nep-pbe New Economics Papers
on Public Economics
Issue of 2011‒10‒09
seventeen papers chosen by
Keunjae Lee
Pusan National University

  1. Western METRics: Marginal Effective Tax Rates in the Western Provinces By Alexandre Laurin; Finn Poschmann
  2. Measuring the burden of the corporate income tax under imperfect competition By Li Liu; Rosanne Altshuler
  3. Taxes, Prisons, and CFOs: The Effects of Increased Punishment on Corporate Tax Compliance in Ecuador By Paul E. Carrillo; M. Shahe Emran; Gabriela Aparicio
  4. Do Cheaters Bunch Together? Profit Taxes, Withholding Rates and Tax Evasion By Paul E. Carrillo; M. Shahe Emran; Anita Rivadeneira
  5. Income Taxation and the Choice of the Tax Rate Schedule: Sacrifice Principles and "Just" Tax Rates By Hans-Georg Petersen
  6. Optimal Fiscal Policy with Endogenous Product Variety By Fabio Ghironi; Sanjay K. Chugh
  7. Carbon Taxation in the EU: Expanding EU Carbon Price By David A. Weisbach
  8. Who Offers Tax-Based Business Development Incentives? By R. Alison Felix; James R. Hines, Jr.
  9. Tax Rate and Tax Base Competition for Foreign Direct Investment By Peter Egger; Horst Raff
  10. Optimal Government Spending Reversal in a Small Open Economy By Shigeto Kitano; Kenya Takaku
  11. Poverty, Human Capital, Life-cycle and the Tax and Transfer Bases: The Role of Education for Development and International Competition By Hans-Georg Petersen
  12. Economic integration and the optimal corporate tax structure with heterogeneous firms By Christian Bauer; Ronald B. Davies; Andreas Haufler
  13. The impact of turning a tax reduction into a tax credit to subsidize in-home services: an evaluation of the 2007 reform in France By C. MARBOT; D. ROY
  14. Optimal public investment, growth, and consumption: Evidence from African countries By Kwasi Fosu, Augustin; Getachew, Yoseph Yilma; Ziesemer, Thomas
  15. Influence of the Fiscal System on Income Distribution in Regions and Small Areas: Microsimulated CGE Model for Côte d'Ivoire By Bédia F. Aka; Souleymane S. Diallo
  16. Linking Investment and Fiscal Policies By António Afonso; João Tovar Jalles
  17. Health, growth and welfare: a theoritical appraisal of the long run impact of medical R&D By Bosi, Stefano; Laurent, Thierry

  1. By: Alexandre Laurin (C.D. Howe Institute); Finn Poschmann (C.D. Howe Institute)
    Abstract: What impact do the tax systems of Canada’s Western provinces have on families’take-home pay and seniors’ pension income, and how does it compare to other provinces? This report answers the question by looking at marginal effective tax rates (METRs) on personal income, which measure the impact of federal and provincial income taxes combined with reductions and clawbacks of income-tested tax credits and benefits.
    Keywords: Fiscal and Tax Competitiveness, marginal effective tax rates (METRs), Canada, Canadian western provinces
    JEL: E52 E61 E64
    Date: 2011–08
  2. By: Li Liu (Centre for Business Taxation, University of Oxford); Rosanne Altshuler (Department of Economics, Rutgers University)
    Abstract: We model and estimate the incidence of the corporate income tax under imperfect competition. Identification comes from variation in effective marginal tax rates in the United States across industries and time. Our empirical results suggest that labor bears a significant portion of the burden of the corporate income tax. In addition, we find that the elasticity of wages with respect to the corporate marginal effective tax rate increases with industry concentration. Over all industries, our estimates suggest that a one dollar increase in corporate tax revenue decreases wages by around 60 cents.
    Keywords: Tax incidence, Wage determination, Corporate income tax, Market structure
    JEL: H22 H25 H31
    Date: 2011
  3. By: Paul E. Carrillo (Department of Economics/Institute for International Economic Policy, George Washington University); M. Shahe Emran (Department of Economics/Institute for International Economic Policy, George Washington University and IPD, Columbia University); Gabriela Aparicio (Department of Economics, George Washington University)
    Abstract: This paper takes advantage of a rich firm level data set from Ecuador to analyze the effects of a reform in 2007 that introduced imprisonment for tax evasion and made a firm’s CFO liable for tax-crimes. Our dataset contains actual tax-return and financial-statement information for the universe of corporations in Ecuador from 2003 to 2007. We study the effects of higher punishment both at the intensive and extensive margins. We combine a difference-in-difference-in-difference approach with the DiNardo, Fortin and Lemieux decomposition method. This allows us to estimate the heterogeneous effects of the reform across the distribution of firms. We find that, at the intensive margin the reform led to an average 10% increase in real corporate tax payments. However, positive effects are only found at the right tail of the tax distribution (above the 75th percentile). At the extensive margin, the probability of entry into the tax-net increased, but most of the firms that entered the tax net claimed zero taxes.
