nep-pbe New Economics Papers
on Public Economics
Issue of 2004‒12‒20
sixteen papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Happy News from the Dismal Science: Reassessing the Japanese Fiscal Policy and Sustainability By Christian Broda; David E. Weinstein
  2. Tax Evasion and Social Interactions By Bernard Fortin; Guy Lacroix; Marie-Claire Villeval
  3. tax credit policy and firms' behaviour: the case of subsidy to open-end labour contract in italy By cipollone piero; Anita Guelfi
  4. A contest with the taxman - The impact of tax rates on tax evasion and wastefully invested resources By Ralph C Bayer
  5. Finding out who the crooks are - Tax evasion with sequential auditing By Ralph C Bayer
  6. Improving the SGP: Taxes and Delegation rather than Fines By Lindbeck, Assar; Niepelt, Dirk
  7. Reforming Reforms: Incentive Effects in Education Finance in Vermont By Stephen J. Schmidt; Karen Scott
  8. The excess burden of tax evasion - An experimental detection- concealment contest By Ralph C Bayer; Matthias Sutter
  9. The Size of the Shadow Economies of 145 Countries all over the World: First Results over the Period 1999 to 2003 By Schneider, Friedrich
  10. Tax Policy for Health Insurance By Jonathan Gruber
  11. Shared Consumption: A Technological Analysis By John A. Weymark
  12. Who Wins and Who Loses? Public Transfer Accounts for US Generations Born 1850 to 2090 By Antoine Bommier; Ronald Lee; Timothy Miller; Stephane Zuber
  13. The Interaction of Public and Private Insurance: Medicaid and the Long-Term Care Insurance Market By Jeffrey R. Brown; Amy Finkelstein
  14. Social Accounting and the Public Sector By Aronsson, Thomas
  15. State Higher Education Spending and the Tax Revolt By Robert B Archibald; David H Feldman
  16. Moral constraints and the evasion of income tax By Ralph C Bayer

  1. By: Christian Broda; David E. Weinstein
    Abstract: We analyze fiscal policy and fiscal sustainability in Japan using a variant of the methodology developed in Blanchard (1990). We find that Japan can achieve fiscal sustainability over a 100-year horizon with relatively small changes in the tax-to-GDP ratio. Our analysis differs from more pessimistic analyses in several dimensions. First, since Japanese net debt is only half that of gross debt, we demonstrate that the current debt burden is much lower than is typically reported. This means that monetization of the debt will have little impact on Japan's fiscal sustainability because Japan's problem is the level of future liabilities not current ones. Second, we argue that one obtains very different projections of social security burdens based on the standard assumption that Japan's population is on a trend towards extinction rather than transitioning to a new lower level. Third, we demonstrate that some modest cost containment of the growth rate of real per capita benefits, such as cutting expenditures for shrinking demographic categories, can dramatically lower the necessary tax burden. In sum, no scenario involves Japanese taxes rising above those in Europe today and many result in tax-to-GDP ratios comparable to those in the United States.
    JEL: E6 H5 H6
    Date: 2004–12
  2. By: Bernard Fortin; Guy Lacroix; Marie-Claire Villeval
    Abstract: The paper extends the standard tax evasion model by allowing for social interactions. In Manski's (1993) nomenclature, our model takes into account social conformity effects (i.e., endogenous interactions), fairness effects (i.e., exogenous interactions) and sorting effects (i.e., correlated effects). Our model is tested using experimental data. Participants must decide how much income to report given their tax rate and audit probability, and given those faced by the other members of their group as well as their mean reported income. The estimation is based on a two-limit simultaneous tobit with fixed group effects. A unique social equilibrium exists when the model satisfies coherency conditions. In line with Brock and Durlauf (2001b), the intrinsic nonlinearity between individual and group responses is sufficient to identify the model without imposing any exclusion restrictions. Our results are consistent with fairness effects but reject social conformity and correlated effects.
