nep-pbe New Economics Papers
on Public Economics
Issue of 2010‒11‒27
fourteen papers chosen by
Oliver Budzinski
University of Southern Denmark

  1. Tax Decentralisation and local Government size By Paolo Liberati; Agnese Sacchi
  2. Government and the provision of public goods : from equilibrium models to mechanism design. By Monique Florenzano
  3. Optimal capital income taxation with tax evasion By D'Andria, Diego
  4. Voluntary contributing in a neighborhood public good game: An experimental study By Berninghaus, Siegfried; Güth, Werner; Schosser, Stephan
  5. Towards a Less Distortive and More Efficient Tax System in Portugal By Álvaro Pina
  6. Network Architecture and Mutual Monitoring in Public Goods Experiments By Carpenter, Jeffrey P.; Kariv, Shachar; Schotter, Andrew
  7. Diamonds are not forever : Botswana medium-term fiscal sustainability By Kojo, Naoko C.
  8. Mobilising Tax Revenue to Finance Development: The Case for Property Taxation in Francophone Africa By Nara F. Monkam
  9. Restoring Fiscal Sustainability in the United States By Patrick Lenain; Robert Hagemann; David Carey
  10. A note on CostBenefit Analysis, the Marginal Cost of Public Funds, and the Marginal Excess Burden of Taxes By Johansson, Per-Olov; Kriström, Bengt
  11. Conditional grants to independent regional governments: The trade-off between incentives and wasteful grant-seeking By Ivo Bischoff; Frédéric Blaeschke
  12. Aid, Public Sector Fiscal Behaviour and Developing Country Debt By Simon Feeny; Mark McGillivray
  13. Distributional effects of a carbon tax on car fuels in France By Benjamin Bureau
  14. Reducing Rent Seeking by Providing Wide Public Service By Amihai Glazer; Stef Proost

  1. By: Paolo Liberati; Agnese Sacchi
    Abstract: The aim of this paper is to re-examine the relationship between fiscal federalism and the size of local governments. Traditionally, the empirical studies have focused on the different accountability power of grants and local taxes, concluding that the former encourages the growth and the latter contributes to contain local public spending. Yet, the existing literature is more silent about the possibility that different types of tax autonomy may still have differential impacts on the expansion of the local public sector. The paper addresses this issue by introducing a new testable hypothesis - the “Tax Separation Hypothesis” (TSH) - according to which tax decentralisation organised on tax bases used only by local governments would favour most the containment of local public expenditures, while that organised on tax base sharing (i.e. piggybacking mechanisms) is not expected to have a significant impact on the local government size. Using an unbalanced panel data set of OECD countries, we adopt the novel approach of disentangling the impact of local taxes - on income, property, and goods and services - on the size of the local public sector. In particular, property taxes only - mostly based on a “tax separation” scheme - seem to have a negative impact on the size of local government. Instead, both income taxes and general taxes on goods and services – often shared with central governments – have uncertain impacts on the size of local governments (and more frequently positive). We conclude that tax decentralisation is a necessary condition to contain local public expenditures, yet it is not sufficient, as a tax separation scheme would in fact be required.
    Keywords: Fiscal decentralisation; Tax sharing; Tax separation; Property taxes; Local government size.
    JEL: H71 H77 H2
    Date: 2010–06
  2. By: Monique Florenzano (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: Focusing on their analysis of the optimal public goods provision problem, this paper follows the parallel development of equilibrium models and mechanism design after the accomodation of Samuelson's definition of collective goods to the general equilibrium framework. Both paradigms lead to the negative conclusion of the impossibility of a fully decentralized optimal public goods provision through market or market-like institutions.
    Keywords: Lindahl-Foley equilibrium, Wicksell-Foley equilibrium, private provision equilibrium, free-rider problem, mechanism design, incentive compatibility, principal-agent models.
