nep-pbe New Economics Papers
on Public Economics
Issue of 2008‒07‒05
twenty-one papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Monetization of Public Goods Provision: A possible solution for the free-rider problem By KOBAYASHI Keiichiro; NAKAJIMA Tomoyuki
  2. Bargaining over public goods By Julio Davila; Jan Eeckhout; César Martinelli
  3. Multi-level Governance: The General Model and the Italian Experience By Bagarani, Massimo; Zampino, Simona
  4. Direct Democracy and Local Public Goods: Evidence from a Field Experiment in Indonesia By Benjamin A. Olken
  5. Political Polarization and the Size of Government By Lindqvist, Erik; Östling, Robert
  6. U.S. Defense Contracts During the Tax Expenditure Battles of the 1980s By Susan Guthrie; James R. Hines, Jr.
  7. What is in it for the poor? Evidence from fiscal decentralization in Vietnam By Nguyen, Hoang-Phuong
  8. The US earned income tax credit, its effects, and possible reforms By Meyer, Bruce D.
  9. Treasury V Dodgers. A Tale of Fiscal Consolidation and Tax Evasion By Maurizio Bovi; Peter Claeys
  10. Economic integration and the relationship between profit and wage taxes By Andreas Haufler; Alexander Klemm; Guttorm Schjelderup
  11. Bottlenecks in the decentralisation of education funding in Poland By Herbst, Mikolaj
  12. Privatization of Credence Goods:Theory and Evidence from Service Contracting By Lindqvist, Erik
  13. State of Governance in Bangladesh: Problems and Prospects. By Ahmad, Sayed Javed
  14. How Differences in Property Taxes within Cities Affect Urban Sprawl? By Song, Yan; Zenou, Yves
  15. Evaluating EU policies on public services: a citizens´ perspective By Clifton, Judith; Díaz-Fuentes, Daniel
  16. The EU VAT Treatment of Public Sector Bodies: Slowly Moving in the Wrong Direction By Rita de la Feria
  17. Investable Tax Credits: The Case of the Low Income Housing Tax Credit By Mihir A. Desai; Dhammika Dharmapala; Monica Singhal
  18. Firm-specific Forward-looking Effective Tax Rates By Peter Egger; Simon Loretz; Michael Pfaffermayr; Hannes Winner
  19. Misalignment in the Growth-Maximizing Tax Rate under Alternative Assumptions of Tax Evasion By Rangan Gupta; Emmanuel Ziramba
  20. Costly Tax Enforcement and Financial Repression: A Reconsideration Using an Endogenous Growth Model By Rangan Gupta; Emmanuel Ziramba
  21. Tax Evasion and Growth: a Banking Approach By Max Gillman; Michal Kejak

  1. By: KOBAYASHI Keiichiro; NAKAJIMA Tomoyuki
    Abstract: We consider a new method of public goods provision: monetization. The government makes a particular public good the specie of money and commits itself to buy the public good at a predetermined nominal price and adjust money supply so that the ratio between the public good reserve and money supply equals a predetermined reserve ratio. In a two-country model, in which one country issues international currency and the other issues domestic currency, we show that if the government that issues the international currency adopts a monetization policy, it can attain both the optimal level of public goods provision and equal cost sharing for the public goods provision between the two countries by choosing the nominal price of the public good and the reserve ratio appropriately. In this case, the international free-rider problem is completely resolved.
    Date: 2008–06
  2. By: Julio Davila (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, Ecole d'économie de Paris - Paris School of Economics - Université Panthéon-Sorbonne - Paris I); Jan Eeckhout (University of Pennsylvania - Department of Economics); César Martinelli (Centro de Investigacion Economica - Instituto Tecnologico Autonomo)
    Abstract: In a simple public good economy, we propose a natural bargaining procedure whose equilibria converge to Lindahl allocations as the cost of bargaining vanishes. The procedure splits the decision over the allocation in a decision about personalized prices and a decision about output levels for the public good. Since this procedure does not assume price-taking behavior, it provides a strategic foundation for the personalized taxes inherent to the Lindahl solution to the public goods problem.
    Keywords: Public goods, bargaining, alternating offers.
