nep-pbe New Economics Papers
on Public Economics
Issue of 2011‒03‒05
twenty-two papers chosen by
Keunjae Lee
Pusan National University

  1. Decentralization and Regional Government Size: an Application to the Spanish Case By Patricio Perez; David Cantarero
  2. Decentralization (Localization) & Corruption: New Cross-Country Evidence By Maksym Ivanyna; Anwar Shah
  3. The Long and Winding Road to Local Fiscal Equity in the United States: A Fifty Year Retrospective By Jorge Martinez-Vazquez; Andrey Timofeev
  4. Fiscal Performance and Sustainability of Local Government in South Africa — An Empirical Analysis By Niek J. Schoeman
  5. Tax System Change and the Impact of Tax Research By Richard M. Bird
  6. The social costs of responsibility By Steven J. Humphrey; Elke Renner
  7. Financing Subnational Governments with Decentralized Taxes By Roy Bahl
  8. The effect of church tax on church membership By Teemu Lyytikäinen; Torsten Santavirta
  9. Individual Income Taxation: Income, Consumption, or Dual? By Robin Boadway
  10. The Challenges of Corporate Income Taxes in a Globalised World By Emilio Albi
  11. Wealth and Wealth Transfer Taxation: A Survey By Helmuth Cremer; Pierre Pestieau
  12. Direct versus Indirect Taxation: Trends, Theory and Economic Significance By Jorge Martinez-Vazquez; Violeta Vulovic; Yongzheng Liu
  13. The Administration of Tax Systems By John Hasseldine
  14. Economic Growth and Inequality: The Role of Fiscal Policies By Walter Leonel Muinelo Gallo; Oriol Roca Sagalés
  15. Intra-Regional Equalization & Growth in Russia By Jorge Martinez-Vazquez; Andrey Timofeev
  16. CPB and Dutch fiscal policy in view of the financial crisis and ageing By Coen Teulings; Frits Bos
  17. The Scale and Scope of Environmental Taxation By Agnar Sandmo
  18. Corruption in the Tax Administration: Is there Scope for Wage Incentives? By Konstantin Pashev; Neven Valev; Vanya Pasheva
  19. A Tax Mix Change to Reduce Greenhouse Gas Emissions By Freebairn, John
  20. Fiscal Policy and TFP in the OECD: A Non-Stationary Panel Approach By R. SCHOONACKERS; F. HEYLEN
  21. The Economics of Excise Taxation By Sijbren Cnossen
  22. Tax Systems in the OECD: Recent Evolution, Competition and Convergence By Vito Tanzi

  1. By: Patricio Perez (University of Cantabria); David Cantarero (University of Cantabria)
    Abstract: This paper studies the impact of decentralization on the size of regional governments in Spain controlling for economies of scale, interregional heterogeneity and institutional framework, and successfully tests some implications of the model. Firstly, it supports the classic public goods theory of a trade-off-between the economic benefits of size and the costs of heterogeneity. Secondly, it rejects the “Leviathan” hypothesis because of vertical power imbalance and lack of fiscal competition among regions. Thirdly, the paper argues that government size is mediated by financial resources obtained through intergovernmental grants, consistent with welfare economics and positive economic politics.
    Keywords: government size, fiscal decentralization, leviathan hypothesis, vertical imbalances, flypaper effect.
    Date: 2010–11–01
  2. By: Maksym Ivanyna (The World Bank); Anwar Shah (The World Bank)
    Abstract: This paper attempts to improve our understanding and measurement of decentralization and its relationship with corruption in a worldwide context. This is done by presenting the conceptual underpinnings of such relationship as well as using superior and more defensible measures of both decentralization in its various dimensions as well as corruption for a sample of 182 countries. It is the first paper that treats various tiers of local governments (below intermediate order of government) as the unit of comparative analysis. In contrast, previous analyses had erroneously focused on subnational governments as the unit of analysis which yields invalid cross-country comparisons. By pursuing rigorous econometric analysis, the paper demonstrates that decentralization, when properly measured to mean moving government closer to people by empowering of local governments, is shown to have significant negative effect on the incidence of corruption regardless of the choice of the estimation procedures or the measures of corruption used. In terms of various dimensions of decentralized local governance, political decentralization matters even when fiscal decentralization is controlled for. Further voice (political accountability) is empirically shown to be more important in combating corruption than exit options made available though competition among jurisdictions.
