nep-pbe New Economics Papers
on Public Economics
Issue of 2007‒01‒13
forty-one papers chosen by
Peren Arin
Massey University

  1. Emergence and Persistence of Inefficient States By Daron Acemoglu; Davide Ticchi; Andrea Vindigni
  2. Debt and the effects of fiscal policy By Carlo Favero and Francesco Giavazzi
  3. Dynamic Scoring: Alternative Financing Schemes By Eric M. Leeper; Shu-Chun Susan Yang
  4. Redistribution, Taxes, and the Median Voter By Marco Bassetto; Jess Benhabib
  5. Fiscal Policy and Macroeconomic Uncertainty in Emerging Markets: The Tale of the Tormented Insurer By Enrique G. Mendoza; P. Marcelo Oviedo
  6. Immigration and the Survival of Social Security: A Political Economy Model By Edith Sand; Assaf Razin
  7. Notional Defined Contribution Pension Systems in a Stochastic Context: Design and Stability By Alan J. Auerbach; Ronald Lee
  8. The Role of the Property Tax in Financing Rural Local Governments in Developing Countries By Richard M. Bird; Enid Slack
  9. Optimal Simple Rules for Fiscal Policy in a Monetary Union By Bernhard Herz; Werner Roeger; Lukas Vogel
  10. Can welfare states outgrow their fiscal sustainability problems? By Erling Holmøy
  11. Public finances in Portugal: a brief longrun view By António Afonso
  12. Optimal Pre-Announced Tax Reforms Under Valuable And Productive Government Spending By Mathias Trabandt
  13. In praise of tax havens: International tax planning and foreign direct investment By Qing Hong; Michael Smart
  14. Optimal Fiscal Policy over the Business Cycle By Filippo Occhino
  15. The Dynamics of Optimal Taxation when Human Capital is Endogenous By Marek Kapicka
  16. Designing Optimal Taxes with a Microeconometric Model of Household Labour Supply By Rolf Aaberge and Ugo Colombino
  17. Changing Patterns of Domestic and Cross-Border Fiscal Policy Multipliers in Europe and the US By Agnes Benassy-Quere; Jacopo Cimadomo
  18. The Incentive Effects of Property Taxation: Evidence from Norwegian School Districts By Jon H. Fiva and Marte Rønning
  19. Transfers versus Public Investment: The Politics of Intergenerational Redistribution and Growth By Martin Gonzalez-Eiras; Dirk Niepelt
  20. Economic Perfomance and Work Activity in Sweden after the Crisis of the Early 1990s By Davis, Steven J.; Henrekson, Magnus
  21. Impact of Public Investment Upon Economic Performance and Budgetary Consolidation Efforts in the European Union By Alfredo Marvao Pereira; Maria De Fatima Pinho
  22. Which Countries Become Tax Havens? By Dhammika Dharmapala; James R. Hines Jr.
  23. Government Intervention as an Optimal Response to Government (not Market!) Failure By Alberto Bisin; Adriano Rampini
  24. Did Big Government's Largesse Help the Locals? The Implications of WWII Spending for Local Economic Activity, 1939-1958 By Joseph Cullen; Price V. Fishback
  25. The final blow to the Stability Pact? EMU enlargement and government debt By Philipp Paulus
  26. The distribution of wealth and redistributive policies By Jess Benhabib; Alberto Bisin
  27. Coordinating Federal and Provincial Sales Taxes: Lessons from the Canadian Experience By Richard M. Bird; Jack M. Mintz; Thomas A. Wilson
  28. Health Insurance and Tax Policy By Karsten Jeske; Sagiri Kitao
  29. Labor Supply Effects of the Recent Social Security Benefit Cuts: Empirical Estimates Using Cohort Discontinuities By Giovanni Mastrobuoni
  30. Demographic Trends, Fiscal Policy and Trade Deficits By Andrea Ferrero
  31. Neutral Property Taxation By Richard Arnott
  32. An assessment of reform options for the public service pension fund in Uganda By Bogomolova, Tatiana; Impavido, Gregorio; Pallares-Miralles, Montserrat
  33. Sovereign default risk with heterogenous borrowers By Juan Carlos Hatchondo; Leonardo Martinez; Horacio Sapriza
  34. Federalism and Reductions in the Federal Budget By John Quigley; Daniel Rubinfeld
  35. Public Policy and Venture Capital Financed Innovation: A Contract Design Approach By Julia Hirsch
  36. Lula’s Social Policies: New Wine in Old Bottles? By Alcino Ferreira Câmara Neto; Matías Vernengo
  37. On the Consequences of Demographic Change for International Capital Flows, Rates of Returns to Capital, and the Distribution of Wealth and Welfare By Dirk Krueger; Alexander Ludwig
  38. Evidence on the Insurance Effect of Redistributive Taxation By Charles Grant; Christos Koulovatianos; Alexander Michaelides; Mario Padula
  39. Education and Crime over the Life Cycle By Giulio Fella; Giovanni Gallipoli
  40. The Connection Between Maternal Employment and Childhood Obesity: Inspecting the Mechanisms By Angela Fertig; Gerhard Glomm; Rusty Tchernis
  41. A free lunch for Emerging Markets: Removing international financial market imperfections with modern finance instruments By Christian Bauer; Bernhard Herz; Stefan Hoops

  1. By: Daron Acemoglu; Davide Ticchi; Andrea Vindigni
    Abstract: Inefficiencies in the bureaucratic organization of the state are often viewed as important factors in retarding economic development. Why certain societies choose or end up with such inefficient organizations has received very little attention, however. In this paper, we present a simple theory of the emergence and persistence of inefficient states. The society consists of rich and poor individuals. The rich are initially in power, but expect to transition to democracy, which will choose redistributive policies. Taxation requires the employment of bureaucrats. We show that, under certain circumstances, by choosing an inefficient state structure, the rich may be able to use patronage and capture democratic politics. This enables them to reduce the amount of redistribution and public good provision in democracy. Moreover, the inefficient state creates its own constituency and tends to persist over time. Intuitively, an inefficient state structure creates more rents for bureaucrats than would an efficient state structure. When the poor come to power in democracy, they will reform the structure of the state to make it more efficient so that higher taxes can be collected at lower cost and with lower rents for bureaucrats. Anticipating this, when the society starts out with an inefficient organization of the state, bureaucrats support the rich, who set lower taxes but also provide rents to bureaucrats. We show that in order to generate enough political support, the coalition of the rich and the bureaucrats may not only choose an inefficient organization of the state, but they may further expand the size of bureaucracy so as to gain additional votes. The model shows that an equilibrium with an inefficient state is more likely to arise when there is greater inequality between the rich and the poor, when bureaucratic rents take intermediate values and when individuals are sufficiently forward-looking.
