nep-pbe New Economics Papers
on Public Economics
Issue of 2010‒06‒11
fourteen papers chosen by
Oliver Budzinski
University of Southern Denmark

  1. Fiscal Illusion and Fiscal Obfuscation:An Empirical Study of Tax Perception in Sweden By Sanandaji, Tino; Wallace, Björn
  2. The fiscal anatomy of a regulatory polity: Tax policy and multilevel governance in the EU By Genschel, Philipp; Jachtenfuchs, Markus
  3. Yardstick competition in a Federation: Theory and Evidence from China By Emilie CALDEIRA
  4. Who do you blame in local finance? An analysis of municipal financing in Italy By Massimo Bordignon; Santino Piazza
  5. Simultaneous Decision-Making in Competitive and Cooperative Environments By Anya Savikhin; Roman M. Sheremeta
  6. Tax Evasion and Community Effects in Italy By Francesco Flaviano Russo
  7. Fiscal Decentralization and Urbanization in Indonesia By Comola, Margherita; de Mello, Luiz
  8. State Corporation Income Taxation: An Economic Perspective on Nexus By David E.Wildasin
  9. The Economic Effects of Replacing the Property Tax with a Sales or Income Tax:A Computable General Equilibrium Approach By Dagney Faulk; Nalitra Thaiprasert; Michael Hicks
  10. Government Revenue Volatility in Alberta By Smith, Constance; Landon, Stuart
  11. Calculating tax shields from financial expenses with losses carried forward By Ignacio Velez Pareja
  12. Trust in whole networks in the public and nonprofit sector: The impact of public sector characteristics? By A. WILLEM;
  13. The Tragedy of the Commons in a Fishery when Relative Performance Matters By Ngo Van Long; Stephanie F. McWhinnie
  14. Infrastructures and productivity: an updated survey By Angel de la Fuente

  1. By: Sanandaji, Tino (Research Institute of Industrial Economics (IFN)); Wallace, Björn (Stockholm School of Economics)
    Abstract: In this paper we present survey evidence suggesting that there exists a sizeable fiscal illusion amongst the general public in Sweden. Respondents in a nation-wide and representative survey systematically underestimate the share of an ordinary worker’s income that is transferred to the public sector. Furthermore, we make a theoretical distinction between tax illusion and fiscal obfuscation, a proposed novel type of fiscal illusion. It has previously been assumed that fiscal illusion derives from a fragmentized tax system with many small, and largely invisible, taxes which tend to be ignored or underestimated by the tax payers. We hypothesize that this systematic bias could in addition emanate from misapprehensions of the real incidence of a tax. Evidence is presented that this could apply even when taxes are few and large, contrary to the tax complexity hypothesis. When this misperception derives from seemingly deliberate tax design and tax labeling, as appears to be the case with the payroll taxes in Sweden, we call it fiscal obfuscation.
    Keywords: Fiscal Illusion; Fiscal Obfuscation; Tax Illusion; Tax Labeling; Tax Structure; Personal Income Taxation
    JEL: H11 H22 H24 H30
    Date: 2010–05–31
  2. By: Genschel, Philipp; Jachtenfuchs, Markus
    Abstract: The paper analyzes the common assumption that the EU has little power over taxation. We find that the EU's own taxing power is indeed narrowly circumscribed: its revenues have evolved from rather supranational beginnings in the 1950s towards an increasingly intergovernmental system. Based on a comprehensive analysis of EU tax legislation and ECJ tax jurisprudence from 1958 to 2007, we show that at the same time, the EU exerts considerable regulatory control over the member states' taxing power and imposes tighter constraints on member state taxes than the US federal government imposes on state taxation. These findings contradict the standard account of the EU as a regulatory polity which specializes in apolitical issues of market creation and leaves political issues to the member states: despite strong safeguards, the EU massively regulates the highly salient issue of member state taxation. --
    Date: 2010
  3. By: Emilie CALDEIRA
    Abstract: While some scholars argue that fiscal decentralization gave Chinese local officials strong incentives to promote local economic growth, traditional fiscal federalism theories are not directly relevant to explain such an effect in the particular context of China. In this paper, we explain the existence of interjurisdictional competition among Chinese local officials using a model of yardstick competition "from the top", in which the central government (and not local voters) creates a competition among local officials by rewarding or punishing them on the basis of relative economic performance. Our model predicts that, in this context, local governments are forced to care about what other incumbents are doing and that public spending settings are strategic complements. Then, by estimating a spatial lag dynamic model for a panel data of 29 Chinese provinces from 1980 to 2004, we provide empirical evidence of the existence of such public spending interactions. We propose a rigorous empirical framework which takes into account heterogeneity, simultaneity and endogeneity problems and spatial error dependence. The results are encouraging to the view that there are some strategic interactions among Chinese provinces, resulting from a yardstick competition created by the central government.
