Essays on the impact of changing tax rates and welfare spending

Rights statement
Awarding institution
  • University of Strathclyde
Date of award
  • 2020
Thesis identifier
  • T16131
Person Identifier (Local)
  • 201669504
Qualification Level
Qualification Name
Department, School or Faculty
  • This thesis examines how changes in tax rates and welfare spending affect the behaviour of markets, households and individuals. In three distinct essays, we make use of applied econometric methods to examine both intended and unintended consequences of changes in tax and welfare policy, their impact on efficiency and equity in the economy, and the way in which they influence people’s behaviour. Our findings are intended to contribute to the wider policy debate on the optimal use of tax and spending instruments to achieve policy objectives. Chapter 1 is titled "A case study of Germany’s aviation tax using the synthetic approach". This chapter is a case study on the German Aviation Tax, a tax levied on departing passengers from German airports1. Aviation taxes receive considerable attention as they have been introduced recently in a number of European countries. Policy makers often motivate these taxes as environmental measures implemented to minimise negative externalities from air travel, or as tools to raise revenues from an otherwise undertaxed sector. Conversely, many experts claim that single-country aviation taxes are inefficient both as environmental measures and revenue-raising tools, due to tax avoidance opportunities presented by tax-exempt airports in neighbouring countries. Critics also point to the adverse effects aviation taxes have on demand, competitiveness and connectivity at domestic air-ports. Despite their policy relevance, empirical evidence on the effects of aviation taxes is sparse. Only a few studies focus on the issue of aviation taxation, and only a handful of these studies examine the ex post effects of newly introduced aviation taxes on passenger flows at tax burdened airports. A key methodological challenge in this small literature stems from the fact that the ex post effects of aviation tax changes can only be analysed in quasiexperimental settings, where airports with changes in aviation taxes (treated airports) are compared to a group of airports (controls) not affected by the same policy. Since passenger trends at airports are affected by a wide variety of factors, and are often times highly idiosyncratic, the methodological challenge is to find the appropriate group of control airports to compare treated ones to. Consequently, our main methodological contribution to the literature is to make use of a novel approach, the synthetic control method, to optimise the selection of control airports. In this chapter, we investigate the impact Germany’s aviation tax has had on passenger numbers using the synthetic control method to generate counterfactual passenger numbers for German airports, and for airports outside Germany but near the German border. Our results suggest that passengers engaged in cross-border substitution in response to the aviation tax. Most tax-exempt airports near German borders have made sizeable gains in passenger numbers since Germany introduced its aviation tax. Within Germany there appears to be a clear distinction in the impact on small/regional airports and that on larger hubs - while we find a negative impact on traffic at regional airports, passenger numbers at hubs were largely unaffected (or were even positively affected). From a policy perspective, the finding of a cross-border substitution effect implies that the aviation tax might not be effective in curbing overall emissions from air travel, whilst also leading to lost tax revenues through the displacement of passengers to neighbouring countries. Considering the dual objectives of the policy, the optimal policy outcome from the imple-mentation of AT would be 1) a reduction in overall air travel demand (to cut emissions) and 2) no cross-border substitution effect in order to avoid the loss of the tax base. The findings in this chapter provide evidence to the contrary: German demand, and overall air travel demand, is not reduced to a large extent, but the cross-border effect is sizeable. Chapter 2 is titled "Limiting the distortionary impacts of transaction taxes: Scottish stamp duty after the Mirrlees Review". This chapter investigates the distortionary impacts of transaction taxes through a case study of the Scottish residential property market. Tax on property transactions, also known as stamp duty, is a common form of property taxation but not a very popular one. Economists consider these taxes inefficient for a number of reasons. First, they reduce the incentive to engage in mutually beneficial property transactions, leading to welfare loss as properties are not owned by the individuals who assign the most value to them. Second, they increase the tax burden on those who, for whatever reason, trade housing more often. Lastly, by increasing the cost of mobility, transaction taxes make it more difficult for homeowners to relocate in search of appropriate employment In line with these efficiency concerns, recent policy changes in Scotland were aimed at reducing distortions from the transaction tax system by 1) simplifying the structure of the tax system and 2) reducing the tax burden for the majority of home buyers (and increasing it for those aiming to buy expensive properties). Although recent studies provide credible empirical evidence on the distortions created by transaction tax regimes, the key contribution of our study is that it is the first one to study policy changes aimed at reducing said distortions. From a policy perspective this is important since governments might struggle to replace transaction tax regimes for budgeting or administrative reasons, leaving sensible reform as the only feasible policy option to mitigate efficiency concerns. To study the property market impacts of transaction taxes and assess the effects of recent reform, this chapter makes use of four sources of variation in transaction tax rates present in recent Scottish tax systems: price notches, kink points, time notches and a shift to a more progressive transaction tax regime. Our analysis makes use of bunching estimator and difference-in-differences approaches to examine how variations in transaction tax rates influence transaction activity on the Scottish property market. Our results show that both kinds of notches have a distortionary impact that is sub-optimal. The Scottish Government’s recent reforms had a positive impact through replacement of price notches with kink points, but time notches emerged allowing other distortions to persist. Through a comparison of price ranges affected and unaffected by the policy changes, we also find that progressive reform had a significant (and long-term) positive impact on transaction activity in the market segment where tax rates were reduced. On the other hand, the higher end of the market, where tax rates increased, was mostly unaffected by progressive reform with the exception of the market for very expensive properties, where a negative effect is identified. Implications of our findings are that if governments want to make transaction tax regimes more efficient, progressive taxation might be a good way to limit their distortionary impact, whilst also encouraging transaction activity in the lower end of the market. Chapter 3 is titled "The impact of housing subsidy cuts on the labour market outcomes of claimants: Evidence from England". This final chapter looks at the labour market impacts of reduced housing subsidies. Housing subsidies are aimed at helping low-income individuals afford appropriate housing, but are costly to offer. Also, in the view of some experts and policy makers, housing subsidies reduce work incentives and/or work effort among claimants. Economic theory is ambiguous on the likely labour market impacts of changes in housing subsidy entitlements. To date, there is no credible empirical evidence linking housing subsidy cuts to positive changes in labour market outcomes. Nonetheless, policy makers often motivate cuts to subsidies as a way to encourage claimants to seek employment (or put in more work effort). This chapter investigates the labour market impacts of recent housing subsidy cuts in England that were justified using a similar argument to that discussed above. Our investigation makes use of individual-level survey data from the Understanding Society survey. Using this data set allows us to track subsidy claimants over time and control for a wide range of individual and household characteristics. Our identification strategy relies on the fact that, within the time period investigated, the subsidy cuts were only implemented for claimants renting from one segment of England’s rental sector (the private rental sector) while claimants renting from other segments (the social rental sector) were unaffected. We utilise this variation in exposure to the subsidy cuts within a difference-in-differences framework to estimate the effect of reduced housing subsidies on the labour market outcomes of claimants. We find no evidence of a change in labour market outcomes for those affected by subsidy cuts, indicating that, at least on aggregate, the reforms did not succeed in encouraging employment among claimants. These null findings should be of considerable interest to policy makers who often assume a causal link between the generosity of benefit entitlements and the work effort/incentives of claimants. More specifically, our findings suggest that as a policy instrument, cuts to housing subsidies may not be effective in generating efficiency gains through increased labour market participation or work effort.
Advisor / supervisor
  • Roy, Graeme
  • Darby, Julie
Resource Type
Date Created
  • 2019