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on Public Economics |
| By: | Troeger, Vera (University of Warwick) |
| Abstract: | This paper attempts at giving theoretical and empirical answers to the remaining puzzles in the literature on tax competition: the persistently high tax rates on mobile capital and the large variation in domestic tax systems. I argue that governments face a political trilemma, in which they cannot maintain the politically optimal level of public good provision, reduce capital taxes to competitive levels and implement a political support-maximizing mix of tax rates on capital and labour simultaneously. In particular, while legal restriction on capital flows have been eliminated by virtually all OECD countries, de facto capital mobility falls short of being perfect. Limits to full capital mobility result from ownership structures: the higher the concentration of capital, the higher the de facto mobility of capital and the lower the equilibrium tax rate. Second, the demand for the provision of public goods further constraints governments’ choices of the capital tax rate. If revenue from taxation of mobile factors declines, politicians cannot necessarily cut back spending without losing political support. Policy makers, accordingly, do not face a simple optimization problem when deciding on capital taxation. Rather, they have to choose a tax system which allows them to supply an appropriate level of public goods. Policy makers finally face a trade-off resulting from the redistributive conflict between capital-owners and workers. This conflict does not resemble a mere zero-sum game, because lower levels of capital taxation are likely to improve aggregate welfare, but the decision on capital taxation also cannot be analyzed in isolation from the distributive effects of reducing taxes on mobile factors. This political logic of tax competition generates important predictions which are tested empirically for 23 OECD countries over 30 years within a spatial econometrics framework |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cge:warwcg:83&r=pbe |
| By: | Ramón E. López; Eugenio Figueroa |
| Abstract: | We show that the tax system in Chile is insufficient, inefficient and inequitable. Insufficient because it does not yield enough revenues for the state to promote human capital development and to face poverty in a more comprehensive way; inefficient because it is highly unbalanced causing most of the tax burden to be concentrated in very few taxes while neglecting the use of the least distortion-prone tax mechanisms available; inequitable because it forces the middle and low income groups to shoulder most of the tax burden while allowing the super rich to get away paying one of the lowest tax rates among middle income and advanced countries. The consequence of the combined effect of the two sides of this fiscal policy - taxation and public expenditures - is to artificially increase the capital intensity of the economy, to deepen its dependency on natural resource based and environmentally dirty industries, to handicap the creation of human capital and to delay the evolution towards a knowledge-based economy. Fiscal policy has thus negatively affected the long run growth potential of the economy and has contributed to perpetuate a highly unequal distribution of wealth and to exacerbate environmental and natural resource degradation. |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:udc:wpaper:wp346&r=pbe |
| By: | L, Agnello.; R, M. Sousa. |
| Abstract: | In this paper, we assess the impact of fiscal consolidation on income inequality. Using a panel of 18 industrialized countries from 1978 to 2009, we find that income inequality significantly rises during periods of fiscal consolidation. In addition, while fiscal policy that is driven by spending cuts seems to be detrimental for income distribution, tax hikes seem to have an equalizing effect. We also show that the size of the fiscal consolidation program (in percentage of GDP) has an impact on income inequality. In particular, when consolidation plans represent a small share of GDP, the income gap widens, suggesting that the burden associated with the effort affects disproportionately households at the bottom of the income distribution. Considering the linkages between banking crises and fiscal consolidation, we find that the effect on the income gap is amplified when fiscal adjustments take place after the resolution of such financial turmoils. Similarly, fiscal consolidation programs combined with inflation are likely to increase inequality and the effects of fiscal adjustments on inequality are amplified during periods of relatively low growth. Our results also provide support for a nonlinear relationship between inequality and income and corroborate the idea that trade can promote a more equal distribution of income. |
| Keywords: | Fiscal consolidation, income inequality, Kuznets curve. |
| JEL: | E62 E64 D63 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:382&r=pbe |
| By: | Tomasz Koźluk Koźluk; Alain Jousten; Jens Høj |
