nep-pbe New Economics Papers
on Public Economics
Issue of 2012‒03‒08
24 papers chosen by
Keunjae Lee
Pusan National University

  1. Fiscal decentralization and public sector efficiency: Evidence from OECD countries By Adam, Antonis; Delis, Manthos D; Kammas, Pantelis
  2. A Partial Race to the Bottom: Corporate Tax Developments in Emerging and Developing Economies By Alexander Klemm; S. M. Ali Abbas; Junhyung Park; Sukhmani Bedi
  3. Local Public Goods Provision in the Post-Agricultural Tax Era in Rural China By Hiroshi Sato; Sai Ding
  4. Differential Taxation and Firms' Financial Leverage: Evidence from the Introduction of a Flat Tax on Interest Income By Frank M. Fossen; Martin Simmler
  5. Taxation and Labor Force Participation: The Case of Italy By Stefania Marcassa; Fabrizio Colonna
  6. Effects of One-Sided Fiscal Decentralization on Environmental Efficiency of Chinese Provinces By Hang Xiong
  7. Optimal public investment, growth and consumption: evidence from African countries By Augustin Kwasi Fosu; Yoseph Yilma Getachew; Thomas Ziesemer
  8. Revenue decentralization and inflation: a re-evaluation By Baskaran, Thushyanthan
  9. Business taxes and the electoral cycle By Dirk Foremny; Nadine Riedel
  10. How Do Laffer Curves Differ Across Countries? By Mathias Trabandt; Harald Uhlig
  11. Does an R&D Tax Credit Affect R&D Expenditure? The Japanese Tax Credit Reform in 2003 By Hiroyuki Kasahara; Katsumi Shimotsu; Michio Suzuki
  12. The Incentive Effects of Marginal Tax Rates: Evidence from the Interwar Era By Christina D. Romer; David H. Romer
  13. Tax Competition for Foreign Direct Investments and the Nature of the Incumbent Firm By Oscar Amerighi; Giuseppe De Feo
  14. Taxation and the Earnings of Husbands and Wives: Evidence from Sweden By M Gelber, Alexander
  15. And Yet they Co-Move! Public Capital and Productivity in OECD: A Panel Cointegration Analysis with Cross-Section Dependence By Anna Bottaso; Carolina Castagnetti; Maurizio Conti
  16. Why Public Investment fails to raise economic growth in some countries?: The role of corruption By M. Emranul Haque; Richard Kneller
  17. Public Infrastructure, non Cooperative Investments and Endogenous Growth By Charles Figuières; Fabien Prieur; Mabel Tidball
  18. Taxation and political stability By Mutascu, Mihai; Tiwari, Aviral; Estrada, Fernando
  19. Gasoline Taxes and Consumer Behavior By Shanjun Li; Joshua Linn; Erich Muehlegger
  21. Fairness and Income Redistribution- an Analysis of the Latin American Tax System By Erik Alencar de Figueiredo; Cleiton Roberto da Fonseca Silva
  22. Fiscal Rules: Theoretical Issues and Historical Experiences By Charles Wyplosz
  23. New Development of Fiscal Decentralization in China By Wang, Zhiguo; Ma, Liang
  24. Effectiveness of cigarette tax in Japan By Kazuki Kamimura

  1. By: Adam, Antonis; Delis, Manthos D; Kammas, Pantelis
    Abstract: This paper empirically examines the relationship between fiscal decentralization and public sector efficiency. A country-level dataset is used to measure public sector efficiency in delivering education and health services and the new indices are regressed on well-established decentralization measures. The analysis is carried out for 21 OECD countries, between 1970 and 2000. Irrespective of whether public sector efficiency concerns education or health services, an inverted U-shaped relationship has been identified between government efficiency in providing these services and fiscal decentralization. This relationship is robust across several different specifications and estimation methods.
