nep-pbe New Economics Papers
on Public Economics
Issue of 2007‒02‒17
thirty-one papers chosen by
Peren Arin
Massey University

  1. Redistributive Effect of U.S. Taxes and Public Transfers, 1994-2004 By Kinam Kim; Peter J. Lambert
  2. Corporation Tax Buoyancy and Revenue Elasticity in the UK By John Creedy; Norman Gemmell
  3. Vountary matching grants can forestall social dumping By Jacques H. DREZE; Charles FIGUIERES; Jean, HINDRIKS
  4. The McKenna rule and U.K. World War I finance By James M. Nason; Shaun P. Vahey
  5. Newspapers and Advertising: The Effects of Ad-Valorem Taxation under Duopoly By Kind, Hans Jarle; Schjelderup, Guttorm; Stähler, Frank
  6. Public Budget Composition, Fiscal(De)Centralization, and Welfare By Calin Arcalean; Gerhard Glomm; Ioana Schiopu; Jens Suedekum
  7. Competing in taxes and investment under fiscal equalization By Jean, HINDRIKS; Susana, PERALTA; Sholmo, WEBER
  8. Rent Taxation in a Small Open Economy: The Effect on Transitional Generations By Marko Koethenbuerger; Panu Poutvaara
  9. Efficient Revenue Sharing and Upper Level Governments: Theory and Application to Germany By Buettner, Thiess; Hauptmeier, Sebastian; Schwager, Robert
  11. Economic Effects of VAT Reform in Germany By Boeters, Stefan; Böhringer, Christoph; Büttner, Thiess; Kraus, Margit
  12. Differentiation of Green Taxes: A Political-Economy Analysis for Germany By Anger, Niels; Böhringer, Christoph; Lange, Andreas
  13. Shadow Economy, Tax Morale, Governance and Institutional Quality: A Panel Analysis By Benno Torgler; Friedrich Schneider
  15. Taxation in Two-Sided Markets By Kind, Hans Jarle; Koethenbuerger, Marko; Schjelderup, Guttorm
  16. Asymmetric Enforcement of Cooperation in a Social Dilemma By Nikos Nikiforakis; Hans-Theo Normann; Brian Wallace
  17. Intergenerational Transfers of Time and Public Long-term Care with an Aging Population By Atsue Mizushima
  18. Fiscal Policy and Macroeconomic Performance in the Euro area - Lessons for the Future By Eckhard Hein; Achim Truger
  19. The Vanishing Bequest Tax: The Comparative Evolution of Bequest Taxation in Historical Perspective By Graziella Bertocchi
  20. Pain or Gain? Short-term Budgetary Effects of Surprise Inflation - the Case of Hungary By Gábor P. Kiss
  21. Growth, public investment and corruption with failing institutions. By David De la Croix; Clara Delavallade
  22. The shadow economy in Colombia: size and effects on economic growth By Friedrich Schneider; Bettina Hametner
  23. Efficiency Losses from Overlapping Economic Instruments in European Carbon Emissions Regulation By Böhringer, Christoph; Koschel, Henrike; Moslener, Ulf
  24. Minimum Wages, Minimum Labour Costs and the Tax Treatment of Low-Wage Employment By Herwig Immervoll
  25. Bicameralism and Government Formation, Second Version By Daniel Diermeier; Hulya Eraslan; Antonio Merlo
  26. Schooling and Citizenship: Evidence from Compulsory Schooling Reforms By Thomas Siedler
  27. Deregulating Job Placement in Europe: A Microeconometric Evaluation of an Innovative Voucher Scheme in Germany By Winterhager, Henrik; Heinze, Anja; Spermann, Alexander
  28. Skill acquisition and economic development — some comments By Bandopadhyay, Titas Kumar
  29. Education, corruption and growth in developing countries. By Cuong Le Van; Mathilde Maurel

  1. By: Kinam Kim (Ministry of Health and Welfare, Republic of Korea); Peter J. Lambert (University of Oregon Economics Department)
    Abstract: In this study we derive measures of the redistributive effect of taxes and welfare expenditures for the U.S. using CPS data for the years 1994, 1999 and 2004. We find that whilst income inequality increased, the redistributive effect of taxes and public transfers together reduced market income inequality by approximately 30 percent. In 2004, 88 percent of the net redistributive effect resulted from public transfers and 12 percent from taxes. The total redistributive effect would have improved by 35 percent in 2004 if, all else equal, horizontal inequities in taxes and public transfers could have been eliminated.
