nep-pbe New Economics Papers
on Public Economics
Issue of 2008‒08‒21
eleven papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Subnational Taxes in Developing Countries: The Way Forward. By Richard M. Bird; Roy Bahl
  2. Capital Taxation and Rent Seeking By Arefiev, Nikolay; Baron, Tatyana
  3. Income Tax Provisions Affecting Owner-Occupied Housing: Revenue Costs and Incentive Effects By James M. Poterba; Todd M. Sinai
  4. Analysing the Effects of Tax-benefit Reforms on Income Distribution - A Decomposition Approach By Olivier Bargain; Tim Callan
  5. An Institutional Theory of Public Contracts: Regulatory Implications By Pablo T. Spiller
  6. Optimal taxation of a monopolistic extractor: are subsidies necessary? By Julien Daubanes
  7. How Does Charitable Giving Respond to Incentives and Income? Dynamic Panel Estimates Accounting for Predictable Changes in Taxation By Jon Bakija; Bradley Heim
  8. Priorities in the Location of Multiple Public Facilities By BOCHET, Olivier; GORDON, Sidartha
  9. Smoking Intensity, Compensatory Behavior and Tobacco Tax Policy By Ian Irvine
  10. Theorizing Modes of Governance in the EU: Institutional Design and Informational Complexity By Blom, Tannelie; Radulova, Elissaveta; Arnold, Christine
  11. Regulation with Budget Constraints Can Dominate Regulation by Price and by Quantity By Linda Cohen; Amihai Glazer

  1. By: Richard M. Bird (University of Toronto); Roy Bahl (University of Toronto; Georgia State University)
    Abstract: This paper reviews the literature and evidence on the most appropriate structure of regional and local taxes in developing countries. A good subnational tax system is critical to an effective and sustainable system of intergovernmental fiscal relations – a need that has become increasingly important around the world as more and more public services are being delivered through subnational governments. In most developing countries potentially sound and productive taxes exist that are suitable for regional and local governments: property taxes, taxes on motor vehicles, surcharges on national personal income taxes, payroll taxes, and even, in some cases, regional value added taxes and properly designed local business taxes.
    Keywords: local taxes; regional taxes; fiscal decentralization
    JEL: H71 H77 O23
    Date: 2008–08
  2. By: Arefiev, Nikolay; Baron, Tatyana
    Abstract: We find the optimal capital income tax rate in an imperfectly competitive economy, where some part of recourses is devoted to rent-seeking activity. Optimal tax offsets the difference between marginal social and marginal private return to capital, which is a result of rent seeking, and the difference between the before tax interest rate and the marginal productivity of capital, which arises from imperfect competition. Optimal capital income tax rate depends neither on other tax rates nor on overall tax burden. Numerically it is close to zero.
    Keywords: Capital taxation, rent seeking, imperfect competition
    JEL: E62 H21
    Date: 2006–12–11
  3. By: James M. Poterba; Todd M. Sinai
    Abstract: The mortgage interest deduction, the property tax deduction, the unique treatment of capital gains on owner-occupied homes, and the absence of taxation on imputed rent from owner-occupied homes all influence the effective cost of housing services. They also affect federal income tax revenues and the distribution of income tax liabilities. We draw on household-level data from the 2004 Survey of Consumer Finances to analyze how several potential reforms would affect incentives for housing consumption as well as the distribution of income tax burdens. Our analysis recognizes that changing the mortgage interest deduction would induce changes in household financial behavior. We estimate that repealing the mortgage interest deduction in 2003 would have raised income tax revenues by $72.4 billion in the absence of any portfolio adjustments, but by only $61.9 billion if homeowners responded by drawing down a limited set of financial assets to partially replace their mortgage debt. The revenue effects of changing the property tax deduction similarly depend on how state and local governments alter their mix of revenue instruments in response to federal tax reform. Our results underscore the importance of recognizing behavioral responses when calculating the revenue costs of income tax provisions relating to owner-occupied housing.
