Can governments raise much revenue by making taxes more progressive?
Nezih Guner, Martin Lopez-Daneri, Gustavo Ventura 05 October 2014
Recent calls for closing fiscal deficits have been combined with proposals to shift the tax burden and increase marginal tax rates on higher earners. This column argues that revenue-maximising tax rates for high earners in the US would be substantially higher than current rates. However, increasing tax rates for high earners would not raise much additional revenue.
The Laffer curve – the hump-shaped relationship between tax rates and government revenue – is a popular relationship from modern economics, one that any student of economics knows. As taxes increase, government revenue first increases but then starts to decline as the reduction in taxable income eventually dominates higher taxes. Recently, Trabbant and Uhlig (2011) study the Laffer curve in the context of the one-sector growth model with a representative household.
Laffer curve, taxation, progressive taxes, marginal tax rates
Taking a bite out of Apple? Fixing international corporate taxation
Ruud de Mooij, Michael Keen, Victoria Perry 14 September 2014
Multinational companies’ ability to pay little corporate income tax has grabbed headlines recently. This column argues that the details of international tax rules matter for macroeconomic performance – especially in low-income countries. This emphasises the importance of the G20–OECD Action Plan on Base Erosion and Profit Shifting. However, dealing properly with tax spillovers will require a deeper global debate about the international tax architecture itself.
It’s hard to pick up a newspaper these days (or, more likely for those reading this, do the digital equivalent) without reading about Apple, Amazon, Google, or a host of others managing, by some magic, to pay little corporate income tax – and the consequent outrage of duly shocked and horrified politicians. Entertaining though all this is, understanding the rules that make such tax avoidance possible is a dull task that many of us are happy to leave to the tax nerds – detail really matters (just ask an international tax lawyer).
tax, taxation, IMF, corporate taxation, corporate income tax, spillovers, tax treaties, tax avoidance, multinationals, tax competition, tax harmonisation
Can giving taxpayers a voice increase tax compliance?
Cait Lamberton, Jan-Emmanuel De Neve, Michael I. Norton 30 May 2014
Non-compliance with tax costs governments billions, in part because people really don't like paying taxes. This column reports two experiments designed to see if it's possible to make people hate taxes a little less and raise tax compliance. The results indicate that if people are given the opportunity to express a preference (though not actually make the final decisions) on how their taxes are spent, they are much less likely to cheat. Simply by making the tax form more interactive, governments could increase tax compliance, while empowering citizens and improving their attitudes towards taxation.
Two things are certain in life: Death and taxes. As evidenced by Facebook groups like ‘I Hate Paying Taxes!’, it’s not clear which of the two people dislike more. Indeed, people can prefer to pay more for a product and avoid tax than get the product for cheap but know that the government is taking a cut (Sussman and Olivola 2011). This ‘tax aversion’ is no small matter. The US has an estimated annual ‘tax gap’ of almost $400 billion due to non-compliance (Internal Revenue Service 2012), while in the UK the gap stands at £42 billion (HMRC 2013).
taxation, tax compliance
It’s time to eliminate the US corporate income tax
Laurence J. Kotlikoff 14 January 2014
Though taxing corporations may be a political no-brainer, it may be a big economic mistake. This column discusses recent research showing that the tax is not paid primarily by rich corporate shareholders. They can, and do, move their capital away from countries that have high corporate rates. Eliminating the US corporate tax by, for example, taxing accrued global corporate profits as personal income can produce dramatic increases in US investment, output, real wages, and saving. Modest gains accrue to early generations with very sizable gains going to young and future generations, both skilled and unskilled.
Perhaps the most maddening aspect of America’s dangerous government’s political infighting is the failure of politicians in both parties to agree to reforms on which they agree.
Take, for example, taxing wealth, and taxing consumption. Many Democrats would love to enhance tax progressivity by taxing wealth and lowering taxes on workers. In contrast, Democrats think retail sales taxation is the most regressive tax around. For their part, many Republicans would applaud switching from wage to retail sales taxation, but would be appalled by wealth taxation.
US, taxation, corporate income tax
Who benefits from state corporate tax cuts? A local labour markets approach with heterogeneous firms
Owen Zidar 13 December 2013
Policymakers often use local corporate tax and other policies to induce businesses to locate in their jurisdictions. This column describes new evidence on the effect of state tax cuts on business location and provides a new framework for evaluating the welfare effects of these policies. Contrary to the conventional view of many policymakers and economists, the results suggest that firm owners bear a substantial portion of the incidence of state corporate tax changes.