    Keywords: decentralization, China, public spending interactions, yardstick competition, spatial panel data
    JEL: H7 H2 D72
    Date: 2010
  4. By: Massimo Bordignon (DISCE, Università Cattolica); Santino Piazza (DISCE, Università Cattolica)
    Abstract: A 1999 reform allowed Italian Mayors to partially substitute a more accountable source of tax revenue (the property tax) with a less trans- parent one (a surcharge on the personal income tax). Theoretical anal- ysis suggests this should give incompetent Mayors a less costly way to hide themselves, so allowing them to be more easily re-elected. An em- pirical analysis on Piedmont municipalities conrms these hypotheses.
    Keywords: Partial decentralization, fiscal federalism, transparency, political behavior.
    JEL: H71 H77 D78
    Date: 2010–05
  5. By: Anya Savikhin (The University of Chicago); Roman M. Sheremeta (Argyros School of Business and Economics, Chapman University)
    Abstract: MWe experimentally investigate simultaneous decision-making in two contrasting environments: a competitive environment (a contest) and a cooperative environment (a voluntary contribution mechanism). We find that the cooperative nature of the voluntary contribution mechanism spills over to the contest, decreasing sub-optimal overbidding in the contest. However, contributions to the public good are not affected by simultaneous participation in the contest. There is a significant negative correlation between decisions made in competitive and cooperative environments, i.e. more cooperative subjects tend to be less competitive and vice versa. This correlation can be rationalized by heterogeneous social preferences towards inequality but not by bounded rationality theory.
    Keywords: cooperation, competition, public goods, contests, experiments, behavioral spillover
    JEL: C72 C91
    Date: 2010–04
  6. By: Francesco Flaviano Russo (University of Napoli Federico II and CSEF)
    Abstract: I propose an analysis of tax evasion in Italy using the data collected by the website This site collects reports by random internet users of the transactions in which they were involved that, lacking any legal receipt, were hidden from the tax authority. I interpret this experiment as a test of the attitude towards tax evasion by the community in which the tax offender operates: less reported episodes are an indication of a more lenient attitude. Since a more lenient attitude of the community is a lower cost of evading taxes, a smaller number of reports must be associated to less tax evasion. I show that the data confirm this claim. I also show that the presence of younger, less educated individuals and the size of the irregular labor force are associated to a more lenient attitude towards tax evasion.
    Keywords: Tax Morale, Tax Evasion Reports
    JEL: K34
    Date: 2010–06–03
  7. By: Comola, Margherita; de Mello, Luiz
    Abstract: Indonesia went through a process of fiscal decentralization in 2001 involving the devolution of several policymaking and service delivery functions to the subnational tiers of government (provinces and districts). This process is likely to have affected r
    Keywords: Indonesia, minimum wage, federalism, urbanization
    Date: 2010
  8. By: David E.Wildasin (University of Kentucky)
    Abstract: Acting in the interest of their residents, within limits imposed by Federal statute and by the Constitution, states have incentives to impose taxes on the profits of corporations owned by nonresidents. This paper presents a model within which a state, using an apportionment formula that includes a sales factor, would choose to tax the income of out-of-state corporations that derive revenues from the sale or licensing of intangible assets to in-state customers, provided that such corporations have sufficient nexus to be taxable. Although such policies enable states to capture rents from nonresidents, they also introduce tax distortions by imposing implicit tariffs on sales by out-of-state firms.
    Keywords: Corporate Taxation, Nexus
    Date: 2010
  9. By: Dagney Faulk (Center for Business and Economic Research, Miller College of Business, Ball State University); Nalitra Thaiprasert (Center for Business and Economic Research, Miller College of Business, Ball State University); Michael Hicks (Center for Business and Economic Research, Miller College of Business, Ball State University)
    Abstract: With the most recent wave of property tax restructuring in the U.S., policy makers have considered the possibility of replacing the property tax. In this analysis we use data for Indiana and a short-run computable general equilibrium model to examine the effects of replacing the property tax with a sales or income tax. We find that replacing the property tax with a sales or income tax has a relatively small effect on aggregate economic variables. Aggregate output in the state decreases by 2 to 3 percent. Larger effects are apparent when analyzing household groups and industry sectors. Replacing the property tax with a sales or income tax decreases household income by over three percent with the income tax being most regressive. Replacing the property tax has a negative effect on sales revenue for most industry sectors with retail sales and several other sectors experiencing large (over five percent) decreases.
