We show that conventional tax gap measures, which ignore the presence of behavioural responses, exaggerate the degree of non‐compliance. This potentially applies both to indirect taxes (such as the ‘VAT gap’) and direct (income) taxes. Further, where these conventional tax gap measures motivate reforms designed to increase the tax compliance rate, they will likely have a tax‐base‐reducing effect and hence generate a smaller increase in realised tax revenues than would be anticipated from the tax gap estimate.     

Taxes and production: The case of Pakistan

This paper investigates the effectiveness of investment incentives and corporate income taxes in influencing production and investment decisions in the Pakistani wearing apparel and leather products industries. Three tax instruments are considered: the corporate income tax (CIT), the investment tax credit (ITC), and the capital cost allowance (CCA).The results show that since there are significant capital adjustment costs, it is important to distinguish between the short, intermediate, and long-run effects associated with the tax instruments. Production decisions are relatively more responsive to changes in the ITC rate compared to changes in either CCA or CIT rates in each run. However, only in the long run for the apparel industry are the ITC and CCA rates cost effective in stimulating investment. The CIT is never cost effective. Thus targeted instruments outperform the general CIT instrument. In addition, although the incentive to invest is enhanced, there is little effect on output. Therefore, tax incentives essentially make production techniques more capital intensive.     

Progressive taxes and firm births

Tax reform proposals in the spirit of the “flat tax” model typically aim to reduce three parameters: the average tax burden, the progressivity of the tax schedule, and the complexity of the tax code. We explore the implications of changes in these parameters for entrepreneurial activity, measured by counts of firm births. The Swiss fiscal system offers sufficient intra-national variation in tax codes to allow us to estimate such effects with considerable precision. We find that high average taxes and complicated tax codes depress firm birth rates, while tax progressivity per se promotes firm births. The latter result supports the existence of an insurance effect from progressive corporate income taxes for risk-averse entrepreneurs. However, implied elasticities with respect to the level and complexity of corporate taxes are an order of magnitude larger than elasticities with respect to the progressivity of tax schedules.     

Housing and Tax Policy

This paper investigates the effects of housing‐related tax policy measures on macroeconomic aggregates using a dynamic general‐equilibrium model featuring borrowing and lending across heterogeneous households, financial frictions in the form of collateral constraints tied to house prices, and a rental housing market alongside owner‐occupied housing. We analyze the effects of various tax policies and find that they all lead to significant output losses, with large long‐run tax multipliers of around 2. Among them, reducing the mortgage interest deduction is the most effective in raising tax revenue per unit of output lost, whereas reducing the depreciation allowance for rental income is the least effective.     

Simplifying the personal income tax system: lessons from the 1998 Spanish reform

Governments often try to reduce the complexity of personal income tax systems by decreasing the number of tax filings. The 1998 reform of the Spanish income tax system has followed this approach by adjusting withholding on earned income to the income tax liability. In this paper, we assess to what extent the reform has fulfilled its purposes, making use of a micro‐simulation tax‐benefit model for Spain, ESPASIM. The number of individuals exempt from filing a tax return has been reduced to around half of the total number of taxpayers. However, the quantity of tax returns sent to the tax administration has not changed so much because the new withholding system adjusts taxes for only 29 per cent of those exempt. Moreover, the new system increases the overall excess of tax withholding by 1.5 billion euro. We also study alternative reforms that could achieve better results than the one implemented.     