| Abstract: | Economic growth is projected to be strengthening from mid-2011 onwards, but will be insufficient to restore the sustainability of public finances. The Belgian strategy to prefund ageing costs by generating fiscal surpluses to bring down public debt was derailed by the global crisis. Restoring the strategy is a priority, especially as spreads on Belgian debt have increased. This will require cuts in public spending, improving efficiency of policies, containing the growth of ageing-related costs and making the tax system more conducive to growth. While past experiences, such as in the 1990s, have shown that successful large consolidations are feasible, the task seems even more difficult this time as potential growth will be muted and interest rates are likely to increase. In this context, a credible fiscal consolidation plan requires the participation of all governments. Its effectiveness can be strengthened by improving the fiscal framework, in particular by introducing multi-year budgets, annual expenditure rules consistent with long-term targets and an enhanced role of an independent fiscal policy watchdog.<P>Mettre les finances publiques belges sur la voie de la viabilité<BR>On prévoit un renforcement de la croissance à partir du milieu de 2011, mais il ne suffira pas à rétablir la viabilité des finances publiques. La stratégie suivie par la Belgique, qui consistait à préfinancer le coût du vieillissement en dégageant des excédents budgétaires permettant de diminuer la dette publique, a été compromise par la crise mondiale. En revenir à cette stratégie est une priorité, d’autant plus que la prime de risque sur les taux d’intérêt de la dette belge a augmenté. Cela exigera de faire des économies, d’améliorer l’efficience des politiques publiques, de contenir la hausse des charges liées au vieillissement de la population et de rendre le système fiscal plus favorable à la croissance. Les expériences passées, par exemple celle des années 1990, ont démontré la possibilité d’effectuer un assainissement en profondeur, mais la tâche semble cette fois plus difficile ; en effet, la croissance potentielle sera très modérée et les taux d’intérêt vont probablement augmenter. Dans ces conditions, pour qu’un plan de redressement budgétaire soit crédible, tous les gouvernements doivent y participer. On peut lui donner plus d’efficacité en améliorant le cadre d’action, notamment par l’instauration de budgets pluriannuels et la fixation de règles de dépenses annuelles conformes aux objectifs à long terme ainsi qu’en faisant jouer un rôle accru à une entité indépendante chargée de surveiller la politique budgétaire. |
| Keywords: | public debt, public finances, tax policy, Belgium, fiscal federalism, social security, fiscal sustainability, budgetary rules, fiscal councils, dette publique, finances publiques, fédéralisme fiscal, sécurité sociale, Belgique, viabilité budgétaire, règle budgétaire, conseil fiscal |
| JEL: | E60 E61 H60 H61 H63 H77 |
| Date: | 2012–04–26 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:954-en&r=pbe |
| By: | Jellal, Mohamed; Bouzahzah, Mohamed |
| Abstract: | Under Principal-Agent-Supervisor paradigm, we examine in this paper how a tax collection agency changes optimal schemes in order to lessen the occurrence of corruption between the tax collector and the taxpayer. The Principal, who maximizes the expected net fiscal revenue, reacts by decreasing tax rates when the supervisor is likely to engage in corrupt transaction with taxpayer.The combat against collusion and corruption may explain the greater reliance on indirect taxes than on direct taxes both in developed and developing countries like Morocco. |
| Keywords: | Principal;Supervisor;Agent; Corruption; Tax Evasion |
| JEL: | D73 D82 H2 H26 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:38813&r=pbe |
| By: | Sutherland, Douglas |
| Abstract: | Public debt in the OECD area passed annual GDP in 2011 and is still rising. For many countries, just stabilising debt - let alone bringing it down to a more sustainable level - is a major challenge. The debt overhangs can affect growth through channels such as raising the cost of capital. The main focus of this paper however is the implications for growth both in the short term and in the long term of reducing debt levels. Consolidation needs are large and most of the reduction in debt will need to come from improvements in the primary balance. In the short term, the pace of consolidation needs to balance consolidation requirements with the effects of fiscal retrenchment on aggregate demand. The trade-off will depend on the choice of fiscal instrument and on the ability of monetary policy to accommodate consolidation. However, other things being equal, a slow consolidation will ultimately require more effort to meet a fixed debt target. In this context, consolidation should aim to use instruments that are friendly to long-term growth. There is scope to improve budgetary positions by reforming transfer systems, raising the efficiency of public services, eliminating certain tax expenditures and collecting additional revenues from less distortionary tax bases. |
| Keywords: | Fiscal consolidation; Growth |
| JEL: | H62 H68 H63 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:38745&r=pbe |
| By: | Luca Corazzini, Christopher Cotton, Paola Valbonesi |
| Abstract: | We present results from a multiple public goods experiment, where each public good produces benefits only if total contributions to it reach a minimum threshold. The experiment allows us to compare subjects' behavior in a benchmark treatment with a single public good and in treatments with more public goods than can be funded. We show how the availability of additional, more-efficient public goods may not make subjects better off. This is because additional options decrease the probability of coordination and discourage contributions. Introducing additional, less-efficient options does not alter coordination and contributions relative to the benchmark. |
| Keywords: | threshold public goods, multiple public goods, salience, efficiency, laboratory experiment |
| JEL: | C91 C92 H40 H41 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:slp:islawp:islawp44&r=pbe |
| By: | William B. Peterman |
