nep-pbe New Economics Papers
on Public Economics
Issue of 2007‒11‒17
ten papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Testing the tax competition theory: How elastic are national tax bases in western Europe? By Aleksandra Riedl; Silvia Rocha-Akis
  2. Partial Fiscal Decentralization By Jan K. Brueckner
  3. How should the government allocate its tax revenues between productivity-enhancing and utility-enhancing public goods? By George Economides; Hyun Park; Apostolis Philippopoulos
  4. Emergence and Persistence of Inefficient States* By Daron Acemoglu; Davide Ticchi; Andrea Vindigni
  5. Two are Better Than One! Individuals' Contributions to Unpacked Public Goods By Michele Bernasconi, Luca Corazzini, Sebastian Kube, Michel André Maréchal.
  6. Local fiscal inflation in France : an unexpected consequence of the growing importance of metropolitan areas ? (In French) By Olivier THOMAS (LEREPS-GRES)
  7. Does public sector efficiency matter? Revisiting the relation between fiscal size and economic growth in a world sample By Konstantinos Angelopoulos; Apostolis Philippopoulos; Efthymios Tsionas
  8. Tax Motivated Takings By Thomas J. Miceli; Kathleen Segerson; C. F. Sirmans
  9. Public Investment, Distributive Politics and Economic Growth By Francisca Guedes de Oliveira
  10. Temporal Causality between Taxes and Public Expenditures: The Case of South Africa By Kasai Ndahiriwe; Rangan Gupta

  1. By: Aleksandra Riedl (Department of Economics, Vienna University of Economics & B.A.); Silvia Rocha-Akis (Department of Economics, Vienna University of Economics & B.A.)
    Abstract: In this paper, we test one of the fundamental assumptions in the tax competition literature, namely, that a country’s taxable income depends on the tax policies pursued in the domestic and in neighbouring countries. Based on a panel of annual data of 14 western European countries spanning the period 1982 to 2004, we show that the common trend in falling corporate income tax (CIT) rates can in part be explained by the existence of fiscal externalities in the form of international resource flows. Our results confirm the presumption put forward in recent empirical tax reaction function studies, that interdependent tax setting behaviour is evidence of tax competition. However, taxable corporate income is shown to react inelastically to domestic and to foreign tax rates. Thus, the observed rise in CIT revenues in Europe between 1982 and 2004 cannot be explained by the trend in falling CIT rates. Moreover, we find that large countries’ tax bases are more responsive to neighbouring countries’ tax policies, which is in contrast to the classic asymmetric tax competition literature.
    JEL: H71 H72 H77 H87 C21 C23
    Date: 2007–11
  2. By: Jan K. Brueckner (Department of Economics, University of California-Irvine)
    Abstract: The fiscal decentralization impulse now sweeping the world often leads to partial decentralization, where subnational governments are funded by central transfers, rather than leading to full local autonomy. Despite the practical important of this arrangement, the literature contains no economic analysis of a partial decentralization regime in a Tiebout-style model. This paper provides such an analysis, relying on the key assumption that public-good provision requires effort on the part of government officials. By choosing different degrees of effort, localities can then provide different public-good levels even when a fixed, common transfer constrains them to spend the same amount. A number of useful results are derived.
    Keywords: Decentralization; Tiebout
    JEL: H0 H7
    Date: 2007–09
  3. By: George Economides; Hyun Park; Apostolis Philippopoulos
    Abstract: We present a fairly standard general equilibrium model of endogenous growth with productive and non-productive public goods and servives. The former enhance private productivity and the latter private utility. We solve for Ramsey second-best optimal policy (where policy is summarized by the paths of the income tax rate and the allocation of the collected tax revenues between productivity-enhancing and utilityenhancing public expenditures). We show that the properties and implications of second-best optimal policy (a) differ from the benchmark case of the social planner’s first-best allocation (b) depend crucially on whether public goods and services are subject to congestion.
    Keywords: Second-best optimal policy; Congested public goods; Growth
    JEL: H2 H4 D9
    Date: 2007–09
  4. By: Daron Acemoglu; Davide Ticchi; Andrea Vindigni
    Abstract: Inefficiencies in the bureaucratic organization of the state are often viewed as important factors in retarding economic development. Why certain societies choose or end up with such inefficient organizations has received very little attention, however. In this paper, we present a simple theory of the emergence and persistence of inefficient states based on patronage politics. The society consists of rich and poor individuals. The rich are initially in power, but expect to transition to democracy, which will choose redistributive policies. Taxation requires the employment of bureaucrats. We show that, under certain circumstances, by choosing an inefficient state structure, the rich may be able to use patronage and capture democratic politics. This enables them to reduce the amount of redistribution and public good provision in democracy. Moreover, the inefficient state creates its own constituency and tends to persist over time. Intuitively, an inefficient state structure creates more rents for bureaucrats than would an efficient state structure. When the poor come to power in democracy, they will reform the structure of the state to make it more efficient so that higher taxes can be collected at lower cost and with lower rents for bureaucrats. Anticipating this, when the society starts out with an inefficient organization of the state, bureaucrats support the rich, who set lower taxes but also provide rents to bureaucrats. We show that in order to generate enough political support, the coalition of the rich and the bureaucrats may not only choose an inefficient organization of the state, but they may expand the size of bureaucracy “excessively” so as to gain additional votes. The model shows that an equilibrium with an inefficient state is more likely to arise when there is greater inequality between the rich and the poor, when bureaucratic rents take intermediate values and when individuals are sufficiently forward-looking.
