nep-pbe New Economics Papers
on Public Economics
Issue of 2008‒10‒07
eleven papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Zero Corporate Income Tax in Moldova: Tax Competition and Its Implications for Eastern Europe By Marcin Piatkowski; Mariusz Jarmuzek
  2. The Supply of Foreign Direct Investment Incentives: Subsidy Competition in an Oligopolistic Framework By Havranek, Tomas
  4. Competition for Private Capital and Central Grants: The Case of Japanese Industrial Parks By Shun-ichiro Bessho; Kimiko Terai
  5. I Will Survive: Capital Taxation, Voter Turnout and Time Inconsistency By Matteo Bassi
  6. Investment Incentives and Effective Tax Rates in the Philippines:A Comparison With Neighboring Countries By Alexander Klemm; Dennis P. J. Botman; Reza Baqir
  7. Tax Evasion Dynamics in the Czech Republic: First Evidence of an Evasional Kuznets Curve By Jan Hanousek; Filip Palda
  8. International Coordination and Domestic Politics By Kimiko Terai
  9. Historical Origins of Schooling: The Role of Democracy and Political Decentralization By Francisco Gallego
  10. Decentralization, economic development, and growth in Turkish provinces By Tosun, Mehmet Serkan; Yilmaz, Serdar
  11. The efficiency frontier as a method for gauging the performance of public expenditure : a Belgian case study By Bruno Eugène

  1. By: Marcin Piatkowski; Mariusz Jarmuzek
    Abstract: Global economic integration intensified tax competition and raised concerns about the resulting "race to the bottom", which could undermine public investment and social spending. The aim of this paper is to test predictions that (i) there is interdependence in CIT rate setting in Eastern Europe and that (ii) the recent CIT cut in Moldova may intensify tax competition in the region. It finds that there is indeed evidence that during 1995-2006 countries in Eastern Europe strategically responded to changes in CIT rates in the region and that Moldovan zero CIT is likely to encourage further cuts in CIT. The paper also discusses implications of tax competition for Eastern Europe and finds that FDI flows will not be much affected, tax revenues are likely to decline, the shift in the composition in tax revenue may increase economic efficiency, but decrease equity. Tax coordination, while difficult politically, could help stem further decline in corporate taxation, but any gains might be modest and not certain to exceed the costs of tax coordination. Without tax coordination, however, it is unclear what exactly could stop corporate taxes from falling further.
    Keywords: Moldova , Corporate taxes , Tax policy , Competition , Economic integration , Public investment , Tax revenues , Foreign direct investment , Social policy , Working Paper ,
    Date: 2008–08–28
  2. By: Havranek, Tomas
    Abstract: This paper examines the microeconomic motivation of governments to provide tax incentives for foreign direct investment. Author applies the classical models of oligopoly to subsidy competition, endogenousing investment incentives, but leaving tax rates exogenous. According to the conventional wisdom, subsidy competition leads to overprovision of incentives. This paper suggests that, in the oligopolistic framework, supranational coordination can either decrease or increase the supply of subsidies. Further, in the setting of subsidy regulation, the host country's corporate income tax rate has an ambiguous effect on the provision of incentives.
    Keywords: Investment incentives; Subsidy competition; Productivity spillovers; Oligopoly; Foreign direct investment; Multinational corporations
    JEL: F23 H25 F21
    Date: 2008–09–26
  3. By: Dracea, Raluca; Cristea, Mirela; Ionascu, Costel; Irtes, Meltem
    Abstract: The academic literature analyzes the fiscality concern from all points of view, and the question which pressed upon the theoreticians and also the practitioners of the last decades remains: which is the adequate level of the fiscality? The difficulty in answering the question consists in opposite interests: on one hand, the government is willing to acquire the highest level due to the ascendant tendency of public expenses; on the other hand, the tax payers long for a much reduced level in order to dispose of more financial funds. Considering the theory of Arthur Laffer as well as the premise that the taxation structure (flat or progressive tax) is less important than the general level of taxation (tax burden), the purpose of this paper consists in the empirical analysis of the correlation between the tax pressure rate, GDP and the tax incomes flux within two States which adopt different tax systems: Romania and Turkey. For this purpose, we have described the methodology of creating the Laffer curve for Romania and Turkey and we have applied the methods concerning the analysis between the GDP and real tax systems, as well as those methods which estimate the empirical tendency of the fiscality rate within the two States, mentioned above, taking into account the parameters which determine it. The conclusion indicates the existence of a correlation between the real GDP and the real tax incomes, strongly manifested in Turkey (progressive tax system) as compared to Romania (flat tax system). Romania provides an optimistic position, based on standard tendencies which confirm the theory of Arthur Laffer within other countries in Eastern Europe.
