nep-pbe New Economics Papers
on Public Economics
Issue of 2008‒05‒10
fifteen papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Political Economy of Multi - Level Tax Assignments in Latin American Countries:Earmarked Revenue Versus Tax Autonomy By Giorgio Brosio; Ehtisham Ahmad
  2. Interaction between vertical and horizontal tax competition: evidence and some theory. By Rizzo, Leonzio
  3. Corporate Income Tax Competition in the Caribbean By Koffie Nassar
  4. Education policy and tax competition with imperfect student and labor mobility By Tim Krieger; Thomas Lange
  5. Competition for FDI with vintage investment and agglomeration advantages By Kai A. Konrad; Dan Kovenock
  6. Spend more, get more? An iniquiry into English local government performance By Revelli Federico
  7. The Incentive Role of Creating "Cities" in China By Li, Lixing
  8. Local Service Provision in Selected OECD Countries: Do Decentralized Operations Work Better? By Giorgio Brosio; Ehtisham Ahmad; Vito Tanzi
  9. Tax Policy in Developing Countries: Looking Back and Forward By Roy W. Bahl; Richard M. Bird
  10. Searching New Ways of Financing the EU Budget: on the Proposal of a European Tax on Foreign Exchange Transactions By Sándor Richter
  11. Which communities should be afraid of mobility? The effects of agglomeration economies on the sensitivity of firm location to local taxes By Jordi Jofre-Monseny; Albert Solé-Ollé
  12. Corruption and regulatory burden By Dzhumashev, Ratbek
  13. Japan's Corporate Income Tax - Overview and Challenges By Thomas Dalsgaard
  14. Stealing from Thieves: Firm Governance and Performance when States are Predatory By Art Durnev; Larry Fauver
  15. The Helping Hand, the Lazy Hand, or the Grabbing Hand? Central vs. Local Government Shareholders in Publicly Listed Firms in China By Yan-Leung Cheung; P. Raghavendra Rau; Aris Stouraitis

  1. By: Giorgio Brosio; Ehtisham Ahmad
    Abstract: A weakness of decentralization and overall tax reforms in Latin America is the lack of attention to adequate taxation at the subnational government. A reliance on shared taxes with extensive earmarking leads to weak subnational accountability and soft budget constraints. The paper explores the options for expanding subnational taxation in Latin America. A range of subnational tax instruments might be considered, but interactions between new tax assignments and the system of transfers is important from a political economy perspective.
    Keywords: Intergovernmental fiscal relations , Latin America , Tax reforms ,
    Date: 2008–03–25
  2. By: Rizzo, Leonzio
    Abstract: The aim of this paper is to determine to what extent and how federal taxes affect local tax decisions. Testing the impact of an increase in the federal tax on horizontal tax competition with Canada-US data for 1984--1994, we find evidence that an increase in federal tax affects horizontal tax competition. The novelty of our approach is that it indirectly tests the effect of an increase in federal tax on provincial tax, by testing whether provincial reaction to an increase in neighboring tax changes according to the federal tax level. The test allows for control of yearly macroeconomic shocks by inserting dummies for each year. These are not used in the empirical literature on vertical tax competition because they would cause perfect collinearity with the federal tax.
    Keywords: horizontal externality; vertical externality; tax competition; tax rate
    JEL: H77 H7 H72 H71 H73
    Date: 2007
  3. By: Koffie Nassar
    Abstract: Motivated by the concern that corporate income tax (CIT) competition may have eroded the tax base, this paper calculates average effective tax rates to measure the impact of CIT competition, including the widespread use of tax holidays, on the tax base for 15 countries in the Caribbean. The results not only confirm erosion of the tax base, but also show that CIT holidays must be removed for recent tax policy initiatives (such as accelerated depreciation, loss carry forward provisions, and tax harmonization) to be effective. These findings suggest that the authorities should either avoid granting CIT holidays or rely more on other taxes (including consumption taxes such as the value-added tax) in order to broaden the tax base.
    Keywords: Income taxes , Caribbean , Tax incentives , Tax rates , Investment ,
    Date: 2008–03–28
  4. By: Tim Krieger (University of Paderborn); Thomas Lange (Ifo institute for economic research & University of Konstanz)
    Abstract: In this paper we analyze the effect of increasing labor (i.e. graduates’/ academics’) and student mobility on net tax revenues when revenuemaximizing governments compete for human capital by means of income tax rates and amenities offered to students (positive expenditure) or rather tuition fees (negative expenditure). We demonstrate that these instruments are strategic complements and that increasing labor mobility due to ongoing globalization not necessarily implies intensified tax competition and an erosion of revenues. On the contrary, the equilibrium tax rate even increases in mobility. Amenities offered to students (or rather tuition fees) may either increase or decrease, and, overall, net revenues increase. An increase in student mobility, however, erodes revenues due to intensified tax and amenity competition.
