Tax Mix Research Articles

The Fiscal Capitalization of Public Spending: Does Municipal Operating and Capital Spending Increase Property Values?

This study investigates the impact of local public spending on property values. The theory of fiscal capitalization, first proposed by Charles Tiebout and Wallace Oates, holds that a positive relationship exists between local public spending and property values. The theory posits that individuals and businesses make locational decisions based on their preferences for a community’s mix of taxes and spending on services. Although an extensive literature exists supporting fiscal capitalization, studies rarely investigate the separate effects of operating versus capital expenditures. Furthermore, few studies have investigated whether a distinct capitalization effect exists between the signal created by ongoing capital expenditures and a longer term amenity effect realized once projects are completed. This article extends the fiscal capitalization theory by assessing these distinctive effects on property values. The study uses a border discontinuity research design, limiting the sample to residential properties near municipal boundaries. The results show capital and operating expenditures have different effects on property values. In addition, the spending on capital improvements has short-term and long-term effects in the property market. The findings provide local policymakers with guidance on the relative benefits of operating versus capital spending when balancing the two choices.

Optimal Taxation of Capital Income with Heterogeneous Rates of Return

Abstract We derive the Pareto-efficient mix of non-linear taxes on labour income and capital income if people differ in their rates of return on capital. We allow for two reasons why rates of return differ: because individuals with higher ability are better able to invest their capital or because wealthier individuals enjoy scale effects in wealth accumulation. In both cases, a strictly positive tax on capital income is part of any Pareto-efficient tax system. We derive a condition for the Pareto-efficient tax mix that relies solely on empirical sufficient statistics—not on social welfare weights—and find that Pareto-efficient taxes on capital income increase with the degree of return heterogeneity. Numerical simulations for empirically plausible return heterogeneity suggest that Pareto-efficient marginal tax rates on capital income are positive and substantial.

Progressing regressively: conditional convergence and Europeanisation of tax mixes

ABSTRACT Tax mixes are important components of welfare systems, affecting income inequality, labour market outcomes and economic performance. Still, they are relatively under-examined in the literature studying the convergence of EU welfare states. Most existing analyses of tax mix convergence are limited to western Europe, mainly use twentieth-century data and do not control for domestic determinants of tax policy. I therefore study the determinants of tax mix composition and convergence in a panel of 30 EU and OECD countries between 1980 and 2019 using linear regressions. I find that tax mixes converge and shift from personal income taxes towards more regressive revenue sources. Contrary to theoretical predictions, both observations are almost unrelated to proxies of tax competition. Instead, the main driving factor is EU membership. Tax mixes of Central and Eastern European member states, however, do not Europeanise: they constitute a distinct group with low and persistently regressive taxation.

Efficiency and Welfare Effects of Fiscal Policy in Emerging Economies: The Case of Morocco

This paper studies the welfare cost of fiscal policy in developing economies where a significant fraction of the population is government spending-dependent, using as an example Morocco. We develop a Dynamic General Equilibrium model representing an economy populated by three types of households: Standard Ricardian households with access to the financial market, households who supply labor but have no access to the financial market, and non-active government-dependent households (who behave as hand-to-mouth agents). The paper computes welfare changes of different tax rates and alternative spending policies and quantifies the trade-off of fiscal policy across the different groups of agents. We find that: (i) Distortions from some taxes can be positive due to the presence of public inputs; (ii) Output efficiency can be gained by changing the tax mix while keeping constant fiscal revenues; and (iii) Social welfare gains can be obtained by increasing public investment and reducing government consumption and keeping lump-sum transfers constant.

The impact of the shadow economy on the direct-indirect tax mix: Can central banks’ independence mitigate the effect?

The recent financial crisis caused by corruption and opacity has led us to examine how the informal economy and other factors affect tax revenues using a three-pillar theoretical analysis. Empirical research has not thoroughly explored the shadow economy's impact on direct and indirect taxes, tax revenues, and the central bank's independence from the shadow economy and tax collection. This paper used 2010–2018 data from 129 countries. The shadow economy and tax revenues had a substantial negative relationship. The shadow economy also changed the fiscal authorities' policy mix by reducing direct taxes and increasing indirect taxes. Finally, the central bank's independence mitigated the shadow economy's negative effects on tax revenues.

