nep-pbe New Economics Papers
on Public Economics
Issue of 2007‒05‒04
sixteen papers chosen by
Peren Arin
Massey University

  1. Fiscal Harmonization in the Presence of Public Inputs By Gonzalo Fernández de Córdoba; José L. Torres
  2. Politically Optimal Fiscal Policy By Michael Kumhof; Irina Yakadina
  3. Tax, Welfare, and Pension Reforms in Slovenia: Implications for Work Incentives and Labor Participation By Anita Tuladhar; Philippe Egoumé-Bossogo
  4. Is the Value Added Tax Reform in India Poverty-Improving? An Analysis of Data from Two Major States By Ajitava Raychaudhuri; Sudip Kumar Sinha; Poulomi Roy
  5. Probabilistic Sustainability of Public Debt: A Vector Autoregression Approach for Brazil, Mexico, and Turkey By Issouf Samake; Evan Tanner
  6. Tax reform and labour-market performance in the euro area - a simulation-based analysis using the New Area-Wide Model By Günter Coenen; Peter McAdam; Roland Straub
  7. Foreign vs. domestic outsourcing: Does VAT taxation of intermediate commodities under destination and origin principles matter? By Giuseppe Bognetti; MICHELE SANTONI
  8. "It's a lot but let it stay" How tax evasion is perceived across Italy By Carlo Fiorio; Alberto Zanardi
  9. Catch-Up Growth, Habits, Oil Depletion, and Fiscal Policy: Lessons from the Republic of Congo By Daniel Leigh; Stéphane Carcillo; Mauricio Villafuerte
  10. Public Infrastructures, Public Consumption, and Welfare in a New-Open-Economy-Macro Model By Giovanni Ganelli; Juha Tervala
  11. How Strong is the Relationship between Defence Expenditure and Private Consumption? Evidence from the United States By Luca Pieroni
  12. Domestic Petroleum Product Prices and Subsidies: Recent Developments and Reform Strategies By David Coady; Amine Mati; Taimur Baig; Joseph Ntamatungiro
  13. Bribery in Health Care in Peru and Uganda By Hunt, Jennifer
  14. Mega-sporting Events as Experience Goods By Malte Heyne; Wolfgang Maennig; Bernd Süssmuth
  15. Uganda: Managing More Effective Decentralization By Giorgio Brosio; Maria Gonzalez; Ehtisham Ahmad
  16. A Subsidized Vickrey Auction for Cost Sharing By Jesse A. Schwartz; Quan Wen

  1. By: Gonzalo Fernández de Córdoba (Universidad de Salamanca); José L. Torres (Universidad de Málaga)
    Abstract: Fiscal harmonization for the European Union member states is a goal that encounters major difficulties for its implementation. Each country faces a particular trade-off between fiscal revenues generated by taxation and the productive efficiency loss induced by their respective tax code. Countries for which a particular harmonized tax code requires more taxation, will have to face an increased efficiency loss, for those required to decrease their taxes, will have to face a loss in fiscal revenue.
    Keywords: Fiscal harmonization, applied general equilibrium,Armonización fiscal, equilibrio general aplicado.
    JEL: E43 E62
    Date: 2007
  2. By: Michael Kumhof; Irina Yakadina
    Abstract: Why do governments issue large amounts of debt? In what sense and for whom is such a policy optimal? We show that twisting the optimal taxation paradigm produces very reasonable predictions for debt and real interest rates. Adding an extra dimension of uncertainty about the political planning horizon gives rise to a positive and very plausible government debt-to-GDP ratio of about 55 percent in a model that otherwise predicts negative government debt. We quantify the impact of political uncertainty on steady state and business cycle dynamics. We illustrate how populist tax cuts can cause business cycle fluctuations.