    JEL: H2 H24 H71 R21
    Date: 2008–08
  4. By: Olivier Bargain (University College of Dublin); Tim Callan (Economic and Social Research Institute)
    Abstract: To assess the impact of tax-benefit policy changes on income distribution over time, we suggest a methodology based on counterfactual simulations. We start by decomposing changes in inequal- ity/poverty indices into three contributions: reforms of the tax-benefit structure (rules, rates, etc.), changes in nominal levels of market incomes and tax-benefit parameters (benefit amounts, tax bands, etc.), and all other changes in the underlying population (market income inequality, demographic composition, employment level, etc.). Then, the decomposition helps to extract an absolute measure of the impact of tax-benefit changes on inequality when evaluated against a distributionally-neutral benchmark, i.e. a situation where tax-benefit parameters are adjusted in line with income growth. We apply this measure to assess recent policy changes in twelve European countries. Finally, the full decomposition allows quantifying the relative role of policy changes compared to all other fac- tors. We provide an illustration on France and Ireland and check the sensitivity of the results to the decomposition order.
    Keywords: Tax-benefit policy, inequality, poverty, decomposition, microsimulation
    JEL: H23 H53 I32
    Date: 2007–08–26
  5. By: Pablo T. Spiller
    Abstract: The fundamental feature of private contracting is its relational nature. When faced with unforeseen or unexpected circumstances, private parties, as long as the relation remains worthwhile, adjust their required performance without the need for costly renegotiation or formal recontracting. Public contracting, on the other hand, seems to be characterized by formalized, standardized, bureaucratic, rigid procedures. Common wisdom sees public contracts as generally more inflexible, requiring more frequent formal renegotiation, having a higher tendency to litigate, and providing weaker incentives. In sum, public contracts are perceived to be less "efficient." In this paper I develop a theory of public contracting that accommodates these stark differences between private and public contracting. The thrust of the paper is that these differences arise directly because of the different hazards present in public and purely private contracts, which directly impact the nature of the resulting contractual forms. A fundamental corollary of this result is that the perceived inefficiency of public or governmental contracting is simply the result of contractual adaptation to different inherent hazards, and as such is not directly remediable. Finally, I apply the main insights from the general framework developed here to understand the characteristics of concession contracts.
    JEL: H11 L14 L32 L33 L51
    Date: 2008–08
  6. By: Julien Daubanes (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland)
    Abstract: In a standard partial equilibrium model of resource depletion, this paper charac- terizes and examines the solution to the optimal taxation problem when extraction is monopolistic. The main result is that the family of subgame perfect effciency- inducing tax/subsidy schemes may include some strict tax policies. This illustrates how the static trade-off between inducing effciency and raising tax revenues in the presence of market power is relaxed under exhaustibility.
    Keywords: Exhaustible resources, Imperfect competition, Optimal taxation
    JEL: Q30 L12 H21
    Date: 2008–07
  7. By: Jon Bakija; Bradley Heim
    Abstract: We estimate the elasticity of charitable giving with respect to its price and after-tax income using a panel of over 550,000 disproportionately high-income tax returns spanning the years 1979 through 2005. Improvements relative to the previous literature include: using state tax variation to help identify our model while controlling for both individual- and time-specific unobserved heterogeneity; carefully dealing with expectations; allowing people at different income levels to have different degrees responsiveness to taxation and different time paths of unobservable influences on giving; and using a measure of charitable giving that more closely approximates current donations. To address the omitted variable bias that would otherwise arise from failing to control for unobservable expectations of future prices and future incomes, we use predictable changes in future federal and state marginal tax rates and tax liabilities, arising from their pre-announced and phased-in nature, as instruments for future changes in prices and income. Our estimate of the elasticity of giving with respect to a persistent price change for the full sample is about -0.7; this elasticity is generally larger when the sample is limited to high-income people and we control for time-varying unobservable influences on charity in a flexible fashion. We find some evidence, particularly among very high-income people, of re-timing giving in response to expected future changes in price, but this finding is sensitive to the source of identification for the price effects. Our estimates are broadly consistent the permanent income hypothesis. Expenditures on charitable giving are estimated to respond more strongly to persistent changes in income than to transitory fluctuations in income. Moreover, we find evidence in some specifications that people will increase their charitable giving now in response to a predictable reduction in future tax liability arising from tax reform.
