nep-pbe New Economics Papers
on Public Economics
Issue of 2009‒07‒17
twenty-two papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  2. Strategic tax collection and fiscal decentralization: the case of Russia By Alexander Libman; Lars P. Feld
  4. Fiscal Decentralization and Public Sector Employment: A Cross-Country Analysis By Jorge Martinez-Vazquez; Ming-Hung Yao
  5. CAN WE TAX THE DESIRE FOR TAX EVASION? By Ratbek Dzhumashev; Emin Gahramanov
  6. Tax Assignment Revisited By Richard M. Bird
  7. Communication, Advice and Beliefs in an Experimental Public Goods Game By Ananish Chaudhuri; Pushkar Maitra; Susan Skeath
  8. Fiscal Perspective of State Rescaling By Jorge Martinez-Vazquez; Andrey Timofeev
  9. Development of Direct Democracy in Swiss Cantons between 1997 and 2003 By Fischer, Justina AV
  10. The BBLR Approach to tax Reform in Emerging Countries By Richard M. Bird
  11. An Assessment of Fiscal Decentralization in Macedonia By Nicoletta Feruglio; Jorge Martinez-Vazquez; Andrey Timofeev
  12. Brains, drains, and roads, growth hills: complementarity between public education and infrastructure in a half-century panel of states By stone, joe/a.; bania, neil
  13. Evaluating the effects of decentralization on educational outcomes in Spain? By Albert Solé-Ollé; Paula Salinas
  14. Fiscal Stimulus: A Neoclassical Perspective By Strulik, Holger; Trimborn, Timo
  15. "Who Gains from President Obama's Stimulus Package ... And How Much?" By Ajit Zacharias; Thomas Masterson; Kijong Kim
  16. Pakistan: Comprehensive Individual Tax Reform: Round 2 By Sally Wallace; Harini Kannan
  17. Pakistan’s Tax Gap: Estimates By Tax Calculation and Methodology By Robina Ather Ahmed; Mark Rider
  18. Tax Policy in Pakistan: An Assessment of Major Taxes and Options for Reform By Wayne Thirsk
  19. Assessing Enterprise Taxation and the Investment Climate in Pakistan By James Alm; Mir Ahmad Khan
  20. Pakistan: Provincial Government Taxation By Roy Bahl; Sally Wallace; Musharraf Cyan
  21. Pakistan – A Globalized Tax World: An Analysis of Its International Tax Practice By Geerten M. M. Michielse
  22. Incidence of Taxes in Pakistan: Primer and Estimates By Umir Wahid; Sally Wallace

  1. By: Wenli Cheng; Dingsheng Zhang
    Abstract: This paper investigates how the trade-off between organization costs, transaction costs and economies of specialization may affect the way public goods are provided. In doing so, it considers two ways of providing a public good. One is collective provision where users organize themselves to jointly finance the public good which is produced by a specialized firm. The other is market provision with bundling where a firm produces the public good and a private good and sells them as a bundle. Both methods of public goods provision deal with the problem of non-excludability. The first method involves organization costs, but can take advantage of specialization economies; the second method avoids organization costs, but may incur some transaction costs and forgoes the benefit of specialization economies. Which method is superior depends on the relative magnitudes of organization costs, transaction costs, specialization economies as well as other features of the economy such as population size.
    Keywords: public good, transaction costs, organisation costs, specialisation economies .
    JEL: H41 L22
    Date: 2009–06
  2. By: Alexander Libman (University of Mannheim); Lars P. Feld (University of Heidelberg)
    Abstract: In a centralized federation, where tax rates and taxation rules are set by the federal government, manipulating the thoroughness of tax auditing and the effectiveness of tax collection could be attractive for regional authorities because of a variety of reasons. These range from tax competition to principal-agent problems, state capture and benefits of fiscal equalization. In this paper we discuss strategic tax auditing and collection from the perspective of fiscal federalism and test for strategic tax collection empirically using data of the Russian Federation. Russia’s regional authorities in the 1990s have always been suspect of tax auditing manipulations in their favor. However, in the 2000s increasing bargaining po¬wer of the centre seems to induce tax collection bodies in the regions to manipulate tax auditing in favor of the federal centre. Our findings confirm the existence of strategic tax collection for the Yeltsin period after exclusion of outliers; the results for the Putin period are however rather ambiguous.