    Keywords: Social interactions, tax evasion, simultaneous tobit, laboratory experiments
    JEL: H26 D63 C24 C92 Z13
    Date: 2004
  3. By: cipollone piero (Bank of Italy , Economic research department); Anita Guelfi (confindustria, research department)
    Abstract: In the past decade fixed-term contracts have been widely used to ease the regulatory burden in several European labour markets. Because there is some concern that they might be a dead-end for many worker, policy makers have intervened to increase transitions from fixed-term to open-end contracts. The effects of these interventions have not been thoroughly studied. This paper is a contribution to fill the gap. We look at a recent Italian policy designed to foster hiring with open-end rather than with fixed-term contracts. Our results seem to indicate that most of the financial support was wasted because of the large dead-weight loss associated to the program. Firms used the subsidy primarily to hire under open-end contracts workers who would have been hired under such contracts regardless of the subsidy, albeit after a short transition into temporary employment
    Keywords: tax credit, open-end contracts, fixed-term contracts, evaluation
    JEL: D78 H25 J23 J38
    Date: 2003–03
  4. By: Ralph C Bayer (University of Adelaide)
    Abstract: We develop a moral hazard model with auditing where both the principal and the agent can influence the probability that the true state of nature is verified. This setting is widely applicable for situations where fraudulent reporting with costly state verification takes place. However, we use the framework to investigate tax evasion. We model tax evasion as a concealment-detection contest between the taxpayer and the authority. We show that higher tax rates cause more evasion and increase the resources wasted in the contest. Additionally, we …nd conditions under which a government should enforce incentive compatible auditing in order to reduce wasted resources.
    Keywords: Tax Evasion, Auditing Rules, Contest, Moral Hazard
    JEL: H26 D82 K42
    Date: 2004–12–14
  5. By: Ralph C Bayer (University of Adelaide)
    Abstract: This paper investigates multi-item moral hazard with auditing contests. Although the presented model is widely applicable, we choose tax evasion as an exemplary application. We introduce a tax-evasion model where tax authority and taxpayer invest in detection and concealment. The taxpayers have multiple potential income sources and are heterogeneous with respect to their evasion scruples. The tax authority - unable to commit to an audit strategy - observes a tax declaration and chooses its auditing efforts. We show that a tax inspector prefers to audit source by source until he finds evidence for evasion to conduct a full-scale audit thereafter.
    Keywords: Moral Hazard, Auditing Rules, Contest, Tax Evasion
    JEL: H26 D82 K42
    Date: 2004–12–14
  6. By: Lindbeck, Assar (The Research Institute of Industrial Economics); Niepelt, Dirk (Institute for International Economic Studies)
    Abstract: We analyze motivations for, and possible alternatives to, the Stability and Growth Pact (SGP). With regard to the former, we identify domestic policy failures and various cross-country spillover effects; with regard to the latter, we contrast an "economic-theory" perspective on optimal corrective measures with the "legalistic" perspective adopted in the SGP. We discuss the advantages of replacing the Pact's rigid rules backed by fines with corrective taxes (as far as spillover effects are concerned) and procedural rules and limited delegation of fiscal powers (as far as domestic policy failures are concerned). This would not only enhance the efficiency of the Pact, but also render it easier to enforce.
    Keywords: Stability and Growth Pact; Spillover Effects; Policy Failures; Pigouvian Taxes; Policy Delegation
    JEL: E63 F33 F42 H60
    Date: 2004–12–14
  7. By: Stephen J. Schmidt (Department of Economics, Union College, Schnectady, NY, USA.; Department of Economics, Rensselaer Polytechnic Institute, Troy, NY 12180-3590, USA.); Karen Scott (Union College, Schnectady, NY, USA.)
    Abstract: In 1997, Vermont passed Act 60, which reformed its education finance system to achieve greater equality of spending within the state. Like other recent education finance reforms that included strong and transparent incentives to reduce spending, Act 60 was politically very unpopular. In February 2004, Vermont passed Act 68, an attempt to acheive court-mandated education equalization at a lesser political cost than that required by Act 60. In this paper we analyze the incentives for local spending created by Act 60 and Act 68, and estimate the effects the change will have on spending inequality in Vermont. We find that Act 68 greatly reduces spending disincentives created by Act 60, but reduces them disproportionately for wealthy towns. As a result it increases inequality of spending in Vermont relative to Act 60. Because spending is quite inelastic with respect to tax prices, however, the increase in inequality is not very large relative to existing inequality. Act 68 does result in lower tax prices in all towns in Vermont and hence produces a moderate increase in education spending statewide. It has also been more politically acceptable than its predecessor, though not unanimously supported. Our findings emphasize the importance of marginal effects of education finance, and suggest that understanding the way in which towns respond to the incentives those effects create is critical in designing successful education finance reforms. They also show that a rereform of education finance in response to political criticism of an initial reform can reduce political concerns without greatly decreasing the equalizing incentives.
