nep-pbe New Economics Papers
on Public Economics
Issue of 2007‒07‒07
twenty papers chosen by

  1. The Origins of State Capacity: Property Rights, Taxation, and Politics By Besley, Timothy J.; Persson, Torsten
  2. How Tax Progression Affects Effort and Employment By Erkki Koskela; Ronnie Schöb
  3. Causes and Consequences of Tax Morale: An Empirical Investigation By Benno Torgler; Markus Schaffner
  4. Why Are Capital Income Taxes So High? By Flodén, Martin
  5. Short- and long-run tax elasticities - the case of the Netherlands By Guido Wolswijk
  6. Dual Income Taxation as a Stepping Stone Towards a European Corporate Income Tax By Bernd Genser; Dirk Schindler
  7. Welfare-maximizing regional government: who benefits from it? By Lapo Valentina
  8. Does Debt Relief Increase Fiscal Space in Zambia? The MDG Implications By John Weeks; Terry McKinley
  9. Government Investment and the European Stability and Growth Pact By Marco Bassetto; Vadym Lepetyuk
  10. Driven to Drink. Sin Taxes Near a Border By Timothy K.M. Beatty, Erling Røed Larsen and Dag Einar Sommervoll
  11. Electoral Accountability and Corruption in Local Governments: Evidence from Audit Reports By Claudio Ferraz; Frederico Finan
  12. From Separate and Unequal to Integrated and Equal? School Desegregation and School Finance in Louisiana By Sarah J. Reber
  13. The Fiscal Implications of Scaling up ODA to Deal with the HIV/AIDS Pandemic By Bernard Walters
  14. Free riding and norms of control: self determination and imposition. An experimental comparison. By Luigi Mittone; Francesca Bortolami
  15. A model to estimate informal economy at regional level: Theoretical and empirical investigation By Albu, Lucian-Liviu
  16. Public sector privatization - legal framework By Strazisar, Borut
  17. Tax Incentives as a Solution to the Uninsured: Evidence from the Self-Employed By Gulcin Gumus; Tracy L. Regan
  18. “Almost” Subsidy-free Spatial Pricing in a Multi-dimensional Setting By Alexei Savvateev; Jacques Drèze; Michel Le Breton; Shlomo Weber
  19. Sub-federal administrative regulation of entry in Russia By Kolomak Evgeniya
  20. Should Market Liberalization Precede Democracy? Causal Relations between Political Preferences and Development By Pauline Grosjean; Claudia Senik

  1. By: Besley, Timothy J.; Persson, Torsten
    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.
    Keywords: development; property rights; state capacity
    JEL: D70 E60 H10 K40 O10
    Date: 2007–06
  2. By: Erkki Koskela (University of Helsinki and IZA); Ronnie Schöb (Free University of Berlin)
    Abstract: Within an efficiency wage framework, we study the effects of two revenue-neutral tax reforms that change the progressivity of the labour tax system. A revenue-neutral increase in both the wage tax and tax exemption and a revenue-neutral change in the composition of labour taxation towards the tax with the smaller tax base will lead to the same results: they moderate wages, workers’ effort, effective labour input and aggregate output. Whether employment rises or falls, however, depends in both reforms on the magnitude of the prereform total tax wedge. The larger this tax wedge is, the more negative is the impact of reforms on workers’ effort. A larger total tax wedge increases the negative effect of tax progression on labour productivity and thus thwarts the positive employment effect of wage moderation.
    Keywords: efficiency wages, tax progression, structure of labour taxation
    JEL: H22 J41 J48
    Date: 2007–06
  3. By: Benno Torgler; Markus Schaffner
    Abstract: Many taxpayers truthfully declare their income to the tax administration. Why? In this paper we have found a significant correlation between tax morale and tax evasion, controlling a variety of factors. Furthermore we have analysed tax morale as dependent variable and studied the determinants that shape it. The results indicate that factors such as the tax administration, tax system, tax awareness, compliance perceptions, trust in officials and others, and the willingness to obey have a relatively strong impact on tax morale.
    Keywords: tax morale; tax compliance; tax evasion; tax system; tax administration; social capital
    JEL: H26
    Date: 2007–05
  4. By: Flodén, Martin
    Abstract: The Ramsey optimal taxation theory implies that the tax rate on capital income should be zero in the long run. This result holds even if the social planner only cares about workers that do not hold assets, or if the planner only cares about any other group in the economy. This paper demonstrates that although all households agree that capital income taxation should be eliminated in the long run, they do not agree on how to eliminate these taxes. Wealthy households would prefer a reform that is funded by higher taxes on labour income while households with little wealth would prefer a reform that is funded mostly by high taxes on initial wealth. Pareto improving reforms typically exist, but the welfare gains of such reforms are modest.
