nep-pbe New Economics Papers
on Public Economics
Issue of 2010‒09‒03
eighteen papers chosen by
Oliver Budzinski
University of Southern Denmark

  1. Tax Perception : An empirical survey By Fochmann, Martin; Kiesewetter, Dirk; Blaufus, Kay; Hundsdoerfer, Jochen; Weimann, Joachim
  2. Optimal Income Taxation and Public-Goods Provision with Preference and Productivity Shocks By Felix Bierbrauer
  3. The Pareto-Frontier in a simple Mirrleesian model of income taxation By Felix Bierbrauer; Pierre C. Boyer
  4. Endogenous Group Formation via Unproductive Costs By Jason Aimone; Laurence R. Iannaccone; Michael D. Makowsky
  5. Political Costs and Fiscal Benefits: The Political Economy of Residential Property Value Assessment By Michael D. Makowsky; Shane Sanders
  6. Tax buyouts By Marco Del Negro; Fabrizio Perri; Fabiano Schivardi
  7. ErbSiHM 0.1 By Houben, Henriette; Maiterth, Ralf
  8. Veblen’s Theory of the Leisure Class Revisited: Implications for Optimal Income Taxation By Aronsson, Thomas; Johansson-Stenman, Olof
  9. Government Revenue Volatility: The Case of Alberta, an Energy Dependent Economy By Stuart Landon; Constance Smith
  10. Decentralization, Democracy and Allocation of Poverty Alleviation Programs in Rural India By Takahiro Sato; Katsushi S. Imai
  11. The impact of profit taxation on capitalized investment with options to delay and divest By Schneider, Georg; Sureth, Caren
  12. Child Benefits in the U.S. Federal Income Tax By Kevin J. Mumford
  13. On the optimality of optimal income taxation By Felix Bierbrauer
  14. Institution [Un]Building: Decentralising Government and the Case of Rwanda By Jesse McConnell
  15. Local Fiscal Policies and Urban Wage Structures By Patricia Beeson; Tara Watson; Lara Shore-Sheppard
  16. The Elasticity of Taxable Income in New Zealand By Iris Claus; John Creedy; Josh Teng
  17. The Fight against income evasion in Hungary By Dr. Imre Zoltán Nagy
  18. Fiscal Policy and Growth: Do Financial Crises make a Difference? By António Afonso; Hans Peter Grüner; Christina Kolerus

  1. By: Fochmann, Martin; Kiesewetter, Dirk; Blaufus, Kay; Hundsdoerfer, Jochen; Weimann, Joachim
    Abstract: This paper gives a survey of the experimental literature on the perception (bias) of individuals with respect to their own tax burden and its effect on economic decisions. Six strands of literature are discussed: (1) perception of marginal tax rates, (2) influence of tax complexity on tax perception, (3) taxation and incentives to work, (4) tax salience, (5) tax morale and fairness and (6) money illusion, perceived inflation and fiscal drag. The literature discussed contains more evidence for than against a perception bias. --
    Keywords: taxation,tax perception,literature survey
    JEL: H24 H31
    Date: 2010
  2. By: Felix Bierbrauer (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: We study how an optimal income tax and an optimal public-goods provision rule respond to preference and productivity shocks. A conventional Mirrleesian treatment is shown to provoke manipulations of the policy mechanism by individuals with similar interests. We therefore extend the Mirrleesian model so as to include a requirement of coalition-proofness. The main results are the following: first, the possibility of preference shocks yields a new set of collective incentive constraints. Productivity shocks have no such implication. Second, the optimal policy gives rise to a positive correlation between the public-goods provision level, the extent of redistribution and marginal tax rates.
    Keywords: Public Goods, Optimal Taxation, Mechanism Design
    JEL: D71 D82 H21 H41
    Date: 2010–05
  3. By: Felix Bierbrauer (Max Planck Institute for Research on Collective Goods, Bonn); Pierre C. Boyer (Toulouse School of Economics (GREMAQ) and EHESS)
    Abstract: We characterize the Pareto-frontier in a simple Mirrleesian model of income taxation. We show how the second-best frontier which incorporates incentive constraints due to private information on productive abilities relates to the first-best frontier which takes only resource constraints into account. In particular, we argue that the second-best frontier can be interpreted as a Laer-curve. We also use this second-best frontier for a comparative statics analysis of how optimal income tax rates vary with the degree of inequity aversion, and for a characterization of optimal public-good provision. We show that a more inequity averse policy maker chooses tax schedules that are more redistributive and involve higher marginal tax rates, but chooses a lower public-goods provision level.
