nep-pbe New Economics Papers
on Public Economics
Issue of 2006‒02‒05
forty-two papers chosen by
Peren Arin
Massey University

  1. Monetary and fiscal policy switching By Troy Davig; Eric M. Leeper; Hess Chung
  2. Tax Competition Reconsidered By Amrita Dhillon; Myrna H. Wooders; Ben Zissimos
  3. Tax reform on the brink of fiscal dominance: a political economy model By Rogério Ladeira Furquim Werneck
  4. Comments on "The Optimal Supply of Public Goods and the Distortionary Cost of Taxation" By Dan Usher
  5. Lobbying, Spillovers and the Benefits of Decentralization By Cheikbossian, Guillaume
  6. Reforming Federal Fiscal Relations in Austria By Andrés Fuentes; Andreas Wörgötter; Eckhard Wurzel
  7. Endogenous Corruption and Tax Evasion in a Dynamic Model By Antonio Acconcia
  8. Local Public Good Provision, Municipal Consolidation, and National Transfers By Robert Dur; Klaas Staal
  9. Heterogenous Groups and Rent-Seeking for Public Goods By Cheikbossian, Guillaume
  10. Tax incentives and economic effects - a general equilibrium approach By Alexandre Porsse; Eduardo Haddad
  11. Adjustment costs and the neutrality of income taxes By Matt Benge; George Fane
  12. Risk Sharing and Efficiency Implications of Progressive Pension Arrangements By Hans Fehr; Christian Habermann
  13. Mad Cows, Terrorism and Junk Food: Should Public Policy Reflect Subjective or Objective Risks? By Johansson-Stenman, Olof
  14. Visibility of Public Budget Burdens and Benefits in New European Union Member Countries By Miguel Roig-Alonso
  15. Commodity Tax Reforms In A Many Consumers Economy: A Viable Decision-Making Procedure By Fabrizio Bulckaen and Marco Stampini
  16. Spatial dependence in models of state fiscal policy convergence By Cletus C. Coughlin; Thomas A. Garrett; Rubén Hernández-Murillo
  18. Corruption and the Shadow Economy: An Empirical Analysis By Axel Dreher; Friedrich Schneider;
  19. Taxing Non-Fixed Trusts By Elaine Abery
  20. The Attitudes of Tertiary Students on Tax Evasion and the Penalties for Tax Evasion - A Pilot Study and Demographic Analysis By Ken Devos
  21. IAS/IFRS in Belgium: Quantitative Analysis of the Impact on the Tax Burden of Companies. By Jacqueline Haverals
  22. Does Social Security Privatization Produce Efficiency Gains? By Shinichi Nishiyama; Kent Smetters
  23. Trans-Tasman Tax Reform: The Real Story By David G. Dunbar
  24. Examining the Effect of the Earned Income Tax Credit on the Labor Market Participation of Families on Welfare By V. Joseph Hotz; John Karl Scholz
  25. Bureaucratic Rents and Life Satisfaction By Simon Luechinger; Stephan Meier; Alois Stutzer
  26. Emotions, Morality and Public Goods: The WTA-WTP Disparity Revisited By Biel, Anders; Johansson-Stenman, Olof; Nilsson, Andreas
  27. Fiscal Implications of Demographic Uncertainty for the United Kingdom By Martin Weale; James Sefton
  28. Fiscal Design and the Location of Economic Activity By Ulrike Stierle-von Schütz
  29. Pension Insurance By Zvi Bodie
  30. Employer Matching and 401(k) Saving: Evidence from the Health and Retirement Study By Gary V. Engelhardt; Anil Kumar
  31. On the Long-term Economic and Budgetary Effects of Public-Sector Investment By Alfredo Marvão Pereira; Maria de Fátima Pinho; José da Silva Costa
  32. Productivity Effects and Determinants of the Allocation of Public Infrastructure By Fumitoshi Mizutani; Tomoyasu Tanaka
  33. Intergovernmental Fiscal Relations - Potentials and Limitations for Financing of Local Development in Croatia By Dubravka Jurlina Alibegovic
  34. Governance, Democracy and Poverty Reduction: Lessons drawn from household surveys in sub-Saharan Africa and Latin America By Javier Herrera; Mireille Razafindrakoto; Francois Roubaud
  35. Private Sector Lessons for Public Sector Reform in Indonesia By Ross H. McLeod
  36. Aging, Pension Reform, and Capital Flows: A Multi-Country Simulation Model By Axel Börsch-Supan; Alexander Ludwig; Joachim Winter
  37. Concessions to PPC? By Bart Wiegmans; Maarten Kievits; Tejo Spit
  38. Defined Benefit Pension Plans and Regulation By Peter Vlaar
  39. The Determinants of Malaysian Land Taxpayers’ Compliance Attitudes By Nor Aziah Abdul Manaf, John Hasseldine and Ron Hodges
  40. Privatization and Cooperative Management in the Provision of Public Services in the Rural United States By John Halstead; Peter Girard
  41. Record keeping practices and tax compliance of SMEs By Chris Evans , Shirley Carlon and Darren Massey

  1. By: Troy Davig; Eric M. Leeper; Hess Chung
    Abstract: A growing body of evidence finds that policy reaction functions vary substantially over different periods in the United States. This paper explores how moving to an environment in which monetary and fiscal regimes evolve according to a Markov process can change the impacts of policy shocks. In one regime monetary policy follows the Taylor principle and taxes rise strongly with debt; in another regime the Taylor principle fails to hold and taxes are exogenous. An example shows that a unique bounded non-Ricardian equilibrium exists in this environment. ; A computational model illustrates that because agents' decision rules embed the probability that policies will change in the future, monetary and tax shocks always produce wealth effects. When it is possible that fiscal policy will be unresponsive to debt at times, active monetary policy (like a Taylor rule) in one regime is not sufficient to insulate the economy against tax shocks in that regime and it can have the unintended consequence of amplifying and propagating the aggregate demand effects of tax shocks. The paper also considers the implications of policy switching for two empirical issues.
