nep-pbe New Economics Papers
on Public Economics
Issue of 2008‒01‒12
eleven papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Making Federalism Work in Italy By Alexandra Bibbee
  2. Single versus Multiple Prize Contests to Finance Public Goods: Theory and Experimental Evidence By Marco Faravelli; Luca Stanca
  3. The Property Tax Incidence Debate and the Mix of State and Local Finance of Local Public Expenditures By George R. Zodrow
  4. 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
  5. The Effect of Direct Democratic Institutions on Income Redistribution: Evidence for Switzerland By Feld, Lars P.; Fischer, Justina A.V.; Kirchgaessner, Gebhard
  6. The limits of self-governance when cooperators get punished: Experimental evidence from urban and rural Russia By Simon Gaechter; Benedikt Herrmann
  7. The Impact of Direct Democracy on Public Education: Evidence for Swiss Students in Reading, Mathematics and Natural Science By Fischer, Justina A.V.
  8. Religion, Terrorism and Public Goods: Testing the Club Model By Eli Berman; David D. Laitin
  9. Decentralization as a disincentive for transnational terror? An empirical test. By Dreher, Axel; Fischer, Justina AV
  10. Fiscal forecasting - lessons from the literature and challenges By Teresa Leal; Javier J. Pérez; Mika Tujula; Jean-Pierre Vidal
  11. Tax Enforcement for SMEs: Lessons from the Italian Experience? By Giampaolo Arachi and Alessandro Santoro

  1. By: Alexandra Bibbee
    Abstract: Fiscal federalism can be an important complement to structural reforms and budget consolidation. Empowering sub national governments, while at the same time making them accountable to local citizens in the uses of tax money, could improve the allocation of public resources and promote catch up of the lagging regions. Italy has launched itself in the federalist direction by decentralising spending, regulatory and tax powers in the late 1990s and reinforcing growing lower level responsibilities with a constitutional reform in 2001. The constitution has yet to be fully implemented, though the government has signaled its intention to do so. A stronger focus should now be put on the financing side, i.e. getting a better match between spending responsibilities and taxing powers so as to boost local autonomy and responsibility in line with the goals of federalist reforms. As the lower levels are fully in charge of health and long term care, they will face intense pressures due to population ageing, which is especially rapid in Italy, so that more tax bases should be devolved to them, especially as pension reform has reduced such pressures on central government. Redistributive mechanisms should be redesigned to improve fiscal effort, and Italy must decide in that context to what extent it can really afford to guarantee uniform national service levels – and conversely, how much regional differentiation of services it will tolerate in pursuit of higher efficiency. Framework conditions need to be strengthened, notably accounting standards which need to be upgraded and unified. Fiscal discipline under the Internal Stability Pact should be strengthened via better ex ante co-ordination and tougher sanctions ex post. <P>Faire fonctionner correctement le fédéralisme en Italie <BR>Le fédéralisme budgétaire peut être un précieux complément des réformes structurelles et des mesures d'assainissement budgétaire. Donner plus de pouvoirs aux administrations infranationales tout en faisant en sorte qu'elles rendent des comptes à leurs administrés pour l'utilisation des recettes fiscales pourrait améliorer la répartition des ressources publiques et favoriser un rattrapage dans les régions en retard. L'Italie s'est lancée sur la voie du fédéralisme en décentralisant les dépenses, les pouvoirs réglementaires et les attributions fiscales à la fin des années 90 et en renforçant les responsabilités croissantes des niveaux inférieurs d?administration par la réforme constitutionnelle de 2001. Mais les nouvelles dispositions constitutionnelles ne sont pas encore pleinement appliquées. Le gouvernement a l'intention d'y remédier. Il faudrait maintenant mettre davantage l'accent sur le volet financier, c'est-à-dire faire mieux concorder les obligations de dépenses et les compétences fiscales, de manière à renforcer l'autonomie et la responsabilité des autorités locales conformément aux objectifs des réformes fédéralistes. Les niveaux infranationaux d'administration, qui ont totalement en charge les soins de santé et la dépendance des personnes âgées, devront faire face à de très fortes pressions du fait du vieillissement de la population, particulièrement rapide en Italie ; il faudrait donc leur décentraliser plus de pouvoirs fiscaux, sachant en particulier que la réforme des retraites a réduit les pressions qui s'exercent sur l'administration centrale. Il faudrait revoir les mécanismes de redistribution dans la perspective d'un plus grand effort fiscal et, dans ce contexte, l'Italie devra décider dans quelle mesure elle peut véritablement se permettre de garantir des niveaux nationaux uniformes de prestation des services publics – et, à l'inverse, quelle différenciation régionale des services elle tolérera en vue d'une plus grande efficience. Il faut renforcer les conditions cadres, en particulier les règles comptables, qui doivent être améliorées et normalisées. On pourrait obtenir plus de discipline budgétaire dans le cadre du pacte interne de stabilité avec une meilleure coordination ex ante et de plus lourdes sanctions ex post.