    Keywords: Redistributive effect; Direct taxes; Public transfers; Inequality
    JEL: D63 H23
    Date: 2007–02–06
  2. By: John Creedy; Norman Gemmell
    Abstract: Observed changes in corporation tax revenues from year to year, which include the effects of changes in tax rates, deductions and compliance, appear to be highly volatile relative to profits, the tax base. This paper examines whether the ‘built-in’ fiscal drag properties of corporation tax can be expected to display similar properties. Simple, conceptual modelling demonstrates that the corporate tax revenue elasticity does indeed display this property in the presence of regular cyclical fluctuation in profit growth, suggesting that much of the observed volatility is inherent to the corporation tax system.
    Date: 2007
  3. By: Jacques H. DREZE (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE)); Charles FIGUIERES; Jean, HINDRIKS (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)
    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 matchning grants sto 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 outcome and guarantee that everyone will gain.
    Keywords: Fiscal federalism, Adjustment process, Matching grants
    JEL: H23 H70
    Date: 2006–11–10
  4. By: James M. Nason; Shaun P. Vahey
    Abstract: The United Kingdom employed the McKenna rule to conduct fiscal policy during World War I (WWI) and the interwar period. Named for Reginald McKenna, Chancellor of the Exchequer (1915–16), the McKenna rule committed the United Kingdom to a path of debt retirement, which we show was forward-looking and smoothed in response to shocks to the real economy and tax rates. The McKenna rule was in the tradition of the “English method” of war finance because the United Kingdom taxed capital to finance WWI. Higher rates of capital taxation also paid for debt retirement during and subsequent to WWI. The United Kingdom was motivated to implement the McKenna rule because of a desire to achieve a balance between fairness and equity. However, the McKenna rule adversely affected the real economy, according to a permanent income model. WWI and interwar U.K. data support the prediction that real activity is lower in response to higher past debt retirement rates.
    Date: 2007
  5. By: Kind, Hans Jarle (Dept. of Economics, Norwegian School of Economics and Business Administration); Schjelderup, Guttorm (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Stähler, Frank (Dept. of Economics, University of Otago)
    Abstract: Newspapers are two-sided platforms that sell their product both to readers and advertisers. Media firms in general, and newspapers in particular, are considered important providers of information, culture and language in most countries. Newspapers are therefore given preferential tax treatment. We show that lower ad valorem taxes lead newspapers to become more differentiated. Thereby the competitive pressure falls, possibly resulting in higher newspaper prices and reduced quality investments.
    Keywords: Two-sided markets; ad-valorem taxes
    JEL: D40 D43 H21 H22 L13
    Date: 2007–02–13
  6. By: Calin Arcalean (Indiana University); Gerhard Glomm (Indiana University); Ioana Schiopu (Indiana University); Jens Suedekum (University of Konstanz)
    Abstract: We present a dynamic two-region model with overlapping generations. There are two types of public expenditure, education and infrastructure funding, and governments decide optimally on budget size (tax rate) and its allocation across the two outlays. Productivity of government infrastructure spending can differ across regions. This assumption follows well established empirical evidence, and highlights regional heterogeneity in a previously unexplored dimension. We study the implications of three different fiscal regimes for capital accumulation and aggregate national welfare. Full centralization of revenue and expenditure decisions is the optimal fiscal arrangement for the country when infrastructure spending productivity is similar across regions. When regional differences exist but are not too large, the partial centralization regime is optimal where the federal government sets a common tax rate, but allows the regional governments to decide on the budget composition. Only when the differences are sufficiently large does full decentralization become the optimal regime. National steady state output is instead highest when the economy is decentralized. This result is consistent with the “Oates conjecture” that fiscal decentralization increases capital accumulation. However, in terms of welfare this result can be reversed.
    Keywords: fiscal federalism, capital accumulation, infrastructure, public education
    JEL: E6 H5 H7
    Date: 2007–02
  7. By: Jean, HINDRIKS (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics); Susana, PERALTA (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE)); Sholmo, WEBER (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE))
    Abstract: The paper considers a model of a federation with two heterogeneous regions that try to attract the capital by competing in capital income taxes and public investment that enhance the productivity of capital. The regionsÕ choices determine the allocation of capital across the regions and their revenues under a tax sharing scheme. This framework allows for the examination of different approaches to fiscal equalization schemes (Boadway and Flatters, 1982, and Weingast, 2006). We show that tax competition distorts (downwards) public investments and that the equalization grants discourage public investments with a little effect on equilibrium taxes. However, the equalization schemes remain beneficial for the federation and, provided that the degree of asymmetry is small, for each region as well.
