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

  1. Mergers in Fiscal Federalism By Marie-Laure Breuillé; Skerdilajda Zanaj
  2. "Optimal taxes and penalties when the government cannot commit to its audit policy" By Leandro Arozamena; Martin Besfamille; Pablo Sanguinetti
  3. Citizens' control and the efficiency of local public services By Núria Bosch Roca; Marta Espasa Queralt; Antoni Mora Corral
  5. Estimation of Tax Leakage and its Impact on Fiscal Health in Kerala By Rakhe PB
  6. Why Hasn’t the US Economic Stimulus Been More Effective? The Debate on Tax and Expenditure Multipliers By F. Gerard Adams; Byron Ganges
  7. Auction versus Negotiation in Public Procurement: Looking for Empirical Evidence By Eshien Chong; Carine Staropoli; Anne Yvrande-Billon
  8. Using a Microeconometric Model of Household Labour Supply to Design Optimal Income Taxes By Rolf Aaberge; Ugo Colombino
  9. Why Lower Tax Rates May be Ineffective to Encourage Investment: The Role of The Investment Climate By S. VAN PARYS; S. JAMES
  10. Balanced Budget Government Spending in a Small Open Regional Economy By Patrizio Lecca; Peter McGregor; Kim Swales
  11. The political economy of infrastructure construction: The Spanish “Parliamentary Roads” (1880-1914) By Marta Curto-Grau; Alfonso Herranz-Loncán; Albert Solé-Ollé
  12. Endogenizing leadership in tax competition: a timing game perspective By Kempf, H.; Rota Graziosi, G.
  13. Does the Size and Quality of the Government Explain the Size and Efficiency of the Financial Sector? By Arusha Cooray
  14. Taxing the Financially Integrated Multinational Firm By Niels Johannesen
  15. Taxing Caloric Sweetened Beverages: Potential Effects on Beverage Consumption, Calorie Intake, and Obesity By Smith, Travis; Biing-Hwan, Lin
  16. Taxation and Globalization By Isabel Horta Correia
  17. Global Determinants of Stress and Risk in Public-Private Partnerships (PPP) in Infrastructure By Renato E. Reside, Jr.
  18. The Effectiveness of Tax Incentives in Attracting FDI: Evidence from the Tourism Sector in the Caribbean By S. VAN PARYS; S. JAMES
  19. Economic Voting in Portuguese Municipal Elections By Rodrigo Martins; Francisco José Veiga
  20. The Political Cost of Reforms By Alessandra Bonfiglioli; Gino Gancia

  1. By: Marie-Laure Breuillé (Université Catholique de Louvain); Skerdilajda Zanaj (CREA, University of Luxembourg)
    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 effects 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
  2. By: Leandro Arozamena; Martin Besfamille; Pablo Sanguinetti
    Abstract: We examine the problem of a utilitarian government that sets taxes and fines for evaders but cannot commit to any enforcement policy. Given the tax law, the government and taxpayers —some of whom are honest— play a report-audit game that, depending on taxes, fines and audit costs, generates either full evasion and no audits, or partial evasion and random auditing. Anticipating both possibilities, we characterize the optimal tax law. We show that it may be optimal for the government not to fine evaders as a way to commit not to audit. Moreover, social welfare is nonmonotonic in the audit cost.
    Keywords: Tax rates, Tax evasion, Enforcement, Audit costs, No commitment, Mixed-strategy equilibrium.
    JEL: D82 H26
    Date: 2010–10
  3. By: Núria Bosch Roca (Universitat de Barcelona & IEB); Marta Espasa Queralt (Universitat de Barcelona & IEB); Antoni Mora Corral (Universitat Internacional de Catalunya & IEB)
    Abstract: It is generally accepted that fiscal decentralization increases citizens’ control over politicians, fostering accountability and increasing efficiency. This article identifies the socioeconomic characteristics of citizens (potential voters) that increase their control over local policy-makers and thus generate greater efficiency in a decentralized context. We also highlight the fiscal characteristics of local governments that influence this control and efficiency. The study examines a sample of Spanish municipalities, applying a methodology based on the conventional procedure of two-stage estimation. In the first stage we estimate the efficiency of local public services by calculating a new version of a global output indicator using the DEA technique. In the second stage, using a Tobit type estimation (censored models) and bootstrap methods, we show how the factors mentioned may influence efficiency. The results suggest that strong presence of retailers, retired people, and people entitled to vote favour citizens’ control, which fosters accountability and efficiency. A factor that facilitates this control, and therefore greater efficiency, is the presence of low opportunity costs for obtaining information regarding local public service management.