    Keywords: labor mobility, student mobility, higher education, tax competition, public expenditure competition
    JEL: I22 J61 F22 H2 H87
    Date: 2008–01
  5. By: Kai A. Konrad; Dan Kovenock
    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: Dynamic tax competition, vintage capital, agglomeration, foreign direct investment, bidding for firms
    JEL: F21 H71
    Date: 2008–04
  6. By: Revelli Federico (University of Turin)
    Abstract: Based on a unique measure of performance of English local governments in the provision of public services (Comprehensive Performance Assessment, CPA), this paper develops a simple analytical framework that fully encompasses the institutional features of the British system of local government finance in order to model the process of performance determination, and uses panel data (2002-2007) to identify the determinants of local government performance. Due to the nature of CPA ratings - measured on a five category (poor to excellent) scale - the empirical work relies on an ordered response approach allowing for cross-sectional heterogeneity. Maximum likelihood estimation of a random effects ordered probit model provides no evidence in support of the “spend more, get more” hypothesis, but rather suggests that spending in excess of centrally set standards has a detrimental effect on local public service performance.
    Date: 2008–04
  7. By: Li, Lixing
    Abstract: This paper examines a distinctive mechanism of providing incentives to local governments – upgrading counties to "cities". In China, awarding city status to existing counties is the dominant way of creating new urban administrative units, during which the local government gets many benefits. Using a large panel data set covering all counties in China during 1993-2004, I investigate the determinants of upgrading. I find that the official minimum requirements for upgrading are not enforced in practice. Instead, economic growth rate plays a key role in obtaining city status. An empirical test is then conducted to distinguish between a principal-agent incentive mechanism and political bargaining. The findings are consistent with the hypothesis that the central government uses upgrading to reward local officials for high growth, as well as aligning local interests with those of the center. This paper highlights the importance of both fiscal and political incentives facing the local government. The comparison between incentive mechanism and bargaining sheds light on an important question about China’s politics of governance: where does power lie in China?
    Keywords: economic growth; incentive mechanism; bargaining; political centralization; fiscal decentralization; county-to-city upgrading; central-local relationship
    JEL: H77 H11 O40 R11 P26
    Date: 2008–04
  8. By: Giorgio Brosio; Ehtisham Ahmad; Vito Tanzi
    Abstract: There is a widespread presumption that decentralization improves public service provision. This has led to policy prescriptions that are assiduously adhered to by countries and international. This paper reviews the recent evidence from OECD countries-which is seen to be inconclusive. This suggests the need for a careful design of programs that take into account the political economy constraints and incentives, as well as more systematic and thorough evaluations of outcomes.
    Date: 2008–03–21
  9. By: Roy W. Bahl (Georgia State University); Richard M. Bird (Rotman School of Management)
    Abstract: We review the changing nature of tax policy in developing countries over the last 30 years and consider what factors determining the level and structure of tax revenues in such countries may have changed recently and how such changes may affect future developments.
    Date: 2008–05
  10. By: Sándor Richter (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: The periodically returning debates and the disappointing bargaining on the financial perspectives for 2007-2013 have led to the proposal of a comprehensive review of the EU budget in 2008/2009. This provides an opportunity for initiating fundamental reforms of the revenue side of the EU budget. One course of reform relies on the principle that the 'own resources' should be collected through the introduction of a European tax. Several options for a European tax were discussed: income taxes, taxes on real economy transactions and finally a tax on financial transactions (tax on stock exchange transactions in shares and bonds, tax on foreign exchange transactions and a tax on 'all' financial transactions), discussed in more detail in the paper. The first proposal, a tax on traditional stock exchange transactions in stocks and bonds, has the disadvantage that the potentially available resources would ensure only a rather small proportion of the revenues of the EU budget. Moreover, the UK and to some extent also Spain would be contributing to the community resources far above the proportionate level reflecting their relative economic strength in the EU. The second proposal, the tax on foreign exchange transactions (the 'Tobin tax'), involves transactions in traditional foreign exchange markets (without financial derivatives). In the absence of experience, predictions about the effect of and revenues from a taxation of foreign exchange transactions are highly arbitrary. Even the most optimistic estimate reckons with revenues covering only about half of those required for financing the EU budget. The criterion of fair contribution across member states is not fulfilled. It turns out that the UK would deliver up to two thirds of the revenues from an EU-wide foreign exchange tax. Other big member states such as Germany, France and Italy would contribute to the common budget with 5%, 6% and less than 2% of the total, respectively. The third version of a financial transactions tax would be a charge on 'all' transactions, i.e. including transactions in financial derivatives. The potential tax base is enormous here by all standards. However, the problem of a fair sharing of burdens across member states would in this case be at least as severe as in the case of the tax on foreign exchange transactions. A financial transactions tax, in any of the three versions discussed in the paper, is thought to be introduced in the European Union only and not world-wide. In all cases the problem of relocation (from the EU generally, and from the leading market place, London, in particular) would emerge. The prospect of losing the benefits derived from London as one of the most eminent financial markets in the world would make any British government a strong opponent to an EU-wide financial transactions tax.
