nep-pbe New Economics Papers
on Public Economics
Issue of 2009‒03‒28
nine papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Fiscal competition over taxes and public inputs - theory and evidence. By Sebastian Hauptmeier; Ferdinand Mittermaier; Johannes Rincke
  2. Causes, Benefits, and Risks of Business Tax Incentives By Alexander Klemm
  3. Comparison of the methodologies for assessing effective tax burden of corporate income used in European Union By Blechova, Beata; Barteczkova, Ivana
  4. Aggregate effects of imperfect tax enforcement: By Robles, Miguel
  5. Consequences of Debt Capitalization: Property Ownership and Debt/Tax Choice By Reiner Eichenberger; David Stadelmann
  6. Reciprocity and Competition: Is There a Connection? By Jonathan C. Rork; Gary A. Wagner
  7. Profit Taxation and Finance Constraints By Christian Keuschnigg; Evelyn Ribi
  8. Central City Exploitation by Urban Sprawl? Evidence from Swiss Local Communities By Christoph A. Schaltegger; Benno Torgler; Simon Zemp
  9. Pollution and the State: The Role of the Structure of Government By Lopez, Ramon; Galinato, Gregmar I.; Islam, Asif

  1. By: Sebastian Hauptmeier (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Ferdinand Mittermaier (Ludwig-Maximilians-Universität München, Geschwister-Scholl-Platz 1, D-80539 München, Germany.); Johannes Rincke (Ludwig-Maximilians-Universität München, Geschwister-Scholl-Platz 1, D-80539 München, Germany.)
    Abstract: We set up a model to characterize the reaction functions of governments competing for mobile capital by simultaneously setting both the business tax rate as well as the level of provision of a productive public input. Using a rich data set of local jurisdictions, we then test the predictions of the model with respect to the nature of strategic interaction among governments. Our findings from efficient estimation of a system of spatially interrelated equations for both policy instruments support the notion that local governments use both the business tax rate and public inputs to compete for capital. In particular, we find that if neighbors cut their tax rates, governments try to restore competitiveness by lowering their own tax and increasing spending on public inputs. If neighbors provide more infra-structure, governments react by increasing their own spending on public inputs. JEL Classification: H72, H77, C72.
    Keywords: Tax competition, public input competition, system estimation.
    Date: 2009–03
  2. By: Alexander Klemm
    Abstract: This paper provides an updated overview of tax incentives for business investment. It begins by noting that tax competition is likely to be a major force driving countries' tax reforms, and discusses tax incentives as a possible response to this. This is complemented by other arguments for and against tax incentives, and by an illustrative analysis of different incentives using effective tax rates. Findings from the empirical literature on tax incentives are also presented. Based on the overview of theoretical and empirical findings, the paper then suggests a matrix of criteria to determine the usefulness of different tax incentives depending on a country's circumstances.
    Keywords: Tax incentives , Foreign direct investment , Tax rates , Tax policy ,
    Date: 2009–01–29
  3. By: Blechova, Beata; Barteczkova, Ivana
    Abstract: In relationship with the changes of tax regulations in surrounding countries and last but not least in connection with the reform of public finances again the question of the further development of the Czech tax system is getting forward. The primary reason for the existence of taxes is fiscal, i.e. to ensure sufficient sources of public budgets for financing public property, however the tax policy must be provided in parallel with measures on the expenditure side of public budgets, that means it is necessary to perceive the tax policy in the context of the whole financial and economic policy of the state. In the sphere of direct taxes the most important external factor is the tax competition between single countries and that is also in the frame of the expanded European Union. The comparison of the income tax of legal entities shows in the last three years unambiguously the decreasing tax burden of firms. However, beside that economic behaviour of companies in connection with positioning their capital abroad reacts on comparability of tax conditions in single countries. Statutory corporate income tax rates are not the right indicator for the comparison of the real economic tax burden of various companies both in the frame of the one state and between the states. That is why for these purposes are used so-called effective corporate income tax rates discussed in this paper, which describes three methodologies for assessing these rates used in the European Union. These methodologies are using either real data from accounting on the national macro level or on the individual company micro level concerning realized entrepreneurial intentions by now or the hypothetical data concerning investments of these companies planed in the future. In conclusion of this paper are presented main differences between these three approaches.
