nep-pbe New Economics Papers
on Public Economics
Issue of 2010‒09‒11
fifteen papers chosen by
Oliver Budzinski
University of Southern Denmark

  1. Urban Governance and Finance in India By M. Govinda Rao; Richard M. Bird
  2. Why the Henry Review Fails on Family Tax Reform By Patricia Apps
  3. Stimulating Local Public Employment: Do General Grants Work? By Lundqvist, Heléne; Dahlberg, Matz; Mörk, Eva
  4. Are Income and Consumption Taxes Ever Really Equivalent? Evidence from a Real-Effort Experiment with Real Goods By Blumkin, Tomer; Ruffle, Bradley; Ganun, Yosef
  5. Costs of taxation and benefits of public goods with multiple taxes and goods By Anderson, James E.; Martin, Will
  6. Decentralisation in Africa and Fiscal Competition Evidence from Benin By Emilie Caldeira; Martial Foucault; Grégoire Rota-Graziosi
  7. Why Don’t Taxpayers Maximize their Tax-Based Student Aid Awards? By Turner, Nick
  8. Taxing Sweets: Sweetener Input Tax or Final Consumption Tax? By Miao, Zhen; Beghin, John C.; Jensen, Helen H.
  9. The Optimal Gas Tax for California By Lin, C.-Y. Cynthia; Prince, Lea
  10. Institution [Un]Building: Decentralising Government and the Case of Rwanda By Jesse McConnell
  11. Housing Subsidies and the Tax Code: The Case of Mortgage Credit Certificates By Greulich, Erica; Quigley, John M.
  12. Can Joe the Plumber Support Redistribution? Law, Social Preferences, and Sustainable Policy Design By Lester, Gillian
  13. Anti-corruption strategies in some South-Eastern European states.An empirical study on the impact of the government performance By Matei, Ani; Matei, Lucica
  14. Auction versus Negotiation in Public Procurement: Looking for Empirical Evidence By Eshien Chong; Carine Staropoli; Anne Yvrande-Billon
  15. Unbalanced Books: How to Improve Toronto’s Fiscal Accountability By Colin Busby; Benjamin Dachis; William B.P. Robson

  1. By: M. Govinda Rao; Richard M. Bird (National Institute of Public Finance and Policy)
    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
  2. By: Patricia Apps
    Abstract: While acknowledging the importance of fairness and the need to avoid creating disincentives in the design of tax reform, the Henry Review recommends a simplified Personal Income Tax and child payments withdrawn on a single family income test. This paper shows that the proposed reforms would consolidate the existing family tax system, which clearly fails in terms of both fairness and disincentives. In the early 1980’s Australia had a highly progressive individual income tax and universal family payments. Since then family income tests on child payments and tax cuts at high income levels have transformed the system into one of joint taxation with the highest marginal rates on low and average wage two-earner families. Under the Review’s recommendations the same families would continue to face the highest tax rates. Data presented indicate strong negative effects on productivity and the tax base due to disincentive effects on labour supply and saving over the life cycle. The paper proposes a return to a strongly progressive individual based income tax and universal family payments.
    Keywords: Taxation, Family payments, Time allocation, Labour supply, Saving, Life cycle
    JEL: D91 H21 H31 J13 J16 J22
    Date: 2010–08
  3. By: Lundqvist, Heléne (Uppsala Center for Fiscal Studies); Dahlberg, Matz (Uppsala Center for Fiscal Studies); Mörk, Eva (Uppsala Center for Fiscal Studies)
    Abstract: The effectiveness of public funds in increasing public employment has long been a question on public and labor economists’ minds. In most federal countries local governments employ large fractions of the working population, meaning that a tool for stimulating local public employment can substantially affect the overall unemployment level. This paper asks whether general grants to lower-level governments have the potential of doing so. Applying the regression kink design to the Swedish grant system, we are able to estimate causal effects of intergovernmental grants on personnel in different local government sectors. Our robust conclusion is that personnel in the central administration increased substantially after a marginal increase in grants, but that such an effect was lacking both for total personnel and personnel in child care, schools, elderly care, social welfare and in technical services. We suggest several potential reasons for these results, such as heterogeneous treatment effects and bureaucratic influence in the local decision-making process.