    Keywords: Optimal Fiscal Policy , Incomplete Asset Markets , Political economy , government debt bias , Fiscal policy , Public debt , Gross domestic product , Political economy , Tax changes , Business cycles ,
    Date: 2007–03–29
  3. By: Anita Tuladhar; Philippe Egoumé-Bossogo
    Abstract: The labor participation rate in Slovenia has been lower than in the EU-15 (the members states prior to May 2004), particularly for the low-income and older individuals. Using simulations of tax and social benefits and public pensions, the paper shows how the current tax, welfare, and pension systems create disincentives to work among these groups. The paper finds that incentives to retire early are strong for men, especially low-wage earners. The marginal effective tax rates also make it costly for low-income individuals to work and negatively affect the probability of participating. The paper proposes reform measures to enhance work incentives and labor participation, which will be crucial for dealing with population aging and for achieving higher potential growth in Slovenia.
    Keywords: Labor particiaption , retirement , pensions , taxation , welfare , Slovenia , Labor supply , Slovenia , Labor policy , Tax reforms , Pensions , Early retirement incentives ,
    Date: 2007–01–08
  4. By: Ajitava Raychaudhuri; Sudip Kumar Sinha; Poulomi Roy
    Abstract: The Value Added Tax (VAT) was introduced in India in place of Sales Tax, taking effect in April 1, 2005. These taxes are in the domain of different state governments within the country's federal set up. Although VAT is widely acclaimed to be a better system than the sales tax on grounds of efficiency in tax collection, no study has been undertaken to assess the impact of this reform measure on social equity. This paper addresses this need with the use of concentration curves and consumption dominance curves of various orders. The simulations were done on two major states in India, namely Maharashtra and West Bengal, using National Sample Survey Unit Level data for the 55th round. The results show that the reform is largely pro-poor, although there are ways to improve it with respect to some items predominantly consumed by the relatively poorer groups.
    Keywords: Value added tax, Marginal tax reform, public distribution system, concentration curve, Lorenz curve, marginal efficiency cost of funds, consumption dominance
    JEL: D12 D63 H21 H22 H71 I32
    Date: 2007
  5. By: Issouf Samake; Evan Tanner
    Abstract: This paper examines the sustainability of fiscal policy under uncertainty in three emerging market countries, Brazil, Mexico, and Turkey. For each country, we estimate a vector autoregression (VAR) that includes fiscal and macroeconomic variables. Retrospectively, a historical decomposition shows by how much debt accumulation reflects unsustainable policy, adverse shocks, or both. Prospectively, Monte Carlo techniques reveal the primary surplus that is required to keep the debt/GDP ratio from rising in all but the worst 50 percent, 25 percent, and 10 percent of circumstances. Such a value-at-risk approach presents a clearer menu of policy options than currently used frameworks.
    Keywords: Tax smoothing , sustainability , vector autoregression , historical decomposition , primary surplus , Fiscal policy , Brazil , Mexico , Turkey , Emerging markets , Public debt , Economic models ,
    Date: 2007–01–08
  6. By: Günter Coenen (Directorate General Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Peter McAdam (Directorate General Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Roland Straub (Directorate General International and European Relations, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: In this paper, we employ a calibrated two-country version of the New Area-Wide Model (NAWM) currently under development at the European Central Bank to examine the potential benefits and spillovers of reducing labour-market distortions caused by euro area tax structures. Our analysis shows that lowering tax distortions to levels prevailing in the United States would result in an increase in hours worked and output by more than 10 percent. At the same time, tax reductions would have positive spillovers to the euro area’s trade partners, bolstering the case for tax reforms from a global perspective. Finally, we illustrate that, in the presence of heterogeneous households, distributional effects may be of importance when gauging the impact of tax reforms. JEL Classification: E32, E62.
    Keywords: DSGE modelling, limited asset-market participation, fiscal policy, tax reform, euro area.