    Keywords: Technical efficiency, local governments, citizens' control, socioeconomic and fiscal variables
    JEL: H11 H71 H72
    Date: 2010
  4. By: Niek Schoeman (Department of Economics, University of Pretoria); Yolande van Heerden (Department of Economics, University of Pretoria)
    Abstract: The use of micro-simulation tax modelling techniques is reasonably well-documented in a broad spectrum of literature in the field of public economics. This article is primarily concerned with assessing the revenue base for individuals by means of such a micro-simulation tax model, using the 2005/2006 Income and Expenditure survey. The challenge was to structure the model in such a way that differences in individual behaviour, the economic environment and the income levels of individuals be captured to reflect the true national economy. The model developed is an extension of the MS model framework as structured by Thompson and Schoeman (2006) as well as Wilkinson (2009). It is different though in the sense that StatsSa data is aligned with published data from the South African Revenue Services (SARS). Given the scarcity of data (limited surveys) this model is a static model assuming that the population characteristics do not change significantly over the period of the analysis and that it remains useful in the short term. The structured model applies a tax calculator to compute the tax liability for each individual under the 2005/2006 tax regulations and rules. The results based on IES data is then benchmarked against the latest available published SARS data in the bulletin Tax Statistics (2009) and the relevant data in the latest (2010) publication Budget Review from the National Treasury. An analysis based on unadjusted data from the IES shows a substantial difference in tax liability compared to official tax figures published by SARS (R65 billion compared to the SARS figure of R101 billion for the 2005/06 IES survey3 year). After benchmarking critical values and the imputation of missing data the numbers are now much closer (R105 billion compared to the SARS R101 billion). The analysis is concluded with some policy scenarios showing the impact of a change in marginal tax rates and the tax threshold. The results highlight the sensitivity of high income earners to changes in tax policy.
    Keywords: Micro-simulation, Tax revenue base, Personal income tax
    JEL: D31 H24
    Date: 2010–10
  5. By: Rakhe PB
    Abstract: This paper is an attempt to analyse the tax leakage in the broader context of fiscal crisis in Kerala, highlighting the relationship between the two. Tax leakage by causing a revenue drain may adversely affect the primary account position and thus may indirectly influence the fiscal sustainability of the state’s economy. This is the main thread of argument coming out of the paper. [Working Paper No. 347]
    Keywords: Kerala Economy, Tax Leakage, General Sale Tax, and Fiscal Sustainability
    Date: 2010
  6. By: F. Gerard Adams (Department of Economics University of Pennsylvania (emeritus)); Byron Ganges (Department of Economics University of Hawaii at Manoa)
    Abstract: Recent dissatisfaction with the impact of expenditure stimulus on economic activity in the United States, along with the results of academic research, have once again raised questions about the effectiveness of fiscal stimulus policies and about whether stimulus to a recessionary economy should be in the form of tax cuts or expenditure increases. This paper considers alternative methods for evaluating the impacts of stimulus policy strategies. We discuss conceptual challenges involved in effectiveness measurement, and we review alternative empirical approaches applied in recent studies. We then present our own estimates of policy multipliers based on simulations of the IHS Global Insight model of the US economy. Based on this review and analysis, we address the question of why recent US stimulus programs have not been more effective.
    Keywords: United States (US) recession and recovery; fiscal and monetary policy; tax and expenditure multipliers; econometric model forecast simulation.
