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on Public Economics |
| By: | Xavier Calsamiglia; Teresa Garcia-Milà; Therese J. McGuire |
| Abstract: | Differences in the degree of fiscal decentralization observed between the U.S. and many countries in Europe cannot be explained within the standard theory of fiscal decentralization. By introducing preferences for solidarity – equality in the provision of public goods and services across regions – we show that different decentralization schemes can coexist as efficient choices. We develop a model of fiscal decentralization that incorporates tastes for solidarity, multiple levels of government, and various tax and transfer instruments. We find that when solidarity is added to the traditional fiscal-federalism framework, the choice along the decentralized-to-centralized spectrum shifts toward a more centralized system. |
| JEL: | H20 H40 H70 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1877&r=pbe |
| By: | Jacques H. Drèze; Charles Figuières; Jean Hindriks |
| Abstract: | The European economic integration leads to increasing mobility of factors, thereby threatening the stability of social transfer programs. This paper investigates the possibility to achieve by means of voluntary matching grants both the optimal allocation of factors and the optimal level of redistribution in the presence of factor mobility. We use a fiscal competition model a la Wildasin (1991) in which states differ in their technologies and preferences for redistribution. We first investigate a simple process in which the regulatory authority progressively raises the matching grants to the district choosing the lowest transfer and all districts respond optimally to the resulting change in transfers all around. This process is shown to increase total production and the level of redistribution. However it does not guarantee that all districts gain, nor that an efficient level of redistribution is attained. Assuming complete information among districts, we first derive the willingness of each district to match the contribution of other districts and we show that the aggregate willingness to pay for matching rates converges to zero when both the efficient level of redistribution and the efficient allocation of factors are achieved. We then describe the adjustment process for the matching rates that will lead districts to the efficient outcome and guarantee that everyone will gain. |
| Keywords: | fiscal federalism, adjustment process, matching grants |
| JEL: | H23 H70 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1867&r=pbe |
| By: | Andreas Haufler; Alexander Klemm; Guttorm Schjelderup |
| Abstract: | The rise in foreign direct investment and the increasing activity of multinational firms expose national corporate tax bases to cross-country profit shifting, but also lead to rising profitability of the corporate sector. We incorporate these two effects of economic integration into a simple political economy model where the median voter decides on a redistributive income tax rate. In this setting economic integration may raise or lower the equilibrium tax rate, depending on whether the higher excess burden of the tax or the larger redistributive gains from the perspective of the representative worker are the dominant effect. Our simple model holds several implications for future empirical work on the relationship between globalization and the effective rate of capital taxation. |
| Keywords: | redistributive taxation, multinational firms, profit shifting |
| JEL: | F23 H20 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1853&r=pbe |
| By: | Thomas Eichner; Marco Runkel |
| Abstract: | Within a two-country model with involuntary unemployment, this paper investigates corporate income taxation under separate accounting versus formula apportionment. In contrast to separate accounting, under formula apportionment the corporate tax policy causes a fiscal externality which goes back to unemployment. This unemployment externality is the lowest when the apportionment formula does not contain a payroll factor. It tends to compensate other externalities such that tax rates become inefficiently low. In an empirical calibration, we show that the transition from separate accounting to formula apportionment improves welfare and reduces unemployment. The welfare increase is the strongest under a pure sales formula. |
| Keywords: | separate accounting, formula apportionment, unemployment |
| JEL: | H25 H71 J60 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1868&r=pbe |
| By: | Iwan Barankay (University of Warwick, CEPR and IZA Bonn); Ben Lockwood (University of Warwick and CEPR) |
| Abstract: | Advocates of fiscal decentralization argue that amongst other benefits, it can increase the efficiency of delivery of government services. This paper is one of the first to evaluate this claim empirically by looking at the association between expenditure decentralization and the productive efficiency of government using a data-set of Swiss cantons. We first provide careful evidence that expenditure decentralization is a powerful proxy for legal local autonomy. Further panel regressions of Swiss cantons provide robust evidence that more decentralization is associated with higher educational attainment. We also show that these gains lead to no adverse effects across education types but that male students benefited more from educational decentralization closing, for the Swiss case, the gender education gap. |
| Keywords: | decentralization, productive efficiency, local public goods |
| JEL: | H40 H52 H70 I20 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2477&r=pbe |
| By: | Matz Dahlberg; Eva Mörk; Jørn Rattsø; Hanna Ågren |
| Abstract: | When investigating the effects of federal grants on the behavior of lower-level governments, it is hard to defend the handling of grants as an exogenous factor affecting local governments; federal governments often set grants based on characteristics and performance of local governments. In this paper we make use of a discontinuity in the Swedish grant system in order to estimate the causal effects of general intergovernmental grants on local spending and local tax rates. The formula for the distribution of funds is used as an exclusion restriction in an IV-estimation. We find evidence of crowding-in, where federal grants are shifted to more local spending, but not to reduced local tax rates. Our results thus confirm a flypaper effect for Sweden. |
| Keywords: | fiscal federalism, grants, flypaper effect, local taxation, local government expenditure, causal effects |
| JEL: | H21 H71 H77 R51 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1857&r=pbe |
| By: | Frank Blasch; Alfons Weichenrieder |
