nep-pbe New Economics Papers
on Public Economics
Issue of 2007‒07‒27
thirteen papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Tax Harmonisation in Europe: The Determination of Corporate Taxable Income in the EU Member States By Oestreicher, Andreas; Spengel, Christoph
  2. Social Welfare and Collective Goods Coercion in Public Economics By Stanley L. Winer; George Tridimas; Walter Hettich
  3. Self-Insurance and Self-Protection as Public Goods By Lohse, Tim; Robledo, Julio R.; Schmidt, Ulrich
  4. The Basic Public Finance of Public-Private Partnerships By Eduardo Engel; Ronald Fischer; Alexander Galetovic
  5. The Non-neutrality of Corporate Tax: An Entrepreneurial Perspective By Filoso, Valerio
  6. Local Governments in the Wake of Demographic Change: Efficiency and Economies of Scale in German Municipalities By Geys, Benny; Heinemann, Friedrich; Kalb, Alexander
  7. Money and Taxes: The Relationship Between Financial Sector Development and Taxation By Tatom, John; Ott, Mack
  8. The Causes of Excessive Deficits in The European Union By Castro, Vítor
  9. Keeping it off the Books: An Empirical Investigation of Firms that Engage in Tax Evasion By Tedds, Lindsay
  10. Institutional Tax Clienteles and Payout Policy By Mihir A. Desai; Li Jin
  11. Inequity Aversion and Individual Behavior in Public Good Games: An Experimental Investigation By Dannenberg, Astrid; Riechmann, Thomas; Sturm, Bodo; Vogt, Carsten
  12. On the Design of Global Refunding and Climate Change By Gersbach, Hans; Winkler, Ralph
  13. Is it Economics or Politics? Trending Economic Factors and the Structure of Congress in the Growth of Government, 1930-2002 By Stanley L. Winer; Michael W. Tofias; Bernard Grofman

  1. By: Oestreicher, Andreas; Spengel, Christoph
    Abstract: The aim of this paper is twofold. First, we want to examine whether and if so, to what extent, the concept of International Financial Reporting Standards (IFRS) meets the requirements of a Common Consolidated Corporate Tax Base (CCCTB) for the EU-wide activities of multinationals as proposed by the European Commission. Second, we estimate the consequences on the effective levels of company tax burdens in selected EU member states if IFRS are considered as a tool for defining the tax base. Our analysis reveals that IFRS could provide elements of a common and harmonised European tax base in certain areas. In particular, tax accounting still has to follow the realisation principle. Therefore, IFRS “fair value-accounting” cannot be adopted for tax purposes. A transition to tax accounting on the basis of IFRS has only minor effects on the effective tax burdens of companies.
    Keywords: International Company Taxation, Effective Tax Burden, Tax Accounting
    JEL: H21 H25
    Date: 2007
  2. By: Stanley L. Winer (Department of Economics, Carleton University); George Tridimas (School of Economics and Politics, University of Ulster); Walter Hettich
    Abstract: This paper develops and expanded framework for social planning in which coercion stemming from the provision of public goods is explicitly acknowledged. Key issues concern the precise definition of coercion, its difference from redistribtion, and its incorporation into social welfare optimization. The paper examines the implications for optimal policy, showing how the Samuelson condition, rules for optimal linear income taxation and commodity taxation, and for the marginal cost of public funds must be modified. In addition, the trade-off between social welface and coercion is mapped under specific conditions and the implications of this trade-off for normative policy choice are considered.
    JEL: D70 H10 H20 H21
    Date: 2007–01–27
  3. By: Lohse, Tim; Robledo, Julio R.; Schmidt, Ulrich
    Abstract: Many public goods like lighthouses and fire departments do not provide direct utility but act as insurance devices against shipwreck and destruction. They either diminish the size and/or the probability of the loss. We extend the public good model with this insurance aspect and generalize Samuelson’s efficient allocation rule when self-insurance and self-protection expenditures are pure public goods. Some comparative static results with respect to changes in income and risk behavior are derived. We analyze the interaction of private market insurance with the public good level, both for efficient provision and for private provision equilibria. The privately provided levels of self- insurance and self-protection decrease when market insurance is available, which suggests that the state should invest more in preventing not insurable risks like wars. Additionally, the state should focus on self-protection expenditures if those are better observable than private self-protection effort.
