nep-pbe New Economics Papers
on Public Economics
Issue of 2005‒05‒23
twenty papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Monopoly, asymmetric information, and optimal environmental taxation By Manel Antelo
  2. Do Daily Retail Gasoline Prices adjust Asymmetrically? By Leon Bettendorf; Stephanie van der Geest; Gerard Kuper
  3. Fiscal incidence of unfunded pension system: an analytical investigation By Vincent Touzé
  4. Optimal minimum wage in a competitive economy By Arantza Gorostiaga; Juan Francisco Rubio-Ramírez
  5. Tax policy design in the presence of social preferences: some experimental evidence By Lucy F. Ackert; Jorge Martinez-Vazquez; Mark Rider
  6. Fiscal policy and minimum wage for redistribution: an equivalence result By Arantza Gorostiaga; Juan Francisco Rubio-Ramírez
  7. Massachusetts business taxes: unfair? inadequate? uncompetitive? By Robert Tannenwald
  8. Lifecycle consistent estimation of effect of taxes on female labor supply in the US: evidence from panel data By Anil Kumar
  9. Nonparametric estimation of the impact of taxes on female labor supply By Anil Kumar
  10. Precautionary savings motives and tax efficiency of household portfolios: an empirical analysis By Gene Amromin
  11. Optimal inflation persistence: Ramsey taxation with capital and habits By Sanjay Chugh
  12. Taxation, entrepreneurship and wealth By Marco Cagetti; Mariacristina De Nardi
  13. An analytical model of required returns to equity under taxation with imperfect loss offset By Lund, Diderik
  14. Is Marriage Poisonous? Are Relationships Taxing? An Analysis of the Male Marital Wage Differential in Denmark By Nabanita Datta Gupta; Nina Smith; Leslie S. Stratton
  15. Ageing, welfare services and municipalities in Finland By Jens Lundsgaard
  16. Nuevos instrumentos de política ambiental By Joan Pasqual Rocabert
  17. State Regulations, Job Search and Wage Bargaining: A Study in the Economics of the Informal Sector By Maxim Bouev; ;
  18. How the gold standard functioned in Portugal: an analysis of some macroeconomic aspects By António Portugal Duarte; João Sousa Andrade
  19. Capital Stock Depreciation, Tax Rules, and Composition of Aggregate Investment By Daniel Levy
  20. Estate Taxes and Charitable Bequests: Evidence from Two Tax Regimes By David Joulfaian

  1. By: Manel Antelo (Universidad de Santiago de Compostela)
    Abstract: This paper aims to examine optimal environmental taxation in an incomplete-information two-period model in which a monopolistic firm produces and pollutes. It is assumed that the polluting firm is privately informed about its costs of production, and the policymaker, which can only infer the firm's costs from observing the output produced in the first period, has the chance to set environmental taxes to affect emissions; the emitter of pollution may then choose a non-optimal level of production in such a period in order to manipulate the policymaker's beliefs concerning its costs. If the policymaker values environmental quality sufficiently, the low-cost polluter has an incentive to misrepresent itself as a high-cost firm in order to secure a low environmental tax in the second period. This leads the high-cost polluting firm to produce, in the first period, an output level that is not higher than output which would be optimal if only short-term considerations were taken into account. The optimal environmental tax rate in the first period, when the firm's output is a signal of its cost, is then lower than or equal to what it would be if the firm's output was not a signal of firm's costs. The expected emissions in the former context are also lower than or equal to those in the latter case. By contrast, when the policymaker's valuation of the environment is sufficiently low, the environmental tax is negative (a subsidy per unit of pollutant emitted) in both the signaling and non-signaling contexts and no less in the former context than in the latter.
