nep-pbe New Economics Papers
on Public Economics
Issue of 2007‒07‒13
nineteen papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Does decentralization improve the efficiency in the allocation of public investment? Evidence from Spain By Alejandro Esteller; Albert Solé
  2. Is a Flat Tax politically feasible in a grown-up Welfare State? By Fuest, Clemens; Peichl, Andreas; Schaefer, Thilo
  3. Patronage-Preserving Federalism? Legislative Malapportionment and Subnational Fiscal Policies in Argentina By Jorge P. Gordin
  4. Fiscal Misperceptions Associated with Tax Expenditure Spending: the Case of Pronatalist Tax Incentives in Sinapore By Poh Eng Hin
  5. The Marginal Cost of Public Funds for Excise Taxes in Thailand By Worawan Chandoevwit and Bev Dahlby
  6. Is there a Displacement Deadweight Loss from Tax Evasion? Estimates Using Firm Surveys from the Czech Republic By Hanousek, Jan; Palda, Filip
  7. The Taxation of Couples By Patricia Apps; Ray Rees
  8. Are equalization payments making Canadians better off ? A two-dimensional dominance answer By Benoît Tarroux
  9. The effects of the introduction of tax incentives on retirement savings By Juan Ayuso; Juan F. Jimeno; Ernesto Villanueva
  10. Responsive Regulation and the Uncertainty of Tax Law - Time to Reconsider the Commissioner's Model of Cooperative Compliance By Mark Burton
  11. Evaluating the Impact of Public Subsidies on a Firms Performance: a Quasi-experimental Approach By Nestor Duch Brown; Daniel Montolio Estivill; Mauro Mediavilla
  12. "Cooperative Federalism" as a Strategic Interaction: Voluntary Decentralization in Environmental Policy By Leah G. Traub; Hilary Sigman
  13. Parochial Politics: Ethnic Preferences and Politician Corruption By Banerjee, Abhijit; Pande, Rohini
  14. Cost-benefit rules for transport projects when labor supply is endogenous and taxes are distortionary By Fosgerau, Mogens; Pilegaard, Ninette
  15. U.S. tax policy and health insurance demand: can a regressive policy improve welfare? By Karsten Jeske; Sagiri Kitao
  16. What Future for the Corporate Tax in the New Century? By Richard S. Simmons
  17. Third degree waiting time discrimination: optimal allocation of a public sector health care treatment under rationing by waiting By Hugh Gravelle; Luigi Siciliani
  18. Why one would accept Voting Theory for Democracy and reject the Penrose Square Root Weights By Colignatus, Thomas
  19. A Unified Framework for Measuring Preferences for Schools and Neighborhoods By Patrick Bayer; Fernando Ferreira; Robert McMillan

  1. By: Alejandro Esteller (Institut d'Economia de Barcelona (IEB); Universitat de Barcelona (UB)); Albert Solé (Institut d'Economia de Barcelona (IEB); Universitat de Barcelona (UB))
    Abstract: The well-known "Decentralization Theorem" (Oates, 1972) establishes the superiority of decentralized public provision over the centralized case, which is not so sensitive to the diversity of expenditure needs among territories. We test this hypothesis using a unique Spanish database that provides information on road and educational infrastructure investment and capital stocks by region both before and after the decentralization of such responsibilities. We find that investment in both categories is much more sensitive to regional output and to infrastructure users and costs when sub-central governments have the responsibility over such services.
