nep-pbe New Economics Papers
on Public Economics
Issue of 2012‒02‒20
fifteen papers chosen by
Keunjae Lee
Pusan National University

  1. The Fiscal-Growth Nexus By António Afonso; João Tovar Jalles
  2. A comparative view on the tax performance of developing countries: Regional patterns, non-tax revenue and governance By Ivanyna, Maksym; von Haldenwang, Christian
  3. Capital structure choice and company taxation: A meta-study By Feld, Lars P.; Heckemeyer, Jost H.; Overesch, Michael
  4. The Labor Supply and Tax Revenue Consequences of Federal Same-Sex Marriage Legalization By Stevenson, Adam
  5. Does Formal Work Pay? The Role of Labor Taxation and Social Benefit Design in the New EU Member States By Koettl, Johannes; Weber, Michael
  6. How sticky are local expenditures in Italy? Assessing the relevance of the “flypaper effect” through municipal data By Elena Gennari; Giovanna Messina
  7. The use of tax havens in exemption regimes By Gumpert, Anna; Hines, James R.; Schnitzer, Monika
  8. Business taxes and the electoral cycle By Foremny, Dirk; Riedel, Nadine
  9. Interjurisdictional Housing Prices and Spatial Amenities: Which Measures of Housing Prices Reflect Local Public Goods? By H. Spencer Banzhaf; Omar Farooque
  10. Government Spending and Private Activity By Valerie A. Ramey
  11. Short-Run Distributional Effects of Public Education in Greece By Koutsampelas, Christos; Tsakloglou, Panos
  12. Unemployment Benefits or Taxes: How Should Policy Makers Redistribute Income over the Business Cycle? By Ek, Susanne
  13. Investment and Growth in Rich and Poor Countries By Yin-Wong Cheung; Michael P. Dooley; Vladyslav Sushko
  14. Growth vs. level effect of population change on economic development: An inspection into human-capital-related mechanisms By Raouf BOUCEKKINE; B. MARTINEZ; J. R. RUIZ-TAMARIT
  15. Effect of social capital on income redistribution preferences: comparison of neighborhood externality between high- and low-income households By Yamamura, Eiji

  1. By: António Afonso; João Tovar Jalles
    Abstract: We assess the fiscal-growth nexus with a large country panel, accounting for the usually encountered econometric pitfalls. Our results show that revenues have no significant impact on growth whereas expenditures have negative effects. The same is true for the OECD with the addition that government revenue has a negative impact on growth. Taxes on income are usually detrimental to growth, as well as public wages, interest payments, subsidies and government consumption have a negative effect on growth. Social spending is detrimental to growth; spending on education and health boosts growth; and there is weak evidence supporting causality running from expenditures and revenues to output and TFP.
    Keywords: budgetary decomposition, crises, panel analysis.
    JEL: C23 E62 H50
    Date: 2012–01
  2. By: Ivanyna, Maksym; von Haldenwang, Christian
    Abstract: Some countries fail to ensure that their citizens and businesses make an appropriate contribution to the financing of public tasks. But not all countries with a low tax ratio automatically fall into this cat-egory. This paper presents an approach to bridge the gap between probabilistic statements based on statistical analyses, and country-specific information. Rather than defining general across-the-board criteria, the approach accounts for different development levels and other influencing factors, such as regional patterns, non-tax revenue and governance. Findings on individual countries or groups of countries should put governments, donors and international organisations in a better position to decide on tax reform programmes and aid modalities. --
    Keywords: tax system,tax ratio,governance,developing countries
    JEL: H20 H60 H27
    Date: 2012
  3. By: Feld, Lars P.; Heckemeyer, Jost H.; Overesch, Michael
    Abstract: This paper provides a quantitative review of the empirical literature on the tax impact on corporate debt financing. Synthesizing the evidence from 46 previous studies, we find that this impact is substantial. In particular, the tax rate proxy determines the outcome of primary analyses. Measures like the simulated marginal tax rate (Graham (1996a)) avoid a downward bias in estimates for the debt response to tax. Moreover, debt characteristics, econometric specifications, and the set of control-variables affect tax effects. Accounting for misspecification biases by means of meta-regressions, we predict a marginal tax effect on the debt ratio of 0.3. --
    Keywords: capital structure,corporate income tax,meta-analysis
    JEL: G30 H32 F23
    Date: 2011
  4. By: Stevenson, Adam
    Abstract: The issue of same-sex marriage legalization is increasingly part of the national political dialogue. This legalization would have a number of economic impacts, one of the most direct being a change in income tax payments, through the so-called marriage penalty. I estimate the effects of same-sex marriage legalization on federal income tax revenue. These estimates rely critically on the responsiveness of labor supply and marital choice to changes in the tax code. I present new evidence on both topics using changes in taxation generated from the 2003 Jobs and Growth Tax Relief Reconciliation Act. In addition, I propose a novel measure of the marriage penalty that incorporates the fact that agents will respond optimally to changes in marginal tax rates within the household.