    Keywords: bureaucracy, corruption, democracy, patronage politics, political economy, public goods, redistributive politics.
    JEL: P16 H11 H26 H41
    Date: 2006
  2. By: Carlo Favero and Francesco Giavazzi
    Abstract: Empirical investigations of the effects of fiscal policy shocks share a common weakness: taxes, government spending and interest rates are assumed to respond to various macroeconomic variables but not to the level of the public debt; moreover the impact of fiscal shocks on the dynamics of the debt-to-GDP ratio are not tracked. We analyze the effects of fiscal shocks allowing for a direct response of taxes, government spending and the cost of debt service to the level of the public debt. We show that omitting such a feedback can result in incorrect estimates of the dynamic effects of fiscal shocks. In particular the absence of an effect of fiscal shocks on long-term interest rates—a frequent finding in research based on VAR’s that omit a debt feedback—can be explained by their mis-specification, especially over samples in which the debt dynamics appears to be unstable. Using data for the U.S. economy and the identification assumption proposed by Blanchard and Perotti (2002) we reconsider the effects of fiscal policy shocks correcting for these shortcomings.
  3. By: Eric M. Leeper (Indiana University); Shu-Chun Susan Yang (Joint Committee on Taxation)
    Abstract: Neoclassical growth models predict that reductions in capital or labor tax rates are expansionary when lump-sum transfers are used to balance the government budget. This paper explores the consequences of bond-financed tax reductions that bring forth a range of possible offsetting policies, including future government consumption, capital tax rates, or labor tax rates. Through the resulting intertemporal distortions, current tax cuts can be contractionary. The paper also finds that more aggressive responses of offsetting policies to debt engender less debt accumulation and less costly tax cuts.
    Keywords: Revenue feedback, capital tax, labor tax, debt management
    JEL: H2 H3 H6
    Date: 2006–12
  4. By: Marco Bassetto (Research Department Federal Reserve Bank of Chicago); Jess Benhabib
    Abstract: We study a simple model of production, accumulation, and redistribution, where agents are heterogeneous in their initial wealth, and a sequence of redistributive tax rates is voted upon. Though the policy is infinite-dimensional, we prove that a median voter theorem holds if households have identical, Gorman aggregable preferences; furthermore, the tax policy preferred by the median voter has the "bang-bang" property
    Keywords: Median voter, gorman aggregation, capital income taxes
    JEL: H21 H23
    Date: 2006–12–03
  5. By: Enrique G. Mendoza (University of Maryland); P. Marcelo Oviedo
    Abstract: Governments in emerging markets often behave like a "tormented insurer", trying to use non-state-contingent debt instruments to avoid sharp adjustments in their payments to private agents despite sharp fluctuations in public revenues. In the data, their ability to sustain debt is inversely related to the variability of their revenues, and their primary balances and current expenditures follow a procyclical pattern that contrasts sharply with the evidence from industrial countries. This paper proposes an equilibrium model of a small open economy with incomplete markets and aggregate uncertainty that can rationalize this behavior. In the model, a fiscal authority that chooses optimal expenditure and debt plans given stochastic revenues interacts with private agents that also make optimal consumption and asset accumulation plans. The competitive equilibrium of this economy is solved numerically as a Markov perfect equilibrium using parameter values calibrated to Mexican data. If perfect domestic risk pooling were possible, the ratio of public-to-private expenditures would be constant. With incomplete markets, however, this ratio fluctuates widely and results in welfare losses that dwarf previous estimates of the benefits of risk sharing and consumption smoothing. The model also yields a negative relationship between average public debt and revenue variability similar to the one observed in the data, and a correlation between output and government purchases that matches Mexican data
    Keywords: optimal debt, fiscal solvency, procyclical fiscal policy, incomplete markets
    JEL: E62 F34 H63
    Date: 2006–12–03
  6. By: Edith Sand; Assaf Razin
    Abstract: In the political debate people express the idea that immigrants are good because they can help pay for the old. The paper explores this idea in a dynamic political-economy setup. For this purpose we develop an OLG political economy model of social security and migration. We characterize sub-game perfect Markov equilibria where immigration policy and pay-as-you-go (PAYG) social security system are jointly determined through a majority voting process. The main feature of the model is that immigrants are desirable for the sustainability of the social security system because the political system is able to manipulate the ratio of old to young and thereby the coalition which supports future high social security benefits. We demonstrate that the older is the native born population the more likely is that the immigration policy is liberalized and the social security system survives.
