nep-pbe New Economics Papers
on Public Economics
Issue of 2012‒06‒05
seventeen papers chosen by
Keunjae Lee
Pusan National University

  1. Local Spending, Transfers and Costly Tax Collection By Fernando Aragon
  2. Government spending, corruption and economic growth By G. d'Agostino; J.P Dunne; L. Pieroni
  3. Trade Credit and Taxes By Mihir A. Desai; C. Fritz Foley; James R. Hines Jr.
  4. Squeezing the state: tariff revenue, state capacity and the WTO’s Doha Round By James Scott
  5. The Impact of Proposed Federal Tax Reform on Farm Businesses By Williamson, James M.; Durst, Ron L.
  6. Optimal labor-income tax volatility with credit frictions. By Abo-Zaid, Salem
  7. Optimal Tax-Transfer Policies, Life-Cycle Labour Supply and Present-Biased Preferences By Lasse Frisgaard Gunnersen; Bo Sandemann Rasmussen
  8. On the Timing and Optimality of Capital Controls: Public Expenditures, Debt Dynamics and Welfare By Raouf Boucekkine; Aude Pommeret; Fabien Prieur
  9. Regional productivity variation and the impact of public capital stock: an analysis with spatial interaction, with reference to Spain By Gómez-Antonio, Miguel; Fingleton, Bernard
  10. Ethnolinguistic Diversity and the Provision of Public Goods: Experimental Evidence from South Africa By Justine Burns; Malcolm Keswell
  11. The Effects of Democratization on Public Goods and Redistribution: Evidence from China By Monica Martinez-Bravo; Gerard Padró i Miquel; Nancy Qian; Yang Yao
  12. Analyzing top US income shares: earned or extracted? By Lambert, Thomas; Kwon, Eundak
  13. A Theory of Dynamic Biofuel Tax Credit By Ye, Fanglin; Lu, Liang; Du, Xiaoxue
  14. Party Nomination Procedures and Quality of Government By Fernando Aragon
  15. Is High Public Debt Always Harmful to Economic Growth? Reinhart and Rogoff and some complex nonlinearities By Alexandru MINEA; Antoine PARENT
  16. The impact of fiscal consolidation on economic growth. An illustration for the Spanish economy based on a general equilibrium model By Pablo Hernández de Cos; Carlos Thomas
  17. What are the effects of public debt on innovation and employment growth? By Mario Coccia

  1. By: Fernando Aragon (Simon Fraser University)
    Abstract: This paper studies the effect of costly taxation on the fiscal response of local governments to intergovernmental transfers. Using a panel dataset of Peruvian municipalities, I find robust evidence that central government's grants have a greater stimulatory effect in municipalities facing higher tax collection costs. The results are consistent with costly taxation partially explaining the flypaper effect.
    Keywords: Flypaper effect; Intergovernmental transfers; Fiscal decentralization
    JEL: H71 H77
    Date: 2012–05
  2. By: G. d'Agostino; J.P Dunne (SALDRU, School of Economics, University of Cape Town); L. Pieroni
    Abstract: This paper considers the effects of corruption and government spending on economic growth. It starts from an endogenous growth model and extends it to account for the detrimental effects of corruption on the potentially productive components of government spending, namely military and investment spending. The resulting model is estimated on a sample of African countries and the results show, first, that the growth rate is strongly influenced by the interaction between corruption and military burden, with the interaction between corruption and government investment expenditure having a weaker effect. Second, allowing for the cyclical economic fluctuations in specific countries leaves the estimated elasticities close to those of the full sample. Third, there are significant conditioning variables that need to be taken into account, namely the form of government, political instability and natural resource endowment. These illustrate the cross country heterogeneity when accounting for quantitative direct and indirect effects of key variables on economic growth. Overall, these findings suggest important policy implications.
