nep-pbe New Economics Papers
on Public Economics
Issue of 2008‒04‒29
thirteen papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Provision of Public Goods in a Federalist Country: Tiebout Competition, Fiscal Equalization, and Incentives for Efficiency in Switzerland By Philippe Widmer; Peter Zweifel
  2. Tax competition among U.S. states: racing to the bottom or riding on a seesaw? By Bob Chirinko; Daniel J. Wilson
  3. The dynamic between municipal revenue sources and the state-local relationship in New England By Richard F. Dye
  4. Social Preferences and Public Economics: Mechanism Design when Social Preferences Depend on Incentives By Samuel Bowles; Sung-Ha Hwang
  5. Avoiding the Value Added Tax: Theory and Cross-Country Evidence By Luiz de Mello
  6. Tax Rates and Tax Evasion: An Empirical Analysis of the Structural Aspects and Long-Run Characteristics in Italy By Chiarini, Bruno; Marzano, Elisabetta; Schneider, Friedrich
  7. Active and Passive Waste in Government Spending: Evidence from a Policy Experiment By Bandiera, Oriana; Prat, Andrea; Valletti, Tommaso
  8. The institutional Design of international double Taxation Avoidance By Rixen, Thomas
  9. Civil Conflict, Federalism and Strategic Delegation of Leadership By Colin Jennings; Hein Roelfsema
  10. Increasing Public Expenditures: Wagner’s Law in OECD Countries By Serena Lamartina; Andrea Zaghini
  11. China’s Institutional Architecture: A New Institutional Economics and Organization Theory Perspective on the Links between Local Governance and Local Enterprises By Krug, B.; Hendrischke, H.
  12. Political economics and normative analysis By Colin Jennings; Iain McLean
  13. Efficient Tax Policy Ranks Education Higher Than Saving By Richter, Wolfram F.

  1. By: Philippe Widmer (Socioeconomic Institute, University of Zurich); Peter Zweifel (Socioeconomic Institute, University of Zurich)
    Abstract: The purpose of this paper is to analyze the efficiency of the 26 Swiss cantons over the period 2000 to 2004 applying Data Envelopment Analysis (DEA). A Total Public Sector Performance (TPSP) indicator for eight local government activities (administration, public safety, education, culture and sport, health, transportation, environment and spatial planning, and public economy) is calculated to measure technical efficiency. Efficiency scores are then related to the fiscal equalization scheme designed to reduce disparities between cantons with the expectation to find a negative relationship. Results show the existing scheme to indeed have a negative influence on the performance of financially advantaged cantons. Surprisingly, however, earmarked transfers from the confederation to the cantons are not found to have a stronger negative influence on cantonal performance, contradicting the rationale for their suppression in a recent reform. Most public services fail to exhibit economies of scale, undermining quests for centralization of public good provision and suggesting the possibility of Tiebout competition.
    Keywords: DEA, efficiency measurement, federalism, fiscal equalization, public finance, Switzerland, Tiebout competition
    JEL: C14 C67 H11 H72 H83
    Date: 2008–04
  2. By: Bob Chirinko; Daniel J. Wilson
    Abstract: This paper provides an empirical analysis of the determination of capital tax policy by U.S. states based on new panel data, a new econometric technique, and a new theoretical model. The analysis is undertaken with a panel data set covering all 48 contiguous states for the period 1969 to 2004 and is guided by the theory of strategic tax competition. The latter suggests that capital tax policy is a function of out-of-state tax policy, in-state and out-of-state economic conditions, and, perhaps most importantly, preferences for government services. Using the Common Correlated Effects Pooled estimator to account for cross-section dependence, and time lags to account for delayed responses, we estimate this reaction function for three state capital tax instruments: the investment tax credit rate, the corporate income tax rate, and the state's capital weight in its multi-state income apportionment formula. We find the slope of the reaction function--i.e., the equilibrium response of in-state to out-of-state tax policy--is negative, contrary to many prior empirical results. We document that a positive slope is obtained when either aggregate time effects or time lags are omitted. We show that the positive slope found in misspecified models is the result of synchronous responses among states to common shocks rather than competitive responses to out-of-state tax policy. While striking given prior findings in the literature, these results are not surprising. The negative sign is fully consistent with qualitative and quantitative implications of the theoretical model developed in this paper. Rather than "racing to the bottom," our findings suggest that states are "riding on a seesaw." ; Formerly titled: Tax Competition and Capital Mobility: Evidence from the U.S. States
    Keywords: Taxation ; State finance
    Date: 2007
  3. By: Richard F. Dye
    Abstract: This working paper was written for the New England Public Policy Center’s third annual conference: “The Dynamic between Municipal Revenue Sources and the State-Local Relationship in New England”. It relies on data from the U.S. Census to examine the dynamic between municipal revenues and the state-local relationship in New England. The analysis shows that—compared with the nation as a whole—municipal governments in New England rely very heavily on the property tax. They also have limited or no access to local-option revenues such as sales taxes, and they rely less on fees and other nontax sources. ; Although some research has shown that the local property tax can help counter fluctuations in state aid, Massachusetts, Rhode Island, and Maine all limit the percent by which local governments may increase their property tax collections from one year to the next. Municipalities in these states are more vulnerable to changes in state aid, and more bound by constraints on other revenue sources. ; New England states and municipal governments will face enormous fiscal pressures as their populations age dramatically and they face higher pension and health care costs. This analysis suggests the need for policymakers to consider new local revenue sources and state aid formulas.