    JEL: F22 H55
    Date: 2006–12
  7. By: Alan J. Auerbach; Ronald Lee
    Abstract: Around the world, Pay-As-You-Go (PAYGO) public pension programs face serious long-term fiscal problems due primarily to actual and projected population aging, and most appear unsustainable as currently structured. Some have proposed the replacement of such plans with systems of fully funded private or personal Defined Contribution (DC) accounts, but the difficulties of transition to funded systems have limited their implementation. Recently, a new variety of public pension program known as "Notional Defined Contribution" or "Non-financial Defined Contribution" (NDC) has been created, with the objectives of addressing the fiscal instability of traditional plans and mimicking the characteristics of funded DC plans while retaining PAYGO finance. Using different versions of the system recently adopted in Sweden, calibrated to US demographic and economic parameters, we evaluate the success of the NDC approach in achieving fiscal stability in a stochastic context. (In a companion paper, we will consider other aspects of the performance of NDC plans in comparison to traditional PAYGO pensions.) We find that the basic NDC scheme is effective at preventing excessive debt accumulation, but does little to prevent significant asset accumulation along many trajectories and on average. With adjustment, however, the NDC approach can be made more stable.
    JEL: H55 J11
    Date: 2006–12
  8. By: Richard M. Bird; Enid Slack (International Tax Program, Rotman School of Management, University of Toronto)
    Abstract: We argue in this paper that better rural local governments are needed to improve the lives of billions and that a good property tax is the key to improving rural local governments. Moreover, we suggest that only by giving local governments both the incentive and the ability to levy a property tax can effective rural local government and a meaningful rural property tax be achieved in most countries. Such a tax would often likely be a simple area-based levy, and the central government may not be too happy either with the way communities run the tax or how they spend the proceeds, but the critical role of the central government is to support and facilitate local action on this front, not to supplant it.
    Keywords: property tax, rural local government
    JEL: H11 H71 R51
    Date: 2006–12
  9. By: Bernhard Herz; Werner Roeger; Lukas Vogel
    Abstract: The paper discusses the stabilizing potential of fiscal policy in a dynamic general-equilibrium model of monetary union. We consider a small open economy inside the currency area. We analyze the demand and supply effects of direct taxation, indirect taxation and government spending and derive optimal simple rules for fiscal stabilization of a technology shock. Fiscal policy achieves substantial macroeconomic stabilization. Simple public-expenditure rules show the highest degree of both output and inflation stabilization. The implementation lag substantially weakens output stabilization, but hardly affects the stabilization of prices. Output-oriented rules imply less instrument inertia than inflation-dominated rules. The implementation lag leads to higher coefficients for inflation relative to output in the optimal rule. Compared to the single-instrument approach the simultaneous optimization of two instrument rules implies only little additional stabilization gains.
    Keywords: Fiscal policy, monetary union, simple policy rules
    JEL: E E F
  10. By: Erling Holmøy (Statistics Norway)
    Abstract: The paper analyses the fiscal effects of productivity shifts in the private sector. Within a stylized model with inelastic labour supply, it shows that productivity shifts in sectors producing non-traded goods (N-sector) are irrelevant for the tax rates necessary to meet the government budget constraint. Also productivity shifts in the traded goods sector (T-sector) have a neutral fiscal effect, provided that the wage dependency of the tax bases and government expenditures are equal. If the wage dependency of expenditures exceeds that of revenues, tax rates must be increased in order to restore the government budget constraint. Simulations on a CGE model of the Norwegian economy confirm the theoretical results, and demonstrate that productivty growth on balance has an adverse fiscal effect. Moreover, the necessary increase in the tax rates of a productivity improvement in the T-sector is three times as high as the corresponding effect of a comparable productivity shift in the N-sector.
    Keywords: Fiscal sustainability; productivity growth; general equilibrium
    JEL: H30 J18
    Date: 2006–10
  11. By: António Afonso
    Abstract: This paper provides a succinct overview of long-run developments regarding public finances in Portugal with an emphasis on the spending side. Issues addressed are the excessive deficit experiences of Portugal, the past experience with fiscal consolidations, and labour cost competitiveness. It is fair to stay that public spending control has been a problem in Portugal, and fiscal consolidations in the 1980s and 1990s have been shorttermed and mostly not successful. Additionally, the compensation of general government employees diverged vis-à-vis the EU15 after EU entry.
    Keywords: public finances; Portugal; fiscal consolidations; compensation of employees.
    JEL: E62 E65 H6
  12. By: Mathias Trabandt (School of Business and Economics Humboldt University Berlin)
    Abstract: This paper analyzes optimal pre-announced capital and labor income tax reforms under valuable and productive government spending. Our baseline optimal reform reveals that these model ingredients result in a reduction of welfare losses that occur when the reform is announced before its implementation. Further, the mere existence of welfare losses from pre-announcement is due to the ability of the government to initially choose very high capital taxes and negative labor taxes. A government that instead chooses optimal long run taxes from the implementation date onwards generates sizable increases of welfare gains from pre-announcing the reform. We show that 4 years pre-announcement of this reform and the baseline optimal reform deliver similar levels of welfare gains. The underlying tax structure of both reforms, however, appears to be very different
    Keywords: Optimal taxation, pre-announcement, valuable and productive government spending, welfare
    JEL: E0 E6 H0
    Date: 2006–12–03
  13. By: Qing Hong; Michael Smart
    Abstract: The multinationalization of corporate investment in recent years has given rise to a number of international tax avoidance schemes that may be eroding tax revenues in industrialized countries, but which may also reduce tax burdens on mobile capital and so facilitate investment. Both the welfare effects of and the optimal response to international tax planning are therefore ambiguous. Evaluating these factors in a simple general equilibrium model, we find that citizens of high-tax countries benefit from (some) tax planning. Paradoxically, if tax rates are not too high, an increase in tax planning activity causes a rise in optimal corporate tax rates, and a decline in multinational investment. Thus fears of a ``race to the bottom\\\'\\\' in corporate tax rates may be misplaced.