| Abstract: | This paper considers the impact on optimal tax policy of including endogenously determined retirement in a life cycle model. Allowing individuals to determine when they retire causes the optimal tax on capital to increase by 75% because of two implicit changes in the aggregate labor supply elasticity. First, including endogenous retirement causes an increase in the overall aggregate labor supply elasticity since agents can change their labor supply on both the intensive and extensive margins. In response, the government limits the distortions from the tax policy by lowering the tax on labor and increases the tax on capital. Second, given that the choice to retire is more relevant for older individuals, endogenous retirement disproportionately increases older agent's elasticity compared to younger individuals. Ideally, the government would decrease the relative labor income tax on individuals when they are older and supply labor more elastically. However, in the absence of age-dependent taxes, the government mimics such a tax policy by further increasing the tax on capital. I find that the welfare lost from not accounting for endogenous retirement when solving for the optimal tax policy is equivalent to approximately one percent of lifetime consumption. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2012-28&r=pbe |
| By: | Jacques K Ngoie; Arnold Zellner |
| Abstract: | Using several variants of a Marshallian Macroeconomic Model (MMM), see Zellner and Israilevich (2005) and Ngoie and Zellner (2012), this paper investigates how various tax rate reductions may help stimulate the U.S. economy while not adversely affecting aggregate U.S. debt. Variants of our MMM that are shown to fit past data and to perform well in forecasting experiments are employed to evaluate the effects of alternative tax policies. Using quarterly data, our one-sector MMM has been able to predict the 2008 downturn and the 2009Q3 upturn of the U.S. economy. Among other results, this study, using transfer and impulse response functions associated with our MMM, finds that permanent 5 percentage points cut in the personal income and corporate profits tax rates will cause the U.S. real GDP growth rate to rise by 3.0 percentage points with a standard error of 0.6 percentage points. Also, while this policy change leads to positive growth of the government sector, its share of total real GDP is slightly reduced. This is understandable since short run effects of tax cuts include the transfer of tax revenue from the government to the private sector. The private sector is allowed to manage a larger portion of its revenue while government is forced to cut public spending on social programs with little growth enhancing effects. This broadens private economic activities overall. Further, these tax rate policy changes stimulate the growth of the federal tax base considerably which helps to reduce annual budget deficits and the federal debt. |
| Keywords: | Marshallian Macroeconomic Model, Disaggregation, Transfer Functions, Impulse Response Functions, U.S. Fiscal Policy Analysis. |
| JEL: | E27 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:280&r=pbe |
| By: | Bracco, Emanuele (University of Lancaster); Redoano, Michela (University of Warwick); Porcelli, Francesco (University of Warwick) |
| Abstract: | This paper provides a simple model to explain effect of political alignment between different tiers of government on policy choices and election outcomes. We derive precise predictions that, as long as voters attribute most of the credit for providing public goods to the local government: (i) aligned municipalities receive more grants, set lower taxes and provide more public goods, (ii) that the probability that the local incumbent is re-elected is higher in aligned municipalities compared to not aligned ones. Our empirical strategy to identify the alignment effects is built upon the fact that being or not aligned changes discontinuously at 50% of the vote share of local parties. This allows us to use sharp regression discontinuity design. Our theoretical predictions are largely con…rmed using a new dataset on Italian public finance and electoral data at the central and local level. |
| Keywords: | Fiscal Federalism, Political Competition, Accountability. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cge:warwcg:86&r=pbe |
| By: | Troeger, Vera (University of Warwick); Schneider, Christina J. (University of California, San Diego) |
| Abstract: | This paper analyzes how opportunistic governments choose between alternative fiscal policies in order to increases their chances of re-election. To increase the provision of public goods shortly before elections – and thus, to generate a fiscal political business cycles – governments may either increase deficits or redistribute governmental resources from longterm efficient sources to short-term efficient public programs. We argue that incumbents who face highly competed elections principally have an incentive to spend more on public goods even though these investments are not efficient in the long term. In principal, they would do so by increasing the deficits (with re-balancing the budget after the election). However, our model demonstrates that incumbents would even electioneer at the cost of long-term investments if the extent of fiscal transparency does not allow them to finance the provision of public goods with higher deficits. In other words, if elections are close and voters may observe the governmental deficit, then governments tend to increase the provision of public goods – and consequently, their electoral prospects – by a redistribution of budget resources from long-term efficient investment to a short-term provision of public goods. We test the predictions with new data on the composition of government consumption for 17 OECD countries over 35 years. The preliminary findings suggest that governments indeed reshuffle resources from long-term efficient investment to short-term public goods before elections especially if elections are contested. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cge:warwcg:84&r=pbe |
