nep-pbe New Economics Papers
on Public Economics
Issue of 2010‒06‒04
nine papers chosen by
Oliver Budzinski
University of Southern Denmark

  1. Tax Morale, Tax Evasion, and the Shadow Economy By Gebhard Kirchgässner
  2. Priming Cooperation in Social Dilemma Games By M Drouvelis; R Metcalfe; N Powdthavee
  3. Is fiscal decentralization harmful for economic growth? Evidence from the OECD countries By Andrés Rodríguez-Pose; Roberto Ezcurra
  4. Urban governance and finance in India. By Rao, M. Govinda; Bird, Richard M.
  5. The Incentives for Tax Planning By Armstrong, Christopher S.; Blouin, Jennifer L.; Larcker, David F.
  6. The Poverty of States: Do State Tax Policies Affect State Labor Productivity? By McPhail, Joseph E.; Orazem, Peter; Singh, Rajesh
  7. Company Car Taxation By Copenhagen Economics
  8. The Norwegian Shareholder Tax Reconsidered By Södersten, Jan; Lindhe, Tobias
  9. Tax evasion in a principal-agent model with self-protection By Biswas, Rongili; Marchese, Carla; Privileggi, Fabio

  1. By: Gebhard Kirchgässner
    Abstract: Under which conditions is moral justification of taxation possible? This question does not only interest philosophers and economists from a scientific point of view, but can have considerable practical relevance as well because the willingness of citizens to pay taxes may depend upon whether they consider taxation to be morally justified or not. We first consider theoretical arguments on the role of tax morale, and when tax evasion might be considered as justified by citizens or not. Then we ask how tax morale can be measured. Next, we discuss the role of tax morale for the shadow economy, before determinants of tax morale and empirical results for the impact of tax morale on tax compliance are discussed. For a high tax morale, institutional and cultural factors are at least as important as economic incentives.
    Keywords: Tax morale, tax evasion, principles of taxation, trust, direct democracy, federalism
    JEL: H20 H26
    Date: 2010–05
  2. By: M Drouvelis; R Metcalfe; N Powdthavee
    Abstract: Research on public goods mainly focuses its attention on the ability of incentives, beliefs and group structure to affect behaviour in social dilemma interactions. This paper investigates the pure effects of a rather subtle mechanism on social preferences in a one-shot linear public good game. Using priming techniques from social psychology, we activate the concept of cooperation and explore the extent to which this intervention brings about changes in people's voluntary contributions to the public good and self-reported emotional responses. Our findings suggest that priming cooperation increases contribution levels, controlling for subjects' gender. Our priming effect is much stronger for females than for males. This difference can be explained by a shift in subjects' beliefs about contributions. We also find a significant impact of priming on mean positive emotional responses.
    Keywords: Priming, contributions, beliefs, emotional responses, public goods experiments
    JEL: C92 D01 H41
  3. By: Andrés Rodríguez-Pose (IMDEA Ciencias Sociales); Roberto Ezcurra (Universidad Pública de Navarra)
    Abstract: The global drive towards decentralization has been increasingly justified on the basis that greater transfers of resources to subnational governments are expected to deliver greater efficiency in the provision of public goods and services and greater economic growth. This paper examines whether this is the case, by analysing the relationship between decentralization and economic growth in 21 OECD countries during the period between 1990 and 2005 and controlling not only for fiscal decentralization, but also for political and administrative decentralization. The results point towards a negative and significant association between fiscal decentralization and economic growth in the sample countries, a relationship which is robust to the inclusion of a series of control variables and to differences in expenditure preferences by subnational governments. The impact of political and administrative decentralization on economic growth is weaker and sensitive to the definition and measurement of political decentralization.
    Keywords: fiscal decentralization;political decentralization;administrative decentralization;economic growth;OECD
    JEL: H71 H72 H77
    Date: 2010–05–24
  4. By: Rao, M. Govinda (National Institute of Public Finance and Policy); Bird, Richard M. (Emeritus of Economics, University of Toronto, Toronto, Canada)
    Abstract: Over 330 million people live in India's cities; 35 cities have a population of over a million and three (Mumbai, Delhi, and Kolkata) of the 10 largest metropolises in the world are in India. India's cities are large, economically important, and growing. However, neither urban infrastructure nor the level of urban public services is adequate for current needs, let alone to meet growing demands. Dealing with this problem is a formidable challenge. Not only must adequate finance for the provision of services be found but it is critical to ensure that the money spent results in desired outputs and outcomes. To do so, local governance structures also need to be reformed and strengthened. This paper attempts to point the way towards some possible solutions by analysing urban governance and finance in India in the context of lessons drawn from fiscal federalism theory and experiences of governance institutions and financing systems both in India and around the world. No one system of urban governance is likely to work equally well for all urban local bodies. However, the paper identifies some key reforms required to realise both the constitutional intent to encourage citizen participation in urban governance and the economic and politically desirable goal of ensuring greater accountability of urban governments. For example, the paper draws attention to existing ambiguities in the assignment system and underlines the need to undertake activity mapping to ensure clarity as well as to make independent agencies significantly accountable to elected governments in urban areas. The paper also discusses a variety of ways of augmenting the resources of the municipal bodies in the country including essential reforms in the property tax system and adequate exploitation of user charges and fees for various services delivered as well as ways of strengthening and improving Central and State transfers to urban local governments. With respect to financing urban infrastructure, development charges should be used more effectively. More should also be done to utilise public lands more effectively. In addition, to a considerable extent capital expenditure requirements will have to be financed through borrowing so further development of the municipal bond market is important, as is more and more effective use of public private partnerships in some areas.
