nep-pbe New Economics Papers
on Public Economics
Issue of 2008‒10‒21
sixteen papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. "Tax Competition, Public Good Provision, and Income Redistribution: The Case of Linear Capital Income Tax" By Toshihiro Ihori; C.C. Yang
  2. Race to the top and race to the bottom: Tax competition in rural China: By Yao, Yi; Zhang, Xiaobo
  3. Optimal Provision of Public Goods: A Synthesis By Claus Thustrup Kreiner; Nicolaj Verdelin
  4. Preferences for Childcare Policies : Theory and Evidence By Rainald Borck; Katharina Wrohlich
  5. The Runaway Taxpayer or: Is Prior Tax Notice Effective against Scofflaws? By Simone Pellegrino; Massimiliano Piacenza; Gilberto Turati
  6. Reconstituting democratic taxation in Europe: The conceptual framework By Agustín José Menéndez
  7. The Incentives to Cooperate in Local Public Goods Supply: A Repeated Game with Imperfect Monitoring By CHEIKBOSSIAN, Guillaume; SAND-ZANTMAN, Wilfried
  8. Fiscal decentralization and economic growth in Central and Eastern Europe By Andrés Rodríguez-Pose; Anne Krøijer
  9. Do Tax Structures Affect Aggregate Economic Growth?: Empirical Evidence from a Panel of OECD Countries By Jens Arnold
  10. Public Finance for Poverty Reduction: An Overview By Moreno-Dodson, Blanca; Wodon, Quentin
  11. The impact of productive efficiency and quality of a regulated local public utility on final goods prices and consumers welfare By Alessandro Petretto
  12. 'Klin'-ing Up: Effects of Polish Tax Reforms on Those In and on Those Out By Morawski, Leszek; Myck, Michal
  13. Joint Bidding in Infrastructure Procurement By Antonio Estache; Atsuhi Iimi
  14. Understanding U.S. Corporate Tax Losses By Rosanne Altshuler; Alan J. Auerbach; Michael Cooper; Matthew Knittel
  15. A Description of Experimental Tax Evasion Behavior Using Finite Automata: the case of Chile and Italy By Nicolás Garrido; Luigi Mittone
  16. The usury doctrine and urban public finances in late-medieval Flanders (1220 - 1550): rentes (annuities), excise taxes, and income transfers from the poor to the rich By Munro, John H.

  1. By: Toshihiro Ihori (Faculty of Economics, University of Tokyo); C.C. Yang (Institute of Economics, Academia Sinica and Department of Public Finance, National Chengchi University)
    Abstract: This paper considers a tax competition model in which regional government activities include income redistribution as well as public good provision. To incorporate the regional government function of income redistribution, we extend the tax system from the stylized proportional capital income tax to the linear capital income tax: the revenue collected from capital taxation in each region is used not only to provide the regional public good but also to offer a uniform lump-sum grant to each individual in the region. In contrast to Hoyt's (1991) finding that the extent to which public goods are undersupplied is monotonically increasing in the number of competing regions, we show that, regardless of the number of competing regions, all heterogeneous individuals concur with each other on the first-best provision of public goods; on the other hand, the size of income redistribution is monotonically decreasing in the number of competing regions.
    Date: 2008–10
  2. By: Yao, Yi; Zhang, Xiaobo
    Abstract: "Fiscal federalism has been argued to intensify regional competition and promote economic growth. This paper is the first, to our knowledge, to empirically assess the patterns and extent of strategic tax competition between geographically neighboring governments in China. Using a panel data set containing data at the county level, we apply Anselin's (1995) local indicator of spatial association (LISA) approach to statistically test the existence of local capital tax competition and examine its determining factors. We find heterogeneous tax competition behaviors across regions. Under decentralized fiscal structure and centralized merit-based governance structure, local governments have strong incentives to compete with each other to attract mobile capital. Counties in the coastal areas with favorable initial conditions of larger tax base tend to “race to the bottom” by lowering tax rates so as to create a pro-business environment. In contrast, the local governments in poor regions have difficulty in competing with the governments on the coast to attract investment and develop the local nonfarm economy. Their local revenues are sometimes barely sufficient to cover the salaries of civil servants on the public payroll. Consequently, they are more likely to levy heavy taxes on existing enterprises, worsening the business investment environment. This leads to a “race to the top” in raising effective tax rate in lagging regions." from authors' abstract
    Keywords: Fiscal decentralization, Regional inequality, Tax competition, economic growth, Development strategies,
    Date: 2008
  3. By: Claus Thustrup Kreiner (Department of Economics, University of Copenhagen); Nicolaj Verdelin (Department of Economics, University of Copenhagen)
    Abstract: There currently exist two competing approaches in the literature on the optimal provision of public goods. The standard approach highlights the importance of distortionary taxation and distributional concerns. The new approach neutralizes distributional concerns by adjusting the non-linear income tax, and finds that this reinvigorates the simple Samuelson rule when preferences are separable in goods and leisure. We provide a synthesis by demonstrating that both approaches derive from the same basic formula. We further develop the new approach by deriving a general, intuitive formula for the optimal level of a public good without imposing any separability assumptions on preferences. This formula shows that distortionary taxation may have a role to play as in the standard approach. However, the main determinants of optimal provision are completely different and the traditional formula with its emphasis on MCF only obtains in a very special case.
