nep-pbe New Economics Papers
on Public Economics
Issue of 2008‒09‒29
nine papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. The impact of economic openness on the vertical structure of the public sector By Antonio Sciala'; Riccardo Tilli
  2. Tax Competition – Areas of Display and Romanian Effects By Mitu, Narcis-Eduard
  3. Are your firm’s taxes set in Warsaw? Spatial tax competition in Europe By Karen Crabbé; Hylke Vandenbussche
  4. Preferences for Childcare Policies: Theory and Evidence By Borck, Rainald; Wrohlich, Katharina
  5. The Efficacy of Parochial Politics: Caste, Commitment, and Competence in Indian Local Governments By Kaivan Munshi; Mark Rosenzweig
  6. Cross-Border Tax Effects on Affiliate Investment - Evidence from European Multinationals By Johannes Becker; Nadine Riedel
  7. Decentralization and Fiscal Federalism in Mexico By Cabrera-Castellanos, Luis F.; Lozano-Cortés, René
  8. Status preferences and optimal corrective taxes: a note By Beckmann, Klaus; Gattke, Susan
  9. Questionable Luxury Taxes: Results from a Mating Game By Thomas, Tobias

  1. By: Antonio Sciala' (Universita' di Padova); Riccardo Tilli (Universita' di Roma)
    Abstract: The aim of this paper is to investigate the impact of economic openness on the vertical structure of the public sector within a country. To tackle this issue we set up a simple theoretical model of fiscal federalism, where both central and local public spending enter the objective functions of both a central government and an aggregate local public sector, accommodating a wide range of behaviours. The degree of economic openness is assumed to erode central tax revenues and through this channel to affect the size of central spending, the size of grants paid to local governments and the optimal amount of local public spending. Consequences on the degree of decentralization are investigated. The main findings are that for a large subset of parameters an increase in economic openness leads to: a) a lower level of central government expenditures; b) a lower level of general government expenditures; c) a higher level of local taxation; d) a higher degree of public sector decentralization.
    Keywords: openness, decentralization, fiscal federalism, public sector, government size.
    JEL: H77 H50 H11
    Date: 2008
  2. By: Mitu, Narcis-Eduard
    Abstract: In the past, governments had more freedom in setting their taxes as the barriers to free movement of capital and people were high. The gradual process of globalization is lowering these barriers and results in rising capital flows and greater manpower mobility. Tax competition exists when governments are encouraged to lower fiscal burdens to either encourage the inflow of productive resources or discourage the exodus of those resources. With tax competition in the era of globalization politicians have to keep tax rates “reasonable” to dissuade workers and investors from moving to a lower tax environment. Most countries started to reform their tax policies to improve their competitiveness. However, the tax burden is just one part of a complex formula describing national competitiveness. The other criteria like total manpower cost, labor market flexibility, education levels, political stability, legal system stability and efficiency are also important.
    Keywords: Tax competition; Positive effects; Negative effects; Flat tax
    JEL: E62 F22 E60
    Date: 2008–09–23
  3. By: Karen Crabbé; Hylke Vandenbussche
    Abstract: Corporate tax rates in Europe have been falling rapidly; as a consequence tax competition within the EU is fiercer than in the rest of the OECD. This paper analyzes heterogeneity in corporate tax rate changes between EU-15 countries as a function of the proximity to the EU-10 new member states. The average corporate tax rate in the new member states has always been considerably lower than the average in the EU-15 countries. Their entry into the EU eliminated capital barriers, in principle allowing firms to locate in one of the new EU-10 with full access to the European Market. Our results indicate that EU-15 countries physically closer to Central-Europe experienced more tax competition. Next we use a spatial regression framework to more formally test the hypothesis that distance to a low tax region affects countries' tax reaction functions.
    Keywords: Spatial tax competition, Corporate taxes, fiscal reaction function
    JEL: H25 H77 H39
    Date: 2008
  4. By: Borck, Rainald (DIW Berlin); Wrohlich, Katharina (DIW Berlin)
    Abstract: We analyse preferences for public, private or mixed provision of childcare theoretically and empirically. We model childcare as a publicly provided private good. Richer households should prefer private provision to either pure public or mixed provision. If public provision redistributes from rich to poor, they should favour mixed over pure public provision, but if public provision redistributes from poor to rich, the rich and poor might favour mixed provision while the middle class favour public provision ('ends against the middle'). Using estimates for household preferences from survey data, we find no support for the ends-against-the-middle result.