    JEL: B20 B21 H10 H41
    Date: 2010–11
  3. By: D'Andria, Diego
    Abstract: The paper discusses the applicability of optimal taxation theory to source-based capital incomes when significant tax evasion is observed. Without tax evasion a modified Ramsey Rule may reduce distortions brought by international capital mobility, leading to levying differentiated tax rates in domestic sectors inversely proportioned to observed elasticities in terms of capital mobility. The introduction of tax evasion brings additional complexity. The viability of optimal tax rates à la Ramsey is explored, and additional requirement (namely that tax evasion is either very low or very homogeneous) are shown to be necessary in order to allow policy-makers to obtain the tax rates minimizing total excess burden. Results are also provided to solve the optimal taxation objective when tax evasion is a relevant phenomenon and is not homogeneous throughout domestic sectors. --
    Keywords: optimal taxation,capital income taxation,tax evasion
    JEL: H21 H26
    Date: 2010
  4. By: Berninghaus, Siegfried; Güth, Werner; Schosser, Stephan
    Abstract: In repeated Public Good Games contributions might be influenced by different motives. The variety of motives for deciding between (more or less) free-riding probably explains the seemingly endless tradition of theoretical and experimental studies of repeated Public Good Games. To more clearly distinguish the motives, we try to enrich the choice set by allowing players not only to contribute but also to locate their contribution to one of the player positions. The location choice affects what individual players gain, but not the overall efficiency of contributing, and allows for discrimination, e.g., rewarding and sanctioning co-players differently. Our experimental results show that adding location choice promotes voluntary cooperation, although discrimination itself has no signifficant effect on behavior. --
    Keywords: Public Good Game,Neighborhood,Cooperation,Experimental Analysis
    Date: 2010
  5. By: Álvaro Pina
    Abstract: The process of fiscal consolidation and the need to step up the poor long term economic performance provide an opportunity to implement tax measures to improve efficiency and rebalance the economy. As consolidation progresses, switching taxes from labour to consumption and property offers an avenue to regain eroded competitiveness and to achieve employment gains, especially if the largest reductions of the labour tax wedge are targeted on low-wage workers. As the consumption tax base is particularly large in Portugal, such a shift could allow a sizeable cut in the tax wedge while still raising revenue, if needed. Productivity and welfare can be increased by simplifying the tax system, thus reducing the high compliance costs it imposes, especially on small and medium sized firms. Also, the tax system could be more environment-friendly by using it to further address transport-sector externalities, which are of particular concern in metropolitan areas. At the same time, the current tight budgetary pressures call for increased efficiency in tax collection. There is ample scope for base broadening through reduced tax expenditures in the major direct and indirect taxes, as well as in property taxation. This Working Paper relates to the 2010 OECD Economic Survey of Portugal (<P>Vers un système fiscal plus efficient et moins générateur de distorsions au Portugal<BR>Le processus d’assainissement des finances publiques et la nécessité de renforcer la mauvaise performance économique à long terme permettent de mettre en oeuvre des mesures fiscales pour améliorer l’efficacité et remettre l’économie sur une trajectoire de croissance. Au fur et à mesure que la consolidation fiscale progresse, le transfert de l’imposition des revenus du travail vers les impôts sur la consommation et sur le patrimoine offre un moyen de regagner la compétitivité perdue et de créer des emplois, surtout si les réductions du coin fiscal sur le travail se concentrent sur les titulaires de bas salaires. L’assiette des impôts sur la consommation étant particulièrement large au Portugal, ce transfert pourrait induire une baisse considérable du coin fiscal tout en augmentant les recettes, le cas échéant. La productivité et le bien-être peuvent être améliorés en simplifiant le système fiscal, réduisant ainsi les coûts de discipline élevés, en particulier vis-à-vis des petites et moyennes entreprises. De même, le système fiscal pourrait être plus favorable à l’environnement en s’attaquant aux externalités générées par les transports, qui sont particulièrement préoccupantes en zone urbaine. Parallèlement, les pressions budgétaires considérables exigent des gains d’efficience dans le recouvrement des impôts. Il existe de nombreuses possibilités d’élargir l’assiette en réduisant les dépenses fiscales pour les principaux impôts directs et indirects, ainsi que pour la fiscalité immobilière. Ce document de travail se rapporte à l’Étude économique du Portugal de 2010 ( surveys/portugal).
