nep-pbe New Economics Papers
on Public Economics
Issue of 2010‒10‒16
twenty-two papers chosen by
Oliver Budzinski
University of Southern Denmark

  1. How do local governments decide on public policy in fiscal federalism? Tax vs. expenditure optimization By Marko Koethenbuerger
  2. Mergers in Fiscal Federalism By Marie-Laure Breuillé; Skerdilajda Zanaj
  3. Alleged Tax Competition: The Mysterious Death of InheritanceTaxes in Switzerland By Marius Brülhart; Raphaël Parchet
  4. Confusion and Learning in the Public Goods Game By Ralph-C Bayer; Elke Renner; Rupert Sausgruber
  5. Tax Policy after the Crisis – Monitoring Tax Revenues and Tax Reforms in EU Member States – 2010 Report By European Commission
  6. It's all about tax rates: An empirical study of tax perception By Blaufus, Kay; Bob, Jonathan; Hundsdoerfer, Jochen; Kiesewetter, Dirk; Weimann, Joachim
  7. Windows Into Public Attitudes Towards Redistribution By Rebbecca Reed-Arthurs; Steven M. Sheffrin
  8. Understanding the Public's Attitudes towards Redistribution through Taxation By Rebbecca Reed-Arthurs; Steven M. Sheffrin
  9. Optimal Redistributive Taxation with both Extensive and Intensive Responses By Laurence JACQUET; Etienne LEHMANN; Bruno VAN DER LINDEN
  10. Policy competition and agglomeration: a local government view By Michiel Gerritse
  11. Bringing Domestic Institutions Back into Understanding Ireland’s Economic Crisis By Niamh Hardiman
  12. Multinationals, tax competition and outside options By Olsen, Trond E.; Osmundsen, Petter
  13. Optimal Fiscal Policy with Robust Control By Justin Svec
  14. Local price variation and the tax incidence of state lotteries By Thomas A. Garrett; Natalia Kolesnikova
  15. Private-activity municipal bonds: the political economy of volume cap allocation By Stephan Whitaker
  16. Capitalization of central government grants into local house prices: panel data evidence from England By Christian A. L. Hilber; Teemu Lyytikäinen; Wouter Vermeulen
  17. Fiscal Management in Haryana: A Review By N K Bishnoi
  18. Performance of Fiscal Accounts in South Africa in a Cross-Country Setting By Burcu Aydin
  19. Job creation tax credits and job growth: whether, when, and where? By Robert S. Chirinko; Daniel J. Wilson
  20. Managing state-owned enterprises in an age of crisis By Muiris MacCarthaigh
  21. New Models of Public Ownership in Energy By Brophy Haney, A.; Pollitt, M.G.
  22. To Starve or not to Starve the Beast? By Michael Kumhof; Daniel Leigh; Douglas Laxton

  1. By: Marko Koethenbuerger (University of Copenhagen & CESifo)
    Abstract: Previous literature widely assumes that taxes are optimized in local public finance while expenditures adjust residually. This paper endogenizes the choice of the optimization variable. In particular, it analyzes how federal policy toward local governments influences the way local governments decide on public policy. Unlike the presumption, the paper shows that local governments may choose to optimize over expenditures. The result most notably prevails when federal policy subsidizes local taxation. The results offer a new perspective of the efficiency implications of federal policy toward local governments and, thereby, enable a more precise characterization of local government behaviour in fiscal federalism.
    Keywords: Tax vs. expenditure optimization, federalism, endogenous commitment, fiscal incentives, policy interaction
    JEL: H7 H3 H1
    Date: 2010
  2. By: Marie-Laure Breuillé; Skerdilajda Zanaj
    Abstract: This paper analyzes mergers of regions in a two-tier setting with both horizontal and vertical tax competition. The merger of regions induces three e¤ects on regional and local tax policies, which are transmitted both horizontally and vertically: i) an alleviation of tax competition at the regional level, ii) a rise in the regional tax base, and iii) a larger internalization of tax externalities generated by cities. It is shown that the merger of regions increases regional tax rates while decreasing local tax rates. This Nash equilibrium with mergers is then compared with the Nash equilibrium with coalitions of regions.
