nep-pbe New Economics Papers
on Public Economics
Issue of 2007‒10‒20
27 papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Tax Enforcement and Tax Havens under Formula Apportionment By Becker, Johannes; Fuest, Clemens
  2. The Optimal Composition of Government Expenditure By John Creedy; Solmaz Moslehi
  3. Modelling the Composition of Government Expenditure in Democracies By John Creedy; Solmaz Moslehi
  4. Tax Competition for International Producers and the Mode of Foreign Market Entry By Ronald B Davies; Hartmut Egger; Peter Egger
  5. The Political Economy of EDP Fiscal Forecasts: An Empirical Assessment By Álvaro Pina; Nuno Venes
  6. Exports, Foreign Direct Investment and the Costs of Corporate Taxation By Christian Keuschnigg
  7. Corporate Tax Policy and Incorporation in the EU By Ruud A. de Mooij; Gaëtan Nicodème
  8. A Chronology Of Postwar U.S. Federal Income Tax Policy By Shu-Chun Susan Yang
  9. The Total Fiscal Cost of Indirect Taxation: an Approximation Using Catalonia's Recent Input-output Table By Ferran Sancho
  10. What We Really Know about Fiscal Sustainability in the EU? A Panel Data Diagnostic. By António Afonso; Christophe Rault
  11. Tax Competition, Tax Arbitrage, and the International Tax Regime By Reuven S Avi-Yonah
  12. Tax Compliance, Tax Morale and Governance Quality By Benno Torgler; Markus Schaffner; Alison Macintyre
  13. A Common Consolidated Corporate Tax Base for Multinational Companies in the European Union, Some Issues und Options By Christoph Spengel; Carsten Wendt
  14. Developments in the Taxation of Corporate Profit in the OECD since 1965: Rates, Bases and Revenues By Michael P Devereux
  15. The Effects of EU Formula Apportionment on Corporate Tax Revenues By Michael P Devereux; Simon Loretz
  16. Population Aging, Foreign Direct Investment, and Tax Competition By Ronald B Davies; Robert R Reed III
  17. Europe Slowly Lurches to a Common Consolidated Corporate Tax Base: Issues at Stake By Jack M Mintz
  18. Public expenditure and growth By Herrera, Santiago
  19. The Effects of Dividend Taxes on Equity Prices: A Re-examination of the 1997 UK Tax Reform By Stephen R Bond; Michael P Devereux; Alexander Klemm
  20. Loyalty and competence: Empirical evidence from public agencies By Alexander F. Wagner
  21. Tax Evasion: Cheating Rationally or Deciding Emotionally? By Giorgio Coricelli; Mateus Joffily; Claude Montmarquette; Marie-Claire Villeval
  22. The Impact of Taxation on the Location of Capital, Firms and Profit: a Survey of Empirical Evidence By Michael P Devereux
  23. Policy evaluation of Public Financial Institutions from the view points of flow of funds By Manabe Masashi
  24. Organization theory, public administration, democratic governance By Johan P. Olsen
  25. The Ups and Downs of Bureaucratic Organization By Johan P. Olsen
  26. How Does the Government (Want to) Fund Science? Politics, Lobbying and Academic Earmarks By John M. de Figueiredo; Brian S. Silverman
  27. Do Small States Get More Federal Monies? Myth and Reality about the US Senate Malapportionment By Larcinese, Valentino; Rizzo, Leonzio; Testa, Cecilia

  1. By: Becker, Johannes; Fuest, Clemens
    Abstract: In this paper, we consider optimal tax enforcement policy in the presence of profit shifting towards tax havens. We show that, under separate accounting, tax enforcement levels may be too high due to negative fiscal externalities. In contrast, under formula apportionment, tax enforcement is likely to be too low due to positive externalities of tax enforcement. Our results challenge recent contributions arguing that, under formula apportionment, there is a tendency towards inefficiently high levels of (effective) tax rates.
