Value-added tax (VAT) is the largest source of tax revenue for many developing country governments, and sales-based registration thresholds are a ubiquitous design feature. Yet, empirical evidence on the mechanisms through which these thresholds alter firm behaviour remains scarce. Using administrative tax data from West Bengal in India, we study the behavioural responses of firms to a turnover threshold for compulsory VAT registration. By exploiting variation in the tax discontinuity at the registration threshold across firms and over time, we show that tax incentives, rather than compliance costs, drive the observed bunching of firms below the threshold, and their associated revealed preference for a simplified tax scheme. The limited role for VAT compliance costs relative to a simplified tax regime has important implications for the design of small business taxation and for the optimal level of VAT registration thresholds.
Motivated by the introduction of digital services taxes (DSTs) in several European countries and the widespread use of revenue-based taxes where profit taxation is imperfect, this paper studies whether targeted output or commodity taxes can serve as surrogate profit taxes when firms avoid corporate taxation – such as by shifting profits to low-tax jurisdictions. The answer is a qualified yes. Output taxation of tax-avoiding firms is optimal when the resulting reduction in output mitigates tax avoidance. I derive an augmented inverse-elasticity rule showing that the optimal output tax decreases with the demand elasticity (as in the classic Ramsey rule) but increases with the output elasticity of profit shifting and the degree of foreign firm ownership. When nonlinear labor income taxation is available, zero output taxation arises only under restrictive ownership conditions – namely, identical ownership shares across household types and full domestic ownership of firms – which are unlikely to hold in practice, particularly in open European economies. In these cases, the optimal tax system combines distortionary profit taxes with non-uniform output taxes. Finally, I establish a complementarity theorem: Whenever the optimal tax system includes a distortionary profit tax, output taxes are also part of the optimal policy mix. These results provide a welfare-based perspective on the role of DSTs as second-best instruments in environments characterized by profit shifting and international ownership.
Incomplete VAT rebates impose an unrebated VAT burden on exporters and may induce firms to engage in export tax evasion through trade misreporting. Using the large-scale reduction in China’s export rebate rates for resource-based products in 2007 as a quasi-natural experiment, this paper draws on bilateral trade data between China and 115 trading partners over the period 2003–2011 and employs a difference-in-differences approach to estimate the effect of an enlarged tax wedge on bilateral trade discrepancies, which serve as an empirical proxy for export tax evasion. We find that reductions in export VAT rebate rates significantly widen bilateral trade discrepancies for affected products relative to unaffected products, a result consistent with stronger incentives for export tax evasion. This finding remains robust across a wide range of identification and robustness tests. The intensive- and extensive-margin analysis shows that the reform increases both the magnitude of existing positive bilateral trade discrepancies and the number of products exhibiting such discrepancies. Further evidence is consistent with adjustments in reported export quantities and product reclassification, while we find no statistically significant evidence of systematic price underreporting. Institutional heterogeneity is interpreted cautiously because partner-country institutions may affect both firms’ reporting behavior and the accuracy of bilateral trade statistics. In addition, products with higher value-to-weight ratios exhibit larger policy-induced bilateral trade discrepancies.
This study examines public pension reform in a model of a small open economy with overlapping generations and intergenerational transmission of human capital. We introduce loan interest subsidies for privately financed education, which render an earlier phase-out of PAYG pensions feasible in a Pareto-improving manner. We then extend the analysis to a closed economy that incorporates general equilibrium effects through factor price adjustments, and show that loan interest subsidies make a Pareto-improving gradual reduction of PAYG pensions feasible even in the presence of these general equilibrium effects. Our results highlight the efficiency gains from linking pension reform with educational loan support, in contrast to prior studies that abstract from private education spending or factor price adjustments.
We estimate the short- and long-run impacts of a property tax reform in New York City (NYC) on the construction of new rental apartments. The reform, announced in 2006 and implemented in 2008, imposed new requirements to claim a property tax exemption. To estimate the short-run impacts, we use the delay between the announcement and the implementation of the reform to estimate the excess housing starts in response to a future property tax increase. We find that the tax reform induced excess building starts of 10,735 new rental units, equivalent to 1
This research consolidates three views of property tax incidence into a dynamic stochastic general equilibrium (DSGE) model and analyzes the effects of property tax shocks on housing markets. We show that the elasticity of substitution between residential housing (owner-occupied) and investment housing (non-owner-occupied) plays an important role for the incidence of the property tax. When applying the model to Taiwan’s housing tax reform, the results indicate that the implementation of a hoarding tax on investment housing fails to curb the investment housing price; the tax effect is passed on to the residential housing price when investment housing and residential housing are considered as complements. A tax on residential housing can effectively moderate residential housing consumption and residential housing prices.