    Keywords: property tax, sales tax, income tax, computable general equilibrium models
    JEL: H71 C68
    Date: 2010–06
  10. By: Smith, Constance (University of Alberta, Department of Economics); Landon, Stuart (University of Alberta, Department of Economics)
    Abstract: The Alberta government is heavily exposed to energy price volatility as it relies to a great extent on revenue derived from the production of oil and natural gas. Energy prices change substantially and unpredictably, causing large and uncertain movements in revenues. Adjusting to these movements typically involves economic, social and political costs. Alberta government revenues are considerably more volatile than the revenues of other provinces, but Alberta’s own-source revenues less royalty payments are of similar size and volatility as those of other provinces. Several methods to reduce the volatility of revenues are assessed. An often-suggested method, tax base diversification (for example, use of a retail sales tax), is shown to have a minor effect on overall revenue volatility since Alberta’s royalty revenues are such a large share of total own-source revenues. Revenue smoothing using futures and options markets can be expensive, is associated with significant political risks, and cannot eliminate all revenue volatility. The Canadian dollar tends to appreciate (depreciate) when energy prices rise (fall), so exchange rate movements have smoothed Alberta government revenues, although not by a large amount. A simulation using Alberta data shows that a revenue savings fund could significantly reduce revenue volatility. This type of fund leads to greater revenue stability because the revenue it contributes to the budget in any particular year is based on revenues averaged over prior years. Revenue uncertainty is also reduced with a savings fund since future revenue depends on known past contributions.
    Keywords: government revenue volatility; energy prices; tax base diversification; government savings fund
    JEL: G13 H20 H71 O13 Q33
    Date: 2010–05–01
  11. By: Ignacio Velez Pareja
    Abstract: When calculating the Weighted Average Cost of Capital (WACC), the well-known textbook formula includes tax shields with the (1-T) factor affecting the contribution of debt to WACC. In this work we develop a procedure for properly calculating tax shields including the case when Losses Carried Forward are allowed and there is Other Income. The proper calculation of tax shields is relevant because the value of tax shields might be a substantial part of firm value. We show that tax shields depend on Earnings before Interest and Taxes and therefore the risk of tax shields is the risk of the free cash flow; this is the cost of unlevered equity.
    Date: 2010–06–03
  12. By: A. WILLEM;
    Abstract: This article argues that networks in the public and nonprofit sector have typical characteristics that might impede the functioning of whole networks and, in particular, the development of affect-based and cognition-based trust. Such characteristics are related to safeguarding public sector values, power imbalance due to the mandatory and vertical character of the network, and effectiveness of networks in the public and nonprofit sector. Network types (i.e. network-administrative organization, lead organization, and shared governance) are suggested as potential moderators in reducing dysfunctionalities in public and nonprofit networks. In a sample of 54 networks, the effects of the assumed network dysfunctionalities on the two types of trust in the different types of networks were studied using a multilevel approach. Findings indicated that especially flexibility in the networks was important. Several characteristics of public and nonprofit networks were less problematic than expected.
    Keywords: networks, network types, public and nonprofit sector, trust
    Date: 2010–03
  13. By: Ngo Van Long (Department of Economics, McGill University); Stephanie F. McWhinnie (School of Economics, University of Adelaide)
    Abstract: This paper presents a simple model of a common access fishery where fishermen care about relative performance as well as absolute profits. Our specification captures the idea that status (which depends on relative performance) in a community in uences a person's well-being. We consider two alternative specifications of relative performance. In our first specication, relative performance is equated to relative after-tax profits. In our second specification, it is relative harvests that matter. We show that overharvesting resulting from the tragedy of the commons problem is exacerbated by the desire for higher relative performance, leading to a smaller steady-state fish stock and smaller steady-state profit for all the fishermen. We examine a tax package, consisting of a tax on relative profit and a tax on effort, and an individual quota as alternatives to implement the socially effcient equilibrium.
    Keywords: Relative Income, Relative Performance, Status, Fishery, Tragedy of the Commons
    JEL: D62 Q20 Q50
    Date: 2010–05
  14. By: Angel de la Fuente
    Abstract: The relationship between infrastructures and productivity has been the subject of an ongoing debate during the last two decades. The available empirical evidence is inconclusive and its interpretation is complicated by econometric problems that have not been fully solved. This paper surveys the relevant literature, focusing on studies that estimate aggregate production functions or growth regressions, and extracts some tentative conclusions. On the whole, my reading of the evidence is that there are sufficient indications that public infrastructure investment contributes significantly to productivity growth, at least for countries where a saturation point has not been reached. The returns to such investment are probably quite high in early stages, when infrastructures are scarce and basic networks have not been completed, but fall sharply thereafter. Hence, appropriate infrastructure provision is probably a key input for development policy, even if it does not hold the key to rapid productivity growth in advanced countries where transportation and communications needs are already adequately served.
    Keywords: infrastructures, public capital, productivity
    JEL: H54 O47
    Date: 2010–06–02

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