Nova workboard

a blog from young economists at Nova SBE


Demonetization in India: Big Policy Failure!!

On November 8, 2016 the Government of India announced demonetization, a move that rendered 86 percent of India’s currency worthless in a matter of few hours. According to Investopedia “Demonetization is the act of stripping a currency unit of its status as legal tender”. As dictated by the Government Rs.500 and Rs.1000 notes of the Mahatma Gandhi series were no longer legal tender and were to be replaced by the newly printed Rs.500 and Rs.2000 notes.  It was move that targeted to combat to tax evasion by “black money” held outside the formal economic system and curb corruption and terrorism and promote the economy to move towards cashless economy by digitising transactions. However, according to me demonetization was a move that not only failed to achieve its objective but was also a reflection of how one economic move can have adverse and far reaching consequences for any economy. This post however will primarily focus on the aftermath of the move and its impact and how it all was a big failure of a public policy.

As demonetization was announced without any prior warning, in a country like India which is still a cash dependent economy, chaos ensued. The immediate repercussions of the move were shortage of cash and most citizens had to stand in long queues to exchange the old banknotes. Further, because the new notes had different dimensions and specifications compared to the old notes, even the ATMs across India had to be re-calibrated. To further complicate the matters, Government had put restrictions on daily amount of cash that could be withdrawn. Of the Rs.15.4 trillion that was demonetised, Rs.14.97 trillion were deposited back into the banks which was far greater than the Government estimate. Hence, the Government’s objective of curbing black money circulation was not entirely successful.  Further, agriculture and industrial production took a hit as they are heavily dependent on cash and the purchase of raw materials was delayed due to cash shortage. Another thing that further puts a blip on the whole scheme of things is that the country lacked the infrastructure required to truly go for a cashless economy.

For schemes that are going to be implemented without any prior information dissemination to the public, like demonetization in India, it is essential that proper infrastructure be put in place to ensure its successful execution. A country like India cannot transfer to a cashless economy overnight and corruption can also not be avoided just by implementing one scheme. First the right kind of infrastructure has to be put in place so that the transactions across different sectors don’t halt and the economy isn’t as adversely affected as it was in this case. Further, for the digitization of transactions to become the norm it essential that the citizens be gradually pushed to move towards it. Therefore, demonetization in India was a failed Government attempt at bringing a change in the economy in fact it only brought a slowdown in the economy.

 Aparna Kansal

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Should I stay or should I go: A European Fiscal Union?

When a group of countries agree on integrating fiscal policies they are joining in a Fiscal Union. This implies that most of the decisions about the collection of taxes and public expenditures are taken by common supranational institutions instead of the national governments.

Every economist knows that monetary policy has limitations. During the last years of the big recession, the European Central Bank was impotent in dealing with the financial crisis using conventional instruments. It had to escape from the liquidity trap through Quantitative Easing. Creating a Fiscal Union with a fiscal authority coordinating it, like a European Ministry of Finance would be an easier way to impose fiscal measures at a European level. This would increase the responsiveness of economic policies to the economic needs, as for example, in fighting unemployment or smoothing the economic cycle. This can be particularly important in a time of higher economic and financial integration between countries, where a shock in one country can spill over to other countries.

However, when we speak about “risk-sharing”, some countries, especially the northern countries, hear “free-ride”. These countries are typically the net contributors to the European Union budget and by taking a further step in the European Project, they are afraid of having one more burden to take care of. Despite that, when one takes a deeper look and accounts for all the gains and losses from being part of the EU, the two countries that benefited most of being in the single market are precisely Germany and Denmark. On top of that, another study states that, on average, if a country had not joined the European Community it would have an income 12% lower, compared to what it has today.

Nevertheless, the creation of the Fiscal Union would have as one of the consequences the uniformization of taxes across all countries, including corporate tax. Some countries in the EU have a low corporate tax rate to incentivize multinational companies establishing their European headquarters in their countries. Some argued that the Fiscal Union because it would uniformize taxes across the Union would damage the countries with lower corporate tax rate. To these specific countries, almost for sure the corporate tax rate would be larger if compared with what it is now, which would damage its Investment (less companies will choose that country to establish themselves) and consequently the GDP. Yet, firms will not ignore the opportunities of the European market. So, it is perfectly plausible to assume that firms will always be established in the EU. The only difference it may arise is the location chosen. Since the countries are in a Fiscal Union it is possible to redistribute money in an easier way.