    Keywords: Corporate Taxation, Foreign Direct Investment
    JEL: F23 H25
    Date: 2007
  2. By: John Creedy; Solmaz Moslehi
    Abstract: This paper examines the optimal ratio of transfer payments to expenditure on public goods, for a given income tax rate. The transfer payment is then determined by the government’s budget constraint. The optimal ratio of transfers to public good expenditure per person is expressed as a function of the ratio of the median to the mean wage, and of the tax rate. Reductions in the skewness of the wage rate distribution are associated with reductions in transfer payments relative to public goods expenditure, at a decreasing rate. Furthermore, increases in the tax rate, from relatively low levels, are associated with increases in the relative importance of transfer payments. But beyond a certain level, further tax rate increases are associated with a lower ratio of transfers to public goods.
    Date: 2007
  3. By: John Creedy; Solmaz Moslehi
    Abstract: This paper considers whether the ratio of transfer payments to expenditure on public goods in democracies can be explained as the outcome of majority voting. A simple model is constructed in which individuals vote for government expenditure on a public good, for a given income tax rate. The transfer payment is then determined by the government’s budget constraint. The equilibrium ratio of transfers to public good expenditure per person is expressed as a quadratic function both of the ratio of the median to the mean wage, and of the tax rate. Data for 29 democratic countries are used to estimate a cross-sectional regression. The empirical results confirm that reductions in the skewness of the wage rate distribution are associated with reductions in transfer payments relative to public goods expenditure, at a decreasing rate. Furthermore, increases in the tax rate, from relatively low levels, are associated with increases in the relative importance of transfer payments. But beyond a certain level, further tax rate increases are associated with a lower ratio of transfers to public goods.
    Date: 2007
  4. By: Ronald B Davies (University of Oregon); Hartmut Egger (University of Zurich, CESifo Munich, and Centre for Globalization and Economic Policy, University of Nottingham.); Peter Egger (Ludwig-Maximilian University of Munich, CESifo Munich, and Centre for Globalization and Economic Policy, University of Nottingham)
    Abstract: This paper studies tax competition between two countries for an international producer. The international producer chooses where to locate its headquarters and whether to serve the overseas market through exports or foreign direct investment (FDI) and local supply. We show that, in the absence of tax competition, the international firm may choose FDI even though this has welfare costs from a global point of view. With tax competition, the parent country’s tax is pinned down, allowing the host country to use its tax rate to enforce exporting instead of FDI. This leads to a Nash equilibrium in the tax setting game which is associated with higher world welfare than the no-tax situation. Thus, because of the effect on entry mode, tax competition provides heretofore unexplored benefits.
    Keywords: Tax competition; Multinational enterprises; Profit taxation
    JEL: F12 F23 H25
    Date: 2007
  5. By: Álvaro Pina; Nuno Venes
    Abstract: This paper analyses the track record of fiscal forecasts reported by 15 European countries in the context of the Excessive Deficit Procedure. For the budget balance, gross fixed capital formation (GFCF) and interest payments, we study the statistical properties of forecast errors and their politico-institutional determinants. While errors in interest and GFCF expenditure present few systematic patterns, budget balance errors are responsive to fiscal institutions and to opportunistic motivations, especially from 1999 onwards: upcoming elections induce over-optimism, whereas commitment or mixed forms of fiscal governance and numerical expenditure rules (but not deficit and debt rules) are associated to greater prudence.
    Keywords: fiscal forecasting; Stability and Growth Pact; Excessive Deficit Procedure; fiscal rules
    JEL: E62 H62 H68
    Date: 2007
  6. By: Christian Keuschnigg (University of St.Gallen (IFF-HSG), CEPR and CESifo)
    Abstract: This paper develops a model of a monopolistically competitive industry with extensive and intensive business investment and shows how these margins respond to changes in average and marginal corporate tax rates. Intensive investment refers to the size of a firm’s capital stock. Extensive investment refers to the firm’s production location and reflects the trade-off between exports and foreign direct investment as alternative modes of foreign market access. The paper derives comparative static effects of the corporate tax and shows how the cost of public funds depends on the measures of effective marginal and average tax rates and on the behavioral elasticities of extensive and intensive investment.