| Abstract: | The paper examines 157 German listed corporations that had the option of changing their fiscal year to achieve a possible tax reduction in connection with the major tax reform of 2000/2001. The tax reduction from a change was larger, the larger the expected profits. However, with costs of changing the fiscal year, not all firms that expect a tax reduction from a change may do so. The paper presents empirical evidence that the propensity to change the fiscal year was significantly related to the amount of expected tax savings. This suggests that the corporate tax reduction – in combination with the special German transitory provisions – induced a deadweight loss: corporations incurred a non-tax cost to avoid a tax cost. |
| Keywords: | tax reform, deadweight loss, fiscal year |
| JEL: | H25 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1861&r=pbe |
| By: | Marcel Gérard |
| Abstract: | This paper investigates replacing separate taxation by consolidation and formulary apportionment in a Bottom-up Federation, when a multijurisdictional firm is mobile in various respects. The reform is decided cooperatively by all the jurisdictions or by some of them, while tax rates remain within the competence of each jurisdiction. The paper sets forth the conditions for the reform to be social welfare enhancing, while not increasing tax competition. Among them, the formula should emphasize criteria that the Multijurisdictional Enterprise cannot easily manipulate and the consolidating area should protect its capacity to levy taxes by adopting a crediting system, possibly extended to accrued capital gains, vis-à-vis the rest of the world. Policy conclusions are suggested accordingly. |
| Keywords: | taxation of multinational enterprises, consolidation and formulary apportionment, fiscal federalism |
| JEL: | H32 H73 H87 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1860&r=pbe |
| By: | Auriol, Emmanuelle; Picard, Pierre M |
| Abstract: | The paper analyses governments’ trade-off between fiscal benefits and consumer surplus in privatization reforms of noncompetitive industries in developing countries. Under privatization, the control rights are transferred to private interests so that public subsidies decline. This benefit for tax-payers comes at the cost of price increases for consumers. In developing countries, tight budget constraints imply that privatization may be optimal for low profitability segments. For highly profitable public utilities, the combination of allocative inefficiency and critical budgetary conditions may favour public ownership. Finally, once a market segment gives room for more than one firm, governments prefer to regulate the industry. In the absence of a credible regulatory agency, regulation is achieved through public ownership. |
| Keywords: | developing countries; government budget constraint; infrastructure; privatization; public utilities; regulation |
| JEL: | H54 L33 L43 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6018&r=pbe |
| By: | Jukka Pirttilä; Håkan Selin |
| Abstract: | Dual income tax systems have become increasingly popular; yet, relatively little is known about the consequences of implementing such tax systems. This paper uses a representative panel of taxpayers from the 1993 Finnish tax reform to measure how overall taxable income and the relative shares of capital income and labour income reacted to the reform. The Finnish tax reform appears to be particularly suitable for analysing the effect of separating labour and capital income tax bases. The reform radically reduced the marginal tax rates on capital income to some, but not all, taxpayers, while the taxation of labour income was not reformed at the same time. We find that the reform led to a small positive impact on overall taxable income, but part of the positive response was probably offset by income shifting among the self-employed. |
| Keywords: | taxable income, income shifting, dual tax system |
| JEL: | C21 H21 H31 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1875&r=pbe |
| By: | Roberto Golinelli (University of Bologna, Department of Economics); Sandro Momigliano (Bank of Italy, Economic Research Department) |
| Abstract: | We examine the impact of four factors on the fiscal policies of the euro-area countries over the last two decades: the state of public finances, the European fiscal rules, cyclical conditions and general elections. We rely on information actually available to policy-makers at the time of budgeting in constructing our explanatory variables. Our estimates indicate that policies have reacted to the state of public finances in a stabilizing manner. The European rules have significantly affected the behaviour of countries with excessive deficits. Apart from these cases, the rules appear to have reaffirmed existing preferences. We find a relatively large symmetrical counter-cyclical reaction of fiscal policy and strong evidence of a political budget cycle. The electoral manipulation of fiscal policy, however, occurs only if the macroeconomic context is favourable. |
| Keywords: | fiscal policy, real-time information, euro-area countries, stabilisation policies, fiscal rules, political budget cycle |
| JEL: | E61 D72 E62 H60 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_609_06&r=pbe |
| By: | Crutzen, Benoît SY; Sahuguet, Nicolas |
| Abstract: | We extend the discussion of redistributive politics across electoral systems to allow for taxation to be distortionary. We allow politicians to choose any tax rate between zero and unity and then redistribute the money collected. We build on the model put forward by Myerson (1993) and Lizzeri and Persico (2001 and 2005) to show that the use of distortionnary taxation can be understood as an analysis of the trade-off between efficiency and targetability. We derive the equilibrium taxes and redistribution schemes with distortions. We show that the presence of distortions makes full taxation unattractive. We also derive the size of the government, the deadweight loss and inequality as a function of distortions. |
| Keywords: | distortionary taxation; redistributive politics |
| JEL: | D72 D78 H23 H31 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5975&r=pbe |
| By: | Laurent Simula (EHESS); Alain Trannoy (EHESS, Greqam-Idep) |
| Abstract: | This paper examines how allowing individuals to emigrate to pay lower taxes changes the optimal non-linear income tax scheme in a Mirrleesian economy. Type-dependent par- ticipation constraints are borrowed from contract theory. An individual emigrates if his domestic utility is less than his utility abroad net of migration costs, utilities and costs both depending on productivity. Three social criteria are distinguished according to the agents whose welfare matters. Mobility signi.cantly alters the closed-economy results qualitatively, but also quantitatively as veri.ed by simulations. A curse of the middle-skilled occurs in the .rst-best. In the second-best, the middle-skilled can support the highest average tax rates and the marginal tax rates can be negative. Moreover, preventing emigration of the highly-skilled is not necessarily optimal. |
| Keywords: | Optimal Taxation, Income Tax, Emigration, Participation Constraints |
| JEL: | H21 H31 D82 F22 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:iep:wpidep:0610&r=pbe |