    Keywords: Public sector efficiency; fiscal decentralization; OECD countries
    JEL: H50 H11 C14 C24
    Date: 2012–02–23
  2. By: Alexander Klemm; S. M. Ali Abbas; Junhyung Park; Sukhmani Bedi
    Abstract: This paper assembles a new dataset on corporate income tax regimes in 50 emerging and developing economies over 1996-2007 and analyzes their impact on corporate tax revenues and domestic and foreign investment. It computes effective tax rates to take account of complicated special regimes, such as partial tax holidays, temporarily reduced rates and increased investment allowances. There is evidence of a partial race to the bottom: countries have been under pressure to lower tax rates in order to lure and boost investment. In the case of standard tax systems (i.e. tax rules applying under normal circumstances), the effective tax rate reductions have not been larger than those witnessed in advanced economies, and revenues have held up well over the sample period. However, a race to the bottom is evident among special regimes, most notably in the case of Africa, creating effectively a parallel tax system where rates have fallen to almost zero. Regression analysis reveals higher tax rates adversely affect domestic investment and FDI, but do raise revenues in the short-run.
    Keywords: Corporate taxes , Cross country analysis , Developing countries , Emerging markets , Tax policy , Tax systems ,
    Date: 2012–01–25
  3. By: Hiroshi Sato; Sai Ding
    Abstract: This paper investigates regional differences in local public goods provision in rural area in the 2000s, using large village sample surveys (CHIP 2002 and 2007 surveys, a survey in Ningxia). Focuses are on changes in the coverage of public investment projects, regional differences in the determinants of public investment projects, and changes in the coverage of public services provided by village collectives. The main findings are as follows. First, we confirmed that coverage of public investment projects had increased in the 2000s. Second, in spite of concentration of fiscal administration into county level as one of the pillars of the reform of taxation and local fiscal system, administrative villages still played indispensable roles in local public goods provision. Third, we found that incentive of peasants, financial ability of villages, and incentive of local government affect location decision and budget structure of public investment projects and that direction and strength of such factors were different by regions.
    Keywords: Local Public goods, Village, Local Government, Rural China
    JEL: H2 H4 R5
    Date: 2012–02
  4. By: Frank M. Fossen; Martin Simmler
    Abstract: Tax competition for the mobile factor capital has led to a trend in many countries to levy lower taxes on interest income, often introducing differential taxation between interest and business income. In this study, we analyze the effect of such differential taxation on the debt ratio of firms. We exploit a 2009 tax reform in Germany as a quasi-experiment, which introduced a flat final withholding tax and opened a gap of 18 percentage points between the tax rate on income from unincorporated businesses and the new lower tax rate on interest income. We apply a regression adjusted semi-parametric difference-in-difference matching strategy based on firm level panel data. In addition, we implement a more structural approach with a tax rate differential, taking into account its endogeneity by using instrumental variables. The results indicate that firms increase their leverage when the tax rate on interest income decreases, albeit to a small degree.
    Keywords: Income taxation, capital taxation, financial structure, leverage, matching
    JEL: H25 H24 G32
    Date: 2012
  5. By: Stefania Marcassa; Fabrizio Colonna (THEMA, Universite de Cergy-Pontoise; Banca d'italia, Economic Structure and Labor Market Division.)
    Abstract: Italy has the lowest labor force participation of women among OECD countries. Moreover, the participation rate of married women is positively correlated to their husbands' income. We show that a high tax schedule together with tax credits and transfers raise the burden of two-earner house- holds, generating disincentives to work. We estimate a structural labor supply model for women, and use the estimated parameters to simulate the eects of alternative revenue-neutral tax systems. We nd that joint taxation implies a drop in the participation rate. Conversely, working tax credit and gender-based taxation boost it, with the eects of the former concentrated on low educated women.
    Keywords: female labor force participation, Italian tax system, second earner tax rate, joint taxa- tion, gender-based taxation, working tax credit JEL Classication: J21, J22, H31
    Date: 2011
  6. By: Hang Xiong (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I)
    Abstract: China's actual fiscal decentralization is one-sided: while public expenditures are largely decentralized, fiscal revenues are recentralized after 1994. One critical consequence of the actual system is the creation of significant fiscal imbalances at sub-national level. This paper investigates empirically effects of fiscal imbalances on environmental performance of Chinese provinces. First, environmental efficiency scores of Chinese provinces are calculated with SFA for the period from 2005 to 2010. Then, these scores are regressed against two fiscal imbalance indicators in a second stage model. Finally, conditional EE scores are calculated. This paper finds that effects of fiscal imbalances on EE are nonlinear and conditional on economic development level. Fiscal imbalances are more detrimental to environment in less developed provinces. These results suggest that the one-sided fiscal decentralization in China may have regressive environmental effects and contribute to regional disparity in terms of sustainable development.
