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on Public Economics |
| By: | Frederick van der Ploeg |
| Abstract: | The theory of tax smoothing and determination of public debt with uncertain future national income is extended for prudence. A prudent government deliberately underestimates future national income and the tax base, especially if the variance and persistence of shocks hitting the tax base are large and the tax rate and the unemployment benefit are large. As a precaution the tax rate is set higher and the level of public spending lower. As a result, as income and the tax base turn out to be bigger than budgeted, the minister of finance enjoys windfall revenues and is able to gradually reduce debt and debt service over time. This permits, depending on political preferences, either gradual cuts in the tax rate, gradual increases in government spending or a combination of both. It is easy to allow for government assets as well. Finally, political economy justifications are offered of why it is desirable to appoint a strong and pessimistic minister of finance. In particular, we show that prudence is able to offset the intertemporal spending, tax and debt biases resulting from the common-pool distortions. If the minister of finance and the prime minister are given as many voting rights as the spending ministers combined, the intratemporal common-pool distortions of an excessively large public sector are eliminated as well. A strong and pessimistic minister of finance can thus control the impatient profligacy of squabbling spending ministers. However, if voters care about outcomes on election eve, prudence may be abused for short-run electoral gains. Opportunistic manipulation of election results, however, also dampens the intertemporal common-pool distortions. |
| Keywords: | prudence, pessimism, precautionary taxation, tax smoothing, public debt, income forecasts, public sector assets, common pool, feedback Nash, voting rights, electoral budget cycles, political economy |
| JEL: | H21 H60 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2007/39&r=pbe |
| By: | Bertil Holmlund (Uppsala University and IZA); Martin Söderström (National Institute of Economic Research, Stockholm) |
| Abstract: | Recent research on the behavioral effects of income taxes has to a large extent focused on the elasticity of taxable income with respect to the net-of-tax rate, i.e., one minus the marginal tax rate. We offer new evidence on this matter by making use of a large panel of Swedish tax payers over the period 1991-2002. Changes in statutory tax rates as well as discretionary changes in tax bracket thresholds provide exogenous variations in tax rates that can be used to identify income responses. We estimate dynamic income models which allow us to distinguish between short-run and long-run effects in a straightforward fashion. The estimates of the long-run elasticity of income with respect to the net-of-tax rate typically hover in a range between 0.20 and 0.30. The short-run elasticities are in general smaller but less precisely estimated. We use the estimates to simulate the fiscal consequences of a tax reform that reduces the top marginal tax rate by five percentage points. Such a reform turns out to have negligible effects on tax revenues and may even yield a fiscal surplus. |
| Keywords: | marginal tax rates, progressive taxes, earned income, tax reform |
| JEL: | H24 H31 J22 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3088&r=pbe |
| By: | Giorgio Coricelli (CNRS); Mateus Joffily (CNRS); Claude Montmarquette (CIRANO, University of Montréal); Marie-Claire Villeval (CNRS-GATE, University of Lyon and IZA) |
| 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. |
| Keywords: | tax evasion, emotions, neuro-economics, physiological measures, shame, experiments |
| JEL: | C91 C92 D87 H26 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3103&r=pbe |
| By: | Roel M.W.J. Beetsma; Frederick van der Ploeg |
| Abstract: | The political distortions in public investment projects are investigated within a bipartisan framework. The role of scrapping and modifying projects of previous governments receives special attention. The ruling party overspends on large ideological public investment projects and accumulates too much debt to bind the hands of its successor, especially if the probability of being removed from office is large and the possibility of scrapping is not ruled out. These political distortions have implications for the appropriate format of a fiscal rule. A deficit rule, like the Stability and Growth Pact, mitigates the overspending bias in ideological investment projects and improves social welfare. The optimal second-best restriction on public debt exceeds the socially optimal level of public debt. Social welfare is boosted more by investment restrictions on ideological projects. The government then perceives a larger benefit of debt reduction. In fact, if scrapping is forbidden, optimal investment restrictions can yields the socially optimal outcome. Finally, debt and investment restrictions are not needed if investment projects only have a financial return. |
| Keywords: | political economy, bipartisan, public investment, ideological projects, market projects, scrapping public investment, golden rule, investment restriction, deficit rule |
| JEL: | E6 H6 H7 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2007/37&r=pbe |
| By: | Jaromir Kovarik |
| Abstract: | We analyze first-order beliefs in a variation of the Public Good Game. We show that (1) the role that belief elicitation plays in the experiment affects both the contribution behavior and beliefs, and (2) framing influences stated beliefs, as much as contribution behavior. In the second part of the paper, we study the role of heterogeneity in the formation of initial beliefs, and provide an empirical model of the belief up-dating process. Subjects use the past experience, stressing the role of experience that comes from situations similar to the current ones. |
| Keywords: | Beliefs, Public Good, Framing, Experiment, (Belief) Learning |
| JEL: | C91 D83 D84 H40 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:usi:labsit:016&r=pbe |
| By: | Adrian Campbell (The International Development Department, University of Birmingham); Satoshi Mizobata (Institute of Economic Research, Kyoto University); Kazuho Yokogawa (Institute of Economic Research, Kyoto University); Elena Denezhkina (European Research Institute, Birmingham University) |
