nep-pbe New Economics Papers
on Public Economics
Issue of 2008‒06‒07
sixteen papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Effects of Flat Tax Reforms in Western Europe on Equity and Efficiency By Paulus A;
  2. Budgetary Separation of Powers in the American States and the Tax Level: A Regression Discontinuity Analysis By Lucas Ferrero; Leandro M. de Magalhaes
  3. The Impact of Personal and Corporate Taxation on Capital Structure Choices By Overesch, Michael; Voeller, Dennis
  4. Wage effects of R&D tax incentives:Evidence from the Netherlands By Lokshin, Boris; Mohnen, Pierre
  5. Strategic vs Non-Strategic Motivations of Sanctioning By Vyrastekova, J.; Funaki, Y.; Takeuchi, A.
  6. Income taxes and the probability to become self-employed: The case of Sweden By Hansson, Åsa
  7. Tax Reform, Delocation and Heterogeneous Firms: Base Widening and Rate Lowering Reforms By Baldwin, Richard; Okubo, Toshihiro
  8. Tax Evasion and Financial Repression: A Reconsideration Using Endogenous Growth Models By Rangan Gupta; Emmanuel Ziramba
  9. Tax Cuts in Open Economies By Alejandro Cuñat; Szabolcs Deak; Marco Maffezzoli
  10. Cigarette Taxes and the Transition from Youth to Adult Smoking: Smoking Initiation, Cessation, and Participation By Philip DeCicca; Donald S. Kenkel; Alan D. Mathios
  11. Rules for the Global Environment By Horst Siebert
  12. Publicly provided private goods: education and selective vouchers By Piolatto, Amedeo
  13. Public Sentiment and Tobacco Control Policy By Perry Singleton
  14. Pareto Improving Taxes By John Geanakoplos; H. M. Polemarchakis
  15. Open International Markets without Exclusion: Encompassing Domestic Institutions, Excludable Goods, and International Public Goods By William Phelan
  16. The Global Effects of U.S. Fiscal Policy By Kimberly Flood

  1. By: Paulus A (Institute for Social & Economic Research);
    Abstract: The flat income tax has become increasingly popular recently, yet its implementation is limited to Eastern Europe. We analyse the distributional and efficiency effects of flat tax scenarios for Western European countries. Our simulations show that flat tax rates required to attain revenue neutrality with existing basic allowances improve labour supply incentives. However, they result in higher inequality and polarisation. Flat rates necessary to keep the inequality levels unchanged allow for some scope for flat taxes to increase both equity and efficiency. Our analysis suggests that Mediterranean countries are more likely to benefit from flat taxes.
    Keywords: Flat tax reform, income distribution, work incentives, microsimulation
    JEL: C81 D31 H24
    Date: 2008–05
  2. By: Lucas Ferrero; Leandro M. de Magalhaes
    Abstract: A political regime has budgetary separation of powers if the power with the prerogative to raise taxes is not the full residual claimant of a tax increase. In the American states two conditions are needed: the governor must have the line item veto, and the political interests of the legislative majority and the governor must not be perfectly aligned. Political alignment between the executive and the legislative depends on the numbers of seats the governor's party controls in the state legislature; it changes discontinuously as we move from a unifed to a divided government. We use regression discontinuity design to establish a causal relation between a divided government and lower tax rates in states with line item veto. In states with block veto such relation is not present. We estimate the jump in the tax level at the discontinuity semiparametrically.
    Keywords: Separation of powers, line item veto, tax level, regression discontinuity, semiparametric.
    JEL: H00 H11 H20 H30 H71
  3. By: Overesch, Michael; Voeller, Dennis
    Abstract: This paper empirically analyses whether both personal and corporate taxation have an impact on companies' capital structure decisions. We investigate the effect of the difference in taxation of debt and equity financing on capital structures. Our empirical results, based on a comprehensive panel of European firm-level data, suggest that a higher tax benefit of debt has the expected significant positive impact on a company's financial leverage. Particularly, we find evidence that the capital structures of smaller companies respond more heavily to changes in the tax benefit of debt. Additional analysis confirms that not only corporate taxes are relevant for corporate financial planning, but variation in capital income tax rates at the shareholder level implicates significant capital structure adjustments as well. Moreover, we find substitutive relationships between non-debt tax shields and the effect of the corporate tax rate on capital structures.