    Keywords: inequality; optimal taxation; redistribution
    JEL: E60 H21
    Date: 2007–06
  5. By: Guido Wolswijk (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper provides estimates for the base elasticities of Dutch taxes, paying particular attention to differences between short-and long-term elasticities, and allowing for asymmetric adjustment. Estimates are presented for five tax categories for the period 1970-2005, after making appropriate corrections for effects of discretionary tax measures. The empirical results indicate that shortterm elasticities often are lower than long-term ones, notably when taxes are subdued. Consequently, shocks to tax revenues tend to be aggravated by the dynamics of short-term elasticities. Ignoring differences between short- and long-term elasticities contributes to revenue ‘surprises’ and an incorrect assessment of the fiscal stance. JEL Classification: H2, H62, H68.
    Keywords: Tax revenue, income elasticity, fiscal indicators, The Netherlands.
    Date: 2007–06
  6. By: Bernd Genser (University of Konstanz); Dirk Schindler (University of Konstanz)
    Date: 2007–06–27
  7. By: Lapo Valentina
    Abstract: Does the purpose of the regional government influence the inter-regional tax competition under spatial concentration? Is the any regional government the effective one? The base of theoretical analyses is the agglomeration theory of new economic geography. It is proposed to build agglomeration model under the inter-regional tax competition, which takes into account the aims of the regional governments, and to test econometrically the tax competition and purposes of the administration in Russian regions
    JEL: R12
    Date: 2007–05–10
  8. By: John Weeks (Professor Emeritus, School of Oriental and African Studies, University of London); Terry McKinley (International Poverty Centre)
    Abstract: .
    Keywords: Debt, Increase, Fiscal Space, Zambia, MDG
    JEL: H21 O23 O17 F23
    Date: 2006–09
  9. By: Marco Bassetto; Vadym Lepetyuk
    Abstract: We consider the effect of excluding government investment from the deficit subject to the limits of the European Stability and Growth Pact. In the model we consider, residents of a given country discount future costs and benefits of government spending more than efficiency would dictate, because they fail to take into account the portion that will accrue to people that have not yet been born or immigrated into the country. It is thus in principle desirable to design budget rules that favor long-term investment (by allowing more borrowing) over other government spending that only carries short-term benefits. However, given the low rates of population growth, mortality, and mobility across European countries, we find that the distortions arising from treating all government spending equally are likely to be modest. We also show that these modest distortions can be alleviated only if net government investment is excluded from the deficit computation; excluding gross investment may even be counterproductive, as it promotes overspending in government capital.
    JEL: D61 E62 H41 H54 H62
    Date: 2007–06
  10. By: Timothy K.M. Beatty, Erling Røed Larsen and Dag Einar Sommervoll (Statistics Norway)
    Abstract: This paper investigates household purchasing behavior in response to differing alcohol and tobacco taxes near an international border. Our study suggests that large tax differentials near borders induce economically important tax avoidance behavior that may limit a government’s ability to raise revenue and potentially undermine the pursuit of important health and social policy goals. We match novel supermarket scanner and consumer expenditure data to measure the size and scope of the effect for households and stores. We find that stores near/far from the international border have statistically significantly lower/higher sales of beer and tobacco than comparable stores far/near the border. Moreover, we find that households near the border report higher consumption of these same goods. This is consistent with households facing lower prices. Finally, we find measures of externalities associated with the consumption of alcohol and tobacco are higher near the border.
    Keywords: Alcohol Consumption; Tobacco Consumption; Border Trade; Taxation
    JEL: C31 F14 I18
    Date: 2007–06
  11. By: Claudio Ferraz (IPEA, Brazil); Frederico Finan (University of California, Los Angeles and IZA)
    Abstract: Political corruption is a concern of many modern democracies. It weakens democratic institutions, restricts public services, and lowers productivity undermining economic development. Yet despite its importance, our understanding of what determines corruption is limited. This paper uses a novel dataset of political corruption in local governments, constructed from reports of an anti-corruption program in Brazil, to test whether the possibility of re-election affects the level of rents extracted by incumbent politicians. Exploiting variation induced by the existence of a term limit, we find that in municipalities where mayors are in their final term, there is significantly more corruption compared to similar municipalities where mayors can still be re-elected. In particular, the share of resources misappropriated is, on average, 57 percent larger in municipalities with lame-duck mayors. The findings suggest that electoral rules that enhance political accountability play a crucial role in constraining politician’s corrupt behavior.