    Date: 2010–04–01
  3. By: Jorge Martinez-Vazquez (International Studies Program. Andrew Young School of Policy Studies, Georgia State University); Andrey Timofeev (International Studies Program. Andrew Young School of Policy Studies, Georgia State University)
    Abstract: Outside the United States, fiscal equity is a common explicit objective for intergovernmental transfers at the central and regional levels, with transfers often having specific equalization targets. In contrast, the United States does not have a comprehensive federal transfer scheme for explicit fiscal equalization but rather employs an array of categorical and block grants, some of which are formula-based while others are project-driven. However, the allocation of many of these grants has equalization effects resulting in the narrowing of fiscal disparities among jurisdictions. Indeed, almost half of federal grants in the United States are allocated to healthcare and another quarter to income security programs. In addition, the largest category of state grants is allocated to school districts using formulae similar to those used in other countries for fiscal equalization by the central government, including the measurement of fiscal capacity and expenditure needs. Few studies have attempted to quantify the extent of equalization achieved with federal and state grants in a manner that would allow comparisons across states and over time. While recently several important studies have been published on fiscal inequities between and within states (e.g., Murray et al., AER 1998), their focus has been narrowed to school districts. In this study we set out to take this literature further by measuring the extent of equalization across local governments in the United States that is implicit in the federal grants system and more explicit in the grants implemented by the individual states. Rather than focusing on specific types of local services, we look at the evolution of per capita resources available to all types of local governments combined. The extent of equalization is measured by the ratio of inequality indices before and after the allocation of grants, following the methodology used in Martinez-Vazquez and Timofeev (JCE 2008). We find that, on average, state grants tend to considerably reduce the within-state inequality but tend to slightly increase the between-state inequality. States showing more equalization are those with less socio-political fractionalization, higher income inequality, less decentralization of revenue, and court-ordered reforms of school financing. The equalizing impact of direct federal grants to local governments has fluctuated over time but all in all it has been much smaller than that of the state grants. Overall, federal grants tend to slightly reduce the between-state inequality but slightly increase the within-state inequality. Because the within-state disparities in own-source revenues have become dominant, the overall level of inequality across local jurisdictions has tended to increase with the allocation of federal grants.
    Date: 2010–09–01
  4. By: Niek J. Schoeman (Department of Economics, University of Pretoria)
    Abstract: This paper analyses fiscal performance in terms of own-revenue collection and sustainability of local municipalities in South Africa. Criteria such as gross value added, revenue collected from own sources, debtors outstanding, the ageing of debt and dependency on grants are considered. The conclusion is that a large number of municipalities do not comply with the requirement that a “reasonable” amount of current expenditures be financed by means of own resources. Furthermore, local government finances are featured by substantial variance as far as collection of own income is concerned. While close to half of them finance more than 50 percent of their current expenditures from own resources, about one third are largely dependent on grants from upper spheres of government and generate less than 20 percent of current expenditures from own resources. As a whole, the fiscal sustainability of the local government sector, given the current scenario of flows, is a reason for concern. In order to comply with international criteria for solid fiscal performance, a number of municipalities will have to improve their performance with regard to own-revenue collection. The reason for this phenomenon seems to be the problem of “soft budgets” and an historic dependence on grants to finance not only capital expenditures but also most, if not all of, current expenditures. Due to historical and political factors, local governments in South Africa differ substantially in terms of potential revenue base, but it may be that in many cases potential revenue is not exploited and that the high level of dependency on grants is the result of inefficiency and lack of political will to be more self-reliant. In view of the wide-spread protest actions against poor quality of service delivery at the local government level, fiscal authorities should take a fresh look at the extent to which these governments are accountable for being more financially independent. This would help prevent the accumulation of debt as a result of growing backlogs in service payments.
