An exercise in political economy of tax reform

If the tax rate is endogenously determined by majority voting, then a fully effective and costless reform resulting in full tax compliance may not be supported by a majority even when the evaders (or, avoiders) are only a minority.     

A classroom game on a negative externality correcting tax: Revenue return,regressivity, and the double dividend

The concept of negative externality is central to the teaching of environmental economics, but corrective taxes are almost always regressive. How exactly might governments return externality-correcting tax revenue to overcome regressivity and not alter marginal incentives? In addition, there is a desire to achieve a double dividend in the use of externality-correcting taxes, that is, to use the revenue to offset existing distortionary taxes, such as those on labor that produce a dead weight loss. In this article, the authors explain a classroom game that was developed for students to understand the theory of externalities, taxation dead weight loss, and regressivity. Then, the problem helps students explore the actual design of a policy that satisfies the double dividend hypothesis and corrects for regressivity.     

Do people respond to tax incentives? An analysis of the Italian reform of the deductibility of home mortgage interests

Before 1992 mortgage interests in Italy were fully tax deductible up to 3500 Euro (7000 for two cosigners). In 1992-1994 the government implemented a series of tax reforms whose ultimate effect was to eliminate the relation between the after-tax mortgage rate and the marginal tax rate. Using data from the 1989-2002 Survey of Household Income and Wealth we test if the elimination of incentives has affected the sensitivity of the decision to borrow and the amount borrowed with respect to the marginal tax rate. Regression analysis and difference-in-differences estimates indicate that tax considerations have not affected the demand for mortgage debt, neither at the extensive nor intensive margin. These results are consistent with lack of financial information and credit rationing during the sample period.     

The implications for households of environmental tax reform (ETR) in Europe

The paper discusses the distributional implications of environmental tax reform (ETR) for households, and presents new results from modelling the impacts of a major ETR for the European Union. The distributional effects arise from the new environmental taxes, any tax reductions made as part of the ETR, the wider macroeconomic impacts from the ETR, any special provisions in the ETR, and the environmental benefits from the ETR. The paper's literature review makes clear that while the impacts from taxes on the household use of energy are very often regressive, transport taxes tend not to be, although the impacts differ between urban and rural households. Moreover, the net distributional impact is often less regressive, or not at all, once the wider distributional effects are taken into account. Residual regressive effects can in principle be removed by further adjustments in the tax or benefits system. The modelling results suggest that an ETR in Europe will actually increase real incomes across the EU as a whole, and will not be generally regressive, although the results differ by country and for different socio-economic groups. The political acceptability of ETR may depend on the worst effects on these groups being mitigated in some way.     

Numerical simulation on property tax reform: evidence from China

This article analyses the property tax reform in China in a computable general equilibrium model that recognizes the interaction between and among housing markets in different provinces and macroeconomic development. Using real data in 2010, we present the benchmark equilibrium for reference property and income tax rates. Then, we examine different property and income tax policies and make a comparison of their production, consumption, welfare and national income. We find that the implementation of property tax would decrease the house production at the expense of welfare in taxed area. The expansion of the taxed regions may increase the total social welfare and national income. Even though property tax policy may not be able to change the income distribution in China, increasing income tax rate could narrow the income disparity. Finally, this article shows the reliability of the conclusions when sensitivity analysis on optimal condition of equilibrium computation is performed under varied property tax policy.     

Regional economic development and environmental repercussions: An environmental input-output approach

This study attempts to examine issues related to the existing adverse relationship between regional economic development and natural environment protection. For doing so, a regional environmental input-output model for the region of central Macedonia in northern Greece is constructed in order to quantify the direct and indirect undesirable negative effects of the production process in the natural environment. The results suggest that there is a considerable trade-off between economic development and environmental deterioration which should be taken into account when policy decisions are made. This paper benefitted from comments by the participants of the Forty-Seventh International Atlantic Economic Conference, Vienna, Austria, March 16–23, 1999.     

Measuring the welfare effects of tax changes using the LES: An application to a carbon tax

This paper explores the use of a parametric approach to the measurement of compensating and equivalent variations resulting from price changes. The approach is based on the application of the Linear Expenditure System (LES) to each of a range of household income groups, rather than being based on a representative consumer. The method is then used to examine the distributional effects of a carbon tax, designed to reduce carbon dioxide emissions. The price changes resulting from a carbon tax depend on the carbon intensities of each good, which depend in turn on the nature of inter-industry transactions (the input-output matrix). The use of transfer payments to compensate for adverse distributional effects of a carbon tax is investigated, using social welfare functions based on equivalent incomes.     

