nep-pbe New Economics Papers
on Public Economics
Issue of 2008‒10‒28
fifteen papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. The Welfare Effects of Tax Competition Reconsidered: Politicians and Political Institutions By Janeba, Eckhard; Schjelderup, Guttorm
  2. Portfolio Substitution and the Revenue Cost of Exempting State and Local Government Interest Payments from Federal Income Tax By James M. Poterba; Arturo Ramirez Verdugo
  3. Are Small countries leaders of the European tax competition ? By Nicolas Chatelais; Mathilde Peyrat
  4. The corporate income tax rate-revenue paradox: Evidence in the EU By Joanna Piotrowska; Werner Vanborren
  5. Effective Profit Taxation and the Elasticity of the Corporate Income Tax Base : Evidence from German Corporate Tax Return Data By Nadja Dwenger; Viktor Steiner
  6. Incorporation and Taxation: Theory and Firm-level Evidence By Peter Egger; Christian Keuschnigg; Hannes Winner
  7. Current and Proposed Non-Oil Tax System in Azerbaijan By Mayra Zermeño
  8. Impure Public Technologies and Environmental Policy By Dirk T.G. Rübbelke; Anil Markandya
  9. Distributional analysis of prospective 2009 US individual income taxes: current law and the candidates’ tax plans By Berliant, Marcus; Strauss, Robert P.
  10. Electoral Uncertainty and Public Goods By Aidt, T.S.; Dutta, J.
  11. Study on reduced VAT applied to goods and services in the Member States of the European Union By Copenhagen Economics
  12. Explaining Public Attitudes on State Legislative Professionalism By Jeffrey Milyo; David M. Konisky; Lilliard E. Richardson, Jr.
  13. Tax Reforms, "Free Lunches", and "Cheap Lunches" in Open Economies By Giovanni Ganelli; Juha Tervala
  14. Determinants of Government Efficiency By David Hauner; Annette Kyobe
  15. Technology Adoption and Innovation in Public Services.The Case of E-Government in ITALY By Davide Arduini; Federico Belotti; Mario Denni; Gerolamo Giungato; Antonello Zanfei

  1. By: Janeba, Eckhard (Dept. of Economics, University of Mannheim); Schjelderup, Guttorm (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: The views on the welfare effects of tax competition differ widely. Some see the fiscal externalities as the cause for underprovision of public goods, while others see tax competition as means to reduce government inefficiencies. Using a comparative politics approach we show that tax competition among presidential-congressional democracies is typically welfare improving, while harmful among parliamentary democracies if under the latter the marginal benefit of the public good is sufficiently high. The results hold when politicians seek re-election because of exogenous benefits of holding office. By contrast, when politicians hold office only to extract rents, tax competition is harmful if politicians are sufficiently patient.
    Keywords: Tax competition; welfare effects; comparative politics approach
    JEL: H24
    Date: 2008–10–17
  2. By: James M. Poterba; Arturo Ramirez Verdugo
    Abstract: This paper explores how alternative assumptions about household portfolio behavior affect estimates of the revenue cost of excluding state and local government interest payments from the federal income tax base. Standard tax expenditure estimates assume that current holders of tax-exempt bonds would replace their holdings of tax-exempt bonds with taxable bonds if the tax exemption were eliminated. We consider a number of alternative possible portfolio responses. Because taxable bonds are among the most heavily taxed assets, assuming that investors holding tax-exempt bonds would otherwise hold taxable bonds yields a larger estimate of the revenue cost of tax exemption than many alternative assumptions. Based on data from the 2004 Survey of Consumer Finances, we estimate that the revenue cost of tax exemption under the "taxable bond substitution hypothesis" is $14.2 billion, compared with $10.1 billion if corporate stock replaces tax-exempt bonds in household portfolios, and $7.9 billion if investors distribute their tax-exempt bond holdings in proportion to the other assets currently in their portfolios. We also explore the revenue effects of capping the dollar amount of tax-exempt interest per tax return and of limiting tax-exempt interest as a fraction of AGI.