    Keywords: Local government, fiscal sustainability, South Africa
    JEL: H71 H72
    Date: 2011–01
  5. By: Richard M. Bird (University of Toronto)
    Abstract: This paper considers the proposition that recent tax policy trends have been decisively influenced by tax research. In both the OECD countries and developing countries, the two most important changes in tax systems in recent decades have been the introduction of the VAT and the general lowering and flattening of statutory income tax rates. The downward pressure on personal and corporate income tax rates has certainly been supported, if not initiated, by the increasing research measuring the distortions caused by high marginal tax rates. Equally, the widespread adoption of VAT is probably due at least in part to acceptance of the economic argument that this form of sales tax is less economically distorting. For the most part, however, countries have not done these things because economists produced persuasive theories or empirical evidence that it would be good to do them but for their own reasons. After reviewing a number of aspects of how tax policy decisions are made in practice, the paper concludes that if tax scholars are interested in improving policy, they should focus not on the short-term political game within which policy decisions are inevitably made in all countries but rather on the long-term game of building up institutional capacity, both within and outside governments, to articulate relevant ideas for change, to collect and analyze relevant data, and to assess and criticize the effects of such changes as are made. Economic research may provide valuable inputs into policy decisions, both because it is the only approach focusing on efficiency concerns and because it can (but often fails to) say some useful things about the distributional outcomes that impact more immediately on policy decisions in most countries. But it is not and cannot be a substitute for the development of the political institutions that need to exist if ‘good’ tax policy is to be developed and implemented.
    Keywords: tax policy, tax research, developing countries, administratin, political economy
    Date: 2010–05–01
  6. By: Steven J. Humphrey (Fachbereich Wirtschaftwissenschaften, Universitaet Osnabrueck); Elke Renner (School of Economics, University of Nottingham)
    Abstract: We use an experimental lottery choice task and public goods game to examine if responsibility for the financial welfare of others affects decisionmaking behaviour in two different types of decision environments. We find no evidence that responsibility affects individual risk preferences. Responsibility does, however, crowd-out cooperation in a public goods game.
    Keywords: responsibility, risk attitudes, social preferences, public goods game
    JEL: C72 C91 D74 H41
    Date: 2011–02
  7. By: Roy Bahl (Andrew Young School of Policy Studies, Georgia State University)
    Abstract: This paper is about the case for assigning taxing powers to subnational governments, and about the structure of this revenue assignment. As Musgrave (1983) put it in perhaps the seminal paper on this subject, “Who Should Tax, Where and What”? This review reconsiders the Musgrave questions after 25 years, asks whether the international trend in tax assignment is in step with what economists have prescribed, and concludes with some thoughts about the most likely future for the decentralization of tax systems.
    Date: 2010–05–01
  8. By: Teemu Lyytikäinen; Torsten Santavirta
    Abstract: Abstract In this study we examine the effect of church tax on the church membership decision using Finnish data. We present both descriptive statistics from an opting-out website and econometric evidence exploiting the panel structure of a large individual-level data set. Our descriptive analysis shows that opting-out is concentrated towards the last days of the year, i.e., the last chance to avoid paying church tax for the entire coming year. Our econometric evidence suggests however, that the average effect of tax incentives in the whole population is very small in magnitude, while being statistically significant. The price elasticity of church membership is roughly -0.01. In addition, we find that church membership dropped substantially when a law change made opting-out significantly easier. This finding suggests that transaction costs play an important role in the membership decision.
