AUTOCRATIC, DEMOCRATIC, AND OPTIMAL GOVERNMENT

All types of government face two major fiscal decisions: the level of government services and the average tax rate. This paper develops models of autocratic, democratic, and optimal government. The effects of alternative government structures are estimated using a common set of parameters based on US. data. Output and government services are higher in u democracy than in an autocracy, but the tax rate is lower. Output is even higher with an optimal government and both government services and the tax rate are lower. The relative outcomes in any government depend strongly on the fiscal horizon of those who govern. (JEL H11)     

Correlates of tax evasion

Tax evasion has increased in the United States. Estimates of evasion indicate that the amount of federal income taxes evaded equals the federal deficit. Thus, controlling tax evasion should be a major concern of future tax policy decisions. This study analyzes the effects of 18 variables that might affect tax evasion. Specifically, the variables were used as independent variables in discriminant analyses to determine their relationship to tax evasion. The results indicated that the variables affect different types of tax evasion differently, and that all variables do not significantly influence tax evasion. Policy implications are presented based on these results.     

PARTIAL TAX HARMONIZATION THROUGH INFRASTRUCTURE COORDINATION

In this article, we analyze the role of infrastructure coordination in facilitating partial tax harmonization within a coalition of asymmetric jurisdictions. Two main results are obtained. First, productivity asymmetries represent a serious handicap for partial tax harmonization that can be remedied by coordinating nontax instruments when they allow to reduce these asymmetries. Second, infrastructure coordination through the choice of a common investment level is particularly indicated when asymmetries between potential members of a tax coalition are large. The current usage of European Union (EU) structural funds orientated to reduce regional infrastructure deficits is therefore suitable to facilitate tax harmonization within the EU. (JEL H87, H54, H21)     

DISTRIBUTIVE CONSEQUENCES OF A PROPERTY TAX REVOLT

Voters who support tax limitations measures such as California's Proposition 13 seem to feel that their expected gains more than compensate for whatever costs may follow from a successful tax revolt. Costs can arise from a decline in government services or from an increase in some replacement tax if service levels are maintained. This paper estimates the perceived and actual incidence of a property tax revolt under alternative assumptions about voter perceptions and eventual outcomes. Our results suggest that the most visible benefits of a tax cut favor low-income homeowners. In the event of government budget cutbacks, it is possible that the distribution of services is sufficiently skewed toward low-income groups to reverse the incidence of a property tax revolt.     

CAN GUEST WORKERS SOLVE JAPAN'S FISCAL PROBLEMS?

The labor force in Japan is projected to fall from 64 million in 2014 to 20 million in 2100, signaling unprecedented tax/transfer adjustments to achieve fiscal sustainability. In this paper, we develop a quantitative overlapping generations model to measure the impact of guest worker programs in Japan. Against a baseline general equilibrium transition in which the consumption tax adjusts to achieve fiscal sustainability, we compute alternative transitions with guest worker programs. Depending on the size and skill distribution of guest workers, these programs may mitigate Japan's fiscal imbalance problem with a relatively manageable increase in the consumption tax. (JEL E2, E6, H5, J11, J15)     

An agent-based model of network effects on tax compliance and evasion

Agent-based models are flexible analytical tools suitable for exploring and understanding complex systems such as tax compliance and evasion. The agent-based model created in this research builds upon two other agent-based models of tax evasion, the Korobow et al., 2007, Hokamp and Pickhardt, 2010 models. The model utilizes their rules for taxpayer behavior and apprehension of tax evaders in order to test the effects of network topologies in the propagation of evasive behavior. Findings include that network structures have a significant impact on the dynamics of tax compliance, demonstrating that taxpayers are more likely to declare all their income in networks with higher levels of centrality across the agents, especially when faced with large penalties proportional to their incomes. These results suggest that network structures should be chosen selectively when modeling tax compliance, as different topologies yield different results. Additionally, this research analyzed the special case of a power law distribution and found that targeting highly interconnected individuals resulted in a lower mean gross tax rate than targeting disconnected individuals, due to the penalties inflating the mean gross tax rate in the latter case.     

THE RATIONALE OF GENERAL EQUILIBRIUM THEORY

This paper is concerned with the methodological issues raised by the attempt to use or apply the results of general equilibrium theory. This concern arises out of a critical discussion of Professor F. H. Hahn's view that general equilibrium theory is far from being a self-contained exercise, and is all the more decisive in its application for being carried out at such a high level of abstraction. It is argued that Hahn's rationale for general equilibrium theorising is unsatisfactory, and alternative lines are suggested along which such a rationale could be constructed.     