    JEL: H24 H7
    Date: 2008–10
  3. By: Nicolas Chatelais (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, Institut CDC pour la recherche - Institut CDC pour la recherche); Mathilde Peyrat (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, ESSEC Business School - Ecole Supérieure des Sciences Economiques et Commerciales)
    Abstract: The aim of this paper is to develop a better understanding of the literature dealing with strategic fiscal behaviours of small EU countries using estimations of tax reaction functions of competing national governments. Deriving a simple model of tax competition in a Nash and Stackelberg game, we use panel data and tools from spatial econometrics to examine the role of small countries in tax competition within the enlarged European Union. We find that interactions are stronger among smaller EU countries than between larges ones and rates set in small countries influence those in big countries. Finally, small countries located in the centre of the EU have more influence on tax policies choices of big countries than small countries located in the periphery of EU.
    Keywords: Strategic interactions, tax behaviours, spatial econometrics, European Union, tax competition, small countries.
    Date: 2008–10
  4. By: Joanna Piotrowska (Ministry of Finance, Poland); Werner Vanborren (European Commission)
    Abstract: In Europe, the decline in the corporate tax rates has not been reflected in the tax-to-GDP ratios. This paper explores to what extent the observed trend can be explained by changes in the effective tax burden on corporate income, in the share of total income accruing to the corporate sector and in total business income relative to GDP. We present an overview of the findings from previous literature, apply the methodology developed by S?rensen to decompose the most complete data available on the European level and make use of information collected from parallel studies on the effective tax burden and corporatization. The results suggest that corporatization is the driving factor for the trend observed in corporate tax revenues.
    Keywords: corporate taxation, tax revenues, incorporation, corporatization
    JEL: H25
    Date: 2008–10
  5. By: Nadja Dwenger; Viktor Steiner
    Abstract: We estimate the elasticity of corporate taxable income with respect to the effective corporate tax rate on the basis of a pseudo-panel constructed from corporate tax return micro data for the period 1998-2001, a period which saw the introduction of a major corporate tax reform in Germany. Endogeneity of the effective tax rate is controlled for by an instrumental variable approach. Our instrument for the observed effective corporate tax rate is the counterfactual effective tax rate a corporation would face in a particular period had there be no endogenous change of corporate profits. This counterfactual is obtained from a detailed microsimulation model of the corporate sector based on tax return micro data. We find a statistically significant and relatively large point estimate of the average tax base elasticity, which implies that a reduction of the statutory corporate tax rate would reduce corporate tax receipts less than proportionally due to income shifting activities. We also find some statistically weak evidence for the hypothesis that the tax base elasticity is higher for corporations that may benefit from various forms of tax shields.
    Keywords: corporate income taxation; tax base elasticity; micro simulation
    JEL: H32 H21 F23 C15
    Date: 2008
  6. By: Peter Egger; Christian Keuschnigg; Hannes Winner
    Abstract: This paper provides theory and firm-level evidence on the incorporation decision of entrepreneurs in a model of corporate governance and taxation. The theory explains how the incorporation decision of entrepreneurs is driven by taxation (corporate and personal income taxes), corporate transparency, access to external capital and limited liability. We estimate features of this model using a large cross-section of more than 540, 000 firms in European manufacturing. The impact of taxation on the incorporation decision is at the heart of this analysis. We find that higher personal income tax rates and their progression are associated with an increase in the probability of incorporation, while higher corporate tax rates entail an impediment to incorporate. This finding is robust to the inclusion of other economic and institutional determinants and to a variety of functional form assumptions about the latent variable in the estimated discrete choice model.
    Keywords: Incorporation, governance, taxes, discrete choice models
    JEL: H25 H73 F23 C21
    Date: 2008–09
  7. By: Mayra Zermeño
    Abstract: This paper analyzes developments in non-oil tax policy, administration, and revenues in Azerbaijan, and suggests measures for further improvement. The main finding is that Azerbaijan's non-oil tax revenues increased significantly as a share of non-oil GDP in the last five years, but remain below potential. The non-oil tax revenue shortfall is mainly due to widespread exemptions, but there is scope for strengthening tax and customs administration. In the short term, expanding the tax base and better tax and customs administration will yield more revenues. In the medium term, more far-reaching reforms including reducing some direct tax rates, should be considered. The overall reform package could be made broadly revenue neutral by improving taxpayers' compliance and reducing exemptions.