Unlike the universal child allowances available in many advanced democracies, the largest child-specific income benefit in the United States, the Child Tax Credit (CTC), is a function of tax liabilities and earnings. As a result, it disproportionately reaches middle- and high-income families and leaves many low-income families ineligible. This study examines, from its enactment through present day, how legislative changes to the federal Child Tax Credit’s key parameters—including refundability, the earnings requirement, and the maximum credit amount—have impacted the share of children eligible for the full credit (overall and by subgroup), and how full-credit eligibility relates to the credit’s impact on child poverty and bottom-tail income inequality, including whether these three metrics move in tandem. We find that, in all years except 2021, at least 19
The literature on the profit-shifting activities and strategies of multinational enterprises (MNEs) has focused predominantly on developed economies. The experience of developing countries may differ, however, because they often employ preferential tax regimes which could substantially alter MNEs’ profit-shifting incentives. This paper studies MNEs of China, the largest developing country, and examines an implicit profit-shifting strategy, risk shifting, while explicitly incorporating China’s preferential tax policies into the empirical analysis. As a common practice in transfer pricing planning, MNEs shift profits to lower-tax jurisdictions by reallocating the operating risk embedded in intra-firm transactions. We find that when the tax rate differential between China and a foreign country increases by 10
In 2012, Kansas exempted pass-through business income from the state individual income tax. We examine the reform’s causal effect on entrepreneurial labor supply using a difference-in-differences design with Current Population Survey and American Community Survey microdata, modeling selection into self-employment with a Heckman selection model. The reform reduced weekly hours among the self-employed in the short run, with the response concentrated among the unincorporated self-employed, the group most directly exposed to the exemption. In our preferred selection-corrected estimates, the reform reduced annual labor supply among unincorporated self-employed workers by roughly 19 to 89 hours, depending on the dataset. The effect attenuates and does not persist. These findings suggest that the Kansas reform did not increase entrepreneurial effort on the intensive margin, despite its stated goal of promoting business activity.
We study labor supply and savings responses to an increase in the full pension eligibility age in the context of South Korea. Using a regression discontinuity design, we document the causal effects of the change on several potential margins of adjustment. We find clear evidence of delayed benefit claiming, consistent with studies in other settings. However, we find little to no statistical evidence of changes in labor supply, in contrast with previous literature. We also find no significant changes in savings or spending. These muted responses may be, in part, because the South Korean pension is relatively new and benefit replacement rates are comparatively modest.
This paper examines whether standardized system specifications improve the fiscal efficiency of local governments. Although ICT has been widely promoted through e-government initiatives to improve government operations, the effectiveness of system standardization has received limited attention. We study Japan’s Regional Information Platform (RIP), a standardized system specification that facilitates interoperability across municipal administrative systems and weakens vendor lock-in. Building on a model of municipal procurement under switching costs, we show that standardization reduces expenditure through two channels: weakened vendor lock-in that lowers system costs, and improved cross-departmental interoperability that reduces labor input. Using variation in RIP adoption across Japanese municipalities, we estimate difference-in-differences models and find that RIP adoption substantially reduces per capita total expenditure. These findings suggest that e-government outcomes depend not only on ICT adoption itself but also on whether administrative systems are standardized and interoperable.
Richard Musgrave et al.’s “Distribution of Tax Payments by Income Groups” (1951) provided the first postwar estimates of the distribution of the fiscal burden, concluding the tax system was not as progressive as statutory rates suggested. Drawing from original archival material, we reconstruct the intellectual context of Musgrave’s study, the methodological debates it gave rise to, and assess its legacy in public finance. The study’s legacy is examined through the rise of econometric estimation, applied general equilibrium modeling, and microdata-based approaches, as well as its influence on policy institutions in the USA and abroad. Despite major advances in data and modeling, we argue that key issues raised by Musgrave—particularly the definition of the income basis and the incidence of the corporate income tax—remain unresolved. The enduring lack of consensus on a uniquely best method highlights both the empirical and normative challenges at the heart of distributional analysis and explains the study’s continued relevance in contemporary debates on taxation and income inequality.
I take a simple model of linear taxation of labour income and append to it the possibility that the chosen tax schedule triggers conflict in society. I demonstrate theoretically that, under certain assumptions, the resulting set of efficient tax schedules is a proper subset of the set of efficient tax schedules in a standard model without the possibility of conflict. Then, I show in a numerical example that the former set can be much smaller than the latter.
We propose a novel measure of fiscal policy divergence based on public budget data. First, we quantify policy similarity across municipalities based on the cosine similarity of their budget allocations, showing strong correlations with geographic proximity and differences in socio-demographic characteristics. Next, we predict budget similarity out-of-sample using a flexible machine-learning model trained on pairwise differences in local characteristics, defining fiscal divergence as the municipality-year average absolute prediction error. In an empirical application to 8,000 Italian municipalities (2000--2015), we show that electoral-cycle patterns are concentrated on the expenditure side of the budget: expenditure divergence is lower in pre-electoral years than in election years, whereas revenue divergence follows a different and less stable pattern.
