nep-pbe New Economics Papers
on Public Economics
Issue of 2005‒03‒13
sixteen papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Savers, Spenders and Fiscal Policy in a Small Open Economy By Egil Matsen; Tommy Sveen; Ragnar Torvik
  2. Trialing incentive based policy to control dryland salinity in the Bet Bet Catchment, north central Victoria. By Jeffery Connor; John Ward
  3. Urban Transport Pricing Reform With Two Levels Of Government By Stef Proost; Akshaya Sen
  4. Public Debt Indexation and Denomination, The Case of Brazil: A Comment By Rubens Penha Cysne
  5. Optimal Redistributive Taxation when Government’s and Agents’ Preferences Differ By Blomquist, Sören; Micheletto, Luca
  6. The Effect of Fiscal Policy and Corruption Control Mechanisms on Firm Growth and Social Welfare: Theory and Evidence By Bernard Gauthier; Jean-Paul Azam; ; Jonathan Goyette;
  7. An assessment of PenSim2 By Carl Emmerson; Howard Reed; Andrew Shephard
  8. Updating the UK's code for fiscal stability By Carl Emmerson; Chris Frayne; Sarah Love
  9. Effectiveness of tax incentives to boost (retirement) saving: theoretical motivation and empirical evidence By Orazio Attanasio; James Banks; Matthew Wakefield
  10. Household Nash equilibrium with voluntarily contributed public goods By Valérie Lechene; Ian Preston
  11. The Employment Effects of Job Creation Schemes in Germany: A Microeconometric Evaluation By Caliendo, Marco; Hujer, Reinhard; Thomsen, Stephan L.
  12. The Effect of Income Taxation on Consumption and Labor Supply By James P. Ziliak; Thomas J. Kniesner
  13. Redistribution via Taxation: The Limited Role of the Personal Income Tax in Developing Countries By Richard M. Bird; Eric M. Zolt
  14. On the role of inequalities and public education expenditures in human capital investment : a theoretical approach By Mohamed Ben Mimoun
  15. Does endogenous formation of jurisdictions lead to wealth stratification ? By Nicolas Gravel; Sylvie Thoron
  16. Proportional Income Taxation and Effective Progressivity By Udo Ebert; Patrick Moyes

  1. By: Egil Matsen (Norwegian University of Science and Technology and Norges Bank); Tommy Sveen (Norges Bank); Ragnar Torvik (Norwegian University of Science and Technology and Norges Bank)
    Abstract: This paper analyzes the effects of fiscal policy in an open economy. We extend the savers-spenders theory of Mankiw (2000) to a small open economy with endoge- nous labor supply. We first show how the Dornbusch (1983) consumption-based real interest rate for open economies is modified when labor supply is endogenous. We then turn to the effects of fiscal policy when there are both savers and spenders. With this heterogeneity taken into account, tax cuts have a short-run contractionary effect on domestic production, and increased public spending has a short-run expan- sionary effect. Although consistent with recent empirical work, this result contrasts with those of most other theoretical models. Transitory changes in demand have per- manent real effects in our model, and we discuss the implications for real exchange- rate dynamics. We also show how "rational" savers may magnify or dampen the responses of "irrational" spenders, and show how this is related to features of the utility functions.
    Keywords: rule-of-thumb consumers, fiscal policy, open economy
    JEL: E21 E62 F41
    Date: 2004–12–29
  2. By: Jeffery Connor (Policy and Economics Research Unit,CSIRO Land and Water); John Ward (Policy and Economics Research Unit,CSIRO Land and Water)
    Abstract: Proceedings of the Salinity Solutions Conference "Working with Science and Society" 2 – 5 August 2004, Bendigo, Victoria.
    Keywords: Australia;salinity;environmental management
    JEL: Q0 Q1 Q2
    Date: 2004–08
  3. By: Stef Proost (K.U.Leuven-Center for Economic Studies; UCL - CORE); Akshaya Sen
    Abstract: This paper analyses two challenges in the reform of urban transport pricing. The first challenge is the construction of an optimal package of urban transport pricing instruments assuming one benevolent government level that maximizes overall welfare. We examine the welfare gains from implementing in succession better parking prices, improved public transport prices and time varying tolling. It is found that parking and tolling are the most important elements of the optimal package and that the alternative policy instruments are sub-additive in their benefits. The second problem studied is the use of these pricing instruments by different government levels. We examine a case where an urban government controls parking fees and the regional government controls the tolling. Although both government levels have different objective functions, we find that the overall efficiency losses in the Nash and Stackelberg equilibria are limited.
