nep-pbe New Economics Papers
on Public Economics
Issue of 2008‒01‒05
twenty-one papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Budget Policy and Income Distribution By Jorge Martinez-Vazquez
  2. Cost Benefit Analysis of Presumptive Taxation By Shlomo Yitzhaki
  3. Economic Effects of A Personal Capital Income Tax Add-on to a Consumption Tax By John W. Diamond; George R. Zodrow
  4. Effect of Corruption on Tax Revenues in the Middle East By Patrick A. Imam; Davina F. Jacobs
  5. The Evolution of Tax Morale in Modern Spain By Jorge Martinez-Vazquez; Benno Torgler
  6. Implications of Return-Free Tax Systems for the Structure of the Individual Income Tax By Janet Holtzblatt
  7. Flat Rate Taxes; A Policy Note By Sandra Hadler; Christine Moloi; Sally Wallace
  8. Moving Towards Dual Income Taxation in Europe By Bernd Genser; Andreas Reutter
  9. Global Reform of Personal Income Taxation, 1981-2005: Evidence from 189 Countries By Klara Sabirianova Peter; Steve Buttrick; Denvil Duncan
  10. Taxation and State Building: Poor Countries in a Globalised World By Odd-Helge Fjeldstad; Mick Moore
  11. Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia By Yuriy Gorodnichenko; Jorge Martinez-Vazquez; Klara Sabirianova Peter
  12. Fiscal Decentralisation, Chinese Style: Good for Health Outcomes? By Hiroko Uchimura; Johannes P. Jütting
  13. Revenue Assignments in the Practice of Fiscal Decentralization By Jorge Martinez-Vazquez
  14. From Income Tax to Consumption Tax? The Case of Jamaica By Roy Bahl; Sally Wallace
  15. How should Individuals be Taxed? Combining "Simplified", Income, and Payroll Taxes in Ukraine By James Alm; Pablo Saavedra; Edward Sennoga
  16. Consumption-Based Direct Taxes: A Guide Tour of the Amusement Park By Charles E. McLure; George R. Zodrow
  17. Using Human Capital Theory to Establish a Potential Income Tax By Dagney Faulk; Jorge Martinez-Vazquez; Sally Wallace
  18. Are Government Policies More Important Than Taxation in Attracting FDI? By Timothy Goodspeed; Jorge Martinez-Vazquez; JLi Zhang
  19. Tax Collection in History By Metin M. Cosgel; Thomas J. Miceli
  20. The Effects of Dividend Taxes on Equity Prices: A Re-examination of the 1997 U.K. Tax Reform By Michael B. Devereux; Stephen Bond; Alexander Klemm
  21. Protestantism and Government Spending: a Negative Relationship? An Empirical Application to Swiss Cantons By Fischer, Justina AV; Schneider, Friedrich

  1. By: Jorge Martinez-Vazquez (Andrew Young School of Policy Studies)
    Abstract: one main goal of fiscal incidence analysis is to contribute to the design of good government policy. The right policy choices require information on which groups are likely to pay particular tax changes and which groups are more likely to benefit from expenditure programs. Policy makers have many questions about how to lighten the burden of taxation for lower income groups and about how to increase the effectiveness of public expenditures. Is it possible to broaden the bases of a value added tax or flatten the rate structure of income taxes without decreasing the overall progressivity of the tax system? What is the better way to target public spending to improve the condition of the poor? Incidence analysis provides some critical information to help policymakers achieve a more equitable distribution of income and to improve the effectiveness of public policy.
    Keywords: inequality, tax system, tax changes. tax policy
    Date: 2007–04–01
  2. By: Shlomo Yitzhaki
    Abstract: The general idea is the following: any tax authority that respects basic human rights has to impose taxes on a base to avoid random and arbitrary taxation. The tax base should be announced prior to the imposition of the tax and therefore, taxpayers are given an advanced warning concerning the tax base. The advanced warning enables the taxpayers to adjust the tax base to the new circumstances so that they can adjust their behavior to the existence of the tax. This adjustment of the tax base by the taxpayer is responsible to the excess burden of the tax. Retroactive taxes, that is taxes imposed on tax bases determined in the past and that, therefore, cannot be changed by the taxpayers are considered as unethical. Although the determination of the tax base is just the first stage in the taxation process- tax liability is determined by applying a rate or a schedule of rates to the base- most of the complications that arise in taxation (and as a result are responsible for administrative and compliance costs) arise in the determination of the tax base.
