nep-pbe New Economics Papers
on Public Economics
Issue of 2007‒04‒14
23 papers chosen by
Peren Arin
Massey University

  1. The Origins of State Capacity: Property Rights, Taxation, and Politics By Timothy Besley; Torsten Persson
  2. Intergovernmental grants and public input provision : theory and evidence from Germany By Hauptmeier, Sebastian
  3. Does accounting for taxes on income provide information about tax planning performance? : Evidence from German multinationals By Overesch, Michael; Schreiber, Ulrich
  4. The Laffer Courve and government optimization of the tax revenues: The Cartagena de Indias case By Toro González, Daniel; Doria, Martha
  5. A Fresh Assessment of the Underground Economy and Tax Evasion in Pakistan: Causes, Consequences, and Linkages with the Formal Economy By M. Ali Kemal
  6. Unit vs. Ad Valorem Taxes in Multi-Product Cournot Oligopoly By Lapan, Harvey E.; Hennessy, David A.
  7. Optimal Fiscal Feedback on Debt in an Economy with Nominal Rigidities By Tatiana Kirsanova; Simon Wren-Lewis
  8. Transfer pricing of intrafirm sales as a profit shifting channel : evidence from German firm data By Overesch, Michael
  9. Fiscal Sustainability in a New Keynesian Model By Campbell Leith; Simon Wren-Lewis
  10. The Impact of the European Union Fiscal Rules on Economic Growth By Vítor Castro
  11. Assessing fiscal soundness - Theory and practice By Nicola Giammarioli; Christiane Nickel; Philipp Rother; Jean-Pierre Vidal
  12. Micro and Macro Elasticities in a Life Cycle Model With Taxes By Richard Rogerson; Johanna Wallenius
  13. German inbound investment, corporate tax planning, and thin-capitalization rules : a difference-in-differences approach By Overesch, Michael; Wamser, Georg
  14. Distributional effects in household models: separate spheres and income pooling By Martin Browing; Pierre-Andre Chiappori; Valerie Lechene
  15. Do hiring subsidies reduce unemployment among the elderly? : Evidence from two natural experiments By Boockmann, Bernhard; Zwick, Thomas; Ammermüller, Andreas; Maier, Michael
  16. Long-run effects of training programs for the unemployment in East Germany By Fitzenberger, Bernd; Völter, Robert
  18. Consumption Responses to In-Kind Transfers: Evidence from the Introduction of the Food Stamp Program By Hilary W. Hoynes; Diane Schanzenbach
  19. Benefit-Entitlement Effects and the Duration of Unemployment: An Ex-Ante Evaluation of Recent Labour Market Reforms in Germany By Hendrik Schmitz; Viktor Steiner
  20. Sick of work or too sick to work? Evidence on health shocks and early retirement from the BHPS By Nigel Rice; Jennifer Roberts; Andrew M. Jones
  21. The Qualities of Leadership: Direction, Communication, and Obfuscation By Torun Dewan; David P. Myatt
  22. Emissions Trading and Profit-Neutral Grandfathering By Cameron Hepburn; John K.-H. Quah; Robert A. Ritz
  23. Efficiency measurement in the port industry: A survey of the empirical evidence By Marianela González; Lourdes Trujillo

  1. By: Timothy Besley; Torsten Persson
    Abstract: Economists generally assume the existence of sufficient institutions to sustain a market economy and tax the citizens. However, this starting point cannot easily be taken for granted in many states, neither in history nor in the developing world of today. This paper develops a framework where "policy choices", regulation of markets and tax rates, are constrained by "economic institutions", which in turn reflect past investments in legal and fiscal state capacity. We study the economic and political determinants of these investments. The analysis shows that common interest public goods, such as fighting external wars, as well as political stability and inclusive political institutions, are conducive to building state capacity. Preliminary empirical evidence based on cross-country data find a number of correlations consistent with the theory.