    Keywords: bureaucracy, corruption, democracy, patronage politics, political economy, public goods, redistributive politics.
    JEL: P16 H11 H26 H41
    Date: 2007
  5. By: Michele Bernasconi, Luca Corazzini, Sebastian Kube, Michel André Maréchal. (ISLA, Universita' Bocconi, Milano)
    Abstract: We study the effects on voluntary contributions of unpacking a single linear public good into distinct but identical parts. In our experiment, subjects either participate to a one linear public good game or a two linear and identical public goods game, with marginal per capita returns of contributions being constant across treatments. We find that unpacking public goods significantly increases contributions of both unexperienced and experienced subjects. Our results highlight new strategies for NGOs for increasing charitable donations.
    Keywords: Voluntary contributions to public goods, unpacking effect, laboratory experiment, charitable donations.
    JEL: C91 C92 H40 H41
    Date: 2007–11
  6. By: Olivier THOMAS (LEREPS-GRES)
    Abstract: This paper intends to question the current development of metropolitan areas in France, and its induced effects. Contrary to the expected benefits (lower costs for the production of public services, scale economies), metropolitan, areas in France has entailed an increase in local taxes and tax burden. Although a part of this fiscal inflation can be attributed to a better quality of public services, the idea that this inflation is the normal result of the strategy of mayors will be stressed.
    Keywords: French metropolitan areas – urban communities with own taxes – fiscal inflation – local public economics – budgetary strategy
    JEL: H30 H73 R51
    Date: 2007
  7. By: Konstantinos Angelopoulos; Apostolis Philippopoulos; Efthymios Tsionas
    Abstract: This paper revisits the relationship between fiscal size and economic growth. Our work differs from the empirical growth literature because this relationship depends explicitly on the efficiency of the public sector. We use a sample of 64 countries, both developed and developing, in four 5-year time-periods over 1980-2000. Building on the work of Afonso, Schuknecht and Tanzi (2005), we construct a measure of public sector efficiency in each country and each time-period by calculating an output to input ratio. In addition, we get an estimate of technical efficiency of public spending for 52 countries for the time-period 1995-2000 by employing a stochastic frontier analysis. Using these two measures, we find evidence of a non-monotonic relation between fiscal size and economic growth that depends critically on government efficiency.
    Keywords: Fiscal policy, government efficiency, growth
    JEL: H1 E6
    Date: 2007–09
  8. By: Thomas J. Miceli (University of Connecticut); Kathleen Segerson (University of Connecticut); C. F. Sirmans (University of Connecticut)
    Abstract: Tax motivated takings are takings by a local government aimed purely at increasing its tax base. Such an action was justified by the Supreme Court's ruling in Kelo v. New London, which allowed the use of eminent domain for a private redevelopment project on the grounds that the project promised spillover public benefits in the form of jobs and taxes. This paper argues that tax motivated takings can lead to inefficient transfers of land for the simple reason that assessed values understate owners' true values. We therefore propose a reassessment scheme that greatly reduces the risk of this sort of inefficiency.
    Keywords: Eminent domain, holdout problem, property taxes, takings, urban redevelopment
    JEL: H71 K11 R51
    Date: 2007–11
  9. By: Francisca Guedes de Oliveira (Universidade Católica Portuguesa (Porto))
    Abstract: This paper develops on a Solow type of model where the government is introduced as a decision maker. Additionally, this paper introduces consumer decisions and assumes that individuals can be differentiated by their relative factor endowment (labor and private capital). The results indicate that the economy’s growth rate has an inverted U-shape relationship with the tax rate on private capital. They also indicate that the tax rate has a positive relation with the amount of money government spend on consumption (rather than on investment in public capital). The paper also concludes that the choice of the tax rate will be above the optimal level and hence the potential growth rate will not be achieved. Taking the analysis further, it can be assumed that voters will try to correct lower tax rates of public investment by choosing an higher tax rate. This tax rate will be higher if society is more disparate in terms of income distribution. Finally, the conclusion from a public policy perspective is that there is a negative relationship between the chosen tax rate and public investment and that this relationship is highly sensitive to the model parameters.
    Keywords: growth, income distribution, government budget, government efficiency
    JEL: A H O11 O43
    Date: 2007–11
  10. By: Kasai Ndahiriwe (Department of Economics, University of Pretoria); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: This paper investigates the direction of causal relationship between taxes and expenditure in South Africa, using quarterly data for the period 1960:1-2006:2, and annual data for 1960 to 2005. For both frequencies, gross domestic product and government debt are included in the VAR system as control variables. For quarterly data the Johansen’s (1991, 1995) methodology suggest two cointegrating equations among the four variables. Our findings support the fiscal synchronisation hypothesis, since Granger causality tests in a Vector Error Correction framework suggests bi-directional causality between taxes and expenditure for the period under study. In contrast to the VECM for quarterly data, the VECM for annual data disprove any option of Granger causality between taxes and expenditure. The apparent ambiguity is indication of the fact that causality, among other factors, depends on the frequency of data.
    Keywords: Granger causality, Cointegration, Error correction, Vector error correction model, Vector autoregressive model
    JEL: C01 C32 H20 H50
    Date: 2007–07

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