    JEL: R48 H71 H21
    Date: 2005–03
  4. By: Rubens Penha Cysne (EPGE/FGV)
    Date: 2005–03
  5. By: Blomquist, Sören (Department of Economics); Micheletto, Luca (Department of Economics)
    Abstract: Paternalism, merit goods and specific egalitarianism are concepts we sometimes meet in the literature. The thing in common is that the policy maker does not fully respect the consumer sovereignty principle and design policies according to some other criterion than individuals’ preferences. Using the self-selection approach to tax problems developed by Stiglitz (1982) and Stern (1982), the paper provides a characterization of the properties of an optimal redistributive mixed tax scheme in the general case when the government evaluates individuals’ well-being using a different utility function than the one maximized by private agents.
    Keywords: optimal taxation; behavioral economics; paternalism; merit goods; non-welfarism
    JEL: H21 H23
    Date: 2005–02–21
  6. By: Bernard Gauthier (IEA, HEC Montréal); Jean-Paul Azam; ; Jonathan Goyette (IEA, HEC Montréal);
    Abstract: The paper investigates the conflict that arises between the government, its bureaucrats and businesses in the tax collection process. We examine the effect of fiscal policy and corruption control mechanisms on the prevalence of tax evasion and corruption behaviour, and their impact on firm growth and social welfare. We first model a situation where bureaucrats are homogeneous and have complete negotiating power over the firms with which they interact. We show that in such a situation the government can set an optimal tax rate and put in place a corruption control mechanism involving detection of corrupt bureaucrats within the framework of a no-corruption equilibrium. However, when the public administration is composed of heterogeneous types of bureaucrats with the specific ability to impose red tape costs on firms, we show, like Acemoglu and Verdier (2000), that it might be best for the government to allow a certain level of corruption, given the cost of monitoring activities. We also show that the government could face lose-lose as well as win-win situations in the conduct of its fiscal policies. We then verify the predictions of the model using firm-level data collected from 243 businesses in Uganda. We test the effect of monitoring on bribe and tax payments. We also test the effect of tax rates and corruption control mechanisms on firm growth. We compare the effect of actual corruption (as measured by bribe payments) with the effect of government corruption expectations on firms’ growth.
    Keywords: Corruption, Tax evasion, Tax administration, Firm growth
    Date: 2004–11
  7. By: Carl Emmerson (Institute for Fiscal Studies); Howard Reed (Institute for Fiscal Studies); Andrew Shephard (Institute for Fiscal Studies)
    Abstract: The Department for Work and Pensions (DWP)’s Pensim2 model is a dynamic microsimulation model. The principal purpose of this model is to estimate the future distribution of pensioner incomes, thus enabling analysis of the distributional effects of proposed changes to pension policy. This paper presents the results of an assessment of Pensim2 by researchers at the IFS. We start by looking at the overall structure of the model, and how it compares with other dynamic policy analysis models across the world. We make recommendations at this stage as to how the overall modelling strategy could be improved. We then go on to analyse the characteristics of most of the individual modules which make up Pensim2, examining the data used and the regression and predictions used in each step. The results from this examination are used to formulate a set of short and medium-term recommendations for developing and improving the model. Finally, we look at what might become possible for the model over a much longer time frame – looking towards developing a ‘Pensim3’ model over the next decade or so.
    Keywords: pensions; microsimulation; policy analysis
    JEL: H55
    Date: 2004–12
  8. By: Carl Emmerson (Institute for Fiscal Studies); Chris Frayne (Institute for Fiscal Studies); Sarah Love (Institute for Fiscal Studies)
    Abstract: The 1998 Code for Fiscal Stability sets out the framework within which UK fiscal policy is now set. While having such a code does not make it easier for a Government to meet its fiscal objectives, it may improve the economic credibility of the policy process. To date the Code has generally worked well, and in any case many of the Treasury’s practices exceed the minimum requirements of the Code. However, improvements could be made in the light of recent experiences. In particular it would be preferable for less emphasis to be placed on the precise forecasts for fiscal aggregates and greater emphasis to be placed on the magnitude of the risks to those forecasts. Using the projections contained in the March 2004 Budget, and information on the size of errors made in the past, we estimate that there is now a 60% chance that the Chancellor’s “golden rule” will be met without further tax increases or spending cuts. This compares to 74% for the forecast made by the Treasury 12 months earlier. As well as clarifying how cautious forecasts are, the uncertainty surrounding projections for fiscal aggregates also has implications for the way in which progress towards any fiscal rules should be interpreted.