Of course, for that a new treaty should be signed and the European budget would have to be allowed to have a deficit or a superavit. Regardless of all the risks that may come from this step, a Fiscal Union would allow both fiscal sustainability and fiscal stability.

 

Tiago Bernardino


IS U.S. TAX REFORM ACTUALLY FAIRER?

The actual framework for personal income tax in the United States consider seven different brackets (table 1).

Schermata 2017-10-01 alle 10.03.53Table 1: 2016 U.S. personal income tax brackets[1]

On the 29th September 2017, Trump administration released an official document called “Unified Framework For Fixing Our Broken Tax Code[2]” stating White House’s tax plan.
One of the main goal of this reform is a tax relief for middle class families, and it is supposed to achieve this aim through a cut of the number of the brackets from seven to three, setting three different tax rates of 12%, 25% and 35% (table 1, last column).

America’s tax code should be working for, not against, middle class families[3]

The Unified Framework is supposed to work to chase a distributional effect that should support middle class families, but does it for real? An analysis from the Urban Brooking Tax Policy Center (TPC) help us to find it out.

According to the TPC, in 2018 taxes would decline by nearly $1,600 on average, and after tax income would rise by 2.1%. This could look like a positive distributional effect, but if we look at the data of table 2 we can see how actually are taxpayers in the top 5% of the income distribution to lift the average.

Taxpayers in the lowest quintile of the income distribution will face a federal tax cut of just about $60, while taxpayers in the top 1% will save $129,030 and the ones in the top 0.01% will see their after tax income increasing of about 10.2% that means $722,510 saved.
Furthermore, some deductions and exemptions (which currently give taxpayers a $4,050 deduction for every person in the household) will be repealed.

Schermata 2017-10-01 alle 09.59.03Table 2: change in after tax income, 2018[4]

Besides, the Tax Policy Center has estimated that this tax framework would produce a fiscal revenue loss of around $2.4 trillion over the first decade and a loss of $3.2 trillion  over the following one.

If White House’s main purpose is seeking a redistribution of wealth, this tax reform doesn’t look like the best way to do it. The top 1% taxpayers will benefit of the 53.3% of the total federal tax change. Moreover, during 2027 the overall tax cut would be smaller such as the after tax income growth (table 3).

Schermata 2017-10-01 alle 12.10.24Table 3: change in after tax income, 2027[5]

This huge tax reform has been one of the main reason why Donald Trump has been elected, but looking at the data it looks like the middle class will not be the one who will benefit the most from the new framework. Actually such a tax plan with such a fiscal revenue loss could bring at raising tax rates in the future, with the middle class families who would be the first ones to suffer from them.

References:
[1] http://www.taxpolicycenter.org/publications/preliminary-analysis-unified-framework/full
[2] https://www.treasury.gov/press-center/press-releases/Documents/Tax-Framework.pdf
[3] See note 2
[4] See note 1
[5] See note 1

Lorenzo Petitti, 30796


(Un)sustainable Tourism: Regulation through Lodging Taxation

Tourism has increasingly become an important activity: it promotes cultural diversity, increases employment, and boosts a country’s GDP. However, this is not a benign phenomenon: studies show that tourism also increases the demand for givengraph services, which creates pressure on residents’ living conditions due to supply constraints. Lisbon has been experiencing this same trend which has led to a rise in congestion, environmental degradation, and an increase in housing prices. Movements such as Morar em Lisboa have been rising against the city’s rents’ increasing and demanded government intervention. So, how can we regulate tourism equitably and efficiently without endangering its economic benefits?

Currently, the Municipal Touristic Tax in Lisbon is a specific, flat-rate tax of 1€ in all lodging facilities, regardless of overnight expenditure. As mentioned in The Economics of Tourism, this is a regressive tax as it constitutes «a larger share of the poorer tourists’ total expenditure». But how can such a tax be designed from a more equitable stance? An alternative would be an ad valorem tax, which is enforced as a percentage of the overnight charge. This type of taxation is already used widely – e.g. Amsterdam or Berlin –, and addresses the regressiveness issue of a specific tax. But we must enquire: what is the impact of this tax on demand and on the economy? A study performed by the University of Vigo which attempted to simulate the effects of certain tourism taxes in Spain simulated a 10% tax on lodging expenditure and concluded that its impact on the economy – namely on GDP and employment –, prices, capital, and labour income was not significant, nonetheless showcasing a considerable rise in government revenue. This is said to happen because, since «many touristic destinations have no clear substitutes», consumers respond to price changes by shifting their consumption by much less than the price variation. Naturally, this study presents limitations: it departs from a case-specific scenario for Spain, and does not directly compare a specific vs. an ad valorem tax, however it does provide some important results to broaden the discussion.