    JEL: H41 H23 H11
    Date: 2008–10
  4. By: Rainald Borck; Katharina Wrohlich
    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
  5. By: Simone Pellegrino (Department of Economics and Finance G. Prato, University of Turin (Italy)); Massimiliano Piacenza (Department of Economics and Finance G. Prato, University of Turin (Italy)); Gilberto Turati (Department of Economics and Finance G. Prato, University of Turin (Italy))
    Abstract: In this paper we study how prior tax notice (following audit and detection of tax fraud by Tax Authorities) affects individual behaviour in terms of tax compliance. We start with a very stylised theoretical framework, considering a situation in which an individual has been already audited and caught as tax evader, and knows that the Tax Authorities are looking for her to cash the due amount of taxes. We concentrate on the decision to move in order to avoid paying the bill, and derive the optimal number of times an individual should move equalising marginal costs and benefits of the decision. We then carry out an empirical analysis based on real data provided by an Italian collection agency for the period 2004-2007. Our results show that previous notice reduces the probability to move, but its cost is not large enough to correct the individual incentive to escape Tax Authorities.
    Keywords: tax-enforcement, individual compliance decisions, prior notice
    JEL: H26 H31 K42 D81
    Date: 2008–05
  6. By: Agustín José Menéndez
    Abstract: This paper explores how and to what extent it is possible to contribute to the democratisation of the European political order by means of modifying the ways in which taxes are deliberated upon, decided and collected in the old continent. In the first part, the author elucidates the particular relationship which prevails between the institutional setup and the decision-making processes of the European Union, the structure of the European tax order and democratic legitimacy, and concludes that No European Democracy without European Taxation. In the second part, the three general RECON models are specified by reference to four dimensions of any tax order, and thus the ground is laid to the study of both the emergence of a supranational tax order and the Europeanisation of national tax systems, which will be conducted in coming papers.
    Keywords: democratization; Europeanization; institutions; law; tax policy
    Date: 2008–09–15
  7. By: CHEIKBOSSIAN, Guillaume; SAND-ZANTMAN, Wilfried
    JEL: H7 C73
    Date: 2008–07
  8. By: Andrés Rodríguez-Pose (London School of Economics); Anne Krøijer (London School of Economics)
    Abstract: The majority of the literature on fiscal decentralization has tended to stress that the greater capacity of decentralized governments to tailor policies to local preferences and to be innovative in the provision of policies and public services, the greater the potential for economic efficiency and growth. There is, however, little empirical evidence to substantiate this claim. In this paper we examine, using a panel data approach with dynamic effects, the relationship between the level of fiscal decentralization and economic growth rates across 16 Central and Eastern European countries over the 1990-2004 period. Our findings suggest that, contrary to the majority view, there is a significant negative relationship between two out of three fiscal decentralization indicators included in the analysis and economic growth. However, the use of different time lags allows us to nuance this negative view and show that long term effects vary depending on the type of decentralization undertaken in each of the countries considered. While expenditure at and transfers to subnational tiers of government are negatively correlated with economic growth, taxes assigned at the subnational level evolve from having significantly negative to significantly positive correlation with the national growth rate. This supports the view that subnational governments with their own revenue source respond better to local demands and promote greater economic efficiency
    Keywords: fiscal decentralization; economic growth; efficiency; devolution; Central and Eastern Europe
    Date: 2008–10–10
  9. By: Jens Arnold