    Keywords: Tax systems , Azerbaijan , Nonoil sector , Tax policy , Tax revenues , Customs administration , Tax reforms , Value added tax , Working Paper ,
    Date: 2008–09–30
  8. By: Dirk T.G. Rübbelke (CICERO); Anil Markandya (Fondazione Eni Enrico Mattei, Italy and University of Bath)
    Abstract: Analyses of public goods regularly address the case of pure public goods. However, a large number of (international) public goods exhibit characteristics of different degrees of publicness, i.e. they are impure public goods. In our analysis of transfers helping to overcome the inefficient provision of such goods, we therefore apply the Lancastrian characteristics approach. In contrast to the existing literature, we consider the case of a continuum of impure public goods. We employ the example of international conditional transfers targeting to overcome suboptimal low climate protection efforts by influencing the abatement technology choice of countries.
    Keywords: Impure Public Goods, Lancastrian Characteristics Approach, Conditional Transfers, Ancillary Benefits of Climate Policy
    JEL: H87 Q54
    Date: 2008–09
  9. By: Berliant, Marcus; Strauss, Robert P.
    Abstract: The purpose of this paper is to compare the distributional characteristics of two presidential candidates’ proposed reforms to the US federal individual income tax. Using an anonymous sample of tax return data from the Brookings-Urban Institute Tax Policy Center and the Center’s simulations of 2009 tax law and the two proposals, we compare the vertical and horizontal equity of the three individual income tax regimes. Surprisingly, there is very little difference among the three proposed individual income tax regimes in terms of vertical and horizontal equity. However, when the initial effective tax rate positions and economic incomes of each pair of taxpayers are compared to the new effective tax rate positions under the two proposals, we find that the Obama proposal makes the tax system more progressive than 2009 law. This change is much more pronounced than under the McCain proposal. On the other hand, when these initial positions are compared to the two proposals viz. a viz. horizontal equity, the McCain proposed tax system is more horizontally equitable than 2009 tax law, and more horizontally equitable than the Obama proposal is when compared to 2009 tax law.
    Keywords: Tax equity; McCain tax plan; Obama tax plan
    JEL: D31 H24
    Date: 2008–10–22
  10. By: Aidt, T.S.; Dutta, J.
    Abstract: This paper argues that uncertain or random voter turnout plays a key role in mediating conflicts of interest between voters and politicians on the one hand and heterogenous groups of voters on the other. Random voter turnout creates an incentive for politicians to seek con- sensus because it is unclear ex ante who will hold the majority among those who turn out to vote. We argue that this leads to efficient provision of public goods and that it protects minority groups against the tyranny of the majority. We also argue that compulsory voting may not be desirable because it reduces randomness in turnouts.
    Keywords: Political Agency, Performance Voting, Turnout Uncertainty, Public Finance
    JEL: D72 D78 H41
    Date: 2008–08
  11. By: Copenhagen Economics (Copenhagen Economics)
    Abstract: Value Added Tax (VAT) in Europe is regularly subject to intensive debate. It is often argued that the current VAT system should be made more uniform to enhance economic efficiency and to protect the functioning of the internal market. But it is also regularly argued that extending reduced VAT to this or that particular product would create economic benefits such as more employment and less inequality. The study concludes that there seems to be a strong argument for making the current VAT structure more simple and uniform, but also an argument for selective cuts in VAT rates primarily in locally supplied services and parts of the hospitality sector. The authors stress the need to consider each case on its own merits and to appraise whether alternative non-VAT instruments may be preferable to reduced VAT rates.
    Keywords: European Union, VAT, taxation
    JEL: H24
    Date: 2008–10
  12. By: Jeffrey Milyo (Department of Economics, University of Missouri-Columbia); David M. Konisky; Lilliard E. Richardson, Jr.
