nep-pbe New Economics Papers
on Public Economics
Issue of 2009‒09‒19
thirteen papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Public Goods Games, Altruism, and Evolution By Ingela Alger
  2. Behavioral Economics and Tax Policy By William Congdon; Jeffrey R. Kling; Sendhil Mullainathan
  3. Bureaucracy and Corruption Taxation Proof By Jellal, Mohamed
  4. The distributional implications of income underreporting in Hungary By Benedek, Dora; Lelkes, Orsolya
  5. Moral Judgments in Social Dilemmas: How Bad is Free Riding? By Robin Cubitt; Michalis Drouvelis; Simon Gaechter; Ruslan Kabalin
  6. The Flypaper Effect Revisited By Fernando Aragon
  7. China : urban services and governance By Brixi, Hana
  8. Tax avoidance, endogenous social norms, and the comparison income effect By Alessandro Balestrino
  9. How Far Are We From The Slippery Slope? The Laffer Curve Revisited By Mathias Trabandt; Harald Uhlig
  10. Distributional Characteristics for Ireland: A Note By David Madden
  11. Economic Incentives and Social Preferences: A preference-Based Lucas Critique of Public Policy By Samuel Bowles; Sandra Polanía Reyes
  12. A Neo-Schumpeterian Approach towards Public Sector Economics By Horst Hanusch; Andreas Pyka; Florian Wackermann
  13. Avoidance Policies – A New Conceptual Framework By David Ulph

  1. By: Ingela Alger (Department of Economics, Carleton University)
    Abstract: How can a desire to cooperate in one-shot interactions survive, even though it gives a material disadvantage to its carrier? I analyze this issue using a one-shot public goods game between two altruistic individuals. Within a pair, the least altruistic individual is better off materially. Between pairs, individuals in the pair with the highest degree of altruism are better off materially. I determine the evolutionarily stable degree of altruism, allowing for assortative matching. The stable degree of altruism is strictly smaller than the degree of assortativity, and it may be negative. It is also increasing in the degree of assortativity. For a given degree of assortativity, the stable degree of altruism depends on the relative strength of the within-pair and the between-group e¤ect on material welfare. This relative strength in turn depends on the production and cost functions in the underlying public goods game.
    Keywords: public goods, teamwork, altruism, evolution of preferences, evolutionary stability
    JEL: D02 D13
    Date: 2009–08–26
  2. By: William Congdon; Jeffrey R. Kling; Sendhil Mullainathan
    Abstract: Behavioral economics is changing our understanding of how economic policy operates, including tax policy. In this paper, we consider some implications of behavioral economics for tax policy, such as how it changes our understanding of the welfare consequences of taxation, the relative desirability of using the tax system as a platform for policy implementation, and the role of taxes as an element of policy design. We do so by reviewing the logic of specific features of tax policy in light of recent findings in areas such as tax salience, program take-up, and fiscal stimulus.
    JEL: H2
    Date: 2009–09
  3. By: Jellal, Mohamed
    Abstract: Using the Principal-Agent-Supervisor paradigm, we examine in this paper how a tax collection agency changes optimal schemes in order to lessen the occurrence of bribery between the tax collector and the taxpayer. The Principal, who maximizes the expected net fiscal revenue, reacts by decreasing tax rates when the supervisor is likely to engage in corrupt transaction with taxpayer. The combat against collusion may explain the greater reliance on indirect taxes than on direct taxes both in developed and developing countries
    Keywords: Principal Agent Supervisor;Bureaucracy ;Collusion; Tax evasion
    JEL: D73 D82 H26
    Date: 2009–09–05
  4. By: Benedek, Dora; Lelkes, Orsolya
    Abstract: The paper estimates the distributional implications of income tax evasion in Hungary based on a random sample of administrative tax records of 230 thousand individuals. Gross incomes in the administrative tax records are compared with those in a nationally representative household budget survey, assuming that tax-evaders are more likely to report their true incomes in an anonymous interview. Our estimates show that the average rate of underreporting is 11%, which conceals large differences between self-employed (who hide the majority of their incomes) and employees. The estimates are likely to be lower bound, due to measurement error in the income survey. These rates are then used in EUROMOD, a tax-benefit microsimulation model to calculate the fiscal and distributional implications of underreporting, while taking account of all major direct taxes and cash benefits and also their interactions. Tax evasion reduces fiscal revenues from personal income taxes by about 19%. While the occurrence of poverty is not affected, income inequality becomes significantly higher (the Gini coefficient increases by 7%), suggesting that high earners tend to evade proportionately more. Finally, we find that tax evasion largely reduces the progressivity of the tax system.
