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on Public Economics |
| By: | Troeger, Vera (University of Warwick); Plumper, Thomas (University of Essex) |
| Abstract: | Contrary to the belief of many, tax competition did not undermine the foundations of the welfare state and did not even abolish the taxation of capital. Instead, tax competition caused governments to shift the tax burden from capital to labor, thereby increasing income inequality in liberal market economies that traditionally redistribute income by relatively high effective capital taxes and relatively low effective labor taxes. In contrast, income inequality did increase little or not at all in social welfare states that dominantly use social security transfers to redistribute income. Governments in social welfare states found it easy to maintain high social expenditures because they increasingly taxed labor, which is relatively immobile, to finance social security transfers. We test the predictions of this theory using a simultaneous equation approach that accounts for the endogeneity of tax policies, fiscal policies, and deficits. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cge:warwcg:82&r=pbe |
| By: | María Jesús Freire-Serén; Judith Panadés i Martí |
| Abstract: | Human capital accumulation may negatively affect economic growth by increasing tax avoidance and reducing effective tax rates and productive public investment. This paper analyzes how the endogenous feedback between human capital accumulation and tax avoidance affects economic growth and macroeconomic dynamics. Our findings show that this interaction produces remarkable growth and welfare effects. |
| Keywords: | tax avoidance, tax non-compliance, Economic growth |
| JEL: | E62 H26 O30 O40 O41 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:599&r=pbe |
| By: | Daniel Artana; Sebastian Auguste; Marcela Cristini; Cynthia Moskovitz; Ivana Templado |
| Abstract: | This paper analyzes sub-national revenues in Argentina. Following a discussion of the recent evolution of government revenues and their vertical imbalance, the paper then analyzes the most important taxes collected by federal, provincial and local governments. Subsequently considered are the determinants of sub-national revenues and the impact of the 2001-2002 crisis. It is found that automatic transfers improve collections of the cascade sales tax and the property tax by enlarging the disposable income of the private and public sector of the provinces favored by the regional redistribution of income, while discretionary transfers reduce own-source revenue effort and encourage public investment. The paper concludes by analyzing options to improve sub-national revenue mobilization and offering specific proposals, particularly in regard to improving the cascade provincial sales tax. |
| JEL: | H71 H77 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:idb:wpaper:4765&r=pbe |
| By: | Holger Strulik; Timo Trimborn |
| Abstract: | We set up a neoclassical growth model extended by a corporate sector, an investment and finance decision of firms, and a set of taxes on capital income. We provide analytical dynamic scoring of taxes on corporate income, dividends, capital gains, other private capital income, and depreciation allowances and identify the intricate ways through which capital taxation affects tax revenue in general equilibrium. We then calibrate the model for the US and explore quantitatively the revenue effects from capital taxation. We take adjustment dynamics after a tax change explicitly into account and compare with steady-state effects. We find, among other results, a self-financing degree of corporate tax cuts of about 70-90 percent and a very flat Laffer curve for all capital taxes as well as for tax depreciation allowances. Results are strongest for the tax on capital gains. The model predicts for the US that total tax revenue increases by about 0.3 to 1.2 percent after abolishment of the tax. |
| Keywords: | Corporate Taxation, Capital Gains, Tax Allowances, Revenue Estimation, Laffer Curve, Dynamic Scoring. |
| JEL: | E60 H20 O40 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:deg:conpap:c016_074&r=pbe |
| By: | H. Spencer Banzhaf; Wallace E. Oates |
| Abstract: | We re-evaluate two forms of fiscal illusion in local public finance: debt illusion and renter illusion. The Ricardian Equivalence Theorem for local governments suggests the form of finance of a public program (tax or debt finance) has no effects on substantive outcomes. For the local case, this results from the capitalization of local fiscal differentials into property values. We show that this version of the model is quite restrictive. In particular, in the U.S, context, where state and local interest is exempt from federal taxation, rational behavior may be inconsistent with Ricardian equivalence if local governments can borrow on more favorable terms than individuals. We also suggest a new test for renter illusion (or the renter effect). In particular, whether or not renters are more likely to support public investments in general, the renter effect suggests that renters are more likely to support them when financed with property taxes than with sales taxes. Using data from hundreds of open space referenda in the U.S. using a variety of finance mechanisms, we find evidence that households do prefer debt financing to tax financing, but find no evidence of the renter effect. |
| JEL: | H3 H4 H7 Q2 R2 R5 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18040&r=pbe |
| By: | Giacomo Ponzetto; Ugo Troiano |