    Keywords: fiscal federalism, tax arrears, transition economies
    JEL: H26 H77
    Date: 2009
  3. By: Ratbek Dzhumashev
    Abstract: In this paper, we analyse implications of corruption on growth. We extend existing growth models by incorporating ubiquitous corruption as a by-product of the public sector. Corruption affects both taxation and public good provision, and therefore causes income redistribution and inefficiencies in the public sector. These effects of corruption lead to lower growth through distortions of investment incentives and resources allocation.
    Keywords: Corruption, growth, public goods, tax evasion
    JEL: D92 D72 E20 E60 H26 H41 O17 O41
    Date: 2009–06
  4. By: Jorge Martinez-Vazquez (International Studies Program. Andrew Young School of Policy Studies, Georgia State University); Ming-Hung Yao (Department of Economics, Tunghai University, Taichung, Taiwan National University of Ireland Galway)
    Abstract: This paper investigates the relationship between public sector employment and fiscal decentralization. We develop a theoretical framework modeling the interactions between the central and sub-national executives regarding the level of public employment at the central and sub-national government levels. In our empirical work, based on a large cross-country dataset, we find that, ceteris paribus, the level of total public sector employees in a country increases with its level of fiscal decentralization. Even though central government employment decreases with decentralization, this is more than fully offset by the increase in employment at the sub-national level accompanying decentralization. Our empirical results also indicate that the relationship between GDP per capita and public sector employment is not monotonic but quadratic, that total public sector employment is higher in unitary countries vis-à-vis federal countries, and that public employment increases with the country’s international economic openness.
    Keywords: fiscal decentralization; public sector employment; public sector size
    Date: 2009–03–01
  5. By: Ratbek Dzhumashev; Emin Gahramanov
    Abstract: A static income tax evasion model à la Yitzhaki (1974) predicts that an increase in the tax rate causes taxpayers to increase their income declaration. In an important contribution, Lin and Yang (2001) obtained exactly the opposite result by extending the Yitzhaki (1974) model to a dynamic one with Ak(t) production technology. In this paper we show that once the Lin and Yang (2001) model becomes fully compatible with the Yitzhaki’s (1974) setting, the negative relationship between taxes and evasion still prevails. We then enrich the dynamic model with a productive public sector, and obtain an ambiguous relationship between taxes and evasion incentives as in Allingham and Sandmo (1972). We also prove that the growth-maximizing share of public expenditures in total output satisfies the natural efficiency condition even in the presence of tax evasion. However, the latter result is not robust to the introduction of the costs associated with income declaration and concealment activities.
    Keywords: Tax Evasion, Optimal Taxation, Economic Growth
    JEL: H26 H21 D91
    Date: 2009–06
  6. By: Richard M. Bird (International Studies Program. Andrew Young School of Policy Studies, Georgia State University)
    Abstract: This paper first restates the lessons to be learned from Richard Musgrave’s pioneering discussion of the tax assignment issue. Next, it considers subsequent developments in the theory of fiscal federalism related to the issue of tax assignment. Surprisingly little clear guidance is offered by the theoretical discussion when it comes to the practical policy issues facing any country with respect to tax assignment: what countries do seems to bear little relation to what theory suggests they should do. This point is illustrated this point by a brief review of tax assignments observed around the world in large emerging countries. The tax assignment issue in such countries as India and China is both important and unduly neglected: for the most part, these are still countries in search (whether they know it or not) for a sustainable solution to this problem. The paper concludes with some reflections about what seem to be future possible -- or, perhaps better, needed -- developments with respect to both the theory and practice of tax assignment, again with special reference to large emerging countries.
    Keywords: tax assignment; fiscal federalism; Richard Musgrave; Brazil, India, China, Nigeria, Russia
    Date: 2008–12–01
  7. By: Ananish Chaudhuri; Pushkar Maitra; Susan Skeath
    Abstract: We study the efficacy of horizontal versus vertical social learning processes in a public goods game. In one treatment, subjects about to play the game can make nonbinding common knowledge announcements about their intentions while, in another, subjects do not communicate directly with group members but receive common knowledge advice from the previous generation of players. A third treatment has subjects play with neither communication nor advice. We find that groups that engage in peer communication achieve much lower levels of contribution to the public good than do groups that receive advice. We attribute this finding in part to the fact that some subjects in the communication treatment opted to make no announcement during the communication phase of play.
    Keywords: Voluntary contributions mechanism, Advice, Communication, Beliefs, Experiments.