    Keywords: accountability, corruption, local governments, re-election
    JEL: D72 D78 H41 O17
    Date: 2007–06
  12. By: Sarah J. Reber
    Abstract: An important goal of the desegregation of schools following the Supreme Court's decision in Brown vs. Board of Education was to improve the quality of the schools black children attended. This paper uses a new dataset to examine the effects of desegregation on public and private enrollment and the system of school finance for Louisiana. I show that the system of school finance in Louisiana had long favored whites in high black enrollment share districts. Because of this system, whites in districts with high black enrollment shares stood to lose the most from desegregation, as the gap between white student-teacher ratios and black student-teacher ratios in those districts was higher. Given the importance of districts' black enrollment share in the system of finance and the potential impact of desegregation, I examine how changes in public and private enrollment, the local property tax base, and per-pupil revenue relate to the initial black enrollment share. The analysis suggests that the Jim-Crow system of school finance -- which had prevailed for over 60 years -- unraveled as the schools desegregated. While desegregation did induce some "white flight" and reduce the local property tax base slightly, the policies had the intended effect of reducing black-white gaps in school resources, as increased funding allowed districts to "level up" average spending in integrated schools to that previously experienced only in the white schools.
    JEL: H71 H72 H75 I22
    Date: 2007–06
  13. By: Bernard Walters (Economics Discipline Area, School of Social Sciences, University of Manchester)
    Abstract: .
    Keywords: Fiscal, Implications,ODA, HIV, AIDS, Pandemic
    Date: 2007–05
  14. By: Luigi Mittone; Francesca Bortolami
    Abstract: This is an experiment on the effect of norm application in a public good game. We want to investigate whether a control norm affects the contribution level differently, only in relation to the way in which the norm is applied in the game. We compare the amount of public good provided in two different groups. In the first group (constituent group), experimental subjects create a control norm, and then they self-apply it in a basic public good game. In the second group (control group), the norm created by the constituent group is exogenously imposed. Experimental results show a significant difference between the two public good levels considered. Self determination implies a higher level of efficiency, as compared to the exogenous one.
    Keywords: public good games, free riding, norm of control, voluntary contribution
    JEL: H41 C92
    Date: 2007
  15. By: Albu, Lucian-Liviu
    Abstract: Many problems emerge since it is widely believed that high tax rates and ineffective tax collection by government are the main causes contributing to the rise of the informal economy. Already the economists have established a relationship between tax rates and tax evasion or size of the informal economy. The higher is the level of taxation, the greater incentive is to participate in informal economic activities and escape taxes. At the macroeconomic level, there is a number of so-called indirect methods used to estimate the size and dynamics of informal economy, reported in literature as “Monetary Approach”, “Implicit Labour Supply Method”, “National Accountancy”, “Energy Consumption Method”, etc. Unfortunately, many times there are huge differences among the estimated shares of informal or underground economy obtained by various methods. For instance, in case of Romania the figures are between about 20% of GDP, obtained on the base of the energy consumption method and more than 45% computed by using the monetary approach. Also, the figures reported by the National Institute for Statistics (NIS), based on national accounts methodology, increased (mainly due to changes in methodology) from about 5% in 1992, to 18% in 1997 and to 20-22% after 2000. Adding to these figures about 7% of GDP, representing the estimated level for self-consumption in case of a rural household, legal non-registered but informal, resulted that last years the informal economy is responsible of 27-29% of national economy. In this article, coming from certain general accepted finding of the theory in matter of modelling underground economy, we concentrate on evaluating analytically the limit-values of certain important parameters involved in models used to estimate the size of underground economy and to explain the mechanisms of its dynamics. Then we shall simulate some exercises on available data. The second goal of the paper is to report some conclusions of our investigation based on data supplied by special surveys organised in Romania. Also, in order to see since certain hypotheses (referring to the complex transmission mechanism from the tax policy decisions to the effective implication of agents into informal economy) are statistically verified and to extend the study from the aggregate level to a deep research inside the population set in regions, we used data supplied by this special large survey, which already were processed and are available in our database.
