nep-pbe New Economics Papers
on Public Economics
Issue of 2011‒09‒05
six papers chosen by
Keunjae Lee
Pusan National University

  1. Culture and Taxes: Towards Identifying Tax Competition By Beatrix Eugster; Raphaël Parchet
  2. Fiscal Decentralization and Peasants' Financial Burden in China By Jing Jin; Chunli Shen; Heng-fu Zou
  3. Public Debt Accumulation and Fiscal Consolidation By Oguro, Kazumasa; Sato, Motohiro
  4. Public Infrastructure Investment, Output Dynamics, and Balanced Budget Fiscal Rules By Bom, P.R.D.; Ligthart, J.E.
  5. Vertical aspects of sub-national deficits: the impact of fiscal rules and tax Autonomy in European countries By Foremny, Dirk
  6. Effects of Growth and Volatility in Public Expenditures on Economic Growth: Theory and Evidence By Liutang Gong; Heng-fu Zou

  1. By: Beatrix Eugster; Raphaël Parchet
    Abstract: We propose a new strategy to identify the existence of interjurisdictional tax competition and to estimate its spatial reach. Our strategy rests on differences between desired tax levels, determined by culture-specific preferences, and equilibrium tax levels, determined by interjurisdictional fiscal externalities as well as by preferences. While fiscal preferences differ systematically and demonstrably between French-speaking and German-speaking Swiss regions, we find that local income tax burdens do not change discretely at the language border but exhibit smooth spatial gradients. The slope of these gradients implies that tax competition constrains tax choices of jurisdictions with a preference for higher taxes at a distance of up to 20 kilometres. Hence, tax competition does constrain income taxation by local governments. When, as in the Swiss system, local jurisdictions are constrained to decide on a single shifter of an exogenously given tax schedule, the effect of tax competition are confined to a small spatial scale.
    Keywords: tax competition; fiscal federalism; culture
    JEL: H31 H71 Z10
    Date: 2011–08
  2. By: Jing Jin (Central University of Finance and Economics); Chunli Shen (University of Maryland); Heng-fu Zou (Development Research Group, the World Bank)
    Abstract: This paper sheds light on the heavy financial burden on peasants in China's fiscal decentralization system. Using a political economy framework, this paper explores the tax-farming nature of China's fiscally decentralized system and examines why the system incurs a particularly heavy financial burden on peasants. Specifically, it points out that a political hierarchy financed by a tax-farming system in China, fails to contain the exploitative behavior of local officials, which results in the expenditure devolution and revenue centralization within the hierarchy. Ultimately, peasants bear the brunt of the tax burden. As the financial pressure of excessive levies and fees reaches a perilous point, peasants are resorting to violent protests. Unless a fiscally decentralized system with horizontal accountability mechanisms evolves, the country¡¯s ability to sustain a centralized polity may become increasingly undermined. A case study of township finance is used to exemplify the exploitative nature of China¡¯s fiscal decentralization system.
    Date: 2011
  3. By: Oguro, Kazumasa; Sato, Motohiro
    Abstract: In this paper, we analyze the relationship between interest rates on government bonds (GB) and fiscal consolidation rule by using an overlapping generation model with endogenous and stochastic growth settings. Our key findings are summarized as follows. First, interest rates of GB may be declining as public debt accumulates relative to private capital, as opposed to the conventional view that buildup of public debt accompanies a rise in interest rates. Second, fiscal consolidation rule plays a key role in determining interest rates in equilibrium. Third, the economy may exhibit discrete changes with interest rates diverging, implying that our observation of relatively low GB interest rates does not assure the continuation of that trend in the future. Fourth, a preventive tax increase to contain public debt at sustainable levels will not gain the political support of existing generations, whose life span is limited. Citizens prefer to shift the ultimate burden of public debt to future generations.
    Keywords: Overlapping generation model, interest rate on government bond, fiscal consolidation rule, default risk
    JEL: E17 H30 H5 H60 E62 H63
    Date: 2011–05
  4. By: Bom, P.R.D.; Ligthart, J.E. (Tilburg University, Center for Economic Research)
    Abstract: We study the dynamic output and welfare effects of public infrastructure investment under a balanced budget fiscal rule, using an overlapping generations model of a small open economy. The government finances public investment by employing distortionary labor taxes. We find a negative short-run output multiplier, which (in absolute terms) exceeds the positive long-run output multiplier. In contrast to conventional results regarding public investment shocks, we obtain dampened cycles in output and the labor tax rate. The cyclical dynamics are induced by the interaction of households' finite life spans, the wealth effect on labor supply, and the balanced budget fiscal rule. Finally, we show that, for a plausible calibration of our model, households' lifetime welfare improves.
    Keywords: Infrastructure capital;public investment;distortionary taxation;fiscal policy;Yaari-Blanchard overlapping generations.
    JEL: E62 F41 H54
    Date: 2011
  5. By: Foremny, Dirk
    Abstract: This article offers an empirical answer to the question of which institutional arrangements can help to keep the accounts of sub-national governments in balance. I take into consideration the autonomy that these governments have in raising their revenues and fiscal rules as formulated in law or constitutions. The former works as an implicit constraint since governments with more autonomy might assume higher responsibility for accumulated deficits. The latter works as a direct explicit constraint on sub-national borrowing, but might be subject to endogeneity through preferences for fiscal responsibility. This potential source of bias is taken into account by using IV techniques for fiscal rules. Results from my original dataset, covering full information for 14 years of all EU15 countries, show that the effectiveness of tools depends critically on the federal background. Fiscal rules work in unitary countries, while higher tax autonomy yields lower deficits in federations.
    Keywords: sub-national deficits; fiscal rules; soft budget constraints; fiscal federalism
    JEL: H71 H74 E61
    Date: 2011–08–26
  6. By: Liutang Gong (Guanghua School of Management, Peking University; Institute for Advanced Study, Wuhan University); Heng-fu Zou (Guanghua School of Management, Peking University; Institute for Advanced Study, Wuhan University; Development Research Group, The World Bank)
    Abstract: This paper sets up a theoretical model linking the growth rate of the economy to the growth rate and volatility of different government expenditures. On a theoretical basis, it is found that volatility in government spending can be positively or negatively associated with economic growth depending on the intertemporal elasticity in consumption. On an empirical basis, it is rather surprising to find no association between growth in capital expenditure and output growth, whereas growth in current expenditure seems to stimulate output growth. In particular, growth in transportation and communication seems to have a negative effect on output growth. It is also very interesting to find that the rises in the volatility in the growth of general public services, transportation, and communication have a positive effect on output growth.
    Keywords: Public expenditures, Volatility, Economic growth
    JEL: E62 I00 H5 O4
    Date: 2011

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