nep-pbe New Economics Papers
on Public Economics
Issue of 2010‒10‒30
twenty papers chosen by
Oliver Budzinski
University of Southern Denmark

  1. An annotated bibliography of tax compliance and tax compliance costs By James, Simon; Edwards, Alison
  2. Subnational taxation in developing countries : a review of the literature By Bird, Richard M.
  3. Electoral rules and incentive effects of fiscal transfers: evidence from Germany By Peter Egger; Marko Koethenbuerger; Michael Smart
  4. Sustaining the Momentum of Fiscal Reform in Hungary By Colin Forthun; Robert P. Hagemann
  5. The housing crisis and state and local government tax revenue: five channels By Byron Lutz; Raven Molloy; Hui Shan
  7. Do people invest in local public goods with long-term benefits: Experimental evidence from a shanty town in Peru By De Hoop, Thomas; Van Kempen, Luuk; Fort, Ricardo
  8. Political Selection of Public Servants and Parliamentary Oversight By Thomas Braendle; Alois Stutzer
  9. Auctioning a Discrete Public Good under Incomplete Information By Murat Yilmaz
  10. Urban sprawl and municipal budgets in Spain: a dynamic panel data analysis By Miriam Hortas-Rico
  11. "Laffer paradox, Leviathan, and Political Contest" By Toshihiro Ihori; C.C. Yang
  12. The great crisis and fiscal institutions in eastern and central Europe and central Asia By Barbone, Luca; Islam, Roumeen; Sanchez, Luis Alvaro
  13. The Welfare Gains of Age Related Optimal Income Taxation By Bastani, Spencer; Blomquist, Sören; Micheletto, Luca
  14. On the Case for a Balanced Budget Amendment to the U.S. Constitution By Marina, Azzimonti; Marco, Battaglini; Stephen, Coate
  15. Lobbying, political competition, and local land supply: recent evidence from Spain By Albert Solé-Ollé; Elisabet Viladecans-Marsal
  16. Religion, Income Inequality, and the Size of the Government By Ceyhun Elgin; Turkmen Goksel; Mehmet Y. Gurdal
  17. Why do small states receive more federal money? Us senate representation and the allocation of federal budget By Valentino Larcinese; Leonzio Rizzo; Cecilia Testa
  18. A Contribution Towards the New Zealand's Tax Reform By B. Laabas; W. A. Razzak
  19. Political Turnover, Taxes and the Shadow Economy By Ceyhun Elgin
  20. Public Procurement in EU Member States - The Regulation of Contract Below the EU Thresholds and in Areas not Covered by the Detailed Rules of the EU Directives By OECD

  1. By: James, Simon; Edwards, Alison
    Abstract: An annotated bibliography of tax compliance and tax compliance costs.
    Keywords: tax; tax compliance; compliance costs; bibliography; tax evasion; tax avoidance; auditing; tax simplification
    JEL: H20 H0 H24 H83 H26
    Date: 2010–10
  2. By: Bird, Richard M.
    Abstract: This paper reviews the literature on tax assignment in decentralized countries. Ideally, own-source revenues should be sufficient to enable at least the richest subnational governments to finance from their own resources all locally-provided services that primarily benefit local residents. Subnational taxes should also not unduly distort the allocation of resources. Most importantly, to the extent possible subnational governments should be accountable at the margin for financing the expenditures for which they are responsible. Although reality in most countries inevitably falls far short of these ideals, nonetheless there are several taxes that subnational governments in developing countries could use to help ensure that decentralization yields more of the benefits it appears to promise in theory. At the local level, such taxes include property taxes and, especially for larger cities, perhaps also a limited and well-designed local business tax. At the regional level, in addition to taxes on vehicles, governments in some countries may be able to utilize any or all of the following -- a payroll tax; a simple surcharge on the central personal income tax; and a sales tax, in some cases perhaps taking the form of a well-designed regional value-added tax. The"best"package for any particular country or subnational government is likely to be not only context-specific and path-dependent, but also highly sensitive to the balance struck between different political and economic factors and interests.