    Date: 2008–06
  3. By: Bagarani, Massimo; Zampino, Simona
    Abstract: During the last twenty years, the introduction of the principle of subsidiarity and the identification of regions as political entities for the coordination of structural expenditure at the local level have led to the adoption of the principle of multi-level governance (MLG), on which principle EU government action is still based. The principle is based on the notion that the spread of governing practices (governance) across various institutions, and hence jurisdictions, results in a greater efficiency of allocation and an improved regulatory capacity compared to what more centralized governmental models are capable of yelding. According to this view, multi-level forms of government are better able to identify the effects of external economies which arise from the supply of public goods at different territorial levels. In other words, a multi-level governmental model enables, more so than other models, these external economies to be internalized and, at the same time, complex and heterogeneous demand from the local populations to be met through territorial intervention policies. Within this framework we will describe the multi level governance (MLG) model adopted from all the Countries of the EU, which constitutes the basis for national and local Public Administrations’ actions in the field of the social and economic development policy addressed to the disadvantaged areas of the Communitarian territory. We will present: a theoretical description of the model MLG in its different categories; the category adopted as a target by the EU with its specific characteristics, and the way those characteristics determine, in terms of operating consequences, the definition of objectives, responsibilities and roles. With reference to the Italian case, we will also describe the practical effects of the MLG model both on the communitarian and national funds governance.
    Keywords: Regional development, fiscal decentralization, multi-level governance, panel data
    JEL: C23 O47 R11 R58
    Date: 2008–06–23
  4. By: Benjamin A. Olken
    Abstract: This paper presents an experiment where 48 Indonesian villages were randomly assigned to choose development projects through either representative-based meetings or direct election-based plebiscites. Plebiscites resulted in dramatically higher satisfaction among villagers, increased knowledge about the project, greater perceived benefits, and higher reported willingness to contribute. Changing the political mechanism had much smaller effects on the actual projects selected, with some evidence that plebiscites resulted in projects chosen by women being located in poorer areas. The results show that direct participation in political decision making can substantially increase satisfaction and legitimacy, even when it has little effect on actual decisions.
    JEL: D72
    Date: 2008–06
  5. By: Lindqvist, Erik (Research Institute of Industrial Economics (IFN)); Östling, Robert (Stockholm School of Economics)
    Abstract: We study the effect of political polarization on government spending and redistribution using the dispersion of self-reported political preferences as our measure of polarization. Politically polarized countries have lower levels of redistribution and government consumption. The relationship between political polarization and the size of government is stronger in democratic countries, indicating that the effect goes through the political system. The results are robust to a large set of controlvariables, including GDP per capita and income inequality.
    Keywords: Political Polarization; Social Cohesion; Ethnic Fractionalization; Social Capital; Size of Government
    JEL: H11 H20 H41
    Date: 2008–05–15
  6. By: Susan Guthrie; James R. Hines, Jr.
    Abstract: This paper considers the impact of the tax treatment of U.S. military contractors. Prior to the early 1980s, taxpayers were permitted to use the completed contract method of accounting to defer taxation of profits earned on long term contracts. Legislation passed in 1982, 1986 and 1987 required that at least 70 percent of the profits earned on long-term contracts be taxed as accrued, thereby significantly reducing the tax benefits associated with long term contracting. Comparing contracts that were ineligible for the tax benefits associated with long term contracting with those that were eligible, it appears that between 1981 and 1989 the duration of U.S. Department of Defense contracts shortened by an average of between one and 3.5 months, or somewhere between 6 and 29 percent of average contract length. This pattern suggests that the tax benefits associated with long term contracts promoted artificial contract lengthening prior to passage of the 1986 Act. The evidence is consistent with a behavioral model in which the Department of Defense ignores the federal income tax consequences of its procurement actions, thereby indirectly rewarding contractors who are able to benefit from tax expenditures of various types.
    JEL: H25 H57
    Date: 2008–06
  7. By: Nguyen, Hoang-Phuong
    Abstract: Like other developing countries, Vietnam has attempted to push for greater fiscal decentralization in the hope of a more efficient delivery of social services to targeted citizens. The fiscal decentralization initiative is encouraging and merits pursuit, but the present study however, shows that a misstep in the decentralization process can discriminate disproportionately against the poor. Specifically, an increase in the sub-provincial share of the total provincial expenditures is predicted to bring about an appreciable decrease in the lowest-quintile average monthly income. We suggest that the Vietnamese government require provinces to adopt pro-poor allocation norms rather than reclaiming its control over the provincial expenditure assignment. This paper’s empirical findings sound a note of considerable caution that other developing countries should exercise in their fiscal decentralization efforts to avoid creating unintended consequences for the poor.
