nep-pbe New Economics Papers
on Public Economics
Issue of 2011‒10‒22
nine papers chosen by
Keunjae Lee
Pusan National University

  1. Political competition and leadership in tax competition By Rupayan Pal; Ajay Sharma
  2. Methodology for Measuring the Fiscal Effect of Regional Expenditures in Colombia By Michael Jorratt
  3. Legislative turnover, fiscal policy, and economic growth: evidence from U.S. state legislatures By Uppal, Yogesh; Glazer, Amihai
  4. Optimal income taxation with tax avoidance By Casamatta, Georges
  5. Evaluation of the Effectiveness and Efficiency of Tax Benefits By Jerónimo Roca
  6. Local Municipality Productive Efficiency and Its Determinants in South Africa By Nara F. Monkam
  7. Private Provision of Public Goods and Information Diffusion in Social Groups By Scharf, Kimberley Ann
  8. Proposed Alterations to the Local Government Fiscal Stress Indicator System for the State of Michigan By Plerhoples, Christina; Scorsone, Eric
  9. Fiscal Multipliers Over the Business Cycle By Michaillat, Pascal

  1. By: Rupayan Pal (Indira Gandhi Institute of Development Research); Ajay Sharma (Indira Gandhi Institute of Development Research)
    Abstract: In this paper, we introduce political competition in a sequential move tax competition game between two regions for foreign owned mobile capital. It shows that in case of sequential move, political delegation takes place only in the follower region, not in the leader region. Moreover, political competition need not necessarily lead to higher tax rate in equilibrium. These results are in the sharp contrast to the existing results.
    Keywords: Mobile capital, Tax competition, Political competition, Leadership, Public good
    JEL: F21 H25 D70 H42 D40 R50
    Date: 2011–10
  2. By: Michael Jorratt
    Abstract: The concept of tax expenditure refers to the revenue the treasury foregoes as a result of applying preferential tax regimes with a view to aiding or stimulating certain economic sectors, activities, regions, or agents. Defined in this way, tax expenditures are additional tools for governments to utilize in state intervention, which aim to achieve similar results to those that can be obtained through direct public expenditure. As such, they should be subject to the same controls and transparency criteria as the latter. The general objective of this paper is to develop a methodology to estimate tax expenditures at a regional level, based on the particular case of Colombia.
    Keywords: Economics :: Fiscal Policy, Colombia; Fiscal Effect; Regional Tax Expenditures
    Date: 2010–06
  3. By: Uppal, Yogesh; Glazer, Amihai
    Abstract: An examination of how increased turnover among legislators in the fifty U.S. states affects fiscal policy and economic growth finds that it makes legislators short-sighted. Turnover increases the size of government by increasing the shares of both total spending and taxes in income. In particular, turnover increases capital expenditure and income taxes, both of which may cause long-run distortions in the economy. Further, increased turnover, by resulting in inefficient fiscal policy, reduces long-term economic growth.
    Keywords: Government size; State finances; Political competition; Legislative turnover; Composition of spending; short-sighted behavior
    JEL: H54 H20 H72 H30 H24 H71 H53 H40 H11 H51 H52
    Date: 2011–10
  4. By: Casamatta, Georges
    Abstract: We follow the approach of Grochulski (2007), who determines the optimal income tax schedule when individuals have the possibility of avoiding paying taxes. We however modify his setup by considering a convex concealment cost function. This assumption violates the subadditivity property used in Grochulski (2007) and this has strong implications for the design of the tax schedule. This latter indeed shows that, with subadditivity, all individuals should declare their true income. Tax avoidance is thus not optimal. With a convex cost function, we find that a subset of individuals, located in the interior of the income distribution, should be allowed to avoid taxes, provided that the marginal cost of avoiding the first euro is suciently small. We also provide a characterization of the optimal income tax curve.
    Keywords: fiscal avoidance; optimal income tax
    JEL: H21
    Date: 2011–10
  5. By: Jerónimo Roca
    Abstract: This paper analyzes the role of fiscal incentives in developing countries and provides a theoretical evaluation of benefits and costs of certain taxes. It also reviews the most notable characteristics of tax incentives frequently granted in Latin America are revised. Special attention is paid to their effectiveness, administration costs, and distortions in allocating resources.
    Keywords: Economics :: Fiscal Policy, Effectiveness; Efficiency; Tax Benefits
    Date: 2010–06
  6. By: Nara F. Monkam (Department of Economics, University of Pretoria)
    Abstract: The paper assesses the technical efficiency of 231 local municipalities in South Africa for 2007 and investigates the potential determinants of efficiency gaps among local municipalities in the country using the nonparametric Data Envelopment Analysis (DEA) and the parametric Stochastic Frontier Analysis (SFA) techniques. In relation to the DEA technique, efficiency scores are subsequently explained in a second stage regression model with potential explanatory factors using a Tobit regression model. The results show that on average, B1 and B3 municipalities could have theoretically achieved the same level of basic services with about 16% and 80% fewer resources respectively; the difference between the most efficient and the least efficient municipalities being quite substantial. The results also show that B4 municipalities could have theoretically achieved the same level of basic services with about 62% fewer operating expenditures. Furthermore, fiscal autonomy and the number and skill levels of the top management of a municipality’s administration were found to influence the productive efficiency of municipalities in South Africa. The paper findings raise concerns over the future of local municipalities in South Africa, especially B3 and B4 municipalities, about their capability to efficiently deliver on expected outcomes on a sustainable basis.