| Abstract: | Countries with greater social capital have higher economic growth. We show that social capital is also highly positively correlated across countries with government expenditure on education. We develop an infinite-horizon model of public spending and endogenous stochastic growth that explains both facts through frictions in political agency when voters have imperfect information. In our model, the government provides services that yield immediate utility, and investment that raises future productivity. Voters are more likely to observe public services, so politicians have electoral incentives to under-provide public investment. Social capital increases voters' awareness of all government activity. As a consequence, both politicians' incentives and their selection improve. In the dynamic equilibrium, both the amount and the efficiency of public investment increase, permanently raising the growth rate. |
| Keywords: | Social Capital, Government Expenditures, Economic Growth, Public Investment, Elections, Imperfect Information |
| JEL: | D72 D83 H50 H54 O43 Z13 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:612&r=pbe |
| By: | Dario Caldara; Christophe Kamps |
| Abstract: | Does fiscal policy stimulate output? SVARs have been used to address this question but no stylized facts have emerged. We derive analytical relationships between the output elasticities of fiscal variables and fiscal multipliers. We show that standard identification schemes imply different priors on elasticities, generating a large dispersion in multiplier estimates. We then use extra-model information to narrow the set of empirically plausible elasticities, allowing for sharper inference on multipliers. Our results for the U.S. for the period 1947-2006 suggest that the probability of the tax multiplier being larger than the spending multiplier is below 0.5 at all horizons. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2012-20&r=pbe |
| By: | Carlos de Miguel; Baltasar Manzano (Universidade de Vigo and Economics for Energy) |
| Abstract: | Green tax reforms have become an important tool not only in protecting the environment but also in bringing about a more efficient tax system. However, reforms often imply accepting sacrifices in the short-run and bring about the risk of potential political opposition. Within this framework, the debate on whether to implement green tax reforms in one-step or gradually becomes of great interest. In this paper we use a calibrated dynamic general equilibrium model to evaluate different reforms that consist in increasing energy taxes and adjusting capital taxation in a revenue-neutral framework. Our findings show that, although an environmental dividend is always granted, the efficiency dividend depends on the type of reform, its size and how gradually it is implemented. Thus, one-step reforms that produce an efficiency dividend would imply large efficiency costs in the short-run. In this case, the reform could only produce efficiency gains in the short-run if it is implemented gradually, although such gains would end up disappearing in the long-run. |
| Keywords: | Green Tax Reform, General Equilibrium |
| JEL: | E62 Q43 H23 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:efe:wpaper:04-2011&r=pbe |
| By: | Stephan Litschig |
| Abstract: | This paper uses a regression discontinuity design to estimate the impact of additional unrestricted grant financing on local public spending, public service provision, schooling, literacy, and income at the community (municipio) level in Brazil. Additional transfers increased local public spending per capita by about 20% with no evidence of crowding out own revenue or other revenue sources. The additional local spending increased schooling per capita by about 7% and literacy rates by about 4 percentage points. The implied marginal cost of schooling accounting for corruption and other leakagesamounts to about US$ 237, which turns out to be similar to the average cost of schooling in Brazil in the early 1980s. In line with the effect on human capital, the poverty rate was reduced by about 4 percentage points, while income per capita gains were positive but not statistically significant. Results also suggest that additional public spending had stronger effects on schooling and literacy in less developed parts of Brazil, while poverty reduction was evenly spread across the country. |
| Keywords: | Intergovernmental grants, decentralization, economic development |
| JEL: | D70 H40 H72 O15 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:510&r=pbe |
| By: | Matthew C. Weinzierl |
| Abstract: | Tagging is a free lunch in conventional optimal tax theory because it eases the classic tradeoff between efficiency and equality. But tagging is used in only limited ways in tax policy. I propose one explanation: conventional optimal tax theory has yet to capture the diversity of normative principles with which society evaluates taxes. I generalize the conventional model to incorporate multiple normative frameworks. I then show that if the principle of equal sacrifice--a classic, comprehensive criterion of fair taxation proposed by John Stuart Mill and associated with the Libertarian normative framework--is given some weight in the social objective function, tagging generates costs that must be weighed against the benefits it generates through conventional channels. Only tags that are sufficiently predictive of ability, such as disability status, will be used. Calibrated simulations using micro data from the United States show that optimal policy may simultaneously include substantial redistribution across income-earning abilities, as in the standard model, and reject three prominently-proposed tags--gender, race, and height--as in actual policy. This explanation for limited tagging also implies that optimal marginal tax rates at high incomes are lower than in standard analysis and closer to those observed in policy. |
| JEL: | D63 H2 H21 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18045&r=pbe |
| By: | Alan Krause |