    JEL: D70 E60 H10 K40 O10
    Date: 2007–04
  2. By: Hauptmeier, Sebastian
    Abstract: This paper uses a simple model of fiscal competition between local jurisdictions to analyse the impact of intergovernmental grants on the composition of public spending. We find that a higher degree of redistribution within a system of ”fiscal equalisation” coincides with a smaller overall share of spending on productivity-enhancing public inputs. Furthermore, in order to test the theoretical predictions, we carry out an empirical analysis based on a panel of German states. The results are consistent with the theoretical findings and support the existence of an incentive effect of intergovernmental grants on state expenditure policies.
    Keywords: Fiscal competition, Fiscal equalisation, Intergovernmental grants, Public expenditure, Germany
    JEL: H72 H77
    Date: 2007
  3. By: Overesch, Michael; Schreiber, Ulrich
    Abstract: This paper investigates the quality of information on tax planning performance which is provided by financial accounting based on IAS 12 (Income taxes). A simple theoretical investment model is used to show that reported tax expenses can be misleading as an indicator of tax planning performance, since timing effects of tax depreciations are suppressed. However, it is shown that IAS 12 provides meaningful information if tax planning strategies are driven by statutory tax rate differences, e.g. in the case of profit shifting. Our empirical analysis of actual tax planning behaviour, based on a panel of German balance sheet data, suggests that in practice international tax planning is significantly driven by statutory tax rates. However, we find that tax depreciation impacts on the size of investment as well and thus, IAS 12 does not fully disclose tax planning performance.
    Keywords: International Taxation, Financial Accounting, Income Taxes, Firm-level Data
    Date: 2006
  4. By: Toro González, Daniel; Doria, Martha
    Abstract: The public managers worries to increase the local government revenues are almost always related with changes in the tax rates, affecting all the agents in the economy. However, at the same time tax exeptions are used like policy instrument in order to achieve economic growth in some sectors, increasing the pressure over some other sectors. This document analize the effect of the tax rates changes over the local government revenues by the estimation of elasticities. This relation is known as the Laffer Courve. The main results show an inelastic relation between the tax rate and the revenues, wich means that an increase of 1% in the tax rate generate an increase in local government revenues in less than a 1%. The results of the model sugesst that a local policy oriented to raise the local government revenues increasing the tax rate is not effective.
    Keywords: Cartagena; local government revenues; tax rates; Laffer Courve.
    JEL: H21 H30
    Date: 2007–04–01
  5. By: M. Ali Kemal (Pakistan Institute of Development Economics, Islamabad)
    Abstract: Rise in the underground economy creates problems for the policy-makers to formulate economic policies, especially the monetary and fiscal policies. It is found that if there was no tax evasion, budgets balance might have been zero and positive for some years and we would not have needed to borrow as much as we had borrowed. It is concluded that the impact of the underground economy is significant to the movements of the formal economy, but the impact of formal economy is insignificant in explaining the movements in the underground economy. In the long run, underground economy and official economy are positively associated. It is estimated that the underground economy ranges between Rs 2.91 trillion and Rs 3.34 trillion (54.6 percent of GDP to 62.8 percent of GDP respectively) in 2005 and tax evasion ranges between Rs 302 billion and Rs 347 billion (5.7 percent of GDP to 6.5 percent of GDP respectively) in 2005. Underground economy and tax evasion were increasing very rapidly in the early 1980s but the rate of increase accelerated in the 1990s. It declined in 1999, but reverted to an increasing trend until 2003. It declined again in 2004 and 2005
    Keywords: Underground Economy, Tax Evasion
    JEL: E26 H26
    Date: 2007
  6. By: Lapan, Harvey E.; Hennessy, David A.
    Abstract: The welfare dominance of ad valorem taxes over unit taxes in a single-market Cournot oligopoly is well-known. This article extends the analysis to multi-market oligopoly. Provided all ad valorem taxes are positive, unit costs are constant, firms are active in all considered markets, and a representative consumer has convex preferences, it is shown that ad valorem taxes dominate in multi-product equilibrium. We discuss the role of unit cost covariances across multi-product firms in determining the extent of cost efficiencies arising under ad valorem taxation. The issue of merger under oligopoly is also considered. Conditions are identified under which a merger increases the sum of consumer and producer surpluses while also increasing the revenue yield from a set of unit taxes. If not all firms are active in all considered markets, then it is also shown that additional conditions are required to ensure the dominance of ad valorem taxes. In multi-input Cournot oligopsony, however, unit taxation welfare dominates. This is because ad valorem taxes on inputs reduce demand elasticities, amplifying market power distortions.