    Keywords: income shifting, tax planning, foreign direct investment, tax competition, thin capitalization
    JEL: H2 H7
    Date: 2006–12–06
  14. By: Filippo Occhino
    Abstract: How should taxes, government expenditures, the primary and fiscal surpluses and government liabilities be set over the business cycle? We assume that the government chooses expenditures and taxes to maximize the utility of a representative household, utility is increasing in government expenditures, only distortionary labor income taxes are available, and the cycle is driven by exogenous technology shocks. We first consider the commitment case, and characterize the Ramsey equilibrium. In the case that the utility function is constant elasticity of substitution between private and public consumption and separable between the composite consumption good and leisure, taxes, government expenditures and the primary surplus should all be constant positive fractions of production, and both government liabilities and the fiscal surplus should be positively correlated with production. Then, we relax the commitment assumption, and we show how to determine numerically whether the Ramsey equilibrium can be sustained by the threat to revert to a Markov perfect equilibrium. We find that, for realistic values of the preferences discount factor, the Ramsey equilibrium is sustainable.
    Keywords: Fiscal policy, Commitment, Time-consistency, Ramsey equilibrium, Markov perfect equilibria, Sustainable equilibria.
    JEL: E62
    Date: 2006–12–03
  15. By: Marek Kapicka (Economics University of California Santa Barbara)
    Abstract: This paper characterizes the dynamics of Pareto efficient income taxes in a dynamic economy with human capital accumulation. I extend the tools and insights developed by Mirrlees (1971) into a dynamic framework. I follow Diamond (1998) by assuming that there are no income effects on labor supply. If the government can freely borrow and save, I show that i) the problem of finding efficient allocation can be decomposed into two relatively simple stages and ii) if agents have access to capital market (with zero tax on capital), the efficient allocations may be in some cases implemented in a competitive equilibrium by using history independent income taxes. I compute the sequence of optimal income taxes that implement the optimum and show that they marginal income taxes tend to decrease over time and that the gains from adjustment of human capital are about 12 times larger than the static gains from labor supply adjustment
    Keywords: Optimal taxation, private information, human capital
    JEL: E6 H21
    Date: 2006–12–03
  16. By: Rolf Aaberge and Ugo Colombino (Statistics Norway)
    Abstract: The purpose of this paper is to present an exercise where we identify optimal income tax rules under the constraint of fixed tax revenue. To this end, we estimate a microeconomic model with 78 parameters that capture heterogeneity in consumption-leisure preferences for singles and couples as well as in job opportunities across individuals based on Norwegian household data for 1994. The estimated model is for a given tax rule used to simulate the choices made by single individuals and couples. Those choices are therefore generated by preferences and opportunities that vary across the decision units. Differently from what is common in the literature, we do not rely on a priori theoretical optimal taxation results, but instead we identify optimal tax rules – within a class of 6-parameter piece-wise linear rules - by iteratively running the model until a given social welfare function attains its maximum under the constraint of keeping constant the total net tax revenue. We explore a variety of social welfare functions with differing degree of inequality aversion and also two alternative social welfare principles, namely equality of outcome and equality of opportunity. All the social welfare functions turn out to imply an average tax rate lower than the current 1994 one. Moreover, all the optimal rules imply – with respect to the current rule – lower marginal rates on low and/or average income levels and higher marginal rates on sufficiently high income levels. These results are partially at odds with the tax reforms that took place in many countries during the last decades. While those reforms embodied the idea of lowering average tax rates, the way to implement it has typically consisted in reducing the top marginal rates. Our results instead suggest to lower average tax rates by reducing marginal rates on low and average income levels and increasing marginal rates on very high income levels.
    Keywords: Labour supply; optimal taxation; random utility model; microsimulation
    JEL: H21 H31 J22
    Date: 2006–09
  17. By: Agnes Benassy-Quere; Jacopo Cimadomo
    Abstract: This paper documents time variation in domestic fiscal policy multipliers in Germany, the UK and the US, and in cross-border fiscal spillovers from Germany to the seven largest European Union economies. We propose two VAR models which incorporate three “global factors” representing developments in the world economy, and we combine them with identification of fiscal shocks à la Blanchard and Perotti (2002) and Perotti (2005), to study the effects of net tax and government spending shocks on GDP, inflation and interest rates. By recursively estimating these models on different samples of data, we find that the domestic impact of tax shocks has been positive but vanishing for Germany and the US, stably not significant for the UK. Financial markets deregulations may play an important role in that since they allow households to be less dependent on disposable income and to smooth more easily consumption. Domestic government spending multipliers are found to be positive but feeble in the short-run and close to zero or slightly negative in the medium-run, implying that private consumption and investments might be crowded out. These results suggest that, in the European Monetary Union, discretionary fiscal policy “surprises” (i.e. unexpected tax cuts and government spending expansions) cannot be used by governments as substitutes for lost national monetary instruments, since they have shown to be progressively ineffective over time. Finally, we find that fiscal expansions in Germany have had beneficial (though declining) effects for neighboring countries, especially the smaller ones. This may indicate that the trade channel of transmission of fiscal policy dominates the interest rate one.