| By: | Ruud de Mooij; Gaetan Nicodème |
| Abstract: | In Europe, declining corporate tax rates have come along with rising tax-to-GDP ratios. This paper explores to what extent income shifting from the personal to the corporate tax base can explain these diverging developments. We exploit a panel of European data on firm births and legal form of business to analyze income shifting via increased entrepreneurship and incorporation. The results suggest that lower corporate taxes exert an ambiguous effect on entrepreneurship. The effect on incorporation is significant and large. It implies that the revenue effects of lower corporate tax rates – possibly induced by tax competition -- partly show up in lower personal tax revenues rather than lower corporate tax revenues. Simulations suggest that between 10% and 17% of corporate tax revenue can be attributed to income shifting. Income shifting is found to have raised the corporate tax-to-GDP ratio by some 0.2%-points since the early 1990s. |
| Keywords: | corporate tax, personal tax, entrepreneurship, incorporation, income shifting |
| JEL: | H25 M13 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1883&r=pbe |
| By: | Ernesto Crivelli; Klaas Staal |
| Abstract: | There is much evidence against the so-called "too big to fail" hypothesis in the case of bailouts to sub-national governments. We look at a model where districts of different size provide local public goods with positive spillovers. Matching grants of a central government can induce socially-efficient provision, but districts can still exploit the intervening central government by inducing direct financing. We show that the ability of a district to induce a bailout from the central government and district size are negatively correlated. |
| Keywords: | bailouts, soft-budget constraints, jurisdictional size, public goods, spillovers |
| JEL: | H40 H70 R10 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1858&r=pbe |
| By: | Kleven, Henrik; Kreiner, Claus Thustrup; Saez, Emmanuel |
| Abstract: | This paper analyzes the optimal income tax treatment of couples. Each couple is modelled as a single rational economic agent supplying labor along two dimensions: primary and secondary earnings. We consider fully general joint income tax systems. Separate taxation is never optimal if social welfare depends on total couple incomes. In a model where secondary earners make only a binary work decision (work or not work), we demonstrate that the marginal tax rate of the primary earner is lower when the spouse works. As a result, the tax distortion on the secondary earner decreases with the earnings of the primary earner and actually vanishes to zero asymptotically. Such negative jointness is optimal because redistribution from two-earner toward one-earner couples is more valuable when primary earner income is lower. We also consider a model where both spouses display intensive labor supply responses. In that context, we show that, starting from the optimal separable tax schedules, introducing some negative jointness is always desirable. Numerical simulations suggest that, in that model, it is also optimal for the marginal tax rate on one earner to decrease with the earnings of his/her spouse. We argue that many actual redistribution systems, featuring family-based transfers combined with individually-based taxes, generate schedules with negative jointness. |
| Keywords: | couples taxation; optimal income tax |
| JEL: | H21 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5978&r=pbe |
| By: | Jens Brøchner; Jesper Jensen; Patrik Svensson; Peter Birch Sørensen |
| Abstract: | This study evaluates the economic effects of corporate tax coordination in the enlarged European Union using a computable general equilibrium model and a comprehensive set of scenarios for both a common corporate EU tax base and for full harmonisation of tax bases and tax rates. Our main findings are as follows: (i) Corporate tax coordination can yield modest aggregate welfare gains, but the details of the coordination policies determine outcomes and economic gains cannot be taken for granted. (ii) All scenarios for coordination leave some EU Member States as winners and others as losers. An agreement on tax coordination is therefore likely to require elaborate compensation mechanisms. (iii) The large and diverse country effects suggest that Enhanced Cooperation for a subset of the Member States may be the most likely route towards tax coordination. Coordination among a subset of relatively homogenous Member States will lead to less radical policy changes, but also to smaller gains. (iv) Identifying winners and losers from coordination for the purpose of a compensation mechanism may be problematic, since countries experiencing gains in GDP and welfare tend to lose tax revenues, and vice versa. |
| JEL: | H77 H87 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1859&r=pbe |
| By: | Hans Jarle Kind; Marko Koethenbuerger; Guttorm Schjelderup |
| Abstract: | Two-sided platform firms serve distinct customer groups that are connected through interdependent demand, and include major businesses such as the media industry, banking, and the software industry. A well known textbook result in one-sided markets is that a government may increase a monopolist's output and reduce the deadweight loss by subsidizing output. The present paper shows that this result need not hold in a two-sided market. On the contrary, a higher ad-valorem tax rate - rather than a subsidy - could increase output and enhance welfare. |
| Keywords: | two-sided markets, ad-valorem taxes, specific taxes, imperfect competition, industrial organization |
| JEL: | D40 D43 H21 H22 L13 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1871&r=pbe |
| By: | Auriol, Emmanuelle; Warlters, Michael |
| Abstract: | In this paper we propose estimates of the marginal cost of public funds (MCF) in 38 African countries. We develop a simple general equilibrium mode inspired by the “1-2-3” model of Devarajan et al. (1994) that can handle taxes on the five major tax classes, takes account of the informal sector, and can be calibrated with little more than national accounts data. Sensitivity analysis suggests that our base case estimates are reasonably robust for purposes of tax reform. Contrary to conventional wisdom, differences in MCF are not strongly related to the wealth of the country. We hence show that a reasonable estimate of the average MCF in Africa is 1.17. On the other hand, there is a strong relationship between the size of the informal sector and the value of MCF. Moreover on average taxes on factors have high MCFs and taxes on imports and domestic goods have low MCFs. This suggests that welfare could be improved by increased reliance on VATs and reduced reliance on exports and factor taxes, and by reducing red tape barriers to business entry into the formal sector. |
| Keywords: | marginal cost of public fund; sub-Saharan Africa; tax reform |