    Keywords: ad valorem tax; imperfect competition; oligopoly merger; quantity-setting game; specific tax; tax efficiency; tax revenue
    JEL: D4 H2
    Date: 2007–04–10
  7. By: Tatiana Kirsanova; Simon Wren-Lewis
    Abstract: We examine the impact of different degrees of fiscal feedback on debt in an economy with nominal rigidities where monetary policy is optimal. We look at the extent to which different degrees of fiscal feedback enhances or detracts from the ability of the monetary authorities to stabilise output and inflation. Using an objective function derived from utility, we find the optimal level of fiscal feedback to be small. There is a clear discontinuity in the behaviour of monetary policy and welfare either side of this optimal level. As the extent of fiscal feedback increases, optimal monetary policy becomes less active because fiscal feedback tends to deflate inflationary shocks. However this fiscal stabilisation is less efficient than monetary policy, and so welfare declines. In contrast, if fiscal feedback falls below some critical value, either the model becomes indeterminate, or optimal monetary policy becomes strongly passive, and this passive monetary policy leads to a sharp deterioration in welfare.
    Keywords: Fiscal Policy, Feedback Rules, Debt, Macroeconomic Stabilisation
    JEL: E52 E61 E63 F41
    Date: 2007
  8. By: Overesch, Michael
    Abstract: This paper investigates whether transfer pricing of intrafirm sales within multinationals represents an important channel of company tax planning. A simple theoretical model, considering profit shifting activities of a multinational company, is used to obtain empirical implications. The empirical analysis, based on a panel of German multinationals, considers directly the supposed tax response of intrafirm sales. The analysis shows a significantly negative impact of the local tax rate on the size of balance sheet items, which reflect intrafirm sales. Thus, the results suggest that transfer pricing of intrafirm sales constitutes an important channel of companies’ profit shifting activities.
    Keywords: Taxation, Multinationals, Profit Shifting, Transfer Pricing, Firm-level Data
    JEL: H25 H26 H32
    Date: 2006
  9. By: Campbell Leith; Simon Wren-Lewis
    Abstract: Most recent work deriving optimal monetary policy utilising New Neo-Classical Synthesis (NNCS) models abstract from the impact of monetary policy on the government`s finances, by assuming that any change in the government`s budget can be financed through lump sum taxes. In this paper, we assume that the government does not have access to such taxes to satisfy its intertemporal budget constraint in the face of shocks. We then consider optimal monetary and fiscal policies under discretion and commitment in the face of technology, preference and cost-push shocks. We confirm that the optimal precommitment policy implies a random walk in the steady-state level of debt. We also find that the time-inconsistency in the optimal precommitment policy is such that governments are tempted, given inflationary expectations, to utilise their monetary and fiscal instruments in the initial period to change the ultimate debt burden they need to service. We show that this temptation is only eliminated if following shocks, the new steady-state debt is equal to the original (efficient) debt level. This implies that under a discretionary policy the random walk result is overturned: debt will always be returned to this initial steady-state even although there is no explicit debt target in the government`s objective function. Analytically and in a series of numerical simulations we show which instrument is used to stabilise the debt depends crucially on the degree of nominal inertia and the size of the debt-stock. We also show that the welfare consequences of introducing debt are negligible for precommitment policy, but can be significant for discretionary policy.