    Keywords: Portugal, property tax, labour tax wedge, VAT, personal income tax, corporate income tax, tax expenditures, tax and growth, environmental taxes, social security contributions, tax compliance costs, Portugal, impôt sur le revenu, dépense fiscale, TVA, cotisations de sécurité sociale, coûts liés au respect de la réglementation, croissance de l’impôt, impôt sur les bénéfices des sociétés, impôts sur le patrimoine, impôt sur l’environnement, coin fiscal sur le travail
    JEL: H20 H21 H23 H24 H25 H26 J32 J38
    Date: 2010–11–10
  6. By: Carpenter, Jeffrey P. (Middlebury College); Kariv, Shachar (University of California, Berkeley); Schotter, Andrew (New York University)
    Abstract: Recent experiments show that public goods can be provided at high levels when mutual monitoring and costly punishment are allowed. All these experiments, however, study monitoring and punishment in a setting where all agents can monitor and punish each other (i.e., in a complete network). The architecture of social networks becomes important when individuals can only monitor and punish the other individuals to whom they are connected by the network. We study several non-trivial network architectures that give rise to their own distinctive patterns of behavior. Nevertheless, a number of simple, yet fundamental, properties in graph theory allow us to interpret the variation in the patterns of behavior that arise in the laboratory and to explain the impact of network architecture on the efficiency and dynamics of the experimental outcomes.
    Keywords: experiment, networks, public good, monitoring, punishment
    JEL: D82 D83 C92
    Date: 2010–11
  7. By: Kojo, Naoko C.
    Abstract: This paper analyzes Botswana's medium-term fiscal sustainability in view of the expected depletion of diamonds in the future. The analysis shows that in the absence of policy adjustments, Botswana's current fiscal policy strategy is unsustainable over the longer term, which could endanger macroeconomic stability and Botswana's reputation as Africa's success story. Ensuring medium-term sustainability of Botswana's public finances requires stronger revenue collection, through improved revenue administration, greater tax enforcement, and the rationalization of tax exemptions in order to realize the full revenue potential. Opportunities also exist to generate more revenue from the non-mining sector through changes in the tax regime. At the same time, the government needs to maximize the effectiveness of public expenditure and bring down public spending to levels that are more in line with long-term revenue prospects. A greater control over the public sector wage bill is critically important. In-house capacity for macroeconomic monitoring and fiscal analysis also needs to be enhanced further. Looking ahead, growth of a dynamic non-mining sector is crucial for Botswana not only from the fiscal sustainability point of view, but from the point of view of achieving balanced development that will create jobs and deliver durable reduction in poverty and inequality. Fiscal policy will have to play a central role in this process.
    Keywords: Debt Markets,Economic Theory&Research,Public Sector Expenditure Policy,Access to Finance,Public Sector Economics
    Date: 2010–11–01
  8. By: Nara F. Monkam (Department of Economics, University of Pretoria)
    Abstract: In the context of a widespread focus on decentralisation in Africa, there has been an imperative to find suitable ways to maximise potential own revenue sources at all sub-national government levels. This need in particular and the need for greater domestic resource mobilisation by African states in general have been exacerbated by the current global financial crisis that has led many countries into recession and left developed and developing countries alike scrambling to find solutions at home. Indeed, greater domestic resource mobilisation will go a long way toward providing African countries with the means to finance their development agenda without relying excessively on external assistance.
    Date: 2010–11
  9. By: Patrick Lenain; Robert Hagemann; David Carey
    Abstract: The United States faces challenging budgetary prospects, as do most other OECD countries. The federal budget deficit widened considerably during the recession, reaching about 10% of GDP in both 2009 and 2010, reflecting the operation of automatic stabilizers and the policy response to the crisis. Consequently, public debt now stands at its highest level since the early–1950s. The Administration has proposed the objective of stabilising the debt-GDP ratio by 2015, which is realistic in scope and ambition, though it requires fiscal tightening measures which are yet to be identified. In the next decade, the effects of population ageing on entitlement spending will be increasingly felt and the fiscal situation could deteriorate significantly in the absence of structural reforms of pension and, especially, health-care programmes.<P>États-Unis : Rétablir la stabilité budgétaire<BR>Comme la quasi-totalité des autres pays de l'OCDE, les États-Unis sont confrontés à des perspectives budgétaires difficiles. Le déficit du budget fédéral s'est considérablement creusé au cours de la récession, pour atteindre environ 10 % du PIB tant en 2009 qu'en 2010, du fait du jeu des stabilisateurs automatiques et des mesures prises par les pouvoirs publics face à la crise. En conséquence, la dette publique s'établit maintenant à son plus haut niveau depuis le début des années 1950. Le gouvernement a proposé de viser une stabilisation du ratio dette/PIB d'ici à 2015, ce qui représente un objectif ambitieux mais réaliste, même si sa concrétisation passe par un durcissement de la politique budgétaire dont les modalités restent à préciser. Au cours des dix prochaines années, le vieillissement de la population fera de plus en plus sentir ses effets sur les dépenses correspondant à des droits à prestations, et la situation budgétaire risque de se dégrader nettement en l'absence de réformes structurelles du système de retraite et, surtout, du système de santé. La récente réforme du système de santé vise à freiner cette croissance des dépenses. La réforme sera plus efficace en réalisant des économies budgétaires à condition que les futures administrations et congrès ne remplacent pas les dispositions de la présente loi.