    Date: 2007–04
  7. By: Giuseppe Bognetti (University of Milan); MICHELE SANTONI (University of Milan)
    Abstract: This paper considers the effects of destination vs. origin principles of intermediate commodity taxation on the organisational structure of firms in the presence of imperfectly competitive product and labour markets. The paper considers a unionised monopoly firm producing a final good by using two intermediate commodities, one of which can be imported. The paper shows that, when the origin principle is adopted, the ratio between the domestic and the foreign VAT rates on intermediates is relevant and organisational choices depend on this ratio, while VAT rates have no effects under the destination principle. In the case of linear or constant elasticity product demand curves, lower domestic rates will disincentive foreign sourcing, while lower foreign tax rates will represent an incentive.
    Keywords: VAT; destination principle; origin principle; intermediate goods; outsourcing.,
    Date: 2007–01–18
  8. By: Carlo Fiorio (University of Milan); Alberto Zanardi (University of Bologna)
    Abstract: We analyze the opinions regarding tax evasion using a sample of micro-data representative of the Italian population. The analysis of determinants of seriousness and size perceptions of tax evasion suggests that age, education, income, area of residence and occupation are all relevant variables. However, combining the analysis of size and seriousness of tax evasion another aspect of Italian duality emerges: notwithstanding its perceived large size, people from the South show a lower tax morale than in the rest of the country. Some possible explanations of these results are discussed.
    Keywords: tax evasion, perceptions, tax morale, social norms,
    Date: 2007–02–01
  9. By: Daniel Leigh; Stéphane Carcillo; Mauricio Villafuerte
    Abstract: In a number of oil producing countries, oil revenue accounts for the majority of government revenue, but is expected to be depleted in a relatively short time frame. Ensuring that fiscal policy is on a sustainable path is thus a high priority, but political and social adjustment costs create incentives to delay fiscal consolidation. This paper estimates how the permanently sustainable non-oil primary deficit (PSNOPD) depends on the speed of consolidation, using an optimization model with habit formation. Realism is added by allowing for negative growth-adjusted interest rates during a temporary period of catch-up growth. Applied to the Republic of Congo, this approach leads to the following conclusions: (i) the current fiscalpolicy stance is unsustainable; (ii) social adjustment costs justify spreading the bulk of the adjustment over five years; and (iii) the slower the adjustment, the lower the PSNOPD level.
    Keywords: Sustainable fiscal policy , habit formation , permanent-income hypothesis , catch-up growth , oil , Republic of Congo ,
    Date: 2007–04–05
  10. By: Giovanni Ganelli; Juha Tervala
    Abstract: This paper focuses on the trade-off faced by governments in deciding the allocation of public expenditures between productivity-enhancing public infrastructures and utility-enhancing public consumption. From the modeling point of view, the paper augments a standard New Open Economy Macroeconomics (NOEM) model by introducing productive public infrastructures. The results show that a temporary increase in the domestic stock of public capital financed by a reduction in public consumption reduces domestic welfare in the short run because the temporary gains from higher productivity do not compensate domestic residents for the utility loss due to lower public consumption. If the policy shift is permanent domestic utility is likely to increase, while foreign residents suffer short-run welfare losses but benefit from welfare gains in the long run. This analysis implies that a permanent domestic reallocation of public spending might result in a virtuous global technological cycle.
    Keywords: Public spending composition , welfare , imperfect competition , nominal rigidities , Infrastructure , Government expenditures , Consumption , Economic models ,
    Date: 2007–03–22
  11. By: Luca Pieroni (University of Perugia (Italy) and University of the West of England, Bristol)
    Abstract: A long run conditional demand model is specified to provide empirical evidence on the relationship between government defence expenditure and private consumption in the United States. By assuming that government defence expenditure is exogenously determined with respect to private consumption decisions, the empirical results show a significant impact on the utility function of households and substitutable or complementary effects for specific categories of private expenditure. The findings are in line with the evidence that in aggregate it is possible to obtain a weak impact of defence expenditure on consumption.