This paper examines whether the Pillar Two Global Minimum Tax reduces bank profitability and regulatory capital, and for which banks the effects are strongest. We use a quarterly exposure-based difference-in-differences design around 2024Q1, where treatment intensity is defined by pre-2024 low-tax exposure among in-scope banks. The analysis uses a quarterly bank-level panel for 2014–2024 and exploits predetermined cross-sectional heterogeneity in low-tax exposure while controlling for bank and quarter fixed effects. The headline estimates show that post-2024 profitability and capital buffers decline more for high-exposure banks: profit after tax falls by about 2.2 basis points of assets per quarter and Tier 1 buffers by about 0.09 percentage points in the baseline specification. Higher low-tax exposure is not interpreted as vulnerability per se. The downside channel is concentrated where high pre-reform low-tax exposure coincides with limited initial capital headroom: event-study, placebo, matched-sample, and split-sample evidence all point to larger post-2024 capital-buffer compression for thin-buffer banks. Overall, the results indicate modest average effects but meaningful tail risk for banks that combine high minimum-tax exposure with thin initial capital buffers.
This paper examines how technological advancements in mobility—specifically, the rise of e-commerce—alter the landscape of tax competition. Previous studies typically present a monotonic relationship in which regions with larger populations impose higher tax rates. However, in reality, this relationship does not always hold. We develop a model of commodity tax competition with e-commerce and show that local tax rates can have a non-monotonic relationship with regional populations. To be more precise, when online shopping is available, the relationship between tax rates and population sizes follows a U-shaped curve: the region with the moderate population has the lowest tax rate, while areas with small or large populations set higher tax rates. This U-shaped relationship arises from the dual effects of e-commerce: changing tax bases and intensifying tax competition. This result holds regardless of how widespread e-commerce becomes, illustrating how the availability of virtual mobility reshapes traditional spatial competition.
We study optimal nonlinear income taxation when productivity depends negatively on labor supply (labor-supply-dependent productivity, LSDP). Relative to a benchmark model with fixed productivities, we find that LSDP leads to higher optimal marginal tax rates, especially for higher-income individuals, and greater redistribution. The key mechanism is that, under LSDP, marginal taxation becomes a more effective screening instrument.
Challenging long-standing norms is how we, as academics studying matters of taxation, make progress: by consuming, or in some cases, replicating prior studies, and reaffirming—or contradicting—their results. Otherwise our science stagnates and our voices become irrelevant to those in government and the business world who form the economic policies we track and hope to influence. Over the course of seven years attempting to correct a simple misunderstanding of an accounting standard, my colleague and I repeatedly demonstrated how an error in measuring income by jurisdiction had influenced the entire debate about the profit-shifting behavior of multinational firms and their use of tax havens. Through our lengthy and ultimately, we believe, successful challenge to the status quo, we learned several important lessons about academic research as a profession, concerning both the role of the community and the role that each individual in the system plays in the pursuit of truth and insight. Throughout the process, our goal was to enact productive change, not to provoke an argument. In that light, we believe our challenge to the status quo will have two lasting impacts: First, when using datasets that attempt to measure the income by jurisdiction of any multinational firm, researchers will now pay more attention to the underlying accounting methods used in the collection of the data. Second, our time-consuming and oftentimes frustrating experience reveals the importance of cross-disciplinary research and better communication between academic accountants and economists.
As income rises, the risk of disability in old age declines, while life expectancy increases. These correlations strengthen the case for public long-term care (LTC) insurance over public pension systems. However, this perspective shifts when considering family solidarity—specifically, the informal care provided by spouses and children to elderly relatives. When viewed through the lens of altruistic caregiving motives, the argument for social LTC insurance becomes more nuanced. The interplay between formal and informal care is a key factor in shaping optimal policy. In this paper, we demonstrate that when family members reliably provide informal care, the design of a comprehensive public LTC system depends on the existence of a private insurance and on the degree of substitutability between informal and formal care.
This study examines the causal impact of tax education on property tax compliance in Benin. Utilizing a randomized controlled trial, two distinct interventions—deterrence and persuasion—were implemented to evaluate their effectiveness. The findings indicate that both approaches significantly and positively influence taxpayer behavior compared to those who received no intervention. However, the deterrence treatment demonstrates a stronger causal effect than the persuasion approach. A formal Clogg-Paternoster test confirms that the difference between the two treatments is not statistically significant at conventional levels. Therefore, assignments were made with the same intensity. Moreover, taxpayers exposed to deterrence measures paid, on average, 30.19