    Keywords: tax policy; tax evasion; income distribution; self-employed
    JEL: H22 D31 I38 C8 H26
    Date: 2009–09–09
  5. By: Robin Cubitt (University of Nottingham); Michalis Drouvelis (University of York); Simon Gaechter (University of Nottingham); Ruslan Kabalin (University of Nottingham)
    Abstract: In the last thirty years economists and other social scientists investigated people’s normative views on principles of distributive justice. Here we study people’s normative views in social dilemmas, which underlie many situations of economic and social significance. Using insights from moral philosophy and psychology we provide an analysis of the morality of free riding. We use experimental survey methods to investigate people’s moral judgments empirically. We vary others’ contributions, the framing (“give-some” vs. “take-some”) and whether contributions are simultaneous or sequential. We find that moral judgments depend strongly on others’ behaviour; and that failing to give is condemned more strongly than withdrawing all support.
    Keywords: moral judgments, framing effects, public goods experiments, free riding
    Date: 2009–08
  6. By: Fernando Aragon
    Abstract: This paper argues that there is nothing anomalous about the flypaper effect. Idevelop a simple median voter model of government spending with costly taxcollection that predicts the flypaper effect and provide a quantifiable measure of itsmagnitude. Using the model insights and previous estimates, I show that a tax ratebetween 8% to 16% would account for the flypaper effect observed in U.S. subnationalgovernments.
    Keywords: flypaper effect, intergovernmental transfers, public finance, fiscaldecentralization
    JEL: H71 H77
    Date: 2009–01
  7. By: Brixi, Hana
    Abstract: The study addresses governance challenges in public service delivery in China. It builds on the citizen scorecard survey conducted in five Chinese cities in 2006 to gauge citizens’ experience with public services, and demonstrates the usefulness of citizens’ feedback for policy development and implementation. The survey found that citizens were generally pleased with urban public services, but worried about the associated fees. Compared with the official urban residents, the urban poor and rural migrants in cities reported sharper utilization constraints, lower readiness to complain or pay informal fees, and a much larger income share spent on public services. The reported citizens’ perceptions sometimes diverged from the evidence and pointed to significant information asymmetries. Explaining the survey results, the study reveals problems of inadequacy, inequality and misaligned incentives in public resource allocation. The study presents several successful experiments reducing the dependence on user fees in basic education and primary healthcare. It recognizes that China has been undertaking comprehensive reforms to enhance equity and quality in public service delivery. Such reforms have included measures to strengthen the regulatory, monitoring, and enforcement systems and accountability relationships. In the context of the ongoing reforms, this study highlights the need to: a) hold the provincial governments accountable for public service delivery performance; b) develop effective mechanisms to align public resources and incentives at each level of government with the national priorities; and c) develop proper means to empower the citizens. In this context, the study affirms that the Chinese government is rightly placing reforms in the intergovernmental, administrative, and public finance systems at the top of its agenda.
    Date: 2009–09–01
  8. By: Alessandro Balestrino
    Abstract: We analyse a model of income tax avoidance with heterogenous agents; we assume the presence of a comparison income e¤ect and of a psychic cost (disutility) of tax dodging. In this context, we show two sets of results. First, we study the policy preferences of the agents, and identify a median-agent political equilibrium. Paralleling previous ?ndings in the optimal taxation literature, we show that the comparison income e¤ect calls for a high degree of progressivity of the income tax; additionally, we ?nd that this tendence is strenghtened by the psychic cost of avoidance. Second, we model the endogenous formation of the stigma attached to the act of avoidance as a "conformism game", and propose a "modal-agent social equilibrium". We also argue that, in general, the stigma is motivated by the desire to make redistribution more e¤ective, as well as by the need to facilitate social competition.