Accounting of the German Statutory Pension Scheme: Balance Sheet,Cross‐Sectional Internal Rate of Return and Implicit Tax Rate

We present a framework for accounting of the German statutory pension scheme and calculate a balance sheet for the period 2005–14. Estimating a funding ratio of about 90 per cent, we present some policy recommendations in order to restore balancing of assets and liabilities. Extending and applying the methodology proposed by Settergren and Mikula (2005), we additionally estimate the aggregate cross‐sectional internal rate of return of the German pension scheme over this period. We are able to show that these internal rates of return are mainly financed by increasing contributions and by increasing unfunded liabilities. Additionally, our analysis reveals that from an expenditure perspective, the major part of the internal rate of return results from changing longevity rather than other changes. We also estimate the implicit tax rates from a cross‐sectional perspective and find that they can mainly be interpreted as an ‘implicit wealth tax’ on pension wealth. Finally, we analyse the impact of demographic change on the balance sheet employing a population projection. While the pure demographic effect leads to a decreasing funding ratio during population ageing, the automatic balancing mechanisms of the German pension scheme lead to a significant overfunding in the long run from the accounting perspective adopted in the Swedish pension system.     

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.     

Tax Deductions and the Marginal Welfare Cost of Taxation

Recent work emphasizes the efficiency costs of tax deductions that distort the pattern of household spending. Using evidence on the sensitivity of taxable income to tax rates, this work suggests that the marginal welfare cost (MWC) of income taxes in the United States could be dramatically higher because of tax deductions, and might exceed unity. This paper develops an alternative approach for assessing the MWC using evidence on underlying parameters (e.g., labor supply elasticities, the demand elasticity for tax-favored goods). A MWC of around 0.3 to 0.5 seems more consistent with these parameter values, though this estimate is still significantly higher because of tax deductions.     

Married couple work participation and earnings elasticities: evidence from tax data

This paper uses administrative tax panel data to estimate work participation and earnings elasticities of married couples by exploiting variation in tax policy. Not only may individuals alter labor supply by working more or less in response to changes in tax policy, they may also alter reported earnings or shift income between taxable and tax-deferred compensation. As a result, in addition to estimating the standard extensive and intensive labor supply elasticities, we also examine elasticities by type of income (wage earnings vs. self-employment earnings) and compensation (taxable vs. tax-deferred). We find that wives have more elastic work participation and earnings than husbands. Furthermore, self-employment income is more responsive to net-of-tax price changes than wage earnings for both husbands and wives, suggesting that it is easier for the self-employed to alter their work hours, work intensity, and/or reported income than wage earners. Finally, we find that wives respond to changes in the net-of-tax price of earnings by altering the amount of earnings subject to current-year taxes through adjustments of tax-deferred contributions to employer-provided retirement accounts.     

Taxes

This is a compendium of notes on taxes. Section 2 presents a general tax scheme. It is a tax on value added by labour and capital that does not favour one or the other. Section 3 contrasts taxation of business income for pass-through entities and corporations. Section 4 discusses property taxes as taxes on housing services and so a form of income tax. Section 5 turns to wealth taxes. The closing Section 6 attempts to explain why people donate to nonprofits but minimise tax payments to governments, even though governments and nonprofits engage in many of the same activities.     

Some Equity and Efficiency Considerations of International Tax Competition

The paper uses a dynamic 2-country equilibrium model with imperfections in the labour market calibrated for the US and EU economy to investigate dynamic efficiency and equity aspects of international tax competition. We focus on tax policy where governments can only decide on the levels of corporate and labour taxes, given a constant share of government consumption and transfers in GDP and a constant VAT rate. We find that the welfare effect of a tax shift from capital to labour depends heavily on the distortionary nature of labour taxes. In contrast to existing results we find substantial positive international spillover effects of corporate tax reduction in one country, with long term gains outweighing short term losses. Results are very different, however, if one goes beyond the representative agent framework. According to our results, a tax switch is most likely not Pareto improving since net wages tend to decline in both regions even in the long run.     

Attitudes towards Tax Levels: A Multi‐Tax Comparison*

We analyse Swedes' opinions about the levels of 11 different taxes to see which taxes people are most averse to and why. The most unpopular tax is the real estate tax, while the corporate tax is the least unpopular. We find a strong self‐interest effect in tax attitudes and that knowledge and education increase support for corrective taxes.     