    JEL: E37 E62 E65
    Date: 2010–07
  7. 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
  8. By: Rolf Aaberge; Ugo Colombino
    Abstract: The purpose of this paper is to present an exercise where we identify optimal income tax rules according to various social welfare criteria, keeping fixed the total net tax revenue. Empirical applications of optimal taxation theory have typically adopted analytical expressions for the optimal taxes and then imputed numerical values to their parameters by using "calibration" procedures or previous econometric estimates. Besides the restrictiveness of the assumptions needed to obtain analytical solutions to the optimal taxation problem, a shortcoming of that procedure is the possible inconsistency between the theoretical assumptions and the assumptions implicit in the empirical evidence. In this paper we follow a different procedure, based on a computational approach to the optimal taxation problem. To this end, we estimate a microeconomic model with 78 parameters that capture heterogeneity in consumption-leisure preferences for singles and couples as well as in job opportunities across individuals based on detailed Norwegian household data for 1994. For any given tax rule, the estimated model can be used to simulate the labour supply choices made by single individuals and couples. Those choices are therefore generated by preferences and opportunities that vary across the decision units. We then identify optimal tax rules – within a class of 9-parameter piece-wise linear rules - by iteratively running the model until a given social welfare function attains its maximum under the constraint of keeping constant the total net tax revenue. The parameters to be determined are an exemption level, four marginal tax rates, three "kink points" and a lump sum transfer that can be positive (benefit) or negative (tax). We explore a variety of social welfare functions with differing degree of inequality aversion. All the social welfare functions imply monotonically increasing marginal tax rates. When compared with the current (1994) tax systems, the optimal rules imply a lower average tax rate. Moreover, all the optimal rules imply – with respect to the current rule – lower marginal rates on low and/or average income levels and higher marginal rates on relatively high income levels. These results are partially at odds with the tax reforms that took place in many countries during the last decades. While those reforms embodied the idea of lowering average tax rates, the way to implement it has typically consisted in reducing the top marginal rates. Our results instead suggest to lower average tax rates by reducing marginal rates on low and average income levels and increasing marginal rates on very high income levels.
    Keywords: Labour supply; optimal taxation; random utility model; microsimulation
    JEL: H21 H31 J22
    Date: 2010
    Abstract: In this paper we first analyze theoretically how the investment climate can affect the impact of corporate taxation on investment in a simple tax competition model where the corporate tax revenues are used to improve the investment climate. We find that an improvement of the investment climate increases the sensitivity of capital to the tax rate if the investment climate is very effective at enhancing the productivity of capital or if the investment climate enhances the productivity of capital much more when the initial investment climate is unattractive than when the initial investment climate is already attractive. As a result, the model calls for the estimation of an investment equation where the tax variable is moderated by an investment climate variable.<br> We estimate such an investment equation using a unique panel dataset of effective corporate tax rates of 80 countries, including countries with an unattractive and countries with an attractive investment climate, for the period 2005-2008. We find two important results. First, a better investment climate increases the sensitivity of FDI to the tax rate. Second, in the worst investment climate countries, FDI reacts not negatively to a rise in the tax rate. These results have important policy implications. For bad investment climate countries it is ineffective to lower the tax rate to compensate for the bad investment climate. Instead, these countries should focus on improving the basic investment climate.
    Keywords: tax competition, investment climate, developing countries, Foreign Direct Investment, corporate tax
    Date: 2010–09
  10. By: Patrizio Lecca (Department of Economics, Strathclyde University); Peter McGregor (Fraser of Allander Institute, Strathclyde University); Kim Swales (Department of Economics, Strathclyde University)
    Abstract: This paper investigates the impact of a balanced budget fiscal policy expansion in a regional context within a numerical dynamic general equilibrium model. We take Scotland as an example where, recently, there has been extensive debate on greater fiscal autonomy. In response to a balanced budget fiscal expansion the model suggests that: an increase in current government purchase in goods and services has negative multiplier effects only if the elasticity of substitution between private and public consumption is high enough to move downward the marginal utility of private consumers; public capital expenditure crowds in consumption and investment even with a high level of congestion; but crowding out effects might arise in the short-run if agents are myopic.
    Keywords: regional computable general equilibrium analysis, fiscal federalism, fiscal policy.
    JEL: H72 R13 R50
    Date: 2010–10
  11. By: Marta Curto-Grau (Universitat de Barcelona & IEB); Alfonso Herranz-Loncán (Universitat de Barcelona); Albert Solé-Ollé (Universitat de Barcelona & IEB)
    Abstract: This paper examines the extent to which the public allocation of road investment was influenced by political and electoral goals during the Spanish Restoration (1874-1923). More precisely, we seek to identify those provinces that were favoured with higher road construction expenditure and whether tactical strategies adopted by the political parties varied over time to reflect increasing political competition. In so doing, this paper combines concepts from three strands of literature: legislative pork-barrel; clientelism and machine politics; and electoral competition. Our main empirical finding for a panel of Spain’s provinces suggests that constituencies electing a higher proportion of deputies from minority or opposition parties were initially punished through lower levels of road investment but that, by the end of the period, they were instead favoured with more resources than the rest. In addition, we also observe that senior deputies who had been ministers in previous administrations were more capable than other politicians of attracting resources to their constituencies
    Keywords: Road investment, distributive politics, electoral competition, vote buying