    Keywords: Decentralization, Growth, Human capital, Roads
    JEL: D72 H54 H72 H77 I20
  2. By: Fuest, Clemens; Peichl, Andreas; Schaefer, Thilo
    Abstract: The introduction of a flat tax is supposed to have several advantages. Administration and compliance costs are reduced, as well as incentives for tax evasion. Furthermore, positive employment and growth effects are expected. Despite these advantages, a flat rate tax is not very popular in most Western European countries. The most important objection against a flat tax states that a flat rate tax would be inequitable and unfair. The present paper uses a simulation model based on a unique database of German micro data to provide empirical evidence for the analysis of the equity and efficiency effects as indicators for the political feasibility of flat rate tax reforms. Our analysis shows that the selection of the schedule and tax base parameters are crucial for the e¤ects of flat tax reforms in terms of equity and efficiency. A flat rate tax with a higher basic allowance and a higher single rate has less harmful distributional effects than a flat rate tax with low basic allowance and tax rate. Nevertheless, the scenario with the lowest parameter values for basic allowance and tax rate is the only alternative that leads to positive labour supply and significantly positive welfare effects. Both labour supply and static welfare e¤ects, however, are quite small. Although we have derived our results for the case of Germany, we do think that similar patterns would be observed in other countries of Western Europe. If this proves to be correct, it will be hard for ‡at tax reforms to invade the grown-up welfare states of "Old Europe".
    Keywords: Flat Tax reform, equity, efficiency, distribution, welfare
    JEL: D31 D60 H20
    Date: 2007
  3. By: Jorge P. Gordin (GIGA Institute of Latin American Studies)
    Abstract: This paper builds on institutional analysis to generate new conclusions about the economic viability of federalism. It does so by suggesting that Weingast´s seminal model of marketpreserving federalism falls short of accounting for the poor fiscal performance of multitiered systems in the developing world. This theoretical deficiency stems to a large extent from the insufficient attention paid by this model to the institutional complexity of federal systems, particularly the public policy effects of legislative malapportionment. Subsequent to an analytical discussion of the potential public spending and distributive politics distortions resulting from overrepresentation, we offer preliminary empirical evidence from Argentina, a federation exhibiting one of the most decentralized fiscal systems in the world and severe imbalances in the territorial distribution of legislative and economic resources. The findings show not only that said imbalances lead to sub-optimal fiscal results but also that they have a mutually-reinforcing relationship with regionalized patronage.
    Keywords: Federalism, legislative malapportionment, subnational fiscal policies, patronage, Argentina
    JEL: A12 H30 J18
    Date: 2007–06
  4. By: Poh Eng Hin
    Abstract: Tax expenditures are a potentially expedient means through which politicians can implement spending programs that target benefits at a select few while ensuring that the cost and distributive effects of such programs remain largely imperceptible to the majority. This paper reports the results of an exploratory study to assess the extent and determinants of public awareness of pronatalist tax policy in Singapore, and of public perceptiveness of the cost and distributive outcomes of these pronatalist tax incentives. It is found that survey respondents largely are aware of the existence of the incentives. However, there is widespread ignorance (if not misperceptions) of the spending implications and hidden cost associated with these incentives and of their distributive biases along eugenic, income and ethnic dimensions. Non-beneficiaries of the tax expenditures not only are less likely to be aware of the existence of the incentives, they are also less likely to be perceptive of the distributive effects. Overall, the empirical findings are a testimony to why the tax expenditure route has proven to be such a politically expedient way for the Singapore Government to implicitly pursue its policy of selective pronatalism.
    Keywords: pronatalist tax policy, tax expenditures, tax incentives
    Date: 2007–07–05
  5. By: Worawan Chandoevwit and Bev Dahlby
    Abstract: The authors extend the Ahmad and Stern (1984) framework for calculating the marginal cost of public funds (MCF) for excise taxes in Thailand by incorporating non-tax distortions caused by (a) environmental externalities, (b) public expenditure externalities, (c) market power in setting prices, (d) addiction, and (e) smuggling or tax evasion. Our calculations, based on our benchmark parameter values, indicates that the MCFs are 0.532 for fuel excise taxes, 2.187 for tobacco excise taxes, 2.132 for alcohol excise taxes and 1.080 for the VAT. Using pro-poor distributional weights does not change the relative social marginal cost of raising revenues through the excise taxes.
