nep-pbe New Economics Papers
on Public Economics
Issue of 2008‒08‒31
fifteen papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Is there evidence of strategic corporate tax interaction among EU countries? By Ruiz, Fernando; Gerard, Marcel
  2. Tax evasion and deductible expenses By Piolatto, Amedeo
  3. Tax Expenditure Estimation and Reporting: A Critical Review By Rosanne Altshuler; Robert D. Dietz
  4. Corporate tax competition and the decline of public investment By Pedro Gomes; Francois Pouget
  5. Tax challenges facing developing countries. By Bird, Richard M.
  6. Tax Reform for Efficiency and Fairness in Canada By Alexandra Bibbee
  7. Investable Tax Credits: The Case of the Low Income Housing Tax Credit By Desai, Mihir; Dharmapala, Dhammika; Singhal, Monica
  8. Minimizing the Price of Tranquility: How to Discourage Scotland's Secession from the United Kingdom By Paul Hallwood
  9. Tax Policy Design and the Role of a Tax-Free Threshold By John Creedy; Nicolas Hérault; Guyonne Kalb
  10. Threats in Latin American and Caribbean countries: how do inequality and the asymmetries of rules affect tax morale? By Mariana Gerstenblüth; Natalia Melgar; Juan Pablo Pagano; Máximo Rossi
  11. Public Choice and the Economic Analysis of Anarchy: A Survey By Powell, Benjamin; Stringham, Edward P.
  12. Optimal Public Policy with Endogenous Mortality By Rangan Gupta; Emmanuel Ziramba
  14. The Third sector in Europe; Does it exhibit a coverging movement? By Edith Archambault
  15. Are One-Best-Way Models of Effective Government Suitable for Developing Countries? By Andrews, Matthew

  1. By: Ruiz, Fernando; Gerard, Marcel
    Abstract: In this paper we empirically investigate whether EU countries set their corporate tax interdependently and, at the same time, we examine which space may be relevant in the construction of this association. Our findings indicate the presence of tax interdependency among the EU-15 in statutory and effective corporate taxes based on the tax codes. Moreover, corporate taxes in the EU-15 seem to suffer from common external shocks.
    Keywords: Tax mimicking; tax competition; spatial panel.
    JEL: H70 H73
    Date: 2008
  2. By: Piolatto, Amedeo
    Abstract: Public finance is strongly affected by tax evasion, which implies that public sector resources are very limited. Most of the analysis on how to fight tax evasion focused on the ways to deter evasion through incentives to people not to evade. This model has a different approach: instead of directly rewarding/punishing agents, it gives incentives to an agent to ensure that some other agents are obliged to declare their revenue. In particular, the idea is to give incentives to consumers (through itemised deductions) to declare their expenditure. This forces sellers to declare their earnings or, at least, it makes it more costly for them to convince buyers to buy on the black market. I show that under few conditions, for a given level of taxation, it is optimal to allow for partial itemised deductions.
    Keywords: direct taxes; tax evasion; deductions
    JEL: H30 H00 H26
    Date: 2008–05
  3. By: Rosanne Altshuler; Robert D. Dietz
    Abstract: We examine the measurement of tax expenditures, as well as review issues concerning the classification of tax expenditures generally. We use calculations from NBER's TAXSIM to illustrate some of the problems with the current methodology for estimating tax expenditures. Unlike most previous work on the topic, we focus on how features of the current tax system including the alternative minimum tax and sunset rules complicate and compromise the value of information provided by the tax expenditure budget.
    JEL: H20
    Date: 2008–08
  4. By: Pedro Gomes (Corresponding author: London School of Economics, STICERD, Houghton Street, WC2A 2AE, London, United Kingdom.); Francois Pouget (University of Paris Dauphine, EURIsCO, 1 Place du Maréchal de Lattre de Tassigny, F-75016 Paris, France.)