    JEL: H54 P16 D72
    Date: 2010
  12. By: Kempf, H.; Rota Graziosi, G.
    Abstract: In this paper we extend the standard approach of horizontal tax competition by endogenizing the timing of decisions made by the competing jurisdictions. Following the literature on the endogenous timing in duopoly games, we consider a pre-play stage, where jurisdictions commit themselves to more early or late, i.e. to fix their tax rate at a first or second stage. We highlight that at least one jurisdiction experiments a second-mover advantage. We show that the Subgame Perfect Equilibria (SPEs) correspond to the two Stackelberg situations yielding to a coordination problem. In order to solve this issue, we consider a quadratic specification of the production function, and we use two criteria of selection: Pareto-dominance and risk-dominance. We emphasize that at the safer equilibrium the less productive or smaller jurisdiction leads and hence loses the second-mover advantage. If asymmetry among jurisdictions is sufficient, Pareto-dominance reinforces risk-domination in selecting the same SPE. Three results may be deduced from our analysis: (i) the downward pressure on tax rates is less severe than predicted; (ii) the smaller jurisdiction leads; (iii) the 'big-country-higher-tax-rate' rule does not always hold. Classification-JEL: H30, H87, C72.
    Keywords: Endogenous timing; tax competition; first/second-mover advantage; strategic complements; stackelberg ; risk dominance.
    Date: 2010
  13. By: Arusha Cooray
    Abstract: This study examines the impact of two dimensions of the government, namely, size and quality, on two dimensions of the financial sector, size and efficiency, in a cross section of 71 economies. The study finds that while increased quality of the government as measured by governance and legal origin positively influence both financial sector size and efficiency, that the size of the government proxied by government expenditure and government ownership of banks, has a negative effect on financial sector efficiency, however, a positive impact on financial sector size, particularly in the low income economies.
    JEL: O11 O16 O43 O57
    Date: 2010–10
  14. By: Niels Johannesen (Department of Economics, University of Copenhagen)
    Abstract: This paper develops a theoretical model of corporate taxation in the presence of financially integrated multinational firms. Under the assumption that multinational firms at least partly use internal loans to finance foreign investment, we find that the optimal corporate tax rate is positive from the perspective of a small, open economy. This finding contrasts the standard result that the optimal source based capital tax is zero. Intuitively, to the extent that multinational firms finance investment in country i with loans from affiliates in country j, the burden of corporate taxes in the latter country partly fall on investment and thus workers in the former country. This tax exporting mechanism introduces a scope for corporate taxes, which is not present in standard models of international taxation. Accounting for the internal capital markets of multinational firms thus represents a way to resolve the tension between standard theory predicting zero capital taxes and the casual observation that countries tend to employ corporate taxes at fairly high rates.
    Date: 2010–07
  15. By: Smith, Travis; Biing-Hwan, Lin
    Abstract: The link between high U.S. obesity rates and the overconsumption of added sugars, largely from sodas and fruit drinks, has prompted public calls for a tax on caloric sweetened beverages. Faced with such a tax, consumers may reduce consumption of these sweetened beverages and substitute nontaxed beverages, such as bottled water, juice, and milk. This study estimated that a tax-induced 20-percent price increase on caloric sweetened beverages could cause an average reduction of 37 calories per day, or 3.8 pounds of body weight over a year, for adults and an average of 43 calories per day, or 4.5 pounds over a year, for children. Given these reductions in calorie consumption, results show an estimated decline in adult overweight prevalence (66.9 to 62.4 percent) and obesity prevalence (33.4 to 30.4 percent), as well as the child at-risk-for-overweight prevalence (32.3 to 27.0 percent) and the overweight prevalence (16.6 to 13.7 percent). Actual impacts would depend on many factors, including how the tax is refl ected in consumer prices and the competitive strategies of beverage manufacturers and food retailers.