    Date: 2005
  2. By: Amrita Dhillon (Department of Economics, University of Warwick); Myrna H. Wooders (Department of Economics, Vanderbilt University); Ben Zissimos (Department of Economics, Vanderbilt University)
    Abstract: In a classic model of tax competition, we show that the level of public good provision and taxation in a decentralized equilibrium can be efficient or inefficient with either too much, or too little public good provision. The key is whether there exists a unilateral incentive to deviate from the efficient state and, if so, whether this entails raising or lowering taxes. A priori, there is no reason to suppose the incentive is in either one direction or the other.
    Keywords: Efficiency, Nash equilibrium, over-provision, tax competition, under-provision
    JEL: C72 H73 H21 H42 R50
    Date: 2006–01
  3. By: Rogério Ladeira Furquim Werneck (Department of Economics PUC-Rio)
    Abstract: With an overindebted public-sector, Brazil has been on the brink of a fiscal dominance problem for quite a long time. The term has been usually associated to a situation in which monetary policy becomes subordinated to fiscal needs. This paper calls attention to broader implications of prolonged exposure to impending fiscal dominance. A highdebt environment may make perfectly reasonable fiscal-reform initiatives seem extremely risky. Without any room to absorb revenue losses, in a complex fiscalfederalism arrangement, the government is bound to recurrently see badly needed tax reform, which could lead to a much less distorting tax system, as an unaffordable adventure. The paper is structured in the following way. The next section presents stylized facts that have been underlying a whole decade of unsuccessful tax-reform attempts in Brazil. Section 3 shows how the combination of those facts creates very unfavorable conditions for the approval of the kind of tax reform the country needs. A simple political economy model is developed in section 4. Simulations based on the model are analyzed in sections 5 and 6. Concluding remarks are presented in the last section.
    Keywords: tax reform, public debt, fiscal dominance, political economy, federalism, Brazil
    JEL: H20 H6 E62 H77
    Date: 2005–08
  4. By: Dan Usher (Department of Economics, Queen\'s University)
    Abstract: An ideal planner would follow the original Samuelson rule: to undertake each and every public project, program or activity up to the point where the sum of its marginal benefits is just equal to its marginal cost. Actual governments modify the rule in response to the marginal cost of public funds and the shadow price of public expenditure. The first of these modifications is an additional cost of public revenue, over and above the tax people actually pay, when people rearrange their affairs to minimize their tax bills. The second is the effect - sometimes positive and sometimes negative - of the provision of the public project, program or activity on total tax revenue. Kaplow can be interpreted as arguing that these modifications cancel out, leaving the original Samuelson rule in tact. He turns out to be right for public provision of intermediate goods that augment output but do not themselves enter as arguments in the utility function. Otherwise he is mistaken.
    Keywords: Public Goodes, Deadweight Loss
    JEL: H21 H41
    Date: 2004–06
  5. By: Cheikbossian, Guillaume
    Abstract: In the presence of spillovers, decentralized provision of local public goods may lead to a higher surplus than centralized provision even if localities have identical preferences. Indeed, free-riding costs associated to decentralization may be larger than the costs of lobbying activities under centralization.
    Keywords: (De)centralization, Local Public Goods, lobbying, Spillovers
    JEL: H11 H41
    Date: 2005
  6. By: Andrés Fuentes; Andreas Wörgötter; Eckhard Wurzel
    Abstract: This paper reviews the fiscal relations between the three levels of government in Austria and points to the scope for reforming them with a view to improving the efficiency of the public sector. Key areas of public sector activity are subject to complex relations across the three layers of government. Fragmentation of decision-making in some spending programmes, such as hospital care and social assistance benefits, needs to be overcome, concentrating financing and spending responsibilities on one government level. Strengthening co-operation between municipalities as well as amalgamations of small municipalities would allow advantage to be taken of scale economies in the provision of local government services. Stronger tax-raising powers of the municipalities and the states, reform of tax sharing rules and improved budgeting procedures would raise the ability of sub-national governments to match the supply of services to local demand patters and improve accountability to voters. This Working Paper relates to the 2005 OECD Economic Survey of Austria ( <P>Réformer les relations budgétaires entre la fédération et les autres niveaux d’administration Ce document rend compte des relations budgétaires entre la fédération et les autres niveaux d’administration en Autriche et met en évidence les possibilités de les faire évoluer en vue d'améliorer l'efficience du secteur public. Les principaux domaines d’activité du secteur public font intervenir des relations budgétaires complexes entre les différents niveaux d’administration. Il faut remédier au morcellement de la prise de décision pour certains programmes de dépenses, notamment les services hospitaliers et l’aide sociale, en regroupant les compétences en matière de financement et de dépense à un seul niveau d’administration. En renforçant la coopération entre les communes et en favorisant leur fusion lorsqu’elles sont de petite taille, on pourrait tirer parti des économies d’échelle pour la fourniture des services publics locaux. En dotant les communes et les Länder de plus larges compétences fiscales, en réformant les règles de partage de l’impôt et en revoyant les procédures budgétaires, on ferait en sorte que les administrations infranationales puissent mieux adapter l’offre de services à la demande locale et aient davantage de comptes à rendre à leur électorat. Ce document de travail se rapporte à l'Étude économique de l'OCDE de l'Autriche 2005 (
    Keywords: intergovernmental relations, relations intergouvernementales, state and local government finances, finances publiques des états et des municipalités, federalism, fédéralisme
    JEL: H71 H72 H77
    Date: 2006–01–23
  7. By: Antonio Acconcia (Università di Napoli Federico II and CSEF)
    Abstract: I analyze a model where the size of tax evasion, the di¤usion of bureaucratic corruption, and the strength of deterrence are jointly determined with capital accumulation, in a framework with private and public inputs of production. I show that, at any time t, the government’s ob jective of reducing the di¤usion of corruption, through more tough punishment, is found to be potentially responsible for greater evasion; an increase in …scal pressure causes more tax evasion and may also induce more corruption. The long-run performance of the economy is signi…cantly a¤ected by corruption, its impact depending upon the size of the public sector and the cost of deterrence. When the government heavily distorts the composition between public and private inputs of production, by implementing an high tax rate, corruption could mitigate the ensuing ine¢ciency. In this case, an higher cost of deterrence determines a higher level of income. Otherwise, corruption is negatively correlated with the level of development. Finally, under nonconvexities in the activity of deterrence poverty traps emerge, and the steady state level of income depends upon the initial condition. Some implications of the model are in line with recent empirical evidence.