    Keywords: Mergers, Tax Competition, Fiscal Federalism
    JEL: H73 H25
    Date: 2010–09–06
  3. By: Marius Brülhart; Raphaël Parchet
    Abstract: Interjurisdictional competition over mobile tax bases is an easily understood mechanism, but actual tax-base elasticities are difficult to estimate. Political pressure for reducing tax rates could therefore be based on erroneous estimates of the mobility of tax bases. We show that tax competition provided the overwhelmingly dominant argument in the policy debates leading to a succession of reforms of bequest taxation by Swiss cantons. Yet, we find only very weak statistical evidence of a relationship between tax burdens on bequests and the concerned tax base of wealthy elderly individuals. Moreover, inheritance tax revenues are found to increase in inheritance tax rates even in the long run, and actual tax rates lie well below the revenue-maximising levels throughout. The alleged pressures of tax competition did not seem in reality to exist.
    Keywords: tax competition; inheritance taxation; fiscal federalism
    JEL: H3 H7
    Date: 2010–06
  4. By: Ralph-C Bayer (School of Economics, University of Adelaide); Elke Renner (University of Nottingham); Rupert Sausgruber (University of Copenhagen)
    Abstract: We test if confusion and learning could potentially explain all the decay of contributions in the repeated public goods games by implementing a limited information environment to mimic the state of confusion. A comparison shows that the rate of decline is more than twice as high in a standard public goods game. Furthermore, we find that simple learning cannot generate the contribution dynamics, which are commonly attributed to the existence of conditional cooperators. We conclude that cooperative behavior observed in public goods games is not a pure artefact of confusion and learning.
    Keywords: public goods experiments, learning, limited information, confusion, conditional cooperation
    JEL: C90 D83 H41
    Date: 2010–10
  5. By: European Commission
    Abstract: The report is prepared jointly by DG ECFIN and DG TAXUD of the European Commission. As the previous edition, the report analyses recent trends in tax revenues and tax reforms in EU Member States. A particular focus of this year's edition is on the consequences of the global economic and financial crisis on revenue systems and the need to provide adequate policy responses. Given the size of the budgetary consolidation required after the crisis, a contribution from the revenue side will be necessary in many countries. The report analyses how revenue increases and tax systems in general could be designed in a growth-friendly way and to what extent some of the reforms would entail a need for coordination at the EU level. Moreover, it discusses tax policy issues related to the crisis and contributes to the ongoing discussion on financial sector taxation.
    Keywords: European Union, taxation, tax reforms, financial sector
    JEL: H21 H22 H23 H25 H27 H62
    Date: 2010–09
  6. By: Blaufus, Kay; Bob, Jonathan; Hundsdoerfer, Jochen; Kiesewetter, Dirk; Weimann, Joachim
    Abstract: In this paper we apply conjoint analysis to study the influence of changes in the tax rate and the tax base on the perceived tax burden. Our results show that the majority of individuals do not make rational tax decisions based on the actual tax burden, but rather use simple decision heuristics. This leads to the importance of the tax rate being significantly overestimated and the importance of the tax base being significantly underestimated. Furthermore we determine framing effects and show that under specific assumptions, a rise in the actual tax burden can lead to a electoral success. --
    Keywords: behavioral public finance,decision heuristics,framing effects,perceived tax burden,tax-cut-cum-base-broadening,tax complexity,tax illusion
    JEL: G11 H20 H30 K34 M41
    Date: 2010
  7. By: Rebbecca Reed-Arthurs; Steven M. Sheffrin (Department of Economics, Tulane University)
    Keywords: redistribution, income taxation, public opinion
    JEL: H23 H29
    Date: 2010–09
  8. By: Rebbecca Reed-Arthurs; Steven M. Sheffrin (Department of Economics, Tulane University)
    Abstract: This paper explores the public's expressed attitudes towards redistribution, then addresses three important gaps in the literature on redistribution. First, studies of support for redistribution have used data focused on desires for transfers from the rich to the poor or to the poor in general, but redistributive polices may also benefit the middle class. Second, experimental research has shown that general views about redistribution may differ from concrete judgments about specific situations-yet much of the existing research uses responses to abstract questions. Finally, there is fundamental uncertainty as to what the public actually means when it suggests preferred distributions of the tax burden-are they expressing pure, ideal preferences, or combining these with their own views of the disincentive effects of higher tax rates? We use data from two nationally representative surveys on taxation and fairness as well as an experiment to address these issues. We find that Americans have some interest in redistribution to both the middle class and the poor. While demand for redistribution to the poor is influenced by many factors (including measures of altruism, political ideology and values) demand for redistribution to the middle class appears to be driven by self-interest and knowledge of the tax system. We find the determinants of demand to be similar under both abstract and concrete question forms. Finally, the experimental results suggest that not only does the public not include incentive effects into their expressions for desired progressivity; but that they do not believe they should be included-in other words, the public separates judgments of progressivity from judgments of economic efficiency.
