nep-pbe New Economics Papers
on Public Economics
Issue of 2007‒11‒03
fourteen papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Does Tax Competition Tame the Leviathan? By Marius BRÜLHART; Mario JAMETTI
  2. Taxing deficits to restrain government spending and foster capital accumulation By Stähler, Nikolai
  3. Do Tax Cuts Starve the Beast: The Effect of Tax Changes on Government Spending By Christina D. Romer; David H. Romer
  4. Ethnic Fragmentation and Police Spending: Social Identity and a Public Good By John Smith; Olugbenga Ajilore
  5. A Positive Theory of Income Taxation By Oriol Carbonell-Nicolau
  6. Equalization Transfers and Dynamic Fiscal Adjustment: Results for German Municipalities and a US-German Comparison By Thiess Buettner
  7. Rule of Thumb Consumers, Public Debt and Income Tax By Rossi, Raffaele
  8. Optimal Taxation : The Design of Child Related Cash- and In-Kind-Benefits By Peter Haan; Katharina Wrohlich
  9. The distribution of expenditure tax burden before and after tax reform: The case of Cameroon By Tabi Atemnkeng Johannes; Atabongawung Joseph Nju; Afeanyi Azia Theresia
  10. Toward a Robust Fiscal Framework for Iceland: Motivation and Practical Suggestions By Anthony Annett
  11. Transfers in Cash and In Kind: Theory Meets the Data By Janet Currie; Firouz Gahvari
  12. Anticipated Fiscal Policy and Adaptive Learning By George Evans; Seppo Honkapohja; Kaushik Mitra
  13. Bargaining over a New Welfare State By Bonatti , Alessandro; Thomsson, Kaj
  14. The Incidence of a U.S. Carbon Tax: A Lifetime and Regional Analysis By Kevin A. Hassett; Aparna Mathur; Gilbert E. Metcalf

  1. By: Marius BRÜLHART; Mario JAMETTI
    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 effects. 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 effect 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: Stähler, Nikolai
    Abstract: In a dynamic model of fiscal policy, social polarization provokes a deficit bias. Policy advisors have recently proposed that governments running a deficit should be forced to generate additional tax revenue. We show that this deficit taxation reduces the deficit bias as it internalizes the externality different lobby groups impose on others. The mechanism described here is not due to the political risk of being elected out of office because the private sector dislikes taxation. Lower government spending and the resulting reduced deficit bias augment capital accumulation.
    Keywords: fiscal rules, deficit taxation, polarization, capital accumulation
    JEL: E62 H61 H62 H63
    Date: 2007
  3. By: Christina D. Romer; David H. Romer
    Abstract: The hypothesis that decreases in taxes reduce future government spending is often cited as a reason for cutting taxes. However, because taxes change for many reasons, examinations of the relationship between overall measures of taxation and subsequent spending are plagued by problems of reverse causation and omitted variable bias. To deal with these problems, this paper examines the behavior of government expenditures following legislated tax changes that narrative sources suggest are largely uncorrelated with other factors affecting spending. The results provide no support for the hypothesis that tax cuts restrain government spending; indeed, they suggest that tax cuts may actually increase spending. The results also indicate that the main effect of tax cuts on the government budget is to induce subsequent legislated tax increases. Examination of four episodes of major tax cuts reinforces these conclusions.
    JEL: E62 H50 H60 N12
    Date: 2007–10
  4. By: John Smith (Rutgers University-Camden); Olugbenga Ajilore (University of Toledo)
    Abstract: We present evidence that more ethnically fragmented communities spend, all else equal, more on police services than less fragmented communities. We introduce a model of spending on police services which we use to interpret the data. In this model, we assume that the decision to commit a crime is a rational consideration of the costs and benefits and that spending on police services reduces the attractiveness of committing a crime. We also assume that being a victim of crime affects a loss in utility. However this victimization cost, if victim and perpetrator are a different ethnicity, is greater than or equal to that if the perpetrator is the same ethnicity. A consequence of the model is that a higher level of spending on police services is associated with more ethnically fragmented communities only when agents suffer this differential cost of victimization. These results contribute to our understanding of the stylized fact that spending on police services is increasing at a time in which crime rates are falling. Further, our results provide empirical support for the contention that people have a larger cost of victimization when the perpetrator is a different ethnicity.