ON THE DESIRABILITY OF TAX COORDINATION WHEN COUNTRIES COMPETE IN TAXES AND INFRASTRUCTURE

This article contains two distinct messages. First, when jurisdictions compete in two independent strategic variables, the decision to coordinate on one variable (a tax rate) induces a carry‐over effect on the unconstrained instrument (infrastructure expenditures). Consequently, classical results of the tax coordination literature may be qualified. A second message is that the relative flexibility of the strategic instruments, which may depend on the time horizon of the decision making, does matter. In particular, tax coordination is more likely to be detrimental (in terms of revenue and/or welfare) when countries can compete simultaneously in taxes and infrastructure, rather than sequentially. The reason is that simultaneity eliminates strategic effects between tax and nontax instruments. (JEL H21, H87, H73, F21, C72)     

THE OPTIMAL TAXATION OF ASSET INCOME WHEN GOVERNMENT CONSUMPTION IS ENDOGENOUS: THEORY,ESTIMATION AND WELFARE

This paper derives the Ramsey optimal fiscal policy for taxing asset income in a model where government expenditure is a function of net output or the inputs that produce it. Extending work by Kenneth L. Judd, I demonstrate that the canonical result that the optimal tax on capital income is zero in the medium to long term is a special case of a more general model. Employing a vector error correction model to estimate the relationship between government consumption and net output or the factor inputs that generate it for the United States between 1948Q1 and 2015Q4, I demonstrate that this special case is empirically implausible, and show how a cointegrating vector can be used to determine the optimal tax schedule. I simulate a version of the model using the empirical estimates to measure the welfare implications of changing the tax rate on asset income, and contrast these results with those generated in a version of the model where government consumption is purely exogenous. The shifting pattern of welfare measurements confirms the theoretical results. I calculate that the prevailing effective tax rate on net asset income in the United States between 1970 and 2014 averaged 0.449. Hence abolishing the tax completely does generate welfare improvements, though only by the equivalent of between 1.103% and 1.616% permanent increase in consumption—well under half the implied welfare benefit when the endogeneity of the government consumption is ignored. The maximum welfare improvement from shifting part of the burden of tax from capital to labor is the equivalent of a permanent increase in consumption of between only 1.491% and 1.858%, and is attained when the tax rate on asset income is lowered to between 0.148 and 0.186. Allowing the tax rate to vary over time raises the maximum welfare benefit to 1.865%. All the results are very robust to a wide range of elasticities of labor supply. (JEL E62, H21, H50)     

CYCLICAL TAX ENFORCEMENT

We wonder whether tax enforcement varies along the economic cycle and aim at answering that question from a positive perspective by means of survey data for the Spanish case (1994–2015). According to a fiscal capacity argument, tax enforcement might be stronger in times of crisis (counter-cyclical), but if the tax administration prioritizes taxpayers' welfare over public revenue, enforcement might be slacker (procyclical). We find tax enforcement is not immune to the state of the economy. In particular, it presents a prevailing counter-cyclical trend, but in presence of a severe economic crisis it turns out to be procyclical. (JEL D78, H12, H26, H83)     

CIGARETTE TAXES AND ILLICIT TRADE IN EUROPE

Cigarettes are highly taxed in Europe, but at higher prices some consumers substitute more toward illicit cigarettes. The illicit retail trade in cigarettes (IRTC) includes counterfeit, untaxed, and smuggled cigarettes. Some existing literature includes claims that taxes are not an important determinant of IRTC. Using data from the European Union, we find the opposite: raising prices leads to substantial increases in IRTC. A €1 increase in tax/pack is expected to increase illicit market share by 5 to 12 percentage points and increase illicit cigarette sales by 29% to 95%. The results are robust to alternative specifications and data. (JEL I18, H26, K42)     

CORPORATE TAX GAMES WITH CROSS‐BORDER EXTERNALITIES FROM PUBLIC INFRASTRUCTURE

We construct a model of corporate tax competition in which governments also use public infrastructure investment to attract foreign direct investment, thus enhancing their tax bases. In doing so, we allow for cross‐border infrastructural externalities. Depending on the externality, governments are shown to strategically over‐ or underinvest in infrastructure. We also examine how tax cooperation influences investment in infrastructure and find that welfare may be lower under tax cooperation than under tax competition; this is the case when infrastructure is very effective in raising the tax base and generates a large negative cross‐border externality. (JEL F23, H40)     

