nep-pbe New Economics Papers
on Public Economics
Issue of 2007‒09‒30
nine papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Does Tax Competition Tame the Leviathan? By Mario Jametti; Marius Brülharty
  2. Pareto-Improving Income Tax Reform By Peter Sinclair
  3. Testing for contemporary fiscal policy discretion with real time data By Kalckreuth, Ulf von; Wolff, Guntram B.
  4. Corporate marginal tax rate, tax loss carryforwards and investment functions: empirical analysis using a large German panel data set By Ramb, Fred
  5. Fiscal policy in developing countries : a framework and some questions By Perotti, Roberto
  6. ÔAlmostÕ subsidy-free spatial pricing in a multi-dimensional setting By Jacques, DREZE; Michel, LE BRETON; Alexei , SAVVATEV; Sholmo, WEBER
  7. A Theory of Minority and Majority Governments By Tasos Kalandrakis
  8. What Has Financed Government Debt? By Hess Chung; Eric M. Leeper
  9. Geography Matters More: Geographical and Institutional Determinants of Income in Brazilian States By Llussa, Fernanda

  1. By: Mario Jametti (Department of Economics, York University); Marius Brülharty (University of Lausanne)
    Abstract: We study the impact of tax competition on equilibrium taxes and welfare, focusing on the jurisdictional fragmentation of federations. In a representative-agent model of fiscal federalism, fragmentation among jurisdictions with benevolent tax-setting authorities unambiguously reduces welfare. If, however, tax-setting authorities pursue revenue maximization, fragmentation, by pushing down equilibrium tax rates, may under certain conditions increase citizen welfare. We exploit the highly decentralized and heterogeneous Swiss fiscal system as a laboratory for the estimation of these e¤ects. While for purely direct-democratic jurisdictions (which we associate with benevolent tax setting) we find that tax rates increase in fragmentation, fragmentation has a moderating e¤ect on the tax rates of jurisdictions with some degree of delegated government. Our results thereby support the view that tax competition can be second-best welfare enhancing by constraining the scope for public-sector revenue maximization.
    Keywords: tax competition,optimal taxation,government preferences,fiscal federalism,direct democracy
    JEL: H2 H7 D7
    Date: 2007–09
  2. By: Peter Sinclair
    Abstract: This paper examines two tax regimes in a world where abilities to earn differ. It compares the distributions of utilities under a “flat” tax regime where all income is subject to a common tax rate, and proceeds finance a common transfer paid to all, with one with a menu of tax rates and transfers from which each can select the combination that suits him or her best. When the two regimes are optimized under a social welfare function that weights minimum utilities enough, or reflects a large enough requirement for government spending, it turns out that everyone is better off in the second regime than the first.
    Keywords: Non-linear income tax, redistribution, Pareto improving tax reform
    JEL: H20
    Date: 2007–07
  3. By: Kalckreuth, Ulf von; Wolff, Guntram B.
    Abstract: We propose a method for indentifying discretionary fiscal policy with real time data. The starting point is the observation that automatic stabilizers should depend on true GDP, while discretionary fiscal policy depends on the information that policy makers have in real time. We approximate the information set of policy makers with GDP data released in real time. True GDP is approximated using the last GDP release. Accordingly, we can compute a real time measurement error. Discretionary fiscal policy can be expected to react to this measurement error, whereas automatic fiscal policy will not. We apply this identification approach in order to test the central identifying assumption of Blanchard and Perotti’s (2002) seminal structural VAR. According to this assumption, fiscal policy makers do not react to GDP evolutions contemporaneously in a discretionary fashion. We find that government expenditure is adjusted upward if GDP in real time is lower than true GDP. This suggests that fiscal policy makers can use short-term funds to buy goods and services in response to GDP updates. Our results therefore call the identifying assumption of Blanchard and Perotti’s (2002) SVAR into question.
    Keywords: discretionary fiscal policy, real-time data, government spending, structural vector autoregression
    JEL: E62 H30
    Date: 2007
  4. By: Ramb, Fred
    Abstract: This study is the first empirical analysis to investigate the relationship between the investment behaviour of firms resident in Germany and the empirically determined marginal tax rates developed by John R. Graham. It is based on the Bundesbank's corporate balance sheet statistics for the period 1971-2002. In an autoregressive distributed lag model, the marginal tax rate is shown to be significant, with an elasticity of between 0.1 and 0.2. An error correction model does not produce any plausible results for the marginal tax rate. Graham's marginal tax rates are a complement to the methods typically used to determine the effective marginal tax rates and effective average tax rates.