    Keywords: Optimal Income Taxation, Public-good provision, Laer-Curve
    JEL: D82 H21 H41
    Date: 2010–05
  4. By: Jason Aimone (George Mason University); Laurence R. Iannaccone (Chapman University); Michael D. Makowsky (Department of Economics, Towson University)
    Abstract: How and why do groups form? In many cases, group formation is endogenous to the actions that individual members take and the norms associated with these actions. In this paper, we conduct an experiment that allows groups to form endogenously in the context of the classic voluntary contribution mechanism public goods game. We identify unproductive costs – “sacrifice” – as a mechanism for endogenous group formation, a result which is consistent with the “sacrifice and stigma” theory of religious groups. We find that changes in relative prices (between private and public goods) act to screen out free-riders, subjects who choose high-sacrifice groups contribute more to the public good once in these groups, and moderate welfare gains are available to those who voluntarily incur unproductive costs.
    Keywords: Endogenous Group Formation, Laboratory Experiment, Free Riding, Public Goods Game, Voluntary Contribution Mechanism, Sacrifice, Unproductive Costs.
    JEL: C92 D71 H41 Z12
    Date: 2010–08
  5. By: Michael D. Makowsky (Department of Economics, Towson University); Shane Sanders (Department of Economics, Nicholls State University)
    Abstract: In many American states and municipalities, property taxes are the primary means of raising government revenues. Unlike sales or income taxes, however, property taxes have a significant element of subjectivity - the assessed value of the property being taxed. Given this subjectivity, there exists the possibility of political and fiscal incentives entering into property value assessment. We examine the determinants of assessed property value growth in a panel of 351 Massachusetts municipalities from 1995 to 2009. We hypothesize that the year to year growth of assessed value is in part determined by the municipality’s fiscal condition, the availability of alternative revenue sources, and whether the municipality’s property assessor is directly elected or appointed by an elected official. We find evidence that elected assessors respond to both the fiscal benefits and political costs of increasing their assessment of property values. Appraisals grow faster in towns with appointed assessors and respond to temporary raises in the cap on tax revenues with increases in appraisal growth.
    Keywords: Property Taxes, Local Public Finance, Property Appraisal.
    JEL: H71 D70
    Date: 2010–08
  6. By: Marco Del Negro; Fabrizio Perri; Fabiano Schivardi
    Abstract: The paper studies a fiscal policy instrument that can reduce fiscal distortions, without affecting revenues, in a politically viable way. The instrument is a private contract (tax buyout), offered by the government to each individual citizen, whereby the citizen can choose to pay a fixed price up front in exchange for a given reduction in her tax rate for a prespecified period of time. We consider a dynamic overlapping-generations economy, calibrated to match several features of the U.S. income and wealth distribution, and show that, under simple pricing, the introduction of the buyout is revenue neutral and at the same time can benefit a significant fraction of the population and lead to sizable increases in labor supply, income, consumption, and welfare.
    Keywords: Fiscal policy ; Taxation ; Contracts
    Date: 2010
  7. By: Houben, Henriette; Maiterth, Ralf
    Abstract: This contribution describes ErbSiHM 0.1 which is an inheritance tax simulation model. ErbSiHM 0.1 comprises of a microsimulation model based on the data of the German Inheritance Tax Statistics 2002 and a group simulation model employing the data of the SOEP. The microsimulation model of ErbSiHM 0.1 allows for detailed analyses of revenue and distributional effects of the German inheritance tax or inheritance tax reform proposals. In addition the impact of the inheritance tax on the tax burden of particular groups of taxpayers can be detected. As the German Inheritance Tax Statistics do not include data of transfers of low-value estates a supplementary group model based on the data of the SOEP has been designed. This SOEP-based supplementary model is in particular useful to estimate revenue effects of tax reforms. --
    Date: 2010
  8. By: Aronsson, Thomas (Department of Economics, Umeå University); Johansson-Stenman, Olof (Department of Economics)
    Abstract: Almost all previous studies on public policy under relative consumption concerns have ignored the role of leisure for status comparisons. Inspired by Veblen (1899), this paper considers a two-type optimal income tax model, where people care about their relative consumption, and where the importance of relative consumption increases with the use of leisure due to increased consumption visibility. We show that increased consumption positionality typically implies higher marginal income tax rates for both ability-types. Using a leisure-weighted measure of reference consumption, rather than a measure where leisure plays no role as in the previous literature, increases the marginal income tax rate implemented for the low-ability type and decreases the marginal income tax rate implemented for the high-ability type, i.e., it gives rise to a regressive tax component.