    Keywords: Church tax, church membership, transaction cost
    JEL: H24 Z12 H31
    Date: 2010–12–30
  9. By: Robin Boadway (Queen's University, Canada and CEDifo)
    Abstract: In the course of our study of individual tax systems, we necessarily touch on all of the above issues. Before doing so, it is worth emphasizing that the personal tax is one of three main broad-based taxes whose bases overlap to a considerable extent, the others being the VAT and payroll taxes. The bases of the latter two taxes are roughly similar in present value terms. They differ only to the extent that an individual’s net inheritances (the present value of inheritances less bequests) and other net transfers are positive. Both are essentially taxes that distort the labor-leisure choice (including the participation decision), at least to the extent that payroll taxes are not used to finance actuarially fair transfer programs. Thus, if payroll taxes finance the equivalent of fully contributory pension funds, they are unlikely to impose a distortion on the labor-leisure choice. In practice, payroll taxes are usually not earmarked to individual accounts so this is not an issue. Since for most taxpayers the bulk of taxable income consists of labor income, there is considerable overlap among the three bases. The main difference is that individual taxes might include elements of capital income in the base (for which the overlap might be with wealth or property taxes). That being the case, the overall tax rate faced by individuals includes all three tax rates.
    Date: 2010–05–01
  10. By: Emilio Albi (University of Madrid, Spain)
    Abstract: This paper reviews corporate income taxation in the context of the economic globalisation experienced in the last thirty years. Given present flows of capital and income between nations and the importance of multinational firms, due consideration can no longer be given to corporate taxation without contemplating international issues. The main purpose of this paper is to examine the current corporate tax trends derived from the changes occurred in the last three decades with a view to defining potential policy prescriptions aimed at making corporate taxation less distortionary and costly.
    Date: 2010–05–01
  11. By: Helmuth Cremer (Toulouse School of Economics (GREMAQ and IDEI); Pierre Pestieau (CREPP, University of LIege and CORE)
    Abstract: This paper provides a survey of the theoretical literature on wealth and wealth transfer taxation. Both forms of taxation are highly controversial and we present arguments in favor and against them. We adopt a theoretical and normative perspective. Our approach is comprehensive in the sense that wealth taxation is discussed as part of an overall tax system, dominated by income and commodity taxation.We show that a crucial factor in designing the tax structure is the motive underlying wealth accumulation and transfers.
    Keywords: wealth taxation, inheritance taxation, capital income taxation
    Date: 2010–05–01
  12. By: Jorge Martinez-Vazquez (International Studies Program. Andrew Young School of Policy Studies, Georgia State University); Violeta Vulovic (International Studies Program. Andrew Young School of Policy Studies, Georgia State University); Yongzheng Liu (International Studies Program. Andrew Young School of Policy Studies, Georgia State University)
    Abstract: The choice of the direct-indirect tax mix also is likely to have, as we review below, important consequences in other dimensions of the economy including macroeconomic stability, disparities in income distribution, and foreign direct investment flows. All those, including economic growth, will be revisited in this paper. There are several other potential effects of the choice of tax mix, including the impact on risk taking and entrepreneurship or taxpayers’ moral and voluntary tax compliance. As Atkinson (1977) points out, supposedly taxpayers may show preference for indirect taxation on the grounds that it offers them choice and some politicians may have similar preferences because indirect taxes may be perceived by the public as being less visible. None of these other possible effects will be explored further in this paper.
    Date: 2010–05–01
  13. By: John Hasseldine (Tax Research Institute, Nottingham University Business School, University of Nottingham, U.K.)
    Abstract: This chapter analyses recent developments in tax administration and best practice. The chapter begins by contextualizing tax administration through a discussion on the necessary separation between the operational tasks performed in tax administration and the more generic, but nevertheless crucial, issues of organization, strategy and internal management required in tax administration. The chapter then describes the recent genesis and the current context of tax administration - especially in Europe (and in Spain). The chapter then identifies prior attempts at benchmarking best practice before finally offering some conjectures on future best practice.