    Keywords: Tax evasion, corruption, public spending, poverty traps
    JEL: D73 H26 H41 K42 O41
    Date: 2006–01–01
  8. By: Robert Dur (Tinbergen Institute, Erasmus University Rotterdam, and CESifo, Munich. Department of Economics H 8-15, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands., Phone: +31104082159, Fax: +31104089161); Klaas Staal (Center for European Integration Studies, Rheinische Friedrich-Wilhelms-Universität Bonn and Tinbergen Institute, Erasmus University Rotterdam.
    Abstract: We analyze a simple model of local public good provision in a country consisting of a large number of heterogeneous regions, each comprising two districts, a city and a village. When districts remain autonomous and local public goods have positive spillover effects on the neighboring district, there is underprovision of public goods in both the city and the village. When districts consolidate, underprovision persists in the village (and may even become more severe), whereas overprovision of public goods arises in the city as urbanites use their political power to exploit the villagers. From a social welfare point of view, inhabitants of the village have insufficient incentives to vote for consolidation. We examine how national transfers to local governments can resolve these problems.
    Keywords: local public goods, municipal consolidation, voting, intergovernmental transfers
    JEL: D7 H2 H7 R5
    Date: 2006–01
  9. By: Cheikbossian, Guillaume
    Abstract: We present a model of endogenous public good provision and group rent-seeking influence e.g. lobbying. Specifically, two groups with different preferences over public good consumption and different sizes engage in rent-seeking activities to influence policymaking in their preferred direction. When there is within-group cooperation in lobbying, both groups neutralize each other in the political process. Without within-group cooperation, the free-rider problem in lobbying makes the smaller group politically influent. In both cases, rent-seeking by each group is increasing in the degree of preference heterogeneity and in membership size of both groups.
    Keywords: Public Goods; Rent-seeking; Free-rider problem
    JEL: D72 H41 H73
    Date: 2005
  10. By: Alexandre Porsse; Eduardo Haddad
    Abstract: Tax incentives are common instruments in regional policies used to attract new investments and promote increase in employment and income, but the impact on regional public finances is very controversial. This paper uses an interregional computable general equilibrium model for the Brazilian economy to evaluate the net effects of tax incentives on the regional government revenues. The model takes into account the structural relationships between two regions and the specific characteristics of the Brazilian federalism that affects regional public finances. The theoretical specification allows capturing indirect and induced effects of the new investments and the net output of such incentive policies for the regional government revenues.
    Date: 2005–08
  11. By: Matt Benge; George Fane
    Abstract: A true income tax would not affect asset values or investment decisions for given values of cash flows and pre-tax interest rates (Samuelson, 1964). However, most so-called income taxes do not fully tax capital gains on accrual. This note shows that in the absence of adjustment costs, investment decisions are not distorted by the lack of a comprehensive tax on the capital gains on unimproved land, provided that the depreciation of improvements is allowed as a tax deduction. It also provides the intuition underlying the closely related results of Hartman (1978) and Abel (1983).
    Keywords: Capital gains tax, depreciation, income tax, investment neutrality.
    JEL: H25
    Date: 2006
  12. By: Hans Fehr; Christian Habermann
    Abstract: The present paper aims to quantify the welfare e.ects of progressive pension arrangements in Germany. Starting from a purely contribution-related benefit system, we introduce basic allowances for contributions and a flat benefit fraction. Since our overlapping-generations model takes into account variable labor supply, borrowing constraints as well as stochastic income risk, we can compare the labor supply, the liquidity, and the insurance effects of the policy reform. Our simulations indicate that for a realistic parameter combination an increase in pension progressivity would yield an aggregate effciency gain of more than 2 percent of resources. However, such a reform would not be implemented because it would not find political support of the currently living generations.
    Keywords: Pension reform; idiosyncratic labor income uncertainty.