    JEL: H71 I22
    Date: 2004–12
  8. By: Ralph C Bayer (University of Adelaide); Matthias Sutter (Max Planck Institute for Research into Economic Systems & University of Innsbruck)
    Abstract: We present an experimental study on the wasted resources associated with tax evasion. This waste arises from taxpayers and tax authorities investing costly effort in the concealment and detection of tax evasion. We show that these socially inefficient efforts - as well as the frequency of tax evasion - depend positively on the prevailing tax rate, but not on the fine which is imposed in the event of detected tax evasion. Tax evasion is less frequent, though, than a model with risk neutral taxpayers predicts. We find evidence that this is due to individual moral constraints rather than to risk aversion.
    Keywords: tax evasion, contest, experiment, tax rates, fines
    JEL: H26 K42 C91
    Date: 2004–12–14
  9. By: Schneider, Friedrich (University of Linz and IZA Bonn)
    Abstract: Using the DYMIMIC approach, estimates of the shadow economy in 145 developing, transition, developed OECD countries, South Pacific islands and still communist countries are presented. The average size of the shadow economy (in percent of official GDP) over 2002/2003 in developing countries is 39.1%, in transition countries 40.1%, in OECD countries 16.3%, South Pacific islands 33.4% and 4 remaining Communist countries 21.8%. An increasing burden of taxation, high unemployment and low official GDP growth are the driving forces of the shadow economy.
    Keywords: shadow economy, tax burden, government regulation, DYMIMIC method
    JEL: O17 O5 D78 H2 H11 H26
    Date: 2004–12
  10. By: Jonathan Gruber
    Abstract: Despite a $140 billion existing tax break for employer-provided health insurance, tax policy remains the tool of choice for many policy-makers in addressing the problem of the uninsured. In this paper, I use a microsimulation model to estimate the impact of various tax interventions to cover the uninsured, relative to an expansion of public insurance designed to accomplish the same goals. I contrast the efficiency of these policies along several dimensions, most notably the dollars of public spending per dollar of insurance value provided. I find that every tax policy is much less efficient than public insurance expansions: while public insurance costs the government only between $1.17 and $1.33 per dollar of insurance value provided, tax policies cost the government between $2.36 and $12.98 per dollar of insurance value provided. I also find that targeting is crucial for efficient tax policy; policies tightly targeted to the lowest income earners have a much higher efficiency than those available higher in the income distribution. Within tax policies, tax credits aimed at employers are the most efficient, and tax credits aimed at employees are the least efficient, because the single greatest determinant of insurance coverage is being offered insurance by your employer, and because most employees who are offered already take up that insurance. Tax credits targeted at non-group coverage are fairly similar to employer tax credits at low levels, but much less efficient at higher levels.
    JEL: H2 I1
    Date: 2004–12
  11. By: John A. Weymark (Department of Economics, Vanderbilt University)
    Abstract: James Buchanan (Economica, 1966) has argued that Alfred Marshall's theory of jointly-supplied goods can be extended to analyze the allocation of impure public goods. This article introduces a way of modelling sharing technologies for jointly-supplied goods that captures the essential features of Buchanan's proposal. Public and private goods are special cases of shared goods obtained by appropriately specifying the sharing technology. Necessary conditions for an allocation in a shared goods economy to be Pareto optimal are identified and related to the optimality conditions for public and private goods.