    Keywords: optimal taxation; redistribution; public goods; relative consumption; status; positional goods
    JEL: D62 H21 H23 H41
    Date: 2010–08–25
  9. By: Stuart Landon; Constance Smith
    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: 2010–08–23
  10. By: Takahiro Sato (Research Institute for Economics and Business Administration, Kobe University); Katsushi S. Imai (Economics, School of Social Sciences, University of Manchester, UK and Research Institute for Economics and Business Administration, Kobe University)
    Abstract: This paper investigates the effect of the devolution of power to the village level government on the household-level allocation of poverty alleviation programs drawing upon National Sample Survey data and the Election Commission’s election data. First, greater inequality in land-holdings and less competition between the two major political parties generally lead to less provision of the poverty alleviation programs. Second, the disadvantaged groups were not necessarily likely to be the primary beneficiaries of the poverty alleviation programs. Third, our results based on the natural experiment approach suggest that decentralisation did not lead to wider household access to poverty alleviation programmes during the 1990s. Our results imply the possibility that the power and resources were captured by the local elite after decentralisation, that is, decentralization did not necessarily contribute to the improvement of the welfare of the socially disadvantaged groups.
    Keywords: Decentralization, Democracy, Poverty Alleviation Programs, Poverty, IRDP (Integrated Rural Development Programme), RPW (Rural Public Works), India
    JEL: C20 I38 O22 P46
    Date: 2010–08
  11. By: Schneider, Georg; Sureth, Caren
    Abstract: In entrepreneurial decisions making uncertain future profits often are a main characteristics of real investment opportunities. If investors can react to uncertainty the degree of irreversibility and timing flexibility inherent in the available project should be integrated into the decision calculus. In this paper we investigate the interdependencies of effects from profit taxation and real options. We model an investment decision including an option to invest and an option to abandon. We show that increasing the tax rate can lead to paradoxical tax effects, i.e. may foster an investor's willingness to invest into a capitalized investment. Instead, if we abstract from the possibility to abandon the investment object such paradoxical effect cannot be identified. Determining the after-tax value of the option to enter the investment project with and without an abandonment option we receive a critical cash flow cutoff level. We find that the value of the option to abandon depends on the tax rate and the amount of periodical cash flows. The option value can be increasing or decreasing in the tax rate. We find scenarios with paradoxical tax effects and show that the observed paradoxical effects are due to the presence of the real abandonment option itself. This finding contributes to the stream of literature that explains potential sources of paradoxical tax effects. The generated decision rules are helpful for investors facing risky investment opportunities and for discussing the economic impact of tax reforms. Furthermore, we highlight the overwhelming importance of integrating taxes in typically applied valuation approaches. --
    Keywords: investment decisions,real options,tax effects,timing flexibility,,uncertainty
    JEL: H25 H21
    Date: 2010
  12. By: Kevin J. Mumford
    Abstract: This paper examines changes in, and interactions between, the major components of the U.S. federal tax code that provide substantial child benefits, including stimulus payments that depend on children. The focus is on creating a measure of total child tax benefit by income level, tax filing status, number of children, and year. From this measure, we learn that child tax benefits have more than doubled in real terms since the early 1990s and that low-income families receive larger child tax benefits than high income families for a first or second child, while the reverse is true for a third or fourth child. This paper also provides a case study of a tax policy change that lacked the intended consequences due to interactions between the child-benefit components of the tax code. Finally, this paper considers a comparison of child tax benefits to estimates of the cost of raising children.
    Date: 2010–01
  13. By: Felix Bierbrauer (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: The Mirrleesian model of income taxation restricts attention to simple allocation mechanism with no strategic interdependence, i.e., the optimal labor supply of any one individual does not depend on the labor supply of others. It has been argued by Piketty (1993) that this restriction is substantial because more sophisticated mechanisms can reach first-best allocations that are out of reach with simple mechanisms. In this paper, we assess the validity of Piketty's critique in an independent private values model. As a main result, we show that the optimal sophisticated mechanism is a simple mechanism, or, equivalently, a Mirrleesian income tax system.