    JEL: D12 D91 H2 H24 H31
    Date: 2008–08
  8. By: BOCHET, Olivier; GORDON, Sidartha
    Abstract: A collective decision problem is described by a set of agents, a profile of single-peaked preferences over the real line and a number k of public facilities to be located. We consider public facilities that do not su¤er from congestion and are non-excludable. We provide a characterization of the class of rules satisfying Pareto-efficiency, object-population monotonicity and sovereignty. Each rule in the class is a priority rule that selects locations according to a predetermined priority ordering among interest groups. We characterize each of the subclasses of priority rules that respectively satisfy anonymity, hiding-proofness and strategy-proofness. In particular, we prove that a priority rule is strategy-proof if and only if it partitions the set of agents into a fixed hierarchy. Alternatively, any such rule can be viewed as a collection of fixed-populations generalized peak-selection median rules (Moulin, 1980), that are linked across populations, in a way that we describe.
    Keywords: Multie blic facilities, Priority rules, Hierarchical rules, Object-lation-monotonicity, Sovereignty, Anonymity, Strategy-oofness, Generalized median rules, Hiding-oofness.
    JEL: D60 D63 D70 D71 H41
    Date: 2008
  9. By: Ian Irvine (Concordia University, Montreal, Canada)
    Abstract: Smokers not only choose the number of cigarettes to smoke in any given period on the basis of price, they also choose the intensity with which to smoke - that is, how much nicotine to inhale. The possibility that quantity-reducing tax policies may be mitigated, or even completely offset, by higher intensity has been raised recently by Adda and Cornaglia (2006). The objective of this paper is to examine this possibility in the context of a utility-maximizing model of smoking that is based on known toxicological patterns. After calibrating this model to re?ect observed behaviors, it is concluded that continuing smokers o¤set about one third of the quantity-reducing impact of higher taxes. Compensatory behavior thus reduces tax e¤ectiveness, but does not render it neutral. While toxicology has long recognized that nicotine inventory management is a key ingredient in smoking behaviour, this paper is the ?rst to incorporate such knowledge into a utility-price based maximizing model.
    Keywords: tobacco, nicotine, cotinine, intensity
    JEL: H21 I12
    Date: 2008–08–06
  10. By: Blom, Tannelie; Radulova, Elissaveta; Arnold, Christine
    Abstract: This article aims to provide a better understanding as to why different institutional arrangements have the particular structural properties which they are found to have. Drawing on the system theoretical tradition in sociology and on ‘complexity theory’, this paper presents an analytical framework whose underpinnings are in the idea that the structural characteristics of institutions and organisations are functionally related to the informational complexity which such social systems have to sustain. This paper starts with an account of the EU political system as an ‘information processing’ system. The ‘informational complexity’, which such a system has to cope with, is analysed and conceptualised along three different dimensions: density of communication, structurability of information and heterogeneity of beliefs and interests. Next an eight-fold classification of EU modes of governance is developed based on the dimensions of centralization/dispersion (of authority), strict/loose coupling (of system units) and inclusive/exclusive access (to decision making). Linking this classification to the model of informational complexity, it is shown that the dimensions of institutional variation can be interpreted as dimensions of institutional adaptation to informational complexity. Finally, the implications of the model are reflected in terms of the hypotheses it suggests.
    Keywords: institutions; governance; functionalism; neo-institutionalism; open coordination; centralisation/decentralisation; diversity/homogeneity; sociology; political science
    Date: 2008–08–12
  11. By: Linda Cohen (Department of Economics, University of California-Irvine); Amihai Glazer (Department of Economics, University of California-Irvine)
    Abstract: A government can use several mechanisms to induce firms to reduce pollution. Well studied are regulations by price and by quantity. We consider a third form of regulation -- government allocates a budget to an agency which subsidizes abatement. We demonstrate that uncertainty can make such constrained regulation more efficient than either regulation by quantity or regulation by price. We also show that the optimal budget declines with a mean-preserving spread in the distribution of marginal costs.
    Keywords: Regulation; Environmental subsidy; Pollution control
    JEL: H23 Q52
    Date: 2008–08

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