    Keywords: survey data, incentives, redistribution
    JEL: H24 H20
    Date: 2010–09
  9. By: Laurence JACQUET (Norvegian School of Economics and Business Administration , CESifo, Hoover Chair and IRES - Université Catholique de Louvain); Etienne LEHMANN (CREST-INSEE, IRES - Université Catholique de Louvain, IZA and IDEP); Bruno VAN DER LINDEN (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE))
    Abstract: We derive a general optimal income tax formula when individuals respond along both the intensive and extensive margins and when income effects can prevail. Individuals are heterogeneous across two dimensions: their skill and their disutility of participation. Preferences over consumption and work effort can differ with respect to the level of skill, with only the Spence-Mirrlees condition being imposed. Employing a new tax perturbation approach that integrates the nonlinearity of the tax function into the behavioral elasticities, we derive a fairly mild condition for optimal marginal tax rates to be nonnegative everywhere. Numerical simulations using U.S. data confirm the mildness of our conditions. The extensive margin strongly reduces the level of optimal marginal tax rates.
    Keywords: Optimal tax formula, Tax perturbation, Random participation
    JEL: H21 H23
    Date: 2010–09–02
  10. By: Michiel Gerritse (VU University of Amsterdam)
    Abstract: This paper presents a model of local government policy competition in an New Economic Geography-setting. To maximize welfare, local governments can subsidize a mobile factor or provide public goods. In the local perspective, firms’ vertical linkages promote colocation and policy (subsidy) setting is simultaneous, giving rise to mixed profiles. Agglomeration benefits lead larger regions to set higher subsidies, preventing a race to the top. We show the results numerically as well as in an analytical case. In contrast to related literature, policy harmonization can be welfare-improving, mainly due simultaneous policy-setting with a (local) utilitarian objective.
    Keywords: Spatial general equilibrium, local policy competition
    JEL: R38 R50 R53 F12
    Date: 2010
  11. By: Niamh Hardiman (UCD School of Politics and International Relations)
    Abstract: The Irish economy has had one of the worst experiences of economic crisis within the EU since the onset of international financial crisis in 2007/8. That the crisis has an international dimension is beyond question. What needs to be explored further is the contribution of domestic political factors which weakened the capacity of the Irish political system to respond and which exposed Ireland to a worse crisis than might otherwise have occurred. Three institutional clusters are analysed: the political priorities and decision-making routines underlying the Irish growth model; the configuration of the public administration system; and the management of the domestic cost base. In all three, urgent priorities for reform are identified. The paper does not advocate reform of the electoral system, which tends to attract more media attention than is warranted. Rather, it argues that energy and intelligence needs to be devoted to reforming the quality of decision-making, limiting government’s fiscal discretion, and opening up transparency in the distribution of the costs of adjustment.
    Date: 2010–10–01
  12. By: Olsen, Trond E. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Osmundsen, Petter (Dept. of Industrial Economics, Risk Management and Planning, University of Stavanger)
    Abstract: We analyse tax competition when a multinational firm has invested in two countries but also has an outside option, e.g., towards a third country. An interesting finding is that more attractive outside options for firms may constitute a win-win situation; the firm as well as its present host countries may gain when this occurs. The reason that it benefits the host countries is that an enhanced outside option reduces the inefficiencies of tax competition. An implication of the result is that better outside options for multinational firms may reduce the gains from host countries’ policy coordination and thus reduce those countries’incentives to coordinate their policies. Also, with a development where outside options become more accessible, the perceived costs of tax competition, e.g., in terms of underprovision of public goods, may be overestimated. Our findings may also have implications for international negotiations, since it provides an argument for mutual reduction of entry barriers, as this may improve outside options.
