nep-pbe New Economics Papers
on Public Economics
Issue of 2012‒09‒16
seventeen papers chosen by
Keunjae Lee
Pusan National University

  1. A Model of Tradeable Capital Tax Permits By Timothy P. Hubbard; Justin Svec
  2. Tax Policy and Firm Entry and Exit Dynamics: Evidence from OECD Countries By Richard Kneller; Danny McGowan
  3. Health, Fairness and Taxation By Valletta Giacomo
  4. International Tax Competition and Coordination By Michael Keen; Kai A. Konrad
  5. Spending within limits: Evidence from municipal fiscal restraints By Leah Brooks; Yosh Halberstam; Justin Phillips
  6. The effect of effective tax rate differentials and clustering on investment in Belgium By Tim Goesaert
  7. Effective tax rates and measures of business size By Kevin B. Moore
  8. The fiscal multiplier in a time of massive public Debt : the euro area Case By Vranceanu, Radu; Besancenot, Damien
  9. Do Absolute Majorities Spend Less?: Evidence from Germany By Ronny Freier; Christian Odendahl
  10. Bargaining over Tax Information Exchange By May Elsayyad
  11. Revisiting fiscal sustainability: panel cointegration and structural breaks in OECD countries By António Afonso; João Tovar Jalles
  12. The impact of tax exclusive and inclusive prices on demand By Naomi E. Feldman; Bradley J. Ruffle
  13. Tax exemptions and rural development: Evidence from a quasi-experiment By Luc Behaghel; Adrien Lorenceau; Simon Quantin
  14. China as a Developmental State By John Knight
  15. Unconventional fiscal policy at the zero bound By Isabel Correia; Emmanuel Farhi; Juan Pablo Nicolini; Pedro Teles
  16. Do homeowners benefit urban neighborhoods? Evidence from housing prices By Mika Kortelainen; Tuukka Saarimaa
  17. Debt and growth: new evidence for the Euro area By Anja Baum; Cristina Checherita-Westphal; Philipp Rother

  1. By: Timothy P. Hubbard (Department of Economics, Colby College); Justin Svec (Department of Economics, College of the Holy Cross)
    Abstract: Standard models of horizontal strategic capital tax competition predict that, in a Nash equilibrium, tax rates are inefficiently low due to externalities - capital infl ow to one state corresponds to capital out ow for another state. Researchers often suggest that the federal government impose Pigouvian taxes to correct for these effects and achieve efficiency. We propose an alternative incentive-based regulation: tradeable capital tax permits. Under this system, the federal government would require a state to hold a permit if it wanted to reduce its capital income tax rate from some pre-determined benchmark. These permits would be tradeable across states. We show that, if the federal government sets the correct number of total permits, then social efficiency is achieved. We discuss the advantages of this system relative to the canonical suggestion of Pigouvian taxes.
    Keywords: tax competition; marketable permits; asymmetric states
    JEL: H25 H42 H70
    Date: 2012–09
  2. By: Richard Kneller (University of Nottingham); Danny McGowan (Bangor Business School)
    Abstract: In this paper we study the effects of reforms to corporate and personal income taxation on the rate of firm entry and exit using industry data for 19 OECD countries from 1998 to 2005. Using a difference-in-differences approach to correct for endogeneity bias we find that increases in corporate taxation affect entry but not exit. The effects of personal taxation depend upon the marginal tax rate that is altered. Increases in marginal tax rates applied at low income levels negatively affect entry and positively affect exit, whereas marginal tax reforms at higher income levels have the opposite effect.
    Keywords: income taxation; firm entry; firm exit; difference in differences
    JEL: D22 H2 H32 L26
    Date: 2012–04
  3. By: Valletta Giacomo (METEOR)
    Abstract: We consider a model where agents differ in their preferences about consumption labor and health,in their (health-dependent) earning ability, and in their health disposition. We study the jointtaxation of income and health expenditure, under incentive-compatibility constraints, on the basisof efficiency and fairness principles. The fairness principles we consider propose, on one side,to reduce inequalities deriving from factors that do not depend on individuals'' responsibility. Onthe other side, redistribution should be precluded at least when all agents in the economy haveequal physical characteristics. We construct, on the basis of such principles, a particular socialwelfare function. Then we give the explicit formula for the comparison of tax policies: we provethat a tax reform should always benefit agents with the worst earning ability and the worst healthdisposition first. Finally, at the bottom of the income distribution the optimal tax scheme shouldexhibit non-uniform tax rates over health expenditure and non-positive average marginal tax ratesover income.
    Keywords: public economics ;
    Date: 2012
  4. By: Michael Keen; Kai A. Konrad
    Abstract: This paper aims to provide a comprehensive survey of the theory of international tax competition. Starting with the standard framework, it visits the non-cooperative equilibrium of tax competition, analyses aspects of partial and regional coordination, repeated interaction, stock-flow-effects, agglomeration effects and time consistency issues in dynamic models. We discuss profit shifting in the Keen-Kanbur model and then survey frameworks to analyze countries’ bidding for firms, tax rate differentiation and preferential tax regimes, the role of information exchange and recent work on tax havens. The paper also discusses approaches that replace the benevolent government assumption by selfish (Leviathan) governments or by political processes that determine countries' decisions on their tax policy in an international context.