    Keywords: budgets, fiscal policy, health care, ageing populations, sustainability, deficit, debt, VAT, tax expenditures, United States 2010, budget, politique budgétaire, vieillissement de la population, système de santé, dépense fiscale, déficit, dette, TVA, États-Unis 2010
    JEL: B20 H51 H55 H60 H68 H75
    Date: 2010–10–25
  10. By: Johansson, Per-Olov (Stockholm School of Economics and CERE); Kriström, Bengt (CERE)
    Abstract: In this note we discuss how to treat taxes in a cost-benefit analysis (CBA). In particular we relate the shadow price of taxes in CBA to the concepts the marginal cost of public funds MCPF) and the marginal excess burden (MEB) of taxes. In particular we demonstrate that the MCPF is equal to one plus the MEB for a marginal increase in a distortionary tax.
    Keywords: Cost-benefit analysis; marginal cost of public funds; excess burden; taxation
    JEL: H21 H41 H43 Q51
    Date: 2010–03–30
  11. By: Ivo Bischoff (University of Kassel); Frédéric Blaeschke (University of Kassel)
    Abstract: The paper addresses the welfare implications of conditional grants in the presence of inefficiencies in regional production. While conditional grants may set incentives for regions to reduce inefficiencies, resources are wasted in the process of grant-seeking. We provide a theoretical model to assess the net effect on welfare. A game-theoretic context is developed to derive the optimal grant-distribution scheme. Depending on the characteristics of the collective good and of the regional government, the optimal ratio of conditional to block grants and the optimal number of recipients vary. The impact of different factors on the optimal grant-distribution scheme is derived.
    Keywords: conditional grants, inefficiencies, rent-seeking, fiscal federalism, opportunistic government
    JEL: D7 H77 H5 H11
    Date: 2010
  12. By: Simon Feeny; Mark McGillivray
    Abstract: This paper looks at public sector debt in developing countries, being concerned specifically with the relationship between aid inflows and the public sector borrowing requirement net of aid loans. After examining the public sector budget constraint and various conditions under which aid might lead to an increase in this borrowing, the paper surveys the empirical results of literature on aid and public sector fiscal behaviour. It finds that the results of a number of studies are consistent with aid leading to increases in this borrowing. Further investigation, in the form of econometric analysis of panel data, also points to this outcome. The paper then looks at a number of theoretical scenarios in which aid leads to increases in borrowing net of aid loans. [Discussion Pape rNo. 2002/40]
    Keywords: aid,borrowing,debt,fiscalbehaviour
    Date: 2010
  13. By: Benjamin Bureau (CERNA - Centre d'économie industrielle - Mines ParisTech)
    Abstract: This paper analyses the distributional effects of alternative scenarios of carbon taxes on car fuels using disaggregated French panel data from 2003 to 2006. It incorporates household price responsiveness that differs across income groups into a consumer surplus measure of tax burden. Carbon taxation is regressive before revenue recycling. However, taking into account the benefits from congestion reduction induced by the tax mitigates regressivity. We show also that recycling additional revenues from the carbon tax either in equal amounts to each household or according to household size makes poorest households better off.
    Keywords: carbon tax; distributional effects
    Date: 2010
  14. By: Amihai Glazer (Department of Economics, University of California-Irvine); Stef Proost (Center for Economic Studies, KULeuven)
    Abstract: A winning coalition which sets policy cannot always ensure that members of the coalition will be the ones getting benefits. Different jurisdictions (including members of the winning coalition) may then engage in costly rent seeking. Maximizing the welfare of the winning coalition may therefore require providing services to jurisdictions which are not members of the winning coalition, thereby reducing rent seeking by members of the winning coalition. The paper shows how this mechanism can generate insuffcient supply of public services, and offers another explanation for the use of co-funding requirements by the central government.
    Keywords: Publicly provided goods; Rent seeking
    JEL: H42 D72
    Date: 2010–11

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