| JEL: | D43 H25 H26 H32 H60 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6007&r=pbe |
| By: | Niklas Potrafke |
| Abstract: | This paper examines the effects of political determinants on the allocation of public expenditures. Analyzing an OECD panel from 1990 to 2004, a SURE model controls for the contemporaneous correlation between the different expenditure categories (COFOG). I find that left governments set other priorities than right governments: In particular, they increase spending for "Environment protection", "Recreation; Culture and Religion" and "Education". The number of coalition partners as well as minority governments affects the allocation of public expenditures, too. In contrast, there are no election and pre-election year effects. |
| Keywords: | Allocation of public expenditures, partisan politics |
| JEL: | D72 E62 H50 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp653&r=pbe |
| By: | Koziarivska Larysa; Oliinyk Andrii |
| Abstract: | The paper researches into the consequences of the pit reform of 2004 introduced on tax revenues, shadow activities, and income streams. The research approach adopted involves constructing theoretical general equilibrium model adapted to Ukrainian practices and further empirical testing of the hypotheses on the firm-level data. The study leads to inferring that the reform did not stimulate any tangible structural changes in the economy; with no effect on the shadow sector size. As a result of the reform, the government's income in the form of PIT revenues was redistributed to firms. The research shows that under the present conditions no other rate is expected to perform better the existing rate. Within the framework of existing structural ties in the economy it would be beneficial to increase compliance by introducing a more severe punishment for evasion. |
| Keywords: | Ukraine, tax reform, tax policy, tax evasion, shadow economy, behavioural response |
| JEL: | D21 E64 H21 H25 H26 H32 |
| Date: | 2006–12–18 |
| URL: | http://d.repec.org/n?u=RePEc:eer:wpalle:06-08e&r=pbe |
| By: | Huizinga, Harry; Voget, Johannes |
| Abstract: | In an international merger or acquisition, the national residences of the acquirer and the target determine to what extent the newly created multinational firm is subject to international double taxation. This paper presents evidence that the parent-subsidiary structure of newly created multinational firms reflects the prospect of international double taxation. The number of acquiring firms at the national level similarly reflects international double taxation. The evidence suggests that tax policy in the form of lower tax rates or the elimination of residence-based worldwide taxation attracts additional parent companies of multinational firms. On the basis of our estimation, we simulate the impact of the elimination of worldwide taxation by the United States on parent firm selection. |
| Keywords: | international taxation; mergers and acquisitions |
| JEL: | F23 H25 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5974&r=pbe |
| By: | Anne-Marie Brook; Edward Whitehouse |
| Abstract: | Recent social security reform has significantly improved the long-run sustainability of the pension system. However, the pension system continues to serve as an important barrier to a more rapid expansion of the formal-sector economy in two ways. First, early-retirement incentives (including severance payments) continue to push many incumbent formal sector workers into the informal sector, often at ages as young as 40-45. While new labour force entrants face a much higher retirement age, policies for incumbents are fiscally expensive, inequitable, and serve to swell the ranks of the informal sector. Second, even when the transition to the new pension rules is complete, net replacement rates will remain very high by OECD standards, requiring high social security contribution rates that make it too expensive for firms to employ low-skilled labour in the formal sector. Thus, further pension reform is one of the keys to overcoming Turkey’s economic duality. Finally, since the pension system does not cover the informal sector, it does little to alleviate poverty among the wider population of older people. This paper discusses a number of reforms that would increase the retirement age, reduce inter-generational inequities, and permit a significant cut in the tax wedge on labour, while better addressing old-age poverty concerns at all levels of income. <P>Le système des retraites en Turquie: : Les réformes supplémentaires pour aider à résoudre le problème de l’informalité <BR>La récente réforme de la sécurité sociale a amélioré largement la viabilité à long terme du système de retraite. Cependant, la structure de ce dernier reste un important obstacle à une expansion plus rapide de l’économie formelle, pour deux raisons. Premièrement, du fait des incitations à une retraite anticipée (telles que les indemnités de départ), de nombreux travailleurs du secteur formel continuent à rejoindre le secteur informel, souvent à un jeune âge comme 40-45 ans. Alors que les nouveaux entrants dans le marché du travail prendront leur retraite à un âge bien plus élevé, les politiques concernant les travailleurs déjà actifs sont coûteuses pour les finances publiques, ne sont pas équitables et nourrissent le secteur informel. Deuxièmement, même lorsque le passage aux nouvelles règles régissant les retraites sera achevé, les taux de remplacement nets seront encore très généreux par rapport aux niveaux observés dans la zone OCDE, avec des taux de cotisation élevés qui dissuadent les entreprises du secteur formel d’employer une main-d’oeuvre peu qualifiée. En conséquence, la poursuite de la réforme des retraites est fondamentale pour surmonter ce dualisme économique. Enfin, parce qu’il ne couvre pas le secteur informel, le système de retraite ne contribue guère à atténuer la pauvreté au sein de la population âgée. Ce chapitre examine plusieurs réformes qui repousseraient l’âge de la retraite, réduiraient les inégalités intergénérationnelles et feraient diminuer significativement le coin fiscal sur le travail, tout en répondant mieux aux préoccupations suscitées par la pauvreté des personnes âgées à tous les niveaux de revenu. |
| JEL: | D10 H55 J14 J18 |
| Date: | 2006–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:oec:elsaab:44-en&r=pbe |
| By: | Niklas Potrafke |
| Abstract: | I test if parties matter with respect to the allocation of public expenditures in Germany. Considering the allocation of rights and duties due to the federal structure, two econometric models are estimated. First, a SURE model analyses spending at the federal level for the period from 1950 to 2003 and finds evidence for partisan politics and election year effects. Second, I examine the spending behaviour in the states from 1974 to 2004 in a panel data framework. In comparison to the federal level, policy has weaker impacts on the allocation of expenditures in the states. |
| Keywords: | Allocation of public expenditures, partisan politics, fiscal federalism |