    Date: 2010–05–01
  14. By: Walter Leonel Muinelo Gallo (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona); Oriol Roca Sagalés (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona)
    Abstract: This paper analyses the impact of different instruments of fiscal policy on economic growth as well as on income inequality, using an unbalanced panel of 43 upper-middle and high income countries for the period 1972-2006. We consider and estimate two individual equations explaining growth and inequality in order to assess the incidence of different fiscal policies. Firstly, our approach considers imposing orthogonal assumptions between growth and inequality in both equations, and secondly, it allows growth to be included in the inequality equation, and inequality to be included in the growth equation. The empirical results suggest that an increase in the size of government measured through current expenditures and direct taxes diminishes economic growth while reducing inequality, being public investment the only fiscal policy that may break this trade-off between efficiency and equity, since increases in this item reduces inequality without harming output. Therefore, the results reflect that the trade-off between efficiency and equity that governments often confront when designing their fiscal policies may be avoided.
    Keywords: fiscal policy, inequality, growth, panel data models
    JEL: E62 D31 O47 C23
    Date: 2011–02
  15. By: Jorge Martinez-Vazquez (International Studies Program. Andrew Young School of Policy Studies, Georgia State University); Andrey Timofeev (International Studies Program. Andrew Young School of Policy Studies, Georgia State University)
    Abstract: Until 2009, the Russian economy had been enjoying above 5% annual growth since it hit bottom along with the oil prices in 1998. However, the dynamics of the economic recovery have been very uneven across Russian regions. Thus, the determinants of regional economic growth are likely to have a strong sub-national level component. In this paper we examine the potential role played by the fiscal relations between regional governments and their constituent localities. Our empirical results strongly suggest that intra-regional fiscal inequality across local governments and inter-jurisdictional equalization policies pursued by the regional governments have a substantial impact on regional growth. Specifically, we find the following policy tradeoff: one standard deviation higher level of regional equalization translates into half a standard deviation lower rate of regional growth. One question for future research is whether decentralization designs into a hierarchical system result in more local government equalization in comparison to other inter-governmental design, such as a bifurcated system, where the central government is in charge of local equalization.
    Date: 2010–05–01
  16. By: Coen Teulings; Frits Bos
    Abstract: Independent national fiscal institutions can play a major role in fiscal policy and in maintaining and restoring sustainability of a country's public finance.
    JEL: A11 D70 E60 E62 H6 P10
    Date: 2010–12
  17. By: Agnar Sandmo (Norwegian Schol of Economics and Business Administration (NH))
    Abstract: This paper provides a discussion of the principles of environmental taxation. It considers the empirical identification of environmental taxes and the problems associated with the choice of the right tax base from the point of view of the correction of market incentives. It then presents a model of optimal second best environmental taxation when taxes must fulfil the double role of modifying market incentives and generating tax revenue. It also considers the issues of the double dividend, the interaction between intrinsic and extrinsic incentives and the problem of designing a tax policy for the alleviation of global environmental problems.
    Date: 2010–05–01
  18. By: Konstantin Pashev (Governance Monitoring Association Sofia and New BUlgarian University); Neven Valev (Department of Economics, Georgia State University); Vanya Pasheva (The World Bank)
    Abstract: We use unique survey data from Bulgaria’s tax administration to evaluate the determinants of corruption risk. We construct a novel measure of corruptibility, defined as the gap between actual income and the self-reported corruption-proof income. The survey data show that raising incomes leads to lower corruption risk. However, incomes would have to almost triple to eliminate the risk of corruption, which makes such a policy intervention politically and financially unfeasible. The results suggest that strengthening monitoring and control might be more cost-effective for addressing corruption risks in the case of the tax administration in Bulgaria. They also suggest that gender, age, and tenure can be used to inform human resource allocation.
