nep-pbe New Economics Papers
on Public Economics
Issue of 2010‒03‒28
twenty-two papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. On tax competition, public goods provision and jurisdictionsÕ size By PIERETTI, Patrice; ZANAJ, Skerdilajda
  2. Democracy, Redistributive Taxation and the Private Provision of Public Goods By Thomas Markussen
  3. Costs of Taxation and Benefits of Public Goods with Multiple Taxes and Goods By James E. Anderson; Will Martin
  4. Taxation and the Quality of Institutions: Asymmetric Effects on FDI By Serena Fatica
  5. Ramsey, Pigou, and a Consumption Externality By Wendner, Ronald
  6. Fiscal Decentralization and Economic Growth in Central and Eastern Europe. By Andrés Rodríguez-Pose; Anne Krøijer
  7. Fiscal federalism and electoral accountability By Toke S. Aidt; Jayasri Dutta
  8. A New Concept of European Federalism. By Bruno S. Frey
  9. Good Governance in Crisis or a Good Crisis for Governance? A Comparison of the EU and the US. By Waltraud Schelkle
  10. Economic ideas and economists in the Parliament in the liberal age: The attempt to implement a tax on incomes in Spain in 1868-1869 By Javier San Julian Arrupe
  11. Generating Jobs through State Employer Tax Credits: Is there a Better Way? By Heidi Garrett-Peltier; Jeff Thompson
  12. An incentive mechanism to break the low-skill immigration deadlock By DE LA CROIX, David; DOCQUIER, FrŽdŽric
  13. Federal Tax Policies and Farm Households By Durst, Ron
  14. Toward a Theory of Public Entrepreneurship By Peter G. Klein; Joseph T. Mahoney; Anita McGahan; Christos N. Pitelis
  15. On the public economics of annuities with differential mortality By BOMMIER, Antoine; LEROUX, Marie- Louise; LOZACHMEUR, Jean- Marie
  16. Willingness to Pay Estimation When Protest Beliefs are not Separable from the Public Good Definition By Kimberly Rollins; M.D.R. Evans; Mimako Kobayashi; Anita Castledine
  17. The global financial crisis and public finances in the New EU Countries from Central and Eastern Europe By Karsten Staehr
  18. Unveiling Vertical State Downscaling: Identity and/or the Economy? By Joan Costa-i-Font
  19. Fiscal policies in Europe and the United States during the Great Depression By Ilja Kristian Kavonius
  20. Drinking and protecting: a market approach to the preservation of cork oak landscapes By Ahlheim, Michael; Frör, Oliver
  21. On Building the American and the European Empires. By Josep M. Colomer
  22. The Recognition of Religion within the Constitutional and Political Order of the European Union. By Ronan McCrea

  1. By: PIERETTI, Patrice; ZANAJ, Skerdilajda (UniversitŽ catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))
    Keywords: tax competition, public goods competition, spatial competition, foreign direct investments, country size
    JEL: H25 H73 F13 F15 F22
    Date: 2009–03–01
  2. By: Thomas Markussen (Department of Economics, University of Copenhagen)
    Abstract: The paper studies in a simple, Downsian model of political competition how the private provision of public goods is affected when it is embedded in a system of democracy and redistributive taxation. Results show that the positive effect of inequality on public goods production, which Olson (1965) pointed to, is weakened and might even be reversed in this context. Also, the median voter may choose a negative tax rate, even if he is poorer than the mean, in order to stimulate public goods production. The relevance of the model is illustrated with an application to the finance of higher education.
    Keywords: public goods; political economy; inequality; taxation; higher education
    JEL: D31 D7 H2 H41 I22
    Date: 2010–03
  3. By: James E. Anderson (Boston College); Will Martin (World Bank)
    Abstract: The fact that raising taxes can increase taxed labor supply through income effects is frequently used to justify greater public good provision than indicated by traditional, compensated analyses. We develop a model including multiple public goods and taxes and derive consistent measures of the marginal benefit of public goods and their marginal social cost inclusive of tax distortions using both compensated and uncompensated measures of the Marginal Cost of Funds (MCF). Our analysis confirms that the desirability of tax financed public projects is independent of whether compensated or uncompensated methods are used. The main innovation shows that the costs or benefits of providing particular public goods should be adjusted by a simple, benefit multiplier not previously seen in the literature if an uncompensated MCF is used.