| Abstract: | This paper includes the following parts: 1) gVertical or Triangle? Local, regional and federal government in the Russian Federation after Law 131.h, by Adrian Campbell, and 2) comments to the paper gSoftness and hardness of the institutions in Russian ocal self-governmenth by Satoshi Mizobata, 3) gLocal budget and local self-government in Russiah by Kazuho Yokogawa and 4) gThe Struggle for Power in the Uralsh by Adrian Campbell and Elena Denezhkina. |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:640&r=pbe |
| 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: | 2007–10–17 |
| URL: | http://d.repec.org/n?u=RePEc:qut:dpaper:225&r=pbe |
| By: | Biung-Ghi Ju (Department of Economics, Korea University); Juan D. Moreno-Ternero (Universidad de Malaga and CORE, Universite catholique de Louvain) |
| Abstract: | We establish the precise connections between progressive taxation and inequality reduction, in a setting where the level of tax revenue to be raised is exogenously fixed and tax schemes are balanced. We show that, in contrast with the traditional literature on taxation, the equivalence between inequality reduction and the combination of progressivity and income order preservation does not always hold in this setting. However, we show that, among rules satisfying consistency and, either revenue continuity, or revenue monotonicity, the equivalence remains intact. |
| Keywords: | progressivity, inequality reduction, income order preservation, consistency, taxation |
| JEL: | C70 D63 D70 H20 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:iek:wpaper:0718&r=pbe |
| By: | Jacobs, J.P.A.M.; Ligthart, J.E.; Vrijburg, H. (Groningen University) |
| Abstract: | The paper contributes to a small but growing literature that estimates tax re- action functions of governments competing with other governments. We analyze consumption tax competition between US states, employing a panel of state-level data for 1977-2003. More specifically, we study the impact of a state's spatial characteristics|that is, its size, geographic position, and border length on the strategic interaction with its neighbors. For this purpose, we calculate for each state an average effective consumption tax rate, which covers both sales and excise taxes. In addition, we pay attention to dynamics by including lagged dependent variables in the tax reaction function. We find overwhelming evidence for strategic interaction among state governments, but only partial support for the effect of spatial character- istics on tax setting. Tax competition seems to have lessened in the 1990s compared to the early 1980s. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:rugsom:07008&r=pbe |
| By: | Elettra Agliardi (University of Bologna and The Rimini Centre for Economics Analysis, Italy.); Rossella Agliardi (University of Bologna) |
| Abstract: | This paper contributes to the debate on alternative corporate tax schemes, employing a rigorous real option methodology which has never been used to study both liquidation policy and taxation. Different tax systems are considered, according to whether the tax regime is progressive or flat and losses are deductible or not. The critical liquidation threshold is derived as a function of interest expenses, the firmÕs driving parameters and the tax rates and taxation brackets. It is shown that only the adoption of a flat tax plan does not interfere with the firmÕs liquidation policy, while any progressive tax schedule can slow down or speed up the closure policy. |
| Keywords: | Corporate debt, default risk, progressive tax, real options. |
| JEL: | G3 G32 G33 G12 H2 H32 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:29-07&r=pbe |
| By: | Frederick van der Ploeg |
| Abstract: | If demand for human services is inelastic or manufactured goods are necessities, labour shifts from manufacturing to services and the budget share of services rises. Higher productivity growth in the market sector pushes up the tax rate and public employment if private goods and public services are poor substitutes, labour supply is inelastic and there are few dependants. Otherwise, private affluence and public squalor result. More dependants boost public employment if the market provides poor substitutes, but public services per dependent may fall due to tax base erosion. Extensions to market and public employment being imperfect substitutes, varying utility of money and public sector productivity depends on pay. |
| Keywords: | Baumol's cost disease, Wagner's law, congestion, cost of public funds, dependency ratio |
| JEL: | E62 H0 J22 J31 J4 O40 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2007/34&r=pbe |
| By: | Biung-Ghi Ju (Department of Economics, Korea University) |
| Abstract: | In the problem of locating multiple public facilities studied by Barbera and Bevia [2, 3], we offer simple necessary and sufficient conditions for efficiency, decentralizability of efficient decisions in a game of community division and local public goods provision, and a constructive algorithm for efficient and consistent decisions. |
| Keywords: | Efficiency, Consistency, Self-selection consistency, No-envy, Local stability, Diversity, Strong Nash equilibrium, Community division, Location |
| JEL: | H40 D60 D70 D71 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:iek:wpaper:0716&r=pbe |
| By: | Charles Figuières; Fabien Prieur; Mabel Tidball |
| Abstract: | This paper develops a two-country general equilibrium model with endogenous growth where governements behave strategically in the provision of productive infrastructure. The public capitals enter both national and foreign production as an external input, and they are financed by a flat tax on income. In the private sector, firms and households take the public policy as given when making their decisions. It is shown that both a Markov Perfect Equillibrium (MPE) and a Centralized Solution (CS) exist, even when the parameters allow for endogenous growth, therefore explosive paths for the state variables. And the dynamic analysis reveals three important features. Firstly, under constant returns, the two countries' growth rates differ during the transition but are identical on the balanced growth path. Secondly, due to the infrastructure externality, assuming away constant returns to scale a country with decreasing returns can experience sustained growth provided that the other grows at a positive constant rate. Thirdly, Nash growth rates are compared with the centralized rates. We show that cooperation in infrastructure provision does not necessarily lead to higher growth for each country. We also show that, in some configurations of households' preferences and initial conditions, cooperation would call for a recession in the initial stages of development, whereas strategic investments would not. Lastly, depending also on the configuration of preferences, we show that cooperation can increase or decrease the gap between countries' growth rates. |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:lam:wpaper:07-05&r=pbe |