    Keywords: Heterogeneous Regions, Fiscal Federalism, Fiscal equalization, Public Investments
    JEL: C72 H23 H70
    Date: 2006–11–29
  8. By: Marko Koethenbuerger (CES, University of Munich and CESifo); Panu Poutvaara (University of Helsinki and IZA)
    Abstract: We show that taxation of rents may yield an intergenerational Pareto-improvement in a small open economy provided tax revenues are earmarked to reduce wage taxes. Previous literature has shown that rent taxation benefits current young and future generations, while we show that it also benefits the current old generation when the initially prevailing tax mix is sufficiently skewed towards wage taxation.
    Keywords: rent taxes, capitalization, transitional dynamics, labor supply, asset prices
    JEL: H22 E62 F02
    Date: 2007–01
  9. By: Buettner, Thiess; Hauptmeier, Sebastian; Schwager, Robert
    Abstract: Recent literature has emphasized that redistributive grant systems may tend to internalize fiscal externalities arising from tax competition. This paper further explores the conditions under which local grant systems enforced by the state government will enhance efficiency. A system of redistributive grants among governments is introduced into a standard model of tax competition. This basic model is then extended in order to allow for variations in the government objectives at the state level. A subsequent empirical analysis of local tax policy exploits the experience with local fiscal revenue sharing in Germany. The results suggest that attempts of state level governments to extract fiscal resources from the local revenue sharing system exert an upward pressure on tax rates.
    Keywords: Fiscal Equalization, Tax Competition Fiscal Federalism, Germany
    JEL: H71 H77
    Date: 2006
  10. By: Hyun H. Son (International Poverty Centre)
    Abstract: This paper proposes a methodology to assess the pro-poorness of government fiscal policies in view of bringing marginal reforms. A government policy is said to be pro-poor if it benefits the poor proportionally more than the non-poor. The author first derives the poverty elasticity for the general class of poverty. Then, using the idea of poverty elasticity, she proposes a pro-poor index that can be utilized to assess government expenditure and tax policies. This index may be useful in making the government fiscal system more beneficial towards the poor through marginal reforms. The proposed methodology is applied to Thailand, utilizing the 1998 Socio-Economic Survey.
    Keywords: Poverty, Income distribution, Pro-poor, Tax policy, Public spending
    JEL: I3 D31 H2 H3
    Date: 2006–04
  11. By: Boeters, Stefan; Böhringer, Christoph; Büttner, Thiess; Kraus, Margit
    Abstract: In the tax policy debate, differentiation of value-added taxes is often justified by distributional concerns. Our quantitative analysis for Germany indicates that such concerns are misplaced. We find that the abolition of VAT differentiation has only negligible redistributive effects. Instead, reduced VAT are found to act as industry-specific subsidies. Whereas the overall welfare effects of pure VAT reforms are very small, a revenue-neutral introduction of a harmonised VAT combined with reductions in the marginal income tax rates or social security contributions turns out to produce substantial welfare gains for all households.
    Keywords: VAT, tax reforms, distribution, efficiency, applied general equilibrium
    JEL: D58 H22 H24
    Date: 2006
  12. By: Anger, Niels; Böhringer, Christoph; Lange, Andreas
    Abstract: In this paper we study political-economy determinants of the differentiation of environmental taxes between sectors. Using a common-agency model, we provide predictions on tax differentiation which are then tested using data from the German Ecological Tax Reform. As the reform is revenue neutral and reduces labor costs, tax differentiation is not only determined by the activity of lobby groups favoring reduced tax rates, but also by the groups’ interest in revenue rebates to labor. Empirical data underpin our theoretical findings: A regression analysis of Germany’s green tax reform explains environmental tax differentiation by the presence of sectoral interest groups. Besides market concentration and energy demand elasticities, the exposure of industries to international trade flows plays an important role in the environmental tax design.