    Keywords: Corporate marginal tax rate, tax loss carryforward, investment behaviour
    JEL: D21 H25
    Date: 2007
  5. By: Perotti, Roberto
    Abstract: This paper surveys fiscal policy in developing countries from the point of view of long-run growth. The first section reviews existing methodologies to estimate the effects of fiscal policy shocks and of systematic fiscal policy, with time series or with cross-sectional methods, and their applicability to developing countries. The second section surveys optimal fiscal policy in developing countries, by considering the role of the intertemporal government budget, and sustainability and solvency. It also reviews the fuzzy deba te on " fiscal space " and " macroeconomic space " - and the usefulness (or lack thereof) of these terms for policy analysis. The third section asks what theory tells us about the optimal cyclical behavior of fiscal policy in developing countries. It shows that it very much depends on the assumptions about the interactions between credit market imperfections at the individual, firms, or government level, and on the supply of external funds to the country. Different sets of assumptions lead to different implications about optimal cyclical behavior. The available evidence on the cyclical behavior of fiscal policy, and possible reasons for the observed prevalence of a procyclical behavior in developing countries, is also reviewed. If one agrees that fiscal policy is indeed less countercyclical than we think is optimal, the issue is how to correct the problem. One obvious question is why government do not self-insure, i.e. why they do not accumulate assets in upturns and decumulate them in downturns. This leads to the analysis of fiscal rules and stabilization funds, in the fourth section. The last section concludes with what the author considers important research and policy questions in each part.
    Keywords: Economic Stabilization,Debt Markets,Public Sector Expenditure Analysis & Management,Economic Theory & Research,
    Date: 2007–09–01
  6. By: Jacques, DREZE (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE) - Belgium); Michel, LE BRETON (UniversitŽ de Toulouse I, GREMAQ and IDEI, Toulouse, France); Alexei , SAVVATEV (NES, Moscow); Sholmo, WEBER (Southern Methodist University, Dallas, USA and UniversitŽ Catholique de Louvain, CORE - Belgium)
    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 O.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-subsidiziation
    JEL: D70 H20 H73
    Date: 2007–09–17
  7. By: Tasos Kalandrakis (W. Allen Wallis Institute of Political Economy, 107 Harkness Hall, University of Rochester, Rochester, NY 14627-0158)
    Abstract: We develop a theory of the emergence of minority and majority governments in multiparty parliamentary systems using a canonical non-cooperative bargaining model and assuming a policy space of arbitrary finite dimension, any number of political parties, and a general class of preferences over the government agreement space. Only majority governments form in the absence of significant political disagreement. Generically, minority governments form with positive probability when parties represented in parliament are ideologically polarized (or when utility from holding cabinet office is small relative to partisan political disagreement). Rather than being paradoxical, minority governments are a regular equilibrium phenomenon.
    Date: 2007–09
  8. By: Hess Chung; Eric M. Leeper
    Abstract: Equilibrium models imply that the real value of debt in the hands of the public must equal the expected present-value of surpluses. Empirical models of fiscal policy typically do not impose this condition and often do not even include debt. Absence of debt from empirical models can produce non-invertible representations, obscuring the true present-value relation, even if it holds in the data. First, we show that small VAR models of fiscal policy may not be invertible and that expanding the information set to include government debt has quantitatively important implications. Then we impose the present-value condition on an identified VAR and characterize the way in which the present-value support of debt varies across types of fiscal shocks. The role of expected primary surpluses in supporting innovations to debt depends on the nature of the shock. Debt is supported almost entirely by changes in the present-value of surpluses for some fiscal shocks, but for other fiscal shocks surpluses fail to adjust, leaving a large role for expected changes in discount rates. Horizons over which debt innovations are financed are long---on the order of 50 years or more.
    JEL: E60 E62
    Date: 2007–09
  9. By: Llussa, Fernanda
    Abstract: Brazil displays a geographic and institutional diversity unique in the world. It extends in a north-south direction rather than the east-west of other countries of similar size. Given the current debate on the relative role of geography and institutions in determining income levels, Brazil provides a single testing ground for the direct and indirect e¤ects of ge- ography. This paper evaluates how much of the income di¤erences across Brazilian regions and states stem from geographic characteristics and in- stitutional characteristics, the latter in turn partly determined by geogra- phy. Our results show, ?rst, that the rate of convergence of state income per capita increases substantially once regional e¤ects are taken into ac- count. Second, institutions, when instrumented with regional dummies, are a signi?cant determinant of state income levels. However, when we add additional geographic characteristics, some institutions cease to signif- icantly a¤ect income. The message from Brazilian data seems to be that, tough geography and institutions matter for income, geography matters more.
    Date: 2007

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