nep-pbe New Economics Papers
on Public Economics
Issue of 2011‒03‒26
eight papers chosen by
Keunjae Lee
Pusan National University

  1. Revenue Equalization Systems in a Federation with Tax Evasion By Lisa Grazzini; Alessandro Petretto
  2. Fiscal Decentralization and Local Tax Effort By Raghbendra Jha; Woojin Kang; Hari K. Nagarajan
  3. Heterogeneous Productivity in Voluntary Public Good Provision: An Experimental Analysis By Fellner, Gerlinde; Iida, Yoshio; Kröger, Sabine; Seki, Erika
  4. America’s Underground Economy: Measuring the Size, Growth and Determinants of Income Tax Evasion in the U.S By Feige, Edgar L.; Cebula, Richard
  5. Optimal Taxation and Redistribution in a Two Sector Two Class Agents' Economy By Selim, Sheikh
  6. The Natural Resource Curse, Fiscal Decentralization, and Agglomeration Economies By Raveh, Ohad
  7. Income Inequality, Regional Development and Decentralisation in Western Europe By Andy Pike; Andrés Rodríguez-Pose; John Tomaney; Gianpiero Torrisi; Vassilis Tselios
  8. Fiscal policy and growth with complementarities and constraints on government By Misch, Florian; Gemmell, Norman; Kneller, Richard