    Keywords: Fiscal decentralization; Vietnam; poverty reduction
    JEL: H87 H83
    Date: 2008–01
  8. By: Meyer, Bruce D. (Harris School of Public Policy Studies, University of Chicago)
    Abstract: In this paper, I first summarize how the US Earned Income Tax Credit (EITC) operates and describe the characteristics of recipients. I then discuss empirical work on the effects of the EITC on poverty and income distribution, and its effects on labor supply. Next, I discuss a few policy concerns about the EITC: possible negative effects on hours of work and marriage, and problems of compliance with the tax system. I then briefly discuss some possible reforms to the structure of the current EITC.
    Keywords: Welfare reform; Earned income tax credit; EITC; Earnings subsidies; Tax credits; Poverty
    JEL: D31 H24 I38 J38
    Date: 2008–05–17
  9. By: Maurizio Bovi (ISAE - Institute for Studies and Economic Analyses); Peter Claeys (Universitat de Barcelona - Facultat de Ciències Econòmiques i Empresarials)
    Abstract: The government influences the equilibrium size of hidden activity. Higher taxes give an incentive to evade. The provision of public services, social transfers and public employment may have offsetting effects on the underground economy. The budget constraint makes the relation between the shadow economy, taxes and spending inherently dynamic. A lack of time series data has prohibited the analyisis of these feedback effects. We take advantage of a unique dataset on the Italian underground economy. We find that over the period 1980-2004 the underground economy reacts to changes in government spending as well as to variations in the tax burden.
    Keywords: fiscal policy, policy rules, taxes, debt, shadow economy, Italy.
    Date: 2008–02
  10. By: Andreas Haufler (University of Munich); Alexander Klemm (International Monetary Fund); Guttorm Schjelderup (Norwegian School of Economics and Business Administration)
    Abstract: This paper analyses the development of the ratio of corporate taxes to wage taxes using a simple political economy model with workers and capitalists that own internationally mobile and immobile firms. Among other results, our model predicts that countries reduce their corporate tax rate, relative to the wage tax when preferences for public goods increase, or when a rising share of capital is employed in multinational firms. We further show how a rise in the wage share changes both the relative size of tax bases and the political influence of different income groups. The predicted relationships are tested using panel data for 23 OECD countries for the period 1980 through 2004. The results of the empirical analysis support our main hypotheses.
    Keywords: Capital and labour taxes; economic integration; multinational firms
    JEL: H20 H73 F15 F23
    Date: 2008
  11. By: Herbst, Mikolaj
    Abstract: Ten years after delegating the responsibility for school management and operation maintenance to local governments, the education funding system in Poland still faces open challenges of fundamental importance. Although the decentralisation of education is commonly considered a success, the particular mechanisms of funding and legal solutions are hotly debated and certainly far from perfect. The financial responsibilities of the central government and the local authorities are imprecisely defined, which provokes conflicts and tensions between the main stakeholders. Moreover, the Polish education system lacks even the basic standards describing an efficient way of service provision. The formula used to allocate the so-called education subvention to individual local governments is subject to endless political bargains and trades and hardly reflects any reasonable policy. Recently, several ideas have been raised in the public debate in Poland on how to reform the funding of education. However, it seems that these heavily ideologised projects go far beyond the necessary changes and do not take into account either the complex context of decentralised education system or the experiences of other countries.
    Keywords: edcation finance; decentralisation; Poland
    JEL: H40 H52 I22
    Date: 2008–06
  12. By: Lindqvist, Erik (Research Institute of Industrial Economics (IFN))
    Abstract: A wide range of services provided by the public sector are credence goods, i.e., services for which the producer has private information whether a certain treatment is needed or not. This paper studies how ownership affects the incentives for producers to reveal such information to public procurers. I develop a model where procurers buy a more extensive treatment in case quality is high. Private firms have strong incentives to reduce cost and must be given rents in order not to shirk on non-contractible quality. The existence of rents makes private firms try to induce demand for unnecessary treatments. Public sector managers have no incentive to cut cost, implying that optimal contracts don't entail rents unless quality is very important. Public sector managers instead use their informational advantage to avoid unpleasant tasks. Empirical evidence from residential care for teenagers with behavioral problems supports the model's predictions. Private ownership prolongs the duration of treatment by more than a year, doubling total cost. Unlike private facilities, public facilities are much more likely to initiate treatment breakdowns for teenagers that are particularly burdensome to treat.