    Keywords: Self-insurance, self-protection, efficient provision of public goods, private provision of public goods, market insurance
    JEL: G22 H41
    Date: 2007
  4. By: Eduardo Engel; Ronald Fischer; Alexander Galetovic
    Abstract: Public-private partnerships (PPPs) cannot be justified because they free public funds. When PPPs are desirable because the private sector is more efficient, the contract that optimally trades demand risk, user-fee distortions and the opportunity cost of public funds is characterized by a minimum revenue guarantee and a cap on the firm's revenues. Yet income guarantees and revenue sharing arrangements observed in practice differ fundamentally from those suggested by the optimal contract. The optimal contract can be implemented via a competitive auction with realistic informational requirements; and risk allocation under the optimal contract suggests that PPPs are closer to public provision than to privatization.
    JEL: H21 H54 L51 R42
    Date: 2007–07
  5. By: Filoso, Valerio
    Abstract: While corporate taxation is a major issue in the debate over international finance, economic theory has no clear stance on who bears its burden. On balance, economists seem still more prone to accept that taxing profits does not affect corporations' outcomes. This paper makes three cases for non-neutrality. First, since corporate taxation is asymmetric between profit and loss, the tax rate may change the ranking of alternative investments. Secondly, the imperfect observability of the use of internal resources makes pure economic profits very difficult to detect. Thirdly, when the pervasive role of entrepreneurship is fully taken into account, corporate taxation appears clearly as a direct tax on market adjustments and as an indirect tax on wages.
    Keywords: Corporate Taxation; Entrepreneurship; Tax Incidence; Austrian Economics
    JEL: H22 L26 B25 H25
    Date: 2007–07–20
  6. By: Geys, Benny; Heinemann, Friedrich; Kalb, Alexander
    Abstract: German municipalities are expected to suffer from (often significant) population losses in the upcoming decades. We assess these local governments’ vulnerability to the fiscal consequences of this demographic decline through two means (using a sample of 1021 municipalities in the state of Baden-Württemberg). First, we consider local government cost efficiency. This indicates that there is a substantial divergence in efficiency despite a homogeneous institutional setting, leaving at least some – mainly smaller – municipalities vulnerable to adverse demographic/financial shocks. Secondly, we estimate the elasticity of local government cost functions to population size. We find that costs rise (fall) underproportionally with population size for small municipalities, whereas this is less the case for larger municipalities. This implies that especially small municipalities are vulnerable to increasing cost pressures under declining population. The overall implication is that large German municipalities (over 10.000 inhabitants) will more easily be able to cope with the expected population decline than smaller ones, supporting a case for boundary reviews or more extensive inter-communal cooperation.
    Keywords: Demographic change, Efficiency, Local government performance, Stochastic frontier analysis, Economies of scale, Cost elasticity
    JEL: D61 H40
    Date: 2007
  7. By: Tatom, John; Ott, Mack
    Abstract: Requiring taxes to be paid in domestic money provides a legal tender basis for money demand and hence to the development of a financial system. In emerging markets, the level of taxation is a positive factor boosting financial development. At higher tax rates, however, taxation provides an incentive to reduce money demand and reduces the size of the financial sector. There is also evidence of re-switching in high-tax developed countries, where financial deepening increases with the tax rate. Such financial deepening represents a form of capital market repression, not unlike the growth-depressing effects of financial repression in many poor countries.
    Keywords: Taxation; financial development; money demand; money multiplier; emerging markets
    JEL: H2 O16 E62
    Date: 2006–10–10
  8. By: Castro, Vítor (University of Warwick, University of Coimbra and NIPE)
    Abstract: Several studies have identified the factors that cause public deficits in industrial democracies. They consider that economic, political and institutional factors play an important role in the understanding of those deficits. However, the study of the determinants of excessive deficits remains practically unexplored. Since excessive deficits can have large negative spillover effects when countries are forming a monetary union without a centralised budget – as it is the case for a group of European countries – this paper tries to explore that gap in the literature by identifying the main causes of excessive deficits and the ways of avoiding them. Binary choice models are estimated over a panel of 15 European Union countries for the period 1970-2006, where an excessive deficit is defined as a deficit higher than 3% of GDP. Results show that a weak fiscal stance, low economic growth, the timing of parliamentary elections and majority left-wing governments are the main causes of excessive deficits in the EU countries. Moreover, the institutional constraints imposed after Maastricht over the EU countries’ fiscal policy have succeeded in reducing the probability of excessive deficits in Europe, especially in small countries. Therefore, this study concludes that supranational fiscal constraints, national efforts to reduce public debts, growth promoting policies and mechanisms to avoid political opportunism and partisan effects are essential factors for an EU country to avoid excessive deficits. Finally, the results presented in this paper raise the idea that a good strategy for the EU countries to avoid excessive deficits caused by the opportunistic behaviour of their policymakers would be to schedule elections for the beginning or the end of the year.