  1. By: Lisa Grazzini (Università degli Studi di Firenze, Dipartimento di Scienze Economiche); Alessandro Petretto (Università degli Studi di Firenze, Dipartimento di Scienze Economiche)
    Abstract: We analyse how vertical or horizontal fiscal equalization affects the overprovision of local public goods due to vertical fiscal externality, when there is tax evasion. The regional governments overspending incentive is examined both in case of a fiscal equalization based on pretax earned income and reported taxable income.
    Keywords: Fiscal federalism; Equalization; Marginal Cost of Public Funds, Tax evasion
    JEL: H2 H41 H71 H77
    Date: 2011
  2. By: Raghbendra Jha; Woojin Kang; Hari K. Nagarajan
    Abstract: In India an important policy initiative has been the devolution of financial responsibilities to village level local governments called the Panchayats. The Preamble to this initiative is two fold. First such devolution would not only lead to increased public expenditure but also such expenditures being targeted in a manner consistent with the preferences and needs of the local population. Second, the local tax base would widen, thereby reducing the magnitude of the equalization transfers. However, the incentive structures behind the granting of such additional financial powers have been inadequately articulated. The results have been in the form of reduction in taxes collected, as well as a perceived shrinking of the tax base. These outcomes are posited by us to be due to ignoring the impact of cost of collecting taxes, as well as perverse impacts of devolution of expenditure decisions on local wages and profits. The extant literature has been so far unable to adequately explain the perverse outcomes of devolution especially where reactions to local tax efforts to transfers from the higher level governments are concerned. This paper has attempted to fill this gap. It models and measures the cost of taxation and uses this and the ratio of transfers that augment the local wage rate to those that do not, after controlling for a number of other village level characteristics, to explain tax collected at the local level within a framework that allows for mutual endogeneity of tax collected and transfers. We find that both the cost of tax collection and the ratio of transfers that augment the local wage rate to those that do not have a significant negative effect on tax collection, thus validating the conclusions of the theoretical model developed in this paper. Several policy conclusions are derived.
    Keywords: Devolution, Incentive Effects, Equalizing transfers, Panchayats and Local Government
    JEL: H71 H77
    Date: 2011
  3. By: Fellner, Gerlinde (University of Vienna); Iida, Yoshio (Kyoto Sangyo University); Kröger, Sabine (Université Laval); Seki, Erika (University of Aberdeen)
    Abstract: This article experimentally examines voluntary contributions when group members' marginal returns to the public good vary. The experiment implements two marginal return types, low and high, and uses the information that members have about the heterogeneity to identify the applied contribution norm. If agents are aware of the heterogeneity, contributions increase in general. However, high types contribute more than low types when contributions can be linked to the type of the donor but contribute less otherwise. Low types, on the other hand, contribute more than high types when group members are aware of the heterogeneity but contributions cannot be linked to types. Our results underline the importance of the information structure when persons with different abilities contribute to a joint project, as in the context of teamwork or charitable giving.
    Keywords: public goods, voluntary contribution mechanism, heterogeneity, information, norms
    JEL: C9 H41
    Date: 2011–03
  4. By: Feige, Edgar L.; Cebula, Richard
    Abstract: Abstract This study empirically investigates the extent of non compliance with the tax code and the determinants of federal income tax evasion in the U.S. Employing the most recent data we find that 18-19% of total reportable income is not properly reported to the IRS, giving rise to a “tax gap” approaching $500 billion dollars. Three time periods are studied, 1960-2008, 1970-2008, and 1980-2008. It is found across study periods that income tax evasion is an increasing function of the average effective federal income tax rate, the unemployment rate, public dissatisfaction with government, and per capita real GDP (adopted as a measure of income), and a decreasing function of the Tax Reform Act of 1986 (during its first two years of being implemented). Modest evidence of a negative impact of IRS audit rates on tax evasion is also detected.
    Keywords: Underground economy; unreported economy; tax evasion; tax gap; non compliance; Federal income tax
    JEL: O17 E52 E26 H26 E41
    Date: 2011–01
  5. By: Selim, Sheikh (Cardiff Business School)
    Abstract: We examine the optimal taxation problem in a two sector neoclassical economy with workers and capitalists. We show that in a steady state of this economy the optimal policy may involve a capital income tax or subsidy, differential taxation of labour income and redistribution. The level and the direction of the redistribution associated with such an optimal policy depends on the pre tax allocation of capital but not on the social weights attached to the different groups of taxpayers. Excess production of consumption goods creates a difference between the social marginal values of consumption and investment which in turns violates the production efficiency condition. Such a difference can be undone by taxing capital income from the consumption sector, and with this optimal policy the government can implement a redistribution scheme where both workers and capitalists bear the burden of distorting taxes. On the contrary, an optimal policy that involves a capital income subsidy in the production of consumption can implement allocations that minimize the relative price difference between consumption and investment that resulted from the excess production of investment goods.
    Keywords: Optimal taxation; Ramsey problem; Two Sector Economy; Redistribution
    JEL: C61 E13 E62 H21
    Date: 2011–03
  6. By: Raveh, Ohad
    Abstract: Natural resource abundance is a blessing for some countries, yet is a curse for others. The degree of fiscal decentralization may account for this divergent outcome. Resources tend to locate in remote, non-agglomerated, and sparsely populated areas; a high degree of fiscal decentralization gives a resource abundant region an advantage in the inter-regional tax competition over capital so that it attracts some capital from agglomerated and densely populated regions. Given a sufficiently high agglomeration level, any such movement of capital would bring a loss of output in the agglomerated region that outweighs the sum of gains from resource income and increased output in the remote region – so that aggregate product in the economy drops. This theory is empirically tested -and confirmed- building on Sachs and Warner’s influential works on the resource curse, employing the World Bank’s Fiscal Decentralization Indicators, and taking the United States as a case study.
    Keywords: Natural Resources; Economic Growth; Resource Curse; Fiscal Decentralization; Agglomeration Economies; Tax Competition
    JEL: O18 O57 O13 Q33 C21
    Date: 2011–01
  7. By: Andy Pike; Andrés Rodríguez-Pose; John Tomaney; Gianpiero Torrisi; Vassilis Tselios
    Abstract: This paper deals with the relationship between fiscal and political decentralisation, regional economic development, and income inequality within regions. Using Moderated Multiple Regression analysis applied to more than 100,000 individuals in the European Union (EU), it addresses two main questions. First, whether decentralisation in western Europe has an effect on within regional interpersonal inequality. Second, whether this possible relationship is mediated by the level of economic development of the region. The results of the analysis show that greater fiscal and political decentralisation is associated with lower interpersonal income inequality, but that this relationship is far from linear. As regional income rises, further decentralisation is connected to a lower decrease or even to an increase in inequality. This finding is robust to the measurement and definition of income inequality, as well as to the weighting of the spatial units by their population size.
    Keywords: Income inequality, income per capita, fiscal and political decentralisation,interaction, regions, Europe
    JEL: R51
    Date: 2011–03
  8. By: Misch, Florian; Gemmell, Norman; Kneller, Richard
    Abstract: This paper considers the implications of complementarity in private production and constraints on government for optimal fiscal policy. Using an endogenous growth model with public finance, it derives three central results which modify findings in the literature under standard assumptions. First, it shows that optimal public spending composition and taxation are interrelated so that first- and second-best fiscal policies differ. Second, it shows that the growth-maximizing fiscal policy is affected by preference parameters. Third, it shows that with budget rigidities and informational limitations, knowledge about the optimal fiscal policy parameter values is not necessary for growth-enhancing fiscal policy adjustments. --
    Keywords: Imperfect Knowledge,Economic Growth,Productive Public Spending,Optimal Fiscal Policy
    JEL: E62 H21 H50 O40
    Date: 2011

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