    Keywords: Subnational Economic Development,Public Sector Economics,Taxation&Subsidies,Debt Markets,Public&Municipal Finance
    Date: 2010–10–01
  3. By: Peter Egger (ETH Zurich, CEPR & CESifo); Marko Koethenbuerger (University of Copenhagen & CESifo); Michael Smart (University of Toronto & CESifo)
    Abstract: The impact electoral rules and fiscal equalization programs have for local public finance are separately analyzed in the literature. This paper empirically analyzes whether legislator elected under different rules respond differently to changes in fiscal incentives. Using a reform of the electoral rule and the equalization system as a natural experiment, we find that municipalities which elect legislators under proportional rule react less strongly to changes in fiscal incentives.
    Keywords: Electoral rule, form of municipal government, fiscal equalization, business tax rates, comparative political economy.
    JEL: D7 H7 C2
    Date: 2010
  4. By: Colin Forthun; Robert P. Hagemann
    Abstract: Hungary has faced a considerable challenge to regain credibility following persistent and high fiscal deficits. Efforts during recent years have produced substantial results. The fiscal deficit has been brought down significantly and, despite the recession, fiscal consolidation has continued to help restore foreign investor confidence. Short-term fiscal adjustment needed to be accompanied by measures that can durably improve Hungary’s fiscal position, however, and it has; the adoption in 2009 of a pension reform and a Fiscal Responsibility Act, creating a Fiscal Council and fiscal rules hold that potential. These results should not lead to complacency. Some expenditure cuts, such as lower public salaries, may prove difficult to sustain. Fiscal consolidation in the past owed both to expenditure cuts and revenue increases. As a result, and despite an important tax reform starting in the second half of 2009 and extended from the beginning of 2010, marginal tax rates remain high, with adverse effects on the labour market and growth. Going forward, the government needs to contain public expenditure growth and improve public administration efficiency to reduce the public “footprint” on the economy and allow lower taxes. Key areas that warrant intensified efforts are public administration and health. The government should help secure a prominent role for the Fiscal Council and sufficient experience needs to accumulate before considering any substantial changes in the fiscal rules. Finally, improvements to make taxation less distortive should continue by further reducing tax wedges, and increasing the role of wealth taxes, notably for local governments. This Working Paper relates to the 2010 OECD Economic Survey of Hungary (<P>Soutenir le rythme de la réforme budgétaire en Hongrie<BR>Le défi auquel se trouve confrontée la Hongrie est de restaurer sa crédibilité après avoir accusé de lourds déficits persistants. Les efforts déployés ces dernières années ont été très fructueux. Le déficit budgétaire a été nettement réduit et, malgré la récession, l’assainissement des finances publiques a raffermi la confiance des investisseurs étrangers. L’ajustement budgétaire à court terme a dû néanmoins se doubler de mesures à même d’améliorer durablement les finances publiques, ce qui a été fait, l’adoption, en 2009, d’une réforme des retraites et d’une loi de responsabilité budgétaire, mettant en place un Conseil budgétaire et des règles de politique budgétaire, y a contribué Mais la tâche n’est pas terminée. Certaines réductions de dépenses, notamment du côté des rémunérations dans le secteur public, pourraient être difficiles à mettre en oeuvre. Dans le passé l’assainissement budgétaire a été obtenu grâce à la réduction des dépenses et à l’augmentation des recettes. En conséquence, et malgré l’importante réforme fiscale du second semestre 2009 qui continue au début de 2010, les taux marginaux d’imposition restent élevés, ce qui a des effets négatifs sur le marché du travail et sur la croissance. Pour l’avenir, il faut que le gouvernement enraye la croissance des dépenses publiques et accroisse l’efficience de l’administration afin d’alléger l’« empreinte » publique sur l’économie et de permettre des baisses d’impôts. L’administration publique et la santé sont les principaux domaines où l’effort devrait être intensifié. Il faudrait que le gouvernement fasse en sorte que le Conseil budgétaire puisse jouer un rôle prééminent et une expérience suffisante sera nécessaire avant d’envisager toute modification substantielle des règles de politique budgétaire. Enfin, il faudra poursuivre l’action en vue d’une fiscalité qui crée moins de distorsions, en réduisant encore les coins fiscaux et en donnant plus de poids à la taxation du patrimoine, notamment au niveau des collectivités locales. Ce document de travail se rapporte à l’Étude économique de l’OCDE de la Hongrie, 2009 (