| JEL: | D72 H50 H72 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp652&r=pbe |
| By: | Ferrett, Ben; Wooton, Ian |
| Abstract: | Intuition suggests that the international distribution of firm ownership ought to affect tax/subsidy competition for mobile plants. One might expect that the greater the share of a firm owned within a potential host country that offers a relatively profitable production location, the more that nation will be prepared to pay to attract the firm's production facility. We show this intuition to be false. In equilibrium, both plant location and the tax/subsidy offers are independent of the international distribution of ownership. The reason is that the tax/subsidy competition equalises the firm's post-tax profits across countries, making owners of capital indifferent towards the location of production. |
| Keywords: | foreign direct investment; international distribution of firm ownership; tax/subsidy competition |
| JEL: | F12 F23 H25 H73 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5984&r=pbe |
| By: | Robert S. Chirinko; Daniel J. Wilson |
| Abstract: | There is an ongoing debate in the U.S. among policymakers and the courts concerning the practical effects of state investment tax incentives. However, this debate often suffers from a lack of clear information on the extent of such incentives among states and how these incentives have evolved over time. This paper takes a first step toward addressing this shortcoming. Compiling information from all 50 states and the District of Columbia over the past 40 years, we are able to paint a picture of the variation in state investment tax incentives across states and over time. In particular, we document three stylized facts: (1) Over the last 40 years, state investment tax incentives have become increasingly large and increasingly common among states; (2) these incentives, as well as the level of the overall after-tax price of capital, are to a large extent clustered in certain regions of the country; and (3) states that enact investment tax credits tend to do so around the same time as their neighboring states. |
| Keywords: | Tax incentives ; Taxation ; State finance |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2006-49&r=pbe |
| By: | Laurent Simula (EHESS); Alain Trannoy (EHESS, Greqam-Idep) |
| Abstract: | In this paper, individuals, initially living in a Mirrleesian economy A, have outside options consisting in settling down in a laissez-faire country B while paying positive migration costs. We first examine the impact of the threat of migration, as- suming participation constraints are taken into account for all individuals, and show that optimal linear income taxes are obtained as corner solutions. We then consider a social criterion allowing emigration of the highest skilled individuals and show by means of an example that social welfare may rise following an increase in income re- distribution, despite this resulting in the departure of the most productive individuals. Numerical simulations on French data illustrate the lack of degrees of freedom o¤ered by linear taxation when agents can vote with their feet, which may be regarded as an argument against linear taxes. |
| Keywords: | Optimal Linear Income Taxation, Participation Constraints, Individual Mobility |
| JEL: | H21 H31 D82 F22 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:iep:wpidep:0606&r=pbe |
| By: | Kathryn Birkeland; Edward C. Prescott |
| Abstract: | People are having longer retirement periods, and population growth is slowing and has even stopped in some countries. In this paper we determined the implications of these changes for the needed amount of government debt. The needed debt is near zero if there are high tax rates and the transfer share of gross national income (GNI) is high. But, with such a system there are huge dead-weight losses as the result of the high tax rate on labor income. With a savings system, a large government debt to annual GNI ratio is needed, as large as 5 times GNI, and welfare is as much as 24 percent higher in terms of lifetime consumption equivalents than the tax-and-transfer system. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:648&r=pbe |
| By: | Angel Asensio |
| Abstract: | The paper studies the effects of heterogeneity upon the monetary and fiscal-budgetary policy interactions in a Keynesian monetary union. As a result of interactions, some of our results contrast sharply with the ones in studies that consider separately monetary, fiscal and budgetary policies. Other non-conventional mechanisms are identified in connection with the supply-side effects of fiscal taxes variations. As concerns policy responses to inherited unemployment, the central bank profile proves notably to be crucial in determining the magnitude of the instrument moves that are required to achieve the objectives. Simulations suggest that heterogeneity is likely to introduce more sources of non conventional effects and to enforce adverse interactions, especially in contexts of high unemployment. However, provided authorities are able to control the distributive conflict and its inflationary consequences, it is beneficial for the union that monetary policy specializes in countering the common effects of shocks, because that pushes governments to concentrate in countering the idiosyncratic effects. Employment targets require then lower instruments responses, as a result of efficiency gains. |
| Keywords: | Monetary policy;Fiscal policy;Monetary union;Macroeconomic governance;Post-Keynesian |
| Date: | 2006–12–14 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00120406_v1&r=pbe |
| By: | Robert S. Chirinko; Daniel J. Wilson |
| Abstract: | Though the U.S. federal investment tax credit (ITC) was permanently repealed in 1986, state-level ITCs have proliferated over the last few decades. The proliferation of state ITCs and other investment tax incentives raises two important questions: (1) Are these tax incentives effective in achieving their stated objective, to increase investment within the state?; and (2) To the extent these incentives raise investment within the state, how much of this increase is due to investment drawn away from other states? To begin to answer these questions, we construct a detailed panel data set for 50 states for 20+ years (depending on the series). The data set contains series on output and capital, their relative prices, and the number of establishments. The effects of tax parameters on capital formation and establishments are measured by the Jorgensonian user cost of capital that depends in a nonlinear manner on federal and state tax parameters. Cross-jurisdiction differences in state investment tax credits and state corporate tax rates entering the user cost, combined with a panel that is long in the time dimension, are key to identifying the effectiveness of state investment incentives. Three models are estimated: (1) a Capital Demand Model motivated by the first-order condition for profit-maximization; (2) a Spatial Discontinuity Model developed by Holmes (1998) that exploits the spatial discontinuity in tax policies that occurs at state borders; and (3) a Twin-Counties Model that matches counties to a cross-border "twin" and relates between county differentials in manufacturing activity to between-county differentials in tax policy. The first model relies on state-level data, while the latter two use county-level data. On balance, the models find a significant channel for state tax incentives on own-state economic activity and document the importance of interstate capital flows, a necessary element for meaningful tax competition. Whether state investment incentives are a zero-sum game among the states is less certain and depends on the definition of the set of competitive states. |