    Keywords: Environmental tax and subsidy policy, monopolistic polluting firm, vertical asymmetric information, signaling and non-signaling
    JEL: D62 D82 L13
    Date: 2005
  2. By: Leon Bettendorf (Faculty of Economics, Erasmus Universiteit Rotterdam); Stephanie van der Geest (Faculty of Economics, Erasmus Universiteit Rotterdam); Gerard Kuper (University of Groningen)
    Abstract: This paper analyzes adjustments in the Dutch retail gasoline prices. We estimate an error correction model on changes in the daily retail price for gasoline (taxes excluded) for the period 1996-2004 taking care of volatility clustering by estimating an EGARCH model. It turns out the volatility process is asymmetrical: an unexpected increase in the producer price has a larger effect on the variance of the producer price than an unexpected decrease. We do not find strong evidence for amount asymmetry. However, there is a faster reaction to upward changes in spot prices than to downward changes in spot prices. This implies timing or pattern asymmetry. This asymmetry starts three days after the change in the spot price and lasts for four days.
    Keywords: Asymmetry; Retail gasoline prices; Volatility
    JEL: D43 E31
    Date: 2005–04–22
  3. By: Vincent Touzé (Observatoire Français des Conjonctures Économiques)
    Abstract: This paper deals with the particular fiscal incidence induced by an unfunded pension system. That consists to understand how the financing and the calculus of pensions modify the transitory and long run macroeconomic dynamics. We develop an OLG model with endogenous labour supply in an economy with productive capital. A tax on the labour income is used to finance pensions. During the retirement, a part of the amount of the pension is exogenous and the other part is linked to the contributive effort during the working period. The method of analysis is not numerical but analytical. The results concern the identification of the steady state and the transitory dynamics. Then we proceed to a sensitive study of the dynamics with respect to changes of the payroll tax or the degree of contribution.
    Keywords: monetary retirement, labor income tax, OLG models.
    JEL: D91 H55 J26
    Date: 2005
  4. By: Arantza Gorostiaga; Juan Francisco Rubio-Ramírez
    Abstract: This paper studies the use of a minimum wage law to implement the optimal redistribution policy when a distorting tax-transfer scheme is also available. The authors build a static general equilibrium model with a Ramsey planner making decisions on taxes, transfers, and minimum wage levels. Workers are assumed to differ only in their productivity. The authors find that optimal redistribution may imply the use of only taxes and transfers, only a minimum wage, or the proper combination of both policies. The key factor driving their results is the reaction of the demand for low-skilled labor to the minimum wage law. Hence, an optimal minimum wage appears to be most likely when low-skilled households are scarce, the complementarity between the two types of workers is large, or the difference in productivity is small.
    Date: 2004
  5. By: Lucy F. Ackert; Jorge Martinez-Vazquez; Mark Rider
    Abstract: This paper reports the results of experiments designed to examine whether a taste for fairness affects people’s preferred tax structure. Building on the Fehr and Schmidt (1999) model, we devise a simple test for the presence of social preferences in voting for alternative tax structures. The experimental results show that individuals demonstrate concern for their own payoff and inequality aversion in choosing among alternative tax structures. However, concern for redistribution decreases when it leads to increasing deadweight losses. Our findings have important implications for the design of optimal tax theory.
    Date: 2004
  6. By: Arantza Gorostiaga; Juan Francisco Rubio-Ramírez
    Abstract: In this paper, we derive conditions under which a minimum-wage law combined with anonymous taxes and transfers and an agent-specific tax-transfer scheme are equivalent policies.
    Date: 2005
  7. By: Robert Tannenwald
    Abstract: In debating Massachusetts business tax policy, protagonists have cited many different indicators purporting to assess the fairness, adequacy, and competitiveness of the Commonwealth’s business taxes. These statistics actually reveal very little about the degree to which Massachusetts business taxes achieve these widely accepted tax policy goals. The author explains why these indicators are misleading and presents new indicators of business tax competitiveness that, although imperfect, are more accurate than those most widely quoted. The article concludes that the fairness of Massachusetts business taxes is unclear and that the Commonwealth’s corporate income taxes are inadequate. The clearest conclusion drawn is that Massachusetts business taxes do not harm its competitive standing.