Income Shifting in the Spanish Dual Income Tax*

Based on a model of behavioural response to taxes, and using the Taxpayers Panel from the Instituto de Estudios Fiscales for the period 1999–2009, we analyse whether the dual nature of the Spanish personal income tax (PIT), reinforced by the 2007 reform, has influenced taxpayers’ behaviour, causing them to convert part of their ‘general income’ (from labour, real estate or economic activities) into ‘savings income’ (from movable capital or capital gains). We also extend the analysis of income shifting and study whether Spanish taxpayers also responded to the different tax treatments given to the two types of savings income (from movable capital and capital gains) until 2007, transforming savings income from one type to the other. The results of our study demonstrate three facts. First, Spanish taxpayers did respond to the different tax rates, shifting income from the general base to different forms of savings, especially capital gains. The highest‐income individuals and the self‐employed and business owners are the groups where this behaviour was most marked. Second, the self‐employed and business owners also turned income from movable assets into capital gains, guided by their different tax rates. And third, we find signs of ‘anticipation’ and ‘learning’ effects caused by the 2007 tax reform. We believe that the results obtained will enrich the growing literature on income shifting.     

Value-added taxation and consumption

One of the main rationales for taxing consumption rather than income is that it is believed that consumption taxes discourage consumption, encourage savings, and thus generate higher economic growth. However, empirical evidence on the actual effectiveness of consumption taxes in stimulating savings is very limited. In this paper, we estimate the impact of a broad-based consumption tax, the value-added tax (VAT), on the aggregate consumption of fifteen European Union countries over the period 1961–2005. Our empirical results indicate, across a variety of estimation methods and specifications, that a one percentage point increase in the VAT rate leads to roughly a one percent reduction in the level of aggregate consumption in the short run and to a somewhat larger reduction in the long run.     

The capitalization of taxes in bond prices: Evidence from the market for Government of Canada bonds

This paper provides estimates of the extent to which corporate and personal income taxes are capitalized in bond prices. The methodology yields estimates of the degree of tax capitalization, rather than an implied tax rate. This makes it straightforward to identify the marginal investor and test for changes in tax capitalization. The empirical approach also makes it unnecessary to jointly estimate the degree of tax capitalization and the entire yield curve. Corporate taxes are found to have been fully capitalized in pre-tax Government of Canada bond yields during the period 1986–1993. Since 1994, taxes have not been capitalized in yields. These results are consistent with the existence of a marginal investor, but the identity of the marginal investor changed from a financial sector firm to a non-taxed entity in the early 1990s.     

Land Tax Changes and Full Capitalisation

We use a unique data set to examine the extent to which changes in the Danish land tax are capitalised into house prices. The Danish local government reform in 2007, which caused tax increases in some municipalities and tax decreases in others, provides plenty of exogenous variation, thus eliminating endogeneity problems. The results imply full capitalisation of the present value of future taxes under reasonable assumptions about discount rates. Consequently, the paper gives an empirical confirmation of two striking consequences of a land tax. First, it does not distort economic decisions because it does not distort the user cost of land. Second, the full incidence of a permanent land tax change lies on the owner at the time of the (announcement of the) tax change; future owners, even though they officially pay the recurrent taxes, are not affected as they are fully compensated via a corresponding change in the acquisition price of the asset.     

Is Targeted Tax Competition Less Harmful than its Remedies?

Some governments have recently called for international accords restricting the use of preferential taxes targeted to attract mobile tax bases from abroad. Are such agreements likely to discourage tax competition or conversely cause it to spread? We study a general model of competition for multiple tax bases and establish conditions for a restriction on preferential regimes to increase or decrease tax revenues. Our results show that restrictions are most likely to be desirable when tax bases are on average highly responsive to a coordinated increase in tax rates by all governments, and when tax bases with large domestic elasticities are also more mobile internationally. Our analysis allows us to reconcile the apparently contradictory results of the previous literature.