    Keywords: marginal cost of public funds, excise taxes, tax reform, excess burden
    Date: 2007–07–05
  6. By: Hanousek, Jan; Palda, Filip
    Abstract: In the presence of the underground economy taxes give rise to a deadweight loss from displacement of efficient producers by inefficient producers. We consider an economy in which a producer faces two types of costs: the cost of production, and taxes. If the ability to evade taxes is inversely proportional to the ability to keep production costs down, high tax rates may cause inefficient producers to crowd out efficient producers. We estimate this deadweight loss from surveys of 426 Czech firms taken in 2004 and 2005. We find that the deadweight loss due to this crowding out can be several times as large as the triangle deadweight losses from discouraged consumption. Our paper provides the first estimates ever of the displacement loss from tax evasion.
    Keywords: Underground economy; social cost of public funds; taxation.
    JEL: H26 H21
    Date: 2007–06
  7. By: Patricia Apps; Ray Rees
    Abstract: This paper is concerned with the question of how couples should be taxed. One reason for the importance of this issue is simply that the overwhelming majority of individuals live in households formed around couples, and so it could be argued that empirically, this is the single most important problem in personal income taxation. A second reason is that the economic theory of optimal taxation and tax reform, at least as it is presented in the mainstream literature, provides little guidance on this issue, resting as it does on models of the single person household. An old insight in the earlier public .nance literature is that any discussion of the taxation of two-person households necessarily involves the recognition of the importance of household production. In this paper we try to show how a simple model of household production can be used to help the analysis of optimal taxation and tax reform, and to put the "conventional wisdom", which says that it is optimal to tax women on a separate, lower tax schedule than men, on a .rmer basis. What emerges clearly from the analysis is how centrally important the relationship between productivity in household production and female labour supply really is, and how little we know about it empirically.
    Keywords: Optimal taxation, household production, labour supply
    JEL: H21 D13 J22
    Date: 2007–07
  8. By: Benoît Tarroux
    Abstract: This paper provides a normative appraisal of the Canadian equalization transfers system. For that sake, the two-dimensional dominance criteria introduced by Atkinson and Bourguignon (RES, 1982) are used to compare the distributions of private and public good before and after equalization payments. As the distribution before equalization is not observable, one simulates it on the basis of various scenarios which specify both its financing by the federal government and its utilization by provincial governments. The results show that Canadian equalization payments never improve social welfare for all utilitarian social planners who believe that household convert public and private goods into well-being by a utility function belonging to the classes that corresponds to the Atkinson and Bourguignon criteria. A further parametric restriction on the class of utility functions however enables to get more precise results.
    Keywords: Equalization,Welfare Dominance, Multidimensional Distribution, Public Goods, Fiscal Federalism.
    Date: 2006–11
  9. By: Juan Ayuso (Banco de España); Juan F. Jimeno (Banco de España; Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)); Ernesto Villanueva (Banco de España)
    Abstract: This paper uses a Spanish panel of tax returns and another on household expenditure during the period 1985-1991 to examine the incidence of the introduction in 1988 of tax incentives to retirement savings on contributions to pension funds and on savings. We first identify the population cohorts who most used these incentives. Then we use data on the evolution of consumption of these cohorts to find that there is substantial heterogeneity in the response of household saving to tax incentives. Most contributions to pension funds are by older/high income individuals. While the overall amount of new saving we estimate is limited (at most 25 cents per euro contributed on average), saving responses differ substantially across age groups. In particular, we document very small consumption drops among the group of households between 56 and 65 years of age, the group that most actively contributed to the plan, while we find instead a larger decrease in consumption expenditures of the group of households between 46 and 55 years of age.