    Keywords: Chinese provinces;Decentralization; Environmental efficiency; SFA
    Date: 2012–02–21
  7. By: Augustin Kwasi Fosu; Yoseph Yilma Getachew; Thomas Ziesemer
    Abstract: 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 Sub-Saharan African (SSA) countries. It develops and estimates a model that posits a non-linear relationship between public investment and growth, to determine the growth-maximising 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 a simulation and examines the public investment GDP share that maximises consumption. This is estimated to be between 8.4 percent and 11 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.
    Date: 2012
  8. By: Baskaran, Thushyanthan
    Abstract: A problematic feature of the existing empirical literature on the relationship between revenue decentralization (RD) and inflation is the use of inaccurate measures for RD. Using a newly constructed measure for RD that accounts for over-time changes in sub-national tax autonomy, this paper finds that RD leads to lower inflation.
    Keywords: Fiscal decentralization; Inflation; Sub-national tax autonomy
    JEL: E31 H29 H71
    Date: 2011
  9. By: Dirk Foremny (University of Bonn); Nadine Riedel (University of Hohenheim & Oxford University CBT & CESifo Munich)
    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: 2011
  10. By: Mathias Trabandt; Harald Uhlig
    Abstract: We seek to understand how Laffer curves differ across countries in the US and the EU-14, thereby providing insights into fiscal limits for government spending and the service of sovereign debt. As an application, we analyze the consequences for the permanent sustainability of current debt levels, when interest rates are permanently increased e.g. due to default fears. We build on the analysis in Trabandt-Uhlig (2011) and extend it in several ways. To obtain a better fit to the data, we allow for monopolistic competition as well as partial taxation of pure profit income. We update the sample to 2010, thereby including recent increases in government spending and their fiscal consequences. We provide new tax rate data. We conduct an analysis for the pessimistic case that the recent fiscal shifts are permanent. We include a cross-country analysis on consumption taxes as well as a more detailed investigation of the inclusion of human capital considerations for labor taxation.
    JEL: E0 E13 E2 E3 E62 H0 H2 H3 H6
    Date: 2012–02
  11. By: Hiroyuki Kasahara; Katsumi Shimotsu; Michio Suzuki
    Abstract: To what extent does a tax credit affect firms' R&D activity? What are the mechanisms? This paper examines the effect of the 2003 Japanese tax credit reform on firms' R&D investment by exploiting cross-sectional variation across firms in the changes in the effective tax credit rate between 2002 and 2003. When we use the benchmark sample to estimate the first-difference equation between 2002 and 2003, our estimate for the elasticity of R&D investment with respect to the effective tax credit rate is 2.05% with a standard error of 0.60, and the estimated effect of the R&D tax credit on R&D investment is significantly larger for small firms with relatively large outstanding debts. When we use different methods and different samples, we find mixed evidence for the positive effect of the R&D tax credit, but an interaction term between the effective tax credit rate and the debt-to-asset ratio is always estimated to be significant for small firms, providing robust evidence for the role of financial constraint in determining the effect of the R&D tax credit.
    Keywords: R&D, Tax Credit, Fnancial Constraint, Japan
    JEL: D22 H25 H32 K34 O31 O38
    Date: 2012–01
  12. By: Christina D. Romer; David H. Romer
    Abstract: This paper uses the interwar period in the United States as a laboratory for investigating the incentive effects of changes in marginal income tax rates. Marginal rates changed frequently and drastically in the 1920s and 1930s, and the changes varied greatly across income groups at the top of the income distribution. We examine the effect of these changes on taxable income using time-series/cross-section analysis of data on income and taxes by small slices of the income distribution. We find that the elasticity of taxable income to changes in the log after-tax share (one minus the marginal rate) is positive but small (approximately 0.2) and precisely estimated (a t-statistic over 6). The estimate is highly robust. We also examine the time-series response of available indicators of investment and entrepreneurial activity to changes in marginal rates. We find suggestive evidence of an impact on business formation, but no evidence of an important impact on other indicators.