    Keywords: fiscal policy; second best; public goods; distortions; costs of taxation, marginal cost of funds; marginal excess burden, thought experiment
    JEL: D61 F11 H21 H43
    Date: 2010–01–30
  4. By: Serena Fatica (European Commission)
    Abstract: Economic integration has intensified international competition to attract productive capital. This paper analyzes, both theoretically and empirically, the effect of tax policies and institutional quality on the allocation of FDI - two aspects that the economic literature has extensively investigated, though only in isolation. I build a simple two-country partial equilibrium model to study competition among governments vying for potential investors whose location choices are driven by both the quality of institutions and the corporate tax rate. Modeling good governance as a public good, it is shown that the jurisdiction providing better institutions is able to levy a higher tax on capital. Moreover, provided firms are sensitive enough to institutional quality, it attracts a larger share of investment than the low-quality/low-tax location. The main predictions of the model are tested on FDI stocks to 63 economies using a simple difference gravity equation derived from discrete choice theory of firms' location. Using a pair of destination countries as the unit of analysis eliminates the need to control for multilateral interdependence among receiving countries, a source of possible bias in the traditional gravity specification in the levels. The empirical evidence corroborates the claim that the sensitivity of foreign investment to the tax rate varies significantly between host countries characterized by different levels of institutional quality. The findings are robust to a number of sensitivity checks and to the use of instrumental variables to tackle endogeneity of the institutional quality variable.
    Keywords: foreign direct investment, fiscal competition, institutions, public goods
    JEL: H7 F21 F23 K00
    Date: 2010–03
  5. By: Wendner, Ronald
    Abstract: This paper analyzes the effects of consumption externalities on optimal taxation and on the social cost and optimal levels of public good provision. If public and private goods are Hicksian complements and no lump sum taxes are available, the second-best level of public good provision can exceed the first-best level. In contrast to economies without externalities, this result even holds for Cobb-Douglas economies with homogeneous agents. Heterogeneity of agents raises the second-best commodity tax rate due to equity considerations, but lowers the tax rate due to the concern for externality-correction.
    Keywords: consumption externality; public good provision; Ramsey rule; Pigou
    JEL: H21 D62 H41
    Date: 2010–03–12
  6. By: Andrés Rodríguez-Pose; Anne Krøijer
    Abstract: The majority of the literature on fiscal decentralization has tended to stress that the greater capacity of decentralized governments to tailor policies to local preferences and to be innovative in the provision of policies and public services, the greater the potential for economic efficiency and growth. There is, however, little empirical evidence to substantiate this claim. In this paper we examine, using a panel data approach with dynamic effects, the relationship between the level of fiscal decentralization and economic growth rates across 16 Central and Eastern European countries over the 1990-2004 period. Our findings suggest that, contrary to the majority view, there is a significant negative relationship between two out of three fiscal decentralization indicators included in the analysis and economic growth. However, the use of different time lags allows us to nuance this negative view and show that long term effects vary depending on the type of decentralization undertaken in each of the countries considered. While expenditure at and transfers to subnational tiers of government are negatively correlated with economic growth, taxes assigned at the subnational level evolve from having a significantly negative to a significantly positive correlation with the national growth rate. This supports the view that subnational governments with their own revenue source respond better to local demands and promote greater economic efficiency.
    Keywords: Fiscal decentralization, economic growth, efficiency, devolution, Central and Eastern Europe
    Date: 2010–01
  7. By: Toke S. Aidt (University of Cambridge); Jayasri Dutta (University of Birmingham)
    Abstract: We study the efficient allocation of spending and taxation authority in a federation in which federal politicians are exposed to electoral uncertainty. We show that centralization may, but need not, result in a loss of electoral accountability. We identify an important asymmetry between positive and negative externalities and show that centralization may not be efficient in economies with positive externalities even when regions are identical and centralization does not entail a loss of accountability. We also show that decentralization can only Pareto dominate centralization in economies with negative externalities.
    Keywords: Fiscal federalism, local public goods, externalities, performance voting,turnout uncertainty, electoral accountability
    JEL: D72 D78 H41
    Date: 2010
  8. By: Bruno S. Frey
    Abstract: By opening markets the European union has been also an economic success. However, with respect to political organization the European Union is far less accomplished. The misguided concept of a successful Europe consists in mistaking integration for harmonization and homogenization. But the essence of Europe is its diversity. No steps have been taken to actively institutionalize competition between governmental units at all levels. The welfare of European citizens could be improved by promoting competition between new jurisdictions. A new type of federalism based on Functional, Overlapping Competing Jurisdictions FOCJ is here proposed. FOCJ form a federal system of governments emerging from below as a response to citizens' preferences. The lowest political units (communes) must be given the freedom to engage in forming FOCJ and must have the right to levy taxes to finance the public services they provide.