    Keywords: Ethnic Fragmentation, Police, Crime, Social Identity, Public Goods
    JEL: D70 H76 H41
    Date: 2007–10–11
  5. By: Oriol Carbonell-Nicolau (Rutgers University)
    Abstract: We propose a dynamic version of the standard two-party electoral competition model adapted to nonlinear income taxation. The theory has a number of desirable features. First, equilibria always exist, even though the set of admissible tax policies is multidimensional. Second, the Nash set can be characterized generically, and its components give sharp predictions. Third, the features of equilibrium tax policies depend only on empirically meaningful fundamentals. Equilibrium tax schedules benefit the more numerous income groups and place the burden of taxation on income groups with fewer voters. For empirical income distributions, the features of an equilibrium tax schedule are reminiscent of Director's law of public income redistribution (Stigler [36]).
    Keywords: nonlinear income taxation, electoral competitionh, Director's law, extensive zero-sum game
    JEL: H23 H31 D7
    Date: 2007–10–26
  6. By: Thiess Buettner (Ifo Institute)
    Abstract: A large panel of German municipalities is employed in order to investigate the dynamic fiscal policy adjustment of local jurisdictions using a VEC model which explicitly takes account of the intertemporal budget constraint. The results confirm that a substantial part of adjustment takes place by offsetting changes in intergovernmental transfers, in particular, in ‘fiscal equalization’ transfers: in present value terms about 34 cents of a one euro decrease in own revenue is compensated by subsequent changes in equalization transfers. The contribution of intergovernmental transfers to restoring fiscal balance, therefore, is about two to three times higher, compared to the case of US municipalities investigated by Buettner and Wildasin (2006). Nevertheless, budget components such as own revenues and general expenditures display larger fluctuations in the German case. This is consistent with the view that fiscal equalization transfers create a moral-hazard problem.
    Keywords: Fiscal balance; Intergovernmental transfers; Local governments; Fiscal equalization
    JEL: H74 H72 H77
    Date: 2007–10
  7. By: Rossi, Raffaele
    Abstract: This paper shows that the introduction of a set of rule of thumb consumers (ROTC) a' la Galí 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 above a specified threshold, the monetary-fiscal policy mix that guarantees a unique equilibrium requires both policies to be, following the definition of Leeper (1991), either active or passive. Finally we show that with the introduction of a distortive fiscal policy and independently of the parametrization used, private consumption responds negatively to a positive government spending shock. JEL classification: E32; E62; H30 .
    JEL: E32 H30 E62
    Date: 2007–08–05
  8. By: Peter Haan; Katharina Wrohlich
    Abstract: This paper contributes to the debate about the optimal design of tax-transfer systems. Based on the theory of optimal taxation, combined with microsimulation and microeconometric techniques we derive the welfare function which makes the current German tax and transfer system for single women optimal. Furthermore, we compare the welfare function conditional on the presence and age of children and assess how reforms of in-kind childcare transfers would affect the welfare function. This analysis allows us to derive conclusions about the optimal design of child related transfers and in-kind benefits.
    Keywords: Optimal taxation, labor supply behavior, transfers for children
    JEL: C23 C25 J22 J64
    Date: 2007
  9. By: Tabi Atemnkeng Johannes; Atabongawung Joseph Nju; Afeanyi Azia Theresia
    Abstract: This paper examines the incidence of indirect taxation in Cameroon in 1983, 1996 and 2001. Using household surveys for these three years, the paper looks into which consumption taxes are progressive and determines if changes in tax policy influenced the welfare of the poor. The paper suggests that the incidence of expenditure taxes changes with the changing economic environment and reveals that the indirect tax reforms of 1994 and 1999 have been generally pro-poor. In the aggregate, consumption taxes became more progressive than before, partly due to changing consumption patterns following the introduction of new taxes or replacement of old ones.
