nep-pbe New Economics Papers
on Public Economics
Issue of 2012‒04‒10
twenty papers chosen by
Keunjae Lee
Pusan National University

  1. Tax avoidance and fiscal limits: Laffer curves in an economy with informal sector By Lukas Vogel
  2. Taxes and the Choice of Organizational Form by Entrepreneurs in Sweden By Edmark, Karin; Gordon, Roger
  3. An Evaluation of the Swedish Earned Income Tax Credit By Edmark, Karin; Liang, Che-Yuan; Mörk, Eva; Selin, Håkan
  4. Fiscal Composition and Aid Effectiveness: A Political-Economy Model By Mosley, Paul
  5. Gender-Based and Couple-Based Taxation By Bastani, Spencer
  6. Stock prices under pressure; How tax and interest rates drive returns at the turn of the tax year By JOhnny Kang; Tapio Pekkala; Christopher Polk; Ruy Ribeiro
  7. Environmental Tax on Products and Services Based on Their Carbon Footprint: A Case Study of the Pulp and Paper Sector By Gemechu, Eskinder D.; Butnar, Isabela; Llop Llop, Maria; Castells i Piqué, Francesc
  8. Why quality matters : rebuilding trustworthy local government in post-conflict Sierra Leone By Sacks, Audrey; Larizza, Marco
  9. European Fiscal Union: What Is It? Does It Work? And Are There Really 'No Alternatives'? By Fuest, Clemens; Peichl, Andreas
  10. Public Debt and Economic Growth: Is There a Causal Effect? By Ugo Panizza; Andrea Filippo Presbitero
  11. Environmental Fiscal Reform and Unemployment in Spain By Anil Markandya; Mikel González-Eguino; Marta Escapa
  12. Tax policy and fair inequality. By Cappelen, Alexander W.; Tungodden, Bertil
  13. Communication in asymmetric group competition over public goods By Jingjing Zhang
  14. Taxing Childcare: Effects on Family Labor Supply and Children By Gathmann, Christina; Sass, Björn
  15. On the Empirics of China's Inter-regional Risk Sharing By Li, Jia
  16. Efficient Minimum Distance Estimation with Multiple Rates of Convergence By Bertille Antoine; Eric Renault
  17. The Fiscal Multiplier and Spillover in a Global Liquidity Trap By Ippei Fujiwara; Kozo Ueda
  18. Assessing agglomeration economies in the Yangzi River Delta, China : a bayesian spatial econometric approach By Hashiguchi, Yoshihiro; Chen, Kuang-hui
  19. Globalization and political trust By Fischer, Justina AV
  20. Productivity and the welfare of nations By Basu, Susanto; Pascali, Luigi; Schiantarelli, Fabio; Serven, Luis

  1. By: Lukas Vogel
    Abstract: The paper extends the QUEST III model by home production to discuss fiscal limits in an economy with tax avoidance. It finds that revenue-maximising labour and corporate tax rates in the benchmark model are relatively high (54% and 72%) compared to current EU-average implicit tax rates. No such limit is found for the consumption tax. Higher substitutability between market and home production flattens the Laffer curves for labour and corporate taxation and introduces one for the consumption tax. Although higher tax rates raise additional tax revenue, the economic costs of higher distortionary taxation in terms of output contraction are substantial.
    JEL: E62 H20 H30
    Date: 2012–01
  2. By: Edmark, Karin (Research Institute of Industrial Economics (IFN)); Gordon, Roger (Research Institute of Industrial Economics (IFN))
    Abstract: This paper makes use of individual data for 2004 to 2008 on owners of closely-held businesses in Sweden to estimate the role of both tax and non-tax determinants in the choice to be a closely-held corporation vs. a proprietorship. While lower-income individuals face relatively neutral incentives, higher income households face strong tax incentives to be corporate. The data suggest a strong response to these tax incentives. Many conventional non-tax determinants are confirmed in the data as well.