    Keywords: federalism, constitutional economics, public choice, monopoly on territory
    JEL: H11 H4 H5
    Date: 2010–01
  9. By: Waltraud Schelkle
    Abstract: The crisis since August 2007 provides an opportunity to observe the workings of good governance institutions under an extreme stress test and in radically different political settings. Institutions such as independent central banks, fiscal rules and regulatory oversight of public finances were meant to depoliticize macroeconomic stabilization. The comparison of responses to the crisis in the United States and in the European Union shows that good governance institutions are in crisis in the US while it has been a good crisis for governance so far in the EU. Levels of fiscal stimulus and monetary easing are surprisingly similar between the EU and the US, yet the ECB has maintained its independence and member states have been restrained from inserting protectionist elements in their stimulus measures. By contrast, the boundaries between economic stabilization and distributive politics have been wiped out in the US because neither the political forces in the states nor the economic forces in the financial sector erected many defences. In the EU, the boundaries as drawn are inimical to joint stabilization efforts but this is exactly why they are politically self-enforcing.
    Keywords: central bank independence, crisis, depoliticization, European Union, fiscal rules, United States
    Date: 2010–01
  10. By: Javier San Julian Arrupe (Universitat de Barcelona)
    Abstract: The presence of economic ideas in parliamentary debates is a field of study that has increasingly gained attention within the wider subject of the institutionalisation of political economy in the so called liberal age in Western world. Within this general framework, this paper focuses on a particular case: It studies the relevance of economic ideas and the role of economists in the debates which took place in the Spanish Parliament following the bill issued by the Minister of Finances Laureano Figuerola in order to establish a tax on personal incomes in 1868. The article attempts to show, first, that economic ideas played a significant role in the design and the subsequent discussions about the income tax, and that the presence and influence of economists in the Parliament at that time was remarkable. Secondly, that this was a serious attempt to modernise the structure of taxation in Spain after the liberal revolution of 1868, seeking to devise a fiscal system capable to foster economic development.
    Keywords: income tax, tax reform, parliament, public finances, political economy, economic liberalism
    JEL: H24 N43 A11 B12 K34
    Date: 2010
  11. By: Heidi Garrett-Peltier; Jeff Thompson
    Abstract: The Governors of Massachusetts, Connecticut, and several other states have recently proposed employer tax credits as measures to fight high unemployment in their states. Such policies are also being considered at the federal level. In the Working Paper, <span style="font-style: normal;">Jeff Thompson and Heidi Garrett-Peltier</span> present evidence that such policies, in fact, do little to increase aggregate demand, and instead only modestly reduce the after-tax cost of labor in an economy with high unemployment, falling wages, and weak demand They suggest a more effective approach to creating jobs in the states: increasing spending in labor-intensive sectors and programs that are matched by federal funds, such as Medicaid. These expenditures would be particularly effective if they were financed through temporary high-income tax increases.
    Keywords: State and Local Taxation, Subsidies, and Revenue, state and Local Budget and Expenditures, State and Local Government, Health, Education, and Welfare, Business Taxes and Subsidies,Labor Demand, Wages, Compensation, and Labor Costs
    JEL: H71 H72 H75 H25 J23 J38
    Date: 2010
  12. By: DE LA CROIX, David (UniversitŽ catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)); DOCQUIER, FrŽdŽric (UniversitŽ catholique de Louvain (UCL). Institut de recherches Žconomiques ( IRES))
    Keywords: public good, inequality aversion, immigration policy
    JEL: F22 D58 D6 D7
    Date: 2009–09–01
  13. By: Durst, Ron
    Abstract: Significant changes in Federal individual income and estate tax policies have occurred over the last 10 years. Analysis suggests that changes in Federal tax provisions affecting both individual and business income taxes have reduced average tax rates for all farm households, resulting in the lowest tax burden on farm income and investment in a decade. Similarly, an analysis of the changes to Federal estate tax policies suggests that increases in the value of property that can be transferred to the next generation free of the estate tax, combined with special provisions for farmers and other small businesses, have greatly reduced the number of farm estates subject to the tax and the amount owed. While nearly 10 percent of commercial farm estates could owe tax in 2009, only 1 to 2 percent of all farm estates are estimated to be subject to the Federal estate tax this year.
