nep-pbe New Economics Papers
on Public Economics
Issue of 2009‒02‒28
fifteen papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Tax Contracts and Government Formation By Gersbach, Hans; Schneider, Maik
  2. Reforming the Tax System in Korea to Promote Economic Growth and Cope with Rapid Population Ageing By Randall S. Jones
  3. Are Your Firm's Taxes Set in Warsaw? Spatial Tax Competition in Europe By Crabbé, Karen; Vandenbussche, Hylke
  4. Public goods, participation constraints, and democracy: A possibility theorem By Grüner, Hans Peter
  5. Volunteering and the State By Franz Hackl; Martin Halla; Gerald J. Pruckner
  6. Decentralized Tax and Public Service Policies with Differential Mobility of Residents By William H. Hoyt
  7. Identifying an Australian ‘Shadow’ Benefit / Cost Ratio for Public Projects By Lawrence, Craig
  8. Why do you want lower taxes? Preferences regarding municipal income tax rates By Jakobsson, Niklas
  9. The Political Economy of the (Weak) Enforcement of Sales Tax By Besfamille, Martin; De Donder, Philippe; Lozachmeur, Jean-Marie
  10. State and Local Government Finance in the Current Crisis: Time for Emergency Federal Relief? By David Wildasin
  11. Tax Limits, Houses, and Schools: Seemingly Unrelated and Offsetting Effects By William Hoyt; Paul A. Coomes; Amelia M. Biehl
  12. Public Versus Private Ownership: Quantity Contracts and the Allocation of Investment Tasks By Hoppe, Eva I.; Schmitz, Patrick W.
  13. Private Provision of Highways: Economic Issues By Kenneth A. Small
  14. Government size and growth: Accounting for economic freedom and globalization By Bergh, Andreas; Karlsson, Martin
  15. At stake with implementation: trials of explicitness in the description of the state By Fabian Muniesa; Dominique Linhardt

  1. By: Gersbach, Hans; Schneider, Maik
    Abstract: We introduce tax contracts and examine how they affect government formation and welfare of voters in a democracy with proportional elections. A tax contract specifies a range of tax rates a party is committed to if in government. We develop a new model of party competition in which parties choose tax rates, public-good provision, and perks, and we show that the introduction of tax contracts has two effects: a perks effect and a policy-shift effect. The former plays a central role in societies with a low degree of political polarization, where it tends to reduce politicians' perks. If a society is highly polarized, tax contracts can yield more moderate political outcomes. However, there are also circumstances in which tax contracts induce more extreme policies.
    Keywords: contract theory; government formation; voting
    JEL: D72 D82 H55
    Date: 2008–12
  2. By: Randall S. Jones
    Abstract: Korea has one of the lowest tax burdens in the OECD area, reflecting its small public sector. However, rapid population ageing will put upward pressure on government spending. The challenge is to meet the long-run need for greater expenditures and tax revenue while sustaining strong economic growth. A pro-growth tax reform implies relying primarily on consumption taxes for additional revenue. There is also scope for raising personal income tax revenue from its current low level by broadening the base by reducing the exemptions for personal income. The planned cuts in the corporate tax rate should be financed at least in part by reductions in tax expenditures. The broadening of direct tax bases would also help finance an expansion of the earned income tax credit to address widening income inequality. In addition, the local tax system should be simplified and reformed to enhance the autonomy of local governments.<P>Réformer le système fiscal en Corée afin de favoriser la croissance économique et de faire face au rapide vieillissement démographique<BR>La Corée est l’un des pays où la charge fiscale est la plus faible dans la zone de l’OCDE, en raison de la petite taille du secteur public. Cependant, le rapide vieillissement démographique va exercer une pression grandissante sur les finances publiques. La difficulté consiste à répondre au besoin à long terme de dépenses publiques et de recettes fiscales accrues tout en soutenant une vigoureuse expansion économique. Pour qu’une réforme fiscale aide à la croissance, elle doit privilégier les impôts sur la consommation comme source de recettes supplémentaires. Il est aussi possible d’augmenter le produit de l’impôt sur le revenu des personnes physiques, actuellement peu élevé, en élargissant l’assiette grâce à une diminution des exonérations. Les réductions prévues du taux d’imposition des sociétés devraient être financées, en partie du moins, par des compressions de dépenses fiscales. L’élargissement des bases d’imposition directe aiderait aussi à financer une extension du crédit d’impôt sur les revenus d’activité afin de remédier aux inégalités croissantes de revenu. Par ailleurs, le système d’impôts locaux devrait être simplifié et réformé afin de renforcer l’autonomie des collectivités territoriales.