    Abstract: This paper examines the relationship between tax structures and economic growth by entering indicators of the tax structure into a set of panel growth regressions for 21 OECD countries, in which both the accumulation of physical and human capital are accounted for. The results of the analysis suggest that income taxes are generally associated with lower economic growth than taxes on consumption and property. More precisely, the findings allow the establishment of a ranking of tax instruments with respect to their relationship to economic growth. Property taxes, and particularly recurrent taxes on immovable property, seem to be the most growth-friendly, followed by consumption taxes and then by personal income taxes. Corporate income taxes appear to have the most negative effect on GDP per capita. These findings suggest that a revenue-neutral growth-oriented tax reform would be to shift part of the revenue base towards recurrent property and consumption taxes and away from income taxes, especially corporate taxes. There is also evidence of a negative relationship between the progressivity of personal income taxes and growth. All of the results are robust to a number of different specifications, including controlling for other determinants of economic growth and instrumenting tax indicators. <P>La structure fiscale a-t-elle un effet sur la croissance économique ? : Évidences empiriques d’un panel de pays de l’OCDE <BR>Cet article étudie le lien entre la structure de la fiscalité et la croissance économique. L’analyse empirique inclut des indicateurs sur la répartition des taxes dans des équations de croissance pour un panel de 21 pays de l’OCDE, en prenant en compte l’accumulation du capital physique et du capital humain. Les résultats montrent que les impôts sur le revenu sont en général associés avec une croissance plus faible que celle associée aux impôts sur la consommation et sur le patrimoine. Plus précisément, nous établissons un classement des instruments de taxation au regard de leur lien avec la croissance. Les impôts sur le patrimoine, et particulièrement les impôts périodiques sur la propriété immobilière, semblent être les plus favorables à la croissance, suivies immédiatement des impôts sur la consommation. Les impôts sur le revenu des individus semblent être significativement moins favorables, et les impôts sur le revenu des sociétés ont les effets les plus négatifs sur le PIB par tête. Ces résultats suggèrent que les réformes augmentant les impôts sur le patrimoine et la consommation au détriment de ceux sur les entreprises seraient susceptibles d’améliorer les perspectives de croissance économique. L’article trouve également les signes d’une relation négative entre la progressivité des impôts sur le revenu des individus et la croissance. Tous les résultats précédents sont robustes à différentes spécifications, incluant le contrôle des autres déterminants de la croissance économique et l’instrumentation des indicateurs de taxation.
    Keywords: growth, croissance, fiscal policy, politique fiscale
    JEL: E62 H21 O47
    Date: 2008–10–09
  10. By: Moreno-Dodson, Blanca; Wodon, Quentin
    Abstract: Governments in low-income countries have the difficult task of making wide-ranging decisions about public spending, taxation, and borrowing with the aim of helping their countries maintain long-term debt sustainability, achieve higher economic growth, and ultimately reduce poverty. Making such decisions is difficult because it involves considering multiple trade-offs. There are at least four reasons why designing and implementing fiscal policies that contribute to growth and poverty reduction are particularly challenging tasks in developing countries. First, private-market failures are widespread and often unpredictable. Second, government and institutional failures also limit the effectiveness of public interventions. Third, raising public revenues is difficult in a context of macroeconomic and growth instability, high debt ratios, weak tax administration, and large informal sectors. Finally, many developing countries lack the data necessary to conduct a thorough analysis of the effect of government policies on the poor segments of the population. Despite those challenges, however, the budget remains one of the most important instruments (together with laws and regulations) that governments have at their disposal to foster poverty reduction. Policy makers in both developing and developed countries, as well as nongovernmental or-ganizations and providers of aid, can benefit from a deeper understanding of how internally or externally financed public funds channeled through the budget can be used more successfully to benefit the poor in a realistic manner. This paper, which serves as an introduction to an edited volume on "Public Finance for Poverty Reduction" starts with a brief discussion of the rationale behind the role of the government in public finance. Then we discuss some of the limitations faced by governments in developing countries. We follow those discussions with an overview of the nature and structure of the material presented in the book and with our thoughts on germane topics yet to be addressed adequately.