    Keywords: income tax, estate tax, tax rates, estate, Federal tax policy, farm losses, commercial farms, Farm Management,
    Date: 2009–05
  14. By: Peter G. Klein; Joseph T. Mahoney; Anita McGahan; Christos N. Pitelis
    Abstract: This paper explores innovation, experimentation, and creativity in the public domain and in the public interest. Researchers in various disciplines have studied public entrepreneurship, but there is little work in management and economics on the nature, incentives, constraints and boundaries of entrepreneurship directed to public ends. We identify a framework for analyzing public entrepreneurship and its relationship to private entrepreneurial behavior. We submit that public and private entrepreneurship share essential features but differ critically regarding the definition and measurement of objectives, the nature of the selection environment, and the opportunities for rent-seeking. We describe four levels of analysis for studying public entrepreneurship, provide examples, and suggest new research directions.
    Keywords: Entrepreneurship, public administration, political economy, institutions, transaction costs
    Date: 2010
  15. By: BOMMIER, Antoine; LEROUX, Marie- Louise (UniversitŽ catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)); LOZACHMEUR, Jean- Marie
    Keywords: uncertain lifetime, redistribution, annuities, nonlinear taxation
    JEL: H55 H23 I31
    Date: 2009–04–01
  16. By: Kimberly Rollins (Department of Resource Economics, University of Nevada, Reno); M.D.R. Evans (Department of Resource Economics and Department of Sociology, University of Nevada, Reno); Mimako Kobayashi (Department of Resource Economics, University of Nevada, Reno); Anita Castledine (Department of Resource Economics, University of Nevada, Reno)
    Abstract: Public good attributes that are correlated with protest beliefs but not separable from the good's value, would affect stated preference estimates of the WTP for the public good. Survey data collected to value a program to prevent ecosystem losses on Nevada rangelands, where the majority of land is publicly owned and managed, reveal more than half of the respondents exhibiting some protest belief. Of these, about 60% voted 'yes' to some nonzero bid amount. By treating protest beliefs and opposition to the proposed program as separate concepts, we systematically analyze their determinants and impacts on WTP. In this framework, people with protest beliefs may or may not vote 'no' to all bids and people may, without being protesters, answer 'no' to all dollar amounts. Multinomial logit regression results suggest that factors motivating people to protest and/or oppose the proposed program are so diverse that a single model does not provide a good fit. We estimate nested models and conclude that different underlying processes determine WTP for "protesters" ($34.02) and "non-protesters" ($69.56).
    Keywords: Stated preferences; Willingness to pay; Protest responses; Rangelands; Valuation of ecosystem services
    JEL: Q51 Q24 Q57
    Date: 2010–02
  17. By: Karsten Staehr
    Abstract: This paper discusses the public finances of the 10 new EU Countries from Central and Eastern Europe, with particular emphasis on the effects of the global financial crisis that started in 2008. The budget outcomes have differed markedly across the new EU countries, both before and during the crisis. The direct impact of the crisis on public finances was limited, but the severe downturns have strained public finances and increased debt ratios considerably. Estimations of budget reaction functions reveal that the budget balance has, in general, been moderately counter-cyclical, but also that the counter-cyclicality derives entirely from the revenue side. The medium-term fiscal outlook rests, to a large extent, on growth prospects. The uncertainties regarding future economic
    Keywords: global financial crisis, fiscal policy, budget reaction functions, Central and Eastern Europe
    JEL: H6 E62 P27
    Date: 2010–02–04
  18. By: Joan Costa-i-Font
    Abstract: State rescaling may take a variety of shapes although scant research has been carried out into the mechanisms and economic incentives that underpin rescaling processes. Recent literature in economics, economic sociology and political economy has identified at least two broad rescaling mechanisms, namely the development of regional identity - operating at the cultural level and proxing preference heterogeneity-, and the heterogeneity in levels of economic development, which influence the extent of regional redistribution. This paper empirically examines the mechanisms of vertical state rescaling by drawing upon empirical evidence from Catalonia and the Basque Country, to explore the evolution of sub-state identity and the rise of inter-territorial fiscal grievances - weakening intraregional economic solidarity. Findings corroborate the idea that the combination of widening sub-national identity raises the costs of managing heterogeneous spatial identities and strengthens support for vertical state downscaling. Similarly, ending regional fiscal solidarity it is found that Catalonia would increase their income by 37%. However, the effect of regional identity exceeds that of regional redistribution in explaining state rescaling support in the magnitude of one to seven. These findings speak to the debate on the formation of Europe, in that they suggest limits to regional redistribution and pinpoint the importance of a common identity.