    Abstract: The government’s choices of the corporate tax rate and public investment are interdependent. In particular, they both respond positively to the other. Therefore, international tax competition not only drives corporate tax rates to lower levels but might also affect negatively the stock of public capital. We build a general equilibrium model that illustrates the relation between the two variables. We then add an element of international tax competition. Our simulations show that when international tax competition drives the statutory tax rate down from 45% to 30%, public investment is reduced by 0.4% of output at the steady state. The short run effect is three times higher. The second part of our study displays an empirical analysis that corroborates the main outcome of the model. We estimate two policy functions for 21 OECD countries and find that corporate tax rate and public investment are endogenous. More precisely, a decline of 15% in the corporate tax rate reduces public investment by 0.6% to 1.1% of GDP. We also find evidence that international competition operates on both policy tools. JEL Classification: H0, H26, H54.
    Keywords: Tax competition, Corporate tax, Public investment, Public capital.
    Date: 2008–08
  5. By: Bird, Richard M. (National Institute of Public Finance and Policy)
    Date: 2008–03
  6. By: Alexandra Bibbee
    Abstract: The Canadian government has set a high priority on reducing the economic burden of taxation. In a context of fiscal surpluses, it has been: markedly reducing corporate income and capital taxes; providing more personal tax relief especially at lower incomes and above all for saving; and cutting the federal value added tax (GST). While such measures, in particular income and capital tax cuts, reduce the economic damage caused by tax, Canada should go further along this route with significant revenue-neutral reforms to achieve a more efficient tax mix that also retains its redistributive features. Numerous tax preferences to favoured activities, firm types, investments and savings vehicles narrow the tax base and create loopholes, keeping statutory rates higher than otherwise and distorting resource allocation. They should therefore be removed. It would also help to shift the tax mix toward more user fees and indirect taxes – including VAT, environmental levies and property taxes – which do not distort inter-temporal economic choices as income taxes do. Lower corporate and personal income taxes could improve the incentives for capital formation, FDI, innovation, entrepreneurship, labour-force participation, work effort, and the pursuit of higher education. The result would be higher standards of living. <P>Réforme fiscale au Canada pour plus d’efficience et d’équité <BR>Le gouvernement canadien s’est fixé pour priorité d’alléger la charge fiscale qui pèse sur l’économie. Dans un contexte d’excédents budgétaires, cette stratégie s’articule autour des objectifs suivants : réduire de manière significative l’impôt sur les sociétés et les impôts sur le capital ; multiplier les allégements fiscaux en faveur des particuliers, surtout ceux à bas revenus ; et abaisser la taxe fédérale sur les produits et services (TPS). Même si ces mesures, et notamment les baisses de l’impôt sur le revenu et sur le capital, atténuent les préjudices économiques causés par l’impôt, le Canada devrait aller plus loin dans cette direction en engageant de vastes réformes sans incidence sur les recettes visant à établir une structure fiscale plus efficiente qui conserve ses fonctions redistributives. De nombreux avantages fiscaux qui favorisent certains types d’activités, d’entreprises, de produits d’investissement et d’épargne restreignent l’assiette d’imposition et créent des failles, ce qui maintient les taux légaux à un niveau inutilement élevé et fausse la répartition des ressources. Ils devraient donc être supprimés. Il serait également judicieux de rééquilibrer la structure fiscale en faveur des droits d’utilisation et des impôts indirects – y compris la TVA, les impôts liés à l’environnement et les impôts fonciers – qui ne faussent pas les choix économiques intertemporels, contrairement aux impôts sur le revenu. Une baisse de l’imposition des ménages et des sociétés pourrait encourager la formation de capital, l’IDE, l’innovation, l’entrepreneuriat, la participation à l’activité économique, le travail et la poursuite d’études supérieures, améliorant ainsi le niveau de vie.
    Keywords: taxation, Canada, Canada, dépense fiscale, taxe à la consommation, taxation, personal income tax, progressivité de l’impôt, impôt sur les corporations, impôt sur les particuliers
    JEL: E62 H2 H77
    Date: 2008–08–12
  7. By: Desai, Mihir (Harvard U); Dharmapala, Dhammika (U of Connecticut); Singhal, Monica (Harvard U)
    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.