Challenges of the Current Tax-sharing System in Slovakia

The sharing of state tax revenues with local self-governments is a common practice in most countries, and the Slovak Republic is no exception. However, these systems vary significantly and while some countries apply a wider tax mix, others use just a single shared-tax system. The latter is the case in Slovakia. The paper evaluates, therefore, the appropriateness of using the current single tax (PIT), in terms of income stability, budget foreseeability and income sufficiency, for this purpose, and afterwards, it takes a look at the appropriateness of the single shared-tax system at large. Based on the data, PIT seems to be a smart choice for the Slovak Republic, as it is both income stable and budgetary foreseeable. From the income-sufficiency point of view, PIT is a medium voluminous tax, compared to other state taxes. However, from the local governments’ perspective and with reference to their needs, this tax is simply not enough. Thus, the overall findings support the idea of enlarging the system to a broader tax mix, just like the ones endorsed by most of the neighboring countries.

Examining the Influence of Direct and Indirect Taxation on Economic Growth: A Case Study of Pakistan

Taxation and expenditure administration represents a significant concern for governments at all levels. Taxation plays a crucial role in the funding and formulation of economic policies. This study undertakes a comparative analysis of Pakistan's direct and indirect taxation systems, their impact on economic progress, and their relationship with inflation. The available data indicate that the impact of indirect taxes on economic growth is more significant compared to that of direct taxes. More precisely, a rise of one percent in indirect taxation results in a corresponding increase of 0.49% in GDP, while direct taxation leads to a GDP increase of 0.22%. Indirect taxes have a greater impact on inflation compared to direct taxes. It is recommended to consider long-term planning, expanding the tax base, reducing tax evasion, and enhancing the efficiency of the tax mix strategy. Indirect taxation has the potential to mitigate wealth inequality and foster economic growth. Tax and monetary policy have the potential to reduce inflation levels.

COMPARISON OF TAX BURDEN INDICATORS IN THE CZECH REPUBLIC AND SLOVAKIA

Abstract The article focuses on the comparison of the tax systems of the Czech Republic and Slovakia in the period 2017-2020. First, it deals with a brief description of the basic parameters of Czech and Slovak taxes, which also include contributions to social security and health insurance. In the next section, there are selected indicators of taxation. These indicators are implicit tax rates on consumption, labour, and capital, effective tax rates, tax mix, and tax quota, and on the other hand, the standard of living is presented by the indicator of gross domestic product per inhabitant in purchasing power parity. By evaluating the selected indicators, it was found that the tax burden in the Czech Republic is higher than in Slovakia, although the tax quota indicator indicates the opposite. It can be stated that it is appropriate to use more indicators to assess the tax burden. Keywords: tax quota, taxation, implicit tax rate, tax mix, Czech Republic, Slovakia.

Vertical and horizontal equity of wealth taxes: An assessment from a joint income-wealth perspective

Despite an established theoretical literature on (optimal) wealth taxation, the empirical literature is still scarce. Previous studies usually focus on country case studies and a specific type of wealth tax in isolation. This paper analyses from a cross-country perspective the distributional effects of the mix of taxes on wealth, on capital income and on transfers of wealth. Moreover, we use the joint distribution of income and annuitised wealth as our analytical framework. To this end we combine data of the Eurosystem Household Finance and Consumption Survey with the tax-benefit microsimulation model EUROMOD, covering six countries: Belgium, Germany, France, Finland, Italy and Spain. Results indicate that existing wealth taxes do not contribute to vertical and horizontal equity: they are often progressive but do not achieve any significant redistribution due to the low revenues they generate and they imply a much lower burden on those deriving their living standard predominantly from wealth than on those who derive it mainly from income.

Financing local public projects

This paper studies the financing of local public projects. The setting is a community with durable housing, undeveloped land available for new homes, and population turnover. The community invests in a public project that may be financed with a mix of a tax on current residents and a debt issue. The paper shows that financing with a debt–tax mix is equivalent to pure tax finance coupled with a tax on future development whose proceeds are shared by future residents. This result has three implications. First, Ricardian Equivalence holds if and only if there would be no future development were the project purely tax financed. Second, when Ricardian Equivalence does not hold, the optimal debt level is such that the associated tax on development appropriately internalizes the negative externalities from this development. Third, when Ricardian Equivalence does not hold, the debt level preferred by current residents will be higher than optimal.

