nep-pbe New Economics Papers
on Public Economics
Issue of 2012‒09‒03
fourteen papers chosen by
Keunjae Lee
Pusan National University

  1. Taxing Hotel Room Sales by Online Travel Companies: What Should Be the Appropriate Tax Base? By James Mak
  2. The output effect of fiscal consolidations By Alesina, Alberto F; Favero, Carlo A.; Giavazzi, Francesco
  3. Algorithm for calculating corporate marginal tax rate using Monte Carlo simulation By Sinha, Pankaj; Bansal, Vishakha
  4. Income inequality, tax base and sovereign spreads By Aizenman, Joshua; Jinjarak, Yothin
  5. Tax incentives or subsidies for R&D? By Busom, Isabel; Corchuelo, Beatriz; Martinez Ros, Ester
  6. Do R&D tax incentives lead to higher wages for R&D workers? Evidence from the Netherlands By Lokshin, Boris; Mohnen, Pierre
  7. Making public sector reforms work : political and economic contexts, incentives, and strategies By Bunse, Simone; Fritz, Verena
  8. Taxing the unobservable: The impact of the shadow economy on inflation and taxation By Ummad Mazhar; Pierre-Guillaume Méon
  9. The Impact of Taxes and Social Spending on Inequality and Poverty in Argentina, Bolivia, Brazil, Mexico and Peru: A Synthesis of Results By Nora Lustig; George Gray Molina; Sean Higgins; Miguel Jaramillo; Wilson Jimenez; Veronica Paz; Claudiney Pereira; Carola Pessino; John Scott; Ernesto Yanez
  10. Highway capital expenditures and vehicle travel By Concas, Sisinino
  11. The Human Capital Roots of the Middle Income Trap: The Case of China By Zhang, Linxiu; Yi, Hongmei; Luo, Renfu; Liu, Changfang; Rozelle, Scott
  12. A Role Model for the Conduct of Fiscal Policy? Experiences from Sweden By Flodén, Martin
  13. Savings and Investments: Theoretical Underpinnings of Investment Theories of Finance and the Taxation Regime on Investments in United Kingdom. By Dissanayake, D.M.N.S.W.
  14. Financial Development and Income Inequality: Is there any Financial Kuznets curve in Iran? By Muhammad, Shahbaz; Tiwari, Aviral; Reza , Sherafatian-Jahromi

  1. By: James Mak (UHERO, University of Hawaii at Manoa)
    Abstract: This essay examines the current dispute between state and local governments in the U.S. and online travel companies (OTCs) over the appropriate hotel occupancy tax base for online hotel bookings. It addresses the question of what should be the appropriate tax base in designing hotel occupancy tax statutes. It argues that the appropriate tax base should be the full rental prices of the hotel rooms paid by consumers inclusive of online travel company markups and service fees and not the discounted net rates paid by the OTCs to their hotel suppliers.
    Keywords: Hotel Occupancy Tax, Online Travel Companies, Merchant Model
    JEL: Q20 Q25
    Date: 2012–07
  2. By: Alesina, Alberto F; Favero, Carlo A.; Giavazzi, Francesco
    Abstract: This paper studies whether fiscal corrections cause large output losses. We find that it matters crucially how the fiscal correction occurs. Adjustments based upon spending cuts are much less costly in terms of output losses than tax-based ones. Spending-based adjustments have been associated with mild and short-lived recessions, in many cases with no recession at all. Tax-based adjustments have been associated with prolonged and deep recessions. The difference cannot be explained by different monetary policies during the two types of adjustments. Studying the effects of multi-year fiscal plans rather than individual shifts in fiscal variables we make progress on question of anticipated versus unanticipated policy shifts: we find that the correlation between unanticipated and anticipated shifts in taxes and spending is heterogenous across countries, suggesting that the degree of persistence of fiscal corrections varies..Estimating the effects of fiscal plans, rather than individual fiscal shocks, we obtain much more precise estimates of tax and spending multipliers.
    Keywords: confidence; fiscal adjustment; investment; output
    JEL: E62 H60
    Date: 2012–08
  3. By: Sinha, Pankaj; Bansal, Vishakha
    Abstract: Simulated marginal tax rates involve complex calculations of simulating future (uncertain) incomes and mimicking corporate tax code. This paper develops two algorithms to calculate simulated marginal tax rate. The codes have been developed to forecast future taxable income of Indian companies and their Marginal Tax Rates (MTR) using Monte Carlo simulation in MATLAB. Loss carry forward and minimum alternate tax rules have been incorporated in both the algorithms. Further, a change is made in both the algorithms to incorporate loss carry backward feature to suit the needs of the country where such laws are applicable. The 10000 simulations in MATLAB suggest that MTR is company specific and it is dependent on the income pattern of the company. The MTR increases when loss carry backward rule is applied. In cases where the company actually pays zero tax in a year due to incurred losses, it is found that even in such cases MTR may be non zero. It is found that there is enough cross sectional and time series variations in MTR, therefore, the effect of tax rates on various policy issues of government and companies can be studied by taking MTR as an effective proxy for tax rates.