    JEL: E62 H62
    Date: 2004–11
  9. By: Orazio Attanasio (Institute for Fiscal Studies and University College London); James Banks (Institute for Fiscal Studies and University College London); Matthew Wakefield (Institute for Fiscal Studies)
    Abstract: The adequacy of household saving for retirement has become a policy issue all around the world. The UK and US have been in the vanguard of those countries that have tried to encourage retirement saving by providing tax-favoured treatment for particular savings accounts. We consider empirical evidence from these two countries regarding the extent to which funds in some specific tax advantaged accounts (IRAs in the US, TESSAs and ISAs in the UK) represent new savings. Our best interpretation of this evidence is that: only relatively small fractions of these funds can be considered to be "new" saving and so these policies have been an expensive means of encouraging saving; there has been some deadweight loss from the policies associated with "reshuffling" of existing savings. Continuing improvements in data on individual financial behaviour create scope for future empirical analysis of incentives to save, both within the standard economic framework that we explain and exploit, and by considering extensions to and adaptations of it.
    Keywords: Saving, tax incentives to save, lifecycle model, household behaviour
    JEL: D91 H39
    Date: 2004–12
  10. By: Valérie Lechene (Institute for Fiscal Studies and Wadham College, Oxford); Ian Preston (Institute for Fiscal Studies and University College London)
    Abstract: We study noncooperative models with two agents and several voluntarily contributed public goods. We focus on interior equilibria in which neither agent is bound by non negativity constraints, establishing the conditions for existence and uniqueness of the equilibrium. While adding-up and homogeneity hold, negativity and symmetry properties are generally violated. We derive the counterpart to the Slutsky matrix, and show that it can be decomposed into the sum of a symmetric and negative semidefinite matrix and another the rank of which never exceeds the number of public goods plus one. Under separability of the public goods the deviation from symmetry is at most rank two.
    Keywords: Nash equilibrium, Intra-household allocation, Slutsky
    JEL: D11 C72
    Date: 2005–03
  11. By: Caliendo, Marco (DIW Berlin and IZA Bonn); Hujer, Reinhard (University of Frankfurt, ZEW Mannheim and IZA Bonn); Thomsen, Stephan L. (University of Frankfurt)
    Abstract: In this paper we evaluate the employment effects of job creation schemes on the participating individuals in Germany. Job creation schemes are a major element of active labour market policy in Germany and are targeted at long-term unemployed and other hard-to-place individuals. Access to very informative administrative data of the Federal Employment Agency justifies the application of a matching estimator and allows to account for individual (group-specific) and regional effect heterogeneity. We extend previous studies in four directions. First, we are able to evaluate the effects on regular (unsubsidised) employment. Second, we observe the outcome of participants and non-participants for nearly three years after programme start and can therefore analyse mid- and long-term effects. Third, we test the sensitivity of the results with respect to various decisions which have to be made during implementation of the matching estimator, e.g. choosing the matching algorithm or estimating the propensity score. Finally, we check if a possible occurrence of 'unobserved heterogeneity' distorts our interpretation. The overall results are rather discouraging, since the employment effects are negative or insignificant for most of the analysed groups. One notable exception are long-term unemployed individuals who benefit from participation. Hence, one policy implication is to address programmes to this problem group more tightly.
    Keywords: evaluation, matching, sensitivity analysis, job creation schemes, long-term unemployed
    JEL: J68 H43 C13
    Date: 2005–03
  12. By: James P. Ziliak; Thomas J. Kniesner (Center for Policy Research, Maxwell School, Syracuse University)
    Abstract: We estimate the incentive effects of income taxation in a life-cycle model of consumption and labor supply that relaxes the standard assumption of strong separability within periods. Our model permits identification of both within-period preference parameters and life-cycle preference parameters such as the inter-temporal substitution elasticity. Results indicate that consumption and hours worked are direct complements in utility, and both increase with an increase in the after-tax share and with a compensated increase in the net wage. The compensated net wage elasticity is about 0.3, nearly double the standard estimates for men in the United States that ignore within-period non-separability between consumption and hours and rely on linear preferences. Given our estimated inter-temporal elasticity of substitution of about -0.96, the Frisch specific substitution elasticities of consumption and labor supply with respect to the after-tax wage are about 0.1 and 0.5, indicating significant inter-temporal smoothing of utility. Depending on consumption measure, static estimates of the marginal welfare cost of revenue-neutral taxation are 6-20 percent, which is about half the estimated welfare cost when additivity between consumption and leisure is incorrectly imposed. [Revised November 2004]
    JEL: J22 H20
    Date: 2003–04
  13. By: Richard M. Bird (International Tax Program, Rotman School of Management, University of Toronto); Eric M. Zolt (University of California, Los Angeles)
    Abstract: In developed countries, the income tax, especially the personal income tax, has long been viewed as the primary instrument for redistributing income and wealth. This article examines whether it makes sense for developing countries to rely on the income tax for redistributive purposes. We put forth three propositions. First, the personal income tax has done little to reduce inequality in many developing countries. This failure is not surprising given that in many countries personal income taxes are neither comprehensive nor very progressive - they often amount to little more than withholding taxes on labor income in the formal sector. Moreover, the personal income tax plays such a small role in the tax systems of developing countries that it would be unrealistic to believe that this tax could have a meaningful impact on distribution. Second, it is not costless to pretend to have a progressive personal income tax system. Tax systems generate real administrative, compliance, economic efficiency and political costs. The costs associated with badly designed and badly administered personal income tax systems likely exceed the costs associated with other taxes. There are opportunity costs as well. Third, given the ineffectiveness of the personal income tax, if countries want to use the fiscal system to reduce poverty or reduce inequality, alternative approaches merit consideration. Countries need to make better use of their expenditure programs in targeting resources to the poor. Given the dominance of taxes on consumption in the tax structure of developing countries, the distributional consequences of consumption taxes are of far greater importance than those of the personal income tax. Countries can also make greater use of benefit taxation and in particular fiscal decentralization may allow for better matching of those who benefit and those who pay for government activity. Finally, countries can consider alternatives to taxing income other than the current comprehensive income approach.