| By: | Jidong Huang; Frank J. Chaloupka, IV |
| Abstract: | This study examined the impact of the 2009 federal tobacco excise tax increase on the use of cigarettes and smokeless tobacco products among youth using the Monitoring the Future survey, a nationally representative survey of 8th, 10th, and 12th grade students. The results of this analysis showed that this tax increase had a substantial short-term impact. The percentage of students who reported smoking in the past 30 days dropped between 9.7% and 13.3% immediately following the tax increase, depending on model specifications, and the percentage of students who reported using smokeless tobacco products dropped between 16% and 24%. It is estimated that there would have been approximately 220,000 – 287,000 more current smokers and 135,000 – 203,000 more smokeless tobacco users among middle school and high school students (age 14 – 18) in the United States in May 2009 had the federal tax not increased in April 2009. The long-term projected number of youth prevented from smoking or using smokeless tobacco that resulted from the 2009 federal tax increase could be much larger given the resulting higher tobacco prices would deter more and more children from initiating smoking and smokeless tobacco use over time. |
| JEL: | I10 I18 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18026&r=pbe |
| By: | Ryo Arawatari (Graduate School of Economics, Nagoya University); Tetsuo Ono (Graduate School of Economics, Osaka University) |
| Abstract: | We develop a two-period, three-class of income model where low-income agents are borrowing constrained because of capital market imperfections, and where redistributive expenditure is financed by tax and government debt. When the degree of capital market imperfection is high, there is an ends-against-the-middle equilibrium where the constrained low-income and the unconstrained high-income agents favor low levels of government debt and redistributive expenditure; these agents form a coalition against the middle. In this equilibrium, the levels of government debt and expenditure might be below the efficient levels, and the spread of income distribution results in a lower debt-to-GDP ratio. |
| Keywords: | Government debt; Borrowing constraints; Voting; Structure-induced equilibrium; Income inequality. |
| JEL: | D72 H52 H60 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1102r2&r=pbe |
| By: | Liu, Lili; Pradelli, Juan |
| Abstract: | This paper explores the building blocks of an institutional framework to govern borrowing by subnational entities to finance infrastructure investment. The framework should help in achieving sustainable financing of development needs and sound management of fiscal risks. Based on international experience, the authors suggest a minimum set of indicators for monitoring fiscal and debt developments. Recognizing the different nature and operations of the subnational entities, they propose specific indicators for special purpose vehicles and the government's general budget. The paper outlines an analytical framework to inform policy decisions concerning subnational debt limits, which are country-specific and should not be mechanically applied. Basic notions underpinning medium-term macro-fiscal frameworks and debt sustainability analyses provide effective guidance for identifying prudent levels of subnational debt. The authors argue that developing fiscal and debt indicators and setting borrowing limits should be part of a broader strategy to put in place an adequate fiscal architecture to coordinate and monitor the budgetary and borrowing policies conducted by individual subnational governments. Consistent with this general principle, they explore several areas of subnational public finance and management that need to be addressed with adequate governance structures and policy choices. |
| Keywords: | Debt Markets,Subnational Economic Development,Access to Finance,Public Sector Economics,Bankruptcy and Resolution of Financial Distress |
| Date: | 2012–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6069&r=pbe |
| By: | Proto, Eugenio (University of Warwick); Rustichini, Aldo (University of Minnesota) |
| Abstract: | We show that personality traits mediate the effect of income on Life Satisfaction. The effect is strong in the case of Neuroticism, which measures the sensitivity to threat and punishment, in both the British Household Panel Survey and the German Socioeconomic Panel. Neuroticism increases the usually observed concavity of the relationship: Individuals with higher Neuroticism score enjoy income more than those with lower score if they are poorer and enjoy income less if they are richer. When the interaction between income and neuroticism is introduced, income does not have signicant effect on his own. To interpret the results, we present a simple model where we assume that (i) Life Satisfaction is dependent from the gap between aspired and realized income, and this is modulated by Neuroticism and (ii) income increases in aspirations with a slope less than unity, so that the gap between aspired and realized income increase with aspirations. From the estimation of this model we argue that poorer tend to over- shoot in their aspiration, while rich tend to under-shoot. The estimation of the model also shows substantial eect of traits on income. |
| Keywords: | Life Satisfaction, Household Income, Personality Theory, Neuroticism |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cge:warwcg:85&r=pbe |