    Keywords: Exports, foreign direct investment, corporate taxation, extensive and intensive investment, effective tax rates, costs of public funds
    JEL: D21 F23 H25 L11 L22
    Date: 2007
  7. By: Ruud A. de Mooij (CPB Netherlands Bureau for Economic Policy Analysis, Erasmus University Rotterdam, CESifo and Tinbergen Institute); Gaëtan Nicodème (European Commission, CEB (Solvay Business School) and ECARES (ULB))
    Abstract: In Europe, declining corporate tax rates have come along with rising tax-to-GDP ratios. This paper explores to what extent income shifting from the personal to the corporate tax base can explain these diverging developments. We exploit a panel of European data on legal form of business to analyze income shifting via incorporation. The results suggest that the effect is significant and large. It implies that the revenue effects of lower corporate tax rates – possibly induced by tax competition -- will partly show up in lower personal tax revenues rather than lower corporate tax revenues. Simulations suggest that between 12% and 21% of corporate tax revenue can be attributed to income shifting. Income shifting is found to have raised the corporate tax-to-GDP ratio by some 0.25%-points since the early 1990s.
    Keywords: Corporate tax; Personal tax; Incorporation; Income shifting
    JEL: H25 L26
    Date: 2007
  8. By: Shu-Chun Susan Yang (Institute of Economics, Academia Sinica)
    Abstract: This note provides a chronology of major tax events that involved changes in federal taxes on individual and corporate income from 1948 to 2006. For each event, the note provides background and policy motivation, major provisions, legislative timeline, and estimated revenue changes. As most tax changes were preceded by extensive legislative delays, this chronology suggests that people were likely to have foreknowledge about tax policy. It also finds that postwar income tax policy was typically motivated by one of three rationales: 1) balancing the budget or reducing deficits, 2) controlling inflation, and 3) stimulating economic activity or promoting growth.
    Keywords: Policy Foresight, Timeline of Tax Events, Tax Policy, Fiscal Policy
    JEL: E62 E61 N42
    Date: 2007–10
  9. By: Ferran Sancho
    Abstract: In this note we quantify to what extent indirect taxation influences and distorts prices. To do so we use the networked accounting structure of the most recent input-output table of Catalonia, an autonomous region of Spain, to model price formation. The role of indirect taxation is considered both from a classical value perspective and a more neoclassical flavoured one. We show that they would yield equivalent results under some basic premises. The neoclassical perspective, however, offers a bit more flexibility to distinguish among different tax figures and hence provide a clearer disaggregate picture of how an indirect tax ends up affecting, and by how much, the cost structure.
    Keywords: tax load, fiscal cost, indirect taxation decomposition
    JEL: C81 D57 E37
    Date: 2007–10–15
  10. By: António Afonso; Christophe Rault
    Abstract: We assess the sustainability of public finances in the EU15 over the period 1970-2006 using stationarity and cointegration analysis. Specifically, we use panel unit root tests of the first and second generation allowing in some cases for structural breaks. We also apply modern panel cointegration techniques developed by Pedroni (1999, 2004), generalized by Banerjee and Carrion-i-Silvestre (2006) and Westerlund and Edgerton (2007), to a structural long-run equation between general government expenditures and revenues. While estimations point to fiscal sustainability being an issue in some countries, fiscal policy was sustainable both for the EU15 panel set, and within subperiods (1970-1991 and 1992-2006).
    Keywords: intertemporal budget constraint; fiscal sustainability; EU; panel unit root; panel cointegration.
    JEL: C23 E62 H62 H63
    Date: 2007
  11. By: Reuven S Avi-Yonah (University of Michigan)
    Date: 2007
  12. By: Benno Torgler; Markus Schaffner; Alison Macintyre
    Abstract: Taxpayers are more compliant than the traditional economic models predict. Why? The literature calls it the “puzzle of tax compliance”. In this paper we use field, experimental and survey data to investigate the empirical evidence on whether presence of tax morale helps to resolve this puzzle. The results reveal a strong correlation between tax morale and tax evasion/compliance which confirms the value of taking the research a step further by looking at the determinants of tax morale. We explore this question with a particular focus on the importance of governance quality.