    Keywords: Tax competition; mobility; common agency; countervailing incentives
    JEL: D82 H21 L51
    Date: 2010–09–30
  13. By: Justin Svec (Department of Economics, College of the Holy Cross)
    Abstract: This paper compares the fiscal policies implemented by two types of government when confronted by consumer uncertainty. Consumers, lacking confidence in their knowledge of the stochastic environment, endogenously tilt their subjective probability model away from an approximating probability model. The government does not face this uncertainty. Through its choice of a labor tax and the supply of one-period public debt, the government manipulates the competitive equilibrium allocation and the consumers' probability distortion. I consider two types of altruistic government. A "benevolent" government maximizes the consumers' expected utility under the approximating probability model, whereas a "political" government maximizes the consumers' expected utility under the consumers' subjective probability model. I find that, relative to a full-confidence setup, the benevolent government relies more heavily on labor taxes to finance fluctuations in spending, while the political government depends more on public debt to absorb the fiscal shock. These policies are designed to re-align the consumers' savings decisions with their full-confidence values and to reduce the fluctuations in the consumers' welfare across states, respectively.
    Keywords: Robust control, uncertainty, taxes, debt, Ramsey problem
    JEL: E61 E62 H21
    Date: 2010–10
  14. By: Thomas A. Garrett; Natalia Kolesnikova
    Abstract: This paper explores the seemingly innocuous practice of ignoring the local price vector in empirical models of lottery demand. We argue using consumer theory that local consumption prices should be included and that the failure to consider local prices results in income elasticity of lottery demand estimates that are biased downward. Using a sample of MSAs, we find that, in accordance with our theory, local prices are a significant determinant of lottery sales and the income elasticity of demand for lotteries is greater in magnitude when the local price vector is considered. The degree of lottery regressivity is thus overstated when local prices are omitted. One notable finding is that the tax incidence of lotteries changes from regressive to progressive once the local price vector is included.
    Keywords: Gambling industry ; Taxation
    Date: 2010
  15. By: Stephan Whitaker
    Abstract: State governments allocate authority, under a federally imposed cap, to issue tax-exempt bonds that fund “private activities” such as industrial expansion, student loans, and low-income housing. This paper presents political economy models of the allocation process and an empirical analysis. Due to an idiosyncrasy of the tax code, the annual per capita volume cap varies widely across states. I estimate that, on average, there is an additional $0.80 per capita per year of borrowing for each additional dollar per capita of volume cap. This confirms that the cap is a binding constraint in most cases, and authority to issue tax-exempt bonds is a scarce resource. I find that mortgage revenue bonds and student loan bonds are the most responsive to differences in the cap. The gross state product and employment in manufacturing and utilities drive allocations to industrial development bonds and utilities bonds. While controlling for the size of the education sector, I find campaign contributions from educational interests are associated with higher authorizations for student loans. One result runs counter to the theoretical models. Higher campaign contributions from utilities interests are associated with lower utilities borrowing. Unions do not have an independent effect on allocations.
    Keywords: Municipal bonds ; Tax exemption
    Date: 2010
  16. By: Christian A. L. Hilber (London School of Economics); Teemu Lyytikäinen (London School of Economics); Wouter Vermeulen (CPB Netherlands Bureau of Economic Policy Analysis & VU University)
    Abstract: We explore the impact of central government grants on local house prices in England using a panel data set of local authorities (LAs) from 2001 to 2008. Electoral targeting of grants to LAs by the incumbent national government provides an exogenous source of variation in grants that we exploit to identify their causal effect on house prices. Our results indicate substantial or even full capitalization. We also find that house prices respond more strongly in locations in which new construction is constrained by physical barriers. Our results imply that (i) during our sample period grants were largely used in a way that is valued by the marginal homebuyer and (ii) increases in grants to a LA may mainly benefit the typically better off property owners (homeowners and absentee landlords) in that LA.