    Keywords: fiscalité, tax reform, impôt, dépense fiscale, property tax, taxe foncière, relative poverty, pauvreté relative, fiscalité locale, capital gains taxes, TVA, VAT, personal income tax, corporate income tax, réforme de la taxation, coin fiscal, impôt sur les bénéfices, tax expenditures, earned income tax credit, crédit d’impôt sur le revenu d’activités professionnelles, environmentally-related taxes, taxes liées à l'environnement, Korean tax system, système de taxation coréen, local tax system, tax wedge
    JEL: H20 H22 H23 H24 H25
    Date: 2009–02–20
  3. By: Crabbé, Karen; Vandenbussche, Hylke
    Abstract: Tax competition within the EU is fiercer than in the rest of the OECD with tax rates falling rapidly. This paper analyzes tax responses of EU-15 countries to corporate tax changes in the EU-10 new member states as a function of their proximity to these 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, 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 geographically closer to the new member states respond stronger to corporate tax changes in these new member states. We use a theoretical and a spatial regression framework to test the hypothesis that distance to a low tax region intensifies countries' tax reaction functions.
    Keywords: corporate taxes; fiscal reaction function; Spatial tax competition
    JEL: H25 H39 H77
    Date: 2009–02
  4. By: Grüner, Hans Peter
    Abstract: It is well known that ex post efficient mechanisms for the provision of indivisible public goods are not interim individually rational. However, the corresponding literature assumes that agents who veto a mechanism can enforce a situation in which the public good is never provided. This paper instead considers majority voting with uniform cost sharing as the relevant status quo. Efficient mechanisms may then exist, which also satisfy all agents' interim participation constraints. In this case, ex post inefficient voting mechanisms can be replaced by efficient ones without reducing any individual's expected utility. Intuitively, agents with a low willingness to pay have to contribute more under majority rule than under an efficient mechanism with a balanced budget. This possibility theorem is not universal in the sense of Schweizer (Games and Economic Behavior, 2005).
    Keywords: Ex post efficiency; Majority voting; Participation constraints; Possibility theorem; Public goods
    JEL: D02 D61 D71 H41
    Date: 2008–12
  5. By: Franz Hackl; Martin Halla; Gerald J. Pruckner
    Abstract: This paper explores the capability of the state to affect the individual’s decision to work for free. For this purpose we combine individual-level data from the European and World Values Survey with macroeconomic and political variables for OECD member countries. Empirically we identify three channels for crowding out of voluntary labor. Firstly, an increase in public social expenditure decreases the probability that the individual will volunteer (fiscal crowding out). Secondly, a political consensus between individuals and the government also induces volunteers to reduce their unsalaried activities (consensual crowding out). And finally, the more a government supports democratization, the lower is the individual’s engagement (participatory crowding out). Religiosity and a more unequal income distribution in a country increase individuals’ willingness to volunteer.
    Keywords: Volunteering, voluntary labor supply, private provision of public goods, public social expenditure, political consensus, democratization
    JEL: H41 H44 H31 J22 I38 H11 D30 D64
    Date: 2009–02
  6. By: William H. Hoyt (Martin School of Public Policy and Administration and Department of Economics, University of Kentucky)
    Abstract: A central focus of an extensive literature on fiscal competition has been on how the decentralization of tax and service policy affects efficiency, generally whether public services are inefficiently under- or overprovided. This question has traditionally been addressed in a framework in which the tax base regions compete for mobile capital. Here I am also interested in the impact of fiscal decentralization on both public service provision and tax policy but in a framework with both labor and capital mobility. Rather than limiting the competing regions to taxing only capital or only labor, I consider the endogenous choice of the two tax instruments in the context of two related models. In the first model, while labor is mobile it is also homogeneous. In this model I show that regions will choose to only tax income and not capital when public service costs are proportionate to the population and, by doing so, will provide the efficient level of public services. However, if there are public service costs not proportionate to the population, “fixed costs,” if given the option, regions will tax or subsidize capital as well as tax income. As a result of capital taxation, the public service is underprovided. I extend the model along the lines of Wildasin (AER, 2000) to consider two groups of workers who differ in both mobility and, in my case, human capital (skill). Unlike Wildasin, the difference in income is exogenous and not the result of investment decisions. In this model, I first consider the policies chosen by these regions when they can only tax income. I find that the public service can be either over or underprovided, depending on the relative impact of changes in public services and taxes on the mobility of the two groups. Next, I consider whether, in the absence of fixed costs, regions will want to tax or subsidize capital and find that in general they will with the magnitude and sign of a tax (subsidy) on capital depending on how capital taxation affects the relative mobility of the two groups of workers.
