Sally Wallace

Is it Really so Hard to Tax the Hard-to-Tax? The Context and Role of Presumptive Taxes

This paper is concerned with the extent to which “presumptive taxation” can be an effective tool to cope with what are commonly called the “hard-to-tax”. While the HTT category is seldom very clearly defined -- often, for example, it excludes those at the top of the power pyramid who manage to save themselves from the full fury of the taxman in accepted (or at least untouchable) ways -- it appears to encompass much of the so-called “informal” (“hidden” “shadow” “underground”) economy that is such a prominent feature of economic reality in many developing and transition countries. Although much of the discussion in this paper covers the use (and abuse) of presumptive taxes in general, our specific focus is on the special simplified tax regimes that have been put into place recently in a number of transitional countries, with special attention to Ukraine and Russia. We analyze the implications of these special regimes in terms of their impact on economic efficiency, equity, and overall tax administration and compliance. We conclude with a brief discussion of the critical problems of developing an “exit strategy” from such special regimes as well as some alternative policies that may prove more promising paths to taxing the HTT.

Public Financing in Developing and Transition Countries

The widespread adoption of fiscal decentralization laws during the past 25 years can be mostly tracked to economic efficiency gains and nation-building objectives. Subnational governments (SNGs) in industrialized countries account for about twice the share of total government expenditures as in developing countries. Transition countries also assign more expenditure responsibilities to SNGs than do the developing countries. There has been little growth in the SNG expenditure or tax shares over the past three decades. We confirm the basic hypotheses that the SNG expenditure share is significantly higher in countries with higher incomes, larger populations, and a lower degree of corruption.

Intergovernmental Transfers: The Vertical Sharing Dimension

There are two dimensions to the structure of an intergovernmental transfer: the vertical share and the horizontal share (Bahl and Linn, 19921). The vertical share is the total pool of funds to be allocated to subnational governments, while the horizontal shares are the amounts received by eligible local governments. Most research (and most political attention) is devoted to the latter. The subject of this paper is vertical sharing. We have three goals. The first is a quantitative analysis of trends and cross-country variations in vertical sharing. In particular, we are interested in what explains the vertical share and whether there has been an increase in the importance of intergovernmental fiscal transfers and in the question of what explains the cross-country variations in this importance. The second is a description of the range of the practice in vertical sharing. Finally, we offer some criteria by which the impact of vertical sharing might be evaluated.

Estimating Differential Responses to Local Fiscal Conditions: A Mixture Model Analysis

Alternative hypotheses exist regarding the impact of local sales and income taxes on local governments’ taxing and spending decisions. One hypothesis is that local governments use sales and income taxes to pay for spending increases and leave property tax collections unchanged, while an equally plausible alternative is that local governments use sales and income taxes to reduce property taxes. Traditional models that restrict the impact of these local taxes to be the same across all local governments are not able to capture both types of behavior. The methodological difficulty lies in allowing for differences in behavior with no a priori information on which cities belong in which category. In this article, the authors use panel data to estimate a mixture model of spending and property tax response to the existence of local taxes. These empirical results provide evidence to support both hypotheses. These differences are both substantive and statistically significant.

The Disappearing State Corporate Income Tax

This paper examines alternative explanations for the decline over the past two decades in state corporate income taxes relative to the state economy. We employ a survey of state tax administrators, individual tax returns from Georgia and Utah, and panel data to explore the importance of tax policy, tax planning, and economic factors on the trend in state corporate taxes. We find that corporate tax planning and economic factors account for much of the relative decline, and that state tax policy changes are important factors. However, federal tax changes had only a modest effect during this period.

The effects of state personal income tax differentials on wages

Abstract A frequently cited assumption in the tax incidence literature is that taxes on capital may be borne by various sectors of the economy while labor taxes are borne by labor. While a national labor tax may indeed be borne by labor, theoretical results from the standard Harberger general equilibrium model show that labor does not necessarily bear the burden of a differential wage tax. In some cases, wage earners are compensated for higher taxes in the form of higher gross wages. Since states impose wage taxes (via the income tax) at different rates, state personal income taxes may explain a portion of wage differences across states. An empirical model tests the incidence of the state personal income tax and finds that in 25% of the cases examined, labor does not bear the full burden of the tax.