    Keywords: Military Expenditure; Consumption; crowding out/in;
    JEL: D12 H31 H4
    Date: 2007–03
  12. By: David Coady; Amine Mati; Taimur Baig; Joseph Ntamatungiro
    Abstract: The paper reviews recent developments in the pass-through of international to domestic petroleum product prices, in the different fuel pricing regimes, and in fuel subsidies in a range of emerging market and developing economies. The main finding of the paper is the limited price pass-through in many countries and the consequent increase in fuel subsidies. The paper proposes that key elements of a successful strategy to contain subsidies should comprise: making subsidies explicit; making pricing mechanisms more robust; combining reductions in subsidies with measures to protect the poorest; using the resulting savings well, and transparency and consultation.
    Keywords: Fiscal policy , petroleum , subsidies ,
    Date: 2007–04–02
  13. By: Hunt, Jennifer
    Abstract: In this paper, I examine the role of household income in determining who bribes and how much they bribe in health care in Peru and Uganda. I find that rich patients are more likely than other patients to bribe in public health care: doubling household consumption increases the bribery probability by 0.2-0.4 percentage points in Peru, compared to a bribery rate of 0.8%; doubling household expenditure in Uganda increases the bribery probability by 1.2 percentage points compared to a bribery rate of 17%. The income elasticity of the bribe amount cannot be precisely estimated in Peru, but is about 0.37 in Uganda. Bribes in the Ugandan public sector appear to be fees-for-service extorted from the richer patients amongst those exempted by government policy from paying the official fees. Bribes in the private sector appear to be flat-rate fees paid by patients who do not pay official fees. I do not find evidence that the public health care sector in either Peru or Uganda is able to price-discriminate less effectively than public institutions with less competition from the private sector.
    Keywords: bribery; corruption; governance; health care
    JEL: H4 K4 O1
    Date: 2007–04
  14. By: Malte Heyne (University of Bremen); Wolfgang Maennig (University of Hamburg); Bernd Süssmuth (Munich University of Technology)
    Abstract: This paper tests the hypothesis that a nation’s hosting of a mega-sporting event is an experience good for its residents. Applying data from an ex-ante and ex-post query based on contingent valuation methods, we use the Soccer World Cup 2006 as a natural experiment. The significant ex-post increase in valuation is shown to be due to adventitious citizens requiring an involving experience, rather than to an updating of a-prior assessment.
    Keywords: Experience goods, contingent valuation method, World Cup
    JEL: L83 Q26 H49
    Date: 2007–04
  15. By: Giorgio Brosio; Maria Gonzalez; Ehtisham Ahmad
    Abstract: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. A politically driven and ambitious decentralization program implemented by the authorities since the late 1990s has had mixed results in terms of enhancing service delivery. Paradoxically, concerns with the results of service delivery, partially driven by donors' requirements, have resulted in a deconcentrated system relying on conditional grants and unfunded mandates. This has reduced the incentives, responsibility, and ownership for local authorities to improve service delivery. Crucially, for functions where the local authorities have had full responsibility, better service quality has resulted than in those areas in which there are overlapping responsibilities between the center and the local authorities.
    Keywords: Fiscal policy , intergovernmental fiscal relations ,
    Date: 2006–12–21
  16. By: Jesse A. Schwartz (Department of Economics, Kennesaw State University); Quan Wen (Department of Economics, Vanderbilt University)
    Abstract: We introduce a subsidized Vickrey auction for cost sharing problems. Although the average, marginal, and serial cost sharing mechanisms are budget-balanced, they are not allocatively efficient and they do not induce players to truthfully reveal their values as a dominant strategy. The conventional Vickrey auction, on the other hand, is allocatively efficient and does induce truthful bidding as a dominant strategy, but also generates an overpayment. This paper modifies the conventional Vickrey auction so that some of the overpayment is used to subsidize additional production without upsetting the players' incentives to bid truthfully. Although this subsidized Vickrey auction is not allocatively efficient, it always Pareto dominates the conventional Vickrey auction and sometimes dominates other existing cost sharing mechanisms.
    Keywords: Cost sharing, dominant strategy implementation, Vickrey auction, subsidized Vickrey auction
    JEL: C72 D44 H42
    Date: 2007–04

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