    Keywords: Tax evasion, corporate tax compliance, tax reform, developing country, punishment, Ecuador
    JEL: H26 H32 O12
    Date: 2011–04
  4. By: Paul E. Carrillo (Department of Economics/Institute for International Economic Policy, George Washington University); M. Shahe Emran (Department of Economics/Institute for International Economic Policy, George Washington University and IPD, Columbia University); Anita Rivadeneira (Centro de Estudios Fiscales, Servicio de Rentas Internas – Ecuador)
    Abstract: We use firm-level administrative data from Ecuador to study the implications of 'reverse withholding' for firms' tax behavior. Withholding does not affect tax liability of firms, but it may result in a discontinuity in the audit probability around the withholding threshold. Exploiting variation in withholding rates across industries and over time, we find that firms' profit taxes concentrate near the withholding rate. To explore the link between bunching and evasion, we use data from third party reports on sales and costs. We show that the firms that bunch are more likely to conceal their sales and inflate their costs. Finally, we create a profile of the firms that bunch and of their general managers: medium size firms in the coastal region headed by single males are significantly more likely to bunch and, presumably, to evade taxes.
    Keywords: Withholding, Reverse Withholding, Firms, Profit Tax, Bunching, Tax Evasion, Ecuador
    JEL: H25 H26 O23 O12
    Date: 2011–03
  5. By: Hans-Georg Petersen
    Abstract: In the history of economic thoughts the problem of a "just" tax rate structure has played an important role. The paper reconsiders the discussions of the last two centuries and sheds additional light on the concrete tax schedules using the more recent methods of tax theory. Even if the substitution effects which play an important role in the theory of optimal taxation are neglected, the slope in the diminishing marginal utility of income causes tax rate structures reaching from accelerated progression to delayed regression. Interestingly the principle of equal relative sacrifice combined with a Bernoulli utility function yields a delayed progression, which is connected with a negative income tax.
    Keywords: income tax, sacrifice principle, tax rate schedule, cardinal utility function
    JEL: H21 H24 D31 B13
    Date: 2011–06
  6. By: Fabio Ghironi (Boston College); Sanjay K. Chugh (University of Maryland)
    Abstract: We study Ramsey-optimal fiscal policy in an economy in which product varieties are the result of forward-looking investment decisions by firms. There are two main results. First, depending on the particular form of variety aggregation in preferences, firms' dividend payments may be either subsidized or taxed in the long run. This policy balances monopoly incentives for product creation with consumers' welfare benefit of product variety. In the most empirically relevant form of variety aggregation, socially efficient outcomes entail a substantial tax on dividend income, removing the incentive for over-accumulation of capital, which takes the form of variety. Second, optimal policy induces dramatically smaller, but efficient, fluctuations of both capital and labor markets than in a calibrated exogenous policy. Decentralization requires zero intertemporal distortions and constant static distortions over the cycle. The results relate to Ramsey theory, which we show by developing welfare-relevant concepts of efficiency that take into account product creation.
    Keywords: zero intertemporal distortions, endogenous product variety, optimal taxation
    JEL: E20 E21 E22 E32 E62
    Date: 2011–08–11
  7. By: David A. Weisbach (University of Chicago)
    Abstract: The current pricing mechanism for carbon in the EU, the EU emissions trading system, only covers 40 percent of emissions. Carbon taxation currently plays no role. The Commission has recently proposed to revise the energy tax system in the EU to include a carbon tax component. This paper evaluates the Commission proposal and considers the possible expansion of the EU carbon pricing base either by expanding emissions trading to cover more sectors or by enacting a carbon tax. It concludes that there are strong arguments for expanding the carbon pricing base, as suggested by the Commission. Nevertheless, expanding the base should done through a unified system, such as expanding the coverage of the emissions trading system or enacting an economywide carbon tax rather than through having side-by-side taxes and trading, as in the Commission proposal.
    Keywords: Carbon Tax
    Date: 2011
  8. By: R. Alison Felix; James R. Hines, Jr.
    Abstract: Many American communities seek to attract or retain businesses with tax abatements, tax credits, or tax increment financing of infrastructure projects (TIFs). The evidence for 1999 indicates that communities are most likely to offer one or more of these business development incentives if their residents have low incomes, if they are located close to state borders, and if their states have troubled political cultures. Ten percent greater median household income is associated with a 3.2 percent lower probability of offering incentives; ten percent greater distance from a state border is associated with a 1.0 percent lower probability of offering incentives; and a 10 percent higher rate at which government officials are convicted of federal corruption crimes is associated with a 1.2 percent greater probability of offering business incentives. TIFs are the preferred incentive of communities whose residents have household incomes between $25,000 and $75,000; whereas TIFs are much less commonly offered by communities whose residents have household incomes below $25,000. The need to finance TIFs out of incremental tax revenues may make it infeasible for many of the poorest of communities to use TIFs for local business development.