Incidence and Economic Impacts of Property Taxes in Developing and Transitional Countries

In this paper, we revisit the theory of property tax incidence in light of the conditions in developing and transition countries by modifying the property tax incidence model to account for at least some of the specific conditions of these countries that are thought to affect property tax incidence. We develop and use a computable general equilibrium (CGE) model and test the impact of various assumptions regarding those specific issues that reflect the reality of property taxes in transition and developing countries. Our results indicate that the burden of property taxes imposed on capital and land is borne by the capitalists (owners of land and capital.) The property tax burden is progressive with the middle income and wealthy consumers bearing a heavier burden compared to the poor consumers. Further, the incidence patterns are largely unaffected by the different assumptions regarding the intranational and international mobility of capital. These findings are robust to alternative distributions of consumer incomes or factor endowments and factor intensities.

The Impact of Incarceration on Food Insecurity Among Households with Children

This study seeks to determine the role that parental incarceration plays on the probability of food insecurity among families with children and very low food security of children using micro-level data from the Fragile Families and Child Well Being Study (FFCWS). The data set contains the 18-question food security module which allows us to explore the link between incarceration and food insecurity and very low food security among children, families, and adults. The incidence of very low food security in our data is somewhat higher than the national average, but the incidence of other levels of food security is similar to national aggregates. Since there is likely reverse causality in the relationship between parental incarceration and food insecurity, we employ a variety of program evaluation techniques to identify the causal relationship between food insecurity and parental incarceration. We employ imputation techniques to account for non-response among the food security variables and independent variables. Our ordinary least squares results suggest that having at least one parent that has ever been incarcerated has a small positive effect (1 to 4 percentage points) on the probability of very low food security among children, adults and households with children, but the results are not significant in various specification. Food insecurity for adults and households with children (a less dire level of food insecurity than very low food security) is affected by parental incarceration under most specifications with magnitudes of impact from 4 to 15 percentage points. This research provides some evidence that incarceration adversely affects children and families in terms of food insecurity. Policies to mitigate the impact could be addressed through the court system whereby children are provided with court-sanctioned support to address food needs.

Lower-Income Families Pay A Higher Share Of Income Toward National Health Care Spending Than Higher-Income Families Do

All health care spending from public and private sources, such as governments and businesses, is ultimately paid by individuals and families. We calculated the burden of US health care spending on families as a percentage of income and found that at the national level, lower-income families pay a larger share of their incomes toward health care than do higher-income families. Specifically, we found that payments made privately, such as those for health insurance or out-of-pocket spending for care, and publicly, through taxes and tax expenditures, consumed more than 20 percent of family income for families in the lowest-income quintile but no more than 16 percent for families in any other income quintile. Our analysis provides a framework for considering the equity of various initiatives under health reform. Although many effects remain to be seen, we find that, overall, the Affordable Care Act should reduce inequities in the burden of paying for national health care spending.

Changing demographics and state fiscal outlook: the case of sales taxes.

Broad-scale demographic changes have implications for state and local finance in terms of the composition of the base of revenue sources and their yields. This article examines the effect of such changes on the potential future yield of consumption-based taxes. The effect of household characteristics and composition on the con sumption of selected groups of goods subject to ad valorem retail sales taxes is estimated, generating demographic elasticities of consumption. These elasticities are applied to projected demographic changes in eight states through the year 2000. The results show rather wide variation in expected consumption shifts and potential tax bases across the states, with income growth having the greatest effect, as expected. Excluding the effects of income and population change, the expected real growth in the consumption base is varied over states. It remains to be seen whether state and local tax structures can or will adjust to capitalize on their potential and whether this growth will be sufficient to offset expenditure pressures likely associated with these demographic shifts.