    Keywords: taxes, corruption, wage policy, Bulgaria
    Date: 2010–05–01
  19. By: Freebairn, John
    Abstract: Placing a price on greenhouse gas emissions using an emissions tax or auctioning tradable permits provide the least cost government intervention to reduce pollution. Initial effects of the charge on pollution include an increase in the relative prices of greenhouse gas intensive products and production processes to reduce pollution, and a net increase in indirect taxes with a windfall boost to government revenue. There are at least three overlapping sets of economic efficiency, equity and political acceptance reasons for returning most of the windfall revenue gains to households as compensating income tax reductions and increases in social security payments as a tax mix change package. Most of the indirect tax increases will be passed onto consumers as a higher cost of living, albeit with changes in relative prices. With a likely regressive incidence, some compensation in a close to lump sum form has both equity and political acceptability claims. With no changes in market wages and nominal interest rates, the higher cost of living will further distort the effects of existing income taxes on labour and capital market decisions and their associated efficiency costs. Or, the cost of living increase will provide a catalyst for compensating increases in market wages and nominal interest rates, with the added risk of initiating an inflationary cycle. A tax mix change package has the potential to neutralise the negative effects of the associated increase in indirect taxation. Given the expected time path of increases in the pollution charge on greenhouse gas emissions, and of the windfall increase in indirect tax revenue, the details of new tax mix change package will need to be renegotiated every few years.
    Keywords: Resource /Energy Economics and Policy,
    Date: 2011
    Abstract: We analyse the in uence of fiscal policy on TFP and per capita output in a panel of OECD countries since 1975. We focus on the effects of government size, government deficits and the composition of taxes and expenditures. Compared to existing studies, our contribu- tion is double. First, we are able to identify both direct and indirect effects of fiscal policy on TFP. The latter stem from the in uence of taxes and expenditures on countries' access to and efficient use of the world stock of technology and knowledge. A second contribution is methodological. The role of the worldwide level of technology introduces a common factor (and therefore cross-sectional dependence) in individual countries' TFP. This common fac- tor is unobserved and most likely non-stationary. The existing empirical literature on fiscal policy and growth largely neglects the econometric complications that may arise from cross- sectionally correlated error terms due to unobserved (and potentially non-stationary) common factors. This leads to inconsistent estimates if the unobserved factors are correlated with the explanatory variables and to a spurious regression problem if they are non-stationary. We appropriately deal with these econometric issues by using the Common Correlated Effects Pooled estimator of Pesaran (2006) and Kapetanios et al. (2006). Our main findings are as follows. Through the direct channel, an overall increase in government size reduces TFP and per capita output. Expenditure shifts in favour of productive purposes have strong and ro- bust positive effects on TFP. Shifts in favour of social transfers reduce TFP. Deficit reduction policies raise TFP if they are financed by expenditure cuts. Through the indirect channel, a rise in the corporate tax rate negatively affects a country's access to the worldwide level of technology whereas education expenditures and human capital formation promote this access.
    Keywords: fiscal policy, total factor productivity, long-run output level, unobserved common factors, panel data
    JEL: C31 C33 E62 O38
    Date: 2011–01
  21. By: Sijbren Cnossen (Univesrity of Maastricht and Erasmus Univeristy Rotterdam)
    Abstract: This paper reviews the economics of taxation. It falls into three parts. The first part examines the rationale of excise taxation by reference to the non-revenue objectives that are pursued through the imposition of the various duties. The second part discusses the instruments that can be applied, i.e. duties, regulations and permits. The third part reviews some issues - discrimination, coordination and earmarking - that often arise in connection with excise taxation.
    Date: 2010–05–01
  22. By: Vito Tanzi
    Abstract: In this paper the focus of attention will be on the 30 countries that belong to the grouping that goes under the name of Organization for European Cooperation and Development (OECD). This international organization started as a European entity but over the years it has expanded its membership to include several countries from other continents. Its current membership includes countries from all continents with the exception of Africa.
    Date: 2010–05–01

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