nep-pbe New Economics Papers
on Public Economics
Issue of 2007‒09‒16
fifteen papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Incomplete Information in Tax Setting of Local;Governments: a Theoretical Framework By Raffaella SANTOLINI
  2. The Value-Added Tax: Its Causes and Consequences By Ben Lockwood; Michael Keen
  3. Fiscal competition in a transition economy By Solanko, Laura
  4. The quest for a fiscal rule: Italy, 1861-1998 By Ricciuti, Roberto
  5. Capital Taxation and Ownership when Markets are Incomplete By Emmanuel Farhi
  6. Ensuring Fiscal Sustainability in G-7 Countries By Daniel Leigh; David Hauner; Michael Skaarup
  7. Does Tax Competition Really Promote Growth? By Koethenbuerger, Marko; Lockwood, Ben
  8. Rule of Thumb Consumers, Public Debt and Income Tax By Rossi, Raffaele
  9. Optimal taxation with imperfect competition and aggregate returns to specialization By Javier Coto-Martínez; Carlos Garriga; Fernando Sánchez-Losada
  10. Assessing the Impact of a Change in the Composition of Public Spending: A DSGE Approach By Ivan Tchakarov; Roland Straub
  11. Individual Responsibility and the Funding of Collective Goods By Louis Levy-Garboua; Claude Montmarquette; Marie-Claire Villeval
  12. VAT Attacks! By Michael Keen
  13. The Basic Public Finance of Public-Private Partnerships By Eduardo Engel; Ronald Fischer; Alexander Galetovic
  14. Tax Evasion in a Transition from Socialism to Capitalism: The Psychology of the Social Contract By Vihanto , Martti
  15. Selfish-biased conditional cooperation: On the decline of contributions in repeated public goods experiments By Tibor Neugebauer; Javier Perote; Ulrich Schmidt; Malte Loos

  1. By: Raffaella SANTOLINI (Universita' Politecnica delle Marche, Dipartimento di Economia)
    Abstract: In the literature, tax interaction is mainly due to tax and yardstick;competition. However, we suppose that tax interaction appears when the;local policy maker conforms his fiscal policy to decisions taken by his;neighbourhood to fill information gaps. Theoretical results show that;incomplete information leads to tax mimicking and a higher level of tax;rate. Moreover, leviathan governments are more sensitive than;benevolent ones to changes in neighbours tax rates (horizontal tax;interaction) but less to changes in the central government tax rate;(vertical tax interaction). Finally, there is no tax rate internalization;effects because an increase in the central government tax rate is not;followed by an equivalent decrease of local government tax rate.
    Keywords: incomplete information, informative trend, political trend, tax mimicking
    JEL: H30 H71 H77
    Date: 2007–08
  2. By: Ben Lockwood; Michael Keen
    Abstract: Has the VAT proved, as its proponents claim, an especially effective form of taxation? To address this, this paper first shows that a tax innovation-such as the introduction of a VAT- reduces the marginal cost of public funds if and only if it also leads an optimizing government to increase the tax ratio. This leads to the estimation, on a large panel, of a system of equations describing the probability of VAT adoption and the revenue impact of the VAT. The sign of the revenue impact is generally ambiguous, but most countries that have adopted a VAT seem to have gained a more effective tax instrument in doing so.
    Date: 2007–07–24
  3. By: Solanko, Laura (BOFIT)
    Abstract: The paper analyses fiscal competition for mobile capital between identical regions in a transition country. A framework similar to Keen-Marchand (1997) is used to analyse welfare effects of regional competition. It is shown that in very early transition when the share of the old sector is overwhelming, consumers in a transition economy may be better off in a competitive equilibrium. The decision-makers, however, would prefer to coordinate their fiscal policies.
    Keywords: tax competition; fiscal competition; transition
    Date: 2007–09–12
  4. By: Ricciuti, Roberto
    Abstract: The Italian fiscal history is characterised by a number of fiscal consolidations. In this paper we characterise fiscal policy in terms of non-linear deterministic processes. We find that government spending and taxes can be described as being non-linear trend stationary processes instead of unit roots. A long run equilibrium relationship - a non-linear co-trend - does exist between the two series, fulfilling the intertemporal government budget constraint. We interpret this result as evidence of a long run fiscal rule that different policy makers have adopted, putting public finance in balance.