    Keywords: tax avoidance, social norms, conformism, comparison income, median voter
    JEL: D72 H26 H31 Z13
    Date: 2009–06
  9. By: Mathias Trabandt; Harald Uhlig
    Abstract: We characterize the Laffer curves for labor taxation and capital income taxation quantitatively for the US, the EU-14 and individual European countries by comparing the balanced growth paths of a neoclassical growth model featuring â€constant Frisch elasticity†(CFE) preferences. We derive properties of CFE preferences. We provide new tax rate data. For benchmark parameters, we find that the US can increase tax revenues by 30% by raising labor taxes and 6% by raising capital income taxes. For the EU-14 we obtain 8% and 1%. Denmark and Sweden are on the wrong side of the Laffer curve for capital income taxation.
    JEL: E0 E60 H0
    Date: 2009–09
  10. By: David Madden (University College Dublin)
    Abstract: The distributional characteristic is a measure which can be used in many applications in social cost-benefit analysis. In the application here, the distributional characteristics of a number of broad aggregates of goods are calculated for Ireland. These calculations can aid in assessing the distributional implications of price and tax changes.
    Keywords: Distributional Characteristic, welfare weight, tax reform
    Date: 2009–08–01
  11. By: Samuel Bowles (Santa Fe Institute, University of Siena, and University of Massachusetts Amherst); Sandra Polanía Reyes (University of Siena)
    Abstract: Policies and explicit incentives designed for self-regarding individuals sometimes are less effective or even counterproductive when they diminish altruism, ethical norms and other social preferences. Evidence from 51 experimental studies indicates that this crowding out effect is pervasive, and that crowding in also occurs. A model in which self-regarding and social preferences may be either substitutes or complements is developed and evidence for the mechanisms underlying this non-additivity feature of preferences is provided. The result is a preference-based analogue to the Lucas Critique restricting feasible implementation to allocations that are supportable given the effect of incentives on preferences. JEL Categories: D64, H41, D78, Z13, C90
    Keywords: Public goods, behavioral experiments, social preferences, second best, motivational crowding, explicit incentives
    Date: 2009–09
  12. By: Horst Hanusch (University of Augsburg, Department of Economics); Andreas Pyka (University of Hohenheim, Department of Economics); Florian Wackermann (University of Augsburg, Department of Economics)
    Abstract: Innovation is the major driver of economic growth and development. To analyze innovation processes the restriction of a framework suited to the analysis of innovation towards the industrial sphere of an economy is not sufficient because of the important co-evolutionary dimensions of innovation. Instead, a comprehensive economic theoretical approach is needed which encompasses all spheres of economic life. This paper is filling this gap by introducing Comprehensive Neo-Schumpeterian Economics and the Neo-Schumpeterian approach towards public sector economics.
    Keywords: innovation, uncertainty, public sector, co-evolution
    JEL: B52 H11 L2 O20 P0
    Date: 2009–09
  13. By: David Ulph (University of St Andrews, Oxford University Centre for Business Taxation)
    Abstract: This paper develops a general theoretical framework within which a heterogeneous group taxpayers confront a market that supplies a variety of schemes for reducing tax liability, and uses this framework to explore the impact of a wide range of anti-avoidance policies. Schemes differ in their legal effectiveness and hence in the risks to which they expose taxpayers - risks which go beyond the risk of audit considered in the conventional literature on evasion. Given the individual taxpayer’s circumstances, the prices charged for the schemes and the policy environment, the model predicts (i) whether or not any given taxpayer will acquire a scheme, and (ii) if they do so, which type of scheme they will acquire. The paper then analyses how these decisions, and hence the tax gap, are influenced by four generic types of policy: • Disclosure – earlier information leading to faster closure of loopholes; • Penalties – introduction of penalties for failed avoidance; • Policy Design – fundamental policy changes that design out opportunities for avoidance; • Product Register - the introduction of GAARs or mini-GAARs that give greater clarity about how different types of scheme will be treated. The paper shows that when considering the indirect/behavioural effects of policies on the tax gap it is important to recognise that these operate on two different margins. First policies will have deterrence effects – their impact on the quantum of taxpayers choosing to acquire different types schemes as distinct to acquiring no scheme at all. There will be a range of such deterrence effects reflecting the range of schemes available in the market. But secondly, since different schemes generate different tax gaps, policies will also have switching effects as they induce taxpayers who previously acquired one type of scheme to acquire another. The first three types of policy generate positive deterrence effects but differ in the switching effects they produce. The fourth type of policy produces mixed deterrence effects.
    Date: 2009

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