    Keywords: taxation, budgets, fiscal policy, public expenditure, fiscal rules, efficiency, fiscal consolidation, fiscal sustainability, public services, deficit, debt, politique budgétaire, finances publiques, imposition, dépenses publiques, règles budgétaires, soutenabilité des finances publiques, consolidation budgétaire, efficacité, déficit, services publics, dette
    JEL: H11 H50 H51 H55 H59
    Date: 2010–09–13
  5. By: Byron Lutz; Raven Molloy; Hui Shan
    Abstract: State and local government tax revenues dropped steeply following the most severe housing market contraction since the Great Depression. We identify five main channels through which the housing market affects state and local tax revenues: property tax revenues, transfer tax revenues, sales tax revenues (including a direct effect through construction materials and an indirect effect through the link between housing wealth and consumption), and personal income tax revenues. We find that property tax revenues do not tend to decrease following house price declines. We conclude that the resilience of property tax receipts is due to significant lags between market values and assessed values of housing and the tendency of policy makers to offset declines in the tax base with higher tax rates. The other four channels have had a relatively modest effect on state tax revenues. We calculate that these channels jointly reduced tax revenues by $15 billion from 2005 to 2009, which is about 2 percent of total state own-source revenues in 2005. We conclude that the recent contraction in state and local tax revenues has been driven primarily by the general economic recession, rather than the housing market per-se.
    Date: 2010
  6. By: Charl Jooste (Department of Economics, University of Pretoria); Ruthira Naraidoo (Department of Economics, University of Pretoria)
    Abstract: Research on tax elasticities in South Africa mainly employs linear models and shows that taxes evolve symmetrically irrespective of the economic cycle. This study extends this research to show that taxes behave asymmetrically and nonlinearly during expansions and contractions. Estimated linear elasticities imply that a one percent expansion in the cycle increases personal income tax, corporate income tax and value added tax by 1.43, 2.52 and 0.99 percent, respectively. However, estimated nonlinear elasticities are significantly different. During an expansion, the above elasticities increase by 1.89, 2.76 and 2.17 percent, respectively while during a contraction phase these elasticities increase by 0.89, 0.88 and 0.82 respectively. This finding of low tax collection during economic contractions has important implications for fiscal sustainability and overall fiscal prudence in South Africa. The findings of high tax elasticities during expansions might explain the underestimation of revenue by the government.
    Keywords: structural budget balance, tax elasticities, nonlinearity, Smooth Transition Regression, Autoregressive Distributed Lag
    JEL: C51 H20 H25
    Date: 2010–10
  7. By: De Hoop, Thomas; Van Kempen, Luuk; Fort, Ricardo
    Abstract: This paper discusses voluntary contributions to health education in a shanty town in Peru, using a new experimental setup to identify voluntary contributions to local public goods. The experiment enables individuals to contribute to a health education meeting facilitated by an NGO, which they know will only be organised if the cumulative investment level exceeds a certain threshold value. In contrast to expectations of aid distributors, individuals contributed a substantial amount of money, despite the long-term nature of the health benefits from health education. High discount rates only seem to have had a detrimental effect on investment in a poorer subsample. Results from a complementary experiment, which identifies donations to a nutrition program, suggest that positive beliefs about short-term benefits from health education in the form of learning effects have played an important role in the investment decision. The results indicate that channelling decision-making power about public good provision to beneficiaries not necessarily implies a crowding out of investment in local public goods with long-term benefits. Hence, particular attention is given to the potential role of cash transfers in the financing of local public goods.