    JEL: E62 H24 H31 N42
    Date: 2012–02
  13. By: Oscar Amerighi (Departiment of Economic Sciences, University of Bologna); Giuseppe De Feo (Department of Economics, University of Pavia)
    Abstract: In this paper we investigate tax/subsidy competition for FDI between countries of different size when a domestic firm is the incumbent in the largest market. We investigate how the nature (public or private) of the incumbent firm affects policy competition between the two governments seeking to attract FDI. We show that the country hosting the incumbent always benefits from FDI if the domestic firm is a public welfare-maximizing firm, while its welfare may decrease when it is a private firm, as already shown by Bjorvatn and Eckel (2006). We also show that, contrary to the case of a private domestic incumbent, a public firm acts as a disciplinary device for the foreign multinational that will always choose the efficient welfare-maximizer location. Finally, an efficiency-enhancing role of policy competition may only arise when the domestic incumbent is a private firm, while tax competition is always wasteful when the incumbent is a public firm.
    Keywords: Foreign Direct Investment; Tax/subsidy competition; Public firm; International mixed oligopoly
    JEL: F12 F23 H25 H73 L13 L33
    Date: 2012–02
  14. By: M Gelber, Alexander (The Wharton School)
    Abstract: This paper examines the response of husbands' and wives' earnings to a tax reform in which husbands' and wives' tax rates changed independently, allowing me to examine the effect of both spouses' incentives on each spouse's behavior. I compare the results to those of more simplified econometric models that are used in the typical setting in which such independent variation is not available. Using administrative panel data on approximately 11% of the married Swedish population, I analyze the impact of the large Swedish tax reform of 1990-1. I find that in response to a compensated fall in one spouse's tax rate, that spouse's earned income rises, and the other spouse's earned income also rises. I test and reject a set of models in which the family maximizes a single utility function. A standard econometric specification, in which one spouse reacts to the other spouse's income as if it were unearned income, yields biased coefficient estimates. Uncompensated elasticities of earned income with respect to the fraction of income kept after taxes are over-estimated by a factor of more than three, and income effects are of the wrong sign. A second common specification, in which overall family income is related to the family's tax rate and income, also yields substantially over-estimated own compensated and uncompensated elasticities. Standard econometric approaches may substantially mis-estimate earnings responses to taxation.
    Keywords: taxation; earnings; labor supply; families; spouses; unitary model
    JEL: H21 H24 H31 J12 J16 J21 J22
    Date: 2011–09–09
  15. By: Anna Bottaso (Department of Economics and Quantitative Methods, University of Genova); Carolina Castagnetti (Department of Economics and Quantitative Methods, University of Pavia); Maurizio Conti (Department of Economics and Quantitative Methods, University of Genova)
    Abstract: In this paper we add to the debate on the public capital - productivity link by exploiting very recent developments in the panel time series literature that take into account cross sectional correlation in non-stationary panels. In particular we evaluate the productive effect of public capital by estimating various production functions for a panel of 21 OECD countries over the period 1975-2002. We find strong evidence of common factors that drive the cointegration relationship among variables; moreover, our results suggest a public capital elasticity of GDP in the range 0.05-0.15, depending on model specification. Results are robust to the evidence of spillovers from public capital investments in other countries and to controlling for other productivity determinants like human capital, the stock of patents and R&D capital.
    Keywords: Public capital; Productivity; Panel Cointegration; Cross-section Dependence.
    JEL: C33 C15 H54 O47
    Date: 2011–11
  16. By: M. Emranul Haque; Richard Kneller
    Abstract: In an endogenous growth model, the government officials are given the task of procuring public goods that are used as productive inputs in the production. Due to the information asymmetry between the government and the bureaucracy, the bureaucrats can falsely report of high quality-high cost procurement, while providing low quality-low cost product. This affects the productivity of the economy and hence reduces growth. Our analysis can show that corruption not only reduces the quality of public services that are necessary for production, but also inflates the public spending beyond the efficient level. In this way, we can explain why public investment fails to raise growth in the countries where corruption is endemic. We test our results empirically by improving the methodology on previous research on this topic by explicitly recognizing the role of simultaneity between public investment, corruption and growth and the possible biases arising from omission of correlated variables from the single reduced form equation based analysis. We use three-stage least squares method in a panel set up for a system of four equations on growth, public investment, corruption and private investment. Our primary results are twofold. First, corruption increases public investment. Second, corruption reduces the returns to public investment and makes it ineffective in raising economic growth.