    Keywords: Business tax - Massachusetts
    Date: 2004
  8. By: Anil Kumar
    Abstract: Very few existing studies have estimated female labor supply elasticities using a U.S. panel data set, though cross-sectional studies abound. Also, most existing studies have modeled female labor supply in the U.S. in a static framework. I make an attempt to fill the gap in this literature, by estimating a lifecycle-consistent specification with taxes, in a limited dependent variable framework, on a panel of married females from the PSID. Both parametric random effects and semiparametric fixed effects methods are applied. The estimate of compensated elasticity for females in the sample is 0.63 (with a standard error of 0.14). These estimates are fairly robust to the choice of both random effects and semiparametric fixed effect estimators and also to the choice of instruments for the endogenous net wage and virtual full income. I estimate exact deadweight loss from taxes and find that deadweight loss from a 20 percent increase in the marginal tax rate is about 18 percent of tax revenue collected, evaluated at the sample mean.
    Keywords: Labor supply ; Women - Employment ; Wages
    Date: 2005
  9. By: Anil Kumar
    Abstract: Econometric models with nonlinear budgets sets frequently arise in the study of impact of taxation on labor supply. Blomquist and Newey (2002) have suggested a nonparametric method to estimate the uncompensated wage and income effects when the budget set is nonlinear. This paper extends their nonparametric estimation method to censored dependent variables. The modified method is applied to estimate female wage and income elasticities using the 1987 PSID. I find evidence of bias if the nonlinearity in the budget set is ignored. The median compensated elasticity is estimated at 1.19 (with a standard error of 0.19).
    Keywords: Labor supply ; Women - Employment ; Wages
    Date: 2005
  10. By: Gene Amromin
    Abstract: Tax efficiency is the dominant consideration in theoretical portfolio models that allow for both taxable and tax-deferred accounts (TDAs). Investors are advised to locate higher-tax assets in their tax-deferred accounts, which in the Unites States commonly translates into "holding bonds inside TDAs and holding equities outside." Yet, observed portfolio allocations are not tax efficient. This paper empirically evaluates the predictions of a recent model designed to bridge the existing gap by explicitly incorporating uninsurable labor income risk and limited accessibility of TDA assets in household decisions [Amromin, 2003]. Together, these elements create tension between household's desire to maintain tax efficient allocations and its concern over the need to make costly TDA withdrawals in the event of bad income draws. This leads some borrowing-constrained households facing labor income risk and TDA access penalties to forgo tax efficiency in favor of allocations that provide more liquidity in bad income states--an outcome labeled as "precautionary portfolio choice." The empirical results based on household-level portfolio data from the Survey of Consumer Finances provide evidence that both the choice of whether to hold a tax efficient portfolio and the degree of portfolio tax inefficiency are related to the presence and severity of precautionary motives.
    Keywords: Households - Economic aspects ; Saving and investment
    Date: 2005
  11. By: Sanjay Chugh
    Abstract: Ramsey models of fiscal and monetary policy with perfectly-competitive product markets and a fixed supply of capital predict highly volatile inflation with no serial correlation. In this paper, we show that an otherwise-standard Ramsey model that incorporates capital accumulation and habit persistence predicts highly persistent inflation. The result depends on increases in either the ability to smooth consumption or the preference for doing so. The effect operates through the Fisher relationship: a smoother profile of consumption implies a more persistent real interest rate, which in turn implies persistent optimal inflation. Our work complements a recent strand of the Ramsey literature based on models with nominal rigidities. In these models, inflation volatility is lower but continues to exhibit very little persistence. We quantify the effects of habit and capital on inflation persistence and also relate our findings to recent work on optimal fiscal policy with incomplete markets.