    Keywords: Capital Structure, Corporate Income Tax, Personal Income Tax, Firm-Level Data
    JEL: G30 G32 H24 H25
    Date: 2008
  4. By: Lokshin, Boris (UNU-MERIT); Mohnen, Pierre (UNU-MERIT)
    Abstract: This paper examines the impact of the Dutch R&D tax incentives program, known as WBSO, on the wages of R&D workers. In our model these wages are partly determined by the governments WBSO tax disbursements. We construct detailed firm- and time specific R&D tax credit rates as a function of the R&D tax incentives scheme to capture the wage effects of the government R&D support. An instrumentalvariables econometric model is estimated using an unbalanced firm-level panel data covering the period 1996-2004. After controlling for firm and industry effects and business cycle fluctuations, R&D tax incentives are found to increase R&D wages. The R&D wage effect of these incentives is smaller than their effect on real R&D investment, but it is still sizeable. The elasticity of the R&D wage with respect to the fraction of the wage supported by the WBSO scheme is estimated at 0.1.
    Keywords: price effect of tax incentives, tax credits, panel data model, R&D workers, wages
    JEL: O32 O38 H25 J30 C23
    Date: 2008
  5. By: Vyrastekova, J.; Funaki, Y.; Takeuchi, A. (Tilburg University, Center for Economic Research)
    Abstract: We isolate strategic and non-strategic motivations of sanctioning in a repeated public goods game. In two experimental treatments, subjects play the public goods game with the possibility to sanction others. In the STANDARD sanctions treatment, each subject learns about the sanctions received in the same round as they were assigned, but in the SECRET sanctions treatment, sanctions are announced only after the experiment is finished, removing in this way all strategic reasons to punish. We find that sanctioning is similar in both treatments, giving support for nonstrategic explanations of sanctions (altruistic punishment). Interestingly, contributions to the public good in both treatments with sanctioning are higher than when the public goods game is played without any sanctioning, irrespective of announcing the sanctions to their receivers during the play of the game, or only after the game is finished. The mere knowledge that sanctions might be assigned increases cooperation: subjects correctly expect that nonstrategic sanctioning takes place against freeriders.
    Keywords: altruistic punishment;nonstrategic sanctions;strategic sanctions;public goods;economic experiment.
    JEL: C72 C92 D74
    Date: 2008
  6. By: Hansson, Åsa (Department of Economics , Lund University and Ratio, Stockholm)
    Abstract: It is widely recognized that entrepreneurial activity plays an important role in promoting new product innovation, discovering new markets, and replacing inefficient incumbents in a process called “creative destruction”, all of which enhance economic growth. Given the importance of entrepreneurship and small business enterprises it is not surprising that policy makers worldwide (and especially in Europe) try to stimulate entrepreneurial activity. One public policy, frequently discussed, is how to design tax policies that stimulate start-ups and entrepreneurship. Existing knowledge about taxes’ effect on entrepreneurial activity and start-ups is relatively limited, however. Existing empirical studies are primarily based on US data and have until recently used aggregated tax measures (e.g., average national tax rates) or hypothetical marginal tax rates and time-series or cross-section data. This study, however, uses a particular rich longitudinal micro-level dataset based on Swedish tax-return information, which makes it possible to track a cohort of individuals over time periods during which tax rate changes took place, and thereby isolate whether real-life individual decisions about self-employment are affected by changes in the tax rates they actually face. In addition, as the tax structure in Sweden is neutral as opposed to the US that encourages risk taking and tax-driven self-employment, studying the effect of income taxes on the probability to become self-employed based on Swedish data provides information about how taxes on self-employment affect self-employment. Contrary to earlier studies based on US data, I find both average and marginal tax rates to negatively impact the probability to become self-employed.