    Keywords: environmental tax reform, interest groups, common agency
    JEL: D62 H23 P16
    Date: 2006
  13. By: Benno Torgler (University of California, Berkeley and CREMA); Friedrich Schneider (Johannes Kepler University of Linz, CREMA and IZA)
    Abstract: This paper analyses how governance or institutional quality and tax morale affect the shadow economy, using an international country panel and also within country data. The literature strongly emphasizes the quantitative importance of these factors to understand the level and changes of shadow economy. However, the limited number of investigations use crosssectional country data with a relatively small number of observations, and hardly any paper has investigated tax morale and provides evidence using within country data. Using more than 25 proxies that measure governance and institutional quality we find strong support that its increase leads to a smaller shadow economy. Moreover, an increase in tax morale reduces the size of the shadow economy.
    Keywords: shadow economy, tax morale, governance quality, government intervention, corruption
    JEL: D73 D78 H2 H26 O17 O5
    Date: 2007–01
  14. By: John Weeks (International Poverty Centre); Terry McKiley
    Abstract: This Country Study critically examines fiscal policies in Zambia, particularly the effect of recent and projected debt relief on ‘fiscal space’. The study finds that due to associated policy conditionalities and other factors, HIPC debt relief will result in less fiscal space, rather than more. And projected G-8 debt relief will only marginally expand fiscal space. Part of the problem is that the Zambian government has little leeway to choose its own fiscal policies, despite donor rhetoric about ‘national ownership’ of poverty-reduction policies. Drawing on the analysis of a national study, the Country Study also estimates the additional public expenditures that would enable Zambia to reach the MDGs. In order to finance these expenditures, it proposes a diversified strategy of increasing tax revenue, expanding the fiscal deficit and obtaining more ODA. Finally, it recommends core elements of an expansionary macro framework that could support a seven per cent rate of economic growth (needed to attain MDG #1, i.e., halving extreme income poverty) and buttress the government’s effort to reach the other MDGs. In the process, it seeks to dispel common fears about the possible adverse effects of such fiscal expansion.
    JEL: B41 D11 D12 E31 I32 O54
    Date: 2006–09
  15. By: Kind, Hans Jarle (Dept. of Economics, Norwegian School of Economics and Business Administration); Koethenbuerger, Marko (Center for Economic Studies, Ludwig-Maximilians-Universität); Schjelderup, Guttorm (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    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 advalorem 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: 2007–02–13
  16. By: Nikos Nikiforakis; Hans-Theo Normann; Brian Wallace
    Abstract: The imposition of sanctions is one of the most common means of enforcing cooperation in decentralized interactions. Typically, agents are asymmetric in the sense that each has a different sanctioning power. Using a public-good experiment we analyze such a decentralized punishment institution in which agents are asymmetric. The asymmetric punishment institution prevents the decay of cooperation towards the non-cooperative equilibrium level. Strong agents contribute less to the public good, but punish more than weak agents. At the aggregate level, we observe remarkable similarities between outcomes in asymmetric and symmetric punishment institutions.
    Keywords: asymmetry, decentralized punishment, public good, punishment effectiveness
    JEL: C92 D70 H41
    Date: 2007
  17. By: Atsue Mizushima (Graduate School of Economics, Osaka University)
    Abstract: In this paper, we use a two-period overlapping generations model to examine the behavior of an economy that incorporates intergenerational transfers of time. In the first part, we describe the dynamics and steady state of the economy in which there is no government. We show that the rate of life expectancy has negative impact on the steady-state level of the capital stock. In the second part, we study the role and the effect of public long-term care policy. We also show that public long-term care lowers the steady-state level of the capital stock but enhances the welfare when the rate of tax is small.
    Keywords: time transfers, household production, overlapping generations
    JEL: E60 I12 J14 J22
    Date: 2007–02
  18. By: Eckhard Hein (IMK at the Hans Boeckler Foundation); Achim Truger (IMK at the Hans Boeckler Foundation)
    Abstract: Since the start of the European Monetary Union fiscal policy in the Euro area has been dominated by the Stability and Growth Pact (SGP). Quite obviously the SGP has been unsuccessful in fulfilling its goals, fiscal sustainability and supporting economic growth. More and more countries have exceeded the 3 percent of GDP limit for the budget deficit, while at the same time macroeconomic performance has been unsatisfactory. We analyse fiscal policy and its macroeconomic impact for the Euro area as a whole and for selected countries and compare it with US fiscal policy, with a special emphasis on the period 2001-2005. Whereas US fiscal policy has been strongly counter-cyclical, thus stabilising the economy, in the Euro area fiscal policy has been much more restrictive and has had pro-cyclical and therefore destabilising effects for many countries. However, one cannot put all the blame on fiscal policy. The ECB's restrictive monetary policy and divergent and destabilising wage developments across the Euro area are at least as important as fiscal policy in the explanation of the Euro area's weak economic performance. As a possible solution for the future, we suggest to replace the SGP by expenditure paths as coordination tool, and we discuss an important modification of the concept. Such expenditure paths could co-ordinate fiscal policies across the Euro area in a counter-cyclical way and at the same time ensure fiscal sustainability. Unfortunately, as long as monetary and wage policies remain un-coordinated and destabilising, any improvements in fiscal policy will not be very effective in enhancing economic performance.