    Keywords: informal economy; invisible sector; tax rate; probability of detection; risk-aversion; computer assistance
    JEL: C13 H31 O17 D31 E62
    Date: 2007
  16. By: Strazisar, Borut
    Abstract: With the accession of ex socialistic countries in EU the problem of public sector privatization become the most popular and at the same times the most important political question. Privatization becomes at the end of the 20th century the magical word, which will resolve all the problems and incapability in public sector. We’re talking about the sector which functioned in monopole framework with all the good and the bad sides of such system. It was the sector which was used and sometimes abused by the state to promote social, political and employment goals. On the other side, distribution, quality and quantity of public goods and services was defined by the state. So the consumers had no choice – their only choice was to use or not use such product. In some countries (like in ex SFRY) also the infrastructure for public services or goods was built with private money (direct or indirect investments) and become the social or state ownership with no remuneration. Within public sector we could speak also about the problem of authority privatization, but it’s a topic, which requires separate analyzes. The intention of this contribution is to show the problems of privatization on the supplier and on the demand side.
    Keywords: public sector privatization; consumer protection; authority privatization
    JEL: K23
    Date: 2006–05
  17. By: Gulcin Gumus (Florida International University and IZA); Tracy L. Regan (University of Miami)
    Abstract: Between the years 1996 and 2003, a series of amendments were made to the Tax Reform Act of 1986 (TRA86) that gradually increased the tax credit for health insurance purchases by the self-employed from 25 to 100 percent. We study how these changes in the tax code have influenced the likelihood that a self-employed person has health insurance coverage as the policy holder of the plan. The Current Population Survey (CPS) is used to construct a data set corresponding to 1995-2005. The empirical analysis is performed for prime-age men and women, and accounts for differences in family structure and potential eligibility. The difference-in-difference estimates suggest that the series of tax credits did not provide sufficient incentives for the self-employed to obtain health insurance coverage. Estimates of the price elasticity of demand confirm the limited response to changes in the after-tax health insurance premium. The effect was largest, however, among the single men and women in our sample, suggesting that a 10 percent decrease in the after-tax price increases the likelihood of coverage by 0.68 and 1.02 percentage points, respectively.
    Keywords: health insurance, self-employment, elasticity, CPS
    JEL: J32 J48 I11
    Date: 2007–06
  18. By: Alexei Savvateev (New Economic School); Jacques Drèze (CORE, Catholic University of Louvain); Michel Le Breton (Université de Toulouse I, GREMAQ and IDEI); Shlomo Weber (outhern Methodist University)
    Abstract: Consider a population of citizens uniformly spread over the entire plane, that faces a problem of locating public facilities to be used by its members. The cost of every facility is financed by its users, who also face an idiosyncratic private access cost to the facility. We assume that the facilities’ cost is independent of location and access costs are linear with respect to the Euclidean distance. We show that an external intervention that covers 0.19% of the facility cost is sufficient to guarantee secession-proofness or no cross-subsidization, where no group of individuals is charged more than its stand alone cost incurred if it had acted on its own. Moreover, we demonstrate that in this case the Rawlsian access pricing is the only secession-proof allocation.
    Keywords: Secession-Proofness, Optimal Jurisdictions, Rawlsian Allocation, Hexagonal Partition, Cross-Subsidization
    JEL: D70 H20 H73
    Date: 2007–06
  19. By: Kolomak Evgeniya
    Abstract: The project assesses the sub-federal regulation of market entry around Russian regions by addressing two problems: what are the consequences of the regulation and what determines the variation of the market entry regulation among the regions. Assumptions of public interest regulation and public choice theories are tested. Empirical base of the project is the constructed data set, describing the administrative regulation of entry by start-up companies in Russian regions.
    JEL: K2 K4
    Date: 2007–05–10
  20. By: Pauline Grosjean (European Bank for Reconstruction and Development); Claudia Senik (Paris School of Economics, University Paris-IV Sorbonne, IUF and IZA)
    Abstract: This paper is dedicated to the relation between market development and democracy. We distinguish contexts and preferences and ask whether it is true that the demand for democracy only emerges after a certain degree of market development is reached, and whether, conversely, democratization is likely to be an obstacle to the acceptation of market liberalization. Our study hinges on a new survey rich in attitudinal variables: the Life in Transition Survey (LITS) conducted in 2006 by the European Bank for Reconstruction and Development and the World Bank, in 28 post-Transition countries. Our identification strategy consists in relying on the specific situation of frontier-zones. We find that democracy enhances the support for market development whereas the reverse is not true. Hence, the relativist argument according to which the preference for democracy is an endogenous byproduct of market development is not supported by our data.
    Keywords: market and democracy, sequencing of development, transition economies, attitudinal variables, cross-country survey
    JEL: H1 H5 P2 P3 P5 O1 O12 O57
    Date: 2007–06

General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.