    Keywords: Inflation (Finance) ; Econometric models ; Monetary policy
    Date: 2005
  12. By: Marco Cagetti; Mariacristina De Nardi
    Abstract: Entrepreneurship is a key determinant of investment, saving, wealth holdings, and wealth inequality. We study the aggregate and the distributional effects of several tax reforms in a model that recognizes the key role played by the entrepreneurs, and that matches very well the extreme degree of wealth inequality observed in the U.S. data. We find that the effects of tax reforms on output and capital formation can be particularly large when they affect the majority of small and medium-size businesses, which face the most severe financial constraints, rather than a small number of big businesses. We show that the consequences of changes in the estate tax depend heavily on the size of its exemption level. The current effective estate tax system seems to insulate most of the businesses from the negative effects of estate taxation thus minimizing the aggregate costs of redistribution. Abolishing the current estate tax would generate a modest increase in wealth inequality and slightly reduce aggregate output. Decreasing progressivity of the income tax can generate large increases in output, as this stimulates entrepreneurial savings and capital formation, but at the cost of large increases in wealth concentration.
    Date: 2004
  13. By: Lund, Diderik (Dept. of Economics, University of Oslo)
    Abstract: Lund (2002a) showed in a CAPM-type model how tax depreciation schedules affect required expected returns after taxes. Even without leverage higher tax rates implied lower betas when tax deductions were risk free. Here they are risky, and marginal investment is taxed together with inframarginal in an analytical model of decreasing returns. With imperfect loss offset tax claims are analogous to call options. The beta of equity is still decreasing in the tax rate, but increasing in the underlying volatility. The results are important if market data are used to infer required expected returns, and in discussions of tax design.
    Keywords: Corporate tax; depreciation; imperfect loss offset; cost of capital; uncertainty
    JEL: F23 G31 H25
    Date: 2005–05–15
  14. By: Nabanita Datta Gupta (Danish National Institute of Social Research, CIM and IZA Bonn); Nina Smith (Aarhus School of Business, CIM and IZA Bonn); Leslie S. Stratton (Virginia Commonwealth University, CIM and IZA Bonn)
    Abstract: The word for ‘married’ in Danish is the same as the word for ‘poison’. The word for 'sweetheart' in Danish is the same as the word for 'tax'. In this paper we expand upon the literature documenting a significant marital wage premium for men in the United States to see if a similar differential exists for married men in Denmark - or if the homonyms have perhaps less of a double meaning. Unlike most other research in this area, our study is based on a large panel sample with complete relationship histories, consisting of about 35,000 young Danish men observed before and after their first marriage or cohabitation during the years 1984-2001. Since the majority of young Danes cohabit before they marry, if they ever marry, cohabitation is allowed for as a separate state. Pooled OLS estimates indicate a marital wage premium of 4-5%, which drops to 2% after controlling for selectivity. The cohabitation premium is found to be of the same size as the marital wage premium. Our results indicate that a part of the marriage or cohabitation premium is not due to marriage or cohabitation itself, but to fatherhood. When information on becoming a father and years spent in fatherhood is added to the empirical model, the results show that fathers receive a ‘fatherhood’ premium during their first few years as fathers and that the initial marital wage premium is reduced.