    Keywords: tax morale; tax compliance; tax evasion; institutional and governance quality; social capital
    JEL: H26
    Date: 2007–09
  13. By: Christoph Spengel (University of Mannheim, Centre for European Economic Research (ZEW)); Carsten Wendt (Centre for European Economic Research (ZEW),)
    Abstract: The European Commission proposed to provide multinational companies with a Common Consolidated Corporate Tax Base (CCCTB) for their EU wide activities. The main goal of this proposal is the removal of existing tax obstacles to cross-border economic activity which are mainly caused by the coexistence of 27 national tax systems. This paper reviews the European Commission’s proposals and the underlying rationale. It addresses some of the key issues that arise when considering the design of the CCCTB. Among the issues under investigation are the definition of the consolidated group, the scope and technique of consolidation, the territorial scope of the consolidated tax base, the treatment of companies joining and leaving the CCCTB, and related issues.
    Keywords: Corporation Tax, Group taxation, tax co-ordination, European Union
    JEL: H21 H25
    Date: 2007
  14. By: Michael P Devereux (Oxford University Centre for Business Taxation, IFS, CEPR and CESifo)
    Abstract: This paper describes developments in corporation taxes in the OECD over the last 40 years. It pays particular attention to the apparent divergence in the trends of the average statutory corporation tax rate and the average ratio of corporation tax revenues to GDP: the former has declined over time, while the latter has risen. It develops a simple framework for assessing the expected effect of the tax rate on tax revenues, and estimates the relationship using a panel of aggregate data for 20 OECD countries from 1965 to 2004, controlling for a measure of the tax base and other factors. There is only weak evidence of any relationship between the two. Evidence which does support a relationship is consistent with the finding of Clausing (2006) that the relationship is nonlinear, and that the implied revenue-maximising tax rate is likely to be low.
    Date: 2007
  15. By: Michael P Devereux; Simon Loretz
    Abstract: The European Commission proposes to replace the current system of taxing corporate income of separate accounting by a two-step 'consolidate and apportionment' procedure. This paper uses a large set of unconsolidated firm-level data to assess the likely impact on corporate tax revenues in each Member State. Taking pre-tax profit as given, overall tax revenues would be likely to drop by 2.5 % if companies can choose whether to participate. By contrast, if they were forced to participate, total tax revenues would be likely to increase by more than 2 %, leaving some European countries, and most notably Spain, Sweden and the United Kingdom better off. We investigate how sensitive these results are to the apportionment factors used.
    Keywords: Corporate Taxation; International Loss Consolidation; Apportionment Rules
    JEL: H25 H87
    Date: 2007
  16. By: Ronald B Davies (University of Oregon and Oxford University Centre for Business Taxation); Robert R Reed III (University of Kentucky)
    Abstract: This paper studies the role of population aging for foreign direct investment and the strategic taxation of capital. Importantly, our theoretical model suggests that the labor market implications of aging differ from the financial market aspects. While population aging may be associated with a lower capital stock in the home country and less foreign direct investment, the effects through the labor market and employment tend to generate larger outbound capital flows. To quantify these aspects, we conduct regression analysis to empirically document how population aging affects FDI. To be specific, we use data on both US inbound and outbound FDI. Notably, the estimates between the US and other developed countries conform quite closely to the predictions of our theory. We conclude by studying the strategic taxation of capital. In particular, we examine this issue in light of the fiscal burden associated with older populations. In contrast to previous work on tax competition, we incorporate that old-age transfer programs are generally funded by labor taxes. In this manner, our framework introduces new insights regarding the incentives for governments to restrict capital outflows since doing so increases the labor income tax base used for intergenerational transfers.