    Keywords: Marginal tax Rate; Corporate taxes; Loss carry forward; Alternate minimum tax; Loss carry backward; Tax code
    JEL: C6 C63 G38 C15 K34
    Date: 2012–07–20
  4. By: Aizenman, Joshua; Jinjarak, Yothin
    Abstract: This paper investigates the association between greater income inequality, de-facto fiscalspace, and sovereign spreads. Using data from 50 countries in 2007, in 2009 and in 2011, wefind that higher income inequality is associated with a lower tax base, lower de-facto fiscalspace, and higher sovereign spreads. The economic magnitude of these effects is rather large: anincrease in the Gini coefficient of inequality by 1 (in a scale of 0-100), is associated in 2011 witha lower tax base of 2 percent of the GDP, and with a higher sovereign spread of 45 basis points
    Keywords: Economics, Income inequality, tax-base, Fiscal space, sovereign spreads
    Date: 2012–06–01
  5. By: Busom, Isabel (Universitat Autonoma de Barcelona); Corchuelo, Beatriz (Universidad de Extremadura); Martinez Ros, Ester (UNU-MERIT/MGSoG, and Universidad Carlos III de Madrid)
    Abstract: This paper studies whether firms' use of R&D subsidies and R&D tax incentives are correlated to two sources of underinvestment in R&D, financing constraints and appropriability. We find that financially constrained SMEs are less likely to use R&D tax credits and more likely to obtain subsidies. SMEs using legal methods to protect their intellectual property are more likely to use tax incentives. Results are ambiguous for large firms. For both having previous experience in R&D increases the likelihood of using tax incentives, while it reduces the likelihood of using exclusively subsidies, suggesting that the latter induce entry into R&D. Results imply that direct funding and tax credits do not have the same ability to address each source of R&D underinvestment, and that on average subsidies may be better suited than tax credits at least for SMEs. From a policy perspective these tools may be complements rather than substitutes
    Keywords: Research and Development, R&D, tax incentives, subsidies, policy mix
    JEL: H25 L60 O31
    Date: 2012
  6. By: Lokshin, Boris (UNU-MERIT/MGSoG, and School of Business and Economics, Maastricht University); Mohnen, Pierre (UNU-MERIT/MGSoG, and School of Business and Economics, Maastricht University)
    Abstract: This paper examines the impact of the Dutch R&D tax incentive scheme on the wages of R&D workers. We construct firm specific R&D tax credit rates that vary over time following variations in the Dutch R&D tax incentive program. Using instrumental variables we estimate a wage-sharing model with an unbalanced firm-level panel data covering the period 1997-2004. The elasticity of the R&D wage with respect to the fraction of the wage supported by the fiscal incentives scheme is estimated at 0.2 in the short run and 0.24 in the long run.
    Keywords: O32, O38, H25, J30, C23
    Date: 2012
  7. By: Bunse, Simone; Fritz, Verena
    Abstract: Supporting effective public sector reform is a major challenge that the World Bank and other agencies and stakeholders have been grappling with. It is increasingly recognized that political economy factors play a crucial role. However, beyond this broad proposition, specific questions arise: What country contexts are more/less propitious for public sector reforms and what reforms are likely to succeed where? And can more explicitly taking political economy challenges into account help to pursue public sector reforms even in less propitious contexts? This paper addresses these issues in two ways: first, it draws on the existing literature to identify key propositions about factors that can trigger or facilitate public sector reforms, and those that tend to work against (successful) reforms. Second, it investigates the experience of World Bank public sector operations over the decade 2000-2010. It finds that governments in many developing countries face incentives to initiate public sector reforms, but that at the implementation stage, political costs frequently outweigh potential gains; and hence reforms are abandoned or left to wither. Real breakthroughs have been achieved in countries experiencing major structural shifts and those having political leadership committed to higher-level goals. The review of operations shows that successful projects are significantly more widespread than the literature would lead to assume. Furthermore, it provides tentative evidence that investing in understanding political economy drivers has been associated with better project performance. Key implications are the need to differentiate between country contexts more clearly ex ante, concentrate more on reform implementation during windows of opportunity that are typically of limited duration, and design reforms with a clear plan of engagement with stakeholder incentives.