    Date: 2012
  17. By: Charles Figuières; Fabien Prieur; Mabel Tidball
    Abstract: This paper develops a two-country general equilibrium model with endogenous growth where governments behave strategically in the provision of productive infrastructure. The public capitals enter both national and foreign production as an external input, and they are …nanced by a at tax on income. In the private sector, fi…rms and households take the public policy as given when making their decisions. For arbitrary constant tax rates, the dynamic analysis reveals two important features. Firstly, under constant returns, the two countries growth rates differ during the transition but are identical on the balanced growth path. Secondly, due to the infrastructure externality, assuming away constant returns to scale a country with decreasing returns can experience sustained growth provided that the other grows at a positive constant rate. Then we endogeneize tax rates. It is shown that both a Markov Perfect Equilibrium (MPE) and a Centralized Solution (CS) exist, even when the parameters allow for endogenous growth, therefore explosive paths for the state variables. Nash growth rates are compared with the centralized rates. We show that cooperation in infrastructure provision does not necessarily lead to higher growth for each country. We also show that, in some con…gurations of households' preferences and initial conditions, cooperation would call for a slowdown in the initial stages of development, whereas strategic investments would not. Lastly, depending also on the con…guration of preferences, we show that cooperation can increase or decrease the gap between countries' growth rates.
    Date: 2012–03
  18. By: Mutascu, Mihai; Tiwari, Aviral; Estrada, Fernando
    Abstract: The present study is, in particular, an attempt to test the relationship between tax level and political stability by using some economic control variables and to see the relationship among government effectiveness, corruption, and GDP. For the purpose, we used the GMM (1991) and GMM system (1998), using a country-level panel data from 112 countries for the period 1997 to 2010. The main results show that political stability is not the key for the tax policy, under the control of political regime durability the taxes as percent in GDP having consistent sinusoidal tendency, by cubic type.
    Keywords: Taxation; Political Stability; Connection; Effects; GMM and GMM system
    JEL: B1 B4 H5 H2 H23 C1 D70 C14 C23 B16 D72 H3 B41 C2
    Date: 2011–07
  19. By: Shanjun Li; Joshua Linn; Erich Muehlegger
    Abstract: Gasoline taxes can be employed to correct externalities associated with automobile use, to reduce dependency on foreign oil, and to raise government revenue. Our understanding of the optimal gasoline tax and the efficacy of existing taxes is largely based on empirical analysis of consumer responses to gasoline price changes. In this paper, we directly examine how gasoline taxes affect consumer behavior as distinct from tax-exclusive gasoline prices. Our analysis shows that a 5-cent tax increase reduces gasoline consumption by 1.3 percent in the short-run, much larger than that from a 5-cent increase in the tax-exclusive gasoline price. This difference suggests that traditional analysis could significantly underestimate policy impacts of tax changes. We further investigate the differential effect from gasoline taxes and tax-exclusive gasoline prices on both the intensive and extensive margins of gasoline consumption. We discuss implications of our findings for the estimation of the implicit discount rate for vehicle purchases and for the fiscal benefits of raising taxes.
    JEL: H3 Q4 Q5
    Date: 2012–03
  20. By: Emmanuel Duguet (ERUDITE - Equipe de Recherche sur l'Utilisation des Données Individuelles Temporelles en Economie - Université Paris XII - Paris Est Créteil Val-de-Marne : EA437 - Université Paris Est Marne-la-Vallée)
    Abstract: We study, at the firm level, whether the incremental R&D tax credit increases the private funding of R&D. In order to answer this question, we use the yearly surveys of the Ministry of Research over the period 1993-2003, as well as the corresponding firm-level tax files. The main issue is whether the firms would have increased their R&D expenditures without this tax incentive. We make use of the Rubin methodology. In a first step, we study the determinants of the probability to benefit from the R&D tax credit, that is the selection process at work in the recipients' sample. We find that the probability to obtain a R&D tax credit increases with the R&D/Sales ratio and decreases with the direct R&D subsidies. Once we have evaluated the probability to get the R&D tax credit, we are able to correct for the selection bias. In a second step, we evaluate the effect of the incremental R&D tax credit on the private funding of research (once subtracted the direct subsidies from all the ministries). We find that, overall, the tax credit adds to the private funding of R&D: 1 Euro of tax credit would give slightly more than one Euro of total R&D. We also find that the incremental R&D tax credit increases the growth of the number of researchers.