| Keywords: | Tax incentives ; Taxation ; State finance |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2006-47&r=pbe |
| By: | Barbara Hanel (University of Erlangen-Nuremberg); Regina T. Riphahn (University of Erlangen-Nuremberg and IZA Bonn) |
| Abstract: | We use reforms in the Swiss public retirement system to identify the responsiveness of retirement timing to financial incentives. A permanent reduction of retirement benefits by 3.4 percent induces more than 70 percent of females to postpone their retirement. The responsiveness of male workers, who undergo a different treatment, is lower. |
| Keywords: | retirement insurance, incentives, social security, labor force exit, natural experiment, Switzerland |
| JEL: | J26 H55 J14 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2492&r=pbe |
| By: | Werner Güth; M. Vittoria Levati; Matthias Sutter; Eline van der Heijden |
| Abstract: | We examine the effects of leading by example in voluntary contribution experiments. Leadership is implemented by letting one group member contribute to the public good before followers do. Such leadership increases contributions in comparison to the standard voluntary contribution mechanism, especially so when it goes along with authority in the form of granting the leader exclusion power. Whether leadership is fixed or rotating among group members has no significant influence on contributions. Only a minority of groups succeeds in endogenously installing a leader, even though groups with leaders are much more efficient than groups without a leader. |
| Keywords: | Voluntary contribution experiment, leadership, exclusion power, endogenous selection |
| JEL: | C72 C92 H41 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:esi:discus:2006-35&r=pbe |
| By: | Christos Kotsogiannis; Robert Schwager |
| Abstract: | A multi-jurisdictional system is thought to improve, through yardstick competition, accountability. At the same time equalization programs, a common feature of multi-jurisdictional systems, are thought to be a prerequisite for both efficiency of the internal market and the equity objective of the equal treatment of equals. This paper shows that such programs, by reducing the information context of comparisons across jurisdictions, introduce perverse fiscal incentives and thus reduce accountability. The consequence of this is that equilibrium rent-taking increases with the intensity of equalization transfers. |
| Keywords: | equalization transfer programs, fiscal capacity, rent-seeking, fiscal federalism |
| JEL: | D72 H77 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1865&r=pbe |
| By: | António Afonso; Pedro Gomes; Philipp Rother |
| Abstract: | In this paper we study the determinants of sovereign debt credit ratings using rating notations from the three main international rating agencies, for the period 1995-2005. We employ panel estimation and random effects ordered probit approaches to assess the explanatory power of several macroeconomic and public governance variables. Our results point to a good performance of the estimated models, across agencies and across the time dimension, as well as a good overall prediction power. Relevant explanatory variables for a country's credit rating are: GDP per capita, GDP growth, government debt, government effectiveness indicators, external debt, external reserves, and default history. |
| Keywords: | credit ratings; sovereign debt; rating agencies; panel data; random effects ordered probit. |
| JEL: | C23 C25 E44 F30 F34 G15 H63 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp352006&r=pbe |
| By: | Panu Poutvaara (University of Helsinki and IZA Bonn) |
| Abstract: | This paper analyzes public provision of internationally applicable and country-specific education, when job opportunities available to those with internationally applicable education are uncertain. Migration provides a market insurance in case labor market opportunities in the home country are poor. An increasing international applicability of a given type of education encourages students to invest more effort when studying. Governments, on the other hand, face an incentive to divert the provision of public education away from internationally applicable education toward country-specific skills. This would mean educating too few engineers, economists and doctors, and too many lawyers. |
| Keywords: | public education, migration, brain drain and brain gain, European Union, common labor market |
| JEL: | H52 I28 F22 J24 J61 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2478&r=pbe |
| By: | Brian Krogh Graversen (Danish National Institute of Social Research); Jan C. van Ours (Tilburg University, CentER, CEPR and IZA Bonn) |
| Abstract: | This paper investigates how a mandatory activation program in Denmark affects the job finding rate of unemployed workers. The activation program was introduced in an experimental setting where about half of the workers who became unemployed in the period from November 2005 to March 2006 were randomly assigned to the program while the other half was not. It appears that the activation program is very effective. The median unemployment duration of the control group is 14 weeks, while it is 11.5 weeks for the treatment group. The analysis shows that the job finding rate in the treatment group is 30% higher than in the control group. This result is mainly driven by the more intensive contacts between the unemployed and the public employment service. |
| Keywords: | unemployment insurance, unemployment duration, experiment |
| JEL: | C41 H55 J64 J65 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2504&r=pbe |
| By: | Marc Fleurbaey; Yves Sprumont |
| Abstract: | We study the construction of a social ordering function for the case of a public good financed by contributions from the population, and we extend the analysis of Maniquet and Sprumont (2004) to the case when contributions cannot be negative, i.e. agents cannot receive subsidies from the others. |
| Keywords: | social ordering, public good, maximin |
| Date: | 2006–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00121373_v1&r=pbe |
| By: | Baland, Jean-Marie; Estevan, Fernanda |