    Keywords: International taxation, tax competition
    Date: 2012–06
  5. By: Leah Brooks; Yosh Halberstam; Justin Phillips
    Abstract: This paper studies the role of a constitutional rule new to the literature: a limit placed by a city on its own ability to tax or spend. We find that such a limit exists in at least 1 in 8 cities, and that limits are not adopted in response to high levels of or variability in taxation. After limit adoption, municipal revenue growth declines by 16 to 22 percent. Our results suggest that institutional constraints may be effective when representative government falls short of the median voter ideal.
    Date: 2012
  6. By: Tim Goesaert
    Abstract: This paper looks at the effect of agglomeration economies on the tax sensitivity of investments in Belgian firms using detailed firm-level data. We find a negative effect of taxation on investment. However, this is dampened by the presence of agglomeration externalities. Our results hint to the importance of local labor market and supplying industries for firm investment decisions and follow the more nuanced view on tax competition of the New Economic Geography models.
    Date: 2012
  7. By: Kevin B. Moore
    Abstract: This paper uses data from the Survey of Consumer Finances (SCF) and the NBER TAXSIM model to estimate marginal and average tax rates for households that own businesses that are pass-thru entities. We examine how marginal and average tax rates vary by the size of business using four different measures of the size: net income, gross receipts, business value, and number of employees. The analysis also uses the long-time series of SCF cross-sections to examine how tax rates for business owners have evolved over the various changes in tax policy of the last two decades.
    Date: 2012
  8. By: Vranceanu, Radu (ESSEC Business School); Besancenot, Damien (University of Paris 13 and CEPN)
    Abstract: This paper argues that in Euro-area economies, where the ECB cannot bail-out financially distressed governments, the fiscal multiplier is adversely affected by the amount of public debt. A regression model on a panel of 26 EU countries over the last 16 years shows that a 10 percentage point increase in the debt-to-GDP ratio is connected to a slowdown in annual growth rates of 0.28 percentage point. Furthermore, the effectiveness of fiscal spending is adversely affected by the amount of public debt.
    Keywords: Fiscal multiplier; Euro-area; Public debt; Illiquidity; the Great Recession
    JEL: C23 E62 G01
    Date: 2012–09–05
  9. By: Ronny Freier; Christian Odendahl
    Abstract: The number of parties in government is usually considered to increase spending. We show that this is not necessarily the case. Using a new method to detect close election outcomes in multi-party systems, we isolate truly exogenous variation in the type of government. With data from municipalities in the German state of Bavaria, we show in regression discontinuity-type estimations that absolute majorities spend more, not less, and increase the property tax rate. We also find weakly significant results for increases in debt. Politically, our results show that the mayor that heads an absolute majority of his own party gains the most, but the party itself does not.
    Keywords: fiscal spending, local election, absolute majority, municipality data, regression discontinuity
    JEL: H11 H71 H72 H74
    Date: 2012
  10. By: May Elsayyad
    Abstract: This paper empirically studies recent treaty signings between tax havens and OECD countries as the outcome of a bargaining process over treaty form. Havens can decide not to sign an agreement, to sign a tax information exchange agreement or to sign a double taxation convention. We use a highly stylized bargaining model to develop testable hypotheses with regards to the type of agreement signed. We show that the main determinants of treaty signing are a haven's bargaining power and good governance. We show that it is easier to renegotiate an already existent treaty to include information exchange than to pressure countries with no existent agreement.
    Date: 2012–02
  11. By: António Afonso (European Central Bank, Directorate General Economics, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany, ISEG/UTL - Technical University of Lisbon, Department of Economics and UECE – Research Unit on Complexity and Economics); João Tovar Jalles (European Central Bank, Directorate General Economics, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany and University of Aberdeen)
    Abstract: We assess the sustainability of public finances in OECD countries, over the period 1970-2010, using unit root and cointegration analysis, both country and panel based, controlling for endogenous breaks. Results notably show: lack of cointegration – absence of sustainability – between government revenues and expenditures for most countries (except for Austria, Canada, France, Germany, Japan, Netherlands, Sweden, and UK); improvements of the primary balance after past worsening in debt ratios for Australia, Belgium, Germany, Ireland, Netherlands and the UK; Granger causality from government debt to the primary balance for 12 countries (suggesting the existence of Ricardian regimes). Overall, fiscal policy has been less sustainable for several countries, and panel data results corroborate the time-series findings. JEL Classification: C32, E62, H62, H63
    Keywords: Debt, primary balance, fiscal regimes, stationarity, breaks, causality, panel cointegration, FMOLS
    Date: 2012–08
  12. By: Naomi E. Feldman; Bradley J. Ruffle
    Abstract: We test the equivalence of tax-inclusive and tax-exclusive prices through a series of experiments that differ only in their handling of the tax. Subjects receive a cash budget and decide how much to keep and how much to spend on various attractively priced goods. Subjects spend significantly more when faced with tax-exclusive prices. This treatment effect is robust to different price levels, to initial shopping-cart purchases and persists throughout most of the ten rounds. A goods-level analysis, intra-round revisions as well as results from a third tax-deduction treatment all cast doubt on salience as the source of our findings.