    Keywords: taxes, government expenditure, intertemporal government budget constraint, non-linear trend stationarity, non-linear co-trending
    JEL: E62 H62 N10
    Date: 2007–09
  5. By: Emmanuel Farhi
    Abstract: This paper analyzes the theoretical and quantitative implications of optimal capital taxation in the neoclassical growth model with aggregate shocks and incomplete markets. The model features a representative-agent economy with proportional taxes on labor and capital. I first consider the case that the only asset the government can trade is a real risk-free bond. Taxes on capital are set one period in advance, reflecting inertia in tax codes and ruling out replication of the complete markets allocation. Because capital income varies with the state of the economy, capital taxation provides a state contingent source of revenues. I thus identify a novel potential role for capital taxation as a risk sharing instrument between the government and private agents. However, this benefit must be weighted again the distortionary cost of capital taxation. For a baseline case, the optimal policy features a zero tax on capital. Moreover, numerical simulations show that the baseline case provides an excellent benchmark. I next allow the government to hold a non trivial position in capital. Capital ownership provides the same benefit or risk sharing but without the cost of tax distortions. In a variety of quantitative exercises, I show that capital ownership allows the government to realize about 90% of the welfare gains from moving to complete markets. Large positions are typically required for optimality. But smaller positions achieve substantial benefits. In a business-cycle simulation, I show that a 15% short equity position achieves over 40% of the welfare gains from completing markets.
    JEL: A1 E21 E22 E23 E6 E60 E62 E66 H21 H3 H31 H32 H6 H60 H61 H62
    Date: 2007–09
  6. By: Daniel Leigh; David Hauner; Michael Skaarup
    Abstract: Rising longevity, falling fertility rates, and the retirement of the baby boom generation will substantially raise age-related government spending in most advanced and many emerging market countries. This paper assesses the evolution of fiscal sustainability for each of the G-7 countries using two standard primary gap indicators. The estimated fiscal adjustment required to ensure long-run fiscal sustainability is substantial for all G-7 countries. In particular, ensuring fiscal sustainability would require an average improvement in the primary balance of about 4 percentage points of GDP. While the overall adjustment required to achieve long-run fiscal sustainability in G-7 countries is large, there are significant growth benefits to putting public finances on a sustainable footing in the near term versus delayed adjustment.
    Date: 2007–07–30
  7. By: Koethenbuerger, Marko (CES, University of Munich,); Lockwood, Ben (Department of Economics, University of Warwick,)
    Abstract: This paper considers the relationship between tax competition and growth in an endogenous growth model where there are stochastic shocks to productivity, and capital taxes fund a public good which may be for final consumption or an infrastructure input. Absent stochastic shocks, decentralized tax setting (two or more jurisdictions) maximizes the rate of growth, as the constant returns to scale present with endogenous growth implies “extreme” tax competition. Stochastic shocks imply that households face a portfolio choice problem, which may dampen down tax competition and may raise taxes above the centralized level. Growth can be lower with decentralization. Our results also predict a negative relationship between output volatility and growth, consistent with the empirical evidence.
    Keywords: tax competition ; uncertainty ; stochastic growth
    JEL: H77 E62 F43
    Date: 2007
  8. By: Rossi, Raffaele
    Abstract: In this paper we show that the introduction of a set of rule of thumb consumers (ROTC) a la Gali' et Al.(2007) in a standard New Keynesian model, can reverse the traditional predictions of a change in government spending on the economy as a whole. In particular, we show that under a reasonable parametrization of the model, an increase in government spending can lead, against the common Keynesian wisdom, to a decrease in total output. Furthermore we analyze how the determinacy condition of the model is affected by the presence of a set of ROTC and a fiscal policy which levies a proportional income tax. In particular we find that, when the share of ROTC is high, the monetary-fiscal policy mix that guarantees a unique equilibrium requires for both policies to be, following the definition of Leeper (1991), either active or passive. Ultemetely we show that with the introduction of a distortive fiscal policy and independently of the parametrization used, private consumption responds negatively to a government spending shock. .
    JEL: E62 E32 H30
    Date: 2007–08–05
  9. By: Javier Coto-Martínez; Carlos Garriga; Fernando Sánchez-Losada
    Abstract: In this paper we explore the proposition that in economies with imperfect competitive markets the optimal capital income tax is negative and the optimal tax on rms prots is conscatory. We show that if the total factor productivity as well as the measure of rms or varieties are endogenous instead of xed, then the optimal scal policy can lead to di_erent results. The government faces a trade-o_ between the xed costs that society pays for the introduction of a new rm and the productivity gains associated to the introduction of a new variety. We nd that the optimal scal policy depends on the relationship between the index of market power, the returns to specialization, and the governments ability to control entry.