Legislators' behaviour and electoral rules: Evidence from an Italian reform

We explore how electoral rules and the degree of civicness of the voters interact in shaping elected officials' behaviour. We examine the expenditure proposals sponsored by Italian Senators from 1994 to 2013 and exploit the 2005 electoral reform that transformed a mainly majoritarian system into a mainly proportional one. First, we find that legislators elected in first-past-the-post districts are more likely to sponsor pork-barrel bills and to put effort into legislative activity than those elected with a closed-list proportional system. Second, more importantly, we show that the effects of the electoral rules are muted in areas with high civicness.     

Environmental taxation for environmental regulation and fiscal policy: An analysis of a Clinton-type BTU tax

This paper provides an empirical study of energy taxes for achieving environmental and fiscal policy objectives. Based on an energy tax structured like Clinton's 1993 BTU tax proposal, we demonstrate that the optimal tax will be higher the greater the environmental costs associated with energy consumption and the larger the economic distortions associated with alternative revenue-raising policies. Greater environmental damages and higher revenue-raising costs also have a fiscal policy implication; they shift the least-cost tax mix for raising additional revenue toward energy taxes and away from conventional tax alternatives.The authors wish to acknowledge the assistance of two anonymous referees, who provided very helpful feedback. We also wish to acknowledge outstanding research assistance from Tracy Terry of the School of Public and Environmental Affairs, Indiana University Bloomington. Of course, the results and conclusions of the paper are the authors' exclusively.     

The learning path of the hidden economy: the tax burden and tax evasion in New Zealand

This paper considers the ‘learning curve’ relationship between the aggregate tax rate and the relative size of the hidden economy in New Zealand. Some simple non-linear models are estimated so that the effects of changes in the effective tax rate on the underground economy can be simulated. This study finds that about half of the hidden activity in New Zealand is a learned response to changing opportunities and constraints in fiscal policy, but this amount varies over the business cycle. Simulating a zero tax rate permits us to discover the ‘natural rate’ of underground and criminal activity. Some partial lessons are drawn for taxation policy in that country.     

Welfare effects of exchange controls: An application to the Haitian economy

This paper estimates monthly welfare losses and the shadow exchange rate that followed a policy of restrictions of access to foreign exchange, in force in the Haitian economy from 1985 to 1991. These losses are substantial. The determinants of the parallel market, another phenomenon consistent with such a policy of restrictions, are also estimated. The author thanks Steven A. Y. Lin, an anonymous referee, and seminar participants at the Latin American and Caribbean Economic Association 1997 meetings and the International Atlantic Economic Conference, Boston, MA, October 8–11, 1998, for helpful comments on earlier drafts. All remaining errors are the author's responsibility.     

Regional effects of export tax rebate on exporting firms: Evidence from China

This paper extends a model from 2003 to separate the direct and indirect impact of an export tax rebate on the intensive margin of firm‐level export sales at the subnational level. The direct impact of the rebate is associated with a reduction of an exporting firm's variable costs, while the indirect impact manifests itself through higher regional wages as a result of increased demand for local labor. First, the empirical results imply that a 1 percent rise in the export tax rebate rate increases the export sales among continuing exporters by 0.2 percent through the direct channel. Second, through the indirect channel, a 1 percent difference in the regional rebate causes a 0.02 percent difference in exporters' sales growth. Both effects are statistically significant, and are consistent with the model's predictions.     

Social distance between workers: An application to Italian geographic areas

This paper is concerned with the measurement of social distance, clustering, or polarization between workers of a given society. This concept is fundamentally different from that of inequality and thus cannot be measured by any Lorenz consistent index. Similarly, it cannot be additively decomposed into within - and between -group components using classical techniques. A new decomposition method is proposed and applied to Italian workers. The method provides an index that can be used both to calculate the distance between social groups classified according to worker characteristic and to track changes across time. The new method also reveals the factors that are reshaping the wage distribution and allows us to identify precisely where these effects are having their greatest impact.
JEL classification: D30, D63, I32.     

Welfare criteria for tax reforms : An extension

Pazner and Sadka (1981) offer simple sufficient conditions for accepting or rejecting tax reforms based on the theory of index numbers. We provide not only sufficient conditions but also necessary conditions for the validity of tax reforms. Thus, a complete characterization of tax reforms is obtained.     