    Keywords: Fiscal policy effectiveness, fiscal shocks, spillovers, factor-augmented VAR, Great Moderation
    JEL: E30 E61 E62
    Date: 2006–12
  18. By: Jon H. Fiva and Marte Rønning (Statistics Norway)
    Abstract: Recent theoretical contributions indicate favorable incentive effects of property taxation on public service providers. The object of this paper is to confront these theories with data from Norwegian school districts. The institutional setting in Norway is well suited for analyzing the effects of property taxation because one can compare school districts with and without property taxation. To take into account potential endogeneity of the choice of implementing property taxation, we rely on instrumental variable techniques. The empirical results indicate that, conditional on resource use, property taxation improves school quality measured as students’ result on the national examination.
    Keywords: Property taxation; Disciplining device; Public sector quality
    JEL: C21 H71 I22
    Date: 2006–10
  19. By: Martin Gonzalez-Eiras (Universidad de San Andres); Dirk Niepelt
    Abstract: In this paper we analyze tax and transfer choices in an OLG economy with capital accumulation and endogenous growth coming from public investment, such as education. We solve for a Markov perfect equilibrium when electoral competition targets the votes of young and old households. We find that when calibrating the model to match US data, it predicts levels of intergenerational transfers and of public investments that are similar to the observed ones. Furthermore the Ramsey policy for the same parameters would call for both generations to be taxed to finance public investment. If the political process internalized the benefits that public investment has on future generations, growth would be twice as high as currently observed
    Keywords: endogenous growth; intergenerational transfers; education; probabilistic voting; Markov perfect equilibrium
    JEL: E62 H55 O41
    Date: 2006–12–03
  20. By: Davis, Steven J. (The University of Chicago Graduate School of Business); Henrekson, Magnus (Research Institute of Industrial Economics)
    Abstract: Following a severe contraction in the early 1990s, the Swedish economy accumulated a strong record of output growth coupled with a disappointing performance in the labor market. As of 2005, hours worked per person 20–64 years of age are 10.5 percent below the 1990 peak and a mere one percent above the 1993 trough. Employment rates tell a similar story. Our explanation for Sweden’s weak performance with respect to market work activity highlights the role of high tax rates on labor income and consumption expenditures, wage-setting arrangements that compress relative wages, business tax policies that disfavor labor-intensive industries and technologies, and a variety of policies and institutional arrangements that disadvantage younger and smaller businesses. This last category includes tax policies that penalize wealth accumulation in the form of owner-operated businesses, a pension system that steers equity capital and loanable funds to large incumbent corporations, and legally mandated job-security provisions that weigh more heavily on smaller and younger businesses. We describe these features of the Swedish institutional setup and provide evidence of their consequences based largely on international comparisons.
    Keywords: Business taxation; Industry structure; Swedish economic performance; Tax effects; Time allocation; Wage-setting institutions; Work activity
    JEL: D13 H30 J20 L52 O52
    Date: 2007–01–03
  21. By: Alfredo Marvao Pereira; Maria De Fatima Pinho
    Abstract: In an period of heightened concern about fiscal consolidation in the Euro zone, a politically expedient way of dealing with the situation is to cut public investment. A critical question, however, is whether or not political expediency comes at a cost, in terms of both long-term economic performance and future budgetary consolidation efforts. In fact, one would expect any type of investment, including public investment, to improve the long-term economic performance. Moreover, to the extent that public investment increases output in the long-term, it also expands the tax base and, therefore, tax revenues in the long term. It is conceivable that public investment has such strong effects on output, that over time it generates enough additional tax revenues to pay for itself. It is equally plausible that the effects on output although positive are not strong enough for the public investment to pay for itself. In the first case, cuts in public investment hurt long-term growth and make the future budgetary situation worse. In the second case, cuts in public investment hurt the long-term economic performance without hurting the future budgetary situation. In this paper we investigate this question empirically in the context of a number of countries in the Euro zone using a vector auto-regressive/error correction mechanism approach to determine the effects of aggregated public investment on output, employment and private investment. Our ultimate objective is to determine in which regime do the different countries seem to fit and determine to what extent cuts in public investment may turn out to be counter-productive in the long-term from a budgetary perspective. JEL Classification: C32, E62, H54, O52
    Date: 2006–08
  22. By: Dhammika Dharmapala; James R. Hines Jr.
    Abstract: This paper analyzes the factors influencing whether countries become tax havens. Roughly 15 percent of countries are tax havens; as has been widely observed, these countries tend to be small and affluent. This paper documents another robust empirical regularity: better-governed countries are much more likely than others to become tax havens. Using a variety of empirical approaches, and controlling for other relevant factors, governance quality has a statistically significant and quantitatively large impact on the probability of being a tax haven. For a typical country with a population under one million, the likelihood of a becoming a tax haven rises from 24 percent to 63 percent as governance quality improves from the level of Brazil to that of Portugal. The effect of governance on tax haven status persists when the origin of a country's legal system is used as an instrument for its quality of its governance. Low tax rates offer much more powerful inducements to foreign investment in well-governed countries than elsewhere, which may explain why poorly governed countries do not generally attempt to become tax havens -- and suggests that the range of sensible tax policy options is constrained by the quality of governance.