    Keywords: Municipal finance - New England ; Property tax - New England
    Date: 2008
  4. By: Samuel Bowles; Sung-Ha Hwang
    Abstract: Social preferences such as altruism, reciprocity, intrinsic motivation and a desire to uphold ethical norms are essential to good government, often facilitating socially desirable allocations that would be unattainable by incentives that appeal solely to self-interest. But experimental and other evidence indicates that conventional economic incentives and social preferences may be either complements or substitutes, explicit incentives crowding in or crowding out social preferences. We investigate the design of optimal incentives to contribute to a public good under these conditions. We identify cases in which a sophisticated planner cognizant of these non-additive effects would make either more or less use of explicit incentives, by comparison to a naive planner who assumes they are absent
    Keywords: Social preferences, implementation theory, incentive contracts, incomplete contracts
    JEL: D52 D64 H21 H41
    Date: 2008–03
  5. By: Luiz de Mello
    Abstract: This paper develops a differential game of tax avoidance by modelling the interactions between a taxpayer and the tax authority. This framework is particularly useful for explicitly modelling situations of conflict. The solution to the game is a non-co-operative Nash that depends on the resources that need to be used by the tax authority to enforce legislation and the cost to be borne by the taxpayer in tax compliance, provided that the curvature of the utility functions is bounded. Empirical evidence is provided for the value added tax (VAT) using a cross-section of OECD and non-OECD countries. OECD indicators of tax administration efficiency are included in the regressions. The empirical findings show that VAT efficiency, defined as the ratio of collections as a share of consumption to the statutory rate, rises the lower the VAT rate, the lower the share of administrative costs in tax revenue (proxying for the efficiency of tax administration), the more pro-competition the regulatory framework in product markets (measuring non-tax incentives for non-compliance) and the better the country’s governance indicators (regulatory quality, rule of law and government effectiveness). This paper is forthcoming in the Public Finance Review. <P>Évasion de la TVA : Théorie et Comparaisons Internationales <BR>Ce document développe un jeu différentiel des évasions fiscales en modélisant les interactions entre les contribuables et les administrations fiscales. Ce cadre est particulièrement adapté à la modélisation des situations de conflit. La solution du jeu est un équilibre de Nash non-coopératif qui dépend des ressources dont ont besoin les administrations fiscales pour appliquer la législation et les coûts imputés aux contribuables dans le respect des obligations fiscales, à condition que la dérivée première de la fonction d’utilité soit bornée. L’analyse empirique utilise la TVA d’un échantillon de pays de l’OCDE et non-OCDE. Les indicateurs OCDE d’efficacité des administrations fiscales sont intégrés aux régressions. Les résultats montrent que l’efficacité de la TVA (définie comme le ratio entre les revenus de la TVA divisé par la consommation et le taux de la TVA), augmente inversement au taux de la TVA et à la part des coûts administratifs dans les revenus des impôts (un indicateur d’efficacité des administrations fiscales). Par contre, l’efficacité de la TVA augment proportionnellement au biais pro-compétition des réglementations des marchés des produits et aux indicateurs de bonne gouvernance (qualité des réglementations, règle de droit et efficacité du gouvernement). A paraître prochainement dans Public Finance Review.