Departing from a standpoint where we see equity as desirable, the previous solution may be satisfactory, however regressiveness is only negative if believed that everyone is entitled to tourism, which is not necessarily the case: a given government’s objective may be to increase the tax such that it removes low-income visitors who spend less in tourism-related services and consumption goods, while not threatening higher-income visitors, hence regulating tourism and safeguarding it as an economic-booster. This is Amsterdam’s case, which is «looking at a new formula to squeeze out low-spending tourists and in favour of the heavier spenders», as stated here by a city councillor.

Concluding, an ad valorem tax on lodging should be considered in Lisbon, with the predicted rising trend in tourism and the consequences it entails, as it promotes equity without significant spillover effects, and higher government revenue which can be allocated to the externalities originated by tourism. Ex-ante, however, we must question as a society what are our main objectives when designing such a policy.

Márcia Silva Pereira, 24103


Can a ‘Fat Tax’ solve the worldwide obesity problem?

The year 2014 was marked as first time in global history in which more people were obese than underweight, turning obesity to one of the major global health problems. This is one of the results of the world’s biggest obesity study, led by researchers from the Imperial College London and, among others, the World Health Organization (see full article here). The excess weight harms health in many ways, to name just a few, diabetes and an increasing risk of a heart attack may be the consequence. As a result, health costs increased tremendously, depending on the empirical method and countries looked at, academics found that obese individuals face medical costs up to 150% higher than those with normal weight. These costs not only represent a high burden for the public health care system, indirect costs such as an increase in missing workdays leads to productivity reductions and thereby affects the entire economy negatively. Hence, an increasing number of governments tries to address the overweight issue using monetary incentives: The so called “Fat Tax”.

The tax’s objective is to increase prices for sugary or fatty products which should decrease demand and make consumers switch to alternative, healthier products. Hungary taxes all kinds of fast food while France focuses on soft drinks only. Denmark on the other hand, abolished its fat tax already one year after implementation. The UK (where average Body Mass Index is highest in Europe) will implement a sugar tax on soft drinks in 2018. Hence, governments face the difficult task of predicting consumers’ and producers’ reactions adequately. This is not always straight forward as the Danish case shows: Instead of reducing their consumption consumers switched to other markets and did their fatty shopping in neighboring countries. This hurt the regional economy and was one of the reasons for abandoning the policy so quickly. Experiences like this raise questions regarding  effectiveness of such taxes but empirical evidence is rare and overall mixed.The WHO, referring to Powell et al. (2013), recommends an increase of prices for sugary products of at least 20% going along with a reduction of prices for fruits and vegetables in order to effectively reduce obesity. In line with these results academics suggest that small taxes have no significant impact on obesity. Does this mean a high price increase is the only valid solution? Probably not, taking also into consideration results by  Muller et al.(2017) who raise equity concerns in that context. Their research indicates that especially low income households may face the extra burden of an additional price increase since high income households tend to have a healthier diet anyway.

Policy makers probably won’t be able to solve the issue by introducing a tax only. Consumers will at some point respond to prices but such policies should definetely be accompanied by educational programs that target the young and low income households to increase awareness of the tax and make people consume less sweets not only because of prices but because of their own good.

Julia Schmitjans


Will robots pay the future taxes?

Automation is growing rapidly, and robots are taking over human jobs. In a recent NBER working paper, MIT economists Daron Acemoglu and Pascual Restrepo analysed how the increase in industrial robot usage between 1990 and 2007 affected US local labour markets. They found that in areas exposed to industrial robots both employment and wages declined in a robust and significant manner. If this trend will continue, we might face higher unemployment. Smaller share of employed people will lead to lower income tax, which in turn lowers government revenue, and thus gives us a reason to be concerned about the future.

In an interview with Quartz, Bill Gates says that the governments should impose a tax on robots to forestall a social crisis. He suggests that one could rely a tax on their installation, or on the profits firms enjoy by saving on the costs of the human labour displaced. The idea is that this tax will slow down automation, and at the same time the money from the tax can be used to retrain workers and to finance public goods, such as health care and education. This last bit is very appealing, because an expansion of this sector will provide lots of hard-to-automate jobs in teaching or caring for the old and sick.