    JEL: H55 J26
    Date: 2005–12
  13. By: Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: Empirical evidence suggests that people’s risk-perceptions are often systematically biased. This paper develops a simple framework to analyse public policy when this is the case. Expected utility (well-being) is shown to depend on both objective and subjective risks. The latter are important because of the mental suffering associated with the risk and as a basis for corrective taxation and second-best adjustments. Optimality rules for public provision of riskreducing investments, “internality-correcting” taxation and provision of (costly) information to reduce people’s risk-perception bias are presented. <p>
    Keywords: Subjective risk; risk management; risk regulation; risk perception bias; terrorism; fat taxes; internalities; cost-benefit analysis; corrective taxation; paternalism
    JEL: D81 H40
    Date: 2006–01–25
  14. By: Miguel Roig-Alonso
    Abstract: The size and pattern of any public budget depend, among other factors, on the visibility of both the burdens and benefits of public revenue and expenditure. Furthermore, such visibility is a necessary - not a sufficient - condition for an efficient allocation of resources between the private and public sectors of an economy. The aim of this contribution, based on a recent research, is to apply fiscal visibility indicators to territorial government levels of new European Union member countries by using data and new qualitative information provided by the International Monetary Fund to draw relevant policy conclusions. Results obtained are particularly important for present and future European Union member countries aiming to make their respective fiscal systems converge for a better integration process, since significant allocation improvements can be obtained by implementing economic policy changes (public accounting systems, tax systems, public deficit management techniques...) in the new European Union member countries to raise both multiplicative and additive visibility values of public budget burdens and benefits and to bring them near to their optimal values. The proposed methodology, applied to former and new European Union member countries, can also be extended to other OECD economies to check whether the European Union pattern is shared by all developed countries and to design future general economic policies.
    Date: 2005–08
  15. By: Fabrizio Bulckaen and Marco Stampini
    Abstract: This paper deals with efficiency and distributional effects of marginal commodity tax reforms in economies with heterogeneous individuals. It contributes to the literature in three ways. First, a decision rule based on revenue potentialities – the ratio between marginal revenue and the tax base - is originally developed with reference to a many consumers economy. The relevance lies in the fact that these indicators do not depend on measures of utility. Second, the connection with former literature is analyzed. Third, a comprehensive and progressive decision-making procedure relying on revenue potentialities is defined. Overall, all that policy makers need to know – in order to look for improvements in efficiency and/or distribution through revenue-neutral marginal commodity tax reforms – is the revenue potentiality of each tax and the share of expenditure by poor families. An example with reference to Italian data is provided.
    Keywords: tax efficiency, commodity tax reform, public economics, revenue neutral, tax reform, commodity tax
    Date: 2006–01–10
  16. By: Cletus C. Coughlin; Thomas A. Garrett; Rubén Hernández-Murillo
    Abstract: We apply spatial econometric techniques to models of state and local fiscal policy convergence. Total tax revenue and expenditures, as well as broad tax and expenditure categories, of state and local governments in each of the 48 contiguous U.S. states are examined. We extend recent work by Annala (2003) in much the same way that Rey and Montouri (1999) extended the literature dealing with income convergence among U.S. states. Our results indicate that most fiscal policies have been converging and that the growth in overall and broad categories of tax revenue and spending are dependent on the corresponding tax and spending behavior in other states. In addition, total expenditures have been converging faster than output, whereas total tax revenues have been converging slower that output. Our models further demonstrate that expenditure growth in a state is dependent upon expenditure growth in economically and demographically similar states, while output growth and revenue growth in a state are dependent on output growth and revenue growth, respectively, in contiguous states.
    Keywords: Fiscal policy
    Date: 2006
  17. By: Santiago Lago-Peñas
    Abstract: In this paper causality between taxes and expenditures is reexamined, suggesting that electoral cycle may be a relevant explicative factor. Using a data set from a wide sample of Spanish municipalities, I test if causal relationships between budgetary variables is effectively affected by the electoral cycle.
    Date: 2005–08
  18. By: Axel Dreher (Swiss Federal Institute of Technology, Zurich); Friedrich Schneider (University of Linz and IZA Bonn);
    Abstract: This paper analyzes the influence of the shadow economy on corruption and vice versa. We hypothesize that corruption and shadow economy are substitutes in high income countries while they are complements in low income countries. The hypotheses are tested for a crosssection of 120 countries and a panel of 70 countries for the period 1994-2002. Our results show that the shadow economy reduces corruption in high income countries, but increases corruption in low income countries. We also find that stricter regulations increase both corruption and the shadow economy.
    Keywords: corruption, shadow economy, regulation, tax burden
    JEL: D73 H26 O17 O5
    Date: 2006–01
  19. By: Elaine Abery
    Abstract: Tax policy is evaluated according to three criteria: equity, efficiency and simplicity. This paper looks at the history of the withdrawn New Business Tax System (Entity Taxation) Bill 2000, which proposed to tax non-fixed trusts in a manner stated to be comparable to the taxation of companies. The Bill attracted almost universal criticism. The three criteria for evaluating tax policy are applied to the Non-Fixed Trust Regime to understand why the Regime was not implemented. The Non-Fixed Trust Regime did not succeed because it sought to apply a regime to non-fixed trusts that would have been much more onerous than that applying to other corporate entities. The Non-Fixed Trust Regime would have been less efficient, less equitable and less simple than the prevailing trusts taxation regime.
    Keywords: Tax, non-fixed trusts
    Date: 2006–01–10
  20. By: Ken Devos
    Abstract: The tax compliance behavioural literature indicates that among other factors, demographic variables play an important role in the compliance behaviour of taxpayers. This pilot study investigates the relationship that exists between demographic and other major tax compliance variables and the attitudes of students towards tax evasion and the penalties for tax evasion. A survey of 470 tertiary taxation students was recently conducted. The findings revealed that the demographic variables analysed including, gender, age, nationality, education/qualifications, occupation, and income level in most cases held statistically significant relationships with the incidence of tax evasion and the penalties for evasion. These results provide useful information for revenue collecting authorities and have implications for tax policy development.