    Keywords: Self-employment; Entrepreneurship; Taxation of closely-held businesses; Business organizational form
    JEL: G32 G38 H25
    Date: 2012–03–26
  3. By: Edmark, Karin (Research Institute of Industrial Economics (IFN)); Liang, Che-Yuan (Department of Economics); Mörk, Eva (Department of Economics); Selin, Håkan (Department of Economics)
    Abstract: Over the last twenty years we have seen an increasing use of in-work tax subsidies to encourage labor supply among low-income groups. In Sweden, a non-targeted earned income tax credit was introduced in 2007, and was reinforced in 2008, 2009 and 2010. The stated motive of the reform was to boost employment; in particular to provide incentives for individuals to go from unemployment to, at least, part-time work. In this paper we try to analyze the extensive margin labor supply effects of the Swedish earned income tax credit reform up to 2008. For identification we exploit the fact that the size of the tax credit, as well as the resulting average tax rate, is a function of the municipality of residence and income if working. However, throughout the analysis we find placebo effects that are similar in size to the estimated reform effects. In addition, the results are sensitive with respect to how we define employment, which is especially true when we analyze different subgroups such as men and women, married and singles. Our conclusion is that the identifying variation is too small and potentially endogenous and that it is therefore not possible to use this variation to perform a quasi-experimental evaluation of the Swedish EITC-reform.
    Keywords: Labor supply; Labor force participation; Tax incentives
    JEL: H24 J21
    Date: 2012–02–01
  4. By: Mosley, Paul
    Abstract: In accounting for the rather gloomy trend of the aid effectiveness literature over the last few years, one explanatory strand has been fiscal, suggesting in particular that aid flows in weak states have tended to erode the taxbase and the structure of institutions. We pursue this idea, tracing the link from politics to domestic tax effort and then using the influence of this on expenditure to explain the leverage of aid. Thus, we argue that in the long run, tax effort determines the effectiveness of aid, and this relationship operates simultaneously in some countries with the negative link in the opposite direction, from aid to domestic tax effort, as observed by Bräutigam and Knack (2004) and others. We find that tax effort and the ability of the state to diversify its taxation structure are important determinants of long-term growth and aid effectiveness, and in our model, we find that overall aid effectiveness is, in a 3SLS model, weakly positive and significant, echoing the findings of Arndt, Jones and Tarp (2009) and Minoiu and Reddy (2010); however, these findings are not robust when retested using the GMMapproach favoured by the literature. A more robust finding, and a key message for policy, is that a broadening of the tax structure in low-income countries is crucial in order to enable those countries to escape from the .weak state . low tax trap., and to make aid more effective.
    Keywords: aid effectiveness, tax policy
    Date: 2012
  5. By: Bastani, Spencer (Uppsala Center for Fiscal Studies)
    Abstract: In a recent paper Alesina et al. (2011) construct a model in which different labor supply elasticities for men and women emerge endogenously from intra-household bargaining. In this paper I explore the optimal tax implications of their model in an economy with both singles and couples and inequality across as well as within households. In the model, the welfare of married women can be improved by lowering taxes for single women. Moreover, if single men earn more than single women, the welfare of married women can alternatively be improved by a gender-neutral tax scheme which taxes singles at a higher rate. Because the government is concerned not only with equalizing utilities within families, but also with the redistribution between high income and low income households, gender-based adjustments in the income tax must be weighed against the welfare consequences of changing the progressivity of the tax system. I find that larger lump-sum transfers to women is always optimal. Interestingly, marginal tax rates, on the other hand, should be lower for women only if the exogenous bargaining power of men is moderate. The welfare gains of gender based taxation are sizable and the welfare gains of having tax instruments which depend on household composition are even larger.
    Keywords: optimal taxation; tagging; family economics; intra-household bargaining
    JEL: D13 H21 J16 J20
    Date: 2012–03–28
  6. By: JOhnny Kang; Tapio Pekkala; Christopher Polk; Ruy Ribeiro
    Abstract: We show that the level of interest rates determines the magnitude of mispricing at the turn of the tax year, as investors face the trade-o¤ between selling a temporarily depressed stock this year and selling next year, but delaying tax implications by one year. Interest rates do explain the predictable variation in US returns and selling behaviour around the turn of the year. Similar results in the UK provide out-of-sample confirmation, as tax and calendar years di¤er. Moreover, part of the variation in the risks and abnormal returns of size, value, and momentum factors can be linked to tax-motivated trading.