The problem with taxing robots, is that it is a capital investment. Economists typically advise against taxing such things, because more capital allow an economy to produce more. Taxation that deters investment is thought to make people poorer without raising much money. But the society has never faced threat of workers losing their old jobs faster than new sectors can absorb them. A forthcoming paper in Harvard Law & Policy review points out that higher unemployment will lead to government losing a substantial amount of tax revenues. The authors argue that today’s tax policy will have to be redesigned, and they have several suggestions; disallowing corporate tax deductions for automated works, creating an “automation tax” which mirrors existing unemployment schemes or increasing the corporate tax rate are just some of them. The authors argue that the ideal solution may be a combination of all their proposals.

According to The Telegraph, South Korea has introduced what is being called the world´s first tax on robots. The South Korean Government said it will reduce tax deduction benefits for investment in automation, which was introduced to boost productivity. The proposal could come into force at the end of the year, when the country´s current tax law is due to expire. Although this is not a direct tax on robots, it will contribute to slowing down automation, and thus preventing a rapid growth in the unemployment. We will have to wait and see if the rest of the world will follow South Korea´s example.

Dana Øye

 

 


Are Inheritance Tax Privileges for firms reasonable?

In modern societies every member has to pay taxes. They are paid to the public sector, which spends money on public goods and aims to reduce inequality through redistribution. However, taxes – especially inheritance taxes – often become topic of emotional discussions regarding fairness. Inheritance is capital, which the heir gets without putting effort in it, from the economics point of view paying taxes on heritage is justified to provide equal opportunities within society.

In 2009 the inheritance tax law in Germany changed, giving larger tax privileges to companies. The idea behind it was to guarantee the surviving of the company, since it was feared that the firm would not be able to pay the tax without harming its business. To get the privileges firms have to prove the continuing existence and keep the amount of workers constant. The former minister of finance Peer Steinbrück argued that due to these regulations family run businesses – which are essential for the German economy – could be protected.

However there are numerous arguments against privileging businesses. For instance some studies even find negative effects on passing on business within the family since managers of the firm are elected by being a family member and not by being the best-qualified person for this job. Also the time and the effort spend on making use of the privileges should be taken into account. In economic terms we refer to this as costs the firm has to burden.

To answer the question if inheritance tax privileges are reasonable it has to be investigated if the firm would have performed differently without the privileges. Since it is impossible to run an experiment in the real world having the two cases in which the firm is once taxed and once not, economists tried to answer this question using data from Germany before 2009, where the tax system had less privileges for businesses. Within the experiment they calculated different tax burden situations and compared them. As one result they could not find evidence that the former inheritance taxes would endanger firms and come to the conclusion that the large privileges given by the new system are not justified.

Nevertheless the advisor council for the ministry of finance suggests that companies should be able to request a respite, which means that they can pay the taxes later if the company is in serious danger at that moment of time.

Also the Federal Constitutional Court decided that the law issued in 2009 is not constitutional and has to be changed. The main criticism was that even really big companies could make use of the exceptions and big parts of administrative property – for example properties used by third parties – could also be given to the next generation without being taxed. Since 2016 the law is changed in the sense of harder regulations if heirs want to make use of the privileges. However, rather than modifying the regulations the privileges itself should be questioned and overthought.

Katharina Fietz

 


Next Country to Cut the Wealth Tax?

A minority of countries in the developed world (with only four in Europe) have taxes on wealth. Sweden and Finland are two of the countries that have been removing the tax over the last decade.

Taxes are always a hot topic, especially when elections are approaching (in my case the Norwegian Parliamentary election). The two biggest parties are in conflict of the future of the wealth tax on corporations. The party in opposition, the Labour Party intends to increase the tax, while the currently ruling party, “Høyre” a conservative party wants to gradually remove the tax.

The recent debate is primarily focused around how the wealth tax is affecting businesses. Business owners argue that removal of the wealth tax will increase the number of jobs and thereby stimulate economic growth. According to studies by NHO, the main representative organization for Norwegian companies, among 60% of the business leaders believe they would hire more workers it the wealth tax is removed.

There are several reasons for this. First, the wealth tax could be distorting competition as it favours foreign companies where wealth tax is non-existing.

Second, the wealth tax facing firms is based on the firm’s equity, in other words the value of its assets after subtracting the firm’s debt. This means that the tax in based on “running” the business rather than the actual value creation in the business. A company with a high equity faces a higher wealth tax burden than a company with a lower equity regardless of the profit (value creation) in the company. Theby Diamond and Mirrlees states that the only tax that should be used is the production-efficient. In other words, we should tax profits, consumption and so on, rather than wealth and other things that affect production decisions.