    Keywords: corruption; military spending; development economics; panel data; Africa
    JEL: O57 H5 D73
    Date: 2012
  3. By: Mihir A. Desai; C. Fritz Foley; James R. Hines Jr.
    Abstract: This paper analyzes the extent to which firms use trade credit to reallocate capital in response to tax incentives. Tax-induced differences in pretax returns encourage the use of trade credit to reallocate capital from firms facing low tax rates to those facing high tax rates. Evidence from the worldwide operations of U.S. multinational firms indicates that affiliates in low-tax jurisdictions use trade credit to lend, whereas those in high-tax jurisdictions use trade credit to borrow: ten percent lower local tax rates are associated with net trade credit positions that are 1.4 percent higher as a fraction of sales. The use of trade credit to get capital out of low-tax, low-return environments is also illustrated by reactions of U.S. firms to the temporary repatriation tax holiday in 2005, when affiliates with positive net trade credit positions were significantly more likely than others to repatriate dividends to parent companies in the United States.
    JEL: F23 G31 G32 H25
    Date: 2012–05
  4. By: James Scott
    Abstract: Abstract Tax revenue forms a critical element of state capacity, in turn underpinning the state’s ability to foster inclusive economic growth. This paper calculates the impact of the WTO’s Doha Round on tariff revenues among low-income countries. It finds that some, though not all, are severely affected, losing up to 17 percent of total government tax revenue. In addition, the tariff cuts are found to be regressive, primarily affecting luxury items, such as motor vehicles. Finally, the paper analyses the effectiveness of the mechanism included in the Doha Round to overcome lost tariff revenue, namely aid for trade.
    Date: 2012
  5. By: Williamson, James M.; Durst, Ron L.
    Keywords: Federal Tax Reform, Agriculture, Farm Business, Agricultural Finance, H20, Q14,
    Date: 2012
  6. By: Abo-Zaid, Salem
    Abstract: This paper studies the optimality of labor tax smoothing in a simple model with credit frictions. Firms’ borrowing to pay their wage payments in advance is constrained by the value of their collateral at the beginning of the period. The labor tax and the shadow value on the credit constraint lead to a (static) wedge between the marginal product of labor and the marginal rate of substitution between labor and consumption. This paper suggests that while the notion of “wedge smoothing” is carried over to this environment, it is achieved only through a volatile labor-income tax rate. As the shadow value on the financing constraint varies over the business cycle, tax volatility is needed in order to counteract this variation and thus allow for “wedge smoothing”. In particular, the optimal labor-income tax rate is lower when the credit market is more tightened and higher when the credit market is less tightened. Therefore, when firms are more credit-constrained and the demand for labor is reduced, optimal fiscal policy calls for boosting labor supply by lowering the labor-income tax rate.
    Keywords: Labor tax smoothing; Credit frictions; Borrowing constraints
    JEL: E62 H21 E44
    Date: 2012–05–11
  7. By: Lasse Frisgaard Gunnersen (Department of Economics and Business, Aarhus University, Denmark); Bo Sandemann Rasmussen (Department of Economics and Business, Aarhus University, Denmark)
    Abstract: Using a two-period model with two types of agents that are characterized by present-biased preferences second-best optimal tax-transfer policies are considered. The paternalistic optimal tax-transfer policy has two main concerns: Income redistribution from high to low ability households and correction of undersaving due to present-biasedness. Policies must comply with incentive-compatibility constraints that restricts both how much income redistribution that can take place and how much savings should be subsidized. A main result is that the degree of present-biasedness has important consequences not only for optimal subsidies to savings but also for optimal marginal income taxes.
    Keywords: Optimal tax-transfer policy, paternalistic government, age-dependent taxes, labour supply, present-biasedness, redistribution
    JEL: H21 H23 H24
    Date: 2012–05–24
  8. By: Raouf Boucekkine; Aude Pommeret; Fabien Prieur
    Abstract: This paper solves a second-best problem where a government has in particular to choose whether to tax financial inflows (capital con- trols) or not, and when. A multi-stage optimal control technique is used to this end. First, it is shown that it is optimal to switch in finite time from capital controls to full financial liberalization (zero tax on capital inflows) whenever a measure of total wealth is above a cer- tain threshold. In particular, a too large initial debt makes financial liberalization sub-optimal. Second, our analysis suggests that capital controls should be used countercyclically: booms should be responded by more financial liberalization while recessions should rather lead to more stringent capital controls. Third, when public expenditure is chosen in order to maximize social welfare, financial liberalization is not unaffordable only for poor countries, even wealthy countries might find it optimal to implement capital controls if they aim to keep a large amount of public expenditure. In short, the preservation of the welfare states might require a more frequent use of capital controls.