    Date: 2008–06
  8. By: Paul Hallwood (University of Connecticut)
    Abstract: What some view as overly-generous funding of the Scottish parliament results from Scotland.s credible threat to secede from the United Kingdom. Scotland is shown to benefit from a second mover advantage in a non-cooperative sequential game over the allocation of public funds. Various reform proposals are criticized for not recognizing that reform of Scottish government finances must be consistent with Scotland.s credible threat. Fiscal autonomy -- in which the Scottish parliament finances a much greater proportion of its spending from Scottish-sourced taxes, is demonstrated to be a viable reform within the existing political context and, in some circumstances, could remove Scotland.s second mover advantage. We also use a cooperative bargaining game model to demonstrate that an Australian style grants commission would not be a viable reform in the British context.
    Keywords: Barnett formula, cooperative game, fiscal autonomy, fiscal federalism, grants commission, non-cooperative game, public finance, regional finance, Scottish executive, Scottish parliament, secession, vertical balance, United Kingdom, vertical imbalance.
    JEL: H77
    Date: 2008–08
  9. By: John Creedy (Department of Economics, The University of Melbourne); Nicolas Hérault (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Guyonne Kalb (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)
    Abstract: This paper examines the role of the tax-free income tax threshold in a complex tax and transfer system consisting of a range of taxes and benefits, each with their own taper rates and thresholds. Considering a range of tax and benefit systems, particularly those having benefit taper rates whereby some benefits are received by income groups other than those at the bottom of the distribution, it is suggested that a tax-free threshold is not a necessary requirement to achieve redistribution. A policy change involving the elimination of the taxfree threshold in Australia and designed to achieve approximate revenue neutrality is examined using the Melbourne Institute Tax and Transfer Simulator. The results demonstrate that it is possible to eliminate the tax-free threshold under approximate overall revenue and distribution neutrality, but that labour supply incentives cannot be improved at the same time.
    Date: 2008–08
  10. By: Mariana Gerstenblüth (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República); Natalia Melgar (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República); Juan Pablo Pagano (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República); Máximo Rossi (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República)
    Abstract: Latin America is well known as the most inequitable region. As it is recognized, inequality and corruption perception weaken the way that political institutions works and the democratic system. Focusing on Latin American and Caribbean countries, we analyze what are the elements that shape tax morale. In particular, we analyze how the context influences on ethic decisions such as the predisposition to pay taxes. Our data source is the survey carried out in 2005 by Latinobarometro. In particular, our objective is to analyze how country performance is determining tax morale. To do so, we estimated four probit models including Gini index, Transparency International Corruption Perception Index and Gross Domestic Product per capita (GDPpc). As expected we found that some socio-demographic variables play a relevant role. Interestingly, we also found that, in this attitude, LAC countries do not register a gender bias. However, those are not our main contributions to the literature on the field. The most important results are linked with: 1) the level matters, GDPpc increases the probability that people have tax morale, 2) moreover, income distribution also influence on tax morale but in opposite direction and 3) corruption perception also reduces tax morale. Those results show that the quality of institutions matters and therefore, the way that democracy works play a relevant role.
    Keywords: tax morale, corruption, inequality, democracy, microeconomic behavior
    JEL: H26 H73
    Date: 2008–08
  11. By: Powell, Benjamin (Suffolk University, Department of Economics); Stringham, Edward P. (Klagenfurt University)
    Abstract: Public choice economists began studying the economics of anarchy in the 1970s. Since then, the amount of research on anarchy has burgeoned. This article surveys the important public choice contributions to the economics of anarchy. Following the lead of the early public choice economists, many current economists are researching and analyzing how individuals interact without government. From their non-public-interested explanations of the creation of government law enforcement to their historical studies of attempts to internalize externalities under anarchy, public choice scholars are arriving at a more realistic perspective on government and how people interact when government law enforcement is lacking. Although the economics of politics often receives more attention, the economics of anarchy is an important area of research in public choice.