    Date: 2006–11
  10. By: Anthony Annett
    Abstract: Expenditure in Iceland, especially related to the government wage bill, has tended to move in a procyclical manner, related to the fragmentation of political decision making. Iceland's elevated macroeconomic volatility reinforces these tendencies, as large booms unleash greater fiscal pressures as well as procyclical revenue elasticities that magnify these underlying strains. To improve its fiscal framework, Iceland could look to the experience of countries like Belgium and the Netherlands. In particular, it could adopt binding nominal expenditure rules, independent forecasts, and use representative committees to lay out medium-term targets across different levels of government.
    Keywords: Working Paper , Fiscal policy , Iceland , Government expenditures , Political economy ,
    Date: 2007–10–10
  11. By: Janet Currie; Firouz Gahvari
    Abstract: We review theoretical explanations for in-kind transfers in light of the limited empirical evidence. After reviewing the traditional paternalistic arguments, we consider explanations based on imperfect information and self-targeting. We then discuss the large literature on in-kind programs as a way of improving the efficiency of the tax system and a range of other possible explanations including the "Samaritan's Dilemma", pecuniary effects, credit constraints, asymmetric information amongst agents, and political economy considerations. Our reading of the evidence suggests that paternalism and interdependent preferences are leading overall explanations for the existence of in-kind transfer programs, but that some of the other arguments may apply to specific cases. Political economy considerations must also be part of the story.
    JEL: H4 H5
    Date: 2007–10
  12. By: George Evans; Seppo Honkapohja; Kaushik Mitra
    Abstract: We consider the impact of anticipated policy changes when agents form expectations using adaptive learning rather than rational expectations. To model this we assume that agents combine limited structural knowledge with a standard adaptive learning rule. We analyze these issues using two well-known set-ups, an endowment economy and the Ramsey model. In our set-up there are important deviations from both rational expectations and purely adaptive learning. Our approach could be applied to many macroeconomic frameworks.
    Keywords: Taxation, expectations, Ramsey model.
    JEL: E62 D84 E21 E43
    Date: 2007–08
  13. By: Bonatti , Alessandro (Yale University); Thomsson, Kaj (Yale University)
    Abstract: The goal of this paper is twofold: First, to develop an estimable model of legislative politics in the US Congress, second, to provide a greater understanding of the objectives behind the New Deal. In the theoretical model, the distribution of federal funds across regions of the country is the outcome of bargaining game in which the President acts as the agenda-setter and Congress bargains over the final shape of the spending bill. For any given preferences (of the President) and distribution of seats in Congress, the model delivers a unique predicted allocation. Combined with data on New Deal programs, this is used to estimate the objectives of the Roosevelt administration. The results indicate that economic concerns for relief and recovery, though not necessarily for fundamental reform and development, largely drove New Deal spending. Political concerns also mattered, but more on the margin.
    Keywords: Political Economy; LegislativeBargaining; New Deal; US Congress; Public Spending
    JEL: C78 D72 H11 H50 N42 P48
    Date: 2007–10–16
  14. By: Kevin A. Hassett; Aparna Mathur; Gilbert E. Metcalf
    Abstract: This paper measures the direct and indirect incidence of a carbon tax using current income and two measures of lifetime income to rank households. Our two measures of lifetime income are current consumption and adjusted or "lifetime" consumption. The use of the adjusted lifetime measure for consumption is intended to correct for long-run predictable swings in behavior. Our results suggest that in general, carbon taxes appear to be more regressive when income is used as a measure of economic welfare, than when consumption (current or lifetime) is used to measure incidence. Further, the direct component of the tax, in any given year, is significantly more regressive than the indirect component. In fact, for 1987, the indirect component of the tax is actually mildly progressive, as the higher deciles tend to pay a larger fraction of their consumption in carbon taxes. Finally we observe a shift over time with the direct component of carbon taxes becoming larger in relation to the indirect component. These effects have mostly offset each other, and the overall distribution of the total tax burden has not changed much over time.
    JEL: H2 Q4 Q54
    Date: 2007–10

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