    Date: 2012–05
  9. By: Gómez-Antonio, Miguel; Fingleton, Bernard
    Abstract: In this paper we examine whether variations in the level of public capital across Spain's Provinces affected productivity levels over the period 1996-2005. The analysis is motivated by contemporary urban economics theory, involving a production function for the competitive sector of the economy ('industry') which includes the level of composite services derived from 'service' firms under monopolistic competition. The outcome is potentially increasing returns to scale resulting from pecuniary externalities deriving from internal increasing returns in the monopolistic competition sector. We extend the production function by also making (log) labour efficiency a function of (log) total public capital stock and (log) human capital stock, leading to a simple and empirically tractable reduced form linking productivity level to density of employment, human capital and public capital stock. The model is further extended to include technological externalities or spillovers across provinces. Using panel data methodology, we find significant elasticities for total capital stock and for human capital stock, and a significant impact for employment density. The finding that the effect of public capital is significantly different from zero, indicating that it has a direct effect even after controlling for employment density, is contrary to some of the earlier research findings which leave the question of the impact of public capital unresolved.
    Keywords: Public capital, urban economics, spatial econometrics,
    Date: 2011
  10. By: Justine Burns; Malcolm Keswell (SALDRU, School of Economics, University of Cape Town)
    Abstract: This paper utilises techniques in experimental economics to investigate the impact of racial identity on the provision of public goods. A large sample of Black and White undergraduate University students were recruited to participate in public goods games, where the racial composition of the groups was varied to include All White groups, All Black groups and mixed race groups (comprising Black and White students). The results show that contrary to predictions from social identity theory, racial homogeneity in a group does not uniformly predict higher contributions to the public pool. Rather, it would appear that observable racial identity may convey information about extensive heterogeneity as opposed to homogeneity, especially where race is highly correlated with diversity in other dimensions, such as ethnolinguistic diversity. In accordance with the established macroeconometric literature on the provision of public goods, the results presented in this study show that contributions to the public good are indeed increasing in the level of trust in a group, and declining in the extent of ethnolinguistic diversity and socio-economic need in the group. Moreover, while communication has a large and significant effect on contributions to the public pool, patterns of communication are a ected by the racial composition of the group, with Black students appearing to be more responsive to communications made by White colleagues as opposed to Black colleagues. Hence, communication is not effective at sustaining co-operation in racially homogenous Black groups, possibly because communication in these groups allows participants to verify the greater diversity on other dimensions amongst group members.
    Date: 2011
  11. By: Monica Martinez-Bravo; Gerard Padró i Miquel; Nancy Qian; Yang Yao
    Abstract: This study investigates the effects of introducing elections on public goods and redistribution in rural China. We collect a large and unique survey to document the history of political reforms and economic policies and exploit the staggered timing of the introduction of elections for causal identification. We find that elections significantly increase public goods expenditure, the increase corresponds to demand and is paralleled by an increase in public goods provision and local taxes. We also find that elections cause significant income redistribution within villages. The results support the basic assumptions of recent theories of democratization (Acemoglu and Robinson, 2000; Lizzeri and Persico, 2004). In addition, we show that the main mechanism underlying the effect of elections is increased leader incentives.
    JEL: H11 O38 P16
    Date: 2012–05
  12. By: Lambert, Thomas; Kwon, Eundak
    Abstract: With the current Occupy Movement occurring on Wall Street and other parts of the globe, a lot of attention has recently been given to growing inequality and how much the top 1 percent of households have in terms of income versus the other 99 percent in the United States. Mainstream economists and other social scientists point to greater trade liberalization, lower union membership, smaller government, greater GDP growth, a greater presence of the financial services industry in the economy, and lower marginal tax rates on upper income households as making significant contributions to growing income inequality and greater income shares for those at the top of the income scale in the United States. Additionally, some mention that gains to upper income households have been made possible by a growing pay gap between skilled and unskilled or educated versus less educated workers, in which upper income households are made up disproportionately of college educated and highly trained individuals. Finally, declines in the number of high paying jobs in manufacturing are also blamed for rising inequality and greater gains in income to top income households relative to those in other income groups. All of these factors affecting inequality have been found to be statistically significant in one study or another. This research note does not dispute the findings of other research efforts but explores the use of three other concepts to explain income inequality. The use of 1) the profitability of the private sector, 2) the decline in the wages and salaries of most workers, and 3) the Marxian concept of rate of exploitation are offered as additional explanations of inequality and the income shares of top income households. Since the Great Depression, it appears that the income shares of the top strata are due just as much to the income losses and “exploitation” of other groups and to governmental policies as they are due to the performance of the general US economy or to the performance of private sector profitability and returns on education. These findings which offer support to both sides of the arguments over greater accumulation of income by those at the top of the income scale.