The looming fiscal reckoning: Tax distortions, top earners, and revenues

How should the U.S. confront the growing revenue needs driven by higher spending requirements? We investigate the mix of potential tax increases that generate a given revenue need at the minimum welfare cost and evaluate its macroeconomic impact. We do so in the context of a life-cycle growth model that captures key aspects of the earnings and wealth distributions and the non-linear shape of taxes and transfers in place. Our findings show that a proportional consumption tax combined with a lump-sum transfer to all households and a reduction in income tax progressivity consistently emerges as the best alternative to minimize welfare costs associated with a given increase in revenue. A 30% long-run increase in Federal tax revenue requires a consumption tax rate of 27.8%, a transfer of about 12% of mean household income to all households, and a reduction of top marginal income tax rates of more than 5 percentage points—output declines by 7.9% in the long run. While transfers are substantial, smaller transfers can accomplish most of the reduction in welfare costs. We find no role for wealth taxes in increasing revenues or minimizing welfare costs.

Optimizing energy efficiency investments in steel firms: A real options model considering carbon trading and tax cuts during challenging economic conditions

This study proposes a policy mix of carbon pricing and tax cuts to incentivize firms to invest in energy-efficient technology during economic downturns and periods of low carbon prices. Utilizing a real options model, we determine the optimal timing for companies to make investments in energy efficiency technology, taking into account economic changes, carbon prices, and tax cuts. Our case study in China demonstrates that neglecting adverse economic conditions leads to an underestimation of the investment threshold and option value. We find that tax cuts, implemented within the emissions trading system, serve as an effective tool to encourage steel firms to invest in energy efficiency technology in the short to medium term. This supports carbon mitigation efforts, particularly during challenging economic situations. The flexibility of the model allows for analysis of energy efficiency technology in diverse firms and countries, as parameters can be adjusted to suit individual requirements.

Pareto-Improving Optimal Capital and Labor Taxes

We study optimal fiscal policy in a model with agents who are heterogeneous in their labor productivity and wealth, and there is an upper bound on the capital tax rate each period. We focus on Pareto-improving plans. We show that the optimal tax reform is to cut labor taxes and leave capital taxes high in the short and medium run. Only in the very long run would capital taxes be zero. For our calibration labor taxes should be low for the first eleven to twenty-six years, while capital taxes should be at their maximum. This policy ensures that all agents benefit from the tax reform and that capital grows quickly after the reform. Therefore, the long-run optimal tax mix is the opposite of the short- and medium-run one. The initial labor tax cut is financed by deficits, which lead to a positive level of government debt in the long run, reversing the standard prediction that the government accumulates savings in models with optimal capital taxes. The welfare benefits from the tax reform are high and can be shifted entirely to capitalists or workers by varying the length of the transition.

Tax burden and the growth of shadow economy in Nigeria: A focus on the corporate tax rate and net taxes on products

The purpose of taxation is to raise revenue to pay for public goods. The question of how tax mix affects the size of the underground economy is one of the most important issues for its application to tax policy. However, the empirical evidence on this subject is limited and also somewhat ambiguous. Empirically, this study specifically aims to evaluate the effect of corporate tax rate and net taxes on the product on shadow economy growth in Nigeria during the period 1996–2020. It employed augmented Dickey–Fuller (ADF) and Phillips and Perron tests to check for unit roots. Thereafter, the Autoregressive Distributed Lag model was employed to determine the short- and long-run effects. The findings of this study show that corporate tax rates and net taxes on products induced much less shadow economy in the long-run while corporate tax rates have a positive impact on shadow economy in the short-run. Keywords: Autoregressive-distributed lag model, corporate tax rate, net taxes, products, shadow economy;

Redistributive Impact of GST Tax Reform: Pakistan, 1990-2001

Pakistan has undergone a significant change in tax structure over the last fifteen years. However, this change is not apparent on the surface, as there has not been much change in the tax to GDP ratio over the last fifteen years. But if we look beyond the surface we can see changes, for example in (1990-91), indirect taxes contributed 82 percent of total tax revenue with Customs, Excise and Sales tax each contributing around 55, 28 and 18 percent respectively, while in (2001-02), indirect tax share within the total tax revenue fell slightly to 68 percent with Customs, Excises and Sales tax each now contributing around 18, 18 and 64 percent respectively. Thus, it may not be wrong to say that there has been a significant change in the tax mix in the span of less than ten years and this development is important from the perspective of efficiency, effectiveness and equity with which revenues have and will be raised. Although, Value Added Tax (VAT) is likely to be more efficient in raising revenue than both the ordinary Sales Tax and Trade Taxes that it has replaced see e.g. [Nellor (1987); Liam Ebrill (2001)], the same cannot be said as far as the fairness issue is concerned. This in no way implies that the trade taxes replaced by VAT were more fair. However in most developing countries they operate with strict import licensing schemes, binding quotas and foreign exchange restrictions that make them more a kin to lump sum tax. Therefore in most cases they have no flow through effect to the consumers [for example see Clarete (1986); Shah (1991)]. But in contrast to this VAT being a consumption tax has the capacity to directly affect each and every household. Thus equity becomes much more of a real concern and this concern is heightened given that governments of most of the developing countries lack the capacity to carry out significant redistribution.