    Keywords: marriage premium, cohabitation, fatherhood
    JEL: J12 J31
    Date: 2005–05
  15. By: Jens Lundsgaard
    Abstract: With population ageing setting in sooner and more forcefully than in other OECD countries, Finland needs to get its fiscal priorities right quickly. That will require considerable reform as public spending currently expands vigorously. While GDP growth has slowed from the exceptionally rapid pace of the late 1990s, public consumption has continued to grow fast, as new obligations by central government and popular demand led municipalities to expand service provision. After some consolidation in 2003, local government spending has accelerated again and the deficit has widened to ¾ per cent of GDP in 2004 for the municipalities considered as a whole – despite still larger transfers from central government. At the same time, the tax burden is high, especially on labour. Ensuring the sustainability of public finances over the long term, while maintaining the essential parts of the welfare society will only be possible by i) raising the effectiveness of public spending, ii) reforming the financing of municipalities to encourage better control of spending and limit future rises in municipal income taxation and iii) rebalancing the mix between public and private provision and funding of services. This working paper discusses ways in which progress could be made on such a policy agenda. It relates to the 2004 OECD Economic Survey of Finland ( updating the Survey’s analysis by incorporating data for 2004 and recent developments. <p> Vieillissement, services sociaux et collectivités locales en Finlande <p> Avec une population qui vieillit plus rapidement et plus fortement que dans les autres pays de l’OCDE, la Finlande se trouve dans l’obligation d’ajuster rapidement ses priorités budgétaires. Il faudra pour cela des réformes considérables, car l’expansion des dépenses publiques est actuellement très forte. Bien que la croissance du PIB se soit ralentie par rapport à son rythme exceptionnellement rapide du début des années 90, la consommation publique a continué à progresser rapidement, les nouvelles obligations imposées par l’administration centrale et par la pression des usagers ayant amené les municipalités à accroître leur offre de services publics. Après une certaine stabilisation en 2003, les dépenses des collectivités locales se sont à nouveau accélérées et le déficit a été porté à ¾ pour cent du PIB en 2004 pour les municipalités considérées dans leur ensemble – malgré le versement de transferts encore plus importants par l’administration centrale. Quant à la charge fiscale, elle reste élevée, surtout celle qui pèse sur la main d’œuvre. Il ne sera possible d’assurer la stabilisation à long terme des finances publiques tout en maintenant les éléments essentiels de la protection sociale qu’à condition i) d’améliorer l’efficacité des dépenses publiques, ii) de réformer le financement des communes pour les inciter à mieux contrôler leurs dépenses et limiter les augmentations futures de l’impôt municipal sur le revenu et iii) de rééquilibrer le partage entre le secteur public et le secteur privé dans l’offre et dans le financement des services publics. Ce document de travail examine les moyens de progresser dans la réalisation de ce programme. Il se réfère à l’Etude économique de 2004 de l’OCDE sur la Finlande ( et met à jour les analyses effectuées dans cette étude en y insérant des données pour 2004 et en prenant en compte l’évolution récente.
    Keywords: Fiscal policy; fiscal federalism; local governments; property tax; income tax; public sector efficiency; welfare services; contracting out; vouchers; ageing; pensions; Finland
    JEL: H2 H4 H5 H7 L3
    Date: 2005–05–10
  16. By: Joan Pasqual Rocabert (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona)
    Abstract: El propósito de este papel es describir los principales instrumentos económicos que pueden utilizarse en la política medio ambiental. Se examinan críticamente las soluciones clásicas, sin olvidar las espurias. Se introduce el tiempo en el análisis, se examina la importancia de la tasa de descuento en el cálculo económico y se presenta el concepto de economías de duración, para estudiar el conflicto entre los intereses individuales y el social y generar propuestas de solución. Se presta especial atención al conflicto entre los intereses de las generaciones presentes y las futuras, apuntando algunas vías para solventarlo.
    Keywords: externalidades, bienes públicos, medio ambiente, desarrollo sostenible,generaciones futuras
    JEL: H23 H41 H43
    Date: 2005–05
  17. By: Maxim Bouev; ;
    Abstract: This paper analyses the emergence of the informal economy in the environment characterised by non-competitive labour markets with wage bargaining. We develop a simple extension of the standard search model à la Pissarides (2000) with formal and informal sectors to show how a government’s auditing of informal firms and barriers to firms’ entry erected in the formal sector by corrupt bureaucracy can make for stable coexistence of formal and informal jobs in the long term. In equilibrium, wage differentials for homogeneous and risk-neutral workers emerge because different types of jobs have different lifetimes and/or have different creation costs. The former are explained by the auditing activities of the government that in the simple set-up destroy informal matches, while keeping formal jobs intact; the latter are due to varying capital costs, or costs associated with red tape and bureaucratic extortion (bribing). Search frictions introduce rent sharing between firms and workers in both formal and informal sectors. This has an important implication for policy making. In particular, we show that if ceteris paribus a firms’ bargaining position vis-à-vis workers is stronger in the formal rather than in the informal sector, governments can afford to appropriate a larger part of a productive match surplus (e.g. by levying higher taxes), without endangering the qualitative outcome in the long run. Rent sharing also implies that both formal and informal sector employees may receive wages above marginal product. We investigate efficiency properties of an equilibrium with formal and informal jobs and discuss the role of the government in creating and eliminating such inefficiencies partially arising from a version of the hold-up problem (Grout, 1984). Some lessons are drawn for normative analyses of policies aimed at reduction of informality in set-ups with non-competitive labour markets. In particular, the conditions are given under which a reduction in size of the informal sector is likely to be detrimental for economic welfare.