    Keywords: Fiscal federalism; intergovernmental grants; public employment; regression kink design; instrumental variables
    JEL: C33 H11 H70 J45
    Date: 2010–09–02
  4. By: Blumkin, Tomer (Ben Gurion University); Ruffle, Bradley (Ben Gurion University); Ganun, Yosef (Ben Gurion University)
    Abstract: The public finance literature demonstrates the equivalence between consumption and labor-income (wage) taxes. We introduce an experimental paradigm in which individuals make real labor-leisure choices and spend their earned income on real goods. We use this paradigm to test whether a labor-income tax and an equivalent consumption tax lead to identical labor-leisure allocations. Despite controlling for subjects’ work ability and inherent labor-leisure preferences and disallowing saving, subjects reduce their labor supply significantly more in response to an income tax than to an equivalent consumption tax. We discuss the economic implications of a policy shift to a consumption tax.
    Keywords: experimental economics, tax equivalence, income tax, consumption tax, behavioral economics
    JEL: C91 H22 H31
    Date: 2010–08
  5. By: Anderson, James E.; Martin, Will
    Abstract: The recent public economics literature involves an apparent consensus that income effects reduce the costs of raising revenues and hence increase the desirable level of public good provision. Higher taxes can indeed reduce the demand for leisure -- and hence increase the supply of taxed labor -- through income effects. However, the consensus is wrong because the income effects of taxes must be considered symmetrically with those from provision of public goods. This paper uses a model with multiple public goods and taxes to derive consistent measures of the marginal benefits of publicly-provided goods and their marginal social costs. With this model, the authors show that either compensated approaches excluding these income effects or uncompensated approaches including them may be used. If an uncompensated measure of the marginal cost of funds is used, however, the benefits of providing public goods should be adjusted with a simple, benefit multiplier not previously seen in the literature. Once this is done, the optimal level of public provision is independent of whether compensated or uncompensated approaches are used. Proper accounting for these income effects -- or their omission using a compensated approach -- appears to substantially raise the hurdle for government provision where there are substantial taxes bearing on labor.
    Keywords: Economic Theory&Research,Public Sector Economics,Debt Markets,Emerging Markets,Taxation&Subsidies
    Date: 2010–09–01
  6. By: Emilie Caldeira; Martial Foucault; Grégoire Rota-Graziosi
    Abstract: Without denying particular dimensions of the decentralisation in Sub-Saharan countries, this paper applies standard reasoning from the fiscal federalism literature to a developing country and tests the existence of strategic interactions among local Beninese governments, called ‘communes’. We first propose a two-jurisdiction model of public expenditure interactions, considering a constrained Nash equilibrium to capture the extreme poverty of some communes. We show that spillovers among jurisdictions involve strategic behaviours of local officials who have sufficient levels of fiscal resources. Second, by estimating a spatial lag model, our analysis provides evidence for the presence of strategic interactions in Benin, contingent on communes’ fiscal autonomy. Such interactions arise among communes which are geographically or ethnically close. We also highlight both an opportunistic behaviour of local governments before local elections and an effect of partisan affiliations. This African democracy appears to be as concerned as developed democracies with strategic fiscal interactions. <P>Cet article applique la théorie du fédéralisme budgétaire à l'analyse du processus de décentralisation d'un pays en développement (le Bénin) et teste l'existence d'interactions stratégiques parmi les juridictions locales du Bénin. À partir d'un modèle de concurrence budgétaire à 2 juridictions, nous définissons les conditions d'un équilibre de Nash contraint pour capturer les effets d'extrême pauvreté de certaines communes. Nous montrons que des externalités entre communes impliquent des comportements stratégiques des décideurs publics locaux pour ceux disposant de ressources budgétaires suffisantes. Ensuite, en estimant un modèle d'interactions spatiales, nous montrons la présence d'interactions stratégiques pour les communes du Bénin, contingentes à leur autonomie budgétaire. De telles interactions émergent parmi les communes géographiquement et ethniquement proches. Par ailleurs, ces interactions surviennent dans le cadre d'un cycle électoral opportuniste de dépenses publiques et sont sensibles à l'affiliation partisane des maires. En conclusion, le Bénin apparaît aussi touché que les démocraties développées par des comportements stratégiques en dépenses publiques locales.