    Abstract: Scholars have long argued that state legislative professionalism, or the provision of staff, legislator salary, and session length, has behavioral incentives for legislators and implications for legislative capacity. Scant attention, however, has been devoted to public attitudes on the provision of these legislative resources. Using survey data on preferences for features associated with a citizen legislature versus a professional legislature, we examine the contours of public attitudes on professionalism and test models on the factors associated with these attitudes. Results suggest partisanship, trust, and approval of the local delegation matter, but the factors differ by the legislative professionalism of the respondents state and for low versus high knowledge citizens.
    Keywords: Legislative Professionalism, Public Opinion, Political Economy
    JEL: D72 H79
    Date: 2008–10–17
  13. By: Giovanni Ganelli; Juha Tervala
    Abstract: This paper focuses on the macroeconomic and budgetary impact of tax reforms in a New Keynesian two-country model. Our results show that both income and consumption unilateral tax rate reductions do not constitute a "free lunch", in the sense that they have negative budgetary consequences for the country which implements them. In addition, the degree of self-financing implied by our model is in the 8½-24 percent range. Since the degree of self-financing estimated in previous literature was larger, we conclude that in our model not only the "lunch" is not "free", but is also not that "cheap". A comparison of alternative (income-tax versus consumption-tax based) fiscal stimulus packages shows that consumption tax cuts imply a larger short-run impact on domestic output but the income tax cuts stimulate the domestic economy more in the long run. We also look at the implications of a revenue-neutral tax reform in which consumption taxes are increased to compensate for lower income tax collection.
    Keywords: Tax reforms , Income taxes , Consumption taxes , Tax rates , Budgetary policy , Economic models , Working Paper ,
    Date: 2008–09–30
  14. By: David Hauner; Annette Kyobe
    Abstract: We compile the first large cross-country panel dataset of public sector performance and efficiency, encompassing 114 countries on all income levels from 1980 to 2006, with about 1,800 country-year observations for the education sector and about 900 observations for health. We regress these indicators on potential economic, institutional, demographic, and geographic determinants. Our most resounding conclusion is that higher government expenditure relative to GDP tends to be associated with lower efficiency in the respective sector. Moreover, we find that richer countries exhibit better public sector performance and efficiency, and that institutional and demographic factors also play a significant role.
    Keywords: Government expenditures , Government accounting , Public sector , Economic indicators , Fiscal policy , Gross domestic product , Public finance , Economic growth , Economic models , Working Paper ,
    Date: 2008–09–30
  15. By: Davide Arduini (University of Urbino “Carlo Bo”); Federico Belotti (University of Rome “Tor Vergata”.); Mario Denni (Italian Competition Authority (Agcm).); Gerolamo Giungato (Italian National Institute of Statistics (Istat)); Antonello Zanfei (Dipartimento di Economia e Metodi Quantitativi, Università di Urbino (Italy))
    Abstract: Using data on 1,176 Italian municipalities in 2005, this paper discusses a number of factors associated with the development of a particular type of innovative activities, namely e-government services supplied by local public administrations (PAs). We find that municipalities which got involved into e-government are larger, carry out more in-house ICT activities and are more likely to have intra-net infrastructures, relative to PAs that do not offer front office digitalised services. They are also generally located in regions with relatively large shares of firms using or producing ICT, where many other municipalities offer digitalised services, and where concentration of inhabitants in metropolitan areas is not very high. The range and quality of e-government services supplied by local PAs tend to increase with their stock of ICT competencies, with their efforts to train workers, and with their ability to organise efficient interfaces with end-users. Moreover, there is a correlation between the range and quality of e-government services offered and the broadband infrastructure development of the geographic area in which local PAs are located. In more general terms, we show that the combination of internal competencies and context specific factors is different when explaining the decision to start e-government activities vs. the intensity of such activities. Regional factors, relating to both demand and supply of services, appear to affect only the decision to enter e-government activities. Competencies needed to expand and improve the quality of services are much more numerous and complex than the ones associated with the mere decision to start e-government activities.
    Keywords: Innovation system, Dynamic capabilities, Technology adoption, Electronic government, Innovation in services, Two-part model.
    JEL: H83 O38
    Date: 2008

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