    Keywords: New Keynesian Model, Government Debt, Monetary Policy, Fiscal Policy
    JEL: E62 E63
    Date: 2007
  10. By: Vítor Castro (Universidade de Coimbra and NIPE)
    Abstract: This study intends to provide an empirical answer to the question of whether Maastricht and SGP fiscal rules have affected growth of European Union countries. A growth equation augment with fiscal variables and controlling for the period in which fiscal rules were implemented in Europe is estimated over a panel of 15 EU countries (and 8 OECD countries) for the period 1970-2005 with the purpose of answering this question. The equation is estimated using both a dynamic fixed effects estimator and a recently developed pooled mean group estimator. GMM estimators are also used in a robustness analysis. Empirical results show that growth of real GDP per capita in the EU was not negatively affected in the period after Maastricht. This is the case when the recent performance of EU countries is compared both with their past performance and with the performance of other developed countries. Results even show that growth is slightly higher in the period in which the fulfilment of the 3% criteria for the deficit started to be officially assessed. Therefore, this study concludes that the institutional changes that occurred in Europe after 1992, especially the implementation of Maastricht and Stability and Growth Pact fiscal rules, should not be blamed for being harmful to growth in Europe.
    Keywords: European Union, Economic Growth, Fiscal rules, Pooled mean group estimator
    JEL: E62 H6 O47
    Date: 2007
  11. By: Nicola Giammarioli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Christiane Nickel (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Philipp Rother (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jean-Pierre Vidal (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper presents a survey of methods for assessing fiscal soundness, i.e. the capability of governments to honour their obligations in the short run and in the long run. The need for a comprehensive monitoring of fiscal soundness derives from the risks to economic stability that arise from the actual or expected difficulty a government may have in honouring its obligations. For the long run, methods derived from the government’s intertemporal budget constraint make it possible to assess the size of a necessary adjustment to achieve sustainability of the debt burden. Uncertainty regarding shocks to the fiscal situation or the behaviour of financial market participants calls for the monitoring of financial flows and government obligations in the short run. Vigilance needs to be all the higher, the greater the uncertainty regarding long-term sustainability.
    Date: 2007–03
  12. By: Richard Rogerson; Johanna Wallenius
    Abstract: We build a life cycle model of labor supply that incorporates changes along both the intensive and extensive margin and use it to assess the consequences of changes in tax and transfer policies on equilibrium hours of work. We find that changes in taxes have large aggregate effects on hours of work. Moreover, we find that there is no inconsistency between this result and the empirical finding of small labor elasticities for prime age workers. In our model, micro and macro elasticities are effectively unrelated. Our model is also consistent with other cross-country patterns.
    JEL: E2 J2
    Date: 2007–04
  13. By: Overesch, Michael; Wamser, Georg
    Abstract: This paper investigates tax planning behavior by means of inter-company finance and the effectiveness of fighting back via thin-capitalization rules. A simple theoretical model, which considers the financing decision of a multinational company, is used to obtain empirical implications. The empirical analysis, based on German inbound investment data from 1996 until 2004, supports a significant impact of tax rate differences on the use of intra-company debt. The effectiveness of the German thin-capitalization rule is tested by using legal amendments as natural experiments. The results suggest that the German thin-capitalization rule induces significantly lower intra-firm debt-levels of inbound investments. Hence, tax planning via intra-firm finance is effectively limited.
    Keywords: Corporate Income Tax, Multinationals, Thin-Capitalization Rule, Difference-in-Differences, Firm-Level Data
    JEL: G32 H25 H26
    Date: 2006
  14. By: Martin Browing; Pierre-Andre Chiappori; Valerie Lechene
    Abstract: We derive distributional effects for a non-cooperative alternative to the unitary model of household behaviour. We consider the Nash equilibria of a voluntary contributions to public goods game. Our main result is that, in general, the two partners either choose to contribute to different public goods or they contribute to at most one common good. The former case coresponds to the separate spheres case of Lundberg and Pollak (1993). The second outcome yields (local) income pooling. A household will be in different regimes depending on the distribution of income within the household. Any bargaining model with this non-cooperative case as a breakdown point will inherit the local income pooling. We conclude that targeting benefits such as child benefits to one household member may not always have an effect on outcomes.