    Keywords: Fiscal interactions, Benin, decentralisation, local government, dynamic panel data, interactions budgétaires, Bénin, décentralisation, gouvernements locaux, économétrie spatiale
    Date: 2010–08–01
  7. By: Turner, Nick
    Abstract: The federal government offers an array of tax-based aid student aid programs designed to lower the cost of postsecondary attendance. Many taxpayers are eligible for more than one program, yet they are limited to one program per student per year. Analyzing a unique panel dataset of individual income tax returns from the U.S. Internal Revenue Service, I find that many taxpayers do not select the single tax-based aid program that offers the largest reduction in combined federal and state taxes. In this paper, I offer three explanations for this pattern of taxbased aid selection. First, I show that salience of federal tax effects causes some taxpayers to select a program that minimizes federal taxes rather than combined state and federal taxes. Second, I show that inertia in program selection causes some taxpayers to default into options offering a smaller reduction in tax liability. Third, I find evidence that suggests some non taxminimizing claims are cases of tax evasion.
    Keywords: tax salience; inertia, default behavior; tax evasion; tax-based student aid
    Date: 2010–07–15
  8. By: Miao, Zhen; Beghin, John C.; Jensen, Helen H.
    Abstract: In order to reduce obesity and associated costs, policymakers are considering various policies, including taxes, to change consumers’ high-calorie consumption habits. We investigate two tax policies aimed at reducing added sweetener consumption. Both a consumption tax on sweet goods and a sweetener input tax can reach the same policy target of reducing added sweetener consumption. Both tax instruments are regressive, but the associated surplus losses are limited. The tax on sweetener inputs targets sweeteners directly and causes about five times less surplus loss than the final consumption tax. Previous analyses have overlooked this important point.
    JEL: I18 Q18
    Date: 2010–09–03
  9. By: Lin, C.-Y. Cynthia; Prince, Lea
    Abstract: This paper calculates the optimal gasoline tax for the state of California. According to our analysis, the optimal gasoline tax in California is $1.37/gallon, which is over 3 times the current California tax when excluding sales taxes. The Pigovian tax is the largest part of this tax, comprising $0.85/gallon. Of this, the congestion externality is taxed the most heavily, at $0.27, followed by oil security, accident externalities, local air pollution, and finally global climate change. The other major component, a Ramsey tax, comprises a full $0.52 of this tax, reflecting the efficiency in raising revenues from a tax on gasoline consumption due to the inelastic demand of this consumption good.
    Keywords: UCD-ITS-RP-10-03
    Date: 2010–01–01
  10. 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
    Date: 2010–05–15
  11. By: Greulich, Erica; Quigley, John M.
    Abstract: The most significant U.S. housing subsidy programs are funded by tax expenditures through the Internal Revenue Code (IRC). Beyond the subsidy to homeownership provided to all owner occupants through the personal income tax, the IRC provides additional subsidies to specific groups of homeowners. The Mortgage Revenue Bond (MRB) program permits lower levels of government to issue tax-exempt debt, using the proceeds to supply mortgages at below-market interest rates to deserving households. States are also permitted to issue and distribute Mortgage Credit Certificates (MCCs) which entitle recipient homeowners to claim a tax credit for some portion of the mortgage interest paid rather than the tax deduction claimed by other homeowners. This paper documents the wide variations in reliance upon MCCs and MRBs across the United States and the emergence of Mortgage Credit Certificates as the largest housing program administered by the state of California. The paper provides an economic analysis of the MCC program using micro data on program recipients in California during the period 1996-1998. We estimate the extent and distribution of MCC subsidies across income and demographic groups, measuring the dollar amount of federal subsidies and their effects upon the user cost of residential capital and the demand price of housing. We analyze the geographic incidence of MCC subsidies across neighborhoods of varying socio-demographic composition and deprivation. Finally, we note important differences in the administrative and programmatic costs of MCCs and MRBs, suggesting that there are clear reasons to favor Mortgage Credit Certificates as a means of subsidizing deserving households.