    Keywords: Public finance; poverty reduction; taxation; debt sustainability; public expenditure; incidence analysis
    JEL: E62 F34 H2 H63
    Date: 2008–01
  11. By: Alessandro Petretto (Università degli Studi di Firenze, Dipartimento di Scienze Economiche)
    Abstract: In this paper, we reconstruct the process by which the decisions of a regulated local public utility, in terms of productive efficiency and quality of the service provided, impact on prices of final consumption goods, supplied in a oligopolistic market operating in the same geographic area. We obtain some formula for these effects which can be quantified by estimating firms’ conditional input demand function of the public service and firms’ inverse demand function for this public good, non-rival, component. Finally, we draw the effects of productive efficiency and quality on consumer welfare and cost-of-living, via changes on tariffs, external effects and final goods prices.
    Keywords: regulation, x-efficiency, oligopoly, consumer welfare
    JEL: L51 D11 D21
    Date: 2008
  12. By: Morawski, Leszek (Warsaw University); Myck, Michal (DIW Berlin)
    Abstract: In 2007 and 2008 Polish governments introduced a series of reforms which led to a substantial reduction in the tax "wedge" (in Polish: "klin") on labour. We show that when considered together the package of introduced reforms brought much greater reductions in the tax burden compared to a widely discussed 15% "flat tax". In the analysis we show the effects of the reforms both for the employed and for the non-employed populations. The latter analysis is done in such a way as to account for the entire (simulated) distribution of wages of the non-employed and shows interesting differences between the effects of reforms on employed and non-employed individuals. We argue that to fully appreciate the effect of reductions in labour taxation it is important to bear in mind that one of the reasons for introducing them is to make employment more likely for those who currently do not work. Given the extent of the reductions in the "klin" it is somewhat surprising that so far so little attention has been given to the recent Polish reforms.
    Keywords: work incentives, tax wedge, labour costs, employment
    JEL: H24 J21 J31
    Date: 2008–10
  13. By: Antonio Estache; Atsuhi Iimi
    Abstract: To utilize public resources efficiently, it is required to take full advantage of competition in public procurement auctions. Joint bidding practices are one of the possible ways of facilitating auction competition. In theory, there are pros and cons. It may enable firms to pool their financial and experiential resources and remove the barrier to entry. On the other hand, it may reduce the degree of competition and can be used as a cover of collusive behavior. The paper empirically addresses whether joint bidding is pro- or anti-competitive in ODA procurement auctions for infrastructure projects. It is found that there is no strong evidence that joint bidding practices are compatible with competition policy, except for a few cases. In road procurements, coalitional bidding involving both local and foreign firms has been found pro-competitive. In the water and sewage sector, local joint bidding may be useful to draw out better offers from potential contractors. Joint bidding composed of only foreign companies is mostly considered anticompetitive.
    Keywords: Public procurement; auction theory; infrastructure development; joint bidding
    Date: 2008
  14. By: Rosanne Altshuler; Alan J. Auerbach; Michael Cooper; Matthew Knittel
    Abstract: Recent data present a puzzle: the ratio of corporate tax losses to positive income was much higher around 2001 than in earlier recessions. Using a comprehensive 1982-2005 sample of U.S. corporation tax returns, we explore a variety of potential explanations for this surge in tax losses, taking account of the significant use of executive compensation stock options beginning in the 1990s and recent temporary tax provisions that might have had important effects on taxable income. We find that losses rose because the average rate of return of C corporations fell, rather than because of an increase in the dispersion of returns or an increase in the gap between corporate profits subject to tax and NIPA corporate profits. Our analysis also suggests that the increasing importance of S corporations may help explain the recent experience within the C corporate sector, as S corporations have exhibited a different pattern of losses in recent years. However, we can identify no simple explanation for this differing experience. Our investigation concludes with some new puzzles: why did rates of return of C corporations fall so much early in the decade and why has the incidence of losses among C and S corporations diverged?
    JEL: H25
    Date: 2008–10
  15. By: Nicolás Garrido; Luigi Mittone
    Abstract: In this paper we use a Moore Automata with Binary Stochastic Output Function for exploring the extensive decision on tax evasion made by subjects in experiments run in Chile and Italy. We show first how an hypothesis about subject behavior is converted into an automaton and how do we compute the probabilities of evading for every states of an automaton. We use this procedure for searching the automaton which is able to anticipate the highest number of decisions made by the subjects during the experiments. Finally we show that automata with few states perform better than automaton with many states, and that the bomb crater effect described in [1] is a well identified pattern of behavior in a subset of subjects.