    Keywords: Statutory corporate tax rate; effective corporate tax rate; implicit tax rate; macro and micro backward-looking methods; micro forward-looking methods; tax wedge; cost of capital; effective marginal tax rate; effective average tax rate
    JEL: H25
    Date: 2008–05–23
  4. By: Robles, Miguel
    Abstract: "This paper studies an economy in which the government is not able to perfectly enforce tax compliance among operating firms, and compares it with a similar economy but with perfect tax enforcement. I develop a competitive general equilibrium model where imperfect tax enforcement may affect aggregate outcomes through two mechanisms. First, it may distort firms' optimal output level as long as the probability of avoiding tax compliance is related to the firm's size. Second, poor tax enforcement may lead to a low provision of the public goods that complement firms' productivity. The results for a calibrated version of the model suggest that in economies with tax enforcement problems, aggregate output might be reduced by 12 percent. I also conclude that sizable aggregate effects can be obtained only when the public goods mechanism is at work. " from authors' abstract
    Keywords: Tax enforcement, Public goods, Informal sector, Size distribution of firms, Social protection, Institutions, Market development, infrastructure,
    Date: 2009
  5. By: Reiner Eichenberger; David Stadelmann
    Abstract: Public debts capitalize into property prices. Therefore, property owners tend to favor tax over debt financing for government spending. In contrast, tenants do not suffer from debt capitalization. Thus, they tend to favor debt over tax financing. Our model of the resulting democratic fight between property owners and tenants over public debts and taxes predicts that the property ownership rate in a jurisdiction negatively effects the debt level. We provide empirical support for this hypothesis by analyzing a cross-section of the 171 communities in the Swiss Canton of Zurich in the year 2000.
    Keywords: Public Debts; Homeownership; Taxes; Ricardian Equivalence
    JEL: H74 R51 H00
    Date: 2009–03
  6. By: Jonathan C. Rork (Andrew Young School of Policy Studies - Georgia State University); Gary A. Wagner (University of Arkansas at Little Rock)
    Abstract: One challenge states face in designing an income tax system is deciding how to treat non-resident earners. Numerous states have entered into reciprocity agreements with other states that exclude non-residents’ income from the tax base. These agreements provide a unique opportunity to explore the nature of state tax competition. We demonstrate that not only do reciprocity agreements dampen competition over income taxes, but the states that enact agreements also exhibit decreased levels of competition over other tax bases. This suggests that reciprocity agreements are a credible vehicle for states to act cooperatively and avoid a potential race to the bottom.
    Keywords: Spatial econometrics, interjurisdictional competition, state taxation, reciprocity.
    JEL: H7 R5
    Date: 2009
  7. By: Christian Keuschnigg; Evelyn Ribi
    Abstract: In the absence of financing frictions, profit taxes reduce investment by their effect on the user cost of capital. With finance constraints due to moral hazard, investment becomes sensitive to cash-flow and own equity of firms. The impact of taxes changes fundamentally. Taxes reduce investment because they erode cash flow and, thereby, a firm's pledgeable income available for repayment to outside investors, and not because they reduce the user cost of capital. We propose a corporate finance model of investment and derive three central results: (i) Even small taxes impose first order welfare losses on financially constrained firms; (ii) ACE and cash-flow tax systems, which are investment neutral in the neoclassical model, are no longer neutral when firms are finance constrained. (iii) When banks are active and provide external finance together with monitoring services, the two systems not only reduce investment, but are also no longer equivalent. With active banks, investment is subject to double moral hazard and the timing of tax payments becomes important. The ACE system gives tax relief at the return stage and provides better incentives than a cashflow tax which gives tax relief upfront.
    Keywords: Finance constraints, profit tax, cash-flow tax, ACE tax
    JEL: G38 H25
    Date: 2009–03
  8. By: Christoph A. Schaltegger; Benno Torgler; Simon Zemp
    Abstract: This paper investigates spatial spillovers in local spending decisions between the center and the surrounding local communities by using panel data of the canton of Lucerne during the 1990s. Due to the geographical fragmentation with a major central city and some 100 small suburban local communities within a distance from 4 to 55 kilometers to the center this area represents a particularly useful database in order to test the relevance of spatial interactions in a small metropolitan area. The empirical evidence confirms strategic interactions among suburban governments and the central city only for public education, health and environmental spending. There are no spatial interactions with the central city for overall government spending.
    Keywords: spatial spillovers; strategic interaction; central city exploitation
    JEL: D72 H72
    Date: 2009–03
  9. By: Lopez, Ramon; Galinato, Gregmar I.; Islam, Asif
    Abstract: Government spending has significant environmental implications. This paper analyzes the effect of the allocation of government spending between public goods broadly defined and private goods or non-social subsidies on air and water pollution. The theoretical model predicts that a reallocation of expenditures from private subsidies to public goods improves environmental quality by reducing production pollution. We estimate an empirical model that shows that such a reallocation causes a significant reduction in air pollutants namely sulfur dioxide and lead and an improvement in water quality measures including dissolved oxygen and biological oxygen demand.
    Date: 2009

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