nep-pbe New Economics Papers
on Public Economics
Issue of 2008‒10‒13
fifteen papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Decentralisation vs fiscal federalism in the presence of impure public goods By Rosella Levaggi
  2. The European Commission´s Proposal for a Common Consolidated Corporate Tax Base By Clemens Fuest
  3. Effects of Flat Tax Reforms in Western Europe on Income Distribution and Work Incentives By Paulus, Alari; Peichl, Andreas
  4. Corporate taxation in the OECD in a wider context By Simon Loretz
  5. Corporate Income Taxation in Canada By George R. Zodrow
  6. What Problems and Opportunities are Created by Tax Havens? By Dhammika Dharmapala
  7. Taxing Leisure Complements By Louis Kaplow
  8. Tax reform, delocation and heterogeneous firms: Base widening and rate lowering rule By Richard E. Baldwin; Toshihiro Okubo
  9. Economic role of public administration in Central Asia: Decentralization and hybrid political regime By Libman, Alexander
  10. The political economy of public spending composition: evidence from a panel of OECD countries By Maria Manuel Pinho
  11. On Estimating Marginal Tax Rates and Tax Progressivities for U.S. States By W. Robert Reed; Cynthia L. Rogers; Mark Skidmore
  12. Taxation of Outbound Direct Investment: Economic Principles and Tax Policy Considerations By Michael P Devereux
  13. Corporate Tax Elasticities A Reader’s Guide to Empirical Findings By Ruud A. de Mooij; Sjef Ederveen
  14. The Political Economy of Cultural Spending: Evidence from Italian Cities By Chiara Dalle Nogare; Matteo M Galizzi
  15. Targeting Public Services through Unequal Treatment of Unequals By Audun Langørgen

  1. By: Rosella Levaggi
    Abstract: The traditional theory for fiscal federalism assumes that the lower tier is more efficient in producing local public goods because of information asymmetry, while on the finance side Central Government might be more efficient in raising resources that can be redistributed through grants-in-aid. This scheme does not take into account that services produced at local level are usually impure public goods. The model developed in this paper allows to derive grants-in aid distribution formulae in this environment and a set of rules that allows to establish when fiscal federalism is a superior alternative to decentralisation.
    Date: 2008
  2. By: Clemens Fuest (Oxford University Centre for Business Taxation)
    Abstract: The European Commission currently prepares a proposal for a directive on the introduction of a Common Consolidated Corporate Tax Base (CCCTB). This paper reviews the current state of the European Commission´s preparation of the CCCTB proposal and discusses the implications for efficiency and fairness of the tax system. The analysis concludes that more evidence of significant economic benefits from introducing a CCCTB would be required to generate widespread support for the project.
    Keywords: Corporate Taxation; European Commission, CCCTB
    JEL: H25
    Date: 2008
  3. By: Paulus, Alari (ISER, University of Essex); Peichl, Andreas (IZA)
    Abstract: The flat income tax has become increasingly popular recently, yet its implementation is limited to Eastern Europe. We analyse the distributional and efficiency effects of flat tax scenarios for Western European countries. Our simulations show that flat tax rates required to attain revenue neutrality with existing basic allowances improve labour supply incentives. However, they result in higher inequality and polarisation. Flat rates necessary to keep the inequality levels unchanged allow for some scope for flat taxes to increase both equity and efficiency. Our analysis suggests that Mediterranean countries are more likely to benefit from flat taxes.
    Keywords: flat tax reform, income distribution, work incentives, microsimulation
    JEL: C81 D31 H24
    Date: 2008–09
  4. By: Simon Loretz (Oxford University Centre for Business Taxation)
    Abstract: Against the background of increased globalisation statutory corporate tax rates have shown a clear downward trend over the last two decades. The sharp decline in these rates was accompanied by substantial tax base broadening and a comparable reduction in personal income tax rates only until the early 1990s. This suggests that corporate tax competition is of increasing importance. So far corporate tax revenues remain fairly stable. But an analysis of corporate taxation in the context of the overall tax systems shows that a substantial shift towards value added taxes has taken place. While the trends so far have been driven by smaller European countries, recent tax reforms indicate that increasing tax competition is inducing a shift towards consumption even for larger economies.