    Date: 2009–01
  7. By: Lawrence, Craig
    Abstract: This paper examines the social opportunity cost of a hypothetical public project in Australia and compares these values with the cost of the project as measured by factor prices. Since 2001, the Australian taxation system has included an ad valorem tax, the Goods and Services Tax, however relatively little analysis of the impact of this tax on public project evaluation methods has been undertaken. This tax creates divergences between social opportunity cost and conventional cost measures. Therefore it is recommended that shadow prices be applied to pubic projects. Following Campbell (1975), a shadow price can be introduced into Australian project evaluation in the form of a cut-off benefit cost ratio. The calculations reported on in the paper indicate that this ratio lies between 1 and 1.3 for public projects in Australia.
    Keywords: allocative efficiency; cost benefit analysis; efficiency; optimal taxation; project evaluation; social discount rate
    JEL: H21 H43 D61
    Date: 2009–02–11
  8. By: Jakobsson, Niklas (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: The factors shaping people’s preferences for municipal labour income tax rates in Sweden were assessed, using survey data. The tax rate actually faced by the respondents had explanatory power for their attitudes towards the tax rate only when a few socio-demographic explanatory variables were included. When a richer set of variables were included the association disappears. The hypothesis that this small or nonexistent effect from the actual tax rate is caused by a Tiebout bias finds no support, but IV-estimations indicate that the actual municipal tax rate may be of importance for the attitudes towards the tax rate. People with higher education, regularly reading a newspaper, agreeing with the political left, and stating that they were satisfied with the municipal services were less likely to want to decrease the municipal tax. People with low income, stated low knowledge about society, and agreeing with the political right were instead more likely wanting to decrease the municipal tax.<p>
    Keywords: tax preferences; attitudes; income tax
    JEL: H24
    Date: 2009–02–23
  9. By: Besfamille, Martin; De Donder, Philippe; Lozachmeur, Jean-Marie
    Abstract: The objective of this paper is to understand the determinants of the enforcement level of indirect taxation in a positive setting. We build a sequential game where individuals differing in their willingness to pay for a taxed good vote over the enforcement level. Firms then compete à la Cournot and choose the fraction of sales taxes to evade. We assume in most of the paper that the tax rate is set exogenously. Voters face the following trade-off: more enforcement increases tax collection but also increases the consumer price of the goods sold in an imperfectly competitive market. We obtain that the equilibrium enforcement level is the one most-preferred by the individual with the median willingness to pay, that it is not affected by the structure of the market (number of firms) and the firms' marginal cost, and that it decreases with the resource cost of evasion and with the tax rate. We also compare the enforcement level chosen by majority voting with the utilitarian level. In the last section, we endogenize the tax rate by assuming that individuals vote simultaneously over tax rate and enforcement level. We prove the existence of a Condorcet winner and show that it entails full enforcement (i.e., no tax evasion at equilibrium). The existence of markets with less than full enforcement then depends crucially on the fact that tax rates are not tailored to each market individually.
    Keywords: imperfect competition; intermediate preferences; majority voting; Tax evasion
    JEL: D43 D72 H26 H32
    Date: 2009–01
  10. By: David Wildasin (Martin School of Public Policy and Administration and Department of Economics, University of Kentucky)
    Abstract: A review of recent fiscal history can help to understand the mechanisms by which subnational governments adapt their tax, expenditure, and debt policies to an ever-changing economic environment, and on the role of fiscal assistance from higher-level governments in this process. In principle, proposed Federal assistance to states and localities may provide useful macroeconomic stimulus and financial support, but past experience, in the US and elsewhere, highlights the pitfalls in achieving rapid delivery of substantial assistance while simultaneously targeting scarce fiscal resources to the most urgent needs and preserving incentives for prudent financial management by states and localities.
