nep-pbe New Economics Papers
on Public Economics
Issue of 2012‒01‒03
eleven papers chosen by
Keunjae Lee
Pusan National University

  1. Quality of taxation and the crisis: Tax shifts from a growth perspective By Doris Prammer
  2. The elasticity of taxable income of high earners: Evidence from Hungary By Áron Kiss; Pálma Mosberger
  3. How much can corporate tax reduction contribute to economic recovery, employment and feedback of tax revenue? By Kazuki Hiraga
  4. Economic Performance and Government Size By António Afonso; João Tovar-Valles
  5. Undeclared economic activity in central and eastern Europe -- how taxes contribute and how countries respond to the problem By Leibfritz, Willi
  6. Public spending efficiency in the Czech Republic: Fiscal policy framework and the main spending areas of pensions and healthcare By Zuzana Smidova
  7. Optimal tax enforcement under prospect theory By Gwenola Trotin; Amedeo Piolatto
  8. The effect of taxation on informal employment: evidence from the Russian flat tax reform By Slonimczyk, Fabian
  9. Coordinating tax reforms in the poorest countries : can lost tariffs be recouped ? By Wagle, Swarnim
  10. An Evaluation of the 1997 Fiscal Decentralization Reform in Mexico: The Case of the Health Sector By André Martínez; Carolina Rodríguez-Zamora
  11. Environmental Tax and the Distribution of Income among Heterogeneous Workers By Mireille Chiroleu-Assouline; Mouez Fodha

  1. By: Doris Prammer (European Commission)
    Abstract: One aim of consolidation after the crisis on the taxation side is to curb growth as little as possible. Economic literature suggests that some tax systems are more conducive to growth, in particular those relying on consumption, environmental and property taxation. This paper reflects on behavioural responses of economic agents to taxation and reviews the literature on the impact of tax structures on growth. Furthermore, it analyses the tax structure in the EU-27 Member States and assess if the crises has triggered a move towards tax systems more conducive to growth.
    Keywords: financial crisis, tax efficiency, optimal taxation, tax structure, tax shift
    JEL: H11 H21 H26 E62
    Date: 2011–12
  2. By: Áron Kiss (Magyar Nemzeti Bank (central bank of Hungary)); Pálma Mosberger (Central European University)
    Abstract: The paper studies how high-income taxpayers responded to the introduction of the ‘extraordinary tax on individuals’ in Hungary in 2007. The study is based on a panel of tax returns compiled by the Hungarian Tax Authority for the purposes of this study, containing information on 10 percent of tax-filers from 2005 and three subsequent years. We estimate the elasticity of taxable income with respect to the marginal net-of-tax rate and find that the taxable income of Hungarian high earners is moderately responsive to taxation: the estimated elasticity is about 0.2. This means that if the upper tax rate of the 2010 Hungarian tax system were increased by a small amount, the behavioral response of taxpayers would reduce the additional tax revenue by about 60 percent. We find evidence suggesting that the elasticity is a reflection of a labor supply response to the tax change on the intensive margin, and not a reflection of tax shifting, avoidance or evasion.
    Keywords: taxable income elasticity, personal income tax, tax avoidance
    JEL: H20 H24 H31 J22
    Date: 2011
  3. By: Kazuki Hiraga (Faculty of Economics, Keio University)
    Abstract: Recently, discussion of corporate tax reduction is hot political issue in Japan. Especially, some researchers and politicians insist on the reduction of corporate tax rate, following the fact of "Corporate tax paradox", which means that corporate tax revenue per Gross Domestic Product (GDP) has a negative correlation with effective corporate tax rate. However, quantitative effect of corporate tax reduction is unclear and the discussion of finance methods does not proceed. Therefore, we examine the quantitative effect of corporate tax reduction to employment, output and total tax revenue which is the cost of tax reduction. To analyze the effect of corporate tax reduction, we use Dynamic General Equilibrium (DGE) model and we use shooting algorithm to calculate the large corporate tax reduction (i.e. 5% or 20% corporate tax rate reduction). As a result, long-run effect of corporate tax reduction not only prompts to economic growth, but also increases total tax revenue, when financed by lump-sum transfer. Because current corporate tax rate is the right hand side of the Laffer curve. With respect to the magnitude of tax reduction, absolute impact of 20% reduction is much larger than that of 5%. But relative impact (i.e. multiplier effect of tax reduction) of 20% reduction is a little smaller than that of 5%. However, short-run effect is smaller than long-run one. In the short-run, since capital accumulation is insufficient, households decrease consumption and tax revenue.