    Keywords: Corporate Taxation; OECD; Tax Competition
    JEL: H25
    Date: 2008
  5. By: George R. Zodrow (Rice University, Oxford University Centre for Business Taxation)
    Abstract: This paper examines Canadian corporate income tax policy, focusing on the implications of international capital mobility, international tax competition – including the need for a corporate tax structure that is competitive with respect to the United States and other competing economies – and international tax avoidance. The paper begins by considering the arguments for tax exemption or even subsidization of capital income, and then examines the many qualifications to these arguments. This analysis pays particular attention to the implications of the existence of firm-specific and location-specific economic rents and the issues raised by new techniques for international tax avoidance. In all cases, the discussion of theoretical arguments is followed by an examination of the empirical evidence, including studies specific to Canada as available. The paper then traces out the implications of the analysis for corporate income tax policy in Canada, including the recently enacted corporate income tax rate reductions and other potential reforms.
    Keywords: Canadian corporate income tax, business tax reform, international tax competition, international tax avoidance, international capital mobility
    JEL: H20 H25
    Date: 2008
  6. By: Dhammika Dharmapala (University of Connecticut)
    Abstract: Tax havens have attracted increasing attention from policymakers in recent years. This paper provides an overview of a growing body of research that analyzes the consequences and determinants of the existence of tax haven countries. For instance, recent evidence suggests that tax havens tend to have stronger governance institutions than comparable nonhaven countries. Most importantly, tax havens provide opportunities for tax planning by multinational corporations. It is often argued that tax havens erode the tax base of high-tax countries by attracting such corporate activity. However, while tax havens host a disproportionate fraction of the world’s foreign direct investment (FDI), their existence need not make high-tax countries worse off. It is possible that, under certain conditions, the existence of tax havens can enhance efficiency and even mitigate tax competition. Indeed, corporate tax revenues in major capitalexporting countries have exhibited robust growth, despite substantial FDI flows to tax havens.
    Date: 2008
  7. By: Louis Kaplow
    Abstract: Ever since Corlett and Hague (1953), it has been understood that it tends to be optimal on second-best grounds to (relatively) tax complements to leisure and subsidize substitutes because doing so helps to offset the distorting effect of taxation on labor supply. Yet in the context of simultaneous optimization of a nonlinear income tax and commodity taxes, Atkinson and Stiglitz (1976) claim to have demonstrated the opposite, that goods complementary with leisure should "face lower tax rates, whereas substitutes face higher tax rates." Derivations in leading texts on optimal taxation seem to yield opposing conclusions regarding the sign of optimal deviation of commodity taxes from uniformity. It is demonstrated that the optimality of relatively taxing leisure complements is indeed correct, and conflicting results are explained.
    JEL: H21 H24
    Date: 2008–10
  8. By: Richard E. Baldwin (Graduate Institute, Geneva and CEPR); Toshihiro Okubo (Research Institute for Economics and Business Administration, Kobe University)
    Abstract: We model international tax competition allowing for agglomeration forces and heterogeneous firms. This provides a new perspective since a tax schedules have different effects on the international relocation decision of small and large firms (large firms are endogenously more sensitive to tax competition) and these decisions affect industry productivity in addition to the usual effects. The model allows us to study rate-lowering base-widening reforms. We show it is generally possible to design such a reforms that raises revenue without losing firms.
    Keywords: tax reform, heterogeneous firms, agglomeration forces.
    JEL: H32 P16
    Date: 2005–10
  9. By: Libman, Alexander
    Abstract: The aim of the paper is to understand how the organization of public administration in Central Asia shapes the results of economic development in the region. It discusses the main factors of bad quality of public administration in the region, paying particular attention to the link between political regimes and public administration. Moreover, it provides an overview of decentralization and devolution of power in Central Asian countries as one of the main channels of transformation of administration. The paper covers both formal decentralization and informal distribution of power between levels of government.
    Keywords: Public administration; hybrid regimes; decentralization
    JEL: D73 P26
    Date: 2008
  10. By: Maria Manuel Pinho (CEMPRE and Faculdade de Economia, Universidade do Porto)
    Abstract: We evaluate the influence of political and institutional features in public spending and its functional composition, by focussing on political actors’ preferences, both opportunistic and partisan, as well as on institutional arrangements as political fragmentation, the electoral system and the political regime. We use a dataset covering 23 OECD countries from 1970 to 2004. Empirical evidence supports the opportunistic approach in the sense that governments tend to engage in fiscal policy manipulation in order to win the next parliamentary election. This pre-electoral manipulation seems to be stronger in new democracies and under center and left-wing governments. There is, however, no evidence of pure partisan behavior. Furthermore, political fragmentation, with regard to both the government and the parliament, seems to favor fiscal indiscipline, particularly on social items.