| By: | Andrew Pickering; James Rockey |
| Abstract: | We analyze the impact of ideology on the size of government. In a simple model the government sets redistribution and provision of public services according to the preferences of the median voter, for whom private consumption is a necessity. Ideology is defined on preferences for public services and the impact of ideology upon the size of government increases with mean income. In empirical work ideology is measured using data based on party manifestos. Much of the increases and divergence in government size observed across OECD countries can be explained by the interaction of ideology and mean income. |
| Keywords: | ideology, Wagner's law, size of government |
| JEL: | D72 H10 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:bri:uobdis:07/599&r=pbe |
| By: | Aureo de Paula (Department of Economics, University of Pennsylvania); Jose A. Scheinkman (Department of Economics, Princeton University) |
| Abstract: | This paper investigates the determinants of informal economic activity. We present two equilibrium models of informality and test their implications using a survey of 48,000+ small firms in Brazil. We define informality as tax avoidance; firms in the informal sector avoid tax payments but suffer other limitations. In the first model there is a single industry and informal firms face a higher cost of capital and a limitation on size. As a result informal firms are smaller and have a lower capital-labor ratio. When education is an imperfect proxy for ability, we show that the interaction of the manager’s education and formality has a positive correlation with firm size. These implications are supported by our empirical analysis. A novel theoretical contribution in this paper is a model that highlights the role of value added taxes in transmitting informality. It predicts that the informality of a firm is correlated to the informality of firms from which it buys or sells. The model also implies that higher tolerance for informal firms in one production stage increases tax avoidance in downstream and upstream sectors. Empirical analysis shows that, in fact, various measures of formality of suppliers and purchasers (and its enforcement) are correlated with the formality of a firm. Even more interestingly, when we look at sectors where Brazilian firms are not subject to the credit system of value added tax, but instead the value added tax is applied at some stage of production at a rate that is estimated by the State, this chain effect vanishes. |
| Keywords: | Informal Sector, VAT, Tax Avoidance |
| JEL: | H2 H3 K4 |
| Date: | 2007–08–27 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:07-035&r=pbe |
| By: | Robert A. Pollak (Washington University in St. Louis, NBER, CESifo and IZA) |
| Abstract: | Does joint taxation disadvantage women? To answer that question, this paper begins by reviewing unitary and bargaining models of intrafamily allocation, and then discusses the determinants of "bargaining power" in a world without taxes. It argues that wage rates rather than earnings are determinants of bargaining power, and then argues that productivity in household production is also a source of bargaining power. In the absence of human capital effects, joint taxation does not appear to disadvantage women in either divorce threat or separate spheres bargaining. Hence, the claim that joint taxation disadvantages women, if it is correct, depends on effects that operate through the incentives to accumulate human capital. But a satisfactory analysis of the effects of taxation on human capital awaits the further development of dynamic models of family bargaining. |
| Keywords: | joint taxation, family bargaining, household production |
| JEL: | H21 H24 D13 J22 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3109&r=pbe |
| By: | Di Bartolomeo Giovanni; Manzo Marco |
| Abstract: | Following the recent developments of the literature on stabilization policies, this paper investigates the effect of tax distortions on equilibrium determinacy in a New Keynesian economy with rule-of-thumb consumers and capital accumulation. In particular, we focus on the inter-action between monetary policy and tax distortions in supporting the saddle-path equilibrium under the assumptions of balanced budget and monetary policy satisfying a Taylor rule. |
| Keywords: | rule-of-thumb consumers, equilibrium determinacy, fiscal and monetary policy inter-actions, and tax distortions |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:ter:wpaper:0013&r=pbe |
| By: | Johannes Becker (University of Cologne); Clemens Fuest (University of Cologne) |
| Abstract: | A large part of border crossing investment takes the form of international mergers and acquisitions. In this paper, we ask how optimal repatriation tax systems look like in a world where investment involves a change of ownership, rather than a reallocation of real capital. We find that the standard results of international taxation do not carry over to the case of international mergers and acquisitions. The deduction system is no longer optimal from a national perspective and the foreign tax credit system fails to ensure global optimality. The tax exemption system is optimal if ownership advantage is a public good within the multinational firm. But the cross border cash flow tax system dominates the exemption system in terms of optimality properties. |
| Keywords: | Corporate Taxation, Mergers and Acquisitions, International Capital Flows |
| JEL: | H25 F23 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:btx:wpaper:0719&r=pbe |