    Keywords: Fiscal policy, consolidation strategies, macroeconomic policy mix, euro area
    JEL: E61 E62 E63 E65
    Date: 2006–05
  19. By: Graziella Bertocchi (Università di Modena e Reggio Emilia, CEPR, CHILD and IZA)
    Abstract: Several countries have recently abolished or significantly reduced their taxes on bequests. Bequest taxes, on the other hand, were among the first to be introduced when modern systems of taxation were developed at the end of the nineteenth century. We propose an explanation for these facts which is based on a dynamic political economy model where redistribution is determined not only by wealth inequality but also by sectoral reallocation from agriculture to manufacturing. The model shows that the dynamics of capital accumulation induce a reduction of wealth inequality, which is further accelerated by the redistributive impact of the bequest tax. Through a standard politico-economic mechanism, wealth equalization pushes toward a reduced role of the bequest tax. At the same time, however, a second mechanism is at work, with structural reallocation from agriculture to manufacturing shifting the tax base from hard-to-avoid taxes on land toward easy-to-avoid taxes on capital. The differential treatment of land and capital introduces a source of asymmetry in the tax system which interferes with the determination of the dynamic political equilibrium of the model. Its effect is to compress bequest taxation but also to delay its gradual reduction due to declining wealth inequality. A number of extensions to the basic model allow to match our theory with the long-term evolution of bequest taxation in modern democracies and with the drastic discrepancies currently observed between tax systems in developed and underdeveloped countries.
    Keywords: bequest tax, inequality, structural reallocation, redistribution, voting
    JEL: H20 P16 N40 O40
    Date: 2007–01
  20. By: Gábor P. Kiss (Magyar Nemzeti Bank)
    Abstract: I study the short-term impact of surprise inflation on the primary balance by separating those budgetary items which immediately respond to inflation from non-responding ones. I assume a passive fiscal policy in a one-year horizon; therefore items fully controlled by the central government are treated as non-responding ones. In the case of the private sector and decentralised government, their responses to inflation depend on decisions. If a 1 percentage point inflation surprise is compensated in the private sector by an increase in wages and consumption, then the nominal increase of the related tax revenue is equivalent to 0.26% of the GDP, i.e. their real value and their proportion to the increase of the nominal GDP remains unchanged. Otherwise, the nominal value of the revenue remains unchanged, resulting in a decrease in its real value and an increase in the deficit-to-GDP ratio by 0.26%. Compensation decided in a decentralised government has the opposite effect, because if it is implemented, then the real value of decentralised expenditure and its proportion to the GDP remains the same through an increase in the nominal expenditure, while if the nominal expenditure is fixed, it results in a decrease of the real expenditure and approximately a 0.13% decrease in the deficit-to-GDP ratio. The fixing of the other nominal expenditure, which does not respond to inflation, results in a 0.08% decrease in the GDP-proportionate expenditure and deficit compared to an increase in the nominal GDP. Reviewing certain episodes in Hungary, we have found that owing to planning errors, the official inflation forecast usually resulted in a larger ‘surprise’ for the budget than for the private sector. Thus, at the time of the impact of the surprise on the budget, the private sector experienced either no surprise or very little, which if materialising was in most cases immediately compensated for. An exception in this case was the adjustment in 1995 - supported by an inflation surprise - when the ratio of the moderately increasing nominal tax revenue to the GDP and its real value significantly decreased. The increase of indirect taxes had an adversary effect on the increase in nominal consumption (inflationary compensation) (1995 and 2004). In addition to moderating consumption, the indirect tax increase in mid-2006 can also moderate wages in real terms since it was announced after the usual wage increases. The decentralised government behaved similarly, as indicated by the experiences in the developed OECD countries. The response of the decentralised government to the moderate nominal increase in central government transfers (i.e. to the decrease in real value of their funds) was to moderate the nominal increase of decentralised expenditure, i.e. real value loss was for the most part not compensated for. The rate of compensation was larger in those years when cheap financing was available (funds from privatisation in 2000), or when the surprise was not sizeable and coincided with the uprising phase of the election-related investment cycle (1998). In 2007 the optimistic inflation projection can result in lower-than-planned central transfers in real terms, which can in turn moderate the nominal increase of decentralised expenditure. Presumably, however, the size of the planning error and its deficit-decreasing effect will be not significant.