    Keywords: Public Sector Management and Reform,Public Sector Economics,National Governance,Public Sector Expenditure Policy,Intergovernmental Fiscal Relations and Local Finance Management
    Date: 2012–08–01
  8. By: Ummad Mazhar; Pierre-Guillaume Méon
    Abstract: We test the notion that a government may rely less on taxes and more on inflation to finance its expenditures the larger the size of the shadow economy. In a sample of developed and developing countries over the 1999-2007 period, we indeed report a negative relation between the tax burden and the size of the shadow economy, and a positive relation between inflation and the size of the shadow economy. We provide evidence that both are conditional on central bank independence and the exchange rate regime. Both survive a series of robustness checks, controlling for reverse causality, simultaneity, level of development, and estimates of the shadow economy.
    Keywords: Shadow economy; Inflation; Taxes; Inflation tax
    JEL: O17 E52 H26 H27
    Date: 2012–08
  9. By: Nora Lustig (Department of Economics, Tulane University); George Gray Molina (Chief Economist for UNDP-Latin America and the Caribbean, New York, New York); Sean Higgins (Department of Economics, Tulane University); Miguel Jaramillo (GRADE (Grupo de Análisis para el Desarrollo), Peru); Wilson Jimenez; Veronica Paz; Claudiney Pereira (Department of Economics, Tulane University); Carola Pessino (School of Government and Executive Director, Centro de Investigaciones y Evaluación en Economía Social para el Alivio de la Pobreza, Universidad Torcuato Di Tella, Buenos Aires, Argentina); John Scott (CIDE (Centro de Investigación y Docencia Económicas), Mexico and,Consejero Académico, CONEVAL (Consejo Nacional de Evaluación de la Política de Desarrollo Social), Mexico); Ernesto Yanez
    Abstract: We apply a standard tax and benefit incidence analysis to estimate the impact on inequality and poverty of direct taxes, indirect taxes and subsidies, and social spending (cash and food transfers and in-kind transfers in education and health). The extent of inequality reduction induced by direct taxes and transfers is rather small (2 percentage points on average) especially when compared with that found in Western Europe (15 percentage points on average). What prevents Argentina, Bolivia and Brazil from achieving similar reductions in inequality is not the lack of revenues but the fact that they spend less on cash transfers-especially transfers that are progressive in absolute terms--as a share of GDP. Indirect taxes result in that net contributors to the fiscal system start at the fourth, third and even second decile on average, depending on the country. When in-kind transfers in education and health are added, however, the bottom six deciles are net recipients. The impact of transfers on inequality and poverty reduction could be higher if spending on direct cash transfers that are progressive in absolute terms is increased, leakages to the nonpoor are reduced and coverage of the extreme poor by direct transfer programs is expanded.
    Keywords: fiscal incidence, inequality, poverty, taxes, social spending, Latin America
    JEL: D31 D63 H11 H22 H5 I14 I24 I3 O15
    Date: 2012–08
  10. By: Concas, Sisinino
    Abstract: We investigate the effects of public capital investment on the demand for travel. We define capital stock as a productive flow that accounts for the physical deterioration of infrastructure over time. We present a framework where additions to capital stock only cover a portion of the long-run equilibrium level, and where policy decisions are dictated by expectations of economic and travel growth. To the extent that these investments increase productivity, they generate induced travel. Using a panel dataset at the state level for the period 1982-2005, we find that the elasticity of travel demand with respect to changes in state highway capital stock is equal to 0.041in the short run, while the long-run is 0.237. Our results show that changes in capital expenditures in response to past levels of traffic are characterized by a three-year lag, suggesting that the investment response to changes in travel is slow to converge to the desired long-run levels.