    Keywords: labor supply; marriage penalty; sexual orientation; DOMA
    JEL: H24 J22 J12 D10
    Date: 2012–02–08
  5. By: Koettl, Johannes (World Bank); Weber, Michael (World Bank)
    Abstract: The analysis presented in this paper defines three different synthetic measurements of disincentives for formal work: two standard measurements, namely the tax wedge and the marginal effective tax rate (METR); and a new, innovative measurement called formalization tax rate (FTR). The novelty of the latter is that it measures disincentives stemming not only from labor taxation, but also from benefit withdrawal due to formalization. A descriptive analysis across a large number of OECD and Eastern European countries reveals that the disincentives for formal work – when measured through the FTR – are especially high for low-wage earners. This suggests that formal work might not pay in this segment of the labor market, in particular for the so-called mini-jobs and midi-jobs (low paying part-time work). Another novelty of the paper is its empirical approach. Using EU-SILC 2008 data and OECD Tax and Benefit data for six Eastern European countries (Bulgaria, Czech Republic, Estonia, Latvia, Poland, and Slovakia), we match disincentives for formal work to individual observations in a large data set. Applying a probit regression, the analysis finds a significant positive correlation between FTR or METR and the incidence of being informal. In other words, controlling for individual and job characteristics, the higher the FTR or the METR that individuals are facing is, the more likely they are to work informally. The tax wedge, on the other hand, yields a negative correlation. This indicates that the tax wedge is not sufficiently capturing disincentives for formal work. We also conclude that in cross-country analysis, it might be more useful to use the tax wedge that applies to low wage earners as opposed to average wage earners.
    Keywords: tax evasion, non-wage labor costs and benefits, informal employment, measurement of work disincentives, formalization tax rate
    JEL: H26 J32 O17
    Date: 2012–01
  6. By: Elena Gennari (Bank of Italy); Giovanna Messina (Bank of Italy)
    Abstract: An extensive literature analyses the impact of upper-tier transfers on the spending behaviour of lower level governments. According to the median voter framework, a transfer from the centre should act as a lump sum grant to residents and thus be spent by jurisdictions in the same proportion as residents are willing to spend their own money on public goods and services. But the actual local expenditure response to central government transfers is stronger than predicted by the theory, giving rise to the “flypaper effect”. Using the database on municipal accounts, and various other information sources, this work aims at assessing the size of the effect for Italian municipalities and the symmetry in the local expenditure response to central government transfers. Our dataset enables us also to investigate the role of some political factors. We find a sizeable effect and a remarkable asymmetric response of municipal expenditures to central government transfers as well as a significant role for political variables.