    Keywords: Taxation ; Fiscal policy
    Date: 2007
  10. By: Ivan Tchakarov; Roland Straub
    Abstract: Despite intense calls for safeguarding public investment in Europe, public investment expenditure, when measured in relation to GDP, has steadily fallen in the last three decades, evoking fears that economic activity may be correspondingly negatively affected. At the same time, however, public consumption in the EU-12 countries has trended up. In this paper, we provide a macroeconomic assessment of the observed change in the composition of public spending in the euro area in a medium-scale two-country dynamic stochastic general equilibrium (DSGE) model. First, we identify the channels through which both temporary and permanent public investment shocks generate larger fiscal multipliers than exogenous increases in public consumption. Second, we quantify the negative impact of a change in fiscal stance, characterized by a permanent rise in public consumption and a permanent fall in public investment, keeping the overall level of public spending constant. The key message of the paper is that calls for reversing the observed trend in the composition of public spending are well justified.
    Date: 2007–07–17
  11. By: Louis Levy-Garboua (CES-TEAM and Paris School of Economics); Claude Montmarquette (CIRANO and Université de Montréal); Marie-Claire Villeval (GATE CNRS, Institute for the Study of Labor (IZA))
    Abstract: When a deficit occurs in the funding of collective goods, it is usually covered by raising the amount of taxes or by rationing the supply of the goods. This article compares the efficiency of these institutions. We report the results of a 2x2 experiment based on a game in the first stage of which subjects can voluntarily contribute to the funding of a collective good that is being used to compensate the victims of a disaster. In the second stage of the game, in case of a deficit, we introduce either taxation or rationing. Each treatment is subjected to two conditions: the burden of the deficit is either uniform for all the subjects, or individualized according to the first-stage contribution. We show that the individualized treatments favor the provision of the collective good through voluntary cooperation whereas the uniform treatments encourage free-riding. Individualized taxation brings the voluntary contributions closer to the optimum while uniform rationing appears to be the worst system since free-riding restrains the provision of the good.
    Keywords: collective goods, experiment, interior Pareto optimum, rationing, responsibility, taxation
    JEL: C91 H21 H30 H41 H50
    Date: 2007–09
  12. By: Michael Keen
    Abstract: Like the theory of the second best that the 2006 congress marks, the VAT is now fifty years old. Judged by the extent and speed of its spread around the world, and the revenue that it raises, the VAT would seem to have been a remarkable success. Over the last few years, however, it has come under a series of attacks. This paper considers three of the most prominent of these. One is the fear (raised mainly in the United States) that the VAT actually does too good a job of raising tax revenue. The second is the view that the VAT does a bad job of taxing the informal sector-and that tariffs might be a better revenue-raising instrument for many developing countries. The third attack is the most literal, by criminals rather than theorists: in the European Union and elsewhere, sophisticated VAT fraud, targeting its refund provisions, has become a serious concern.
    Keywords: Working Paper , Value added tax , Tax reforms , Indirect taxation ,
    Date: 2007–06–28
  13. 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 classification: H21, H54, L51, R42.
    Date: 2007
  14. By: Vihanto , Martti (BOFIT)
    Abstract: In a common assumption of the economics of tax evasion, extending beyond the basic Allingham-Sandmo model, the choice of a taxpayer to evade taxes depends upon the perceived fairness of the tax system. The purpose of the paper is to provide a psychological foundation for this assumption by drawing on Hayek’s theory of human behavior as a process of rule following. According to the main hypothesis, taxpayers are more compliant with tax laws to which they can in principle give their full consent. A social contract as a basis of tax policy may provide a potent means to combat tax evasion particularly in transition economies that have inherited a deep mistrust of the government from their socialist past.
    Keywords: tax evasion; social contract; economics of psychology; transition economies; Austrian economics
    Date: 2007–09–13
  15. By: Tibor Neugebauer; Javier Perote; Ulrich Schmidt; Malte Loos
    Abstract: In the recent literature, several hypotheses have been put forward in order to explain the decline of contributions in repeated public good games. We present results of an experiment which allows to evaluate these hypotheses. The main characteristics of our experimental design are a variation of information feedback and an elicitation of individual beliefs about others’ contributions. Altogether, our data support the hypothesis of conditional cooperation with a selfish bias.
    Keywords: experimental economics, information feedback, public goods, voluntary contributions, conditional cooperation
    JEL: C72 C92 H41
    Date: 2007–09

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