    Keywords: Laffer curve fiscality rate tax incomes static statistical analysis correlations
    JEL: E62 H21
    Date: 2008–09
  4. By: Shun-ichiro Bessho (Department of Economics, Hitotsubashi University); Kimiko Terai (Hosei University)
    Abstract: We construct a simple model of fiscal competition taking `rent-seeking' behavior of local governments into account and estimate a policy reaction function based on the model. We consider the scale of public input as each local government's policy tool. Local autonomies' method of seeking central grants often takes the form of personnel exchange with central government. Our estimation of the policy reaction function suggests that such personnel exchange has an effect on the development of industrial parks.
    Keywords: Business area development; Policy competition; Rent-seeking, Spatial model
    JEL: H11 H54 H76 H77 R53
    Date: 2008–09
  5. By: Matteo Bassi (Università di Salerno, CSEF Toulouse School of Economics (GREMAQ))
    Abstract: This paper reconsiders the debate around the political determination of capital income taxes and explains why such taxes survive in most OECD countries. The political economy literature on redistributive politics (Persson and Tabellini 2003) emphasizes the role played by the lower class in the political arena: being labor more concentrated than capital, the majority of the population benefits by overtaxing capital and undertaxing labour. However, in reality, political participation (voting, lobbying, protesting etc.) is positively correlated with income. Therefore, a paradoxical result emerges: why do the upper class, who is politically more active and own most of the capital, still favour a positive capital tax? Hence, voters' income is not the sole relevant variable in the political determination of the capital tax. To reconcile this apparent puzzle, we propose a model that incorporates time inconsistency à la Laibson in individual preferences We show that time inconsistent individuals are politically more homogeneous (or “single-minded”) than far-sighted, and prefer to tax more capital income, instead of labor income, since accumulated saving are below the planned (and optimal) level and the distortionary effects of a higher capital tax are not only reduced but also delayed in time. We demonstrate that, since politicians find easier to please hyperbolic voters by proposing a tax policy that includes lower labor and higher capital taxes compared to an economy with only far sighted. Moreover, we show that, as the proportion of time inconsistent individuals in the population increases, the tax policy becomes more and more biased towards capital taxation.
    Keywords: Political Economy, Multidimensional Voting, Capital Taxation, Redistribution, Hyperbolic Discounting
    JEL: A12 D72 H21 H24 H31
    Date: 2008–09–26
  6. By: Alexander Klemm; Dennis P. J. Botman; Reza Baqir
    Abstract: We compare the general tax provisions and investment incentives in the Philippines to six other east-Asian economies-Malaysia, Indonesia, Lao, Vietnam, Cambodia, and Thailand. We calculate effective tax rates and find that general effective tax rates are relatively high in the Philippines, while investment incentives are comparable to those in neighboring countries. Tax holidays are most attractive for very profitable firms, creating redundancy, and for investment in short-lived assets. We also consider recently-proposed tax reforms that would replace tax holidays by a reduced corporate income tax rate or a low tax on gross receipts. The results suggest that this would result in stronger incentives to invest, while government revenue increases. Alternatively, replacing holidays with a general reduction in the corporate tax rate and offering accelerated depreciation will either not provide the same incentives or be very costly.