    Keywords: Italy, Italie, health care, fiscal federalism, public spending, fédéralisme fiscal, efficiency, decentralisation, décentralisation, regions, régions, Efficacité de la dépense publique, provinces, local authorities, provinces, autorités locales
    JEL: H71 H72 H75 H77
    Date: 2007–12–20
  2. By: Marco Faravelli; Luca Stanca
    Abstract: This paper investigates single and multiple prize contests as incentive mechanisms for the private provision of public goods, under the assumptions of income heterogeneity and incomplete information about income levels. We compare experimentally a one-prize contest with a three-prize contest in a case where theory predicts that several prizes maximise revenues. We ¯nd that, contrary to the theoretical predictions, total contributions are signi¯cantly higher in the one-prize contest. In both treatments contribu- tions converge towards theoretical predictions over successive rounds, but the e®ects of repetition are di®erent: convergence is fast in the one-prize treatment, while gradual and with some undershooting in the three-prize treatment. Focusing on individual income types, the better performance of the single-prize contest is largely explained by the contributions of high- income individuals: a single larger prize provides a more e®ective incentive for richer individuals than three smaller prize
    Keywords: Auctions; Public Goods; Laboratory Experiments.
    JEL: C91 D44 H41
    Date: 2007–11
  3. By: George R. Zodrow (Baker Institute for Public Policy, Rice University)
    Abstract: Many states in the US have in recent years changed the mix of state and local revenue sources used to finance local public expenditures, especially primary and secondary education, with local property taxes being replaced by various sources of state tax revenue. This article examines the desirability of such a tax substitution, focusing on the implications of the long-standing debate between the “benefit tax” and “capital tax” views of the incidence of the tax. It also includes a discussion of some recent research that elaborates the capital tax view of the property tax.
    Keywords: Property tax incidence, capitalization, capital tax view, new view, benefit tax view, Texas tax reform, margin tax
    JEL: H10 H21 H22 H71
    Date: 2008
  4. By: Yuriy Gorodnichenko; Jorge Martinez-Vazquez; Klara Sabirianova Peter
    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.
    JEL: D73 H21 H24 H26 J3 O1 P2
    Date: 2008–01
  5. By: Feld, Lars P. (Alfred-Weber-Institute, Ruprecht-Karls-University of Heidelberg); Fischer, Justina A.V. (Dept. of Economics, Stockholm School of Economics); Kirchgaessner, Gebhard (SIAW-HSG, University of St. Gallen)
    Abstract: There is an intensive dispute in political economics about the impact of institutions on income redistribution. While the main focus is on comparison between different forms of representative democracy, the influence of direct democracy on redistribution has attracted much less attention. In this paper, employing both a composite index and measures of single institutions, we find that direct democracy is particularly associated with lower welfare spending. Moreover, we estimate a model which explains the determinants of achieved redistribution measured by Gini coefficients using panel data provided by the Swiss Federal Tax Office from 1981 to 1997. While our results indicate that less public funds are used to redistribute income and actual redistribution is lower, inequality is not reduced to a lesser extent in direct than in representative democracies for a given initial income distribution.
    Keywords: Income Redistribution; Direct Democracy; Referendums; Initiatives
    JEL: D70 D78 H11 H75 I30
    Date: 2007–04–30
  6. By: Simon Gaechter (University of Nottingham); Benedikt Herrmann (University of Nottingham)
    Abstract: We report evidence from public goods experiments with and without punishment which we conducted in Russia with 566 urban and rural participants of young and mature age cohorts. Russia is interesting for studying voluntary cooperation because of its long history of collectivism, and a huge urban-rural gap. In contrast to previous experiments we find no cooperation-enhancing effect of punishment. An important reason is that there is substantial punishment of high contributors in all four subject pools. Thus, punishment can also undermine the scope for self-governance in the sense of high levels of voluntary cooperation that are sustained by sanctioning free riders only.