    JEL: C92 C33 C34
    Date: 2009–06
  8. By: Jorge Martinez-Vazquez (International Studies Program. Andrew Young School of Policy Studies, Georgia State University); Andrey Timofeev (International Studies Program. Andrew Young School of Policy Studies, Georgia State University)
    Abstract: Recent socio-spatial studies point out a number of ongoing trends in the “scale division of labor of the state,” including among others, “destatization,” "denationalization, and “internationalization.” We draw on the literature in public economics to review several approaches to measuring state rescaling. We employ these measures to produce empirical evidence on the extent of state rescaling and its determinants. We find that over the last two decades there has been a world trend towards decentralization while the average government size has not changed.
    Keywords: Fiscal Decentralization, Size of Government, Globalization
    Date: 2008–12–01
  9. By: Fischer, Justina AV
    Abstract: This paper describes institutions of direct democracy between 1997 and 2003 in 26 Swiss cantons (states), specifically the statutory initiative and referendum, the constitutional initiative, and the fiscal referendum. In particular, it discusses their applications, but also the legal requirements for making use of them, including the signature requirements, the time available for their collection, and the financial thresholds. Optional and mandatory forms of these direct-legislative institutions are distinguished. This paper also provides calculations of the index and sub-indices of direct democracy for the additional years 1997 to 2003, in continuation of Stutzer (1999), using the identical methodology. Extending Trechsel and Serdült (1999) and Stutzer (1999) this paper includes the political institutions of the so-called Landsgemeinde cantons. Description of these institutions is based on the author’s reading of 26 cantonal constitutions in their versions between 1997 and 2003.
    Keywords: institutions; direct democracy; direct legislation; initiative; referendum; fiscal referendum; constitution; Switzerland: culture
    JEL: H4 D7 H11 I31 H72 K19 H73 N40
    Date: 2009–07–08
  10. By: Richard M. Bird (International Studies Program. Andrew Young School of Policy Studies, Georgia State University)
    Abstract: Fiscal experts have years proposed a holy trinity of tax reform options for developing countries: broader bases, lower rates, and better administration. The review in this paper of fifty years of experience auggests that what might be called the BBLR approach-- broader bases and lower rates -- to tax structure reform holds up fairly well. Nonetheless, some qualifications to the basic BBLR approach are suggested and the continuing fundamental importance of understanding and improving tax administration is stressed.
    Keywords: tax reform, tax bases, tax rates, tax administration
    Date: 2008–12–01
  11. By: Nicoletta Feruglio (UNDP, Bratislava); Jorge Martinez-Vazquez (International Studies Program. Andrew Young School of Policy Studies, Georgia State University); Andrey Timofeev (International Studies Program. Andrew Young School of Policy Studies, Georgia State University)
    Abstract: In this report we highlight some of the progress that has been made in the reform of the system of intergovernmental fiscal relations in Macedonia, but we dedicate more space and attention to those areas of the system where challenges still remain. The report is structured along the main pillars of the decentralization system and provides an assessment of the main challenges and issues the Government of Macedonia faces in each of these areas. The main areas covered include: vertical structure and scope of the government sector, expenditure assignments revenue assignment, intergovernmental transfers, and borrowing. In the final section, we outline a possible agenda for reform.
    Keywords: Fiscal Decentralization, Macedonia, intergovernmental fiscal relations, expenditure assignments ,revenue assignment
    Date: 2008–12–01
  12. By: stone, joe/a.; bania, neil
    Abstract: Applying a Barro-style model of endogenous growth to a fifty-year panel of states from 1957 to 2007, We examine the extent to which expenditures on public education and infrastructure— together with the taxes necessary to support them— enhance or impede the steady-state growth of state and local economies, as measured by per capita personal income. Our findings suggest that the independent effect of tax expenditures on either public infrastructure or education alone is significantly negative, but the complementary effect of each on the other is positive enough to make their combined effect significantly positive— except at large scales, where we find diseconomies, consistent with the ‘growth hill’ predicted by theory. Policy effects are identified empirically using a recursive structure with very long lags, GMM/instrumental variables, and controls for both fixed and time-varying heterogeneity. Results are robust to a variety of alternative specifications.