    Keywords: Cost Benefit Analysis, Presumptive Taxation, administrative cost, compliance cost, tax compliance
    Date: 2007–06–01
  3. By: John W. Diamond; George R. Zodrow
    Abstract: The general idea is the following: any tax authority that respects basic human rights has to impose taxes on a base to avoid random and arbitrary taxation. The tax base should be announced prior to the imposition of the tax and therefore, taxpayers are given an advanced warning concerning the tax base. The advanced warning enables the taxpayers to adjust the tax base to the new circumstances so that they can adjust their behavior to the existence of the tax. This adjustment of the tax base by the taxpayer is responsible to the excess burden of the tax. Retroactive taxes, that is taxes imposed on tax bases determined in the past and that, therefore, cannot be changed by the taxpayers are considered as unethical. Although the determination of the tax base is just the first stage in the taxation process- tax liability is determined by applying a rate or a schedule of rates to the base- most of the complications that arise in taxation (and as a result are responsible for administrative and compliance costs) arise in the determination of the tax base.
    Keywords: Personal Capital Income Tax, Consumption Tax, tax bas, tax authority
    Date: 2007–06–01
  4. By: Patrick A. Imam; Davina F. Jacobs
    Abstract: This study estimates the impact of corruption on the revenue-generating capacity of different tax categories in the Middle East. We find that the low revenue collection as a share of GDP there compared to other middle-income regions is due in part to corruption, and certain taxes are more affected than others. Taxes that require frequent interaction between the tax authority and individuals, such as taxes on international trade, seem to be more affected by corruption than most other types of taxation. This suggests that if governments need to raise more tax revenues in a way that minimizes distortions and maximizes social welfare, they should implement reforms that either reduce corruption or raise revenues from tax categories that are less susceptible to corruption. Possible reforms of the revenue system and administration are examined.
    Keywords: Corruption , Middle East , Tax revenues , Taxes , Tax systems , Tax administration ,
    Date: 2007–11–30
  5. By: Jorge Martinez-Vazquez (Andrew Young School of Policy Studies); Benno Torgler (World Bank)
    Abstract: This paper studies the evolution of tax morale in Spain in the post-Franco era. In contrast to the previous tax compliance literature, the current paper investigates tax morale as the dependent variable and attempts to answer what actually shapes tax morale. The analysis uses survey data from two sources: the World Values Survey and the European Values Survey, allowing us to observe tax morale in Spain for the years 1981, 1990, 1995, and 1999/2000. The study of the evolution of tax morale in Spain over nearly a 20-year span is particularly interesting because the political and fiscal system evolved very rapidly during that period.
    Keywords: Tax Morale, Spain, tax compliance, fiscal system
    Date: 2007–08–01
  6. By: Janet Holtzblatt
    Abstract: Many countries do not require all taxpayers to file an annual income tax return. Return-free systems shift some of the costs of operating the tax system from taxpayers to employers, other third parties, and the government. Return-free systems may work best when the tax system is relatively simple: when the unit of taxation is the individual, the tax rate structure is relatively flat, and there are few deductions and credits. The more the tax code is used to achieve tax and social policy goals other than simplification, the more difficult it may be to exempt most taxpayers from filing requirements.
    Keywords: Return-Free Tax Systems, Individual Income Tax, tax policy, social policy
    Date: 2007–06–01
  7. By: Sandra Hadler; Christine Moloi (Andrew Young School of Policy Studies); Sally Wallace (Andrew Young School of Policy Studies, Georgia State University)
    Abstract: The objective of this paper is to provide an assessment of flat tax policies for policy makers. To do this, the paper reviews the theoretical impacts of a flat tax - how might a flat tax affect a country's tax administration, revenue generation, and economy - as well as the experience of countries that have recently introduced flat taxes. This subject is particularly timely, since in recent years the ‘flat tax' has developed an aura as a panacea for some of the ills of tax policy and tax administration. In particular, it has been seen as a vehicle to simplify tax systems both in OECD countries, whose tax systems have become overly complicated with time, and in transition countries, as they have struggled to introduce western-style taxation systems. Some flat tax proponents argue that countries with a weak tax administration and/or those encumbered by complicated tax systems may benefit more from moving to a flat rate income tax than a major reform of its tax system, such as moving to a broader consumption based tax.