| Abstract: | Recent empirical research has found that high-skill individuals tend to be less risk averse than low-skill individuals, which implies that their respective constant relative risk aversion (CRRA) utility functions have different curvature. This paper examines the effects of this form of preference heterogeneity on the classic question of whether taxing savings is desirable when the government also implements optimal nonlinear income taxation. It is shown that taxing or subsidising savings may be optimal, even if labour is separable from consumption in the utility function. Specifically, if the individuals' discount rate is lower (resp. higher) than the market interest rate, it is optimal to tax (resp. subsidise) savings. If the individuals' discount rate is equal to the market interest rate, zero taxation of savings is optimal. This basic relationship holds under both linear and nonlinear taxation of savings. |
| Keywords: | Savings taxation; nonlinear income taxation; preference heterogeneity. |
| JEL: | H21 H24 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:12/13&r=pbe |
| By: | Ross Guest; Anthony J. Makin |
| Abstract: | In 2009-10 governments around the world implemented unprecedented fiscal stimulus in order to counter the impact of the Global Financial Crisis of 2008-09. This paper analyses the impact of fiscal stimulus using a dynamic open economy, overlapping generations model that allows for feedback effects of fiscal stimulus on private sector expenditure via changes in the tax rate and the interest rate. There are two types of goods – traded (T) and non-traded (N) goods, which differ in their capital intensities. The main qualitative result is that the dynamic output gains from fiscal stimulus depend on the productivity of the initial stimulus spending, on the speed of repayment of debt, on the sensitivities of the interest rate to government debt and of labour supply to the tax rate. Also, the overlapping generations framework allows an intergenerational welfare analysis. Among the biggest winners from stimulus are those about to retire. The biggest losers are those near the start of their working lives when the stimulus is implemented. |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:deg:conpap:c016_045&r=pbe |
| By: | Yoseph Yilma Getachew |
| Abstract: | This paper studies the distributional and the growth effects of public investment in a simple growth model with incomplete market where both growth and inequality are endogenously determined. Taxation lowers growth through distorting private investment, whereas public investment stimulates long run growth. Higher inequality corresponds to lower growth when the credit and insurance markets are missing as these prevent the efficient amount of investment to be undertaken in the economy. In this case, public investment may have additional efficiency benefit through substituting for the missing markets. It serves as means to relax resource constraints that impede certain investment. The efficiency effect of complementary public investment, on the other hand, is compromised as it aggravates it. |
| Keywords: | Public Capital; Elasticity of Substitution; Wealth Mobility; Growth. Incomplete Market |
| JEL: | D3 E25 H4 O11 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:deg:conpap:c016_072&r=pbe |
| By: | Jean J. Gabszewicz (CORE Université catholique de Louvain); Salome Gvetadze (CREA, University of Luxembourg); Skerdilajda Zanaj (CREA, University of Luxembourg) |
| Abstract: | This paper examines how and why people migrate between two re- gions with asymmetric size. The agglomeration force comes from the scale economies in the provision of local public goods, whereas the disper- sion force comes from congestion in consumption of public goods. Public goods considered resemble club goods (or public goods with congestion) and people are heterogeneous in their migration costs. We find that the large countries can be destination of migrants for sufficiently high provision of public goods, even when the large country taxes too much. The high provision of public good offsets the congestion effect. While, the small country can be the destination of migrants for two reasons. Firstly, when public good supply is intermediate, people move to avoid congestion in the large country and to benefit from low taxation in the small one. Finally, when the provision of public goods is low, people move towards the small countries just to avoid congestion. |
| Keywords: | Migration, public goods, congestion. |
| JEL: | H0 F3 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:luc:wpaper:11-13&r=pbe |
| By: | Yasser Abdih; Christian Ebeke; Adolfo Barajas; Ralph Chami |
| Abstract: | This paper identifies a remittances channel that transmits exogenous shocks, such as business cycles in remittance-sending countries, to the public finances of remittance-receiving countries. Using panel data for remittance-receiving countries in the Middle East, North Africa, and Central Asia, three types of results emerge. First, remittances appear to be strongly procyclical vis-Ã -vis sending country income. Second, remittances tend to be spent on consumption of both imported and domestically produced goods, rather than on investment. Third, shocks in the sending countries are transmitted via remittances to the public finances - specifically, tax revenues - of receiving countries. In the case of the 2009 global downturn, this impact was particularly strong for several countries in the Caucasus and Central Asia, whereas in the subsequent recovery in 2010 virtually all receiving countries benefitted from an upturn in remittance-driven tax revenues. |
| Keywords: | Business cycles , Capital inflows , Cross country analysis , Demand , External shocks , Middle East and Central Asia , North Africa , Private consumption , Tax revenues , Workers remittances , |
| Date: | 2012–04–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/104&r=pbe |
| By: | Stephan Litschig; Kevin Morrison |