    JEL: C70 E62 H26
    Date: 2008–04–14
  6. By: Chiarini, Bruno (University of Naples, Parthenope); Marzano, Elisabetta (University of Naples, Parthenope); Schneider, Friedrich (University of Linz)
    Abstract: By using official time series of the Italian evaded VAT base (Ministry of Finance) for the period 1980-2004 we investigate empirically the long-run characteristics of tax evasion and the relationship with the tax burden. We focus on three important issues not analyzed so far. First, using different measures of aggregate economic activity as reference variables in estimating the average tax burden, we investigate the size and dynamics of the over-burden traceable back to tax evasion. Second, exploiting cointegration techniques, we quantify the elasticity between tax evasion and the average tax rate in Italy. We then comment on the complex dynamic interaction between tax burden and tax evasion, to ascertain whether in the Italian experience there is evidence for any “vicious circle” between them.
    Keywords: tax evasion, VAT evasion, effective tax rate, apparent tax rate, VECM
    JEL: H30 H26 O17 C32
    Date: 2008–04
  7. By: Bandiera, Oriana; Prat, Andrea; Valletti, Tommaso
    Abstract: We propose a distinction between active waste and passive waste as determinants of the cost of public services. Active waste entails utility for the public decision maker (as in the case of bribery) whereas passive waste does not (as in the case of inefficiency due to red tape). To assess the empirical relevance of both forms of waste, we analyze purchases of standardized goods by Italian public bodies and exploit a policy experiment associated with a national procurement agency. A revealed preference argument implies that if public bodies with higher costs are more likely to buy from the procurement agency rather than from traditional suppliers, cost differences are more likely to be due to passive waste. We find that: (i) Some public bodies pay systematically more than others for observationally equivalent goods and such price differences are sizeable; (ii) Differences are correlated with governance structure: the central administration pays at least 22% more than semi-autonomous agencies (local government is at an intermediate level); (iii) The variation in prices across public bodies is principally due to variation in passive rather than active waste; (iv) Passive waste accounts for 83% of total estimated waste.
    Keywords: government spending; waste
    JEL: H11 H57
    Date: 2008–04
  8. By: Rixen, Thomas
    Abstract: This article analyzes the institutional design of international double tax avoidance. The basic argument is that double tax avoidance exhibits the strategic structure of a coordination game with a distributive conflict. The distribution of tax revenues depends on the asymmetry of investment flows between treaty partners. Since investment flows are defined dyadically, bilateral bargaining can best accommodate countries’ concern for the distribution of tax revenues and other economic benefits connected to the tax base. Moreover, because there are no serious externality problems with bilateral agreement, this solution is also viable. At the same time, there is a need for a multilateral organization to disseminate information and shared practices in the form of a model convention that provides a focal point for bilateral negotiations. The strategic structure of a coordination game can also explain why the institutions of double tax avoidance do not have to be equipped with third-party enforcement capabilities. Instead, the Mutual Agreement Procedure (MAP) is interpreted as a device to deal with the fact that double tax agreements (DTAs) are incomplete contracts.
    Keywords: Double Taxation; Rational Institutional Design; International Political Economy
    JEL: F20 H25 F53
    Date: 2008
  9. By: Colin Jennings (Department of Economics, University of Strathclyde); Hein Roelfsema (Utrecht School of Economics, Utrecht University)
    Abstract: This article analyses negative externalities that policy makers in one region or group may impose upon the citizens of neighbouring regions or groups. These externalities may be material, but they may also be psychological (in the form of envy). The latter form of externality may arise from the production of "conspicuous" public goods. As a result, decentralized provision of conspicuous public goods may be too high. Potentially, a centralized legislature may internalize negative externalities. However, in a model with strategic delegation we argue that the median voter in each jurisdiction may anticipate a reduction in local public goods supply and delegates to a policymaker who cares more for public goods than she does herself. This last effect mitigates the expected benefits of policy centralization. The authors' theory is then applied to the setting of civil conflict, where they discuss electoral outcomes in Northern Ireland and Yugoslavia before and after significant institutional changes which affected the degree of centralization. These case studies provide support for the authors' theoretical predictions.
