nep-pbe New Economics Papers
on Public Economics
Issue of 2011‒02‒05
five papers chosen by
Keunjae Lee
Pusan National University

  1. Welfare State - The Scandinavian Model By Torben M. Andersen
  2. Collective risk sharing: The social safety net and employment By Torben M. Andersen
  4. The Deficit-Reducing Potential of a Financial Speculation Tax By Dean Baker
  5. Redistributive Taxation, Incentives, and the Intertemporal Evolution of Human Capital By Christian Ferreda; Matías Tapia

  1. By: Torben M. Andersen (School of Economics and Management, Aarhus University, Denmark)
    Abstract: The Scandinavian countries have achieved both a high level of living standard (measured by e.g. average income) and an egalitarian outcome (measured by e.g. income inequality) despite a very large public sector and thus a large tax burden (about 50 % of GDP). The Scandinavian cluster thus poses a challenge to the standard view on the tradeoff between efficiency and equity. How come that the Scandinavian countries have been able to achieve high equality without much sacrifice of efficiency in terms of income? This paper addresses this question with the outset in recent work stressing the insurance aspect of the welfare state. A broad interpretation of the Scandinavian welfare model in terms of social insurance or common pool aspects is given. The effects of social insurance are discussed and the potential incentive problems arising in a common pool arrangement are argued to be mitigated by a number of counteracting mechanisms. Issues in policy design and the political economy of the welfare state are also discussed.
    Keywords: Risk-sharing, incentives, common-pool problems, political support
    JEL: H1 E62 F22 P1
    Date: 2011–01–24
  2. By: Torben M. Andersen (School of Economics and Management, Aarhus University, Denmark)
    Abstract: The direct effects as well as the policy responses to the financial crisis have raised the issue whether individuals carry too large costs and consequences of changes which are beyond their control and influence. Collective risk sharing is considered insufficient and in need of expansion. The policy focus is thus shifting from incentives to insurance, and it is debated how welfare state arrangements can trade-off efficiency and equity concerns. While this trade-off is core to economics, most policy analyses and advice focus only on the incentive or distortion side. This paper looks at the insurance side based on the fact that it is impossible to separate redistribution from collective risk sharing. It is argued that insurance effects are crucial for behavioural responses and hence the relation between efficiency and equity. However, two factors limit the scope for collective risk sharing, namely, adverse incentive effects (common pool) and the nature of shocks. It is argued that the former depends crucially on policy design, and in particular the extent to which eligibility criteria in the social safety net have an active focus on job search and employment. Collective risk sharing schemes are vulnerable to persistent shocks, and it is an important question whether welfare arrangements themselves are a source of more inertia or persistence in the adjustment process. It is argued that there is no evidence that this is the case, but nonetheless persistent shocks pose a serious challenge to an extended welfare state.
    Keywords: Risk, insurance, common pool, shocks, persistence
    JEL: H1 E62 F22 P1
    Date: 2011–01–24
  3. By: Javier Díaz-Giménez (IESE Business School); Josep Pijoan-Mas (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: In this article we quantify the aggregate, distributional and welfare consequences of investment expensing and progressivity in flat-tax reforms of the United Sates economy. We find that investment expensing as in the Hall and Rabushka type of reform brings about sizable output gains and non-trivial increase in after-tax income inequality. But we also find that it results in large aggregate welfare gains in steady-state. Two additional flat-tax reforms with full investment expensing and varying degrees of progressivity reveal that the distributional role of the tax-exemption in the labor income tax is limited. But we also find that the progressivity of the reforms matters for welfare: economies with more progressive consumption-based flat-taxes are good for the very poor and are ultimately preferred by a Benthamite social planner because they allow households to do more consumption and leisure smoothing. Our findings suggest that moving towards a progressive consumption-based flat tax scheme could achieve the goals of raising government income, stimulating the economy and providing a safety net for the households that have been hit the hardest by the recession.
    Keywords: Flat-tax reforms, progressivity, efficiency, inequality.
    JEL: D31 E62 H23
    Date: 2011–01
  4. By: Dean Baker
    Abstract: While a number of commissions and organizations around Washington have produced plans for reducing the projected deficit in the decades ahead, most have not included a financial speculation tax (FST) in the mix. This seems peculiar since an FST has several features that could make it attractive as a revenue source.
    Keywords: taxes, speculation, transactions, Wall Street
    JEL: G G1 G18 G2 G24 G28 G3 G38
    Date: 2011–01
  5. By: Christian Ferreda; Matías Tapia
    Abstract: This paper contributes to the literature on redistributive taxation and human capital dynamics by explicitly analyzing the role of incentives in the education market where human capital is produced. We introduce an explicit education market with heterogeneous private schools in a dynamic stochastic general equilibrium model with overlapping generations and human capital accumulation. We use the model to simulate the effects of taxation on growth, intergenerational mobility, inequality, and welfare. Equalization in education expenditures reduces incentives for differentiation in the education market, with the distribution of education investments shifting towards the least productive schools. This has significant consequences on equilibrium outcomes, and highlights the importance of incorporating the role of intermediation when analyzing redistribution policies.
    Keywords: Human capital, school market, redistributive taxation, inequality, efficiency.
    JEL: E24 H21 I21
    Date: 2010

This nep-pbe issue is ©2011 by Keunjae Lee. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.