    Keywords: surprise inflation, inflation sensitivity, decentralised government.
    JEL: E31 E65 H61 H71 H72
    Date: 2007
  21. By: David De la Croix (CORE, Université Catholique de Louvain); Clara Delavallade (Centre d'Economie de la Sorbonne)
    Abstract: Corruption is thought to prevent poor countries from catching-up. We analyze one channel through which corruption hampers growth : public investment can be distorted in favor of specific types of spending for which rent-seeking is easier and better concealed. To study this distorsion, we propose an optimal growth model where households vote for the composition of public spending subject to an incentive constraint reflecting individuals' choice between productive activity and rent-seeking. At equilibrium, the intensity of corruption and the structure of public investment are determined by the predatory technology and the distribution of political power. Among different regimes, the model shows a possible scenario of distortion without corruption in which there is no effective corruption yet still the possibility of corruption distorts the allocation of public investment, thus hampering growth. We test the implications of the model on a panel of countries estimating a system of equations with instrumental variables. We find that countries with a high predatory technology invest more in housing and physical capital in comparison with health and education. For equal initial conditions, such countries grow slower and have higher corruption, in particular when political power is concentrated.
    Keywords: Public investment, optimal growth, corruption, political power.
    JEL: O41 H50 D73
    Date: 2006–10
  22. By: Friedrich Schneider (Department of Economics, Johannes Kepler University Linz, Austria); Bettina Hametner
    Abstract: Using the currency demand approach size and development of the Colombian shadow economy are estimated over the period from 1976 to 2002. In the 70s the size fluctuated around 20% of official GDP and rose to 50% in the 90s. The most important factors driving the shadow economy are unemployment and taxation. Analyzing the interaction between shadow and official economy, the shadow economy has a positive effect on the official one. Average growth rate of real per capita GDP is 1.11% between 1976 and 2002 and the shadow economy "explains" on average between 0.09 and 0.27 of this growth.
    Keywords: Colombian shadow economy; currency demand method; taxation; unemployment; interaction between the shadow and official economy
    JEL: O17 O5 D78 H2 H11 H26
    Date: 2007–01
  23. By: Böhringer, Christoph; Koschel, Henrike; Moslener, Ulf
    Abstract: Energy markets and energy-intensive industries in all EU member states – especially in Germany – are subject to a diverse set of policies related to climate change. We analyse the potential efficiency losses from simultaneous application of emission taxes and emissions trading in qualitative and quantitative terms within a partial equilibrium framework for the EU. It turns out that those firms within the EU Emissions Trading Scheme (EU ETS) which at the same time are subject to domestic energy or carbon taxes will abate inefficiently much while other firms within the EU ETS will benefit from lower international emission permit prices. The same logic disproves the argument that additional national emission taxes will reduce inefficiencies in abatement supposed to be resulting from allowance (over-) allocation. In essence, unilateral emission taxes within the EU ETS are ecologically ineffective and subsidise net permit buyers. Thus, all firms that are subject to emissions trading and any CO2 emission taxes at the same time should be exempt from the latter. The foregone tax revenue could be generated by auctioning a small fraction of the permits instead. This would be cheaper for the emissions trading sectors as a whole and could be compatible even with the tight auctioning restrictions of the EU directive.