    Keywords: Flat tax, Flat rax rate, tax system
    Date: 2007–03–01
  8. By: Bernd Genser; Andreas Reutter
    Abstract: The paper summarizes the arguments in favor of a shift from comprehensive to dual income taxation and complements the discussion by an overview on tax reforms which reveal the characteristic features of a dual income tax system. The scope of our analysis is not restricted to the Nordic countries, we also include other European countries, whose tax reform steps can be regarded as a move toward a dual income tax. We focus on problems of running a final withholding income tax regime under individual and household taxation including the most recent dual income tax reforms in the Nordic countries, but nevertheless argue that it may be worthwhile for the Commission to consider dual income taxation as a blueprint for income tax coordination in the EU.
    Keywords: Dual Income Taxation, tax reforms. imcome tax, nordic countries tax reform
    Date: 2007–06–01
  9. By: Klara Sabirianova Peter (Andrew Young School of Policy Studies); Steve Buttrick; Denvil Duncan
    Abstract: In this paper we use a panel of 189 countries to describe the salient trends that have emerged in national personal income tax systems spanning the twenty five year period from 1981 to 2005. Using complete national income tax schedules with statutory rates, thresholds, country-specific tax formulas and other information, we calculate actual average and marginal tax rates at different income levels as well as time-varying measures of structural progressivity and complexity of national tax systems. Overall, our analysis shows a significant transition from complex, graduated tax schedules that featured multiple tax brackets and stair stepped tax rates to simpler, flatter tax schedules distinguished by fewer tax brackets and lower rates. The emerging trend toward flat tax schedules is also highlighted. We show that frequent alterations of tax structures have diminished the overall progressivity and complexity of national tax systems; however, the degree of this change varies considerably by country group.
    Keywords: Personal Income Taxation, flat tax, progressivity, national tax system, personal income tax system
    Date: 2007–12–01
  10. By: Odd-Helge Fjeldstad; Mick Moore
    Abstract: How far has the recent global wave of tax reform contributed to state building in poorer countries? Our conclusion mirrors other general globalisation arguments: there are good things to report, but worrying problems in the poorest and most dependent countries. The reform agenda is least appropriate to those countries most in need of the state-building to which the taxation process has contributed at in other places and times. Governments in poorer countries have little choice but to go along with a reform agenda reflecting the priorities and needs of the more powerful actors in the international system. The contemporary tax reform agenda does not address the more urgent problems that the poorest countries face.
    Keywords: Taxation Accountability State building Developing countries JEL classification: F59, H20, H30, O10
    Date: 2007
  11. By: Yuriy Gorodnichenko; Jorge Martinez-Vazquez (Andrew Young School of Policy Studies); Klara Sabirianova Peter (Andrew Young School of Policy Studies)
    Abstract: Using micro-level data, we examine the effects of Russia’s 2001 flat rate income tax reform on consumption, income, and tax evasion. We use the gap between household expenditures and reported earnings as a proxy for tax evasion with data from a household panel for 1998-2004. Utilizing difference-in-difference and regression-discontinuity-type approaches, we find that large and significant changes in tax evasion following the flat tax reform are associated with changes in voluntary compliance and cannot be explained by changes in tax enforcement policies. We also find the productivity response of taxpayers to the flat tax reform is small relative to the tax evasion response. Finally, we develop a feasible framework to assess the deadweight loss from personal income tax in the presence of tax evasion based on the consumption response to tax changes. We show that because of the strong tax evasion response the efficiency gain from the Russian flat tax reform is at least 30% smaller than the gain implied by conventional approaches.
    Keywords: tax evasion, consumption-income gap, personal income tax, flat tax, difference-in-difference, regression discontinuity, deadweight loss, transition, Russia.
    Date: 2007–12–01
  12. By: Hiroko Uchimura; Johannes P. Jütting
    Abstract: This paper analyses the effect of fiscal decentralisation on health outcomes in China using a panel data set with nationwide county-level data. We find that counties in more fiscally decentralised provinces have lower infant mortality rates than counties where the provincial government remains the main spending authority, if certain conditions are met. Spending responsibilities at the local level need to be matched with county governments’ own fiscal capacity. For county governments that have only limited revenues, the ability to spend on local public goods such as health care depends crucially upon intergovernmental transfers. The findings of this paper, therefore, support the common assertion that fiscal decentralisation can lead to more efficient production of local public goods, while also highlighting the conditions required for this result to be obtained. <BR>Ce papier analyse l’effet de la décentralisation fiscale sur la santé en Chine, à partir d’une analyse de panel avec des données de district recueilli au niveau national. Les auteurs trouvent que, sous certaines conditions, les districts aux systèmes plus décentralisés ont des taux de mortalité infantiles moins élevés que ceux où le gouvernement provincial reste la principale autorité. Les responsabilités pour les dépenses au niveau local doivent toutefois être accompagnées de capacités fiscales adéquates. Pour les gouvernements de districts à bas revenus, la capacité à investir dans des biens publics comme les services de santé, dépend principalement des transferts intergouvernementaux. Les analyses confirment l’argument selon lequel la décentralisation fiscale peut mener à une plus grande efficacité des biens publics, en soulignant les conditions nécessaires pour atteindre ce résultat.