    Keywords: Self-employment; entrepreneurship; small business; taxation; wealth
    JEL: H24 H26 J24
    Date: 2008–06–04
  7. By: Baldwin, Richard; Okubo, Toshihiro
    Abstract: We model international tax competition allowing for agglomeration forces and heterogeneous firms. This provides a new perspective since a tax schedules have different effects on the international relocation decision of small and large firms (large firms are endogenously more sensitive to tax competition) and these decisions affect industry productivity in addition to the usual effects. The model allows us to study rate-lowering base-widening reforms. We show it is generally possible to design such a reforms that raises revenue without losing firms.
    Keywords: agglomeration; heterogeneous firms; tax reform
    JEL: H32 P16
    Date: 2008–05
  8. By: Rangan Gupta (Department of Economics, University of Pretoria); Emmanuel Ziramba (Department of Economics, University of South Africa)
    Abstract: Using two dynamic monetary general equilibrium models characterized by endogenous growth, financial repression and endogenously determined tax evasion, we analyze whether financial repression can be explained by tax evasion. When calibrated to four Souther European economies, we show that higher degrees of tax evasion within a country, resulting from a higher level of corruption and a lower penalty rate, yields higher degrees of financial repression as a social optimum. However, a higher degree of tax evasion, due to a lower tax rate, reduces the severity of the financial restriction. In addition, we find the results to be robust across growth models with or without productive public expenditures. The only difference being that the policy parameters in the former case have higher optimal values.
    Keywords: Underground Economy, Tax evasion, Macroeconomic Policy
    JEL: E26 E63
    Date: 2008–05
  9. By: Alejandro Cuñat; Szabolcs Deak; Marco Maffezzoli
    Abstract: A reduction in income tax rates generates substantial dynamic responses within the framework of the standard neoclassical growth model. The short-run revenue loss after an income tax cut is partly - or, depending on parameter values, even completely - offset by growth in the long-run, due to the resulting incentives to further accumulate capital. We study how the dynamic response of government revenue to a tax cut changes if we allow a Ramsey economy to engage in international trade: the open economy's ability to reallocate resources between labor-intensive and capital-intensive industries reduces the negative effect of factor accumulation on factor returns, thus encouraging the economy to accumulate more than it would do under autarky. We explore the quantitative implications of this intuition for the US in terms of two issues recently treated in the literature: dynamic scoring and the Laffer curve. Our results demonstrate the internaional trade enhances the response of government revenue to tax cuts by a relevant amount. In our benchmark calibration, a reduction in the capital-income tax rate has virtually no effect on government revenue in steady state.
    Keywords: international trade, Heckscher-Ohlin, dynamic macroeconomics, taxation, revenue estimation, Laffer curve
    JEL: E13 E60 F11 F43 H20
    Date: 2008–03
  10. By: Philip DeCicca; Donald S. Kenkel; Alan D. Mathios
    Abstract: Policy makers continue to advocate and adopt cigarette taxes as a public health measure. Most previous individual-level empirical studies of cigarette demand are essentially static analyses. In this study, we use longitudinal data to examine the dynamics of young adults' decisions about smoking initiation and cessation. We develop a simple model to highlight the distinctions between smoking initiation, cessation, and participation and show that the price elasticity of smoking participation is a weighted average of corresponding initiation and cessation elasticities, a finding that applies more broadly to other addictive substances as well. The paper's remaining contributions are empirical. We use data from the 1992 wave of the National Education Longitudinal Study, when most of the cohort were high school seniors, and data from the 2000 wave, when they were about 26 years old. The results show that the distinction between initiation and cessation is empirically useful. We also contribute new estimates on the tax-responsiveness of young adult smoking, paying careful attention to the possibility of bias if hard-to-observe differences in anti-smoking sentiment are correlated with state cigarette taxes. We find no evidence that higher taxes prevent smoking initiation, but some evidence that higher taxes are associated with increased cessation.
    JEL: I12
    Date: 2008–05
  11. By: Horst Siebert
    Abstract: The paper looks at the global environment as a public good and as a sink for CO2-emissions. It discusses problems to be solved in institutional arrangements to protect global environmental media and looks at criteria for allocating the costs of emission reduction and emission rights. It analyzes institutional mechanisms that stabilize CO2-agreements and reviews the Kyoto Protocol, the perspectives for its successor and EU emission trading. The paper also reviews arrangements for biodiversity and existing multilateral arrangements.