    JEL: H25 H71 H73
    Date: 2011–09
  9. By: Peter Egger; Horst Raff
    Abstract: This paper argues that the large reduction in corporate tax rates and only gradual widening of tax bases in many countries over the last decades are consistent with tougher international competition for foreign direct investment (FDI). To make this point we develop a model in which governments compete for FDI using corporate tax rates and tax bases. The model’s predictions regarding the slope of policy reaction functions and the response of equilibrium tax parameters to trade costs and market size are shown to be consistent with panel data for 43 developed countries and emerging markets. Using estimated policy reaction functions we simulate the effect of regional trade integration and find that this integration has contributed significantly to the observed fall in corporate tax rates
    Keywords: corporate taxes; tax competition; foreign direct investment; multinational firms; free-trade areas; regional integration
    JEL: F15 F23 H20 H25
    Date: 2011–09
  10. By: Shigeto Kitano (Research Institute for Economics and Business Administration, Kobe University); Kenya Takaku (Graduate School of Economics, Nagoya University)
    Abstract: This paper reexamines optimal debt stabilization policy in a small open economy borrowing from abroad. We incorporate spending reversals as a policy option available to policy-makers for stabilizing public debt. Results show that spending reversals can be welfare-improving and that there exists an optimal degree of spending reversal if the debt elasticity of the country-specific risk premium is high. The tradeoff between smoothing the tax rate and stabilizing the sovereign interest rate in the discussion of optimal tax rate policy (Bi, 2010) does not arise. Spending reversals can lower both the tax rate volatility and that of the interest rate.
    Keywords: sovereign debt, debt stabilization, welfare, spending reversals, small open economy
    JEL: F41
    Date: 2011–09
  11. By: Hans-Georg Petersen
    Abstract: The paper is based on an individual life-cycle model, which describes the purely economic components of human capital. The present value of human capital is determined by all future income flows, which at the same time constitute the individual as well as the total tax base of a nation. Therefore, the income of the productive population determines the total tax revenue, which is spent for public goods (including education) and transfers (for poverty reduction). The efficient design of the education system (by private and public education investments) determines the quality of the human capital stock as well as the future gross income flows. The costs of public goods and the transfer expenditures have to be financed from the total tax revenue, which also affects the individual tax burden via the specific tax bases and tax rates. Especially the redistribution of income is connected with serious disincentives, influencing the preferences for work and leisure as well as for consumption and saving. An efficient tax and transfer system being accompanied by an education system financed in public private partnership, which treats equally labor and capital income, sets positive incentives for the formation of human, financial, and real capital. An important prerequisite for a sustainable growth process is the efficient design of the social security system, being based on the family as well as a collective risk equalization scheme. If that system is diminishing absolute poverty in an appropriate time period by transfers and vocational education measures for the grown-up as well as high quality primary, secondary and tertiary education programs for the children, the transfer expenditure would decrease and the tax bases (income and consumption) increase, lowering the burden on the productive population. For the first time, this micro model presented in this paper pools all the relevant variables for development within a simple life-cycle model, which can also be used for a powerful analysis of the current failures in existing tax and transfer schemes and fruitful empirical investigations. Hence, an efficient tax and transfer scheme strongly contributes to an improved national position in the global competition.
    Keywords: poverty, human capital, life-cycle analysis, lifetime income, education, taxation, transfers, redistribution, risk equalization, social security
    JEL: D1 D31 D91 H21 H31 H55 I21 I22 I32 J17 J24 O15 P46
    Date: 2011–07
  12. By: Christian Bauer (University of Munich); Ronald B. Davies (University College Dublin); Andreas Haufler (University of Munich)
    Abstract: We study the optimal combination of corporate tax rate and tax base in a model of a small open economy with heterogeneous firms. We show that it is optimal for the small country's government to effectively subsidize capital inputs by granting a tax allowance in excess of the true costs of capital. Economic integration reduces the optimal capital subsidy and drives low-productivity firms from the small country's home market, replacing them with high-productivity exporters from abroad. This endogenous policy response creates a selection effect that increases the average productivity of home firms when trade barriers fall, in addition to the well-known direct effects.