    Keywords: emissions trading, emission taxes, National Allocation Plans
    JEL: D61 H21 H22 Q58
    Date: 2006
  24. By: Herwig Immervoll (OECD, ISER, University of Essex, European Centre Vienna and IZA)
    Abstract: International comparisons of minimum-wage levels have largely focused on the gross value of minimum wages, ignoring the effects of taxation on both labour costs and the net income of employees. This paper presents estimates of the tax burdens facing minimum-wage workers. These are used as a basis for cross-country comparisons of the net earnings of these workers as well as the cost of employing them. In addition, results show the evolution of net incomes and labour costs during the 2000-2005 period and the relative importance of minimum-wage adjustments and tax reforms in driving these changes. Statutory minimum wages are in place in 21 OECD countries, ranging between USD 0.7 and USD 10 per hour. In a number of countries, minimum-wage levels have gone up in real terms in recent years. Given considerable tax burdens even at the lowest wage levels, tax policy measures can have a sizable impact on the net earnings available to low-wage workers. Social contributions and payroll taxes add, on average, around 18% to the cost of employing minimum-wage workers. The international variation of minimum labour costs in dollar terms is enormous, with hourly costs in the highest-cost country (the Netherlands) exceeding those at the bottom (Mexico) by a factor of 12. Differences are also large when compared across countries that are closer geographically or whose economies are more integrated. Despite reductions in non-wage labour costs in several countries, there has been no convergence of minimum labour costs in recent years. This paper is the working paper version of a chapter to appear in the 2007 edition of Taxing Wages, an annual OECD publication. The Taxing Wages chapter will include results for 2006.
    Keywords: minimum wage, labour cost, taxation, OECD
    JEL: J2 J3 H2 H3
    Date: 2007–01
  25. By: Daniel Diermeier (MEDS,Kellogg School of Management, Northwestern University); Hulya Eraslan (Finance Department, Wharton School, University of Pennsylvania); Antonio Merlo (Department of Economics, University of Pennsylvania)
    Abstract: In this paper we present a structural approach to the study of government formation in multi-party parliamentary democracies. The approach is based on the estimation of a stochastic bargaining model which we use to investigate the effects of specific institutional features of parliamentary democracy on the formation and stability of coalition governments. We then apply our methodology to estimate the effects of governmental bicameralism. Our main findings are that eliminating bicameralism does not affect government durability, but does have a significant effect on the composition of governments leading to smaller coalitions. These results are due to an equilibrium replacement effect: removing bicameralism affects the relative durability of coalitions of different sizes which in turn induces changes in the coalitions that are chosen in equilibrium.
    Keywords: Political Stability, Government Formation, Government Dissolution, Bicameralism, Comparative Constitutional Design
    JEL: D72 H19 C73
    Date: 2002–05–01
  26. By: Thomas Siedler (University of Essex, DIW Berlin and IZA)
    Abstract: This paper examines whether schooling has a positive impact on individual's political interest, voting turnout, democratic values, political involvement and political group membership, using the German General Social Survey (ALLBUS). Between 1949 and 1969 the number of compulsory years of schooling was increased from eight to nine years in the Federal Republic of Germany, gradually over time and across federal states. These law changes allow one to investigate the causal impact of years of schooling on citizenship. Years of schooling are found to be positively correlated with a broad range of political outcome measures. However, when exogenous increase in schooling through law changes is used, there is no evidence of a causal effect running from schooling to citizenship in Germany.
    Keywords: voting, civic engagement, education, externalities, instrumental variables estimation
    JEL: I2 H4 H23
    Date: 2007–01
  27. By: Winterhager, Henrik; Heinze, Anja; Spermann, Alexander
    Abstract: Job placement vouchers can be regarded as a tool to spur competition between public and private job placement activities. The German government launched this instrument in order to end the public placement monopoly and to subsidize its private competitors. We exploit very rich administrative data provided for the first time by the Federal Employment Agency and apply propensity score matching as a method to solve the fundamental evaluation problem and to estimate the effect of the vouchers. We find positive treatment effects on the employment probability after one year of 6.5 percentage points in Western Germany and give a measure for deadweight loss.
    Keywords: Job Placement, Active Labor Market Policy, Matching
    JEL: H25 J68
    Date: 2006
  28. By: Bandopadhyay, Titas Kumar
    Abstract: Deme, Franck and Naqvi(2005) showed that the increased government expenditure on education, training and skill acquisition leads to lower unemployment rate, expansion of the urban formal sector and the contraction of the urban informal sector. This was observed to be the case in Lesotho. The result is based on the two vital assumptions: public expenditure on education ,training and skill acquisition should be very large; and the skill acquisition function is a rising step function. We present a general equilibrium model with perfect capital mobility to analyse the impact of government expenditure on skill acquisition on urban unemployment, the urban formal sector and the urban informal sector.We find that it is possible to derive the Deme, Frank and Naqvi(2005) result independent of the level of government expenditure and the nature of the skill function.