    Keywords: flypaper effect, intergovernmental transfers, fiscal federalism
    JEL: D72 H30 H72 H77
    Date: 2012–01
  7. By: Gumpert, Anna; Hines, James R.; Schnitzer, Monika
    Abstract: This paper analyzes the tax haven investment behavior of multinational firms from a country that exempts foreign income from taxation. High foreign tax rates generally encourage firms to invest in tax havens, though significant costs of reallocating taxable income dampen these incentives. The behavior of German manufacturing firms from 2002-2008 is consistent with this prediction: at the mean, one percentage point higher foreign tax rates are associated with three percentage point greater likelihoods of owning tax haven affiliates. This contrasts with earlier evidence for U.S. firms subject to home country taxation, which are more likely to invest in tax havens if they face lower foreign tax rates. Foreign tax rates appear to be unrelated to tax haven investments of German firms in service industries, possibly reflecting the difficulty they face in reallocating taxable income. --
    Keywords: tax havens,multinational firms,tax avoidance,profit shifting,manufacturing FDI,service FDI
    JEL: H87 F23
    Date: 2011
  8. By: Foremny, Dirk; Riedel, Nadine
    Abstract: The purpose of this paper is to assess whether politicians manipulate the timing of tax rate changes in a strategic way to maximize reelection prospects. To do so, we exploit the German local business tax as a testing ground which is set autonomously by German municipalities. As election dates vary across local councils, the data allows us to disentangle effects related to the timing of elections from common trends. Using a rich panel data-set for German municipalities, we assess the impact of elections on local business tax choices. The findings support the notion of a political cycle in tax setting behavior as the growth rate of the local business tax is significantly reduced in the election year and the year prior to the election, while it jumps up in the year after the election. This pattern turns out to be robust against a number of sensitivity checks. --
    Keywords: local business tax choice,political economy,election cycle
    JEL: H25 H71 D72
    Date: 2012
  9. By: H. Spencer Banzhaf; Omar Farooque
    Abstract: Understanding the spatial variation in housing prices plays a crucial role in topics ranging from the cost of living to quality-of-life indices to studies of public goods and household mobility. Yet analysts have not reached a consensus on the best source of such data, variously using self-reported values from the census, transactions values, tax assessments, and rental values. Additionally, while most studies use micro-level data, some have used summary statistics such as the median housing value. Assessing neighborhood price indices in Los Angeles, we find that indices based on transactions prices are highly correlated with indices based on self-reported values, but the former are better correlated with public goods. Moreover, rental values have a higher correlation with public goods and income levels than either asset-value measure. Finally, indices based on median values are poorly correlated with the other indices, public goods, and income.
    JEL: H4 R2 R30
    Date: 2012–02
  10. By: Valerie A. Ramey
    Abstract: This paper asks whether increases in government spending stimulate private activity. The first part of the paper studies private spending. Using a variety of identification methods and samples, I find that in most cases private spending falls significantly in response to an increase in government spending. These results imply that the average GDP multiplier lies below unity. In order to determine whether concurrent increases in tax rates dampen the spending multiplier, I use two different methods to adjust for tax effects. Neither method suggests significant effects of current tax rate changes on the spending multiplier. In the second part of the paper, I explore the effects of government spending on labor markets. I find that increases in government spending lower unemployment. Most specifications and samples imply, however, that virtually all of the effect is through an increase in government employment, not private employment. I thus conclude that on balance government spending does not appear to stimulate private activity.
    JEL: E24 E62
    Date: 2012–01
  11. By: Koutsampelas, Christos (University of Cyprus); Tsakloglou, Panos (Athens University of Economics and Business)
    Abstract: The present paper examines the short-run distributional impact of public education in Greece using the micro-data of the 2004/5 Household Budget Survey. The aggregate distributional impact of public education is found to be progressive although the incidence varies according to the level of education under examination. In-kind transfers of public education services in the fields of primary and secondary education lead to a considerable decline in relative inequality, whereas transfers in the field of tertiary education appear to have a small distributional impact whose size and sign depend on the treatment of tertiary education students living away from the parental home. When absolute inequality indices are used instead of the relative ones, primary education transfers retain their progressivity, while secondary education transfers appear almost neutral and tertiary education transfers become quite regressive. Finally, we use the EUROMOD tax-benefit microsimulation model in order to estimate the first-round distributional effects of a graduate tax imposed on the current stock of graduates. The main policy implications of the findings are outlined in the concluding section.