    Keywords: highway capital; public capital; capital accumulation; induced vehicle travel; induced vehicle miles of travel
    JEL: H54 H41 R4 C33
    Date: 2012–08–01
  11. By: Zhang, Linxiu; Yi, Hongmei; Luo, Renfu; Liu, Changfang; Rozelle, Scott
    Abstract: China, like other middle income countries, is facing the challenges of the next stage of development as its leaders seek to guide the nation into becoming a high income country. At this same point of development, however, other countries have faltered, raising the possibility of stagnation or collapse. The stagnation of growth after reaching a level of income high enough to be call “middle income” is a phenomenon which some observers call the Middle Income Trap. In this paper we explore one of the major challenges that nations, including China, must face in the transition from middle to high income: the management of inequality. In particular, we explore the possible roots of future inequality that is associated with a nation’s underinvestment in the human capital of broad segments of its population. To meet this goal we first look at several benchmarks of successful transitions from middle to high income (e.g., the case of South Korea) and not-so-successful transitions (Mexico). We then exam more systematically the characteristics of countries that have successfully transitioned (or graduated) from middle to high income (Graduates) and those that are attempting to do so now (Aspirees). With this background, we describe the challenges that China faces in the light of rising wage rates and highly unequal income distribution today. We also document the high levels of human capital inequality in China today, a harbinger of high future inequality. In discussing the sources of the human capital inequality, in addition to the structural and institutional barriers that are discouraging many students (and their parents) from staying in school to achieve the levels of learning that we believe are necessary for preparing individuals for employment in the coming decades, we also identify severe nutritional and health problems. We believe that these nutrition and health problems, unless addressed, are creating serious China’s human capital deficiencies in poor areas of rural China and locking in decades of hard-to-address inequality. The paper ends with a call for leaders in China (and countries at the same level of income of China) to launch immediately a war on poor education, health and nutrition as one step in helping such nations avoid the Middle Income Trap in the future.
    Keywords: Labor and Human Capital,
    Date: 2012–08
  12. By: Flodén, Martin
    Abstract: Sweden was hit by a severe macroeconomic crisis in the early 1990s. GDP fell for three consecutive years in 1991-1993, unemployment increased by 9 percentage points, banks had to be nationalized, and public budget deficits exceeded 10 percent of GDP. The recovery was however quick. GDP growth was around four percent in 1994-1995, and budget deficits had been eliminated by 1998. Growth remained high in the subsequent decade, and the government debt ratio was reduced by almost 50 percent of GDP. This paper describes and analyzes the Swedish crisis and the policy measures implemented in response to the crisis. Policy measures include abandoning the fixed exchange rate, fiscal austerity, a new stricter fiscal framework, and several structural reforms in the 1990s. These policies were appropriate for handling the Swedish crisis, but the Swedish experiences have limited applicability for the current debt crisis, in particular because currency depreciation in combination with strong growth on export markets was a key ingredient in the Swedish recovery. Implementing fiscal austerity would have been more complicated absent this export-led growth. Moreover, the new fiscal framework has most likely contributed to strengthening public finances, but I demonstrate that budget surpluses and high GDP growth only explain around a third of the reduction in the public debt ratio after 1997.
    Keywords: Banking crisis; Fiscal consolidation; Fiscal rules; Macroeconomic crisis
    JEL: E02 E32 E62 E65 G01
    Date: 2012–08
  13. By: Dissanayake, D.M.N.S.W.
    Abstract: Each and every individual require money not only for day today activities but also for investment needs as well. Having the investment might be the correct explanation for an individual since by this he is able to get the improved life for his prospect. Basically this assessment discusses some theoretical underpinnings of savings and investments. These two notions are topical contexts in behavioral research. Basically the notion of investment theory comprises with theories such as Efficient Market Hypothesis, Greater Fool Theory, Fifty Percent Principle, Odd Lot Theory, Rational Expectations Theory, Prospect Theory (Loss-Aversion Theory), and the Short Interest Theory. Investment strategies can be classified into four categories, namely; the fundamental approach, the psychological approach, the academic approach and the electric approach. A detailed analysis has given pertaining to those approaches. Further a detailed analysis has also given pertaining to the UK tax regime on investments.
    Keywords: Investments; Investment theories; Savings; Taxation regime
    JEL: E22 O16 H2
    Date: 2012–08–24
  14. By: Muhammad, Shahbaz; Tiwari, Aviral; Reza , Sherafatian-Jahromi
    Abstract: This deals with the investigation of the relationship between financial development and income inequality in case of Iran. In doing so, we have applied the ARDL bounds testing approach to examine the long-run relationship in the presence of structural break stemming in the series. The unit root properties have been tested by applying Zivot-Andrews (1992) and Clemente et al. (1998) structural break tests. The VECM Granger causality approach is used to detect the direction of causal relationship between financial development and income distribution. Moreover, Greenwood-Jovanovich (GJ) hypothesis has also been tested for Iranian economy. Our results confirm the long run relationship between the variables. Furthermore, financial development reduces income inequality. Economic growth worsens income inequality, but inflation and globalization improve income distribution. Finally, GJ hypothesis is found as well as U-shaped relationship between globalization and income inequality in case of Iran. This study might provide new insights for policy makers to reduce income inequality by making economic growth more fruitful for poor segment of population and directing financial sector to provide access to financial resources of poor individuals at cheaper cost.
    Keywords: Financial Development; Income Inequality; ARDL Bound Testing
    JEL: E44
    Date: 2012–08–20

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