    Keywords: Privatization; Public Sector Contracting; Credence Goods; Incomplete Contracts; Contracting Out; Residential Youth Care; Juvenile Delinquency
    JEL: H11 H40 L32 L33
    Date: 2008–06–04
  13. By: Ahmad, Sayed Javed
    Abstract: This paper discusses the problems and issues on the political failures in Bangladesh as well as identifies some possible solutions. The approach here is analytical mostly reviewing current news, reports and other related materials. A comparative study is also done between the present and proposed system to get a quick glimpse on the overall situation. The idea here is to seek out reasonable and practical solutions that would yield better result for Bangladesh and bring about positive changes in the political scenario that would allow the country to move forward as a successful and dignified nation. I’ve kept the scope of this paper limited to political party, elections and governance.
    Keywords: Governance; Good governance; Public Policy; Public Administration; Elections; Parliament; etc.
    JEL: A39 H11 H83 D78 D8 J18 Y4 D73 O2 D02 I3 R5 D74 F5 G38 D72 I28
    Date: 2008
  14. By: Song, Yan (University of North Carolina at Chapel Hill, USA); Zenou, Yves (Research Institute of Industrial Economics (IFN))
    Abstract: This article attempts a formal analysis of the connection between the differentiated property tax rates within urban areas and urban spatial pattern in U.S. cities. We first develop a duocentric-city model where the Central Business District (CBD) is located at the origin while the Suburban Business District (SBD) is at the other end of the city. We show that the ratio between the property tax in the suburbs and in the center has an ambiguous impact on the size of the city. We then test this model empirically to determine this sign by using a dataset of effective property tax rates we developed using GIS techniques for central cities and suburbs in 445 urbanized areas. The empirical analysis estimates the link between these two variables by controlling for variables such as population, income, agricultural rent, commuting cost, climate, crime, and employment structure. Results from the empirical analyses suggest that a lower property tax rate in the suburbs in comparison to the central city is associated with more expansive urban growth and greater level of decentralization of population and employment.
    Keywords: Central City; Suburbs; Urban Sprawl; Urban Decentralization; Differentiated Property Tax
    JEL: H30 H71 R14
    Date: 2008–06–19
  15. By: Clifton, Judith; Díaz-Fuentes, Daniel
    Abstract: This article evaluates EU policies on public services – particularly public network services - from the citizens´ point of view. It is first argued that citizens´ perceptions about these services are important because they are essential for quality of life, but also because they exhibit economic characteristics such as asymmetrical information, adverse selection and positive externalities. Changing EU policy on public services is synthesised and classified into two main phases in section two. Citizen satisfaction with public services as revealed through surveys from 1997 to 2007 is explored in the third section. In the discussion, the prospects for EU policy on public services are considered and, it is argued that, from the perspectives of subsidiarity and proportionality, policy towards strengthening the common market is being increasingly uploaded to the supranational level in the form of directives, whilst cohesion and redistribution policies are being downloaded to the national level or dealt with at the supranational level by “soft” instruments.
    Keywords: Economics of public services; evaluation; citizen; consumer; satisfaction; privatization; liberalization; competition.
    JEL: L96 L38 H41 L3 L9 L94
    Date: 2008–07–03
  16. By: Rita de la Feria (Oxford University Centre for Business Taxation)
    Abstract: In most countries applying a VAT system, the activities and transactions undertaken by public sector bodies are not subject to full taxation. The rationale usually invoked to justify lack of full taxation is of a mixed conceptual and political kind. On one hand, there is a view that the activities of those bodies are hard to tax and that, in practice, it is almost impossible to establish a single VAT treatment applicable to all of them. One the other hand, and more importantly, there is a perception that exclusion of the products supplied by public sector bodies from full taxation, achieves social and distributional aims. The rule under the EU VAT system is that supplies by public sector bodies are non-taxable. In practice, however, the VAT treatment of public sector bodies is extremely complex, giving rise to significant legal problems and economic distortions. The aim of this paper is to consider the current legislative framework, with special consideration being given to recent developments in this area, at both legislative and jurisprudential levels, in an attempt to determine whether they constitute positive progress, or whether together they represent a slow and subtle move towards a further deepening of the system’s already existing flaws.