    Keywords: income inequality; profitability; rate of exploitation; surplus value; top income shares; trade unions
    JEL: B5
    Date: 2012–05–02
  13. By: Ye, Fanglin; Lu, Liang; Du, Xiaoxue
    Abstract: In this paper, we set up a social cost minimization problem for a government. Using dynamic optimization tools, we analytically shows how exogenous parameters could affect the optimal social cost and the optimal tax credit policy path.
    Keywords: Optimal Control, Biofuel, Tax Credit, Environmental Economics and Policy, Resource /Energy Economics and Policy, Q42, Q48,
    Date: 2012–05–22
  14. By: Fernando Aragon (Simon Fraser University)
    Abstract: This paper explores empirically the relation between party's procedures to nominate candidates, such as primaries, and quality of government. Using a panel data of Latin America countries, I find robust evidence that the quality of government is higher during the mandate of primary-nominated presidents. The empirical strategy exploits within country variation and controls for relevant covariates at country and party level. Using an instrumental variable approach with determinants of primary adoption produces similar results. The findings are consistent with primaries increasing incentives among candidates to improve policy design, and suggest that party institutions matter for governance.
    Keywords: Governance; Political parties; Candidate nomination procedures; Primaries
    JEL: H11 H80
    Date: 2012–05
  15. By: Alexandru MINEA (Centre d'Etudes et de Recherches sur le Développement International); Antoine PARENT
    Abstract: In their already-famous 2010 article "Growth-in-a-Time-of-Debt" (AER-100(2)-pp.-573-78), Carmen Reinhart and Kenneth Rogoff show that average post-WW2 economic growth is dramatically declining in advanced economies, once the debt-to-GDP ratio is above a 90% threshold. We explore the relevance of this exogenous threshold using up-to-date econometric techniques, and reveal an endogenously-estimated threshold around a debt-to-GDP ratio of 115%, above which the negative debt-growth link changes sign. Consequently, additional evidence is needed before suggesting policy recommendations regarding growth effects of fiscal policy in such high debt regimes, which may be subject to complex nonlinearities.
    Keywords: public debt, economic growth, nonlinear effects, cliometrics
    JEL: N10 E62 H63
    Date: 2012
  16. By: Pablo Hernández de Cos (Banco de España); Carlos Thomas (Banco de España)
    Abstract: This study illustrates the effects of different fiscal consolidation measures on economic activity through simulations performed with a general equilibrium model calibrated to the Spanish economy. Overall, our results show that fiscal consolidation has short-run costs but sizable long-run benefits in terms of growth. Regarding the short-run costs, their magnitude depends crucially on the presence of confidence effects due to the consolidation process, which tend to reduce the value of fiscal multipliers
    Keywords: Fiscal consolidation, general equilibrium, fiscal multipliers, confidence effects
    JEL: E62 C68
    Date: 2012–05
  17. By: Mario Coccia (Ceris - Institute for Economic Research on Firms and Growth,Turin, Italy)
    Abstract: The study here analyzes, across European countries, the relationship between labour and drivers of technological innovation, also considering the interaction of these variables with the structural indicator of the public debt. The main findings are: the fruitful effect of total public expenditure on education as a percentage of GDP and R&D intensity on employment rate, whereas an increase of general government consolidated gross debt has a negative effect for employment rate as well as for technology proxies. Empirical evidence provides some elements to discuss main economic policy implications from relationships between observed facts.
    JEL: J01 J08 I20 H63 O30 O33
    Date: 2012–06

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