    Keywords: Anarchism; Lawlessness; Order; Internalization of Externalities; Self-Governance
    JEL: D74 H11 K42
    Date: 2008–08–19
  12. By: Rangan Gupta (Department of Economics, University of Pretoria); Emmanuel Ziramba (Department of Economics, University of South Africa)
    Abstract: Using a monetary pure-exchange overlapping generations model, where the probability of survival of the young agents depends upon share of government expenditure on health, education and infrastructure, we analyze the welfare-maximizing policy mix between explicit and implicit taxation. We show that increases in the survival probability lead to an increase in the reliance on seigniorage as a welfare maximizing outcome. However, for our results to hold, the seigniorage tax base must be large enough for the benevolent planner to use the inflation tax.
    Keywords: Monetary Pure Exchange Overlapping Generations Model; Probability of Survival; Welfare Maximizing Policy Mix
    JEL: H2 H51 I1 I18
    Date: 2008–08
  13. By: Yolande Van Heerden (Department of Economics, University of Pretoria); Niek J. Schoeman (Department of Economics, University of Pretoria)
    Abstract: The optimum level of government intervention in the economy has been researched extensively internationally but not in South Africa. This paper is primarily concerned with assessing the optimum size of government in terms of revenue and expenditure for South Africa, in order to maximize economic growth, using time series data for the period 1960 to 2006. The results indicate that the actual average tax burden far exceeds its optimum level and that the authorities will have to adjust tax policy accordingly in order to improve on the level of economic growth. The optimum level of taxation is estimated within a balanced budget scenario.
    Date: 2008–08
  14. By: Edith Archambault (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, MATISSE - Modélisation Appliquée, Trajectoires Institutionnelles et Stratégies Socio-Économiques - CNRS : UMR8595 - Université Panthéon-Sorbonne - Paris I)
    Abstract: The European Union in its widening movement shows five clusters of Third sector organisations with complex bonds and ties with the surrounding societies and national identities In introduction, we compare briefly the Europe’s Third sector features to North America’s ones (Historical and ideological roots, relationship with central and local governments, sources of income and composition of the Third sector…) In a first part, the European Third sector is broken up into five clusters (Esping-Andersen, Salamon and Anheier) : Continental, Anglo-saxon, Nordic, Mediterranean and Oriental according to :• The relationship to the government (central/local, high/low level of taxation) • The ratio of social protection to GDP, the share of public social expenditure and the dominant type of social security regime• The main religions and their links with parts of the Third sector• The labour market situation (unemployment, flexibility, security) with a special attention devoted to female work (employment rate; full time or part time) in relation with volunteering.Then we give data issued from the Comparative Nonprofit Sector Project (CNP2, Salamon et alii, 2004) on paid employment and volunteering, level and orientation of the partnership with the government, sources of income in every cluster.The second part is devoted to the question of a likely converging evolution of these clusters :• A faster growth rate in new member states makes them catch up gradually the other ones and choose “best practices” regarding social policies and social security regimes• The trend to decentralisation in larger member states combined with the retrenchment of central government is in favour of local solutions to local issues and of public-private partnerships especially with nonprofit organisations.• Despite the ambiguities of its policy towards civil society organizations, European authorities expect them filling the gap of democracy and fighting European bureaucracies.
    Keywords: European and American Third sectors; public-private partnership; Continental cluster; Anglo-Saxon cluster; Nordic cluster; Mediterranean cluster; Oriental cluster; Convergence;
    Date: 2008
  15. By: Andrews, Matthew (Harvard U)
    Abstract: Effective government matters, but what is it? Good governance indicators go some way to provide a definition, but how much do they say about what effectiveness is, why this is so, and how it matters to development? This is the current article's question. It argues that good governance work suggests a one-best-way model ostensibly of an idyllic, developed country government: Sweden or Denmark on a good day, perhaps. The model lacks consistency, however, seems inappropriate for use in the development dialog and is not easily convey-able, looking more like a set of well meaning but problematic proverbs. The good governance picture of effective government is not only of limited use in development but also constitutes a threat, promoting isomorphism, institutional dualism, and 'flailing states' and imposing an inappropriate model of government that "kicks away the ladder" today's effective governments climbed to reach their current states. The model's major weakness lies in the lack of an effective underlying theoretical framework. A theory of government is needed before we measure government effectiveness or propose specific models of what government should look like. Such theory should address basic questions that center on the fit of different governing systems to different contexts.
    Date: 2008–03

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