    Keywords: Sugar-sweetened beverages (SSB), soft drinks, soda tax, added sugars, obesity, and beverage demand, Food Consumption/Nutrition/Food Safety, Health Economics and Policy,
    Date: 2010–07
  16. By: Isabel Horta Correia
    Abstract: <br>The decline of capital taxation is associated with efficiency gains.<br>We show that, when agents are heterogeneous, equity concerns can change the policy recommendation driven by efficiency. Given the empirical evidence on the roots of heterogeneity inside each country, either in developing or developed economies, the elimination of capital taxation would lead always to a decline in inequality and to an increase of welfare of the poorest, in a small open economy acting unilaterally. On the contrary for a group of open economies following the same policy, the opposite occurs: with the elimination of capital taxation inequality worsens and it hurts the poorest of each country. Therefore globalization can be important to support a positive tax on capital.
    JEL: D63 E62 F42
    Date: 2010
  17. By: Renato E. Reside, Jr.
    Abstract: This study analyzes the determinants of stress in public-private partnerships (PPPs) in infrastructure investment. While project failures seldom occur, there are many stresses that hinder success. One of these is broad political risk: the prerogative of government executives to make sweeping changes in investment rules or regulations—through measures such as protracted tariff freezing—that undermine a project’s market value. Broad political risk can constitute the biggest threat to project outcomes. However, this is usually only realized after other risks, such as currency risk, have materialized first. Thus, broad political risk can be controlled. [ADBI Working Paper 133]
    Keywords: public-private partnerships (PPPs), infrastructure investment, government, political, currency
    Date: 2010
  18. By: S. VAN PARYS; S. JAMES
    Abstract: We investigate to what extend tax incentives have been effective in attracting Foreign Direct Investment in the tourism sector in the Caribbean in the period 1997-2007. More precisely, we test whether the neoclassical investment theory prediction that tax incentives, by lowering the user cost of capital, raise investment, holds in the Eastern Caribbean Currency Union (ECCU). We use differences in difference to assess the impact of an important change in tax incentives for tourism investment in Antigua and Barbuda in 2003. The other ECCU countries serve as excellent control group countries since the small islands share the same currency, coordinate macroeconomic policies to some extent, have similar geographical characteristics, and compete for the same big international tourism corporations. Accounting for other factors driving tourism FDI in this region, we find that tourism investment in Antigua and Barbuda after 2003 increased significantly more than investment in the other six ECCU countries due to the tourism tax incentives reform. This study is one of the first to assess the impact of sector specific tax incentives on investment in developing countries. Moreover, while previous studies relied on cross sectional differences, our differences in difference approach offers a cleaner way to identify the effect of the tax incentives policy.
    JEL: H21 H25 H32 F21
    Date: 2010–09
  19. By: Rodrigo Martins (Faculdade de Economia, Universidade de Coimbra); Francisco José Veiga (Universidade do Minho - NIPE)
    Abstract: This paper analyses the impact of economic conditions on Portuguese local electoral outcomes. We use two extensive datasets to estimate an economic voting model which accounts for the possibility that different levels of government have different levels of responsibility for economic outcomes and for clarity of government responsibility. Empirical results indicate that the performance of the national economy is important especially if local governments are of the same party as the central government. The municipal situation is also relevant particularly in scenarios of higher clarity of government responsibility.
    Keywords: Local governments, Elections, Portugal, Voting, Economic conditions
    JEL: D72 H7
    Date: 2010
  20. By: Alessandra Bonfiglioli; Gino Gancia
    Abstract: This paper formalizes in a fully-rational model the popular idea that politicians perceive an electoral cost in adopting costly reforms with future benefits and reconciles it with the evidence that reformist governments are not punished by voters. To do so, it proposes a model of elections where political ability is ex-ante unknown and investment in reforms is unobservable. On the one hand, elections improve accountability and allow to keep well-performing incumbents. On the other, politicians make too little reforms in an attempt to signal high ability and increase their reappointment probability. Although in a rational expectation equilibrium voters cannot be fooled and hence reelection does not depend on reforms, the strategy of underinvesting in reforms is nonetheless sustained by out-of-equilibrium beliefs. Contrary to the conventional wisdom, uncertainty makes reforms more politically viable and may, under some conditions, increase social welfare. The model is then used to study how political rewards can be set so as to maximize social welfare and the desirability of imposing a one-term limit to governments. The predictions of this theory are consistent with a number of empirical regularities on the determinants of reforms and reelection. They are also consistent with a new stylized fact documented in this paper: economic uncertainty is associated to more reforms in a panel of 20 OECD countries.
    Keywords: Elections, Reforms, Asymmetric Information, Uncertainty.
    JEL: E6 H3
    Date: 2010–10–27

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