    Keywords: Public good, Global warming, Emission reduction, Emission rights, Institutional Mechanisms, Kyoto Protocol, Post-Bali negotiations, EU emission trading, fauna and flora, existing multilateral arrangements
    JEL: D62 F02 H41 Q20 Q54
    Date: 2008–05
  12. By: Piolatto, Amedeo
    Abstract: The literature on vouchers often concludes that a vouchers-based system cannot be the outcome of a majority vote. This paper shows that, when the value of vouchers and who is entitled to receive them are fixed exogenously, the majority of voters are in favour of selective vouchers. On top of that, as long as the introduction of vouchers does not undermine the existence of the public school system, introducing selective vouchers induces a Pareto improvement. Middle class agents are the only one using vouchers in equilibrium, while the poorest agents in the economy profit from the reduction in public school congestion.
    Keywords: public economics; education; vouchers; voting
    JEL: H42 I2 D70
    Date: 2008
  13. By: Perry Singleton (Center for Policy Research, Maxwell School, Syracuse University, Syracuse, NY 13244-1020)
    Abstract: The well-documented correlation between cigarette excise taxes and cigarette demand may not be entirely causal if excise taxes reflect public sentiment towards smoking. I consider whether proxies for smoking sentiment--the prevalence of smoking by education and intention to quit statuses--are correlated with support for and implementation of tobacco control laws. I find that cigarette excise taxes are most sensitive to the prevalence of educated smokers who do not want to quit. Additionally, when proxies for public sentiment are included, the estimated elasticity of cigarette demand declines from -2.0 to -1.3.
    Keywords: Cigarette demand, excise taxes, legislative endogeneity
    JEL: H23 I18
    Date: 2008–05
  14. By: John Geanakoplos (Cowles Foundation, Yale University); H. M. Polemarchakis (Dept. of Economics, University of Warwick)
    Abstract: We show that in almost every economy with separable externalities, every competitive equilibrium can be Pareto improved by a package of anonymous commodity taxes that causes prices to adjust and markets to reclear at different levels of individual consumption. This constrained suboptimality of competitive allocations might provide a rationale for economic policy in economies with externalities. It shows that policy makers should look for good tax packages that help everybody, rather than thinking taxes must inevitably be bad for some lobby that will oppose them.
    Keywords: Externalities, Commodity taxes, Constrained suboptimality
    JEL: D50 D60 D62 D82
    Date: 2008–05
  15. By: William Phelan
    Abstract: This paper uses the concept of the ‘encompassing group’ to set out a collective action theory based explanation for the maintenance of open international markets to add to existing explanations for stable international market regimes, hegemonic stability and tit-for-tat specific reciprocity. While groups representing small constituencies have incentives to seek inefficient redistributions of income while imposing costs on wider society, cohesive groups representing large cross-issue constituencies – encompassing groups – have incentives to accept costs in return for the provision of public goods. States whose domestic political institutions are encompassing – inclusive of large numbers of diverse interests and centralized to provide coordination across issue-areas – have similar incentives to accept costs on constituents in order to support the provision of public goods for their constituents as a whole – such as welfare gains from trade or avoiding damage to reliable international markets – even without the application of external sanctions.
    Date: 2008–03–26
  16. By: Kimberly Flood
    Abstract: The author examines the global impact of U.S. fiscal policy using the Bank of Canada's Global Economy Model (Lalonde and Muir 2007). In particular, she examines the global macroeconomic implications of the expiration of major tax cuts in the United States and of expected increases in U.S. entitlement program expenditures. The results of her analysis suggest that the expiration of previously enacted tax cuts in the United States will impose short-run costs on the U.S. economy. However, the rest of the world will benefit from an associated decline in the world real interest rate and from a redistribution of wealth linked to a partial reversal of global current account imbalances as U.S. government debt declines. The author's analysis of the expected increase in U.S. entitlement program expenditures, financed through debt, suggests that entitlement program expenditures will crowd out economic growth in the United States and the rest of the world.
    Keywords: Fiscal policy; International topics; Regional economic developments
    JEL: H0 H2 H3
    Date: 2008

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