    Keywords: public spending; functional composition; political economy
    JEL: D72 H5
    Date: 2008–10
  11. By: W. Robert Reed (University of Canterbury); Cynthia L. Rogers; Mark Skidmore
    Abstract: This research presents a simple procedure for improving state-specific estimates of marginal tax rates (MTR’s). Most research employing MTR’s follows a procedure developed by Koester and Kormendi (K&K, 1987). Unfortunately, the time-invariant nature of the K&K estimates precludes their use as explanatory variables in panel data studies. Furthermore, their estimates are not based on statutory tax parameters. In contrast, our procedure produces timevarying estimates of MTR’s that are directly related to observed changes in statutory tax parameters. Using comprehensive data on state tax policy parameters, our procedure produces state-specific MTR’s estimates for all 50 states over the years 1977-2004. We compare our refined MTR’s to alternative estimates and evaluate implications for estimating tax progressivity for US states.
    Keywords: State tax revenues; Marginal tax rates; Tax burden; Tax progressivity; Economic growth.
    JEL: H71 H24 H25
    Date: 2008–08–08
  12. By: Michael P Devereux (Oxford University Centre for Business Taxation)
    Abstract: This paper reviews economic principles for optimality of the taxation of international profit, from both a global and national perspective. It argues that for traditional systems based on the residence of the investor or the source of the income, nothing less than full harmonisation across countries can achieve global optimality. The conditions for national optimality are more difficult to identify, but are most likely to imply source-based taxation. However, source-based taxation requires an allocation of the profits of multinational companies to individual jurisdictions; this is not only very difficult in practice, but in some cases is without any conceptual foundation. The taxation of interest income on a residence basis is also hard to justify if the aim of the tax system is to tax only the income arising from economic activity in a given country.
    Date: 2008
  13. By: Ruud A. de Mooij (Erasmus University Rotterdam, CPB, CESifo, Tinbergen Institute, Oxford University Centre for Business Taxation); Sjef Ederveen (Ministry of Economic Affairs, the Netherlands)
    Abstract: Corporate taxes exert a variety of effects on business behaviour. A wealth of empirical evidence assesses the magnitude of these behavioural margins of taxation. This article offers an up-to-date review and aims to provide common ground by computing for each distortion the semi-elasticity of the corporate tax base. We pay particular attention to international investment where it is not a priory clear whether marginal investment decisions or discrete locations are most important. Using an extension of the meta analysis of De Mooij and Ederveen (2003), we explore the extent to which existing studies reveal differences in effect size between the intensive and extensive margins of international investment.
    JEL: F2 H25
    Date: 2008
  14. By: Chiara Dalle Nogare; Matteo M Galizzi
    Abstract: Political Economy and the Economics of Art and Cultural Heritage rarely have intersected. In this paper we investigate the relationship between Italian municipalities’ spending on culture in the 90s and 2000s and a number of political variables, such as a left/right dummy, an election year dummy and a term limit indicator, controlling, among others, for economic as well as socio-demographic characteristics of their population, level of human capital and instruction, proxies of social capital, extent of private financing of cultural provision, touristic and artistic relevance. We use panel data regression analysis and find that there are indeed some significant political determinants of local government cultural expenditure.
    Date: 2008
  15. By: Audun Langørgen (Statistics Norway)
    Abstract: When private goods are publicly provided, government authorities have to determine the distribution of services on recipients. In this paper, the public service provider is assumed to maximize utility defined over service supply to different target groups, given a budget constraint. The production technology is target group specific and depends on the ability of each target group to produce service outcomes. Three benchmark allocation principles are identified: equality of treatment (ET), equality of outcome (EO) and equality of marginal cost (EMC). These principles can be considered to be consistent with special cases of a public preference model, which allows for compromises between different allocation principles. The condition of technological dominance implies that there is a clear-cut equity-productivity trade-off, whereas violations of this condition may reduce the significance of the trade-off.
    Keywords: treatment targeting; technological dominance; equity-productivity trade-off; publicly provided private goods; in-kind transfers
    JEL: H42
    Date: 2008–09

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