    Keywords: tax compliance, taxpayers, tax evasion, tax
    Date: 2006–01–10
  21. By: Jacqueline Haverals (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels)
    Abstract: The adoption of IAS/IFRS in the European Union is part of the European Commission’s globaltax harmonisation policy whose aim is to establish a common (consolidated) corporate tax base. The paper shows that the impact of an IAS/IFRS- based tax accounting on the effective tax burden of Belgian companies is large and not uniform across sectors. Some sectors, like construction and automotive vehicles, experience much larger increases in effective tax burdens than others. Globally the impact is relatively important. The analysis is conducted thanks to the European Tax Analyzer, a multi-period forward looking program. In a European context, an IAS/IFRS-based tax accounting will increase the effective corporate tax burdens in all selected countries. However it will most probably maintain the current tax competitive positions of EU countries. The expected broadening of the tax base could constitute an opportunity to reduce the corporate income tax rate without changing the overall effective burden.
    Keywords: International Accounting Standards/International Financial Reporting Standards, Effective Tax Burden, Tax Accounting.
    JEL: H21 H25
    Date: 2005–09
  22. By: Shinichi Nishiyama (Georgia State University); Kent Smetters (The Wharton School, University of Pennsylvania)
    Abstract: While privatizing Social Security can improve labor supply incentives, it can also reduce risk sharing when households face uninsurable risks. We simulate a stylized 50-percent privatization using an overlapping-generations model where heterogeneous agents with elastic labor supply face idiosyncratic earnings shocks and longevity uncertainty. When wage shocks are insurable, privatization produces about $21,900 of new resources for each future household (growth adjusted over time) after all households have been fully compensated for their possible transitional losses. However, when wages are not insurable, privatization reduces efficiency by about $5,600 per future household despite improved labor supply incentives. We check the robustness of these results to different model specifications and arrive at several surprising conclusions. First, privatization actually performs relatively better in a closed economy, where interest rates decline with capital accumulation, than in an open economy where capital can be accumulated without reducing interest rates. Second, privatization also performs relatively better when an actuarially-fair private annuity market does not exist than when it does exist. Third, introducing progressivity into the privatized system to restore risk sharing must be done carefully. In particular, having the government match private contributions on a progressive basis is not very effective at restoring risk-sharing—too much matching actually harms efficiency. However, increasing the progressivity of the remaining traditional system is very effective at restoring risk sharing, thereby allowing partial privatization to produce efficiency gains of $2,700 per future household.
    Date: 2005–10
  23. By: David G. Dunbar
    Abstract: In 2003 the Australian and NZ governments enacted legislation to permit trans-Tasman companies to allocate to their shareholders franking credits and imputation credits. This legislation is known as the pro rata allocation method, and was heralded as a major improvement in trans-Tasman taxation. This paper critically evaluates the claims which have been made by the Australian and NZ governments about the reduction in personal income tax which the pro rata allocation solution will deliver to individual share holders in a typical trans-Tasman company. The paper concludes that the benefits have been significantly over stated and that a more effective legislative solution would have been the streaming model. Accordingly the pro rata allocation solution is unlikely to discourage trans-Tasman companies from engaging in profit repatriation strategies to overcome the inherent tax inefficiency associated with the pro rata allocation solution.
    Keywords: Australia, New Zealand, tax, pro rata allocation, streaming model, tax reform
    Date: 2006–01–10
  24. By: V. Joseph Hotz; John Karl Scholz
    Abstract: This paper examines the employment effects of the earned income tax credit (EITC). We use a unique dataset, created by matching administrative data from public assistance records, unemployment insurance records, and federal tax returns for a sample of California residents. We conduct a set of four tests to assess our ability to isolate the causal effects of the EITC on employment. The first test is based on the intuition that if the EITC alters employment, all else being equal, employment rates for two-or-more child families should grow relative to the employment rates of one-child families, as credit amounts available to these groups of families diverged over the 1990s. The second test examines whether or not people eligible for the EITC actually file tax returns and claim it. The third test is based on the intuition that, if the EITC, and not other factors such as the strong economy in the 1990s, is causing employment differences between families with two or more children relative to those with one child, we should expect to see no employment differences (after conditioning on other characteristics) between families with two children and families with three or more children, since the EITC did not change differentially for the latter two groups. The fourth test conditions the sample on those who do not file tax returns and again examines employment changes in the 1990s for families with two or more children relative to families with one child. Using fixed-effects empirical employment models estimated on a sample of single-parent families, our coefficient estimates are consistent with the EITC having a substantial, positive effect on the employment of families who have used or will use welfare.
    JEL: H2 J2
    Date: 2006–01
  25. By: Simon Luechinger; Stephan Meier; Alois Stutzer
    Abstract: The monopoly position of the public bureaucracy in providing public services allows government employees to acquire rents. Those rents can involve higher wages, monetary and non-monetary fringe benefits (e.g. pensions and staffing), and/or bribes. We propose a direct measure to capture the total of these rents: the difference in reported subjective well-being between bureaucrats and people working in the private sector. In a sample of 38 countries, we find large variations in the extent of rents in the public bureaucracy. The extent of rents is determined by differences in institutional constraints and correlates with perceptions of corruption. We find judicial independence to be of major relevance for a tamed bureaucracy.
    Keywords: public sector, rents, life satisfaction, corruption, judicial independence
    JEL: D72 D73 I31 J30 J45 K42 H11 H83
    Date: 2006–01
  26. By: Biel, Anders (Department of Psychology, Göteborg University); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, Göteborg University); Nilsson, Andreas (Department of Psychology, Göteborg University)
    Abstract: Empirical evidence suggests that people’s maximum willingness to pay for having a good is often substantially lower than their minimum willingness to accept not having it, and that this discrepancy tends to be especially large when valuing public goods. This paper hypothesizes that differences in emotions (e.g. regret) and moral perceptions can account for much of this discrepancy for public goods. A simple, real-money dichotomous-choice experiment is set up to test these hypotheses, which are largely supported. <p>
    Keywords: Willingness to pay; Willingness to accept gap; Endowment effect; Emotions; Ethics; Experiments
    JEL: C91 H41
    Date: 2006–01–25
  27. By: Martin Weale; James Sefton
    Abstract: We assess the implications of demographic uncertainty for the United Kingdom’s fiscal position. We construct stochastic population projections and then use the framework provided by generational accounts to project government revenues and expenditures. We present stochastic paths for the budget balance over time and also evaluate the frequency distribution of the increase in taxes needed to deliver fiscal solvency.
