This paper analyzes the effects of dividend tax reforms on tax revenues, income shifting, and earnings retention. It examines two significant policy changes in Israel during the 2010s. Using administrative tax records, we study a permanent five-percentage point increase in the dividend tax rate in 2012, and a temporary tax relief enacted in 2017. The permanent tax hike triggered an immediate surge of over 100% in reported dividend income and tax revenues. It did not generate a lasting shift in dividend flows. In contrast, the temporary relief of 2017 led to a sharp decline in dividend payments upon its expiration. Notably, firms increased earnings retention after the preferential rate ended, potentially anticipating similar future relief. We also find evidence of income shifting via wage-to-dividend conversions for tax planning. Finally, increased earnings retention after 2017 produced a 1- 2 percentage point downward bias in the top 1% income share due to unreported dividend income.

This paper focuses on the centralization program implemented in Israel in 2004 to analyze whether the administrative subordination of municipalities is an effective policy to deal with problems related to soft-budget constraint of lower level governments.  The results consistently show, for different specifications and samples of municipalities, that this program brought a substantial decrease of municipalities’ expenditures (mostly because of decreases on salary payments), and an increase of local property tax collection.  Our analysis shows that all of the fiscal impact of the program is due to the appointment of an accountant that reports directly to the central government, a relatively mild form of administrative subordination.  In contrast, more intrusive forms of subordination, like the central imposition of a recovery program, do not result in any substantial improvement of municipalities’ fiscal situation.  This leads us to conclude that a mild form of administrative subordination is an effective tool to cope with problems related to soft-budget constraints, whereas political subordination is not an effective tool to reach that goal.

We design an experiment to study the effects of social identity on preferences over redistribution. The experiment highlights the trade-off between social identity concerns and maximization of monetary payoffs. Subjects belonging to two distinct natural groups are randomly assigned gross incomes and vote over alternative redistributive tax regimes, where the regime is chosen by majority rule. We find that a significant subset of the subjects systematically deviate from monetary payoff maximisation towards the tax rate that benefits their group when the monetary cost of doing so is not too high. These deviations cannot be explained by efficiency concerns, inequality aversion, reciprocity, social learning or conformity. Finally, we show that behavior in the lab helps explain the relationship between reported income and stated preferences over redistribution observed in survey data.

This paper develops a positive theory of overlapping income taxation in a federation of states. The analysis provides a complete characterization of the equilibrium federal and states tax rates as functions of the level of total productivity dispersion between the states. The federal rate is increasing in the level of total productivity dispersion between the states, even if the income of the decisive voter at the federal level is above the mean income. Given that the individuals’ income is endogenously determined there exists a negative trade-off between the implemented federal tax rate and the resulting states’ tax rates, regardless of the pre-tax income of the decisive voter at the state level. Thus, high levels of productivity dispersion between the states cause a higher than optimal federal tax rate together with low states’ tax rates. It is also shown that a system of overlapping income taxation is not efficient. The resulting inefficiency might be exacerbated by the implementation of a federal matching grants program, contradicting previous results in the related normative literature.

This paper develops a political economy model that is consistent with the fact that democracies have a preference for increasing marginal tax rates on income. We present a model in which there is an exogenous set of political parties with preferences over the set of admissible tax schedules. This set contains virtually any increasing and piecewise linear continuous function. Each party decides whether or not to present a candidate for election. There is a fixed cost of running. The elected candidate implements one of her preferred tax policies. Our main results provide conditions under which a Strong Nash Equilibrium exists, and a tax schedule with increasing marginal tax rates is implemented in some Nash Equilibria and in any Strong Nash Equilibrium.

This paper develops a political economy model that is consistent with the fact that  democracies have a preference for increasing marginal tax rates on income. We present a model in which there is an exogenous set of political parties with preferences over the set of admissible tax schedules. This set contains virtually any increasing and piecewise linear continuous function. Each party decides whether or not to present a candidate for election. There is a fixed cost of running. The elected candidate implements one of her preferred tax policies. Our main results provide conditions under which a Strong Nash Equilibrium exists, and a tax schedule with increasing marginal tax rates is implemented in some Nash Equilibria and in any Strong Nash Equilibrium.