    Keywords: public education, redistribution, Greece
    JEL: I24 D31
    Date: 2012–01
  12. By: Ek, Susanne (Uppsala University)
    Abstract: This paper studies optimal unemployment benefit levels and optimal proportional income tax rates over the business cycle. Previous research suggests that policy makers should make unemployment insurance (UI) dependent on the business cycle because the UI system can be used to smooth consumption across different economic states. However, high benefits increase unemployment. An alternative way to redistribute income is to vary tax rates over the business cycle. In this paper, we develop an equilibrium search and matching model with risk-averse workers and two states, namely, a good and a bad state. The model yields potential ambiguity concerning the welfare effects of business cycle-dependent UI. The model is calibrated to United States (U.S.) labor market data. The numerical results suggest that higher benefits in the bad state are optimal, but the benefit differential is small. A more efficient way for policy makers to redistribute income over the business cycle is to decrease taxes in the bad state. Compared to an optimal uniform system, however, differentiation yields small welfare gains. Nevertheless, imposing two tax rates strictly dominates imposing two benefit levels. This finding is robust to a wide range of sensitivity checks.
    Keywords: job search, business cycles, unemployment insurance, time-varying benefits and taxes
    JEL: E32 H24 J64 J65
    Date: 2012–01
  13. By: Yin-Wong Cheung; Michael P. Dooley; Vladyslav Sushko
    Abstract: This paper revisits the association between investment and growth. The empirical findings highlight substantial heterogeneity for the effect of investment on growth and suggest a possible negative association. Results based on a battery of cross-sectional and time-series regressions show that the link between investment and growth has weakened over time and that investment in high-income countries is more likely to have a negative effect on growth. The adverse effect for high-income countries appears to have increased over time. An implication is that uphill capital flows could be associated with negative or zero returns. The result is robust to the presence of control variables that are commonly included in growth studies.
    JEL: F43 O4 O57
    Date: 2012–01
  14. By: Raouf BOUCEKKINE (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES), Center for Operations Research and Econometrics (CORE) and GREQAM,Aix-Marseille University, France); B. MARTINEZ (Department of Economics, Universidad Complutense de Madrid (Spain)); J. R. RUIZ-TAMARIT (Department of Economic Analysis, Universitat de Valencia (Spain), and Department of Economics, Université Catholique de Louvain (Belgium) (IRES))
    Abstract: This paper studies the different mechanisms and the dynamics through which demography is channelled to the economy. We analyze the role of demographic changes in the economic development process by studying the transitional and the long-run impact of both the rate of population growth and the initial population size on the levels of per capita human capital and income. We do that in an enlarged Lucas-Uzawa model with intergenerational altruism. In contrast to the existing theoretical literature, the long-run level effects of demographic changes, i.e. their impact on the levels of the variables along the balanced growth path, are deeply characterized in addition to the more standard long-run growth effects. We prove that the level effect of the population rate of growth is non-negative (positive in the empirically most relevant case) for the average level of human capital, but a priori ambiguous for the level of per capita income due to the interaction of three transmission mechanisms of demographic shocks, a standard one (dilution) and two non-standard (altruism and human capital accumulation). Overall, the sign of the level effects of population growth depend on preference and technology parameters, but numerically we show that the joint negative effect of dilution and altruism is always stronger than the finduced positive human capital effect. The growth effect of population growth depends basically on the attitude to intergenerational altruism and intertemporal substitution. Moreover, we also prove that the long-run level effects of population size on per capita human capital and income may be negative, nil, or positive, depending on the relationship between preferences and technology, while its growth effect is zero. Finally, we show that the model is able to replicate complicated time relationships between economic and demographic changes. In particular, it entails a negative effect of population growth on per capita income, which dominates in the initial periods, and a positive effect which restores a positive correlation between population growth and economic performance in the long term.
    Keywords: Human Capital, Population Growth, Population Size, Endogenous Growth, Level Effect, Growth Effect
    JEL: C61 C62 E2 J10 O41
    Date: 2011–10–28
  15. By: Yamamura, Eiji
    Abstract: This paper explores how individual preferences for income redistribution are influenced by social capital, which is measured by rates of participation in community activities. Individual-level data and place of residence data were combined to examine how social capital accumulated in residential areas influences an individual’s preference for income redistribution. After controlling for individual characteristics, I obtained the following key findings: people are more likely to prefer income redistribution in areas with higher rates of community participation. This tendency is more clearly observed in high-income groups than in low-income groups. This implies that one’s preference for income redistribution is influenced by psychological externalities.
    Keywords: Redistribution; Social capital; Inequality; Externality
    JEL: D63 H20 D30 Z13
    Date: 2012–01–23

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