    Keywords: Municipalities, spending efficiency, sub-national government finance, fiscal decentralization; DEA analysis, Tobit, SFA
    JEL: H11 H71 H72 H77
    Date: 2011–10
  7. By: Scharf, Kimberley Ann
    Abstract: We describe a model of fundraising in social groups, where private information about quality of provision is transmitted by social proximity. Individuals engage in voluntary provision of a pure collective good that is consumed by both neighbors and non-neighbors. We show that, unlike in the case of private goods, better informed individuals face positive incentives to incur a cost to share information with their neighbors. These incentives are stronger, and provision of the pure public good greater, the smaller are individuals’ social neighborhoods.
    Keywords: private provision of public goods; social learning
    JEL: D6 D7 H1 L3
    Date: 2011–10
  8. By: Plerhoples, Christina; Scorsone, Eric
    Abstract: Monitoring the fiscal stress levels of local governments at the state level is a critical strategy for predicting and preventing fiscal crises. The State of Michigan currently monitors the fiscal stress levels of its local governments using a set of indicators created in 2002. These indicators, however, are not capturing all types of fiscal stress and are not being utilized to their fullest. In this report, we outline proposed changes to the current system, calculate the proposed indicators, and then compare them to the current system. The new fiscal stress indicator system proposed here builds upon the current system in five ways. First, it better captures different types of fiscal stress that are being missed in the current system, including those caused by transfers of money from one fund to another and unfunded long term liabilities. Second, it utilizes a mixture of scoring methods that help to determine both relative stress and absolute stress. Third, it measures both current stress levels and changes in stress levels in order to predict future stress in localities that are currently healthy and those that are worsening. Fourth, it captures the magnitude of stress within each indicator rather than assigning a point of either zero or one based on a single threshold. And fifth, it differentiates between different types of fiscal stress which allows it to be better linked with possible solutions based on the specific type of fiscal stress faced by each locality. Two key points are proposed in this paper. First, fiscal stress involves not only financial distress, but service level distress. If a locality is not providing an adequate level of services to its citizens, it is in stress. A city that has balanced books but a high level of unemployment or crime is not a healthy city. Second, not all types of fiscal stress will be solved through the use of short term strategies such as emergency financial managers and emergency loans. Some stress is chronic and requires solutions that are more structural in nature. Short term solutions may work well in situations where the stress is short term and perhaps internally controlled. They may not be successful, however, in situations where stress is chronic and external in nature. The new indicator system helps to distinguish between these different types of fiscal stress. However, fiscal stress indicator systems do not work in isolation. Results must be analyzed and acted upon and indicators must be published in a timely manner. Cities that fall within the distressed range should be further examined and solutions should be sought. The new system will facilitate this action by helping the state to not only acknowledge and predict fiscal stress, but to better link it with strategies that are suited for the specific type of fiscal stress in each locality. This will help the state to not only alleviate fiscal stress, but to prevent it before it occurs.
    Keywords: Fiscal Stress Indicators, Local Government, Public Economics, H72,
    Date: 2011–04
  9. By: Michaillat, Pascal
    Abstract: This paper develops a theory characterizing the effects of fiscal policy on unemployment over the business cycle. The theory is based on a model of equilibrium unemployment in which jobs are rationed in recessions. Fiscal policy in the form of government spending on public-sector jobs reduces unemployment, especially during recessions: the fiscal multiplier---the reduction in unemployment rate achieved by spending one dollar on public-sector jobs---is positive and countercyclical. Although the labor market always sees vast flows of workers and a great deal of matching, recessions are periods of acute job shortage without much competition for workers among recruiting firms. Hence hiring in the public sector reduces unemployment effectively because it does not crowd out hiring in the private sector much. An implication is that empirical studies should control for the state of the economy when fiscal policies are implemented to estimate accurately the amplitude of fiscal multipliers in recessions.
    Keywords: business cycle; fiscal multiplier; job rationing; matching frictions; unemployment
    JEL: E24 E32 E62 J64
    Date: 2011–10

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