    Keywords: health, santé, fiscal decentralisation, décentralisation fiscale, China, Chine, Health-care finance, financement des services de santé
    JEL: H51 H72 H75 I18
    Date: 2007–11
  13. By: Jorge Martinez-Vazquez (Andrew Young School of Policy Studies)
    Abstract: Over the past two decades there has been an unprecedented move toward decentralized governance all over the world. These changes have taken special significance in many developing and transitional countries where centralized systems were perceived to have failed to deliver improved general welfare. The promise of political, administrative and fiscal decentralization is that it can strengthen democratic representative institutions, increase the overall efficiency of the public sector and lead to improved social and economic welfare for countries that decide to adopt it.
    Keywords: Revenue Assignments, Fiscal Decentralization, governance, transitional countries
    Date: 2007–05–01
  14. By: Roy Bahl (Andrew Young School of Policy Studies, Georgia State University); Sally Wallace (Andrew Young School of Policy Studies, Georgia State University)
    Abstract: Over the past decade, a number of countries have shifted to single rate tax systems with broader bases and lower rates. In the U.S. , there continues to be discussion of the merits of a consumption tax, and of base-broadening reforms to the income tax system. The objective of this paper is to demonstrate how, over time, a conventional income tax could be converted to a flat rate consumption tax in a developing country. The value of this analysis, we hope, comes with the use of a real world situation ( Jamaica ), which allows us to focus on the detail that determines the feasibility of transitioning to a flat rate tax on consumption. Our main contribution is to show the conditions under which the switch can be revenue neutral.
    Keywords: Income Tax, Consumption Tax, Jamaica, Jamaica tax system
    Date: 2007–06–01
  15. By: James Alm (Andrew Young School of Policy Studies, Georgia State University); Pablo Saavedra; Edward Sennoga
    Abstract: Individuals in most all countries face a wide range of direct taxes on their income, especially variants of the individual income tax and payroll taxes. For the income tax, attempts are often made to reduce the compliance and administrative costs of the tax by using “presumptive” or “simplified” methods, in which the tax liability is determined indirectly from some simple indicators that are more easily measured than the “true” tax base itself. However, when a “simplified” income tax is combined with other direct taxes on individuals, the ways in which these taxes interact, their combined effects on revenues, resource allocation, and income distribution, and the appropriate design of the overall system of these taxes remain unresolved – and unexplored – issues. This paper examines these issues, focusing on the experience of Ukraine . A simple computable general equilibrium model is used to quantify many of the effects of the “system” of simplified, income, and payroll taxes.
    Keywords: Income Tax, payroll Tax, Ukraine, individual tax, presumptive method
    Date: 2007–06–01
  16. By: Charles E. McLure; George R. Zodrow
    Abstract: Although consumption-based direct taxation has long been advocated in academic and policy circles, very few countries have actually implemented such taxes. This article analyzes numerous attempts to implement various forms of consumption-based direct taxation around the world, drawing on the authors' experiences with some of these efforts. It provides an overview of alternative approaches to direct consumption taxation, examines arguments favoring consumption taxes over income taxes, and then analyzes efforts at “fundamental tax reform” – that involved replacing an income tax with a consumption tax – in both the United States and numerous developing countries and countries in transition from socialism.
    Keywords: Consumption-Based Direct Taxes, income taxes, consumption taxes
    Date: 2007–06–01
  17. By: Dagney Faulk; Jorge Martinez-Vazquez (Andrew Young School of Policy Studies); Sally Wallace (Andrew Young School of Policy Studies, Georgia State University)
    Abstract: There are good arguments for an individual income tax on “potential income”, but the drawback to such a tax is the significant administrative concern regarding the implementation of the tax. This paper argues that human capital theory provides a widely accepted and straightforward method to estimate “potential income” using observed characteristics of individuals, and operationalizes this approach using data for the U.S.A. The paper also suggests that a “potential income tax” is very similar to a “presumptive income tax.” The paper concludes by reviewing some significant problems with the implementation of a potential/presumptive income tax.