    Date: 2011–11
  4. By: António Afonso; João Tovar-Valles
    Abstract: We construct a growth model with an explicit government role, where more government resources reduce the optimal level of private consumption and of output per worker. In the empirical analysis, for a panel of 108 countries from 1970-2008, we use different proxies for government size and institutional quality. Our results, consistent with the presented growth model, show a negative effect of the size of government on growth. Similarly, institutional quality has a positive impact on real growth, and government consumption is consistently detrimental to growth. Moreover, the negative effect of government size on growth is stronger the lower institutional quality, and the positive effect of institutional quality on growth increases with smaller governments. The negative effect on growth of the government size variables is more mitigated for Scandinavian legal origins, and stronger at lower levels of civil liberties and political rights. Finally, for the EU, better overall fiscal and expenditure rules improve growth.
    Keywords: growth, institutions, fiscal rules, pooled mean group, common correlated effects Classification-C10, C23, H11, H30, O40
    Date: 2011–10
  5. By: Leibfritz, Willi
    Abstract: The paper examines the incentives and distortions created by tax policy and administration structures that motivate individuals to undeclare or under-declare work in the new EU member countries. It analyses the tax level and the tax structure"mix"of tax instruments, the special taxation regimes set up to attract workers and entrepreneurs back into the formal economy and how tax policies such as the introduction of a"flat tax"on income from labor and capital impacted workers and entrepreneurs in terms of formalizing work. It also attempts to gain some insight into the effectiveness of tax administration by comparing some input and output measures As non-tax factors can amplify the adverse effects of taxes on the labor market and reduce the effectiveness of tax reform, some of these other economic framework conditions are also discussed. This paper concludes by refining the main results and possible best practices for tackling undeclared work. The paper argues that the new EU member countries have had mixed success tackling undeclared work. While taxation matters, other underlying conditions for formal sector activity are also important. Addressing the problem of undeclared work therefore requires a broad policy approach with further improvements in tax policies, tax administration, and in general economic framework conditions for formal sector activity.
    Keywords: Taxation&Subsidies,Emerging Markets,Public Sector Economics,Debt Markets,Tax Law
    Date: 2011–12–01
  6. By: Zuzana Smidova
    Abstract: The Czech fiscal position is generally sound and policy making is prudent. However, the fiscal framework was not strong enough to contain spending in the upturn and it would benefit from independent budget oversight. An anchor for the fiscal policy would be helpful, in the form of an explicit debt target coupled with corresponding spending ceilings and deficit targets. The ongoing fiscal consolidation, spending pressures and an already relatively high average tax burden necessitate public sector efficiency improvements. There is scope for improvement in the management of government spending, mainly by enhancing transparency, introducing performance-oriented budget indicators at both central and local levels, improving the management of state-owned enterprises and developing the procurement practices of the public sector. Legislated increases in the retirement age will improve pension system sustainability. A new defined contribution tier is being introduced which should help to diversify future retirement income. At the same time, there is uncertainty about the number of participants who will decide to divert their contribution to the new tier and hence about the implications for revenues in the existing defined benefit pension tier. Also, attention should be taken regarding administrative costs of the new tier, since these can have a significant impact on future replacement rates and therefore public support for it. With more emphasis on private savings, the financial literacy of the population also needs to be stepped up. In healthcare the authorities plan to continue improving the multi-insurer model through incremental reforms such as limiting pharmaceutical costs and improving provider-payment system. The potential for efficiency improvement in healthcare network planning and better care management should be explored, while ensuring that insurers and health providers are given the correct incentives. This working paper relates to the 2011 Economic Survey of the Czech Republic,<P>Efficience des dépenses publiques en République tchèque : cadre de politique budgétaire et principales zones de dépenses dans le domaine des retraites et des soins de santé<BR>La situation des finances publiques tchèques est globalement saine et la politique budgétaire est prudente. Cependant, le cadre budgétaire n'a pas permis de contenir les dépenses durant la phase ascendante du cycle et il pourrait être renforcé par une meilleure application des plafonds de dépenses à moyen terme et par la mise en place d'un mécanisme indépendant de supervision des finances publiques. La politique budgétaire gagnerait à avoir un point d'ancrage sous la forme d'un objectif d'endettement explicite assorti des objectifs de déficit et plafonds de dépenses correspondants. L'effort d'assainissement budgétaire en cours, la pression des dépenses et une charge fiscale moyenne déjà relativement lourde sont autant de facteurs qui nécessitent une amélioration de l'efficience du secteur public. Il est possible d'améliorer la gestion des dépenses publiques, principalement en favorisant une plus grande transparence, en adoptant des indicateurs budgétaires axés sur les résultats au niveau central et au niveau local, en renforçant la gouvernance des entreprises publiques et en perfectionnant les procédures de passation des marchés publics. Le relèvement programmé de l'âge de la retraite améliorera la viabilité du système de retraite. Le nouveau régime à cotisations définies qui va être mis en place devrait permettre