    Keywords: Local public finance, house prices, supply constraints, central government grants
    JEL: H2 H3 H7 H81 R21 R31
    Date: 2010
  17. By: N K Bishnoi
    Abstract: An attempt has been made to understand the factors leading to the worsening situation of the state finances. Investigations reveal that the revenue receipts of the state could not keep pace with expenditure requirements and therefore, led to the decline of its fiscal health. [Working Paper No. 34]
    Keywords: Haryana, state finances, expenditure, fiscal health, management,
    Date: 2010
  18. By: Burcu Aydin
    Abstract: This paper analyzes the cyclical fluctuations in South Africa in a cross-country context, and studies the impact of the output gap by controlling for export intensity, the debt burden, asset prices, and banking crises. Results show that South Africa’s revenue performance was outstanding during the mid-2000s, and the recent decline in revenue was one of the least among the emerging and advanced markets. Results on the elasticity of tax revenue show that South Africa’s elasticity is higher during business upturns, indicating good prospects for recovering the revenue lost during the global financial crisis.
    Keywords: Business cycles , Cross country analysis , Economic models , Fiscal analysis , Revenues , South Africa , Tax collection , Tax revenues ,
    Date: 2010–09–17
  19. By: Robert S. Chirinko; Daniel J. Wilson
    Abstract: This paper studies the effects of Job Creation Tax Credits (JCTCs) enacted by U.S. states over the past 20 years. First, we investigate whether JCTCs stimulate within-state job growth. Second, we assess from where any increased employment comes from – in-state or out-of-state? Third, we evaluate when JCTCs' effects occur. In particular, we test for negative anticipation effects between JCTC enactment and when legislation goes into effect. We investigate these questions using a difference-in-differences estimator applied to monthly panel data on employment, the JCTC value, the JCTC effective and legislative dates, and various controls.
    Keywords: Tax credits ; Tax incentives ; Public policy
    Date: 2010
  20. By: Muiris MacCarthaigh (UCD Geary Institute, Institute of Public Administration)
    Abstract: As with all aspects of public management, the control, financing and regulation of state-owned enterprises (SOEs) are matters subject to changing international trends and domestic political imperatives (OECD 2005). What the effects of the global financial crisis will be on the ownership and financing of SOEs is slowly unfolding but will undoubtedly be heavily influenced by a new era of public sector reforms principally designed to reassert central political controls as well as fiscal pressures to balance state budgets. Responses have not been uniform - while many states are resorting to sales of their assets, certain enterprises, most notably banks, have come into public ownership and reversed the privatisation trend of recent decades. The role of the state is therefore once again in need of reconsideration (Skocpol 2008). Drawing on the Irish case, the issues of state-owned enterprise ownership, management and financing are addressed in this paper. Findings from two datasets - one concerning aspects of the corporate governance of existing Irish SOEs collected in 2008 (MacCarthaigh 2009) and another which presents a time-series analysis of Irish commercial and non-commercial public bodies since 1924 will identify the contemporary challenges faced by SOEs and how they are responding to them. The study will be informed by insights from institutional and organizational theory, as well as more recent writings on delegation and agencification.
    Date: 2010–10–01
  21. By: Brophy Haney, A.; Pollitt, M.G.
    Abstract: This paper discusses some of the new and continuing ways in which the public sector is involved in the electricity / energy sector around the world. This involvement continues to be significant in spite of the longrunning trend towards privatisation, competition and independent regulation in the energy sector. We discuss why the theoretical case for public ownership might be more attractive now than in the recent past. We then discuss six case studies of modern public ownership drawn from the UK (Great Britain and Northern Ireland), Denmark, New Zealand, Finland and Chile. The investments covered include wind and nuclear power, LNG facilities, electricity and gas distribution investments and energy service companies for combined heat and power. We conclude with some outstanding questions raised by the apparently favourable conditions for increased public involvement in energy.
    Keywords: Public ownership, electricity, gas
    JEL: L32 L94 L95
    Date: 2010–10–01
  22. By: Michael Kumhof; Daniel Leigh; Douglas Laxton
    Abstract: For thirty years prominent voices have advocated a policy of starving the beast cutting taxes to force government spending cuts. This paper analyzes the macroeconomic and welfare consequences of this policy using a two-country general equilibrium model. Under several strong assumptions the policy, if fully implemented, produces domestic output and welfare gains accompanied by losses elsewhere. But negative effects can easily arise in the presence of longer policy implementation lags, utility-enhancing government spending, and productive government capital. Overall, the analysis finds no support for the idea that starving the beast is a foolproof way towards higher output and welfare.
    Keywords: Budget deficits , Cross country analysis , Economic models , Fiscal analysis , Fiscal policy , Government expenditures , Tax policy , Tax reductions , United States , Welfare ,
    Date: 2010–09–02

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