| Abstract: | Does additional government spending improve the electoral chances of incumbent political parties? This paper provides the first quasi-experimental evidence on this question. Our research design exploits discontinuities in federal funding to local governments in Brazil around several population cutoffs over the period 1982-1985. We find that extra fiscal transfers resulted in a 20% increase in local government spending per capita, and an increase of about 10 percentage points in the re-election probability of local incumbent parties. We also find positive effects of the government spending on education outcomes and earnings, which we interpret as indirect evidence of public service improvements. Together, our results provide evidence that electoral rewards encourage incumbents to spend part of additional revenues on public services valued by voters, a finding in line with agency models of electoral accountability. |
| Keywords: | Government spending, voting, regression discontinuity |
| JEL: | H40 H72 D72 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:515&r=pbe |
| By: | Daniel Albalate (Faculty of Economics, University of Barcelona) |
| Abstract: | Interest in public accountability and government transparency is increasing worldwide. The literature on the determinants of transparency is evolving but is still in its early stages. So far, it has typically focused on national or regional governments while neglecting the local government level. This paper builds on the scarce knowledge available in order to examine the economic, social, and institutional determinants of local government transparency in Spain. We draw on a 2010 survey and the transparency indexes constructed by the NGO Transparency International (Spain) in order to move beyond the fiscal transparency addressed in previous work. In so doing, we broaden the analysis of transparency to the corporate, social, fiscal, contracting, and planning activities of governments. Our results on overall transparency indicate that large municipalities and left-wing local government leaders are associated with better transparency indexes; while the worst results are presented by provincial capitals, cities where tourist activity is particularly important and local governments that enjoy an absolute majority. The analysis of other transparency categories generally shows the consistent impact of these determinants and the need to consider a wider set of variables to capture their effect. |
| Keywords: | Transparency; Local Government; Corruption. JEL classification: H11; H70; Z18. |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:ira:wpaper:201210&r=pbe |
| By: | Abraham, Arpad; Koehne, Sebastian; Pavoni, Nicola |
| Abstract: | Several frictions restrict the government's ability to tax assets. First of all, it is very costly to monitor trades on international asset markets. Moreover, agents can resort to non-observable low-return assets such as cash, gold or foreign currencies if taxes on observable assets become too high. This paper shows that limitations in asset observability have important consequences for the taxation of labor income. Using a dynamic moral hazard model of social insurance, we find that optimal labor income taxes typically become less progressive when assets are imperfectly observed. We evaluate the effect quantitatively in a model calibrated to U.S. data. |
| Keywords: | Optimal Income Taxation; Capital Taxation; Asset Accumulation; Progressivity |
| JEL: | H21 D82 E21 |
| Date: | 2012–05–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:38629&r=pbe |
| By: | Natasha Xingyuan Che; Antonio Spilimbergo |
| Abstract: | Which structural reforms affect the speed the regional convergence within a country? We found that domestic financial development, trade/current account openness, better institutional infrastructure, and selected labor market reforms facilitate regional convergence. However, these reforms have mixed effects on the growth of regions closer to the country’s development frontier. We also document that regional income disparity and average income are inversely correlated across countries so that speeding up regional convergence increases national income. We also present a theoretical model to discuss these results. |
| Keywords: | Cross country analysis , Economic models , Euro Area , Europe , Fiscal reforms , Labor market policy , Labor market reforms , |
| Date: | 2012–04–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/106&r=pbe |
| By: | Susanto Basu; Luigi Pascali; Fabio Schiantarelli; Luis Serven |
| Abstract: | We show that the welfare of a representative consumer can be related to observable aggregate data. To a first order, the change in welfare is summarized by (the present value of) the Solow productivity residual and by the growth rate of the capital stock per capita. We also show that productivity and the capital stock suffice to calculate differences in welfare across countries, with both variables computed as log level deviations from a reference country. These results hold for arbitrary production technology, regardless of the degree of product market competition, and apply to open economies as well if TFP is constructed using absorption rather than GDP as the measure of output. They require that TFP be constructed using prices and quantities as perceived by consumers. Thus, factor shares need to be calculated using after-tax wages and rental rates, and will typically sum to less than one. We apply these results to calculate welfare gaps and growth rates in a sample of developed countries for which high-quality TFP and capital data are available. We find that under realistic scenarios the United Kingdom and Spain had the highest growth rates of welfare over our sample period of 1985-2005, but the United States had the highest level of welfare. |
| Keywords: | productivity, welfare, TFP, Solow Residual |
| JEL: | D24 D90 E20 O47 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:621&r=pbe |