    Keywords: Population Aging, Fiscal Policy, Foreign Direct Investment
    JEL: F20 H87
    Date: 2007
  17. By: Jack M Mintz (J. L. Rotman School of Management,University of Toronto, New York University Law School)
    Date: 2007
  18. By: Herrera, Santiago
    Abstract: Given that public spending will have a positive impact on GDP if the benefits exceed the marginal cost of public funds, the present paper deals with measuring costs and benefits of public spending. The paper discusses one cost seldom considered in the literature and in policy debates, namely, the volatility derived from additional public spending. The paper identifies a relationship between public spending volatility and consumption volatility, which implies a direct welfare loss to society. This loss is substantial in developing countries, estimated at 8 percent of consumption. If welfare losses due to volatility are this sizeable, then measuring the benefits of public spending is critical. Gauging benefits based on macro aggregate data requires three caveats: a) considering of the impact of the funding (taxation) required for the additional public spending; b) differentiating between investment and capital formation; c) allowing for heterogeneous response of output to different types of capital and differences in network development. It is essential to go beyond country-specificity to project-level evaluation of the benefits and costs of public projects. From the micro viewpoint, the rate of return of a project must exceed the marginal cost of public funds, determined by tax levels and structure. Credible evaluations require microeconomic evidence and careful specification of counterfactuals. On this, the impact evaluation literature and methods play a critical role. From individual project evaluation, the analyst must contemplate the general equilibrium impacts. In general, the paper advocates for project evaluation as a central piece of any development platform. By in creasing the efficiency of public spending, the government can permanently increase the rate of productivity growth and, hence, affect the growth rate of GDP.
    Keywords: Public Sector Economics & Finance,,Economic Theory & Research,Debt Markets,Public Sector Expenditure Analysis & Management
    Date: 2007–10–01
  19. By: Stephen R Bond (Nuffield College, Oxford and Institute for Fiscal Studies); Michael P Devereux (Oxford University Centre for Business Taxation and IFS); Alexander Klemm (Institute for Fiscal Studies and University College London)
    Abstract: We re-examine the extent to which personal taxes on dividends are capitalised into the equity prices of domestic firms, using data from around the time of the 1997 UK dividend tax reform, which removed a significant tax credit for an important group of investors: UK pension funds. The tax-adjusted CAPM suggests that the impact should depend on an average of dividend tax rates across all investors, and that UK pension funds should reduce their holdings of the previously tax-favoured asset: UK equities. Given that UK pension funds are small relative to the total size of the world capital market, a small open economy-type argument implies that the main effect of the reform would be to reduce UK pension funds’ ownership of UK equities, with little impact on the price of UK equities. We present evidence which is consistent with these hypotheses. We discuss why previous research (Bell and Jenkinson, 2002) reached the different conclusion that this tax reform had a large negative impact on UK share prices.
    Date: 2007
  20. By: Alexander F. Wagner (University of Zurich and swiss Finance Institute)
    Abstract: Recent organizational theories suggest that there is a tradeoff between loyalty and competence. This paper tests several such theories in the context of public agencies. Prime ministers, chancellors, and kings alike need to secure the (efficient or inefficient) loyalty of their agencies, such as support in important policy proposals or low corruption. They are also interested in agencies’ levels of competence. I find that governments have highly competent officials in their agencies (1) where officials have few private sector contacts, (2) where officials can extract few bribes, (3) where careers in agencies are expected to be long-lasting, and (4) where the agencies are powerful, i.e., where their loyalty is important. This set of findings fits best with a theory of loyalty as a noncontractible behavior, implying that too competent staff cannot be induced to loyalty unless loyalty is highly valued by the government. Other theories are either rejected or are less plausible because they cannot explain the complete set of observed regularities.
