Essays on the Economics of Taxation
Abstract
This thesis consists of an introductory chapter and three essays on the economics of taxation. The first essay considers the insurance value of income taxes and its measurement. The second essay is joint work with Youssef Benzarti and Jarkko Harju, and looks into the incidence of payroll taxes and the effects they have on the input choices of firms. The third essay is joint work with Tuomas Kosonen and Riikka Savolainen and studies sin taxes.
While all the essays focus on different taxes, all make both methodological contributions and have empirical content. The introductory chapter discusses the links these have and shows that the methodological contributions of all the essays can be firmly grounded in a shared framework of utility maximizing agents.
The first essay studies the insurance value of income taxes. The paper provides a framework for characterizing and measuring the insurance value. First, I provide a novel Slutsky-syle decomposition of individual-level welfare impacts of tax changes when there is income uncertainty. Using this decomposition, I characterize optimal taxes with both redistributive preferences and uncertainty, an the MVPF of tax reforms under income uncertainty. The willingness-to-pay (WTP) for the insurance aspect of taxes is a function of unobservable marginal utilities. Building on the Baily (1978) – Chetty (2006) -literature on unemployment insurance, I develop three methods to estimate the WTP. Using one of thse, a novel consumption based approximation, I estimate the ex-ante MVPF of marginal tax increases at different points of the income distribution for the US. Taking the insurance value into account suggests that, ex-ante, the efficiency costs of tax increases are both lower with insurance value and, surprisingly, that they are decreasing instead of increasing in income.
The second essay studies the incidence of payroll taxes and the effects of payroll taxes on the input choices of firms. We exploit the abolition of a size-based capital depreciation threshold in Finland above which employer-level payroll tax rates were higher, creating a tax notch. We report large impacts on firm distribution and dynamics that extend far from the threshold. We show that standard difference-in-differences estimators are biased in such a setting and develop a new method to provide meaningful estimates of the impacts of the reform. Using our novel methodology, we find large effects on a variety of outcomes such as employment, revenue and investment, suggesting sizeable scaling effects. Our incidence estimates suggest a 37–63 split between firm owners and workers, respectively.
The third essay studies the relationship between substitutability of taxed and non-taxed goods and the price elasticity of demand. We organize the paper through a simple model that yields as a result a highly convex relationship between the demand elasticity and how close non-taxed substitutes are available. Empirically we analyze a Finnish sin tax scheme for sweets, soda and ice cream providing us with quasi-experimental variation through multiple reforms. We have product and store-level data on sales and prices containing hundreds of millions of observations. We also develop survey evidence on substitution preferences across categories of goods. Our estimated consumption elasticity is close to zero for sweets and ice cream that have intermediate non-taxed substitute: cookies. In a stark contrast, when the tax rate was doubled for sugary soft drinks but not for their close substitute non-sugary soft drinks, consumption elasticity is close to unity. These estimates align well with our theory framework wherein even with intermediate non-taxed substitutes available the demand elasticity is close to zero, while it is close to unity when very close substitutes are available. We also provide evidence that the quasi-experimental price elasticity estimates in the previous literature align with our theory framework.
Publication Information
Jysmä, S. (2025), Essays on the Economics of Taxation, Tampere University Dissertations 1136.
- ISSN: 2489-9860 (Print), 2490-0028 (Online)
- ISBN: 978-952-03-3698-1 (Print), 978-952-03-3699-8 (Online)
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- Sami Jysmä
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- sami.jysma@labore.fi
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