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on Public Economics |
| By: | Clément Carbonnier (THEMA - Université de Cergy-Pontoise, 33 boulevard du port, F 95011 Cergy-Pontoise cedex, France) |
| Abstract: | This article provides theoretical and empirical evidence that local fiscal competition generates a bias toward low business tax rates. Furthermore, it is shown that this bias is stronger for smaller jurisdictions. First, a theoretical model is settled with private and public capital and a fixed factor. The fixed factor allows to consider differences between the jurisdictions. The results show that there exists a bias toward low tax rates due to tax competition. This bias generates an underprovision of public capital, and therefore production is smaller with tax competition than with cooperation. Moreover, the bias toward low tax rates is stronger for jurisdictions with less fixed factor. That means that tax competition generates a larger production decrease for smaller jurisdictions. The empirical part aims at estimating the bias toward low tax rates and its dependency with respect to the fixed factor. Panel regressions with temporal and individual fixed effects of the tax rates are implemented with French local data, using the creation of intercity communities. The results indicate that the bias toward low local tax rates is strong: up to 23% decrease for the smaller cities. It is also significantly decreasing with respect to the city size: there is no tax rate decrease due to tax competition for the biggest cities. |
| Keywords: | Optimal taxation; Business taxes ; Tax competition ; Public capital; Firm location. |
| JEL: | H21 H25 H73 R12 R30 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2008-17&r=pbe |
| By: | Bert Saveyn; Stef Proost |
| Abstract: | The paper studies a regional environmental tax reform in a federal state. A region unilaterally improves the environmental quality by increasing its energy taxes. The regional government recycles the excess tax revenues by lowering either pre-existing distorting labor or capital taxes. This regional tax reform causes a vertical tax externality in the federal budget. We show how the nature of this externality depends on the environmental goal, the tax-recycling scenario, the initial local and federal tax shares, and the relative importance of the reforming region in the federal state. Simulations illustrate the effects for Belgium and US. |
| Keywords: | Tax Reform; Vertical Tax Externality; Federalism |
| JEL: | H23 H77 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0514&r=pbe |
| By: | Mertens, Karel; Ravn, Morten O. |
| Abstract: | We provide empirical evidence on the effects of tax liability changes in the United States. We make a distinction between "surprise" and "anticipated" tax shocks. Surprise tax cuts give rise to a large boom in the economy. Anticipated tax liability tax cuts are instead associated with a contraction in output, investment and hours worked prior to their implementation. After their implementation, anticipated tax liability cuts lead to an economic expansion. We build a DSGE model with changes in tax rates that may be anticipated or not, estimate key parameters using a simulation estimator and show that it can account for the main features of the data. We argue that tax shocks are empirically important for U.S. business cycles and that the Reagan tax cut, which was largely anticipated, was a main factor behind the early 1980’s recession. |
| Keywords: | anticipation effects; fiscal policy; structural estimation; tax liabilities |
| JEL: | E20 E32 E62 H30 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6673&r=pbe |
| By: | Konrad, Kai A; Kovenock, Dan |
| Abstract: | Countries compete for new FDI investment, whereas stocks of FDI generate agglomeration benefits and are potentially subject to extortionary taxation. We study the interaction between these aspects in a simple vintage capital framework with discrete time and an infinite horizon, focussing on Markov perfect equilibrium. We show that the equilibrium taxation destabilizes agglomeration advantages. The agglomeration advantage is valuable, but is exploited in the short run. The tax revenue in the equilibrium is substantial, and higher on "old" FDI than on "new" FDI, even though countries are not allowed to use discriminatory taxation. If countries can provide fiscal incentives for attracting new firms, this stabilizes existing agglomeration advantages, but may erode the fiscal revenue in the equilibrium. |
| Keywords: | Agglomeration; Bidding for firms; Dynamic tax competition; Foreign direct investment; Vintage capital |
| JEL: | F21 H71 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6740&r=pbe |
| By: | Mark Schelker; Reiner Eichenberger |
| Abstract: | In the economic literature various political institutions designed to control the government have been analyzed. However, an important institution has been neglected so far: independent auditing institutions with an extended mandate to analyze the budget draft and individual policy proposals. We argue that auditors with an extended mandate improve transparency and provide essential information on the impact of policy proposals on common pool resources. This leads to less wasteful spending and a more efficient allocation of public resources. We empirically analyze the policy impact of local auditors with an extended audit mandate in Switzerland. Auditors, who can evaluate and criticize policy proposals ex ante to policy decisions, significantly reduce the general tax burden and public expenditures. We find similar results with different datasets. These results are robust to various changes in the econometric specification. |