| Abstract: | In this paper, we investigate the role of young adult mortality on child labour and educational decisions. We argue that mortality risks are a major source of risks in returns to education in developing countries. We show that, in the absence of appropriate insurance mechanisms, the level of child labour is inefficient, but it can be too high or too low. It is too high when parents are not very altruistic or anticipate positive transfers from their children in the future. Uncertain returns to education, endogenous mortality or imperfect capital markets unambiguously increase child labour. When the level of child labour is inefficiently high, we also show that a cash transfer conditional on child's schooling can always restore efficiency regarding child labour. |
| Keywords: | child labour; conditional cash transfers; education; mortality risks; old-age security motive |
| JEL: | D13 D81 H31 I00 O12 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5972&r=pbe |
| By: | Lambert-Mogiliansky, Ariane; Sonin, Konstantin; Zhuravskaya, Ekaterina |
| Abstract: | We study the nature of judicial bias in bankruptcy proceedings following the enactment of bankruptcy law in Russia in 1998. We find that regional political characteristics affected judicial decisions about the numbers and types of bankruptcy procedures initiated after the law took effect. In particular, controlling for indicators of firms’ insolvency and the quality of the regional judiciary, reorganization procedures were significantly more frequent in regions with politically popular governors and governors who had hostile relations with the federal government. Poor judicial quality was also associated with higher incidence of reorganizations. In addition, the quality of the regional judiciary affected performance of firms in reorganization procedure: in regions with poor judicial quality firms in reorganization significantly underperformed firms not in bankruptcy; while the opposite was true in regions with high-quality judges. The effect of judicial quality on restructuring is particularly strong in regions with politically popular governors because the judicial bias in governor’s favor is the highest in poor-quality courts when governors are popular. This evidence is consistent with previously reported anecdotes, which suggested that politically strong regional governors used bankruptcy proceedings to protect firms from paying federal taxes. |
| Keywords: | bankruptcy; capture; incentives; regional governments; Russia; transition |
| JEL: | D23 G33 H11 H77 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5998&r=pbe |
| By: | Fabio Giambiagi; Luiz de Mello |
| Abstract: | This paper reviews the main elements of social security reform in Brazil since 1998 and discusses areas where further policy action is yet to be taken to ensure the sustainability of the social-security system over time. Outlays on pensions paid to private-sector workers have risen as a result of population ageing and the increase in the value of the minimum wage in real terms, to which the minimum pension is linked. Some features of existing social protection programmes, including means-tested old-age and disability-related benefits, reduce the incentives facing workers to seek social security coverage. At the same time, an expansion of the base of contributions to social security has been constrained by widespread labour informality. Further reform will therefore need to focus on options for containing the rise in social security spending while tackling labour informality so as to broaden the base of contributions. <P>Réforme du système de retraite au Brésil : Réussites et défis <BR>Ce document analyse les réformes du système de retraite brésilien depuis 1998 et propose des éléments d'une réforme complémentaire qui pourraient être mise en place pour assurer la soutenabilité du système de retraite dans la durée. Les dépenses publiques des pensions accordées aux travailleurs retraités du secteur privé ont augmenté dû au vieillissement de la population et à l'accroissement de la valeur du salaire minimum en termes réels, auquel la pension minimale est indexée. Certains éléments des programmes de protection sociale existants, y compris les transferts de revenu aux personnes âgées et aux invalides, n'incitent pas les travailleurs à être couverts par la sécurité sociale. En même temps, l'informalité très répandue des marchés du travail constitue une contrainte à l'expansion de la recette des cotisations sociales. Par conséquent, des réformes complémentaires devront mettre en oeuvre des dispositifs visant la contention de l'accroissement des dépenses publiques des pensions et à la réduction de l?informalité du travail de façon à augmenter la recette des cotisations sociales. |
| Keywords: | Brazil, Brésil, social security reform, réforme du système de retraite, social protection, protection sociale |
| JEL: | H55 I38 J32 |
| Date: | 2006–12–06 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:534-en&r=pbe |
| By: | Claudio Agostini (ILADES-Georgetown University, Universidad Alberto Hurtado); Gastón Palmucci (Tribunal de Defensa de la Libre Competencia (Chile)) |
| Abstract: | Housing units with closer access to public transportation enjoy a higher market value than those with similar characteristics but poorer access. This difference can be explained by the less expensive cost of transport to the main workplaces and shopping areas in town. For this reason, investments in public transport infrastructure, for example, building a new metro line, are capitalized totally or partially on land property and housing prices. This work analyzes empirically the degree of capitalization on housing prices when the new Line 4 of the Santiago de Chile Metro System was built. In particular, and given that the new line started operating in December 2005, the degree of anticipated capitalization on housing prices at the moment of announcing construction of Line 4 and at the moment of informing on the basic engineering to determine the location of the stations has been estimated. A unique data base has been used, containing all home buying and selling operations in the Greater Santiago between December 2000 and March 2004. The results show that the average apartment price rose between 3.3% and 4.4% as a consequence of having announced the construction, and between 4.5% and 5.7% after information on the location of the stations was made known. This increase was not distributed evenly but depended on the distance to the closest station. An indirect effect of this kind of capitalization is that property tax collection increases if landed property is reassessed according to the price rise. This effect is not negligible in magnitude and could stand for a minimum between 14% and 20% of investment in the new metro line, which gives way to an interesting discussion with respect to the form of financing the metro network extension. |
| Keywords: | Metro, Apartment Prices, Anticipated Capitalization |
| JEL: | H54 R21 R53 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:ila:ilades:inv176&r=pbe |