    Keywords: Impure public goods, shared goods, Pareto optimality
    JEL: H41
    Date: 2003–02
  12. By: Antoine Bommier; Ronald Lee; Timothy Miller; Stephane Zuber
    Abstract: Public transfer programs in industrial nations have massive long term fiscal imbalances, and apparently permit the elderly to benefit through pension and health care programs at the cost of the young and future generations. However, the intergenerational picture is turned upside down when public education is included in generational accounts along with pensions and health care. We calculate the net present value (NPV) of benefits received minus taxes paid for US generations born 1850 to 2090, and find that all generations born from 1950 to 2050 are net gainers, while many of today's old people are net losers. Windfall gains for early generations when Social Security and Medicare started up partially offset windfall losses when public education was started, roughtly consistent with the Becker-Murphy theory.
    JEL: H0
    Date: 2004–12
  13. By: Jeffrey R. Brown; Amy Finkelstein
    Abstract: We show that the provision of even incomplete public insurance can substantially crowd out private insurance demand. We examine the interaction of the public Medicaid program with the private market for long-term care insurance and estimate that Medicaid can explain the lack of private insurance purchases for at least two-thirds and as much as 90 percent of the wealth distribution, even if comprehensive, actuarially fair private policies were available. Medicaid's large crowd out effect stems from the very large implicit tax (on the order of 60 to 75 percent for a median wealth individual) that Medicaid imposes on the benefits paid from private insurance policies. Importantly, Medicaid itself provides an inadequate mechanism for smoothing consumption for most individuals, so that its crowd out effect has important implications for overall risk exposure. An implication of our findings is that public policies designed to stimulate private insurance demand will be of limited efficacy as long as Medicaid continues to impose this large implicit tax.
    JEL: H4 H51 I11 J14
    Date: 2004–12
  14. By: Aronsson, Thomas (Department of Economics, Umeå University)
    Abstract: This paper contributes to the theory of social accounting. As such, it tries to extend earlier literature on the welfare equivalence of the comprehensive net national product in two main directions, both of which refer to the public sector. One is by considering welfare measurement problems associated with redistributive policy and public good provision, when the public revenues are raised by distortionary taxes. The other is by addressing the consequences of a 'federation-like' decision structure, where independent tax and expenditure decisions are made both by the central government and by lower level governments. In particular, the analysis shows how so called vertical fiscal external effects, which are associated with tax base sharing among the central and lower level governments, contribute to social accounting.
    Keywords: Welfare measurement; second best; public goods; economic federations
    JEL: H21 H23 H41 H70 I31
    Date: 2004–12–13
  15. By: Robert B Archibald (College of William & Mary); David H Feldman (College of William & Mary)
    Abstract: Public effort in support of higher education – measured as state funding per thousand dollars of personal income – has declined by thirty percent since the late 1970s. During this time period many states implemented Tax and Expenditure Limits and/or supermajority requirements for tax increases. We use a forty-eight state panel from 1961 to 2001 to evaluate the effect of these tax revolt institutions for state effort on behalf of higher education. These provisions have a statistically significant and economically large impact on the timing and magnitude of this decline in state effort. An understanding of the fiscal environment caused by these provisions is critical for the future of state-supported higher education.
    Keywords: State higher education spending, tax revolt, Tax and Expenditure Limits
    JEL: I22 H71
    Date: 2004–12–10
  16. By: Ralph C Bayer (University of Adelaide)
    Abstract: This paper re-examines the individual income tax evasion decision in the simple framework introduced by Allingham and Sandmo (1972), where the individual taxpayer decides how much of his income is invested in a safe asset (reported income) and in a risky asset (concealed income). These early models could not convincingly reproduce the empirically observed positive influence of higher tax rates and higher gross income on tax evasion simultaneously. We replace the standard assumption that risk aversion is the factor limiting the extent of evasion by assuming risk neutral taxpayers and argue that this is a reasonable approximation. The observation that concealing income is costly leads to the conclusion that, instead of risk aversion, evasion costs (such as concealment expenses and moral cost) might be the factors that limit tax evasion. We reproduce the stylized facts not explained by older models for very general tax and penalty schemes, including those where the standard model definitely fails to do so.
    Keywords: Tax Evasion, Risk Preferences, Moral Constraints
    JEL: H26
    Date: 2004–12–14

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