    Keywords: informal economy, regulations, wage bargaining, labour markets, search models
    JEL: E24 H26 J31 J41 J42 J64 O17
    Date: 2005–04–01
  18. By: António Portugal Duarte (Faculty of Economics - University of Coimbra & Group for Monetary & Financial Studies - GEMF); João Sousa Andrade (Faculty of Economics - University of Coimbra & Group for Monetary & Financial Studies - GEMF)
    Abstract: This paper studies the Gold Standard in Portugal. It was the first country in Europe to join Great Britain in 1854. The principle of free gold convertibility was abandoned in 1891. For the purposes of a macroeconomic study, we also extended the analysis up to 1913. Our study points out the mistake of comparing different systems with the same indicators. Examination of demand, supply and monetary shocks in the context of a VAR model confirm the idea that the principles of classical economics are appropriate for the Gold Standard in Portugal.
    Keywords: Gold Standard, Macroeconomic Stability, Convertibility, Portugal, VAR and Unit Roots
    JEL: B10 C32 E42 E58 F31 F33 N23
    Date: 2005–05–19
  19. By: Daniel Levy (Bar-Ilan University)
    Abstract: I estimate time varying aggregate capital stock depreciation rates for the post-war U.S. economy using capital-investment evolution equation along with the data on the annual net capital stock and corresponding quarterly gross investment series. I estimate depreciation rates of consumer durable goods, producer durable goods, and nonresidential business structures. The estimation results suggest that the three depreciation rate series have been behaving very differently over time. In particular, I find that over time the implied depreciation rate of nonresidential business structures has remained stable, the implied depreciation rate of consumer durable goods has been steadily declining, while the implied depreciation rate of producer durable goods has been increasing, especially during the last 10–15 years. These findings are interpreted in terms of the changes in the composition of the aggregate nonresidential business fixed and producer durable good capital stocks. In addition, I discuss the implications of the changes introduced during the 1980s in rules and regulations governing a depreciation accounting for tax purposes, and their effect on the estimates of capital depreciation rates derived in this paper. The main argument the paper makes is that technological progress may be leading to accelerated depreciation of producer durable goods and equipment since newer and more advanced technology makes older equipment obsolete. The empirical evidence reported in this paper supports this argument.
    Keywords: Time Varying Depreciation Rate, Capital Stock, Consumer Durable Goods, Producer Durable Goods, Business Structures, Technological Progress
    JEL: E22 C82
    Date: 2005–05–15
  20. By: David Joulfaian (Government of the United States, Department of the Treasury)
    Abstract: Much of the literature on the effects of estate taxation on charitable bequests has relied on cross sectional data, reflecting the uniqueness of death. Few have explored longitudinal data to exploit exogenous variations in tax regimes. The latter, however, continue to be susceptible to omitted variable as well as measurement error biases attributable to changes in the treatment of spousal bequests and frequent changes in tax regimes. This paper explores the effects of the estate tax on charitable bequests using administrative data from two tax regimes where earlier biases are minimized. The deductibility of charitable bequests is found to have significant implications for giving. However, the effects of estate tax repeal are much smaller. These findings are sensitive to expectations of the tax regime in effect at time of death.
    Keywords: Bequests, Taxes, Charitable Giving
    JEL: D19 H24 H31
    Date: 2005–05–14

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