    Date: 2008
  16. By: Munro, John H.
    Abstract: The objectives of this study are three-fold. The first is to rebut Charles Kindleberger’s famous dictum that usury ‘belongs less to economic history than to the history of ideas’; and in particular to demonstrate that the resuscitation of the anti-usury campaign from the early 13th century led to a veritable financial revolution in late-medieval French and Flemish towns: one that became the ‘norm’ in modern European states from the 16th century (in England, from 1693): a shift in public borrowing from interest-bearing loans to the sale of annuities, usually called rentes or renten. That anti-usury campaign had two major features: (1) the decrees of the Fourth Lateran Council of 1215, which provided harsh punishments – excommunication -- for both unrepentant usurers and princes who failed to suppress them; and (2) the establishment of the two mendicant preaching orders: the Franciscans (1210) and the Dominicans (1216), whose monks preached hellfire and eternal damnation against all presumed usurers – including, of course, anyone who received any interest on government loans. There is much evidence that from the 1220s, many financiers in many French and Flemish towns, fearing for their immortal souls, preferred to accept far lower returns on buying rentes than the interest they would have earned on loans. These rentes, based on 8th-century Carolingian census contracts, had two basic forms: (1) life-annuities, by which a citizen purchased from the government, with a lump sum of capital, an annual income stream lasting a lifetime, or the lifetime of his wife as well; (2) perpetual annuities, by which the annual income stream was indeed perpetual, or until such time as the government chose to redeem the rentes, at par. Initially, some theologians opposed sales of rentes as subterfuges to cloak evasion of the usury doctrine. But in 1250-1, Pope Innocent IV declared them to be non-usurious contracts, essentially because they were not loans. Subsequent popes in the 15th century confirmed his views and the non-usurious character of rentes, on two conditions: (1) that the buyer of the rente could never demand redemption or repayment, and (2) that the annual annuity payments (and any ultimate redemptions) be in accordance with actual rent contracts: i.e., that the funds be derived from the products of the land. Ecclesiastical authorities soon agreed that taxes on the consumption of the products of the land (and sea) met this test: i.e., taxes on beer and wine (which always accounted for the largest share), bread, textiles, fish, meat, dairy products, etc. The second objective is to measure the importance of 'rentes' in the civic finances of Flemish towns, in terms of both revenues and expenditures: from the annual town accounts Ghent (14th century only), and Aalst (1395-1550), where they had far greater importance. The related third objective is to measure the burden of the excise taxes for master building craftsmen in Aalst, in tables that measure the values of the excise tax revenues expressed in real terms: first, in the equivalent number of ‘baskets of consumables’ (which form of the base of the Consumer Price Index), and second their value in terms of the annual money-wage incomes of master masons (for 210 days). This provides an entirely new look at the late-medieval ‘standard of living’ controversy – with indications that this consumption-tax burden sometimes rose from about 13,200 to almost 30,000 days’ wage income, for a town of perhaps 3600 inhabitants (but obviously less dramatic on a per capita basis). That tax burden rose the most strongly when, by other indications, real wages (RWI = NWI/CPI) were also finally rising; and thus possibly these real wage gains were largely eliminated. That per capita tax burden would have been all the greater if, in the course of the 15th century, Aalst had experienced the same decline as did small towns of Brabant, to the east, on the order of 25%, and some other Flemish towns, in which the population decline varied from 9% to 28 %. In earlier publications I had challenged the widespread view that the era following the Black Death, with a radical change in the land:labour ratio, came to be a ‘Golden Age’ of the artisan and labourer. I contended instead that frequent inflations eroded or eliminated wage gains, and thus that periodic rises in real wages were due essentially to steep deflations combined with pronounced wage-stickiness. As I also calculated, English artisans in the 1340s had earned real wages that were about 50% of the Flemish; but by the 1480s, they had narrowed that gap (with much less inflation) to about 80%. That gap was probably even smaller, until the 1640s, when England’s Parliament finally imposed similar excise taxes on consumption.
    Keywords: usury; canon law; Church Councils; public debts; civic loans; excise taxes; rentes (annuities); warfare; Flanders; Ghent; Aalst; inflation; deflation; real wages; building craftsmen
    JEL: E62 E43 N93 D31 E42 B11 J45 E25 J81 H20 E31 H31 H71 E44 J31 J10 O52
    Date: 2007–08

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