    Keywords: Health education; Field Experiment; Public Good; Peru
    JEL: H41 C93 I1
    Date: 2010–07
  8. By: Thomas Braendle; Alois Stutzer (University of Basel)
    Date: 2010
  9. By: Murat Yilmaz
    Date: 2010
  10. By: Miriam Hortas-Rico (Universidad Complutense de Madrid & IEB)
    Abstract: Urban sprawl has recently become a matter of concern throughout Europe, but it is in southern countries where its environmental and economic impact has been most severe. This low-density, spatially expansive urban development pattern can have a highly marked impact on municipal budgets. Thus, local governments may see sprawl as a potential source of finance, in terms of building-associated revenues and increased transfers from upper tiers of government. At the same time, sprawl leads to increased levels of expenditure, as it may raise the provision costs of certain local public goods and requires greater investment in extending basic infrastructure for new urban development. What, therefore, is the net fiscal impact of urban sprawl? Do local governments consider the long-run net fiscal impact of new urban growth or do they simply focus on its short-term benefits, ignoring future development costs? This paper addresses these questions by analysing the dynamic relationship between urban sprawl and local budget variables. To do so, we estimate a panel vector autoregressive model using data for 4,000 Spanish municipalities for the period 1994-2005. Computed Generalised Impulse Response Functions show: (i) that sprawl considerably increases demand for new infrastructure, (ii) that the capital deficit generated by this new infrastructure is covered in the main by intergovernmental transfers and, to a lesser extent, by revenues linked to the real estate cycle, and (iii) that sprawl leads to a short-term current surplus, as the increase in current revenues offsets the increase in current expenditures due to public service provision for new developments. Overall, these findings point to a moral hazard problem for local governments in which inordinate intergovernmental transfers and development revenues encourage excessive urban sprawl.
    Keywords: Urban sprawl, local public finance, dynamic panel data
    JEL: H1 H72 R51
    Date: 2010
  11. By: Toshihiro Ihori (Faculty of Economics, University of Tokyo); C.C. Yang (Institute of Economics, Academia Sinica)
    Abstract: This paper considers a political contest model wherein self-interested politicians seek rents from the public budget, while general voters make political efforts to protest against politicians' rent seeking directly (for example, through voting in referendums such as the passage of Proposition 13) or indirectly (for example, through donating money to organized groups such as the National Taxpayer Union). We show that the political contest may ironically lead to the Laffer paradox; that is, rent-seeking politicians may intend to set the tax rate higher than the revenue-maximizing rate. For taming Leviathans, political protests may not be as effective as competition among governments.
    Date: 2010–10
  12. By: Barbone, Luca; Islam, Roumeen; Sanchez, Luis Alvaro
    Abstract: This paper examines fiscal outcomes in Eastern and Central European countries before and during the global crisis of 2008-2010. These outcomes are evaluated in the context of overall changes in fiscal institutions and global market conditions. Eastern and Central European countries’ situations improved dramatically in the pre-crisis period as tax revenues boomed, and fiscal institutions were reformed. Expenditures increased quite significantly in real terms for some of the countries in the pre-crisis era so that when tax revenues collapsed in the wake of the crisis, the countries were left with large deficits. Institutional reform helped countries manage their fiscal situations better, but the crisis also exposed shortcomings of the status quo. In the post-crisis period, fiscal institutions aimed at promoting fiscal discipline are being strengthened. Governments will also need to take a closer look at the sustainability of current expenditure patterns, particularly the strong emphasis on social expenditures.
    Keywords: Public Sector Expenditure Policy,Debt Markets,Fiscal Adjustment,Subnational Economic Development,Public Sector Economics
    Date: 2010–10–01
  13. By: Bastani, Spencer (Uppsala Center for Fiscal Studies); Blomquist, Sören (Uppsala Center for Fiscal Studies); Micheletto, Luca (Uppsala Center for Fiscal Studies)
    Abstract: Using a calibrated overlapping generations model we quantify the welfare gains of an age dependent income tax. Agents face uncertainty regarding future abilities and can by saving transfer consumption across periods. The welfare gain of switching from an age-independent to an age-dependent nonlinear tax amounts in our benchmark model to around three percent of GDP. The gains are particularly high when there are restrictions on debt policy. The gains of using a nonlinear- as opposed to a linear tax are even larger. Surprisingly, it is of secondary importance to optimally choose the tax on interest income.