    Date: 2008
  17. By: Mihir A. Desai; Dhammika Dharmapala; Monica Singhal
    Abstract: The Low Income Housing Tax Credit (LIHTC) represents a novel tax expenditure program that employs "investable" tax credits to spur production of low-income rental housing. While it has grown into the largest source of new affordable housing in the U.S. and its structure is now being replicated in other programs, the LIHTC has also drawn skepticism and calls for its repeal. This paper outlines a conceptual framework for exploring the conditions under which investable tax credits may be the most effective mechanism to deliver a production subsidy and discusses the desirability of employing investable tax credits in other policy domains. Estimates of tax expenditures under this program are provided and efficiency costs, distributional issues, and the likely effects of reforms to tax provisions such as the AMT are considered.
    JEL: H2 H76 R31 R51
    Date: 2008–06
  18. By: Peter Egger (Ifo Institute and University of Munich); Simon Loretz (Oxford University Centre for Business Taxation); Michael Pfaffermayr (Department of Economics and Statistics, University of Innsbruck); Hannes Winner (Department of Economics and Statistics, University of Innsbruck)
    Abstract: This paper computes (marginal and average) forward-looking effective tax rates for a sample of more than 550,000 firms in and outside of Europe using Bureau van Dijk's ORBIS data-base. Comparing the firm-level effective tax rates with their country-level counterparts we arrive at two important findings for empirical research on the behavioral response to taxation. First, the firm-level component of the effective tax burden is generally much more important than the one at the country level. Second, tentative empirical results on the nexus between firm sales and corporate taxation illustrate that the conclusions obtained with forward looking firm- level effective tax rates differ starkly from those based on country-level forward-looking rates or backward-looking effective tax rates at the firm level.
    Keywords: Corporate taxation; effective tax rates; firm sales
    JEL: H25 C33
    Date: 2008
  19. By: Rangan Gupta (Department of Economics, University of Pretoria); Emmanuel Ziramba (Department of Economics, University of South Africa)
    Abstract: Using a general equilibrium endogenous growth model based on an overlapping generations framework, and characterized by tax evasion and productive public expenditure, we analyze the relationship between growth-maximizing tax rates and alternative assumptions about the nature of tax evasion. We show that if the government treats tax evasion as exogenous, when it is determined endogenously, it ends up choosing a growth-maximizing tax rate that is higher than it should ideally be. The paper, thus, highlights a possible misalignment in the growth-maximizing tax rate in the event of a failure on part of the government to realize the behavioral nature of tax evasion.
    Keywords: Endogenous Growth, Optimal Tax Rate, Overlapping Generations Model, Tax Evasion
    JEL: E6 E62 E26
    Date: 2008–06
  20. By: Rangan Gupta (Department of Economics, University of Pretoria); Emmanuel Ziramba (Department of Economics, University of South Africa)
    Abstract: Using a monetary endogenous growth overlapping generations model characterized by financial repression, purposeful government expenditures and costly tax enforcement, we analyze whether financial repression can be explained by the cost involved in raising taxes. Note financial repression is modeled via ``high" obligatory reserve requirements that banks in the economy need to hold. We show that higher costs of tax collection produces a monotonic increase in reserve requirements. Moreover, the government tends to rely more on indirect taxation, compared to direct taxation, as costs of tax collection increases.
    Keywords: Costly tax Enforcement, Financial Repression, Endogenous Growth, Overlapping Generations Model
    JEL: E62 H21 O41
    Date: 2008–06
  21. By: Max Gillman (Cardiff University); Michal Kejak (The Center for Economic Research and Graduate Education of Charles University (CERGE EI))
    Abstract: The paper formalizes the relation between flat taxes and growth when there is a competitive equilibrium tax evasion. A decentralized tax evasion service is supplied by the banking sector. The bank production function follows the financial intermediation microfoundation approach, with deposits as an input. Across a class of endogenous growth models, tax evasion decreases the effective tax rate, and thereby lessens the negative effect of taxes on growth. And as the tax rate rises, tax evasion causes the growth rate to fall by less. Underlying the results is a fiscal principle whereby tax evasion creates, or magnifies, a rising demand price sensitivity to higher tax rates.
    Keywords: Tax evasion, financial intermediation, endogenous growth, and flat taxes.
    JEL: E13 E62 H26 O41
    Date: 2008–06

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