    Keywords: Human Capital, Potential Income Tax, presumptive income tax
    Date: 2007–06–01
  18. By: Timothy Goodspeed (Hunter College and CUNY Graduate Center); Jorge Martinez-Vazquez (Andrew Young School of Policy Studies); JLi Zhang (Andrew Young School of Policy Studies)
    Abstract: This paper attempts to broaden the existing empirical literature on foreign direct investment by incorporating government expenditure policies, such as investment in infrastructure, and institutional factors that may impact business investment, such as corruption, along with other conventional determinants such as taxes, location factors, and agglomeration effects. We do so in an unbalanced panel data setting, where we use fixed effects to control for country specific idiosyncrasies and also year dummies in some specifications. Our data include both developing and developed countries in different regions of the world. The regression results indicate that better infrastructure and lower taxes attract FDI, with weaker evidence suggesting lower corruption also increases FDI. These results are robust and hold after controlling for fixed country effects, common year effects of FDI, and agglomeration effects. The magnitude of the response of FDI to infrastructure changes is similar to that of taxes in elasticity terms. The results add evidence to previous cross-sectional results and emphasize the importance of a range of government policies in addition to taxation in attracting foreign direct investment.
    Keywords: FDI, government expenditures, tax level and corruption
    Date: 2007–03–01
  19. By: Metin M. Cosgel (University of Connecticut); Thomas J. Miceli (University of Connecticut)
    Abstract: Methods of tax collection employed by modern governments seem dull when compared to the rich variety observed in history. Whereas most governments today typically use salaried agents to collect taxes, various other types of contractual relationships have been observed in history, including sharing arrangements which divide the tax revenue between the government and collectors at fixed proportions, negotiated payment schemes based on the tax base, and sale of the revenue to a collector in exchange for a lump-sum payment determined at auction. We propose an economic theory of tax collection that can coherently explain the temporal and spatial variation in contractual forms. We begin by offering a simple classification of tax collection schemes observed in history. We then develop a general economic model of tax collection that specifies the cost and benefits of alternative schemes and identifies the conditions under which a government would choose one contractual form over another in maximizing the net revenue. Finally, we use the conclusions of the model to explain some of the well-known patterns of tax collection observed in history and how choices varied over time and space.
    JEL: D8 H2 J4 L3 M5 N4
    Date: 2007–12
  20. By: Michael B. Devereux; Stephen Bond; Alexander Klemm
    Abstract: We re-examine the extent to which personal taxes on dividends are capitalized into the equity prices of domestic firms, using data from around the time of the 1997 U.K. dividend tax reform, which removed a significant tax credit for an important group of investors: U.K. pension funds. The tax-adjusted CAPM suggests that the impact should depend on an average of dividend tax rates across all investors, and that U.K. pension funds should reduce their holdings of the previously tax-favored asset: U.K. equities. Given that U.K. 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 U.K. pension funds' ownership of U.K. equities, with little impact on their price. We present evidence which is consistent with these hypotheses. We discuss why previous research (Bell and Jenkinson, 2002) reached a different conclusion.
    Keywords: Working Paper , United Kingdom , Tax reforms , Stock prices , Pensions , Investment , Economic models ,
    Date: 2007–08–22
  21. By: Fischer, Justina AV (Dept. of Economics, Stockholm School of Economics); Schneider, Friedrich (Department of Economics, University of Linz)
    Abstract: Recent empirical growth literature suggests that cultural factors play a decisive role in economic development, while empirical evidence for their impact on government activity remains scant. In this paper, we conjecture based on Weber’s Protestant Ethics that ‚Protestant values’ such as self-reliance and austerity should affect both the size and scope of governments. More specifically, we hypothesize that smaller government budgets should be observable in more Protestant jurisdictions. Using a panel of sub-federal expenditure in 26 Swiss cantons from 1980 to 1998 we find supporting evidence, observing that the share of Protestants in the cantonal residential population exerts a spending dampening impact. Our results suggest that cultural factors should not be omitted from future public finance analyses.
    Keywords: Protestantism; Culture; Government Spending; Public Finance
    JEL: A13 H30 H72 Z10
    Date: 2007–12–19

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