    Keywords: housing subsidy, tax policy, tax credit
    Date: 2009–10–08
  12. By: Lester, Gillian
    Abstract: This article explores how to build political support for law reform designed to achieve economic redistribution. Specifically, I analyze and compare reforms that aim to redistribute by targeting benefits at low-income individuals through an income or means test, versus those that emphasize “universal†allocation of benefits, not conditioned on poverty. I argue that notwithstanding that we should expect universal provision (by definition) to achieve less redistribution than means testing, universalist policies ultimately may be more effective in achieving this goal because they are likely to be more politically durable, and–more intriguingly—to create social conditions that increase toleration for redistribution. I support this argument by drawing upon the growing body of research in psychology and economics suggesting that people have a mixture of self-regarding and other-regarding impulses, and that some forms of social organization are more likely than others to elicit pro-social behavior. Universalist programs, I argue, plausibly increase preferences for redistribution by tapping social norms of reciprocity, generating group identity effects based on a sense of common vulnerability, and serving as a “policy frame†that de-emphasizes the salience of low-income people as an undeserving “out-group.†I use a case study of recent social insurance legislation as a springboard for developing an empirical research agenda that would help evaluate the strength of my thesis. The analysis offered by this article has implications for contemporary intellectual debates in such areas as tax policy, public finance, behavioral law and economics, distributive justice, law and psychology, health law.
    Date: 2010–02–22
  13. By: Matei, Ani; Matei, Lucica
    Abstract: The preoccupations about conceiving and promoting efficient anti-corruption strategies exist in most states, especially in the developing countries. The opportunity of such strategies derives from the direct link, demonstrated theoretically and empirically, between the effects of the anti-corruption strategies and government performance, translated both in the economic and social results and living standard, welfare etc. In the last decades, the transnational actors – UN, World Bank, OECD, EU etc. - have affirmed as promoters of own anti-corruption strategies, directing the states’ efforts, conferring adequate levels of relevance, effectiveness, efficiency or sustainability. The South-Eastern European states incorporate own anti-corruption strategies in the framework of general strategies, aiming the government reform in the context of the European integration process. Strengthening the public integrity, reducing corruption, developing a genuine climate of economic freedom become important objectives concerning the impact on government performance. The paper incorporates briefly the main characteristics of anti-corruption strategies, developed by transnational actors and it aims to shape theoretical and empirical frameworks for the impact of anti-corruption strategies. The focus on some South-Eastern European states has a demonstrative character, as the presented analyses may be extended to various geo-political areas.
    Keywords: anti-corruption strategies; assessment; impact; government performance.
    JEL: D73 D63 G18
    Date: 2010–08–20
  14. By: Eshien Chong (ADIS - Université Paris Sud - Paris XI); Carine Staropoli (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Anne Yvrande-Billon (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: The relative efficiency of auctions and negotiations is still a puzzle in the literature. While auctions are the prescribed procedures and the most used ones for public procurement, in the private sector, where buyers are free to choose their purchasing method, competitive tendering is far from being their preferred option (Bajari et al. 2009). In addition, recent empirical studies (Estache et al. 2009, Bajari et al. 2009) highlight some failures of auction procedures and identify conditions under which negotiation is more efficient. In particular, they show that auctions perform poorly when projects are complex. In this paper, our aim is to contribute to this debate by providing an empirical analysis of how awarding mechanisms are chosen in public procurement in France. To this end, we examine a comprehensive database of 76,188 observations corresponding to the entire set of public procurement work contracts awarded between 2005 and 2007 in the construction sector. We find empirical regularities regarding the choice of awarding procedures by public buyers. However, most of these regularities do not coincide with what the theoretical literature considers as transaction-cost minimizing behaviours. In particular, the size of the construction projects as well as the length of contracts do not appear as key determinants of the choice of awarding procedures, which translates into costly renegotiations.
    Keywords: Auctions; Public Procurement, Contract Theories
    Date: 2010–07
  15. By: Colin Busby (C.D. Howe Institute); Benjamin Dachis (C.D. Howe Institute); William B.P. Robson (C.D. Howe Institute)
    Abstract: As Toronto gears up for a municipal election this fall, the city's poor record on fiscal accountability promises to be a central issue. As the sixth largest government in Canada, with a budget of over $11 billion annually, Toronto city hall should have its finances under better control. A 10-year comparison of planned spending changes announced in budgets with actual results reported after year-end reveals large deviations between planned and actual spending that are routine. To increase transparency and accountability, Toronto should consolidate its now separate capital and operating budgets, move to a uniform accounting basis for its budgets and year-end results, and provide multi-year budgets. City government should adhere more closely to the budgets Council votes every year.
    Keywords: Governance and Public Institutions, Toronto, fiscal accountability
    JEL: E62 H72
    Date: 2010–08

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