    Keywords: skill acquisition; economic development.
    JEL: H21 H2
    Date: 2006
  29. By: Cuong Le Van (Centre d'Economie de la Sorbonne); Mathilde Maurel (Centre d'Economie de la Sorbonne)
    Abstract: Education is key in explaining growth, as emphasized recently by Krueger and Lindahl (2001). But for a given level of education, what can explain the missing growth in developing countries ? Corruption, the poor enforcement of property rights, the government share of property rights, the government share of GDP, the regulations it imposes might influence the Total Factor Productivity (TFP thereafter) of a country's economic system. A number of empirical papers emphasize the consequences bad institutions have on growth, but few are examining the link between education, corruption (more generally bad institutions) and growth. Our model assumes that at low level of GDP per head and high level of corruption education spending has no impact on growth. The slope gets positive only at above critical size of corruption. The implications are tested using the data set of Xavier Sala-i-Martin, Gernot Doppelhofer and Ronald I. Miller (2004), which is extended with the aggregate governance indicators of Kaufman et ali.
    Keywords: Public spending, education, corruption, endogeneous growth.
    JEL: O41 H50 D73
    Date: 2006–12
  30. By: Anis Chowdhury (University of Western Sydney, Australia); Terry McKinley (International Poverty Centre)
    Abstract: This paper examines how macroeconomic policies can be managed to accommodate a large inflow of foreign aid to combat the HIV/AIDS epidemic and still maintain macroeconomic stability. Because of the daunting scale of this epidemic, funds need to be disbursed urgently in order to contain its spread, yet some economists worry that rapidly scaling up foreign assistance for this purpose will cause inflation and appreciation of the real exchange rate. If such effects occur, they could impair a country’s international competitiveness and endanger its growth prospects. However, this paper maintains that such effects can be minimised if governments and central banks coordinate fiscal, monetary and exchange rate policies. If they do, they should be able to both ‘spend’ aid in order to finance larger government programmes and ‘absorb’ aid in order to import more real resources. Often, governments that receive foreign aid neither spend nor absorb it fully, defeating the basic purpose of development assistance. Because governments fear inflation, they are reluctant to finance a significant increase in spending on HIV/AIDS programmes even when the funding is available. Central banks are reluctant to sell the foreign currency they receive from HIV/AIDS related aid because they fear that such an action might appreciate the domestic currency. However, if aid-induced spending on HIV/AIDS programmes minimises the adverse impact of the epidemic on human capabilities, not only would it combat a grave human development crisis but also it could safeguard long-term economic growth. Instead of adhering to restrictive macroeconomic policies, governments could target their increased spending on productivity enhancing public investment and central banks could amplify the flow of low-cost credit to stimulate private investment. If the real exchange rate does begin to appreciate, the central bank can implement means to manage its fluctuations in order to maintain competitiveness. Moreover, if a significant proportion of HIV/AIDS funds is used to directly finance the import of drugs and medical equipment that are not produced domestically (which is often the case), there is likely to be even less impact on inflation or appreciation of the exchange rate.
    Keywords: Macroeconomic policies, ODA, HIV/AIDS, Poverty
    JEL: I3 D31 H2 H3
    Date: 2006–05
  31. By: Marcelo Medeiros (International Poverty Centre); Debora Diniz (University of Brasilia, Brazil); Flávia Squinca (University of Brasilia, Brazil)
    Abstract: The paper presents an analysis of the Continuous Cash Benefit Programme (BPC, which stands for Benefício de Prestação Continuada in Portuguese), an unconditional cash transfer to the elderly or to extremely poor individuals with disabilities. The information used in the assessment stems from the study of court decisions and laws related to the programme since its implementation, an analysis based on questionnaires applied to medical experts, interviews with the programme managers, as well as a review of pre-existing studies regarding BPC. In order to contribute to the management of the programme, as well as to improvements or even implementation of similar programmes in other countries, the study gives some recommendations about the design, operation and future evaluations of the programme.
    Keywords: Cash benefits, Poverty, Income distribution, Disabled persons, Brazil, Continuous Cash Benefit Programme
    JEL: I3 D31 H2 H3
    Date: 2006–05

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