    Keywords: Loyalty, self-enforcing contracts, public agencies, corporate finance
    JEL: D86 H1 P16
    Date: 2005–06
  21. By: Giorgio Coricelli; Mateus Joffily; Claude Montmarquette; Marie-Claire Villeval
    Abstract: The economic models of tax compliance predict that individuals should evade taxes when the expected benefit of cheating is greater than its expected cost. When this condition is fulfilled, the high compliance however observed remains a puzzle. In this paper, we investigate the role of emotions as a possible explanation of tax compliance. Our laboratory experiment shows that emotional arousal, measured by Skin Conductance Responses, increases in the proportion of evaded taxes. The perspective of punishment after an audit, especially when the pictures of the evaders are publicly displayed, also raises emotions. We show that an audit policy that induces shame on the evaders favors compliance. <P>Les modèles économiques d'évasion fiscale prédisent que les individus devraient frauder dès que le bénéfice attendu de l'évasion dépasse son coût espéré. Sous cette condition, le fort taux de revenu déclaré pourtant observé constitue une énigme. Dans cet article, nous nous intéressons au rôle des émotions comme explication possible de ce phénomène. Notre expérience de laboratoire montre que l'intensité des émotions, mesurée par la conductance de la peau, augmente avec la proportion du revenu qui n'est pas déclarée. La perspective d'une sanction à l'issue d'un contrôle, en particulier lorsque la photo des contrevenants est diffusée, soulève également des émotions. Nous montrons qu'une politique de contrôle qui suscite la honte chez les fraudeurs favorise l'honnêteté fiscale.
    Keywords: tax evasion, emotions, neuro-economics, physiological measures, shame, experiments., fraude fiscale, émotions, neuro-économie, mesures physiologiques, honte, expériences.
    JEL: C91 C92 D87 H26
    Date: 2007–10–01
  22. By: Michael P Devereux (Oxford University Centre for Business Taxation, IFS, CEPR and CESifo)
    Date: 2007
  23. By: Manabe Masashi (Graduate School of Economics, Osaka university)
    Abstract: The purpose of this paper is to develop an experimental model which links inter-institutional flow of funds to real macroeconomy and then to estimate quantitatively the effects of changing scale of postal savings or government financial institutions on GDP. The empirical analysis indicates that at least after 1980 expanding size of postal saving and government financial institutions had negative effects on GDP. It implies that reducing scale of public financial institutions could improve the performance of real macroeconomy.
    Keywords: Flow of funds, Public financial institutions, Postal saving
    JEL: G11 G18 H63
    Date: 2007–10
  24. By: Johan P. Olsen
    Keywords: organization theory; organization theory; public administration; governance; democratization; democratization
    Date: 2007–01–10
  25. By: Johan P. Olsen
    Keywords: democracy; administrative adaptation; institutionalisation; institutionalism; organization theory; organization theory; public administration; institutions; European Commission; political science
    Date: 2007–09–17
  26. By: John M. de Figueiredo; Brian S. Silverman
    Abstract: This paper examines academic earmarks and their role in the funding of university research. It provides a summary and review of the evidence on the supply of earmarks by legislators. It then discusses the role of university lobbying for earmarks on the demand side. Finally, the paper examines the impact of earmarks on research quantity and quality.
    JEL: H41 O38 P16
    Date: 2007–10
  27. By: Larcinese, Valentino; Rizzo, Leonzio; Testa, Cecilia
    Abstract: We analyze the relationship between senate malapportionment and the allocation of the US federal budget to the states during the period 1978-2002. A substantial literature originating from the inuential paper by Atlas et al. (1995), using a within estimation methodology …nds that small and overrepresented states get signi…cantly larger shares of federal funds. Revisiting the econometric speci…cation used by the current empiri- cal research, we show that the number of senators percapita is inappropriate to capture malapportionement in regressions using broad federal programs, and that the results ob- tained with this indicator are extremely non-robust to reasonable speci…cation changes. In particular, senators percapita have a signi…cant impact on federal spending only in re- gressions containing state …xed e¤ects. Furthermore, the coefficients estimated using the within methodology are statistically di¤erent across states and, therefore, cannot be used to assess spending differentials between states. The magnitude and signi…cance of those coe¢ cients suggest a within state-speci…c inverse relationship between broad spending categories and population which is not systematically related to the size of the states and seems more compatible with incrementalist theories of budget allocation.
    Keywords: federal budget; malapportionment; small state advantage; overrepresentation
    JEL: H50 H61 H5 H59 H76 H53
    Date: 2007–04

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