    Keywords: India, Urban public finance, Urban governance, Intergovernmental fiscal relations, Property tax, Metropolitan areas, Infrastructure finance
    JEL: R51 H70
    Date: 2010–03
  5. By: Armstrong, Christopher S. (University of Pennsylvania); Blouin, Jennifer L. (University of Pennsylvania); Larcker, David F. (Stanford University)
    Abstract: Recent research argues that differences in the structure of top executive compensation plans and/or corporate culture explain cross-sectional variation in tax avoidance. However, this research does not link tax planning to the incentives of the specific executive managing the tax function in the firm. We use a proprietary data set with detailed executive compensation to examine the relation between the incentives of the tax director and the book-tax gap, financial and cash effective tax rates, and measures of tax aggressiveness. We find that the incentives of the tax director exhibit a strong negative relation with the financial effective tax rate, but little relation with the other tax attributes. We interpret these results as indicating that tax directors are provided with incentives to generate a favorable impact to the financial statements.
    JEL: H25 M41 M52
    Date: 2009–06
  6. By: McPhail, Joseph E.; Orazem, Peter; Singh, Rajesh
    Abstract: There are substantial differences in output per worker across states that persist over time.  This study demonstrates that differences in state taxation of capital income, capital ownership, and consumption can explain why differences in labor productivity can persist.  First, state tax policies persist with little change in the taxes imposed over time.  Second, sales, property, and capital income taxes will all lower equilibrium labor productivity in the context of a neoclassical growth model.  The most negative effects occur at the highest marginal tax rates.  These theoretical predictions are supported, using data on state marginal tax rates and output per worker over the 1977-2004 sample period.  Over that period, the mix of state tax policies has led to a reduction in labor productivity averaging almost 20% per year.  The implied adverse effect of tax distortions on labor productivity across states is substantial, varying from -11.8% in Nevada to -27.6% in Iowa.  State tax policies have become increasingly damaging to labor productivity over time as states have increased their marginal tax rates.  On the other hand, government expenditure policies explain none of the variation in labor productivity across states or time.  
    Keywords: states; tax efficiency; Property tax; sales tax; corporate tax; income tax; capital gains tax; Solow growth model; labor productivity
    JEL: H2 H3 H7
    Date: 2010–05–26
  7. By: Copenhagen Economics
    Abstract: This study presents new, nearly EU wide estimates of the level of subsidies to company cars. In addition, it also provides some preliminary rough illustrations of the possible effects of such subsidies on economic welfare and environment and discusses the policy implications.
    Keywords: taxation, car taxation, subsidies, environment
    JEL: H22 H23 H25 H31 H32 H54
    Date: 2010–06
  8. By: Södersten, Jan (Uppsala Center for Fiscal Studies); Lindhe, Tobias (Uppsala Center for Fiscal Studies)
    Abstract: In an article in International Tax and Public Finance, Peter Birch Sørensen (2005) gives an in-depth account of the new Norwegian Shareholder Tax, which allows the shareholders a deduction for an imputed risk-free rate of return. Sørensen’s positive evaluation appears as reasonable for a closed economy where the deduction for the imputed return is capitalized into the market prices of corporate shares. We show that in a small open economy where no capitalization occurs, the Norwegian shareholder tax is likely to leave the distortions caused by the corporate income tax unaffected, and to add new distortions to shareholders’ portfolio decisions.
    Keywords: Tax neutrality; open economy; shareholder taxation; corporate-personal tax integration; small firms
    JEL: H24 H25
    Date: 2010–05–25
  9. By: Biswas, Rongili; Marchese, Carla; Privileggi, Fabio
    Abstract: Gatekeepers have an increasing role in taxation and regulation. While burdening them with legal liability for misconducts that benefit those who resort to their services actually discourages wrongdoings — as will be clarified in the paper — an alienation effect can also arise. That is, the gatekeeper might become more interested in covering up the illegal behavior and in cooperating with the perpetrator. Such perverse effects are difficult to detect and to measure. This paper studies the problem with respect to tax evasion by firms, by building upon the classical Allingham and Sandmo (1972) model and by providing a more detailed description of the "concealment costs" than that available in the literature, which often simply makes assumptions about their existence and their functional form. The relationship between a risk neutral firm owner aiming at evading taxes and a risk averse gatekeeper is described through a simple principal-agent framework. The paper highlights the role of legal rules pertaining to liability for tax evasion in shaping the parties choices, since concealment costs vary according to whether the risk neutral principal or the risk averse agent are held responsible when tax evasion is detected. The main result of the analysis is that there are simple conditions under which one can easily infer whether harnessing the agent is socially beneficial.
    Keywords: tax evasion, firm, agency, risk aversion
    JEL: H26 H32 D81 K42
    Date: 2009–12

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