de diversifier les sources de revenu des futurs retraités. En même temps, il est difficile de dire combien de personnes décideront de transférer une partie de leurs cotisations vers le nouveau régime et quelles retombées cela aura sur les recettes du régime à prestations définies. Par ailleurs, il faudrait faire attention aux frais administratifs du nouveau régime, car ces charges peuvent avoir une incidence non négligeable sur les taux futurs de remplacement et donc sur l'adhésion du public. Compte tenu du rôle accru dévolu à l'épargne-retraite privée, il faut aussi améliorer les connaissances financières de la population. Dans le domaine de la santé, les autorités ont l'intention de continuer à améliorer graduellement le modèle à assureurs multiples, avec des mesures progressives visant par exemple à limiter les dépenses en médicaments et à perfectionner le système de paiement des prestataires. Il faudrait explorer les possibilités de gains d'efficience dans la planification du réseau de santé et dans la gestion des soins, tout en veillant à offrir aux assureurs et aux prestataires de soins les incitations qui conviennent. Ce document de travail se rapporte à l’Étude économique de l’OCDE sur la République tchèque 2011,
    Keywords: budgets, public finances, pensions, health care, Czech Republic, fiscal frameworks, local governments, finances publiques, soins de santé, République tchèque, collectivités locales, cadre budgétaire
    JEL: H51 H55 H57 H61 H72
    Date: 2011–11–21
  7. By: Gwenola Trotin (EQUIPPE); Amedeo Piolatto (Universidad de Alicante)
    Abstract: Prospect Theory (PT) has become the most credited alternative to Expected Utility Theory (EUT) as a theory of decision under uncertainty. This paper characterizes the optimal income tax and audit schemes under tax evasion, when taxpayers behave as predicted by PT. We show that the standard EUT results keep holding under PT, under even weaker conditions. Under fair assumptions on the reference income and on the utility function of taxpayers, we show that the optimal audit probability function is non-increasing and the optimal tax function is nondecreasing and concave.
    Keywords: Tax evasion; Income tax enforcement; Prospect theory
    JEL: D81 H26 K42
    Date: 2011–12
  8. By: Slonimczyk, Fabian
    Abstract: The 2001 Russian tax reform reduced average tax rates for the personal income tax and the payroll or social tax. It also made the tax structure more regressive. Because individuals in the lower income bracket were for the most part not affected, it is possible to estimate the effects of the reform using a differences-in-differences approach. I study the effect of the reform on informal employment. Informality is defined using information on employment registration and self-employment. Applying parametric and semi-parametric techniques, I find evidence that the tax reform led to a significant reduction in the fraction of informal employees. Among the different forms of informality I study, the reform seems to have had the strongest effect on the prevalence of informal irregular activities. I also document stronger effects on individuals who benefited from the largest reductions in tax rates.
    Keywords: informal sector; entrepreneurship; tax reform; difference-in-difference; transition; Russia
    JEL: O17 J3 P2 H24
    Date: 2011
  9. By: Wagle, Swarnim
    Abstract: A revenue-neutral switch from trade taxes to domestic consumption taxes is fraught with implementation challenges in countries with a large informal sector. It is shown for a sample of low-income countries over 25 years that they have had a mixed record of offsetting reductions in trade tax revenue. The paper then analyzes the specific case of Nepal, using a unique data set compiled from unpublished customs records of imports, tariffs and all other taxes levied at the border. It estimates changes to revenue and domestic production associated with two sets of reforms: i) proportional tariff cuts coordinated with a strictly enforced value-added tax; and ii) proposed tariff cuts under a regional free trade agreement. It is shown that a revenue-neutral tax reform is conditional on the effectiveness with which domestic taxes are enforced. Furthermore, loss of revenue as a result of intra-regional free trade can be minimized through judicious use of Sensitive Lists that still cover substantially all the trade as required by Article XXIV of the GATT.
    Keywords: Debt Markets,Trade Policy,Economic Theory&Research,Free Trade,International Trade and Trade Rules
    Date: 2011–12–01
  10. By: André Martínez; Carolina Rodríguez-Zamora
    Abstract: This paper studies the impact of the health decentralization of funds and responsibilities that took place in Mexico in 1997 on state level health outcomes. It renders two main results. First, the magnitude of transfers from the federal government to states failed to take into account state-specific needs; instead, transfers were mainly determined by the pre-reform health expenditures of the federal government in each state. Second, decentralization did not boost the advances in health outcomes already achieved under the centralized health sector regime. We conclude by discussing plausible reasons for the disappointing impact of decentralization on health outcomes.
    Keywords: Fiscal decentralization, federalism, health.
    JEL: H51 H75
    Date: 2011–12
  11. By: Mireille Chiroleu-Assouline (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne); Mouez Fodha (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne)
    Abstract: This paper analyzes the environmental tax policy issues when labor is heterogeneous. The objective is to assess whether an environmental tax policy could be Pareto improving, when the revenue of the pollution tax is recycled by a change in the labor tax properties. We show that, depending on the heterogeneity characteristics of labor and on the initial structure of the tax system, a policy mix could be designed in order to leave each class of workers unharmed. It consists of an increase in progressivity together with a decrease in the flat rate component of the wage tax.
    Keywords: Environmental tax ; Heterogenous agents ; Welfare analysis ; Tax progressivity
    Date: 2011–11

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