    Keywords: EU, cross member state redistribution, taxation, EU taxes, own resources, expenditures, EU policies, faire sharing of burdens, foreign exchange markets, derivatives, globalization
    JEL: F15 F21 F23 F31 F32 F36 F59 H23 H26 H61 H62 H77 H87
    Date: 2008–01
  11. By: Jordi Jofre-Monseny (Universitat de Barcelona & IEB); Albert Solé-Ollé (Universitat de Barcelona, IEB & CESifo)
    Abstract: This paper examines the effects of agglomeration economies (AE) on the sensitivity of firm location to tax differentials. An initial reading of the story suggests that, with AE, when a firm moves into a community attracted by a tax reduction, other firms may decide to move in as well. This suggests that AE increase the sensitivity of firm location to local taxes. However, a second version of the story reads that, if economic activities are highly concentrated in space, AE might offset any tax differential, hence suggesting a reduction in this sensitivity. This paper provides a theoretical model of intraregional firm location with Marshallian AE that is able to generate both hypotheses: AE increase (decrease) the effect of taxes when locations are (are not) of a similar size. We then use Spanish municipal data for the period 1995-2002 to test these hypotheses, analyzing the combined effect of local business taxes and Marshallian AE on the intraregional location of employment. In line with the theory, a municipality with stronger AE experiences lower (higher) tax effects if it is sufficiently dissimilar (similar) to its neighbors in terms of size.
    Keywords: Local taxes, agglomeration economies, local employment growth, instrumental variables.
    JEL: R3 H32
    Date: 2008
  12. By: Dzhumashev, Ratbek
    Abstract: It is known that government has discretionary power in providing public goods and regulating the economy. Corrupt bureaucracy with discretionary power creates and extracts rents by manipulating with the public good supply and regulations: i) by attaching excessive red tape to the public good they are providing; ii) or by making the regulations di±cult for the private agents to comply with. The former type of corruption results in less public input being provided at higher cost to the private agents. The latter increases non-compliance, which then breeds bribery. Consequently, the overall public sector burden is higher in the environment with corrupt bureaucracy. We show this outcome using a simple theoretical model, and then confront it with empirical evidence.
    Keywords: corruption; regulatory burden
    JEL: D73 L51 H41 D02 H23
    Date: 2008–05–05
  13. By: Thomas Dalsgaard
    Abstract: The structure of Japan's corporate income tax system is broadly in line with those of other G7 countries. However, relatively high marginal and average effective tax rates prompt the question of whether adjustments should be considered to meet the objectives of promoting growth, investment and competitiveness in a revenue neutral manner. This paper discusses key issues and trade-off's related to changes in the corporate income tax system. It does not provide recommendations, but raises issues that could hopefully serve as useful inputs to the ongoing discussion and tax debate in Japan.
    Keywords: Corporate taxes , Japan , Tax rates , Income taxes ,
    Date: 2008–03–24
  14. By: Art Durnev; Larry Fauver
    Abstract: We investigate how predatory government policies (expropriation, lack of property rights protection, corruption, crime) interact with managerial incentives in shaping firm governance structure. Our model shows that owners have lower incentives to encourage valuemaximization by managers if the government is likely to expropriate firm profits. This result emerges because it is more difficult for governments to seize firm profits that managers have already stolen and hidden from the owners. The model also demonstrates that the positive valuation effect of stronger firm governance is lower in states with more predatory governments. We test these predictions using several distinct data sets on firm governance and disclosure practices, and the business and financing obstacles firms face due to government intervention. The empirical results are consistent with the model’s predictions. Specifically, we find that firms located in countries with more predatory governments practice weaker governance and disclose less information. Further, the previously documented positive relation between firm governance and firm performance is weaker or disappears altogether when governments pursue predatory policies. Finally, in countries with more predatory governments, firm-specific characteristics are less important in explaining variation in governance and firms have more similar governance structures.
    Date: 2007–09
  15. By: Yan-Leung Cheung; P. Raghavendra Rau; Aris Stouraitis
    Abstract: We analyze related party transactions between Chinese publicly listed firms and their stateowned enterprise (SOEs) shareholders to examine whether companies benefit from the presence of government shareholders and politically connected directors appointed by the government. We find that related party transactions between firms and their government shareholders seem to result in expropriation of the minority shareholders in firms controlled by local government SOEs or with a large proportion of local government affiliated directors on their board, and in provinces where local government bureaucrats are less likely to be prosecuted for misappropriation of state funds. On the other hand, firms controlled by the central government (or with a large proportion of central government affiliated directors) are benefited in their related party transactions with their central government SOEs.
    Keywords: Law and economics; Government ownership; China; State-Owned Enterprises (SOE); Related party transactions; Political connections
    JEL: G15 G34 K33
    Date: 2008–02

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