| Keywords: | auditor; audit court; special interests; political economics; public finance |
| JEL: | D70 H10 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cra:wpaper:2008-06&r=pbe |
| By: | Frank M. Fossen |
| Abstract: | When possible income tax reforms are debated, the suspected impact on entrepreneurship is often used as an argument in favour or against a certain policy. Quantitative ex-ante evaluations of the effect of certain tax reform options on entrepreneurship based on microeconometric research have not been provided by the literature, however. This paper estimates the ex-ante effects of the German tax reform 2000 and of two hypothetical flat tax scenarios on entries into and exits out of self-employment in Germany. For the estimation I apply a microsimulation model which is based on the tax-benefit model STSM and on structural microeconometric models of transitions into and out of self-employment. These structural models include an estimated parameter of risk aversion. The simulation results indicate that flatter tax systems do not encourage, but rather discourage people from choosing self-employment. This is explained by the reduction of entrepreneurs' income risk through progressive taxation. |
| Keywords: | Entrepreneurship, income taxation, risk, tax reform 2000, flat tax |
| JEL: | H24 J23 L26 D81 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp773&r=pbe |
| By: | Guriev, Sergei; Yakovlev, Evgeny; Zhuravskaya, Ekaterina |
| Abstract: | The optimal degree of decentralization depends on the importance of inter-state externalities of local policies. We show that inter-state externalities are determined by spatial distribution of interest groups within the country. Interest groups who have multi-state scope internalize inter-state externalities to a larger extent than the lobbyists with interests within a single state. We use variation in the geographic boundaries of politically-powerful industrial interests to estimate the effect of inter-state externalities on firm performance. Using firm-level panel data from a peripheralized federation, Russia in 1996-2003, we show that, controlling for firm fixed effects, the performance of firms substantially improves with an increase in the number of neighbouring regions under influence of multi-regional business groups compared to the number influenced by local business groups. Our findings have implications for the literatures on federalism and on international trade as trade restrictions are a common source of inter-state externalities. |
| Keywords: | Federalism; Inter-jurisdictional externalities; Inter-state trade barriers; Interest groups; Multinational firms |
| JEL: | D78 F15 F23 H77 P26 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6671&r=pbe |
| By: | Mark Schelker |
| Abstract: | Public auditors should reduce agency problems and improve transparency. We address the question of whether auditors should be elected by the citizens or appointed by either the legislature or the executive, and explore the influence of conducting performance audits. We construct a unique dataset at the US State level capturing differences in the institutional design of state auditing institutions. We estimate the influence of auditor characteristics on different outcome variables reflecting government performance and implement an alternative identification strategy relying on citizens’ electoral decisions. We examine whether citizens use divided government – a costly mechanism to control the government – as a substitute, when other effective, but less costly mechanisms are not available. Even if the empirical results are sometimes difficult to interpret, we generally find that (1) performance audits tend to be beneficial and (2) elected auditors with a strong mandate to conduct performance audits seem to outperform other institutional arrangements. |
| Keywords: | Public auditors; audit courts; political institutions; political economics |
| JEL: | D70 H10 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cra:wpaper:2008-04&r=pbe |
| By: | Michael Jones; Michael McKee |
| Abstract: | Models for voluntary provision of public goods predict free riding is rational unless the model includes a motive for the act of giving referred to as a “warm glow” in the literature. The source for this warm glow is likely to include the gratitude of the recipient. The experimental setting employed here controls for positive or negative reciprocity from the recipient of a gift to isolate the individual satisfaction from the act of giving as the remaining motivation for giving. The experimental treatment is whether the recipient is informed that his/her payoff includes a “gift” from another participant (donor or giver). The central finding is that donations increase when the donor/giver knows that the recipient knows that a gift has been provided. Key Words: |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:apl:wpaper:08-06&r=pbe |