New businesses and start-up companies might have a high equity, but no income. The wealth tax is considered a tax on individuals as the owners of the companies are individuals.  In many new companies with positive equity and no income (hence no ability to pay dividends), the owners of the company may be forced to sell part of their shares to pay the wealth tax. This can be a discouragement for entrepreneurship.

The government is dependent on collecting taxes to fund education, health care, unemployment money and so forth. Taxes need to be designed in a way to incentivize value-creating behaviour. Regarding firms, the wealth tax seems to discourage job creation and innovation. On that note, dropping the wealth tax could have positive effects on the unemployment and value creating of the country.

This is the time when Norwegian politicians must pay attention to the design of the tax system. Over the last 3 years just over 48 000 jobs in the Norwegian oil sector has disappeared. Any tax burden that might lead to reduced investment in R&D and job creation should be removed. It is crucial to design a tax system that encourages innovation, entrepreneurship and job creation in the coming years.

Ingrid Knudsen Aas – 3105


Argentina: New things will come

Argentina is one of the countries that paid most taxes in the world. The tax pressure its more than 40% than the average of the other countries of America Latina. Now a days the government its preparing a tax reform to be discuss in the congress the next year. They are discussing which will be the central issues to discuss and how to attack the problems that the country is facing with this matter.

At the time of the description of where Argentina stands in relation to the rest of the world, there are alarming conclusions. The country’s fiscal burden stands at 32% of GDP, surpassing by 40% the average level of Latin America and the Caribbean (which stands at 22.8%). At the same time, it is a level similar to that of the most developed countries in the world that make up the OECD (34.3%). It is confirmed with scientific evidence a popular saying: in Argentina so many taxes are paid as in Europe, but to receive services from the third world.

Nevertheless, one of the central problems that the government will have is the tax evasion. As tax evasion is much higher in Argentina than in developed countries, tax aliquots must necessarily be higher. In other words, it is necessary to charge more to the “few” that they tax. Also in Argentina the value added tax is from 21% and all only raises 7.2% of the gross domestic product. While for example in New Zealand the value added tax is of 15%, 6 points less than Argentina and raises 10% of the gross domestic product. The region average is 13% and at the global level is 15.7%. Being one of the taxes that more collect, it is very difficult to reduce the aliquot although it is one of the alternatives that at the moment studies the Minister of Finance, Nicholas Dujovne.

In Argentina, the companies paid 35% of taxes in their profit, while the majority of the countries in America Latina has an average of 28% and the global is 24.3%. This makes impossible for the foreign companies to invest in Argentina because its taxes are so high. On the other hand, regarding social work, the employer must pay between 23% and 27% additional on the salary in social security. That number drops to 13.3% in Latin America, almost half that in Argentina, while the global average stands at 17.4%.

The themes that are going to be discussed in the congress but the government are: reduce distortions and tax exemptions, attack evasion and tax avoidance, to encourage the formalization of the economy, review inefficient taxes and last of all the gradual establishment of reforms. Also I would like to add that during the last year after a long period the political right won the election. After a long time, Argentina is opening to the world, trying to bring new investments from foreign countries. We hope that in the years that come Argentina can become a world power as it was at some time ago.

Francisco Monpelat


Enriching Lisbon while it sleeps

With the local Portuguese elections of 2017, a heated debate on the Lisbon touristic municipal tax incidence arose. This tax is decomposed into an overnight tax (a 1€ extra charge per night introduced in 2016 with a maximum of 7€, yielding 13.5M€) and an air and maritime arrival tax (introduced in 2015 only in the airport and materialized on a 1€ extra charge per arrival, yielding 3.8M€ and borne by ANA, which refused its prolongation to 2016). Basically, the arrival tax applies to all citizens except Lisbon residents, children under two years old and passengers having their connection flight in Lisbon and the overnight tax to every citizen above thirteen years old.

The effectiveness of the lodging tax has been recognized even by the political parties who voted against it. However, improvements can still be achieved. One discussed proposal is to increase the tax to 2€/night to guarantee more affordable housing opportunities, though its opponents defend that Lisbon cannot rely on the touristic tax to solve its structural problems. This critic seems reasonable because when taxes increase by 1% (perceived by consumers as a price increase), guests´ behavior may change (lodging demand elasticity) – empirical data shows a fall on the occupation rate. Nevertheless, the more inelastic the lodging demand (insensitive to tax increases), the higher the success probability of such policy.