    Keywords: labor income taxation; capital income taxation; age-dependent taxes; OLG model
    JEL: H21 H23 H24
    Date: 2010–10–25
  14. By: Marina, Azzimonti; Marco, Battaglini; Stephen, Coate
    Abstract: This paper uses the political economy model of Battaglini and Coate (2008) to analyze the impact of a balanced budget rule that requires that legislators do not run deficits. It considers both a strict rule which cannot be circumvented and a rule that can be overridden by a super-majority of legislators. A strict rule leads to a gradual but substantial reduction in the level of public debt. In the short run, citizens will be worse off as public spending is reduced and taxes are raised to bring down debt. In the long run, the benefits of a lower debt burden must be weighed against the costs of greater volatility in taxes and less responsive public good provision. To quantify these effects, the model is calibrated to the U.S. economy using data from 1940-2005. While the long run net benefits are positive, they are outweighed by the short run costs of debt reduction. A rule with a super-majority override has no effect on citizen welfare or fiscal policy.
    Keywords: Balanced Budget Amendment; Political Economy; Markov Equilibrium; Bargaining
    JEL: H21 C70 D60 E60
    Date: 2010
  15. By: Albert Solé-Ollé (Universitat de Barcelona, IEB & Cesifo); Elisabet Viladecans-Marsal (Universitat de Barcelona & IEB)
    Abstract: We analyze whether local land supply is influenced by the degree of political competition, and interpret the findings as being indicative of the influence wielded by land development lobbies. We use a new database including both political and land supply data for more than 2,000 Spanish municipalities for the period 2003-2007. In Spain, land use policies are largely a local responsibility with municipalities having periodically to pass comprehensive land use plans. The main policy variable in these plans, and the one analyzed here, is the amount of land classified for potential development. We measure local political competition as the margin of victory of the incumbent government. We instrument this variable using the number of votes obtained by parties represented in local government when standing at the first national legislative elections following the re-establishment of democracy, and the number of votes they actually obtained regionally at the national legislative elections. The results indicate that stiffer political competition does indeed reduce the amount of new land designated for development. This effect is found to be most marked in suburbs, in towns with a high percent of commuters and homeowners, and in municipalities governed by the left.
    Keywords: Land use regulations, urban growth controls, political economy.
    JEL: H7 Q15 R52
    Date: 2010
  16. By: Ceyhun Elgin; Turkmen Goksel; Mehmet Y. Gurdal
    Date: 2010–12
  17. By: Valentino Larcinese (London School of Economics); Leonzio Rizzo (Università di Ferrara & IEB); Cecilia Testa (Royal Holloway University of London)
    Abstract: In this paper we provide new evidence on the importance of the so-called small state advantage for the allocation of the US federal budget. We also provide a new interpretation of the available empirical evidence. Analyzing outlays for the period 1978-2002, we show that not only does the population size of a state matter, but so too does its dynamics. Once population scale and change effects are separated, the impact of population size is substantially reduced, and population change turns out to be an important explanatory variable of current spending patterns. The impact of scale and change effects varies substantially across spending programs. Small states enjoy an advantage in defense spending, whereas fast growing ones are penalized in grants allocations. Our results imply that the interests of the states are not easily aligned around their population size alone. The distortion associated with population dynamics is concentrated on federal grants where formulas play a substantial role in limiting budgetary adjustments. Hence, a large part of the inverse relationship between spending and population appears to be driven by mechanisms of budgetary inertia which are compatible with incrementalist theories of budget allocation.
    Keywords: federal budget, malapportionment, small state advantage, overrepresentation.
    JEL: D72 H61 H77
    Date: 2010
  18. By: B. Laabas; W. A. Razzak
    Abstract: We use the work-leisure choice model to estimate equilibrium labour supply (hours-worked) in New Zealand and Australia over the period 2000 – 2008. We then stochastically solve the model over a future period from 2010 to 2015, and then re-solve it under six different tax policy scenarios for New Zealand. We evaluate the welfare and relative productivity implications of each policy.
    Keywords: Taxes, labour supply, welfare and productivity.
    JEL: C63 E62 J22
    Date: 2010–10–15
  19. By: Ceyhun Elgin
    Date: 2010–08
  20. By: OECD
    Abstract: How do Member States regulate their national public procurement systems below the EU thresholds and in areas not regulated in detail by the EU Directives? This paper provides the reader with an overview of different national policies, rules and procedures and presents common features and patterns in the regulatory approach of the countries covered. It will help Sigma partner countries design efficient and sound legal frameworks also outside the scope of the EU Directives. It may as well be of interest to the Member States themselves and to the international procurement community at large.
    Date: 2010–05–27

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