    Keywords: pension funds, tax incentives, savings
    JEL: D14 H24 H55
    Date: 2007–07
  10. By: Mark Burton
    Abstract: Over the last decade the Australian Taxation Office has adapted the model of ‘responsive regulation’ in developing its cooperative compliance model. This model seeks to promote voluntary compliance with Australia’s taxation laws by tailoring the administrative treatment of taxpayers in accordance with the individual taxpayer’s tax compliance posture. The fulcrum of this model of tax administration is the proposition that taxation law is determinate, such that ‘complying’ and ‘non-complying’ taxpayers may be segregated and treated accordingly. This paper argues that this dichotomous model is problematic in at least some tax contexts, and considers the implications of legal indeterminacy for the cooperative compliance model.
    Keywords: cooperative compliance model, responsive regulation, tax administration, tax compliance
    Date: 2007–07–05
  11. By: Nestor Duch Brown; Daniel Montolio Estivill; Mauro Mediavilla (Universitat de Barcelona)
    Abstract: Many regional governments in developed countries design programs to improve the competitiveness of local firms. In this paper, we evaluate the effectiveness of public programs whose aim is to enhance the performance of firms located in Catalonia (Spain). We compare the performance of publicly subsidised companies (treated) with that of similar, but unsubsidised companies (non-treated). We use the Propensity Score Matching (PSM) methodology to construct a control group which, with respect to its observable characteristics, is as similar as possible to the treated group, and that allows us to identify firms which retain the same propensity to receive public subsidies. Once a valid comparison group has been established, we compare the respective performance of each firm. As a result, we find that recipient firms, on average, change their business practices, improve their performance, and increase their value added as a direct result of public subsidy programs.
    Keywords: public policy, evaluation studies, firm performance, propensity score matching
    JEL: H32 H25 L53 L25
    Date: 2007
  12. By: Leah G. Traub; Hilary Sigman
    Abstract: Under most U.S. environmental laws and some health and safety laws, states may apply to implement and enforce the law, through a process known as authorization or primacy. The paper presents a simple model of the strategic interaction between the federal and state governments with such voluntary decentralization. The model suggests that the federal government may design the policy so that states that desire stringent regulation authorize, whereas other states remain under the federal program. We then test the implications of this model using data on U.S. water pollution and hazardous waste regulations, two of the most important environmental programs to allow authorization. Consistent with the results of our model, we find that states with stronger environmental preferences authorize more quickly and more fully under both policies. This evidence runs counter to concerns that states use control of their programs to undercut federal environmental standards.
    JEL: H77 Q53
    Date: 2007–07
  13. By: Banerjee, Abhijit; Pande, Rohini
    Abstract: This paper examines how increased voter ethnicization, defined as a greater preference for the party representing one's ethnic group, affects politician quality. If politics is characterized by incomplete policy commitment, then ethnicization reduces average winner quality for the pro-majority party with the opposite true for the minority party. The effect increases with greater numerical dominance of the majority (and so social homogeneity). Empirical evidence from a survey on politician corruption that we conducted in North India is remarkably consistent with our theoretical predictions.
    Keywords: Corruption; Ethnic Voting; India
    JEL: O12 P16
    Date: 2007–07
  14. By: Fosgerau, Mogens; Pilegaard, Ninette
    Abstract: We embed a stylized traffic model within a general equilibrium model in which labor supply is endogenous and income taxes are distortionary. Within this framework we derive simple rules for performing a cost-benefit analysis that can be applied knowing only the output of the traffic model and a factor that accounts for the labor market distortion in a consistent manner. Thus the rules that we derive should be applicable in the large number of cost-benefit analyses that are performed based on the output of traffic models. Such analyses are routinely performed and guide the allocation of a large share of public investment in many countries of the world as well as the assessment of policies such as road user charging. We find that the rules for leisure transport are exactly the same as in a conventional CBA that includes the marginal cost of public funds. For business travel and commuting we find new rules as a result of the assumption that transport costs have the same distortionary effect as income taxes.