If the local government´s objective is to increase the revenue levied by this tax, then two less obvious alternatives can be explored. Firstly, following Ancona´s (Italy) example, Lisbon´s city council could set a fixed tax independent of the accommodation´s length. Given an average stay in the capital of 2,36 nights and assuming no substantial future changes, setting a tax superior to 2,36€/person would expectedly generate a higher recipe. A possible critic here is the higher the number of nights spent in Lisbon, the higher the benefit acquired so discriminating the overnight tax according to benefit levels delivered to the tourist seems reasonable (benefits principle).

Secondly, note Paris´ example where lodging taxes vary according to the accommodation´s number of “stars”. Since hotels with five, four and three stars lodge most tourists in Lisbon, by setting a tax above 1€/per night for these accommodations and a lower tax for the remaining (tourism progressive taxation), the town hall could expect to increase overnight total tax revenue. Additionally, bearing in mind equity considerations, this proposal is justified by the typically higher predisposition to pay a superior tax of a tourist that stays in a three to five-star hotel than the one who stays in a hostel (diminishing marginal utility of income). However, this alternative presupposes not a fall on overall consumption but rather induce high spending tourist to “reduce only their savings”.

Personally, such tax makes absolute sense as to improve the quality of the city (not decrease the number of visitors), since the increase in Lisbon tourism is exerting higher pressure on existing resources. Accordingly, the proposed alternatives would be more efficient to achieve the desired goal while generating a higher revenue.

Margarida Castro Rego | 23848


Are taxes on cigarettes increasing inequality?

Smoking cigarettes causes one out of five death in the United States and the annual expenditure on smoking related diseases amount to nearly $160 billion.[1] Therefore, are taxes on cigarettes not only a way to increasing tax revenue but also decrease expenditure and save lives. In 2009, the federal excise taxes on cigarettes increased by 158% hoping to get 1 million smokers to quit and to prevent 2 million young people from ever starting. However, do taxes on cigarettes have the intended effect or are they merely punishing low-income households and thereby increasing inequality?

Cigarettes are an addictive good making it difficult to quit when first started. Theory on myopic addiction states that addicted people are short sighted and irrational. This means that even though price changes affect demand, there is a tendency of a price increase to have a smaller effect than a price decrease.[2] Because of the addictive power of cigarettes, demand is quite inelastic. A meta-analysis on price-elasticities of cigarette demand by Gallet and List shows that a price increase of 10% will lead to a drop in demand of only 3.2% for people older than 24 years, which also is the age group that consume the most. This means that the consumer is highly affected in an economic perspective, because they pay a high price (due to the tax) for a good that they do not wish to stop using or are unable to because of addiction and therefore have to decrease consumption of other goods if financial constraint.

However, who are the typical smokers and thereby who are really affected by these taxes? Studies shows that smoking is high among certain population groups, especially groups with low education levels and people living below the poverty level.  26.1% of people living below the poverty level smoke compared to 13.9% of people living above it. This means that low-income households are more affected by cigarettes taxes, but not only because they are the group where most people smoke, but also because they spend the larger fraction of their income on cigarettes. A study of the Consequences of High Cigarette Excise Taxes for Low-Income Smokers[3] in New York shows that low-income households (below $30.000 a year) spent 23.6% (14.2% nationally) of their annual income on cigarettes in 2011-2012 while households with a yearly income above $60.000 only spent 2.2% (2.0% nationally). Because of this, imposing taxes on cigarettes might be a way to lower consumption but it do as well imposes a significant financial burden on some of the poorest people and thereby just increase inequality.

Written by Ida Hammerberg Nielsen, Exchange student at NOVA SBE

[1] https://www.cdc.gov/tobacco/data_statistics/index.htm

[2] http://fjc.people.uic.edu/Presentations/Slides/rational.addiction.pdf

[3] http://journals.plos.org/plosone/article?id=10.1371/journal.pone.0043838#top


A discussion of the 277 percentage tax on import of cheese to Norway

Agriculture has been a big part of Norwegian history. Forestry, fishing and agriculture used to be the main source of income to the Norwegian people. After world war two and especially after the discovery of oil in the Barents Sea this changed. Since 1969 the number of farms keeping domestic animals in Norway has been reduced by 378 percent, and the number is still going down.

Bilde1Statistics Norway: Total number of holdings keeping domestic animals by time

The Norwegian government has taken some steps to make sure they don’t lose all the agriculture, and one of those steps is to add a tax of 277 percent on import of cheese to Norway. They do this to make sure that instead of importing cheese from the rest of the world, companies find it cheaper to just buy cheese made from Norwegian farmers. This also ensures that the prices on cheese can have a level which makes the cheese business lucrative to the farmers.