    JEL: H25 H87 K10
    Date: 2006–12
  23. By: Alberto Bisin; Adriano Rampini (Department of Finance Northwestern University)
    Abstract: This paper provides a theory of government intervention, such as government ownership, regulation, mandatory public schooling, subsidies, and industrial policy, as an optimal policy response due to the inability to commit not to expropriate private investment or bail agents out. If the government cannot commit not to expropriate the capital of private firms expost, private firms may not invest ex ante. The government may hence need to undertake investment itself. Thus, government ownership may be optimal, and, indeed, may be optimal even if government owned firms are less efficient. Public enterprise as a remedy for lack of private investment due to the threat of expropriation by the government should be particularly important in capital intensive sectors such as manufacturing, extraction of natural resources, and services which require large infrastructure investments, which is consistent with the data. Similarly, if the government bails out households which do not invest in schooling or save for retirement ex post, the government has to enforce universal schooling and force agents to save through social security systems ex ante. Government intervention may thus primarily be a response to government failure rather than market failure
    Keywords: Public enterprise, time inconsistency, optimal policy
    JEL: H1 H2
    Date: 2006–12–03
  24. By: Joseph Cullen; Price V. Fishback
    Abstract: We examine whether local economies that were the centers of federal spending on military mobilization experienced more rapid growth in consumer economic activity than other areas. We have combined information from a wide variety of sources into a data set that allows us to estimate a reduced-form relationship between retail sales per capita growth (1939-1948, 1939-1954, 1939-1958) and federal war spending per capita from 1940 through 1945. The results show that the World War II spending had virtually no effect on the growth rates in consumption that we examined. This contrasts with Fishback, Horrace, and Kantor's (2005) findings of about half a dollar increase in retail sales associated with a dollar of New Deal public works and relief spending. Several factors contributed to this relative lack of impact. World War II spending often required a conversion of plants designed for civilian good production into military factories and back again over the 9 year period. Substantially higher federal tax rates that were paid by the majority of households imposed much stronger fiscal drags on the benefits of the spending. Finally, less of the military spending was earmarked for wages and use of locally produced inputs, which reduced the direct stimulus to the local economy.
    JEL: H50 N32 N42 N92 R11
    Date: 2006–12
  25. By: Philipp Paulus
    Abstract: The continued debate on even the softened Stability and Growth Pact (SGP) highlights that the question of public debt in the European Monetary Union (EMU) needs further scrutiny. Both political economy models for emerging market sovereign debt and exchange rate regimes, as well as models on common pool and debt spillover problems in a monetary union point to an upward drift of public debt for countries joining EMU. In turn, this could lead to the expectation that, the more countries join EMU, the more pressure on an already battered SGP will develop. However, such models and first empirical research tend to focus only on the behaviour of governments – that is, the demand side on the market for government debt. Factors determining the supply side of government debt – i.e. capital markets – are most of the time left out of the analysis. This paper tries to fill this gap by analysing empirically the effects of both public debt demand and supply factors on the budget balances in the EMU candidate countries of Central and Eastern Europe (CEE) as well as in EMU and other OECD countries from 1994 to 2005. The results suggest that, although demand factors seem to have played a more important role than supply factors, some evidence for market conditions limiting new debt is found. More interestingly, despite the SGP disappointment, membership of EMU, as well as the time of the convergence to EMU, so far appears to coincide with more positive budget balances. Since most of the SGP literature assumes that EMU will cause a bias for higher debt due to spillover effects between EMU member countries, this could warrant a different theoretical approach to the impact of monetary unions on government debt.
    Keywords: monetary union, fiscal stability, government debt, EMU enlargement
    JEL: F33 G15 H62 H63
    Date: 2006–12
  26. By: Jess Benhabib; Alberto Bisin (Department of Economics New York University)
    Abstract: In this paper we study theoretically the dynamics of the distribution of wealth in an Overlapping Generation economy with bequest and various forms of redistributive taxation. We characterize the transitional dynamics of the wealth distribution and as well as the stationary distribution. We show that, in our economy, the stationary wealth distribution is a power law, a Pareto distribution in particular. Wealth is less concentrated (the Gini coefficient is lower) for both higher capital income taxes and estate taxes, but the marginal effect of capital income taxes is much stronger than the effect of estate taxes. Finally, we characterize optimal redistributive taxes with respect to an utilitarian social welfare measure. Social welfare is maximized short of minimal wealth inequality and with zero estate taxes.
    Keywords: wealth distribution
    JEL: E6 C6
    Date: 2006–12–03
  27. By: Richard M. Bird; Jack M. Mintz; Thomas A. Wilson (International Tax Program, Rotman School of Management, University of Toronto)
    Abstract: Canada has operated both a federal value-added tax (the GST) and two variants of provincial VATs for the last 15 years. In addition, several provinces have continued to operate retail sales taxes similar to those in most US states. A brief review of experience around the world with 'two-level' sales tax indicates that Canadian experience is the most relevant international experience for the US to consider. We conclude that the Canadian case suggests that the introduction of a federal VAT in the US would not create any great technical problems for eithere the states or business.