    Keywords: growth human capital public infrastructure
    JEL: H4 H72 H00
    Date: 2009
  13. By: Albert Solé-Ollé (Universitat de Barcelona); Paula Salinas (Universitat de Barcelona)
    Abstract: Several arguments derived from fiscal federalism theory suggest that decentralization may lead to improved levels of efficiency in the provision of public goods and services. The aim of this study is to examine this hypothesis by evaluating the effects of decentralization on educational outcomes in Spain. These are measured using a survival rate, defined as the ratio between the number of students who enrolled in upper-secondary (non-compulsory) education and the number of students enrolled in the final year of lower-secondary (compulsory) education during the previous academic year. We use a panel data set comprising the 50 provinces of Spain for the years 1978 to 2005, a period that covers the entire process of decentralization. Since education competences were devolved to the regions at different points in time, we can estimate the effects of these reforms by applying the differences-in-differences method and by using the non-decentralized autonomous regions as the comparison group. We find that decentralization in Spain had a positive impact on educational outcomes when pupils on vocational training programmes are not taken into account, and that the richer the region is the more marked the effect becomes. However, this improvement in educational outcomes is achieved at the expense of enrolment in vocational training programmes. These effects might reflect a better match between population preferences and educational policies consequent upon decentralization.
    Keywords: Decentralization, Policy Evaluation, Education
    JEL: H11 H43 H52 I28
    Date: 2009
  14. By: Strulik, Holger; Trimborn, Timo
    Abstract: Can a large-scale defcit spending program speed up recovery after recession? To answer that question we calibrate a standard neoclassical growth model with US data and assume that an exogenous shock has driven aggregate output far below steady-state level. We calibrate the model such that a permanent increase of government expenditure is effective in raising output. We then show that "fiscal stimulus", i.e. a temporary increase of government expenditure is not only ineffective but detrimental. Even before the spending program expires, aggregate output is lower than it could be without fiscal stimulus. We show the generality of this result w.r.t. size and persistence of the shock, size of the government spending multiplier, and the scale and duration of the stimulus program. Using a phase diagram we provide the economic intuition for our unpleasant finding and explain why, generally, private capital stock reaches its lowest level when a deficit spending program expires. We also show how an accompanying temporary cut of capital income taxes helps to prevent the negative repercussion of deficit spending on economic recovery.
    Keywords: deficit spending, government spending multiplier, economic recovery, economic growth
    JEL: E60 H30 H50 O40
    Date: 2009–07
  15. By: Ajit Zacharias; Thomas Masterson; Kijong Kim
    Abstract: In this Special Report, Levy scholars Ajit Zacharias, Thomas Masterson, and Kijong Kim provide a preliminary assessment of the 2009 American Recovery and Reinvestment Act (ARRA), a package of transfers and tax cuts that is expected to provide relief to low-income and vulnerable households especially hurt by the economic crisis, while at the same time supporting aggregate demand. By the administration's estimate, ARRA will create or save approximately three and a half million jobs by the end of 2010; while the ameliorating impact of the stimulus plan on the employment situation is surely welcome, say the authors, the government could have achieved far more at the same cost by skewing the stimulus package toward outlays rather than tax cuts. Their analysis points toward the necessity for a comprehensive employment strategy that goes well beyond ARRA. The need for public provisioning of various sorts--ranging from early childhood education centers to public health facilities to the “greening” of public transportation--coupled with the severe underutilization of labor, naturally suggests an expanded role for public employment as a desirable ingredient in any alternative strategy.
    Date: 2009–06
  16. By: Sally Wallace (Andrew Young School of Policy Studies, Georgia State University); Harini Kannan
    Abstract: The fundamental proposal for comprehensive individual income tax reform in Pakistan is to provide an integrated income tax structure that pertains to income of all individuals (including non-incorporated businesses) and which otherwise dramatically simplifies the taxation of individual income in Pakistan. An integrated individual income tax would treat individuals (salaried employees, self-employed businesses, and other non-corporate entities) in a similar way by applying a given tax rate structure to taxable income.
    Keywords: Pakistan, Pakistan taxation, individual income tax, income tax
    Date: 2008–12–01
  17. By: Robina Ather Ahmed; Mark Rider (Andrew Young School of Policy Studies, Georgia State University)
    Abstract: This report provides estimates of Pakistan’s tax gap by type of tax and describes the methodologies and data used to produce these estimates. A country’s tax gap is the amount of tax that goes uncollected due to non-compliance with the tax law. For estimation purposes, the operational definition of the tax gap is the difference between potential and actual federal tax revenue, where potential revenue is the amount of tax that the government would collect if everyone fully complied with the tax law. It is a simple matter to get actual tax collections by type of tax, so the trick to estimating a country’s tax gap is to obtain a reasonably accurate measure of potential tax revenue. Our basic strategy is to use micro-simulation models to estimate the potential revenues from Pakistan’s federal taxes of which there are only a hand full. Such modeling requires micro-economic data with information about the relevant tax bases and a tax calculator to simulate tax liabilities by type of tax. The advantage of this approach is the detailed information that it provides on the rate of compliance by type of tax which should be helpful in targeting scarce tax enforcement resources and in evaluating tax policy reforms.