    Date: 2011–02
  7. By: Gemechu, Eskinder D.; Butnar, Isabela; Llop Llop, Maria; Castells i Piqué, Francesc
    Abstract: The main aim of this work is to define an environmental tax on products and services based on their carbon footprint. We examine the relevance of conventional life cycle analysis (LCA) and environmentally extended input-output analysis (EIO) as methodological tools to identify emission intensities of products and services on which the tax is based. The short-term price effects of the tax and the policy implications of considering non-GHG are also analyzed. The results from the specific case study on pulp production show that the environmental tax rate based on the LCA approach (1,8%) is higher than both EIO approaches (0,8% for product and 1,4% for industry approach), but they are comparable. Even though LCA is more product specific and provides detailed analysis, EIO would be the more relevant approach to apply economy wide environmental tax. When the environmental tax considers non-GHG emissions instead of only CO2, sectors such as agriculture, mining of coal and extraction of peat, and food exhibit higher environmental tax and price effects. Therefore, it is worthwhile for policy makers to pay attention on the implication of considering only CO2 tax or GHG emissions tax in order for such a policy measure to be effective and meaningful. Keywords: Environmental tax; Life cycle analysis; Environmental input-output analysis.
    Keywords: Medi ambient -- Impostos, Medi ambient -- Anàlisi d'impacte, 33 - Economia,
    Date: 2012
  8. By: Sacks, Audrey; Larizza, Marco
    Abstract: A broad consensus has emerged among practitioners and researchers that failure to build accountable and legitimate institutions is a critical risk factor associated with vicious circles of repeated violence. Despite this consensus, very few studies have tested the extent to which local government performance and decentralized service provision shape citizens'beliefs toward political authorities. This paper contributes to fill this gap by examining the antecedents of trustworthy local government authorities in a post-conflict and fragile setting, Sierra Leone. Taking advantage of a unique longitudinal survey, the National Public Services, it examines the impact of sub-national variation in local government performance on citizens'beliefs about the trustworthiness of local government authorities. To test the hypothesis, it uses multilevel models to exploit variation over time and within and across sub-national units in Sierra Leone. The results suggest that improvements in the quality of decentralized service delivery, as well as perceptions of local councillors'honesty, are positively associated with perceptions of local government officials as trustworthy political authorities. These findings speak to the possibility that local service provision can play a role in shaping the relationships between citizens and the state and in overcoming the root causes of fragility and conflict.
    Keywords: Health Monitoring&Evaluation,Population Policies,E-Government,Public Sector Corruption&Anticorruption Measures,E-Government
    Date: 2012–04–01
  9. By: Fuest, Clemens (University of Oxford); Peichl, Andreas (IZA)
    Abstract: The view is widespread that there are just two options for the future of the Eurozone – either it is complemented by a fiscal union, or it will fall apart. In this paper, we discuss five possible elements of a fiscal union, of which three are in the centre of the current debate on fiscal union in the Eurozone. Second, we argue that the fiscal union will only work if political integration in Europe goes significantly beyond the current state of affairs. Third, we suggest an alternative approach, which places less emphasis on centralised fiscal policy coordination and focuses on financial sector reform, decentralised responsibility for government debt and sovereign debt restructurings in the case of fiscal crises.
    Keywords: Fiscal Union, EU, EMU, Euro, ESM
    JEL: E62 H77 H87
    Date: 2012–03
  10. By: Ugo Panizza (UNCTAD and The Graduate Institute, Geneva); Andrea Filippo Presbitero (Universit… Politecnica delle Marche, Department of Economics, MoFiR)
    Abstract: This paper uses an instrumental variable approach to study whether public debt has a causal effect on economic growth in a sample of OECD countries. The results are consistent with the existing literature that has found a negative correlation between debt and growth. However, the link between debt and growth disappears once we instrument debt with a variable that captures valuation effects brought about by the interaction between foreign currency debt and exchange rate volatility. We conduct a battery of robustness tests and show that our results are not affected by weak instrument problems and are robust to relaxing our exclusion restriction.
    Keywords: Government Debt, Growth, OECD countries
    JEL: F33 F34 F35 O11
    Date: 2012–04
  11. By: Anil Markandya; Mikel González-Eguino; Marta Escapa
    Abstract: The theoretical literature relevant to the relationship between environmental taxation and employment creation is centred on the suggestion by Pearce (1991) that environmental taxation could lead to a “double dividendâ€. In this paper we review the literature on the employment double dividend for Spain and add to it with some new analysis of our own that fills some important gaps in the literature.