    Date: 2005–01
  28. By: Ulrike Stierle-von Schütz
    Abstract: In the process of economic integration regional production structures are about to change. Several studies analysed already trends of regional specialization in the European Union and attempted to figure out determinants of observed changes. In this context, up to date the role of the public sector and especially the impact of different fiscal designs as determinants of the change in production structures have been left aside. Advantages and shortcomings of decentralized government organization have been largely discussed theoretically within the last decades. Several empirical studies attempted to examine the impact of decentralization on national performance, e.g. economic growth and fiscal stability. This paper aims at linking these two subjects and analyzes the empirical relationship between regional specialization and fiscal decentralization for a panel of 15 Member States of the European Union, controlling for regional and other institutional determinants. The analysis shows that rather autonomous regions tend to diverse their production structure in order to insure against adverse supply shocks.
    Date: 2005–08
  29. By: Zvi Bodie
    Abstract: Around the world today there are striking differences in pension systems. The roles played by families, employers, trade unions, financial intermediaries, community organizations, affiliation groups, and governmental agencies vary tremendously. Yet despite these differences, in almost every country the government is ultimately the pension insurer of last resort, either explicitly or implicitly. If designed well and managed well, a system of government pension insurance can enhance the wellbeing of the individuals served by it and even contribute towards the resilience of the financial system at large. But if designed or managed poorly, it can undermine economic security at both the micro and macro level. This paper explores the principles for the successful management of pension insurance and draws some lessons from the mistakes made by the U.S. government in managing its Pension Benefit Guarantee Corporation.
    Keywords: pension funds; insurance.
    JEL: G23 H55
    Date: 2005–12
  30. By: Gary V. Engelhardt; Anil Kumar
    Abstract: Employer matching of employee 401(k) contributions can provide a powerful incentive to save for retirement and is a key component in pension-plan design in the United States. Using detailed administrative contribution, earnings, and pension-plan data from the Health and Retirement Study, this analysis formulates a life-cycle-consistent two-limit censored regression model of 401(k) saving and estimates the effect of matching on 401(k) saving accounting for non-linearities in the household budget set induced by matching. Parametric and semi-parametric estimates indicate that an increase in the match rate by 25 cents per dollar of employee contribution raises 401(k) saving by $500-$800 (in 1991 dollars), and the estimated elasticity of contributions with respect to matching ranges from 0.06-0.17 overall, with two-thirds of this effect on the extensive margin and one-third on the intensive margin.
    Keywords: Saving; Taxation; Private Pensions.
    JEL: E21 H24 J32
    Date: 2006–01
  31. By: Alfredo Marvão Pereira; Maria de Fátima Pinho; José da Silva Costa
    Abstract: In this work we use a VAR/ECM approach to determine the effects of aggregated public investment on output, employment and private investment for five EU countries. Based on impulse-response functions associated to the estimated VAR, we obtain long-term accumulated elasticities, long-term marginal productivities and annual rates of return, allowing for an economy performance analysis. Based on our results, we can conclude that, generally, the aggregated public investment crowds in output, employment and private investment, and it can be considered a useful tool in growth in the long run.
    Date: 2005–08
  32. By: Fumitoshi Mizutani; Tomoyasu Tanaka
    Abstract: Inefficient use of public money is a policy issue of concern in Japan. Some contend that spending towards the formation of public capital does not promote economic growth, one reason being that such investment is concentrated in underdeveloped regions which have a low impact on the growth of economic activity. Investment in underdeveloped regions might be the result of political misallocation or simply the fact that public capital no longer contributes to private productivity. Our study addresses these two important issues: whether or not public infrastructure contributes to production in the private sector, and whether or not political factors really affect the allocation of public infrastructure investment. If the political factors indeed affect allocation, what kinds of political factors are the most deterministic? First, we survey studies on this topic published since the 1970s. For methodology, we plan to take a simultaneous approach to examine these issues. Second, because some data are not publicly available, we construct a data set of public infrastructure and related variables. Public capital in this study is limited to public infrastructure such as roads, ports, airports, banks and dams. Railroads and electric power plants are excluded because these were built by the private sector in Japan. In this study, we plan to use a panel data set covering 46 prefectures and 9 time periods for every 5 years from 1955 to 1995 in Japan. Therefore, the total sample size in this study is 414. Third, after constructing the data set, we overview the regional distribution of public infrastructure and the relationship between public infrastructure allocation and political factors. Last, we estimate simultaneous equations regarding regional production function, infrastructure investment function and grant allocation function. By using these estimated functions, we evaluate whether or not public capital contributes to production and what kind of political factors affect the allocation of public infrastructure investment.
    Date: 2005–08
  33. By: Dubravka Jurlina Alibegovic
    Abstract: The major goal of this paper is to give an overview on the most important issues regarding intergovernmental fiscal relations and regional inequalities in Croatia. The first section will give a general background for analysis of intergovernmental fiscal relations. In order to achieve this, the present model of financing of the local and regional self-government units, the number and size of local and regional governments and distribution of functions and revenue sources among levels of government in Croatia will be presented. The second section will elaborate regional inequalities in Croatia measured by several indicators. The aim is to find out degree of correlation among intergovernmental finance system, especially the current grant and equalization system, and regional inequalities in Croatia. The paper will conclude with a summary of the strengths and weaknesses of the overall intergovernmental fiscal relations and regional inequalities. This last section will offer several recommendations aiming at the improvement of intergovernmental finance and reduction of regional inequalities in Croatia.