    Keywords: Cost-benefit; Transport; General Equilibrium
    JEL: R42 H40
    Date: 2007–06–18
  15. By: Karsten Jeske; Sagiri Kitao
    Abstract: The U.S. tax policy on health insurance is regressive because it favors only those offered group insurance through their employers, who tend to have a relatively high income. Moreover, the subsidy takes the form of deductions from the progressive income tax system, giving high-income earners a larger subsidy. To understand the effects of the policy, we construct a dynamic general equilibrium model with heterogenous agents and an endogenous demand for health insurance. We use the Medical Expenditure Panel Survey to calibrate the process for income, health expenditures, and health insurance offer status through employers and succeed in matching the pattern of insurance demand as observed in the data. We find that despite the regressiveness of the current policy, a complete removal of the subsidy would result in a partial collapse of the group insurance market, a significant reduction in the insurance coverage, and a reduction in welfare coverage. There is, however, room for raising the coverage and significantly improving welfare by extending a refundable credit to the individual insurance market.
    Date: 2007
  16. By: Richard S. Simmons
    Abstract: It has long been recognised that the corporate tax suffers from several inherent deficiencies. However, in recent years, the transformation and integration of the world economy have exacerbated and highlighted these weaknesses, placing a question mark over the future of the tax. Through an examination of the problems besetting the tax today, a critical analysis of the conventional arguments supporting it, and a review of economic and political factors relevant to its continued existence, this article considers its future in the new century.
    Keywords: corporate taxation, tax revenues, tax competition
    Date: 2007–07–05
  17. By: Hugh Gravelle; Luigi Siciliani
    Abstract: In many public health care systems treatment is rationed by waiting time. We examine the optimal allocation of a .xed supply of a treatment between di¤erent groups of patients. Even in the absence of any distributional aims welfare is increased by third degree waiting time discrimination. Because waiting time imposes dead weight losses on patients, lower waiting times should be o¤ered to groups with higher marginal waiting time costs and with less elastic demand for the treatment.
    Keywords: Waiting times, prioritisation, rationing
    JEL: H21 H42 I11 I18
    Date: 2007–07
  18. By: Colignatus, Thomas
    Abstract: Various scientists under the label of “Scientists for a democratic Europe” (SDE) sent a joint “Letter to the governments of the EU member states” (2007) advising the use of the Penrose Square Root Weights (PSRW) for the EU Council of Ministers. When we compare the SDE letter with Colignatus (2001, 2007b) “Voting theory for democracy” (VTFD) then we find that SDE does not fit voting theory for democracy. Inspection of the material upon which the SDE letter is based also shows a moral choice while the rigorous empirical analysis by Gelman, Katz and Bafumi (2007) is actually misrepresented. So the SDE letter can also be rejected on its own grounds. The PSRW approach seems not valid for (indivisible) individuals but may be applicable for divisible shares in shareholder meetings.
    Keywords: voting theory; voting systems; elections; public choice; political economy; Borda Fixed Point; democracy; European Union; Penrose square root weights;
    JEL: D71 A2 H0
    Date: 2007–07–06
  19. By: Patrick Bayer; Fernando Ferreira; Robert McMillan
    Abstract: This paper develops a comprehensive framework for estimating household preferences for school and neighborhood attributes in the presence of sorting. It embeds a boundary discontinuity design in a heterogeneous model of residential choice to address the endogeneity of school and neighborhood attributes. The model is estimated using restricted-access Census data from a large metropolitan area, yielding a number of new results. First, households are willing to pay less than one percent more in house prices -- substantially lower than previous estimates -- when the average performance of the local school increases by five percent. Second, much of the apparent willingness to pay for more educated and wealthier neighbors is explained by the correlation of these sociodemographic measures with unobserved neighborhood quality. Third, neighborhood race is not capitalized directly into housing prices; instead, the negative correlation of neighborhood race and housing prices is due entirely to the fact that blacks live in unobservably lower quality neighborhoods. Finally, there is considerable heterogeneity in preferences for schools and neighbors: in particular, we find that households prefer to self-segregate on the basis of both race and education.
    JEL: H0 H4 H72 R0 R21 R31
    Date: 2007–07

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