    Keywords: Environmental fiscal reform, double dividend hypothesis, unemployment, Spain
    Date: 2012–04
  12. By: Cappelen, Alexander W. (Dept. of Economics, Norwegian School of Economics and Business Administration); Tungodden, Bertil (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: The standard economic approach to tax policy has to a large extent relied on welfarist theories of justice, in particular the utilitarian view that the government should try to maximize the sum of individual welfare. This welfarist framework has proved a productive point of departure for much economic analysis, but it has an important limitation in its inability to take into account considerations of personal responsibility. Welfarist theories evaluate policies solely on the basis of their consequences for individual welfare, and thus do not assign any intrinsic importance to how a specific situation came about.
    Keywords: Tax policy; Income inequality; Fairness.
    JEL: D31 D63 J31
    Date: 2012–02–15
  13. By: Jingjing Zhang
    Abstract: This paper examines whether and how cheap talk communication can facilitate within-group coordination when two unequal sized groups compete for a prize that is shared equally among members of the winning group, regardless of their (costly) contributions to the group’s success. We find that allowing group members to communicate before making contribution decisions improves coordination. To measure how much miscoordination remains, we employ a control treatment where miscoordination is eliminated by asking group members to reach a unanimous contribution decision. Average group contributions are not significantly different in this control treatment. Cheap talk communication thus completely solves miscoordination within groups and makes group members act as a single agent. Furthermore, it is the larger group that benefits from communication at the expense of the smaller group. Finally, content analysis of group communication reveals that after the reduction of within-group strategic uncertainty, groups reach self-enforcing agreements on how much to contribute, designate specific contributors according to a rotation scheme, and quickly discover the logic of the mixed-strategy equilibrium.
    Keywords: Group competition, threshold public goods, coordination, cheap talk communication, content analysis, experiments
    JEL: C72 C92 D72 H41
    Date: 2012–04
  14. By: Gathmann, Christina (University of Heidelberg); Sass, Björn (University of Mannheim)
    Abstract: Previous studies report a wide range of estimates for how female labor supply responds to childcare prices. We shed new light on this question using a reform that raised the prices of public daycare. Parents respond by reducing public daycare and increasing childcare at home. Parents also reduce informal childcare indicating that public daycare and informal childcare are complements. Female labor force participation declines and the response is strongest for single parents and low-income households. The short-run effects on cognitive and non-cognitive skills are mixed, but negative for girls. Spillover effects on older siblings suggest that the policy affects the whole household, not just targeted family members.
    Keywords: childcare, labor supply, cognitive skills, family policy, Germany
    JEL: J13 J22 J18
    Date: 2012–03
  15. By: Li, Jia
    Abstract: This study provides a comprehensive investigation on the mechanisms of risk sharing among China's provinces over the period 1995-2009. Using three empirical techniques, we found that, first, the extent of risk sharing attained by the provinces is relatively limited, and the financial liberalization since the late 1990s has not helped improve the degree of risk sharing. Second, credit market, compared to capital market, capital depreciation, and tax-transfer system, has been the single operative channel of risk sharing in China. Third, there are possibilities for China to gain the benefits of risk sharing from various institutional factors. In particular, though still insignificant, rural-urban migration, formal financial system and fiscal transfer appear to start to promote risk sharing recently. In contrast, FDI seems to be a dis-smoothing factor in China.
    Keywords: Risk sharing; financial liberalization; China
    JEL: E2 C0 G0 C2
    Date: 2012–03
  16. By: Bertille Antoine (Simon Fraser University); Eric Renault
    Abstract: This paper extends the asymptotic theory of GMM inference to allow sample counterparts of the estimating equations to converge at (multiple) rates, different from the usual square-root of the sample size. In this setting, we provide consistent estimation of the structural parameters. In addition, we define a convenient rotation in the parameter space (or reparametrization) to disentangle the different rates of convergence. More precisely, we identify special linear combinations of the structural parameters associated with a specific rate of convergence. Finally, we demonstrate the validity of usual inference procedures, like the overidentification test and Wald test, with standard formulas. It is important to stress that both estimation and testing work without requiring the knowledge of the various rates. However, the assessment of these rates is crucial for (asymptotic) power considerations. Possible applications include econometric problems with two dimensions of asymptotics, due to trimming, tail estimation, infill asymptotic, social interactions, kernel smoothing or any kind of regularization.