    Date: 2005–08
  34. By: Javier Herrera (DIAL, Paris); Mireille Razafindrakoto (DIAL, Paris); Francois Roubaud (DIAL, Paris)
    Abstract: Public statistics face quite a challenge when it comes to measuring new dimensions of development (institutions, governance, and social and political participation). To take up this challenge, modules on Governance, Democracy and Multiple Dimensions of Poverty have been appended to household surveys by National Statistics Institutes in twelve African and Latin-American developing countries. This paper presents the issues addressed and the methodological lessons learnt along with a selection of findings to illustrate this innovative approach and demonstrate its analytic potential. We investigate, for instance, the population’s support for democratic principles, the respect for civil and political rights and the trust in the political class; the “need for the State”, particularly of the poorest; the extent of petty corruption; the reliability of expert surveys on governance; the perception of decentralisation policies at local level; the level and vitality of social and political participation, etc. The conclusive appraisal made opens up prospects for the national statistical information systems in the developing countries. The measurement and tracking of this new set of objective and subjective public policy monitoring indicators would benefit from being made systematic.
    Keywords: Africa, Latin America, Democracy, Monitoring Mechanism, Household Surveys,
    JEL: I31 I32 I38 H11 D73 O54 O55
    Date: 2006–01–06
  35. By: Ross H. McLeod
    Abstract: Development economists often analyse the performance of particular sectors of the economy, yet they have largely ignored that of one of the most important sectors, namely, the public sector, the performance of which is demonstrably poor. They are also continually giving recommendations to the Indonesian government as to what constitutes sound economic policy, whereas there is abundant evidence that the bureaucracy has neither the incentive nor the competence to implement such policy. Civil service reform is therefore crucial to improving Indonesia's economic performance. This paper argues that the key to such reform is the adoption of human resource management practices similar to those that can be observed in successful, large business enterprises: namely, creating an environment of open and fair competition for all positions within the organisation.
    Keywords: civil service reform, human resource management, performance evaluation, competition, incentives
    JEL: D73 H11 H83 J31 L33 M12 M51
    Date: 2005
  36. By: Axel Börsch-Supan; Alexander Ludwig; Joachim Winter
    Abstract: Population aging and pension reform will have profound effects on international capital markets. First, demographic change alters the time path of aggregate savings within each country. Second, this process may be amplified when a pension reform shifts old-age provision towards more pre-funding. Third, while the patterns of population aging are similar in most countries, timing and initial conditions differ substantially. Hence, to the extent that capital is internationally mobile, population aging will induce capital flows between countries. All three effects influence the rate of return to capital and interact with the demand for capital in production and with labor supply. In order to quantify these effects, we develop a computational general equilibrium model. We feed this multi-country overlapping generations model with detailed long-term demographic projections for seven world regions. Our simulations indicate that capital flows from fastaging regions to the rest of the world will initially be substantial but that trends are reversed when households decumulate savings. We also conclude that closed-economy models of pension reform miss quantitatively important effects of international capital mobility.
    Keywords: aging; pension reform; capital mobility.
    JEL: E27 F21 G15 H55 J11
    Date: 2005–12
  37. By: Bart Wiegmans; Maarten Kievits; Tejo Spit
    Abstract: Public private cooperation (further PPC) is frequently presented as the solution for budgetary shortages for governments at national and regional level. A PPC invests in infrastructure whereby efficient cooperation enables advantages for both public and private parties is claimed. It proves to be difficult to really interest private businesses for investments in infrastructure. Therefore, the central question, which we answer in this paper, is: 'From a theoretical perspective, is PPC an option for investments in infrastructure?' In this paper, a literature review is presented on the subject of public private cooperation for the development of infrastructure projects. The main findings are that firstly, there is a large diversity in projects that might qualify for PPC. More specific, each infrastructure project is unique, making it even more difficult to implement cooperation. Secondly, the role of the national and regional governments in financing infrastructure is changing. This changing role means that the governments withdraw themselves on core functions and that they strive for private party risk-bearing in infrastructure investments. Thirdly, the theoretical definition of PPC and the more practical definition differ. In Europe, most PPCs are worked out as a concession (and therefore not a real PPC). Fourthly, from a cost point of view it is possible that the government is more efficient in cost terms and the private party is more efficient in terms of turnover. Fifthly, there are several reasons for the government to interfere in economic living. Reasons concerning infrastructure might be the public goods characterise and the external impacts. Sixthly, the public characteristics of infrastructure are decreasing. Seventhly, in general it is unattractively for private parties to invest in infrastructure. In order to make it more attractive, profits can be offered to the private parties. However, this will increase the total costs of the project. Eighthly, process management shows that it is no simple task to turn a PPC into a success. When the participating parties are persuaded of the advantages that the cooperation between public and private parties can offer, have chosen consciously for the PPC, and are prepared to invest in cooperation for the long-term, then PPC can offer means to pursue the defined objectives. If true cooperation is aimed for, costs, risks, and profits must be shared instead of divided. The joint venture can provide insights into the process of sharing. Ninthly, the construction businesses are production ventures, whereas banking services and the government operate in the service industry. Finally, the market of the most important private parties that are involved in PPC is an oligopoly. This suggests quite some market power for the private businesses involved.