| By: | Yuanzhu Lu (China Economics and Management Academy, Central University of Finance and Economics); Sougata Poddar (Department of Economics, National University of Singapore) |
| Abstract: | We consider a game of endogenous timing of sequential choice of capacity and quantity with observable delay in a mixed duopoly and a private duopoly under two possible time structures. In mixed duopoly, we find that a simultaneous play at the capacity stage or at the quantity stage can never be supported as subgame perfect Nash equilibrium (SPNE); whereas a simultaneous play at each stage turns out to be the unique SPNE in a private duopoly. In mixed duopoly there is multiplicity of equilibria and all SPNEs require sequentiality at the capacity as well as quantity stage. These equilibrium outcomes are invariant with respect to the endogenous time structures. In this context, we also show that the public firm never chooses over (excess) capacity in mixed duopoly, while the private firm never chooses under capacity in both mixed and private duopoly. |
| Keywords: | Endogenous timing, public firm, private firm, over capacity, under capacity |
| JEL: | L13 D43 H42 |
| URL: | http://d.repec.org/n?u=RePEc:nus:nusewp:wp0605&r=pbe |
| By: | A. Mitchell Polinsky; Steven Shavell |
| Abstract: | We analyze a model in which firms are able to acquire information about product risks and may or may not be required to disclose this information. We initially study the effect of disclosure rules assuming that firms are not liable for the harm caused by their products. Although mandatory disclosure obviously is superior to voluntary disclosure given the information about product risks that firms possess -- since such information has value to consumers -- voluntary disclosure induces firms to acquire more information about product risks because they can keep silent if the information is unfavorable. The latter effect could lead to higher social welfare under voluntary disclosure. The same results hold if firms are liable for harm under the negligence standard of liability. Under strict liability, however, firms are indifferent about revealing information concerning product risk, and mandatory and voluntary disclosure rules are equivalent. |
| JEL: | D18 D62 D82 H23 K13 L15 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12776&r=pbe |
| By: | S. Brock Blomberg; Thomas DeLeire; Gregory D. Hess |
| Abstract: | We construct and estimate an economic model of religious giving. We employ a dynamic consumer optimization model with mortality in which intra-temporal utility stems from both consumption and religious contributions. Individuals also decide how to allocate resources between religious contributions (which have both a this-life consumption value and an after-life investment value) and other consumption expenditures. If religious contributions do not have an after-life investment value, the ratio of contributions to consumption expenditures should be unrelated to the probability of death. However, if there is an investment value from religious giving, individuals should allocate a greater share of their income to religious contributions as their probability of death increases. We estimate the model using data from the Consumer Expenditure Survey on the consumption and religious contribution patterns of a repeated cross-section of households and of a synthetic cohort panel. We find strong evidence that individuals behave as if religious contributions have a value in the after-life, in a manner consistent with the after life-cycle model. The estimates of the structural parameters of the model also imply that while after-life investment considerations (i.e. impending death) are an important determinant of the life-cycle profile of religious contributions, within-life (i.e. religious consumption) factors pin down a household’s average level of religious contributions over a lifetime. |
| Keywords: | god, life-cycle, consumption, religion, tithing |
| JEL: | H10 H50 H80 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1854&r=pbe |
| By: | António Afonso; Miguel St. Aubyn |
| Abstract: | We estimate a semi-parametric model of health production process using a two-stage approach for OECD countries. By regressing data envelopment analysis output efficiency scores on non-discretionary variables, both using Tobit analysis and a single and double bootstrap procedure, we show that inefficiency is strongly related to GDP per head, the education level, and health behaviour such as obesity and smoking habits. The used bootstrapping procedure corrects likely biased DEA output scores taking into account that environmental variables are correlated to output and input variables. |
| Keywords: | technical efficiency; health; DEA; bootstrap; semi-parametric. |
| JEL: | C14 C61 H52 I11 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp332006&r=pbe |
| By: | Garcia Pires, Armando José |
| Abstract: | Two central results in the strategic trade literature are that governments shall support winners and that there is a policy prisoner dilemma in international subsidy wars (i.e. countries have incentives to support local firms but they would be better off by cooperating to not intervene). We show that exactly the contrary holds when asymmetries between firms are endogenous. Specifically, the incentives to support are bigger for loser firms given that intervention can aim at making them winners (competitiveness shifting effects). As a result the countries that host less competitive firms always prefer intervention. We illustrate this with the Airbus-Boeing case. |
| Keywords: | Airbus; asymmetric firms; Boeing; R&D investment; R&D subsidies |
| JEL: | F13 H52 L13 L52 O31 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5979&r=pbe |
| By: | Almeida, Rita; Carneiro, Pedro |
| Abstract: | This paper investigates how enforcement of labour regulation affects the firm's use of informal labour, firm size and firm performance. Using firm level data on employment, capita, and output, census data on informal employment at the city level, and administrative data on enforcement of regulation at the city level, we show that in areas where law enforcement is stricter firms employ a smaller proportion of informal workers. Furthermore, by reducing the firm's access to unregulated labour stricter enforcement is also associated with smaller firms, less fluid labour markets, and (possibly) lower labour productivity. We control for different regional and firm characteristics, and we instrument enforcement with the distance between firm location and the location of an enforcement office, a measure of access of labour inspectors to firms. Taken together, our findings suggest that increased access to labour flexibility frees the firm from growth constraints, and it is likely to contribute to an improvement in productivity. |
| Keywords: | employment; informal sector; labour demand; labour markets; productivity; regulation |
| JEL: | H00 H10 J50 K20 L50 L60 O17 O40 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5976&r=pbe |