    Keywords: GMM; Mixed-rates asymptotics; Kernel estimation; Rotation in the coordinate system
    JEL: C32 C12 C13 C51
    Date: 2012–03
  17. By: Ippei Fujiwara; Kozo Ueda
    Abstract: We consider the fiscal multiplier and spillover in an environment in which two countries are caught simultaneously in a liquidity trap. Using a standard New Open Economy Macroeconomics (NOEM) model, an optimizing two-country sticky price model, we show that the fiscal multiplier and spillover are contrary to those predicted in textbook economics. For the country with government expenditure, the fiscal multiplier exceeds one, the currency depreciates, and the terms of trade worsen. The fiscal spillover is negative if the intertemporal elasticity of substitution in consumption is less than one and positive if the parameter is greater than one. Incomplete stabilization of marginal costs due to the existence of the zero lower bound is a crucial factor in understanding the effects of fiscal policy in open economies.
    JEL: E52 E62 E63 F41
    Date: 2012–04
  18. By: Hashiguchi, Yoshihiro; Chen, Kuang-hui
    Abstract: This paper estimates the magnitude of agglomeration economies in the Yangzi River Delta, China, by using the empirical model proposed by Chen and Hashiguchi (2010). The model is an extension of the Ciccone-Hall model (Ciccone and Hall 1996), and enables us to take into account both the endogeneity problem and spatial autocorrelation without instrumental variables in the estimation. County-level data for Shanghai, Jiangsu, and Zhejiang in 2009 and Bayesian methods are used to estimate the model. As a result, the magnitude is found to be insignificant. This indicates that the effect of agglomeration economies is very weak in this area, and so regional development policies for enhancing the interaction among firms and the linkage between industries are required to increase the benefit of agglomeration.
    Keywords: China, Local economy, Econometric model, Agglomeration economies, Spatial autocorrelation, Endogeneity, Bayesian estimation
    JEL: C21 C51 R10 R11 R15
    Date: 2012–03
  19. By: Fischer, Justina AV
    Abstract: This paper postulates that a country’s integration into the world economy may lower citizens’ political trust. I argue that economic globalization constrains government’s choice set of feasible policies, impeding responsiveness to the median voter. Matching individual-level survey data from 1981 to 2007, repeated cross-sections of altogether 260’000 persons from 80 countries, with a measure of a country’s degree of economic globalization for the same time period, I find that there is a trust-lowering impact of globalization; its magnitude, however, depends on whether or not the individual is informed about politics and the economy. Trust-lowering effects of globalization are larger for those who have no interest in politics, are unwilling to indicate their political leaning, or who have low educational levels. Two-stage least squares regressions and a set of country and time fixed effects support a causal interpretation. Obviously, viewing the domestic government as accountable for its policies plays a decisive role for the relation between economic globalization and political trust. Robustness against country’s degree of economic development, past globalization and different time periods is tested.
    Keywords: Political trust; globalization; international trade; openness; FDI; World Values Survey
    JEL: F15 H41 Z13
    Date: 2012–03–30
  20. By: Basu, Susanto; Pascali, Luigi; Schiantarelli, Fabio; Serven, Luis
    Abstract: This paper shows that the welfare of a country's representative consumer can be measured using just two variables: current and future total factor productivity and the capital stock per capita. These variables suffice to calculate welfare changes within a country, as well as welfare differences across countries. The result holds regardless of the type of production technology and the degree of market competition. It applies to open economies as well, if total factor productivity is constructed using domestic absorption, instead of gross domestic product, as the measure of output. It also requires that total factor productivity be constructed with prices and quantities as perceived by consumers, not firms. Thus, factor shares need to be calculated using after-tax wages and rental rates and they will typically sum to less than one. These results are used to calculate welfare gaps and growth rates in a sample of developed countries with high-quality total factor productivity and capital data. Under realistic scenarios, the U.K. and Spain had the highest growth ratesof welfare during the sample period 1985-2005, but the U.S. had the highest level of welfare.
    Keywords: Economic Theory&Research,Currencies and Exchange Rates,Environmental Economics&Policies,Debt Markets,Emerging Markets
    Date: 2012–04–01

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