    Keywords: Philippines , Investment incentives , Tax rates , Corporate taxes , Tax reforms , Revenue sources , Southeast Asia , Working Paper ,
    Date: 2008–09–05
  7. By: Jan Hanousek; Filip Palda
    Abstract: Using surveys of the Czech Republic taken in 2000, 2002, 2004, and 2006 we measure how the percentage of tax evaders evolved from 1995 until 2006. We find that at first evasion rose, leveled off, and then fell along a quadratic path, suggesting the existence of what we call an evasional Kuznets curve. Our paper is the first to document the existence of an evasional Kuznets curve and to show how it can help improve Markov-chain predictions of tax evasion. We conclude by suggesting that the evasional Kuznets curve may be a subset of a larger trend in evasion for both transitional and developed economies.
    Keywords: Underground economy, tax evasion, Markov chains, transition, evasional Kuznets curve.
    JEL: H26 H43 K42 O17
    Date: 2008–09
  8. By: Kimiko Terai (Hosei University)
    Abstract: We examine how international coordination between countries generates a trend to establish an international institution for the provision of global public goods. In the present model, the forces creating movement to international agreement are a politician's opportunistic motive for re-election, and his optimistic expectation of unanimous consent on agreement between countries. If a politician expects another politician in a neighboring country to signal his good performance to his citizens by participating in the agreement, he also decides to participate in the agreement, which then brings benefit spillovers to his country. Furthermore it is shown that, by dividing political authorities for coordination between the executive and politicians, observed over-compliance in the agreement by participating countries can be explained.
    Keywords: International environmental agreements; Global public goods; Re-election pressure; Division of authorities
    JEL: D72 D78 D82 H87 Q58
    Date: 2008–09
  9. By: Francisco Gallego (Instituto de Economía. Pontificia Universidad Católica de Chile.)
    Abstract: Why does schooling attainment vary widely across countries? Why are differences in schooling attainment highly persistent? I show that cross-country differences in schooling are related to political institutions, such as democracy and local democracy (political decentralization), which are affected by colonial factors. By using the number of native cultures before colonization as an instrument for political decentralization, I show that, after controlling for the causal effect of income on schooling, the degree of democratization positively affects the development of primary education, whereas political decentralization has a positive and significant impact on more advanced levels of schooling.
    Keywords: Schooling, Political Decentralization, Democracy, Institutions, Colonialism, School Decentralization.
    JEL: I2 N3 O15
    Date: 2008
  10. By: Tosun, Mehmet Serkan; Yilmaz, Serdar
    Abstract: There have been important developments in the decentralization of the government structure in Turkey since the early 1980s. This paper examines economic development and growth in Turkish provinces. Although there is a rich literature on the economic effects of government decentralization from both developed and developing countries, these effects have not been examined widely in the context of Turkish local governments. The authors first describe changes since the early 1980s and recent reform efforts. They then provide an empirical analysis of the effects of decentralization in Turkish provinces using cross-sectional and panel data approaches. The panel dataset consists of 67 provinces from 1976 to 2001. The analysis examines whether variations in local decentralization across these provinces and across time have had a significant impact on economic development and growth in those provinces. The findings suggest a weak negative economic effect of decentralization through a number of municipalities per capita. However, the findings do not show any significant impact from the creation of new provinces by separation from the existing ones.
    Keywords: Municipal Financial Management,Economic Theory&Research,Regional Governance,Intergovernmental Fiscal Relations and Local Finance Management,Public Sector Management and Reform
    Date: 2008–09–01
  11. By: Bruno Eugène (National Bank of Belgium, Research Department)
    Abstract: This paper uses the Free Disposal Hull framework in order to assess the relative efficiency of Belgian general government in the field of health care, education and public order and safety. In order to do so, this paper aggregates a large number of outcome indicators. Several drawbacks indicate that results must be interpreted cautiously. These drawbacks aside, the analysis reveals that Belgium is relatively efficient in the field of health care. As a whole, the Belgian education system is more expensive but also produces better results than the European average. However, an analysis based on a limited set of indicators reveals that the French-speaking education sector is very inefficient while the Flemish Community’s efficiency is markedly better. As far as public order and safety are concerned, major improvements could and should be made, either to improve service or cut costs
    Keywords: Public spending efficiency, FDH
    JEL: H11 H51 H52 H59
    Date: 2008–09

This nep-pbe issue is ©2008 by Oliver Budzinski. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.