    Keywords: sales tax, value-added tax, intergovernmental coordination
    JEL: H77 H71 H25
    Date: 2006–11
  28. By: Karsten Jeske; Sagiri Kitao (Economics New York University)
    Abstract: The U.S. tax policy on health insurance favors only those offered group insurance through their employers, and is highly regressive since the subsidy takes the form of deductions from the progressive income tax system. The paper investigates alternatives to the current policy. We find that a complete removal of the subsidy results in a significant reduction in the insurance coverage and serious welfare deterioration. There is, however, room for improving welfare and raising the coverage, by eliminating regressiveness in the group insurance subsidy and by extending refundable credits to the private insurance market. Our work is the first in highlighting the importance of studying health policy in a general equilibrium framework with an endogenous demand for the health insurance. We use the Medical Expenditure Panel Survey (MEPS) to calibrate the process for income, health expenditure shocks and health insurance offer status through employers and succeed in producing the pattern of insurance demand as observed in the data, which serves as a solid benchmark for the policy experiments
    Keywords: Income taxation, health insurance, heterogeneous agents
    JEL: H20 H31 E62
    Date: 2006–12–03
  29. By: Giovanni Mastrobuoni
    Abstract: In response to a "crisis" in Social Security financing two decades ago Congress implemented an increase in the Normal Retirement Age (NRA) of two months per year for cohorts born in 1938 and after. These cohorts began reaching retirement age in 2000. This paper studies the effects of these benefit cuts on recent retirement behavior. The evidence strongly suggests that the mean retirement age of the affected cohorts has increased by about half as much as the increase in the NRA. If older workers continue to increase their labor supply in the same way, there will be important implications for the estimates of Social Security trust fund exhaustion that have played such a major role in recent discussions of Social Security reform.
    Keywords: normal retirement age, retirement behavior, social security reform
    JEL: H55 J26
    Date: 2005
  30. By: Andrea Ferrero (Economics New York University)
    Abstract: In this paper, I argue that demographic factors play a central role in accounting for the trade deficit experienced by the U.S. during the last three decades. The main idea is that cross-country demographic differentials lead to adjustments in savings and investments which are associated with international capital flows towards relatively young and rapidly growing economies. I develop a tractable two-country framework with life-cycle structure that formalizes this intuition. The model permits to illustrate analytically and quantitatively the contribution of demographic variables in determining the equilibrium trade balance. I show that persistent differences in population aging can explain a significant fraction of the negative trend in the U.S. trade balance. Notably, the explicit consideration of the demographic transition also helps to reconcile the dynamics of the trade balance with the evolution of the U.S. fiscal deficits and generates a declining pattern for the real interest rate broadly consistent with the data
    Keywords: External Imbalances, Aging, Fiscal Deficits
    JEL: J11 H87 F32
    Date: 2006–12–03
  31. By: Richard Arnott (Boston College)
    Abstract: A major difficulty in implementing land/site value taxation is imputing the land value of builton sites. The literature has focussed on two alternatives. The first, residual site value, measures postdevelopment site value as property value less structure value, measured as depreciated construction costs. Residual site value would be relatively easy to estimate, but residual site value taxation is distortionary, discouraging density. The second, raw site value, measures post-development site value as "what the land would be worth were there no building on the site (though in fact there is)". Raw site value taxation is neutral (does not distort the timing and density of development), but the estimation of raw site value would be complex so that assessment would likely be less fair and more arbitrary, contentious, and prone to abuse. This paper asks the question: Is it not possible to design a property tax system (taxation of predevelopment land value, post-development structure value, and post-development site value at possibly different rates) that employs the administratively simpler residual definition of post-development site value and achieves neutrality? The paper provides an affirmative answer, characterizes the tax rates that achieve neutrality, and briefly discusses issues of practical implementation.
    Date: 2006–06–27
  32. By: Bogomolova, Tatiana; Impavido, Gregorio; Pallares-Miralles, Montserrat
    Abstract: This paper analyzes the future liabilities that the Ugandan Public Service Pensions Fund might accumulate under the provisions of the Pensions Act (CAP 286) unless it is reformed. It then discusses alternative reform options that can be used in designing an educated homegrown reform of the fund. The paper supports a hybrid (two-pillar) reform option composed of a small defined benefit scheme and a complementary defined contribution scheme, instead of a pure defined contribution (monopillar) reform option discussed by policymakers in the country. The main reason for this is related to the fact that hybrid and pure defined contribution reforms will have the same impact on reducing pension expenditure (for the same grandfathering rules and surplus in the first pillar). In addition, everything else being equal, the hybrid reform is likely to produce higher average replacement rates due to the redistributive and pooling properties of the small defined benefit pillar.
    Keywords: Pensions & Retirement Systems,Enterprise Development & Reform,Population Policies,State Owned Enterprise Reform,Labor Markets
    Date: 2006–12–01
  33. By: Juan Carlos Hatchondo; Leonardo Martinez; Horacio Sapriza
    Abstract: We study a standard quantitative model of sovereign default in which the government in a small open economy (SMO) decides how much to save and whether to default on its debt. In contrast with previous quantitative studies, we do not assume that a defaulting country is exogenously excluded from capital markets, and we assume that political parties with different discount factors alternate in power. Preliminary quantitative results indicate that even without assuming exogenous exclusion, after a default episode, the model generates difficulties in market access---in average, for the same level of debt, spreads are higher after default; due to this increase in borrowing costs, capital inflows are initially decreased, and recover slowly after that. We also describe the strategic interaction of governments with different patience
    Keywords: Sovereign Default, Strategic Behavior; Endogenous Borrowing Constraints; Markov Perfect Equilibrium.