    Keywords: social norms, free riding, misdirected punishment, experiments
    JEL: H41 C91 D23 C72
    Date: 2007–11
  7. By: Fischer, Justina A.V. (Dept. of Economics, Stockholm School of Economics)
    Abstract: Empirical analyses for the US suggest that stronger people’s control over the school budget is deleterious to student performance. Using Swiss data on ninth graders in mathematics, reading and natural science collected jointly with the PISA study 2000, this paper tests this hypothesis for Switzerland, exploiting inter-cantonal variation in political institutions. For both student performance in reading and mathematics, stronger popular rights appear to lower educational achievement through the school budget channel. In particular, the qualification of teachers is identified as most influential determinant of student achievement, which is shown to be linked to educational spending.
    Keywords: Direct democracy; public finance; economics of education; PISA
    JEL: H10 H41 I28
    Date: 2007–12–31
  8. By: Eli Berman; David D. Laitin
    Abstract: Can rational choice modeling explain why Hamas, Taliban, Hezbollah and other radical religious rebels are so lethal? The literature rejects theological explanations. We propose a club framework, which emphasizes the function of voluntary religious organizations as efficient providers of local public goods in the absence of government provision. The sacrifices religious clubs require are economically efficient (Iannaccone (1992)), making them well suited for solving the extreme principal-agent problems faced by terrorist and insurgent organizations. Thus religious clubs can be potent terrorists. That explanation is supported by data on terrorist lethality in the Middle East. The same approach explains why religious clubs often choose suicide attacks. Using three data sources spanning a half century, and comparing suicide attackers to civil war insurgents, we show that suicide attacks are chosen when targets are "hard," i.e., difficult to destroy. Data from Israel/Palestine confirm that prediction. To explain why radical religious clubs specialize in suicide attacks we model the choice of tactics by rebels attacking hard targets, considering the human costs and tactical benefits of suicide attacks. We ask what a suicide attacker would have to believe to be rational. We then embed that attacker and other operatives in a club model. The model has testable implications for tactic choice and damage achieved by clubs and other rebels, which are supported by data on terrorist attacks in the Middle East: Radical religious clubs are more lethal and choose suicide terrorism more often, when they provide benign local public goods. Our results suggest benign tactics to counter terrorism by religious radicals.
    JEL: D2 D31 H41 H56 H68 J0 J13 O17 O24 Z12
    Date: 2008–01
  9. By: Dreher, Axel (Swiss Economic Institute, ETH Zurich); Fischer, Justina AV (Dept. of Economics, Stockholm School of Economics)
    Abstract: Using panel data for a maximum of 109 countries over the years 1976-2000, we empirically analyze the impact of decentralization on the occurrence of transnational terror. Taking account of the potential simultaneity between terror and decentralization, our results show that expenditure decentralization robustly reduces the number of terror events in a country, while political decentralization has no impact.
    Keywords: Terrorism; Decentralization; Democracy
    JEL: D74 H40 H70
    Date: 2007–12–20
  10. By: Teresa Leal (Department of Economics and Statistics, University of Huelva, Dr. Cantero Cuadrado 6, 21071 Huelva, Spain.); Javier J. Pérez (Directorate General Economics, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Mika Tujula (Directorate General Economics, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jean-Pierre Vidal (Directorate General Economics, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: While fiscal forecasting and monitoring has its roots in the accountability of governments for the use of public funds in democracies, the Stability and Growth Pact has significantly increased interest in budgetary forecasts in Europe, where they play a key role in the EU multilateral budgetary surveillance. In view of the increased prominence and sensitivity of budgetary forecasts, which may lead to them being influenced by strategic and political factors, this paper discusses the main issues and challenges in the field of fiscal forecasting from a practitioner’s perspective and places them in the context of the related literature. JEL Classification: H6, E62, C53.
    Keywords: Fiscal policies, government budget, forecasting, monitoring.
    Date: 2007–12
  11. By: Giampaolo Arachi and Alessandro Santoro
    Abstract: The paper aims to provide a detailed description and evaluation of the Italian experience in tax auditing and enforcement for SMEs which we believe may have some lessons for developing countries with similar sized shadow economies and large numbers of micro-enterprises. We focus on an audit strategy known as “Studi di settore”, which roughly translates as “business sector analyses”, which relies on statistical methods to select the taxpayers to be audited. We show how Studi di settore can be used as an audit rule or as a presumptive tax and we compare it with optimal audit rules and with alternative presumptive taxes on the basis of the available evidence for Italy. We discuss whether Studi di settore may be a useful policy tool for establishing presumptive taxation for SMEs in developing countries when resources for tax auditing are scarce. A presumptive regime may naturally evolve in a full-fledged audit selection mechanism following the development of the private and public sectors.
    Keywords: tax evasion, shadow economy, SMEs, audit strategies, presumptive taxation, Italy, developing countries
    Date: 2008–01–07

This nep-pbe issue is ©2008 by Oliver Budzinski. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.