    Keywords: conflict; federalism; strategic delegation
    JEL: D72 D74 H77
    Date: 2008–03
  10. By: Serena Lamartina (European Central Bank); Andrea Zaghini (Banca d’Italia & Center for Financial Studies, Frankfurt)
    Abstract: The paper proposes a panel cointegration analysis of the joint development of government expenditures and economic growth in 23 OECD countries. The empirical evidence provides indication of a structural positive correlation between public spending and per-capita GDP which is consistent with the so-called Wagner’s law. A long-run elasticity larger than one suggests a more than proportional increase of government expenditures with respect to economic activity. In addition, according to the spirit of the law, we found that the correlation is usually higher in countries with lower per-capita GDP, suggesting that the catching-up period is characterized by a stronger development of government activities with respect to economies in a more advanced state of development.
    Keywords: Fiscal Policy, Wagner’s Law, Panel Cointegration
    JEL: E62 H50 C23
    Date: 2008–04
  11. By: Krug, B.; Hendrischke, H. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: We start our exploration of China’s institutional change by asking what the China experience can tell us about institutional economics and organization theory. We point to under-researched areas such as the formation of firms and the interplay between firms and local politics. Our findings support the dynamic capability approach which concentrates on activities rather than on pre-defined groups and models institution building as a co-operative game between the local business community and local government agencies. We find that the analysis of firms has to set in before they are formed by entrepreneurs and networks and we identify political management as a core competence of these two groups. While this contradicts the conventional view of clientelism or principle agent relations as institutional building blocks, we don’t propose competing models. Instead, we suggest focusing on a dynamic process in which the role of players can change. Faced with the spontaneous emergence of institutions, our concept of institutional architecture captures the fact that the two models can co-exist side by side and that, once the dichotomy between formal and informal institutions is given up, there can be a transition from local patron-client relations to local business-state coordination.
    Keywords: institutional change;entrepreneurship;networks;dynamic capabilities;diversity and convergence of institutions
    Date: 2008–04–17
  12. By: Colin Jennings; Iain McLean (Department of Economics, University of Strathclyde; Nuffield College, University of Oxford)
    Abstract: The approaches and opinions of economists often dominate public policy discussion. Economists have gained this privileged position partly (or perhaps mainly) because of the obvious relevance of their subject matter, but also because of the unified methodology (neo-classical economics) that the vast majority of modern economists bring to their analysis of policy problems and proposed solutions. The idea of Pareto efficiency and its potential trade-off with equity is a central idea that is understood by all economists and this common language provides the economics profession with a powerful voice in public affairs. The purpose of this paper is to review and reflect upon the way in which economists find themselves analysing and providing suggestions for social improvements and how this role has changed over roughly the last 60 years. We focus on the fundamental split in the public economics tradition between those that adhere to public finance and those that adhere to public choice. A pure public finance perspective views failures in society as failures of the market. The solutions are technical, as might be enacted by a benevolent dictator. The pure public choice view accepts (sometimes grudgingly) that markets may fail, but so, it insists, does politics. This signals institutional reforms to constrain the potential for political failure. Certain policy recommendations may be viewed as compatible with both traditions, but other policy proposals will be the opposite of that proposed within the other tradition. In recent years a political economics synthesis emerged. This accepts that institutions are very important and governments require constraints, but that some degree of benevolence on the part of policy makers should not be assumed non-existent. The implications for public policy from this approach are, however, much less clear and perhaps more piecemeal. We also discuss analyses of systematic failure, not so much on the part of markets or politicians, but by voters. Most clearly this could lead to populism and relaxing the idea that voters necessarily choose their interests. The implications for public policy are addressed. Throughout the paper we will relate the discussion to the experience of UK government policy-making.
    Keywords: public finance; public choice; political economics; normative analysis
    JEL: D6 D7
    Date: 2008–03
  13. By: Richter, Wolfram F. (University of Dortmund)
    Abstract: Assuming a two-period model with endogenous choices of labour, education, and saving, it is shown to be second-best efficient not to distort the choice of education. In general this implies distorting the saving decision. Hence a strict order of policy priority is derived. Efficient tax policy ranks education higher than saving. The result assumes an isoelastic earnings function and holds else for arbitrary utility functions. Isoelasticity of earnings is justified with reference to the empirically well-founded Power Law of Learning.
    Keywords: endogenous choice of education, labour and saving, efficient taxation of human and nonhuman capital investment, power law of learning
    JEL: H21 I28 J24
    Date: 2008–04

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