    Keywords: vertical state downscaling, spatial identity, regional elites, devolution, Basque Country and Catalonia, Europe
    Date: 2010–03
  19. By: Ilja Kristian Kavonius
    Abstract: Abstract: This paper discusses the fiscal policy reactions and economic policies of European countries and the United States during the Great Depression. Economic as well as economic history literature has tended to overlook the fiscal policy aspects of the Great Depression, in particular in relation to European countries. This paper concentrates specifically on this aspect, providing a comprehensive discourse on the background of the crisis and using for analysis a data set compiled from available international sources. On this basis, central government reactions, mainly on the expenditure side, are analysed. Thus, this paper provides new information concerning the economic policies during the Great Depression and helps to understands how the Great Depression developed. The conclusion reached is that fiscal policies between the two World Wars were mainly neo-classical, i.e. expenditure reacted to the development of revenue. In certain European countries, for example the Netherlands and Sweden, some counter-cyclical fiscal policies can be observed. However, as the governments there were smaller and the effect therefore comparably limited, this did not play a key role in the economic recovery. Finally, the paper briefly discusses the similarities and differences between the Great Depression and the current crisis.
    Keywords: Great Depression, fiscal policy, counter-cyclical, Keynesian fiscal policy, neo-classical economic policy, economic policy
    JEL: N12 H30 N42 N44 H60 H50 N14 H62 H63
    Date: 2010–02–11
  20. By: Ahlheim, Michael; Frör, Oliver
    Abstract: With the availability of new techniques to close wine bottles avoiding the risk of “corky” taste the tradition of closing wine bottles with cork stoppers is on the retreat. As a consequence the Mediterranean cork oak forests with their rich biodiversity are endangered since their cultivation is not profitable anymore. This paper explores the viability of a market approach to the preservation of these ecologically valuable landscapes. In an internet-based Contingent Valuation survey we assess wine consumers' willingness to pay a higher price for wine bottles closed with high-quality cork stoppers instead of buying wine with alternative stoppers in order to preserve the cork oak landscapes. We find that though many wine consumers have experience with tainted wine they are, nevertheless, willing to buy wine with (highquality) cork stoppers at higher prices. Their average WTP is, however, not sufficient to cover the additional costs of these stoppers. Thus, we propose a financing mix of market returns and government subsidies for preserving the cork oaks. As a precondition for this market approach to be successful bottles with high-quality cork stoppers must be clearly identifiable in the shops, and consumers must be informed about the ecological consequences of supporting the cork production. --
    Keywords: Provision of public goods,cost-benefit analysis,Contingent Valuation,cork oak landscapes
    JEL: D6 H4 Q27 Q51 Q57
    Date: 2010
  21. By: Josep M. Colomer
    Abstract: The processes of building the United States of America (USA) during the nineteenth century and the European Union (EU) since mid-twentieth century are among the major claims for the possibility of a vast, ‘imperial’-size political unit based on democratic principles. The crucial period for the consolidation of the USA was between the Civil War and the First World War, when it established clear territorial limits and completed its internal institutionalization as a federal democratic union. While the EU has achieved higher levels of economic integration on some issues than the USA did one hundred years ago, it still recognizes a number of additional candidates to become member-states and has not attained a stable constitutional framework. As it was the case for the USA about a century ago, for the current European Union putting an end to the process of territorial expansion and fixing neat external frontiers seems to be a necessary condition to achieve internal institutional stability and robust federal formulas.
    Date: 2010–01
  22. By: Ronan McCrea
    Abstract: This article analyses the recourse to religion as a source of law in the legal and political order of the European Union. It demonstrates that the legitimacy of religious input into law is recognised institutionally, symbolically and substantively. However, religious influence within the Union’s public order must accommodate cultural and humanist influences that can serve to limit attempts to reflect religious teaching in law and which are particularly restrictive of the influence of “outsider” faiths whose demands cannot be routed through culture and those faiths with extensive political ambitions. Thus, the Union’s approach is characterised by a complex and shifting balance between religious, cultural and humanist influences which is struck in a pluralist context that attempts to reconcile the differing balances between such influences in individual Member States with the need to maintain the open and sufficiently religiously neutral common European ethical framework necessary for the functioning of the Union as a polity.
    Keywords: Religion, Secularism, Constitutional Law, European Union, Fundamental Rights
    Date: 2010–01

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