OPTIMAL WAGE TAXATION WHEN HUMAN CAPITAL AND EMPLOYMENT ARE ENDOGENOUS

This paper studies how optimal wage tax conclusions from the classic two‐period life cycle model of human capital accumulation are affected by endogenizing the number of taxpaying workers. In the absence of a corrective policy, young individuals underinvest in human capital from a social perspective because tax premiums for transfers to nonworkers are not actuarially adjusted downward for human capital attainment. A combination of wage taxes and wage subsidies can restore proper price signals. Numerical simulations suggest that even modest employment elasticities can be sufficient to substantially impact the magnitudes and even the signs of optimal wage tax rates. (JEL H21, H3, J24)     

DO STATE EXCISE TAXES REDUCE ALCOHOL‐RELATED FATAL MOTOR VEHICLE CRASHES?

We study the effect of alcohol excise taxes on alcohol‐related fatal traffic crashes by examining two large increases in excise taxes in Illinois that occurred in 1999 and in 2009. Using the synthetic control method, we do not find evidence that the tax increases led to a long‐term reduction in fatal alcohol‐related motor vehicle crashes following either tax increase. These results are robust across several specifications and pass sensitivity tests. However, we find evidence that following the 2009 increase Illinois counties that do not share a border with another state experienced a temporary drop in alcohol‐related traffic fatalities. (JEL H71, H75, 118)     

INCOME TAXES AND INVESTMENT DECISIONS: THE LONG-LIFE APPRECIATING ASSET CASE

In this paper a neoclasical tax incidence model is used to analyze the effects of alternative methods of taxing income derived from products whose production process is long-lived. Forestry is selected as a classic case. Compared with a "neutral" income tax, two other types of income tax, which approximate those currently applying to the forestry sectors in Australia and the United States, respectively, bias production toward longer growth periods, increase land (site) values, and depress timber prices.     

TAX POLICY AND INCOME INEQUALITY IN THE UNITED STATES, 1979–2007

This paper assesses the effects of U.S. tax policy reforms on inequality over around three decades, from 1979 to 2007. It applies a new method for decomposing changes in government redistribution into (1) a direct policy effect resulting from policy changes and (2) the effects of changing market incomes. Over the period as a whole, the tax policy changes increased income inequality by pushing up the income share of high‐income earners (the top 20%). (JEL H23, H31, H53, P16)     

DOES THE PUBLIC SECTOR IMPLODE FROM BAUMOL'S COST DISEASE?

The root of the Baumol cost disease is higher productivity increases for manufactured goods than for services. The implied increase in relative costs of service production is widely claimed to have devastating implications for the public sector as a provider of tax‐financed services such as health, education, and care. To match the increasing costs it appears inevitable that tax rates would be ever increasing. It is shown that this inference does not follow under standard assumptions when accounting explicitly for service provision from both the private and public sectors. Strikingly under assumptions often made in the literature, the welfare maximizing tax rate for a utilitarian policy maker would remain constant despite the Baumol cost disease, and by implication the share of public employment in total employment will remain constant. (JEL H5, H11, O41)     

THE CULTURE OF CORRUPTION,TAX EVASION,AND ECONOMIC GROWTH

This study uses a dynamic general equilibrium model to quantify the effects of corruption and tax evasion on fiscal policy and economic growth. The model is calibrated to match estimates of tax evasion in developing countries. The calibrated model is able to generate reasonable predictions for net tax rates, the corruption associated with public investment projects, and the negative correlation between corruption and tax revenue. The presence of corruption and evasion is shown to have significant, but not large, negative effects on economic growth. The relatively moderate effects help explain the absence of a robust negative correlation between growth and corruption in cross‐country data. The model also implies that cracking down on tax evasion before addressing corruption can be a bad idea and that higher wages for public officials can improve welfare. (JEL H3, O4)     

TRADE LIBERALIZATION AND CORPORATE INCOME TAX AVOIDANCE

We identify the effect of trade liberalization on corporate income tax avoidance in a sample of Chinese manufacturing firms, taking advantage of China's entry into the World Trade Organization (WTO). We find that firms engage in more tax avoidance in industries with larger tariff reductions. Further analysis shows that firms with a lack of cash or a high demand for cash before WTO entry tend to engage in more tax avoidance after WTO entry. Our study also provides evidence that manipulating costs is one way that firms avoid corporate income tax. (JEL D22, F61, F63, H26)