    Keywords: Excessive public deficits ; European Union ; Political opportunism ; Binary choice models
    JEL: E62 H6 O52
    Date: 2007
  9. By: Tedds, Lindsay
    Abstract: This paper uses a unique and recently available dataset that contains detailed information on firms from around the world to investigate factors that affect under-reporting behaviour by firms. The empirical strategy employed exploits the nature of the dependent variable, which is interval coded, and uses interval regression which provides an asymptotically more efficient estimator than the ordered probit, provided that the classical linear model assumptions hold. These assumptions are investigated using standard diagnostic tests that have been modified for the interval regression model. Evidence is presented that shows that firms in all regions around the world engage in under-reporting. Regression results indicate that government corruption has the single largest causal effect on under-reporting, resulting in the percentage of sales not reported to the tax authority being 53.4 percent higher. Taxes have the second single largest causal effect on under-reporting, resulting in the percentage of sales not reported to the tax authority being 20.2 percent higher. Access to financing, organized crime, political instability and the fairness of the legal system were found to have no effect on under-reporting. It is also found that there is a significant correlation between under-reporting and the legal organization of the business, size, age, ownership, competition and audit controls.
    Keywords: Underground Economy; Tax Non-compliance; Firm Characteristics; Interval Regression
    JEL: C24 O17 D21
    Date: 2007–07
  10. By: Mihir A. Desai; Li Jin
    Abstract: This paper employs heterogeneity in institutional shareholder tax characteristics to identify the relationship between firm payout policy and tax incentives. Analysis of a panel of firms matched with the tax characteristics of the clients of their institutional shareholders indicates that "dividend-averse" institutions are significantly less likely to hold shares in firms with larger dividend payouts. This relationship between the tax preferences of institutional shareholders and firm payout policy could reflect dividend-averse institutions gravitating to low dividend paying firms or managers adapting their payout policies to the interests of their institutional shareholders. Evidence is provided that both effects are operative. Instrumental variables analysis indicates that plausibly exogenous changes in payout policy result in shifting institutional ownership patterns. Similarly, exogenous changes in the tax code indicate that as the tax cost of paying dividends changes, managers alter their dividend policy to serve their institutional shareholders.
    JEL: G32 H24
    Date: 2007–07
  11. By: Dannenberg, Astrid; Riechmann, Thomas; Sturm, Bodo; Vogt, Carsten
    Abstract: We present a simple two-steps procedure for a within-subject test of the inequity aversion model of Fehr and Schmidt (1999). In the first step, subjects played modified ultimatum and dictator games and were classified according to their preferences. In the second step, subjects with specific preferences according to the Fehr and Schmidt model were matched into pairs and interacted with each other in a standard public good game and a public good game with punishment possibility. Our results show that the specific composition of groups significantly influences the subjects’ performance in the public good games. We identify the aversion against advantageous inequity and the information about the coplayer’s type as the main influencing factors for the behavior of subjects.
    Keywords: individual preferences, inequity aversion, experimental economics, public goods
    JEL: C91 C92 H41
    Date: 2007
  12. By: Gersbach, Hans; Winkler, Ralph
    Abstract: We design a global refunding scheme as a new international approach to address climate change. A global refunding system allows each country to set its carbon emission tax, while aggregate tax revenues are partially refunded to member countries in proportion to the relative emission reductions they achieve within a given period, compared to some given baseline emissions. In a simple model we show that a suitably designed global refunding scheme is self-enforcing and achieves the social global optimum.
    Keywords: climate change mitigation; global refunding scheme; international agreements; self-enforcing mechanisms
    JEL: H23 H41 Q54
    Date: 2007–07
  13. By: Stanley L. Winer (Department of Economics, Carleton University); Michael W. Tofias (Duke University); Bernard Grofman (University of California, IrvineAuthor-Name: John H. Aldrich; Duke University)
    Abstract: We expand the investigation of the role of Congress in explanations of government growth, building on the work of Kau and Rubin (2002). In addition to reconsidering the importance of the median ideological position of elected representatives they introduced, we allow for the roles of majority party strength and of party control of Congress. We consider the relative importantce of the state of Congress and of trending supply and demand-side economic factors in the evolution and composition of federal spending since 1930, and we use the resulting model to simulate the consequences of the radical and historically unprecedented shift to the right of Congress in 1994/95.
    JEL: H1 H3 H5 H6
    Date: 2006–06–29

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