    Keywords: corporate tax reform, trade liberalization, firm heterogeneity
    JEL: H25 H87 F15
    Date: 2011
  13. By: C. MARBOT (Insee); D. ROY (Insee)
    Abstract: Since 1991, French taxpayers who employ someone to work at their home (for care, cleaning, etc.) can deduct 50 % of the employment cost from their income tax. In 2007, the tax reduction was turned into a tax credit, making lower income households eligible. However, this change was limited to economically active home employers, which narrowed the scope of the reform. To measure its impact, we use exhaustive tax data, built into a panel covering the 2006-2008 period. First, we study the changes in the amounts refunded, in the number and in the characteristics of home employers. In 2008, households spent 7.8 billion euros on in-home services. 2.6 billion were refunded to them in tax reduction, only 151 million in actual tax credit. Among home employers that did not benefit from the tax reduction scheme in 2006, only 14% later became recipients of the tax credit. This is because the requirement to be economically active excludes the elderly, who make up most of the less well-off home employers. Next, we try to measure the causal change in the consumption of in-home services attributable to the new tax credit. Depending on the definition of the incentive, between 15 % and 25 % of households are impacted. Combining matching and difference-in-difference estimates, we find a significant increase both in the number of home employers and in their expenditure.
    Keywords: Tax credit, home employers, in-home services, tax incentives, policy evaluation, matching, difference-in-difference estimates
    JEL: D13 H23 H31
    Date: 2011
  14. By: Kwasi Fosu, Augustin (UNU-WIDER); Getachew, Yoseph Yilma (Durham Business School, Durham University); Ziesemer, Thomas (UNU-MERIT, and Department of Economics, Maastricht UNiversity)
    Abstract: How much does public capital matter for economic growth? How large should it be? This paper attempts to answer these questions, taking the case of SSA countries. It develops and estimates a model that posits a nonlinear relationship between public investment and growth, to determine the growth-maximizing public investment GDP share. It empirically also accounts for the crowding-in and crowding-out effects between public and private investment, with equations estimated separately and simultaneously, using System GMM. The paper further runs simulation and examines the public investment GDP share that maximizes consumption. This is estimated to be between 8.4 percent and 11.0 percent. The results from estimating the growth model are in the middle of this range, which is larger than the observed value of 7.2 percent at the end of the sample period. These outcomes suggest that, on average, there has been public under-investment in Africa, contrary to previous findings.
    Keywords: Public investment, Economic Growth, Nonlinearity
    JEL: H40 O40 O47
    Date: 2011
  15. By: Bédia F. Aka; Souleymane S. Diallo
    Abstract: The objective of this paper is to examine how a small open economy such as Côte d’Ivoire (CI) can obtain growth-based internal tax resources, and how the tax system affects households and individuals through relative prices. A microsimulated CGE model is used to analyse the effects of an alternative tax system on households by utilizing a survey. It is postulated that the military and political crisis that started in 1999 with the first coup d’etat in Côte d’Ivoire is transitory and that CI has an internal tax policy capacity. This paper indicates that an alternative tax structure can reduce distortion in regional poverty, inequality for households, and in cities and small areas of the country. A model is formulated using Côte d’Ivoire’s 1998-based social accounting matrix and the 1998 population survey of 4,200 households. The main findings of this study are that the post-crisis tax policies envisioned by the government (reducing the tax rate on firms, reducing import taxes and increasing taxes on household income) result in an increase in poverty and inequality at the regional, city and small area levels.
    Date: 2011–01
  16. By: António Afonso; João Tovar Jalles
    Abstract: We assess the relevance of budgetary components for private and public investment using data for a panel of 95 countries for the period 1970-2008, and accounting for the usually encountered econometric pitfalls. Our results show a positive effect attributed to total government expenditures and to public investment in fostering private investment, and negative effects of government expenditure on wages and government consumption spending on private investment. Interest payments and subsidies have a negative effect on both types of investment (particularly in the emerging economies sub-group). Social security spending has a negative effect on private investment for the full and OECD samples, whereas government health spending has a positive and significant impact on private investment.
    Keywords: budgetary decomposition, panel analysis, causality, non-linearities, fiscal-rules Classification-C23, E62, H50
    Date: 2011–08
  17. By: Bosi, Stefano; Laurent, Thierry
    Abstract: This paper aims at providing a simple economic framework to address the question of the optimal share of investments in medical R&D in total public spending. In order to capture the long-run impact of tax-financed medical R&D on the growth rate, we develop an endogenous growth model in the spirit of Barro [1990]. The model focuses on the optimal sharing of public resources between consumption and (non-health) investment, medical R&D and other health expenditures. It emphasizes the key role played by the public health-related R&D in enhancing economic growth and welfare in the long run.
    Keywords: Public health ; Medical R&D; Public spending; Endogenous growth
    JEL: H51 I18 H23 O31
    Date: 2011–08–06

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