There are many opponents to this tax on import of cheese. As this newspaper article says, the EU has criticized the tax on several occasions, claiming it will harm trade between the EU and Norway. The European Parliament has made a briefing on the possible consequences of the rise in taxes, where they include a statement from the Swedish Minister of Trade, claiming the tax will lead to the loss of 700 jobs in the Swedish diary industry.

The opinion of the Norwegian people and companies are divided. The big super market chain says (Norwegian) the tax pushes the prices for cheese up for the consumer and the selection is worse than it would be without the tax. The Farmers’ Association in Norway, on the other hand, argues (Norwegian) that the tax does not harm the selection of cheese in the stores, do not raise the prices of cheese and other product in Norway and that the tax is vital to the survival of almost 10.000 milk farmers.

Is this tax to the benefit of the Norwegian people? It all comes down to what people in Norway prefer. Do they want competitive prices and more imported products like cheese, or do they want Norwegian products to a higher price? The University of Stavanger (Norwegian), based on a survey for a doctoral thesis, writes that 57 percent of people in the survey said they would pick Norwegian food instead of imported international food if possible, and 65 percent thinks the Norwegian food is safer to eat than food from other countries. This can indicate that the Norwegian food market can withstand an increase in competition in the market. If so, is there any point in having this regulation?

Ben Larsen


Impact of Goods and Services Tax in India

In India, before July 1, 2017 consumers had to pay taxes at each and every stage of goods and services. This leads to double taxation. Now, only one tax at the end of product is paid, Government Service Tax (GST). It is meant to unify indirect taxes across the country on products and services. It has brought in ‘one nation one tax’ system. There are two components of GST – central GST and state GST. In case of inter state transaction ISGT is applied which is the sum of CGST and SGST.

Currently, around 160 countries have implemented GST in some form or the other. GST was first introduced in 1954 in France. In some countries, VAT is the substitute for GST.

GST has reduced the prices of the major commodities. It has removed the cascading effect (tax on tax) from the prices. Now the tax is charged only on profits at each stage in the distribution channel. Earlier the tax was levied on total cost (Cost price + Profit) at each stage and this resulted in cascading effect.There are now five slabs of GST rates charge on the goods (Min 0%, Max 28%).

In the short run, from consumer view point it feels like the tax on some commodities has increased slightly. Cost has increased for small-scale manufacturers and traders, as they have to implement GST in their business model and bring change in their business. There is also a general perception that government will generate less revenue as taxes paid by the consumer on essential items has declined.

Implementation of new policy always has some difficulties in the initial phase. However, in the long run, Indian economy will have benefits from the reform. The implementation of GST has put the burden on businesses that escaped earlier from paying tax. This will increase tax net. Inflation will reduce as double taxation system has been removed. Government like in other countries might reduce slabs from 5 to 2, lower rate for essential items and higher rate for luxury items. This will make it less complicated system. The government will add some of the highest revenue generating products (petroleum, electricity) in GST slabs once the new system is stabilized. This will further benefit the consumer.

The government has account Rs 42,000 Cr of tax for the July month. The collection from custom duty and IGST from imports have doubled compared to last year. This is positive sign of the policy. Though, It has only been three months from the day GST was implemented. Based on the results, it seems policy is being executed as planned and will help in the growth of Indian economy.

In Indian economy, it is going to be hard to implement the reform perfectly but hard is not impossible.

Nupur Mittal


European taxation faces digital revolution: web tax is coming!