GHG mitigation schemes and energy policies: A model-based assessment for the Italian economy

We build up a large scale dynamic general equilibrium model embodying a cap on pollutant emissions, an electricity sector and fuel consumption to analyse climate-energy policies for the Italian economy. Our results show how the trade-off between environmental quality and economic activity can be effectively overcome by recycling the revenues from the sales of emission permits in labour tax reductions. A tax combination aimed at reducing the consumption of fossil fuel, while simultaneously decreasing taxes on labour, is expansionary, but the final outcome is influenced by the underlying GHG emission policy. Tax incentives encouraging the use of clean energy sources, by discouraging the use of fossil fuel, produce a sizeable reallocation of emissions across sectors and are found to be expansionary. Overall the paper highlights the non-trivial interactions between the different fiscal tools in hand to meet the legally binding commitment on emission reduction, while limiting the potential negative fallout on the economy.     

Determinants of dividend payout and dividend propensity in an emerging market,Iran: an application of the LASSO

Accurate prediction of dividends is important for market participants such as investors, firm managers, and monitoring authorities, as they can, respectively, invest, manage dividend decisions, and monitor dividend policies more effectively. We identify the most relevant variables for predicting the dividend payout of the firms in an emerging market, Iran, using the least absolute shrinkage and selection operator (LASSO). The advantages of the LASSO include: enhancing the prediction accuracy of the dividend model, improving interpretation of the results, and applicability to high-dimensional data. We obtain several results. First, some fundamental determinants of dividends in the industrialized economies such as market-to-book ratio and current ratio, do not play a role in deciding dividends in Iran. Second, LASSO-selected variables outperform the variables commonly used in the literature in terms of model fit and prediction accuracy. Third, business risk, leverage, return on assets and effective tax rate are the most important predictors of dividend propensity of the Iranian firms. Fourth, if the support vector machine algorithm, an often-used classification method, is combined with LASSO-selected variables, it can better discriminate between dividend-paying and dividend non-paying firms than other methods such as logistic regression and linear discriminant analysis.

Abbreviations: LASSO: Least Absolute Shrinkage and Selection Operator; TSE: Tehran Stock Exchange; RMSE: Root Mean Squared Errors; MAE: Mean Absolute Errors; ROC: Receiver Operating Characteristics; GMM: Generalized Method of Moments; MENA: Middle East and North Africa region; AIC: Akaike Information Criterion; BIC: Bayesian Information Criterion; LARS: Least Angel Regression; OLS: Ordinary Least Squares; AUC: Area Under Curve; BS: Brier Score ; OA: Overall Accuracy; LDA: Linear Discriminant Analysis; SVM: Support Vector Machine algorithm; LR: Logistic Regression.     

Corporate tax reform and business investment: Empirical estimates for structures and equipment

New econometric investment equations, separating equipment from structures, are used to evaluate the impact of the 1986 tax reform law. The computations suggest that investment in equipment will be significantly reduced, largely as a consequence of the abolition of the investment tax credit. Despite longer tax lives, investment in structures may increase because of the reduction in corporate income tax rates.     

The impact of the Indonesian income tax reform: A CGE analysis

This study evaluates the impacts of Indonesia's recent income tax reforms on key macroeconomic variables, as well as the impacts on poverty and income distribution. It was found that the reductions in personal income tax and corporate income tax increase economic growth under a balanced budget assumption. The policy reforms also lead to a small reduction in the incidence of poverty. However, the policies also lead to an increase in income inequality because the tax cut is more beneficial to households in the highest income categories. It is recommended that future tax cuts should target the urban and rural poor.     

Consumer support for environmental policies: An application to purchases of green cars

This paper focuses on how consumer motivation can be tapped in order to encourage the adoption of cleaner technologies. Consumers are heterogeneous — they may be guided by intrinsic motivation or extrinsic motivation. While information provision policies (such as the energy label for cars) may be effective in encouraging certain consumers to adopt green cars, financial incentive schemes (such as subsidies or fines) may be more persuasive for extrinsically-motivated consumers. We develop a dynamic theory of adoption of environmental innovations, in which information-provision policies are followed by financial incentives (first ‘carrot’, then ‘stick’ incentives). Analysis of a survey dataset of Swiss households observes considerable heterogeneity in terms of support of information-provision or financial incentive policies, in line with our conjectures. Our results will be of particular interest to policymakers interested in guiding consumers towards cleaner technologies.