    Keywords: childcare, redistribution, political preferences, public provision of private goods
    JEL: J13 D72 H42 D19
    Date: 2008–09
  5. By: Kaivan Munshi (Brown University); Mark Rosenzweig (Yale University)
    Abstract: Parochial politics is typically associated with poor leadership and low levels of public good provision. This paper explores the possibility that community involvement in politics need not necessarily worsen governance and, indeed, can be efficiency enhancing when the context is appropriate. Complementing the new literature on the role of community networks in solving market problems, we test the hypothesis that strong traditional social institutions can discipline the leaders they put forward, successfully substituting for secular political institutions when they are ineffective. Using new data on Indian local governments at the ward level over multiple terms, and exploiting the randomized election reservation system, we find that the presence of a numerically dominant sub caste (caste equilibrium) is associated with the selection of leaders with superior observed characteristics and with greater public good provision. This improvement in leadership competence occurs without apparently diminishing leaders' responsiveness to their constituency.
    Keywords: politics, commitment, governance
    JEL: H11 H44 O12
    Date: 2008–09
  6. By: Johannes Becker (Oxford University Centre for Business Taxation); Nadine Riedel (Oxford University Centre for Business Taxation)
    Abstract: Several recent papers show that increases in the capital stock at one multinational affiliate tend to raise the capital stock at other locations, rather than to reduce it. In this paper, we theoretically and empirically explore the consequences of these findings for national corporate tax policy. Our main hypothesis is that domestic corporate taxation not only reduces domestic capital investment but also lowers capital stocks at foreign affiliates within a multinational group. The paper identifies several channels through which domestic taxation may exert such a cross-border effect on foreign capital. Using micro data on European multinational firms, we confirm the hypothesis showing that a ten percentage point increase in corporate tax rates is associated with a 5.5 percent decrease in the affiliate’s capital stock. From a welfare point of view, this cross-border tax effect on capital investment gives rise to a negative fiscal externality of corporate taxation which is empirically shown to compensate a substantial fraction of the well-known positive profit shifting externality.
    Keywords: Multinational Firms, Foreign Direct Investment, Corporate Taxation
    JEL: H25 F23
    Date: 2008
  7. By: Cabrera-Castellanos, Luis F.; Lozano-Cortés, René
    Abstract: In this paper we analyze the evolution and current situation of the Mexican Fiscal Federalism. Our diagnosis showed that deep structural inequalities in the country is present, both internally and in comparison with the countries of the OECD. We pointed out the low financial autonomy of the subnational governments and the system of transferences in force is examined. Also, we evaluate the current transferences and we conclude that deep innefficiency and inequality problems remains.
    Keywords: Descentralización; Federalismo Fiscal; Transferencias; México
    JEL: H77 H73
    Date: 2008
  8. By: Beckmann, Klaus (Helmut Schmidt University, Hamburg); Gattke, Susan (Helmut Schmidt University, Hamburg)
    Abstract: We take issue with the argument expounded, among others, by Layard (2006, Economic Journal) that status-seeking preferences justify heavier taxation of income because this serves to internalise the negative externality that the pursuit of status imposes on others. In a model where status depends on both income and effort, we show that the optimal corrective tax rate is smaller than if non-monetary status plays no role, and that a subsidy of work effort at the margin may be called for. Additionally, we demonstrate how the elasticity of labour supply depends on the parameters of the status production function in such a model, and discuss potential implications for optimal income taxation.
    Date: 2008–01–31
  9. By: Thomas, Tobias (Helmut Schmidt University, Hamburg)
    Abstract: This contribution provides a game theoretical derivation of market demand as a function of the level and distribution of income in the considered economy: if (i) the price is low, everyone buys the good; if (ii ) the price is high, only the rich buy the good (a status good in a narrow sense). If (iii) the price is located in very high or in middle range, demand collapses. With this, we explain the critical price from which a status good acts as a distinctive signal. In addition, this approach shows the potential welfare-improving impact of conspicuous consumption. Taking these results into account, recommendations by numerous economists to prevent the welfare losses of conspicuous consumption by introducing a luxury tax are highly questionable.
    Keywords: luxury tax; conspicuous consumption; mating model; signaling game; status good
    JEL: C70 D11 D82
    Date: 2008–08

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