    Keywords: Nash Equilibrium, Nash Bargaining, Collective Models, Intra-Household Allocation
    JEL: D10 C71 C72
    Date: 2006
  15. By: Boockmann, Bernhard; Zwick, Thomas; Ammermüller, Andreas; Maier, Michael
    Abstract: We estimate the effects of hiring subsidies for older workers on transitions from unemployment to employment in Germany. Using a natural experiment, our first set of estimates is based on a legal change extending the group of eligible unemployed persons. A subsequent legal change in the opposite direction is used to validate these results. Our data cover the population of unemployed jobseekers in Germany and was specifically made available for our purposes from administrative data. Consistent support for an employment effect of hiring subsidies can only be found for women in East Germany. Concerning other population groups, firms´ hiring behavior is hardly influenced by the program and hiring subsidies mainly lead to deadweight effects.
    Keywords: Hiring subsidies, older workers, evaluation, natural experiments
    JEL: C31 H24 J64
    Date: 2007
  16. By: Fitzenberger, Bernd; Völter, Robert
    Abstract: Public sector sponsored training was implemented at a large scale during the transition process in East Germany. Based on new administrative data, we estimate the differential effects of three different programs for East Germany during the transition process. We apply a dynamic multiple treatment approach using matching based on inflows into unemployment. We find positive medium-and long-run employment effects for the largest program, Provision of Specific Professional Skills and Techniques. In contrast, the programs practice firms and retraining show no consistent positive employment effects. Furthermore, no program results in a reduction of benefit recipiency and the effects are quite similar for females and males.
    Keywords: multiple treatments, training programs, East Germany
    JEL: C14 H43 J68
    Date: 2007
  17. By: Karen Mayor; Richard S.J. Tol (Economic and Social Research Institute, Dublin)
    Abstract: We use a model of domestic and international tourist numbers and flows to estimate the impact of the recent and proposed changes in the Air Passenger Duty (APD) of the United Kingdom. We find that the recent doubling of the APD has the perverse effect of increasing carbon dioxide emissions, albeit only slightly, because it reduces the relative price difference between near and far holidays. Tourist arrivals in the UK would fall slightly. Tourist arrivals from the UK would fall in the countries near to the UK, and this drop would be only partly offset by displaced tourists from the UK. Tourist numbers in countries far from the UK would increase. The proposal of the Conservative Party to exempt the first 2,000 miles (for UK residents) would decrease emissions by roughly the same amount as abolishing the APD altogether – but tourist arrivals in the UK would not rise. These results are reversed if we assume that domestic holidays and foreign holidays are close substitutes. If the same revenue were raised with a carbon tax rather than a boarding tax, emissions would fall with higher taxes.
    Keywords: International tourism, carbon dioxide emissions, boarding tax, United Kingdom
    JEL: L83 L93 Q54
    Date: 2007–04
  18. By: Hilary W. Hoynes; Diane Schanzenbach
    Abstract: Economists have strong theoretical predictions about how in-kind transfer programs -- such as providing vouchers for food -- impact consumption. Despite the prominence of the theory, there has been little empirical work documenting actual responses to in-kind transfers. In this work, we leverage previously underutilized variation in the date of the county-level original implementation of the Food Stamp Program in the 1960s and early 1970s. Using the Panel Study of Income Dynamics, we employ difference-in-difference methods to estimate the impact of program availability on food spending, labor supply and family income. Consistent with theoretical predictions, we find that the introduction of food stamps leads to a decrease in out of pocket food spending, an increase in overall food expenditures, and a decrease (although insignificant) in the propensity to take meals out. The results are quite precisely estimated for total food spending, with less precision in estimating the impacts on out of pocket food costs. We find evidence of small work disincentive impacts in the PSID, which is confirmed with an analysis of the 1960, 1970 and 1980 Census.