    JEL: F34 F41
    Date: 2006–12–03
  34. By: John Quigley (University of California, Berkeley); Daniel Rubinfeld (University of Calfornia, Berkeley)
    Abstract: (No abstract)
    Keywords: Economy,
    Date: 2006–06–27
  35. By: Julia Hirsch (Universidad Iberoamerica and CFS)
    Abstract: The effects of public policy programs which aim at internalizing spill-overs due to successful innovation are analyzed in a sequential double-sided moral hazard doublesided adverse selection framework. The central focus lies in analyzing their impact on contract design. We show that in our framework only ex post grants are a robust instrument for implementing the first-best situation, whereas the success of guarantee programs, ex ante grants and some types of investment grants depends strongly on the characteristics of the project: in certain cases they not only give no further incentives but even destroy contract mechanisms and so worsen the outcome.
    Keywords: Public Policy, Contract Design, Venture Capital, Moral Hazard, Asymmetric Information
    JEL: D82 G24 G32 H25 H81
    Date: 2006–12–08
  36. By: Alcino Ferreira Câmara Neto; Matías Vernengo
    Abstract: It has become common sense to argue that the reforms of social policies after the 1988 Constitution were somehow instrumental in explaining social progress, and that Lula’s policies mark a break with the 1988 Constitution. We suggest that both propositions are misleading. We argue that the financialization of government expenditures has led to worsening income distribution, and by limiting the ability of the state to increase social spending it has limited the ability of the state to reduce social inequalities. We argue that a recovery of Keynesian ideas about full employment and the euthanasia of the rentier are central for the development of a more just and civilized society in Brazil.
    Keywords: Income Inequality, Social Policies, Keynesian Policies
    JEL: E25 H50 O54
    Date: 2006–07
  37. By: Dirk Krueger; Alexander Ludwig (Department of Economics Mannheim Research Institute for the Econ)
    Abstract: In all major industrialized countries the population is aging over time, reducing the fraction of the population in working age. Consequently labor is expected to be scarce, relative to capital, with an ensuing decline in real returns on capital and increases in real wages. This paper employs a large scale OLG model with intra-cohort heterogeneity to ask what are the distributional consequences of these changes in factor prices induced by changes in the demographic structure. Since these demographic changes occur at different speed in industrialized economies we develop a multi-region (the US, the European Union, the rest of the OECD and the rest of the world) openeconomy model that allows for international capital flows. This allows us to evaluate to what extent the distributional consequences of changing factor prices for the US and Europe are mitigated or accentuated by the fact that the population is aging at different rates elsewhere in the world
    Keywords: aging, capital flows, pension reform, welfare, distribution
    JEL: E27 F21 H55
    Date: 2006–12–03
  38. By: Charles Grant; Christos Koulovatianos; Alexander Michaelides; Mario Padula
    Abstract: A distinguishing feature among households is whether adult members work or not, since the occupational status of adults affects their available time for home activities. Using a survey method in two countries, Belgium and Germany, we provide household incomes that retain the level of well-being across different family types, distinguished by family size and occupational status of adults. Our tests support that childcare-time costs are important determinants of household well-being. Estimates of child costs relative to an adult are higher for households that are time-constrained (all adults in the household work). Moreover, we find supportive evidence for the hypothesis that, in two-adult households, there is a potential for within-household welfare gains from specialization in market- vs. domestic activities, especially childcare.
    JEL: D13 J22 D31 I31
    Date: 2006–12
  39. By: Giulio Fella (Economics Queen Mary, University of London); Giovanni Gallipoli
    Abstract: This paper provides a framework within which to study the equilibrium impact of alternative policies. We develop an overlapping generation, life-cycle model with endogenous education and crime choices. Education and crime depend on different dimensions of heterogeneity, which takes the form of differences in innate ability and wealth at birth as well as employment shocks. The model is calibrated to match education enrolments, aggregate (property) crime rate and some features of the wealth distribution. In our numerical experiments we find that policies targeting crime reduction through increases in high school graduation rates are more cost-effective than simple incapacitation policies. The cost-effectiveness of high school subsidies increases significantly if they are targeted at the wealth poor. Financial incentives to high school graduation have radically different implications in general and partial equilibrium
    Keywords: Crime, Education, Life Cycle
    JEL: E26 H52 I28 K42
    Date: 2006–12–03
  40. By: Angela Fertig (University of Georgia); Gerhard Glomm (Indiana University); Rusty Tchernis (Indiana University)
    Abstract: This paper investigates the channels through which maternal employment affects childhood obesity. We use time diaries and interview responses from the Child Development Supplement of the Panel Study of Income Dynamics which combine information on children’s time allocation and mother’s labor force participation. Our empirical strategy involves estimating the effect of children’s activities and meal routines on BMI, estimating the effect of maternal employment on these activities and routines and then combining these two estimates. We find that maternal employment affects child weight through two main mechanisms – supervision and nutrition, however, the particular channels vary by mother’s education.
    Keywords: Childhood Obesity, Labor Supply, Time Allocations
    JEL: H75 I12 J13 J22
    Date: 2006–12
  41. By: Christian Bauer; Bernhard Herz; Stefan Hoops
    Abstract: Regulations and frictions of the market for emerging market bonds keep up the price of capital demanded by emerging countries. Instruments of modern finance, i.e. a pool of emerging market bonds refinanced via an enhanced Asset Backed Securities structure, can significantly reduce the interest payments. In an extensive simulation study based on empirical data, the cumulated interest savings for a horizon of 10 years amount to up to 44% of the credit sum. The theoretical structure of the transaction is explicitly derived in cooperation with professionals from major commercial banks and thus realistic. The implementation is costless and does neither require institutional reforms nor debt forgiveness and is in line with market forces.
    Keywords: Emerging Markets, financial market imperfections, finance instruments, debt crises, asset backed securities (ABS)
    JEL: H63 F34 G
    Date: 2006–11

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