    Date: 2012
  13. By: Luc Behaghel (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique); Adrien Lorenceau (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Simon Quantin (INSEE - Institut National de la Statistique et des Etudes Economiques - INSEE)
    Abstract: This paper provides quasi-experimental (RDD) estimates of the impact of a tax credit program targeted at less densely populated areas. The program was launched in the mid 1990s in rural France and includes corporate and payroll tax exemptions. Variations over time and across rm types allow un-bundling the overall program impact into three components: a quite restrictive, short-term (1-year) payroll tax exemption on new hires; permanent payroll tax exemptions in the non-pro t sector; and corporate tax exemptions for new rms. We nd no signi cant impact of the program on total employment or the number of plants, and no impact of the di erent program components on targeted subsets of rms. Large positive e ects can be statistically rejected.
    Keywords: Tax exemptions ; Rural Development ; Enterprise Zones
    Date: 2012–09
  14. By: John Knight
    Abstract: The paper examines the notion of a ‘developmental state’ and shows that China possesses the characteristics of a developmental state. It explains the political economy which generated such a state in China and in some other economies. It analyses the methods and mechanisms that were introduced to create a developmental state, in particular the incentive structures that the leadership used to solve the principal-agent problem. These include personnel policies, fiscal decentralization, and patronage relationships. That leads to a review of its successes, limitations and adverse consequences, and to the question: can China’s developmental state be sustained? Conclusions are drawn for both China and other developing countries.
    Keywords: China; Developmental state; Economic growth; Incentives; Principal-agent problem; Virtuous circle
    JEL: B52 E02 O10 O53 P16 P26
    Date: 2012
  15. By: Isabel Correia; Emmanuel Farhi; Juan Pablo Nicolini; Pedro Teles
    Abstract: When the zero lower bound on nominal interest rates binds, monetary policy cannot provide appropriate stimulus. We show that, in the standard New Keynesian model, tax policy can deliver such stimulus at no cost and in a time-consistent manner. There is no need to use inefficient policies such as wasteful public spending or future commitments to low interest rates.
    Date: 2012
  16. By: Mika Kortelainen; Tuukka Saarimaa
    Abstract: Homeownership is heavily subsidized in many countries mainly through the tax code. The adverse effects of lenient tax treatment of owner-occupied housing on economic efficiency and growth are large and well documented in the economics literature. The main argument in favor of subsidizing owner-occupied housing is that it creates positive externalities that offset these adverse effects. This paper tests whether homeowners create positive externalities to their immediate neighborhood that capitalize into housing prices in multi-storey buildings. Using semiparametric hedonic regressions with and without instrumental variables we find no evidence of positive externalities from neighborhood homeownership rate. This result is robust to relaxing the identification assumptions of our instrument using a recently developed set identification method. Our results suggest that the adverse efficiency effects of lenient tax treatment of owneroccupied housing are not offset by positive externalities.
    Keywords: Homeownership, neighborhood effects, partial linear model, set identification
    JEL: R21 D62
    Date: 2012–09–03
  17. By: Anja Baum (University of Cambridge, Faculty of Economics, Austin Robinson Building, Sidgwick Avenue Cambridge, CB3 9DD, UK); Cristina Checherita-Westphal (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany); Philipp Rother (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany)
    Abstract: Against the background of the euro area sovereign debt crisis, our paper investigates the relationship between public debt and economic growth and adds to the existing literature in the following ways. First, we extend the threshold panel methodology by Hansen (1999) to a dynamic setting in order to analyse the nonlinear impact of public debt on GDP growth. Second, we focus on 12 euro area countries for the period 1990-2010, therefore adding to the current discussion on debt sustainability in the euro area. Our empirical results suggest that the shortrun impact of debt on GDP growth is positive and highly statistically significant, but decreases to around zero and loses significance beyond public debt-to-GDP ratios of around 67%. This result is robust throughout most of our specifications, in the dynamic and non-dynamic threshold models alike. For high debt-to-GDP ratios (above 95%), additional debt has a negative impact on economic activity. Furthermore, we can show that the long-term interest rate is subject to increased pressure when the public debt-to-GDP ratio is above 70%, broadly supporting the above findings. JEL Classification: H63, O40, E62, C20
    Keywords: Public debt, economic growth, scal policy, threshold analysis
    Date: 2012–07

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