Research on the Green Effect of Environmental Policies—From the Perspective of Policy Mix

Environmental protection policy serves as an effective means for the government to curb environmental pollution and promote high-quality economic development. The government must weigh the effects of different policy mixes. From the perspective of policy combination, this paper discusses the green effect of environmental protection policy theoretically and empirically. First and foremost, this paper sorts out the reforming time of environmental protection taxes and the situation of the low-carbon pilot city, and puts forward two hypotheses. Furthermore, by referring to the environmental protection tax, the policy for the low-carbon pilot city, and the urban air quality indicator from 2014 to 2020, this paper explores the green effect of the environmental protection policy and further validates the consolidation effect of the policy mix on the green effect. The study reveals a significant decrease in the air pollution level in regions with higher standards for levying an environmental protection tax. The conclusion remains robust via parallel trend testing and substitution of the subject variables. Furthermore, an analysis of the policy mix of an environmental protection tax indicates that the policy mix of an environmental protection tax and low-carbon city produces a significant green effect, which not only curbs air pollution but also reduces greenhouse gas emissions. An in-depth analysis shows that an environmental protection tax has the best green effect in the first and second areas of a low-carbon pilot market. The synergies of low-carbon pilot effects are higher in areas with low and middle tax rates.

Effects of scenario-based carbon pricing policies on China's dual climate change mitigation goals: Does policy design matter?

Although the carbon pricing policy is a critical driving factor that will help China achieve economic growth, energy transition, and dual climate change mitigation goals, the kind of carbon pricing policy that will complement the country's current development situation remains controversial. We apply the World Induced Technical Change Hybrid (WITCH) model to explore the heterogeneity and synergy of different carbon pricing policies, and the results indicate that it will be challenging to achieve carbon neutrality before 2060. The study find that the combined policy —a mix of carbon tax and carbon market policies — has the optimal emission reduction effect but comes with the highest economic cost, proving to be unsuitable in the long run. The carbon tax policy is an important transitional means to assist in emission reduction, which can serve as an important supplement to carbon market policy and be phased out after the market mechanism matures.

International Trade, the Great War, and the Origins of Taxation: Sister Republics Parting Ways

AbstractThe First World War was a watershed moment for the development of the modern tax state. Yet, whereas the tax yield strongly increased in this period, little is known about how the tax mix changed, in particular regarding the turn to direct taxation. Examining the two ‘Sister Republics’ Switzerland and the USA, this paper demonstrates that tax reforms in this critical period for modern tax systems were conditioned by coalitions among producer groups, which had already come into existence before the war. Most notably, farmers and their position on international trade were important in shaping coalitions on the turn to direct taxation. The Great War's main role was to temporarily interrupt (Switzerland) or cement (USA) the tax system's reorientation. The paper thus shows that war‐induced tax reforms have a lasting impact on the tax mix only if powerful coalitions support these reforms independently of the war effort.

How elastic is alcohol consumption?

Strange as it may seem, Treasury, brewers, winemakers, distillers and drinkers all share a common interest: The taxation of alcohol and its price elasticity of demand. Treasury needs this information to determine revenue, the industry for pricing purposes, and drinkers bear the burden of taxation. This paper presents new estimates of demand elasticities of beer, wine and spirits for Australia. The estimates are considerably lower than those of Srivastava et al. (2014), who used monthly, off-premise consumption. Frequency of purchase and location of drinking are most likely the source of the differences. The paper demonstrates the importance of demand elasticities with simulations of changes in the tax mix for alcoholic beverages with partial and general equilibrium approaches.

Consumption indivisibility and the optimal tax mix

This paper reexamines optimal commodity and income taxation with consumption indivisibility. We show that, in the presence of indivisible-good consumption, the Atkinson-Stiglitz theorem on the uselessness of commodity taxation fails. Without a distortion on consumption, the optimal commodity tax on indivisible goods acts as a differential lump-sum tax to engage in income redistribution and achieve the social optimum. The optimal tax rate for a specific divisible good is higher (lower) if the divisible good and the indivisible good are substitutes (complements). Differential commodity taxation can always improve welfare under a simple linear income tax system.