    Keywords: Pakistan, Pakistan Taxation, tax gap, non-compliance
    Date: 2008–12–01
  18. By: Wayne Thirsk (Andrew Young School of Policy Studies, Georgia State University)
    Abstract: This paper undertakes a critical evaluation of the strengths and weaknesses of all of Pakistan’s major sources of tax revenue: the individual income tax, the corporate income tax, the sales tax, excise taxes and trade taxes on imports. For each major tax it describes the nature of the current tax base and the rate or rate structure that is applied to that base. After that exercise the paper identifies certain features of each tax that raise significant concerns for tax policy and constitute the beginning of an agenda for future tax reform. In each case the tax policy issues that have been flagged are discussed within a policy framework that appeals to the broadly accepted norms of “good” taxation and international experience in grappling with these issues. The concluding section of this paper sets forth for consideration an array of tax reform proposals that attempt to address the most important flaws and problems that have been detected in Pakistan’s tax system.
    Keywords: Pakistan, Pakistan Taxation, fiscal decentralization, revenue mobolization, sources of tax revenue
    Date: 2008–12–01
  19. By: James Alm (Andrew Young School of Policy Studies, Georgia State University); Mir Ahmad Khan
    Abstract: The Pakistan system of taxing enterprises has undergone some major changes in recent years. Nevertheless, the corporate tax system remains plagued by a number of problems. The existence of numerous exemption programs has significantly reduced tax revenues, and has greatly distorted the allocation of investment across sectors and asset types. There also seems to exist significant amounts of tax evasion, evasion that also distorts resource allocation, reduces tax revenues, and compromises the distributional objectives of the system. In part as a result of tax avoidance and tax evasion, the tax base has shrunk over time, further reducing revenues and leaving the more visible taxpayers still out of the tax net. The extensive use of tax incentives is seldom tracked, quantified, and evaluated, and the intended effects on economic growth are uncertain. The incentives are only one feature of the tax system that contributes to an overly complicated system, complications that illustrate the limitations of the tax administration. The tax system was designed for times and circumstances that are long past, and the system has evolved over time in a piecemeal, ad hoc manner with little apparent thought given to the ways in which the pieces of the system need to fit together.
    Keywords: Pakistan, Pakistan Taxation, Pakistan system of taxing enterprises, tax avoidance, tax evasion
    Date: 2008–12–01
  20. By: Roy Bahl (Andrew Young School of Policy Studies, Georgia State University); Sally Wallace (Andrew Young School of Policy Studies, Georgia State University); Musharraf Cyan (International Studies Program. Andrew Young School of Policy Studies, Georgia State University)
    Abstract: The purpose of this study is to review the status of revenue mobilization by sub-national Governments in Pakistan, and to identify reform options that might lead to a higher level of revenues and a better functioning fiscal decentralization. This analysis is based on case studies of Punjab and NWFP provinces, and on data gathered in the course of field work in the two provinces.
    Keywords: Pakistan, Provincial Government, Pakistan Taxation, fiscal decentralization, revenue mobolization
    Date: 2008–12–01
  21. By: Geerten M. M. Michielse
    Abstract: The Government of Pakistan is considering an extensive tax and administrative reform by 2009 and asked the World Bank to provide a discussion paper on several technical issues. This report is dealing with the international aspects of the tax system: (a) the double tax agreements, and (b) the trade agreements.
    Keywords: Pakistan, Pakistan Taxation, tax agreements, trade agreements
    Date: 2008–12–01
  22. By: Umir Wahid; Sally Wallace (Andrew Young School of Policy Studies, Georgia State University)
    Abstract: Who pays Pakistan’s taxes? Do they fall inordinately on low-income families, or on labor working in the formal sector, or is the tax burden borne disproportionately by the higher income classes, who also own most of the capital in the country? The fairness of the tax system is not only affected by who pays taxes, but by who does not. The latter group might include those working in the hard-to-tax informal sector, agriculture, those who benefit from legal exemptions, and those who evade taxes.
    Keywords: Pakistan, Pakistan taxation, hard-to-tax informal sector
    Date: 2008–12–01

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