    JEL: H31 I38
    Date: 2007–04
  19. By: Hendrik Schmitz (Ruhr Graduate School in Economics, Essen); Viktor Steiner (Free University Berlin, DIW Berlin and IZA)
    Abstract: We analyse benefit-entitlement effects and the likely impact of the recent reform of the unemployment compensation system on the duration of unemployment in Germany on the basis of a flexible discrete-time hazard rate model estimated on pre-reform data from the German Socioeconomic Panel (SOEP). We find (i) relatively strong benefit-entitlement effects for the unemployed who are eligible to means-tested unemployment assistance after the exhaustion of unemployment benefit, but not for those without such entitlement; (ii) nonmonotonic benefit-entitlement effects on hazard rates with pronounced spikes around the month of benefit-exhaustion, and (iii) relatively small marginal effects of the amount of unemployment compensation on the duration of unemployment. Our simulation results show that the recent labour market reform is unlikely to have a major impact on the average duration of unemployment in the population as a whole, but will significantly reduce the level of long-term unemployment among older workers.
    Keywords: unemployment duration, unemployment insurance, benefit-entitlement effects, German labour market reforms, ex-ante evaluation, hazard rate model
    JEL: J64 J65 H31
    Date: 2007–03
  20. By: Nigel Rice; Jennifer Roberts (Department of Economics, The University of Sheffield); Andrew M. Jones
    Abstract: We follow individuals as they retire using discrete-time hazard models applied to a stock sample from 12 waves of the British Household Panel Survey. Results confirm that health shocks are a determinant of retirement age and are quantitatively more important than pension entitlement. This is the case for both men and women and is observed for both a measure of health limitations and a measure of latent health status obtained from a generalized ordered probit model. Further, our results provide evidence that, for women, the health status of their partner impacts on their retirement decisions; an effect that is not evident for men.
    Keywords: Health, Retirement, Discrete-time duration models
    JEL: H55 I12 J26
    Date: 2007–01
  21. By: Torun Dewan; David P. Myatt
    Abstract: Party activists wish to (i) advocate the best policy and yet (ii) unify behind a common party line. An activist`s understanding of his environment is based on the speeches of party leaders. A leader`s influence, measured by the weight placed on her speech, increases with her judgement on policy (sense of direction) and her ability to convey ideas (clarity of communication). A leader with perfect clarity of communication enjoys greater influence than one with a perfect sense of direction. Activists can choose how much attention to pay to leaders. A necessary condition for a leader to monopolize the agenda is that she is the most coherent communicator. Sometimes leaders attract more attention by obfuscating their messages. A concern for party unity mitigates this incentive; when activists emphasize following the party line, they learn more about their environment.
    Keywords: Leadership, Direction, Coordination, Communication, Oligarchy
    JEL: D7 D8 H1
    Date: 2007
  22. By: Cameron Hepburn; John K.-H. Quah; Robert A. Ritz
    Abstract: This paper examines the amount of grandfathering needed for an emissions trading scheme (ETS) to have a neutral impact on firm profits. We provide a simple formula to calculate profit-neutral grandfathering in a Cournot model with firms of different sizes and a general demand function. Using this formula, we obtain estimates of profit-neutral grandfathering for the electricity, cement, newsprint and steel industries. Under the current EU ETS, firms obtain close to full grandfathering; we show that while this may still leave some firms worse off, others have probably benefitted substantially. We find no evidence that any industry as a whole could be worse off with full grandfathering. We also show that the common presumption that a higher rate of cost pass-through lowers profit-neutral grandfathering is unreliable
    Keywords: Emissions Trading, Emissions Permits, Grandfathering Firm Profits, Cost Pass-Through, Market Structure
    JEL: D43 H23 Q58
    Date: 2006
  23. By: Marianela González (DAEA, Universidad de Las Palmas de Gran Canaria); Lourdes Trujillo (Department of Economics, City University, London and DAEA, Universidad de Las Palmas de Gran Canaria)
    Abstract: The purpose of this paper is to further the understanding of the port sector through a systematic analysis of the existing studies assessing the economic efficiency and productivity of the sector. The emphasis is on the measurement methodologies, the variables used and the results in terms of the various port activities as well as on the relevance of dimensions such as the size of the port, its ownership, location, etc. One of the main contributions of our analysis is the evidence provided of the need to very clearly isolate and spell out the port activity for which the efficiency assessment is being conducted. From an economic policy viewpoint, our assessment also points to the necessity of more closely involving the relevant authorities to improve the data collection system.
    JEL: L92 H54
    Date: 2007–04

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