    Keywords: tax credit, evaluation, research and development
    Date: 2012–01–01
  21. By: Erik Alencar de Figueiredo; Cleiton Roberto da Fonseca Silva
    Abstract: This paper assesses the effects of income redistribution policies on "responsibilit -sensitive" fairness levels in major Latin American countries. In doing so, the following items are analyzed- i) the fairness rule described in Bossert (1995),Konow (1996), and Cappelen & Tungodden (2007) and; ii) the redistribution mechanism (taxation policy) proposed by Ooghe & Peich (2010). The results indicate that taxation does not have a significant effect on Latin American fairness indicators. This behavior can be explained, among other factors, by the fiscal design used, which utilizes high rates associated with the effort variables and fails to equalize unequal opportunities.
    Keywords: Theory of Justice,Redistribution,
    JEL: D31 E62 H2
    Date: 2012
  22. By: Charles Wyplosz
    Abstract: Fiscal indiscipline is a feature of many developed countries. It is generally accepted that the source of the phenomenon lies in the common pool problem, the fact that recipients of public spending to fail to fully internalize the costs that taxpayers must assume. As a result, democratically elected governments are led to postpone tax collection, or to cut spending. Solving the fiscal discipline problem requires internalizing this externality. This calls for adequate institutions or for rules, or both. This paper reviews the various types of solutions that have been discussed in the literature and surveys a number of experiments. With the European debt crisis in mind, the paper pays particular attention to the common pool problem that emerges in federal states. The main conclusions are the following. First, rules are unlikely to exist unless they come with supporting institutions. Second, fiscal institutions are neither necessary nor sufficient to achieve fiscal discipline, but they help. Third, because institutions must bind the policymakers without violating the democratic requirement that elected officials have the power to decide on budgets, effective arrangements are those that give institutions the authority to apply legal rules or to act as official watchdogs.
    JEL: E61 E62 H62 H77
    Date: 2012–03
  23. By: Wang, Zhiguo; Ma, Liang
    Abstract: Understanding the logic of fiscal decentralization is pivotal for the next steps of fiscal reform, and retrospection of the literature and evidences accumulated in the field is the first step. As a typical transition economy with rapid and extensive devolution reforms, China is the ideal context to examine the causes, processes, and effects of fiscal decentralization, attracting numerous academic endeavors both domestic and abroad. However, the literature has not been fully reviewed and the evidences on fiscal decentralization are still mixed and inconclusive. This paper aims to comprehensively review the latest advancement in the area of fiscal decentralization in China over the past decades. The processes, characteristics, and measurements of fiscal decentralization are firstly reviewed, and the antecedents and consequences of fiscal decentralization are then synthesized. The knowledge gap and avenues for future research are finally discussed, aiming to make the China fiscal decentralization knowledge contributive, accumulative, and sustainable.
    Keywords: Fiscal decentralization; Federalism; New development; Corruption; China; Review
    JEL: H70 H30
    Date: 2012–02–25
  24. By: Kazuki Kamimura (Keio University)
    Abstract: In this paper, we estimate the relationship between cigarette tax (price) and smoking behavior in Japan. We breaks smoking behavior into participation part and conditional demand part. With Keio Household Panel Survey (KHPS), we can identify the effect of cigarette price depending on intertempporal variation of cigarette price. Main results are as follows. First, effect of cigarette price is considerable and negative as expected. Particularly in case of male, cigarette price work on both participation and consumption. Thus cigarette tax increase is possible policy alternative to lower the smoking prevalence rate in Japan though decrease of tax revenue is not negligible. Second, effect of large tax increase in October 2010 is not as expected based on past performance. With various specification, effect of large tax increase in October 2010 is smaller than that of modest tax increase in July 2006 in estimates. This result implies accumulated effect of repeating modest cigarette tax increase is larger than effect of large cigarette tax increase even if total increment of cigarette price is the same. Third, there is considerable gender difference of sensitivity to cigarette price. While estimates in participation equation seems almost the same, elasticity differs a lot. In addition, consumption elasticities of male is by far larger than those of female. Thus for most of female, alternatives are smoking as in the past or quit smoking when confronting the cigarette tax increase. Fourth, there is strong evidence for recent anti-smoking trend in Japan. Though our proxy is how many years have passed since the enforcement of Health Promotion Law and thus somehow inaccurate, including the variable considerable change the estimates of cigarette price and is itself significant. Therefore, to explore how cigarette tax works in recent Japan, how to control the anti-smoking trend is unavoidable issue. Additionally we seek to obtain more reliable elasticities with various specifications. When we use dataset consists of who has ever smoked in recent years, elasticities seem most trustworthy.
    Date: 2012–03

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