    Keywords: redistribution, progressivity, developing countries, tax policy, personal income tax, benefit taxation
    JEL: H22 H24 O15 O17 O23
  14. By: Mohamed Ben Mimoun (TEAM)
    Abstract: We show in this paper that greater inequality in the distribution of wealth implies lower investment in higher education levels and lower aggregate income. Liquidity constraints and indivisibility in human capital investment result in the long-run in multiple equilibria with poverty traps. Although the heterogeneity in individual abilities allows economic mobility is not full : poor individuals with low abilities remain poor forever. The effect of the fiscal redistribution on the level of human capital investment is ambiguous unless for higher levels of income inequality where this effect is positive. Education funding policies however, are shown to be more efficient in enhancing human capital investment and rising interclass and intergenerational economic mobility.
    Keywords: Wealth inequality; human capital; economic mobility; fiscal redistribution; public education expenditures
    JEL: H52 I21 I22 I28 O15
    Date: 2004–11
  15. By: Nicolas Gravel (IDEP-GREQAM and Université de la Méditerranée); Sylvie Thoron (GREQAM and Université de Toulon)
    Abstract: This paper examines the validity of the “folk” intuition that endogenous formation of jurisdictions is likely to create stratification of households according to their wealth. More specifically, we examine a simple model of jurisdiction formation, close in spirit to that of Whestoff ([27]), in which a continuum of unequally wealthy households endowed with the same preferences for one public good and one private good make a location decision in a finite set. Households who choose the same location form a jurisdiction. Within each jurisdiction, the public good is financed by a proportional wealth tax whose rate is decided by a social choice mechanism. The only assumption imposed on the mechanism is to select the most preferred tax rate of one member of the jurisdiction. We define a jurisdiction structure to be stable if it gives to no household any incentive to move away from its jurisdiction. We raise the question of whether stable jurisdiction structures will be stratified in the precise sense that if two households belong to one jurisdiction, then so do all households with intermediate wealth. We provide a necessary and, if households preferences satisfy an additional regularity property, sufficient condition on the households preferences that guarantees that any stable jurisdictions structure involves stratification in this sense. The condition is that the household’s most preferred tax rate must be a strictly monotonic function of its wealth.
    Date: 2003–05
  16. By: Udo Ebert (Institut fur Volkswirtschaftslehre, Carl von Ossietzky Universität Oldenburg); Patrick Moyes (CNRS, IDEP and GRAPE, Universite Montesquieu Bordeaux IV)
    Abstract: When incomes are exogenously given, a progressive tax structure reduces inequality in the sensethat the Lorenz curve of after tax incomes is nowhere below that of before tax incomes whatever the circumstances as it was shown by U. Jakobsson (Journal of Public Economics 5 (1976), 161-168) The relevance of this standard result is however seriously limited since real-world incomes are determined by the working decisions of the agents in the economy. The paper aims at investigating the implications for e_ective progression of relaxing the assumption of exogenous incomes when individuals have the same preferences but di_erent talents. We _rst extend the standard result to the case where agents' working decisions are fully taken into account and we conclude that it is generally impossible to disentangle the respective contributions to inequality reduction of the tax schedule and agents' preferences. We next demonstrate that an elasticity of labour supply which is non-decreasing in productivities is both necessary and su_cient for a proportional tax schedule to result in less unequally distributed incomes. Journal of Economic Literature
    Keywords: Endogenous incomes, Labour supply, Redistribution, Taxation, Inequality, Progressivity
    JEL: H23 H24 D63
    Date: 2003–09

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