    JEL: H7
    Date: 2009–01
  11. By: William Hoyt (Martin School of Public Policy and Administration and Department of Economics, University of Kentucky); Paul A. Coomes (Department of Economics and College of Business, University of Louisville); Amelia M. Biehl (Department of Economics, University of Southern Indiana)
    Abstract: Property tax limitations, as well as other tax and expenditure restrictions on state and local governments in the United States, date back to the late nineteenth century. A surge in property tax limitation legislation occurred in the late 1970s and early 1980s, and its effects on government revenue, school financing, and educational quality have been studied extensively. However, there is surprisingly little literature on how property tax limits affect housing markets. For the first time, we examine the impacts of property tax limitations on housing growth, in addition to their impacts on housing prices. Using state-level data over twenty-three years, we find that property tax limits increase housing prices (indexes) by approximately 1.6%. These limits appear to have little impact on the growth in the housing stock, as measured by the number of permits. Our evidence suggests that this is because while property tax limits reduce property taxes they also increase the price of housing. These two counteracting effects lead to ambiguous impacts on the gross price of housing.
    JEL: H71 R31
    Date: 2009–01
  12. By: Hoppe, Eva I.; Schmitz, Patrick W.
    Abstract: The government wants a certain good or service to be provided. Should the required assets be publicly or privately owned or should a partnership be formed? Building on the incomplete contracting approach, we argue that the initially specified quantity of an ex ante describable basic good can have important effects on investment incentives, which has been neglected in the literature so far. We also study how the tasks of investing in quality improvements and cost reductions should be assigned. We show how the optimal contracts and governance structures depend on the exogenous parameters of the model such as the nature of the investments and the parties' bargaining powers.
    Keywords: Contractible control; Incomplete contracts; Privatization
    JEL: D23 D86 H11 L33
    Date: 2008–11
  13. By: Kenneth A. Small (Department of Economics, University of California-Irvine)
    Abstract: This paper reviews issues raised by the use of private firms to finance, build, and/or operate highways — issues including cost of capital, level and structure of tolls, and adaptability to unforeseen changes. The public sector’s apparent advantage in cost of capital is at least partly illusory due to differences in tax liability and to constraints on the supply of public capital. The evidence for lower costs of construction or operation by private firms is slim. Private firms are likely to promote more efficient pricing. Effective private road provision depends on well-structured franchise agreements that allow pricing flexibility, restrain market power, enforce a sound debt structure, promote transparency, and foster other social goals.
    Keywords: Privatization; Road finance; Toll road; Road pricing
    JEL: H44 H54 L91 R42
    Date: 2009–02
  14. By: Bergh, Andreas (Lund university & The Ratio Institute); Karlsson, Martin (Institute of Ageing, University of Oxford)
    Abstract: Several recent studies have found a negative relation between government size and economic growth in rich countries. Since countries with big government have experienced above average improvements in both the Economic freedom index and the KOF globalization index, we argue that existing studies suffer from an omitted variable problem. Using Bayesian Averaging over Classical Estimates (BACE) in a panel of OECD countries, we show that the negative effect from government size is very robust and may have been underestimated in previous studies. The dataset is an updated and extended version of the data used by Fölster and Henrekson (2001), covering the period 1970-1995. We find clear evidence that globalization has a positive effect on growth, but find no effect of economic freedom. Finally, we find that the negative effect of government size decreases substantially in size but remains significant when we add the period 1996-2005 to the sample. Our results support the idea that countries with big government can use institutional quality such as economic freedom and globalization to mitigate negative growth effects of taxes and public expenditure.
    Keywords: Government size; growth; economic freedom; globalization; taxes
    JEL: H11 O43
    Date: 2009–02–16
  15. By: Fabian Muniesa (Centre de Sociologie de l'Innovation, Mines ParisTech); Dominique Linhardt (Centre de Sociologie de l'Innovation, Mines ParisTech)
    Abstract: Studies a number of aspects of the reform of public finance and public management in France (LOLF), with special attention to science and technology policy, using a pragmatist approach to the sociology of the state.
    Keywords: Science and technology studies, science and technology policy, political sociology, government, France, LOLF, performance, New Public Management, statistics
    JEL: D73 D78 E61 E65 H11 H41 H52 H61 H83 I20 I23 I28 O32 O38 Z13
    Date: 2009–02

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