State and local governments have been increasing business location incentives and cutting corporate taxes to attract businesses to their jurisdictions. For instance, Jay Inslee, the Gov. of Washington, recently passed a $9 billion corporate tax package for Boeing to retain its manufacturing base near Seattle. It is the largest corporate tax break any state has ever granted a company.
taxation, economic geography
Tax policy in (and for) hard times
Michael Keen 16 October 2013
Fiscal consolidation, and public concern that its pain be fairly spread, is putting tax systems under considerable pressure. This column takes stock of how they have been faring, and how they could do better.
Tax policy, like everything else, has been through tough times since the onset of the crisis. First, tax policy was to stimulate the economy (Heady 2011). Now it is to help consolidate the fiscal position – always with considerable urgency and all in the midst of public anger and disquiet.
What state has all this left our tax systems in? In the latest Fiscal Monitor (IMF 2013), my colleagues and I take a close look.
Macroeconomic policy Taxation
Inequality, wealth, taxation, fiscal policy, fiscal consolidation, global crisis
Removing deadweight loss from economic discourse on income taxation and public spending
Charles F Manski 18 August 2013
Economists usually think of taxation as inefficient. This column argues that the anti-tax rhetoric evident in much lay discussion of public policy draws considerable support from the prevalent negative language of professional economic discourse. Optimal income taxation doesn’t have to employ the pejorative concepts of inefficiency, deadweight loss and distortion; and this column argues that it is high time for economists to discard them and make analysis of taxation and public spending distortion-free.
The anti-tax rhetoric evident in much lay discussion of public policy draws considerable support from the prevalent negative language of professional economic discourse. Economists regularly write about the 'inefficiency', 'deadweight loss', and 'distortion' of income taxation.
Frontiers of economic research
taxation, efficiency, inefficiency
France’s weak economic performance: Sick of taxation?
Balázs Égert 10 May 2013
France has recorded one of the lowest real per capita income growth levels in the OECD over the last 20 years or so. One of the many structural weaknesses causing this weak performance is the French tax system. This column argues that complexity, instability and non-neutrality coupled with very high effective tax rates in many areas of the French tax system put a heavy burden on the economy.
France is often labelled these days as one of Europe’s problem children (The Daily Telegraph 2013, Handelsblatt 2013). Indeed, France is one of the OECD countries which has recorded the weakest real per capita income growth over the last two decades or so (Figure 1). This weak economic performance can be explained by the country’s structural weaknesses in many areas, including taxation. The high tax burden (43% of GDP in 2010) and the structure of the tax system weigh heavily on the economy.
Europe's nations and regions
France, reform, taxation, Eurozone crisis
Who really pays social security contributions and labour taxes?
José M. González-Páramo, Ángel Melguizo 06 February 2013
In spite of its policy relevance, academics and policymakers cannot agree on who bears the brunt of a tax on labour. This column uses meta-regression techniques to argue that economic institutions, the tax wedge definition, and the time horizon are crucial in determining who actually pays. Results based on 52 empirical papers suggest that in the long run, workers bear between two thirds of the tax burden in Continental and Anglo-Saxon economies, and nearly 90% in Nordic ones.
For almost two decades, a common policy recommendation to boost job creation from academic and international institutions has been to reduce social contributions. In order to compensate for revenue losses – taking into account that ageing will pose additional challenges to financing many social policies, especially in the fields of pensions and healthcare – this policy recommendation often includes an increase in other sources of revenues, such as consumption or environmental taxes.
Labour markets Macroeconomic policy
taxation, fiscal policy, Social security, meta-analysis
Are the Nordic countries really less innovative than the US?
Mika Maliranta, Niku Määttänen, Vesa Vihriälä 19 December 2012
Do the ‘cuddly’ Nordic countries free ride on the ‘cut-throat’ incentives for innovation in US-style economies? Don’t PCs, the internet, Google, Windows, iPhones and the Big Mac speak for themselves? This column argues that, despite a higher overall tax burden and more generous safety nets, the Nordics have generated at least as much – if not more – innovation than the US. So far, ‘cut-throat’ capitalism has not been the only road to an innovative economy.
The cut-throat versus cuddly capitalism distinction (Acemoglu et al. 2012) resonates with widely-held stereotypes. The US is a ‘mean streets’ sort of place to live but the law of the jungle approach to capitalism produces breakthrough innovations. European nations – especially Nordic nations – are just, social democratic societies, but comfort saps the life out of invention. Acemoglu et al. (2012) argue that advancing the technology frontier fast requires US style cut-throat capitalism and that cuddly Nordic economies are free-riding on US innovation.
Productivity and Innovation
US, innovation, taxation, Nordic