On 29th September European Union have discussed at the “Tallinn Digital Summit” a procedure to regulate taxation for digital firms, such as Google, Facebook and Amazon, in order to ensure that companies pay their fair share of tax where they generate profits, thus capturing a new sort of business which is not taken into account by the traditional tax system.
Nowadays 9 out of the top 20 companies in terms of market capitalisation belong to digital sectors, representing almost the 54% of total firms which are taken into consideration. In addition to this, digital economy covers at the moment 10% of total Euro-area GDP and a further increment of 30%-40% is attended in the next ten years. This obviously is affecting tax revenues in european borders: member States lost more than € 5.4 billion between 2013 and 2015 due to non-payments from digital giants. Furthermore, the current average tax rate in the EU economy stands at 20.9% for traditional sectors, whereas it is only 8.5% for companies involved in digital businesses (https://ec.europa.eu/taxation_customs/sites/taxation/files/1_en_act_part1_v10_en.pdf).
In the attempt to define new policy responses which could be able to face this innovative global progress, European Union should find answers to two crucial questions: “Where to tax?” and “What to tax?”.
Member States are discussing on three possible short-term solutions: a tax on “digital” turnover of companies, a withholding tax on digital transactions and a levy on revenues related to the provision of digital services or advertising activities released remotely by entities with a no-significant economic presence in the country. This last proposal is adopted in India since 1st June 2016, with all its for and against, as explained in this paper (https://www.brookings.edu/wp-content/uploads/2017/01/workingpapertax_march2017_final.pdf). This “equalisation levy” aims to level the playing field for a fair distribution of taxation jurisdiction between the origin and the source country. Furthermore, since it is imposed on digital transactions and not on income, it would not involve international tax agreements. On the other hand, tax incidence is not still clear and more work needs to be done to analyse the sharing of the burden between producers and consumers. Moreover, a “digital meter” should be adopted, in order to guarantee measurements in terms of digital activities and number of users.
Nevertheless, European Commission is also encouraging the application of the Common Consolidated Corporate Tax Base (https://ec.europa.eu/taxation_customs/business/company-tax/common-consolidated-corporate-tax-base-ccctb_en) for this new type of companies, which could ensure in the long-run a deeper monitoring of the location of the value generated, thus limiting possible tax avoidances in countries with lower taxation.
To conclude, digitalisation surely implies an innovation in international taxation, which might contemplate a reassessment of the tax residence in favour of a system which emphasises the relevance of the turnover’s location. Furthermore, European Union needs to win the double challenge to outline a common agenda for member States and a rigorous deal with digital firms.

Federica Bonanno


Excise taxes as a useful tool in fighting inequality in today’s politics

On the past decade, Portugal saw a sharp decrease on its income inequalities. Using the Gini Index to measure such phenom, the 2004 – 2009 period was a success in fighting said lack of equity. Nevertheless, preoccupations subsist since 2009. With Portugal undergoing a hard and exigent readjustment program, just after a harsh crisis, the fight against inequalities stagnated, with the typical Portuguese loosing income and wealth.

Nevertheless, one must first ask if inequalities are indeed meant to be fought. As this is an ongoing debate amongst economists, with some advocating for high inequality levels due to e.g. efficiency gains, while others advocate for more equity due to, e.g. a bigger propensity to consume amongst the poorest, I will abstain to enter this debate. Alternatively, I will take the “need to fight inequalities” as a given fact, and recommend the best way to do so, using as a framework today’s Portuguese society, namely its political reality and its tax scheme.

Gini Index Imagem

Although seemingly obvious that progressive taxes are more popular than regressive ones (due to the simple fact that the poor are more numerous than the rich), that is in fact inaccurate. Joel Slemrod proves that there is a large support for regressive taxes in the US, largely due to misconceptions regarding the prevailing tax scheme. Furthermore, Jean Hindriks proves that support for progressive (or regressive for that matter) taxes is quite cyclical and volatile. Thus, a standard approach such as an increase on the wealthier echelon of the Portuguese IRS (tax on labor income) is not ideal for a politician looking for a sure reelection.

Alternatively, it is safer to opt for a more discrete tax on consumption, namely an excise one. Contemporary governments have already carved this path (e.g., “fiscalidade verde” or “taxa turística”). It is naïve to think an excise tax will have a huge impact on redistributing income, but as the current choices are scarce – namely due to the public budget’s current constraints and the necessary deleveraging – these are nevertheless quite interesting options for the current cabinet, not only from a pragmatic, “elections” perspective, but also as a useful tool for reducing in reducing inequalities.

Excise taxes are classically assumed to be regressive. For example, in Denmark, researchers found taxes on CO2 – Namely, those taxed directly to households – increase inequalities, i.e., are regressive, so one must careful when opting for an excise tax as a tool for reducing inequality. Still, there are plenty of examples which help build a case for the progressivity of excise taxes, whether it be on the cigarettes market, or the gasoline one. Using the later examples, and after due and careful study of its consequences, I do believe the current Portuguese cabinet should impose (or increase) similar taxes, such as the famous “fat tax”, or simply increase taxes on liquor, cigarettes, amongst others.

It will not end wealth disparities amongst Portuguese but it is certainly an interesting path, from both a social perspective and a pragmatic, electoral one.

Rodrigo Marçal Camacho | Student no. 30508 | MSc. Economics