    Date: 2005–08
  38. By: Peter Vlaar
    Abstract: In this paper, it is investigated to what extent optimal investment policy by Dutch pension funds is affected by changes in regulation. It turns out that a complete market valuation method increases the cost of the defined benefit pension relative to a fixed discount rate method, as high pension premiums are to be payed exactly when expected future returns are the lowest. In practice, this timing problem does not seem to be severe for Dutch pension funds as solvency requirements are only applied to guaranteed pension rights, whereas a major part of pension benefits (indexation) is conditional. Moreover, a fixed interest rate may still be used to calculate pension premiums. Regarding the asset mix, the optimal duration of bonds in portfolio seems higher than currently observed, both under market valuation and under a fixed discount rate method. The new regulatory rules only slightly reduce the attractiveness of equity investment.
    Keywords: pension valuation; equity investment; optimal duration. J.E.L. Code: C15; G11; G23; G28
    JEL: H55 J26
    Date: 2005–12
  39. By: Nor Aziah Abdul Manaf, John Hasseldine and Ron Hodges
    Abstract: This article analyzes the determinants of Malaysian land taxpayers’ compliance attitudes. While income taxpayers often have the structural opportunity to underreport income/overstate deductions, it is more difficult to hide land ownership. Despite this, there are high levels of uncollected land tax revenue in Malaysia. We document the factors associated with land taxpayers’ compliance attitudes and our results should be useful to policy makers in Malaysia and elsewhere, as we find that independent variables significant in prior income tax compliance research also extend to the field of property and land tax compliance.
    Keywords: malaysia, tax, compliance, land
    Date: 2006–01–10
  40. By: John Halstead; Peter Girard
    Abstract: Local governments in the U.S. are struggling with financial shortfalls due to economic downturns, loss of federal assistance, and resistance to raising more revenue through property taxes. This has led to increased interest in provision of municipal services by private contractors and cooperative arrangements in an effort to increase efficiency. Using results from previous studies in Illinois and Wisconsin we attempt to model the municipal decision of how to provide residents town services. In order to test the applicability of past work to smaller towns we conducted a survey of the mostly rural state of New Hampshire in the summer of 2004. This paper will provide descriptive statistics of this New Hampshire survey and comparisons to the results of past work. We also construct decision-making models using logit, probit, and Poisson techniques which examine the influence of population, location and other exogenous factors on the decision to privatize.
    Date: 2005–08
  41. By: Chris Evans , Shirley Carlon and Darren Massey
    Abstract: This paper reports upon a research project which was designed to explore the relationship between the record keeping practices of small businesses and their potential exposure to tax and related business compliance problems. It was hypothesised that these problems might include increased tax audit exposure (combined with the potential for adverse tax audit outcomes where record-keeping practices are poor), higher tax compliance costs, and greater liquidity and cash flow problems that cause difficulties in remitting taxes collected on behalf of the Australian Taxation Office (ATO) which can lead to business failure. The paper examines these issues and suggests that although there are a number of links between small business record keeping practices and tax compliance issues, these links are neither as straightforward nor as strong as the initial hypotheses might have suggested. The research used a mixture of qualitative (focus group) and quantitative (survey) methodologies and involved more than 500 small business owners and managers, over 300 tax practitioners , and a small number of ATO auditors. Overall, the research showed that there was some dissonance between perceptions and reality. All of the key stakeholders – SME owners/managers, practitioners and ATO auditors – perceived (to varying degrees) direct relationships between poor SME record keeping practices and adverse tax compliance outcomes. But those perceptions were not always confirmed by the evidence of actual behaviour. Poor record keeping did not, of itself, necessarily lead to a higher vulnerability to audit (though once audited SMEs with poor records were more likely to suffer adverse audit outcomes). Nor did poor record keeping necessarily translate to higher compliance costs (though the data were ambivalent). Nor, finally, did poor record keeping necessarily lead to liquidity and cash flow problems. The outcomes of the project suggest that further and more detailed research is required to explore these complex relationships. The current project was ambitious in its scope, and was ultimately limited in its findings by its reliance on the self-assessment of the quality of record keeping practices by SMEs themselves. Further research should be narrower in focus. For example, separate projects should investigate each of the three compliance relationships (audit; compliance costs and liquidity) with record keeping practice. In addition, future research should seek more objective measures of the quality of SME record keeping practice, utilising evaluations by advisers (as originally intended in this project) and by the researchers themselves.
    Keywords: SME, record keeping, tax compliance
    Date: 2006–01–10
  42. By: Santiago J. Rubio (Universitat de València)
    Abstract: In this paper we model the case of an international non-renewable resource monopolist as a differential game between the monopolist and the governments of the importing countries, and we investigate whether a tariff on the resource importations can be advantageous for the importing countries. We find that the results depend crucially on the kind of strategies the importing country governments can play and on whether the monopolist chooses the price or the extraction rate. For a price-setting monopolist it is shown that the importing countries cannot use a tariff to capture monopoly rents if they are constrained to use open-loop strategies, even if the governments sign a tariff agreement. This result is drastically modified if the importing countries in the tariff agreement use Markov (feedback) strategies. For a quantity-setting monopolist the nature of the game changes and an open-loop tariff is advantageous for the importing countries. Moreover, in this case the importing countries in a tariff agreement enjoy a strategic advantage which allows them to behave as a leader.
    Keywords: tariffs, tariff agreements, non-renewable resources, depletion effects, price-setting monopolist, quantity-setting monopolist, differential games, open-loop strategies, linear strategies, Markov-perfect Nash equilibrium, Markov-perfect Stackelberg equilibrium
    JEL: C73 D41 D42 F02 H20 Q38
    Date: 2005–03

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NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.