    Keywords: Optimal Income Taxation, Mechanism Design
    JEL: D82 H21 D86
    Date: 2010–04
  14. By: Jesse McConnell
    Abstract: The challenge of institution building in African countries remains a major threat to the establishment of peace and justice, and the entrenchment of sustainable social and economic development. This may be attributed largely to the dynamic and complex social landscape of most African countries. While single borders bring political definition to post-independent countries, such countries often struggle to find a single national identity that transcends numerous tribal, ethnic or historic identities. The role of central government in creating an effective structure of governance is crucial in the steps towards postconflict nation-building. However, national institution building is not necessarily the right answer, especially in contexts difficult to govern, such as vast geographic areas or complex social and ethnic realities. It is in this sense that this paper – and the initial states of this research – seeks to find an alternative to ‘institution building’ as a way forward in good governance practices, suggesting rather a decentralised and localised approach. The case study that will be brought to be bear as an example of this is Rwanda and a recent governance mechanism – Imihigo – as an approach that has helped create a new national identity while instilling a culture of service delivery and accountability amongst its public servants and political leadership. What this paper will seek to argue – in looking at the approach by Rwanda in decentralising its government – is that institution building is not necessarily the way forward in Africa’s ‘good governance’ discourse. Instead, this paper – and the broader borders of what my research is seeking to explore and understand – seeks to present a reformed approach to good governance in Africa, especially contexts that have been divided along complex lines such as ethnicity, geography, national identity, or the competition for natural resources. Though it will be beyond the scope of this research paper specifically, intended environments that this research is hoped to be applicable – and will therefore involve further research around the applicability of such – include the Democratic Republic of Congo, Cote d’Ivoire, Burundi and Sudan.
    Keywords: governance; decentralisation; institution; service delivery; Rwanda
    Date: 2010–05–17
  15. By: Patricia Beeson (University of Pittsburgh); Tara Watson (Williams College); Lara Shore-Sheppard (Williams College)
    Abstract: It has long been recognized that average wages vary strikingly across regions and urban areas, in part due to differences in local amenities and fiscal policies. However, analogous differences in wage dispersion remain relatively unexplored. We develop a model suggesting that, after accounting for individual characteristics, wage dispersion across income groups should reflect differences in the relative valuation of local amenities and fiscal policies. We empirically investigate whether there is a link between local taxes and expenditures and the degree of dispersion in the wage structure, and find evidence that such a relationship exists.
    Keywords: inequality, wage distributions, local expenditures, local taxes
    JEL: H7 J31
    Date: 2010–04
  16. By: Iris Claus; John Creedy; Josh Teng
    Abstract: This paper reports estimates of the elasticity of taxable income with respect to the net-of-tax rate for New Zealand taxpayers. The elasticity of taxable income was estimated to be substantially higher for the highest income groups. Generally it was higher for men than for women. Changes in the timing of income flows for the higher income recipients were found to be an important response to the announcement of a new higher-rate bracket. The marginal welfare costs of personal income taxation were consistent across years, being relatively small for all but the higher tax brackets. For the top marginal rate bracket of 39 per cent, the welfare cost of raising an extra dollar of tax revenue was estimated to be well in excess of a dollar. Furthermore, for the top bracket the marginal tax rate was often found to exceed the revenue-maximising tax rate.
    JEL: H24 H31
    Date: 2010–07
  17. By: Dr. Imre Zoltán Nagy (Óbuda University)
    Abstract: The evasion of income causes the national budget of Hungary great damage. Just the partial prevention of it would benefit greatly to the state balance and the realization of the economic policy in Hungary. Repelling income evasion can only be achieved by various means. These are the following: To identify and abolish its reasons and causes; to post strict regularizations consistent with the EU legislation; to close legal gaps; not to concentrate on penalties; to reduce high taxes and the exorbitant income centralization of the state; to take the moral education for serious as well as the legal harmonization and effect analysis for the various decisions.
    Date: 2010
  18. By: António Afonso; Hans Peter Grüner; Christina Kolerus
    Abstract: In this paper we assess to what extent in the existence of a financial crisis, government spending can contribute to mitigate economic downturns in the short run and whether such impact differs in crisis and non crisis times. We use panel analysis for a set of OECD and non-OECD countries for the period 1981-2007. The fiscal multiplier for the full sample for instrumented regular and crisis spending is about 0.6-0.8 considering the sample average government spending share of GDP of about one third. Altogether, we cannot reject the hypothesis that crisis spending and regular spending have the same impact using a variation of controls, sub-samples and specifications.
    Keywords: fiscal policy, financial crisis, growth, OECD, EU, panel analysis.
    JEL: C23 E62 E44 F43 H50
    Date: 2010–06

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