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on Public Economics |
| By: | Giertz, Seth H. (University of Nebraska at Lincoln); Tosun, Mehmet S. (University of Nevada, Reno) |
| Abstract: | This paper develops a simulation model in order to examine the effectiveness of state attempts at redistribution under a variety of migration elasticity assumptions. Key outputs from the simulation include the impact of tax-induced migration on state revenues, excess burden, and fiscal externalities. With modest migration elasticities, the costs of state-level redistribution are substantial, but state action may still be preferred to a federal policy that is at odds with preferences of a state's citizens. At higher migration elasticities, the costs of state action can be tremendous. Overall excess burden is greater, but this is dominated by horizontal fiscal externalities. Horizontal fiscal externalities represent a cost to the state pursuing additional redistribution, but not a cost at the national level. |
| Keywords: | fiscal externalities, fiscal federalism, income redistribution, excess burden, deadweight loss |
| JEL: | H21 H23 H71 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6798&r=pbe |
| By: | Alan J. Auerbach (Professor of Economics and Law, University of California, Berkeley (E-mail: auerbach@econ.berkeley.edu)) |
| Abstract: | This paper considers implications of population aging for the conduct of fiscal policy, grouping the issues into four areas, focusing on the impact of aging on: (1) the size of government budget imbalances; (2) the composition of government spending and government budget flexibility; (3) the composition of tax collections and the desirability of alternative tax systems; and (4) the effectiveness of fiscal policy as a tool for stabilization. Societal aging puts considerable stress put on public sector finances because of large, unfunded and age-based entitlement programs. Even if existing programs can be modified, a growing share of government budgets will be devoted to old-age entitlement programs, and both economics and politics suggest that this will reduce the flexibility of budget determinations. An aging population makes certain tax bases - in particular, consumption taxes, and wealth transfer taxes as well - more productive and efficient. The consequences of aging are less clear as to stabilization policy, both with respect to the effectiveness of automatic stabilizers and the ability of government to take effective discretionary actions. |
| Keywords: | deficits, fiscal imbalances, tax reform, political economy, stabilization policy |
| JEL: | E62 H21 H62 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:12-e-12&r=pbe |
| By: | Julio López-Laborda (Department of Public Economics, University of Zaragoza); Antoni Zabalza (Department of Economic Analysis, University of Valencia) |
| Abstract: | The purpose of this paper is to evaluate the efficiency cost of transfers. To this end, we develop a model of individual demand decisions about the provision of a regional public good that encompasses a continuum of tax/transfers scenarios to finance regional public expenditure. We assume that individuals have identical quasi-linear preferences defined over private consumption and the regional public good, that endowment income varies between individuals and regions and that regions have different predetermined sizes. We show that, despite its simplicity, this model is capable of discriminating the efficiency properties of the different scenarios considered, and that the substitution of transfers for own regional taxes always raises the provision of the regional public good. Our model yields the so called “flypaper effect” with no need to appeal to the existence of “fiscal illusion” by the part of the individual. We nevertheless find that “fiscal illusion” increases the elasticity of public good provision with respect to transfers, and we suggest two potentially refutable hypotheses to identify the existence of this phenomenon. |
| Keywords: | Regional finance, taxes, transfers, fiscal illusion, flypaper effect |
| Date: | 2012–09–19 |
| URL: | http://d.repec.org/n?u=RePEc:ays:ispwps:paper1229&r=pbe |
| By: | Philipp Doerrenberg (University of Cologne); Denvil Duncan (Indiana University) |
| Abstract: | We examine the extent to which labor supply elasticities with respect to tax rates depend on access to evasion opportunities. It is observed that some types of workers have the opportunity to hide their income while others do not have such opportunities, e.g. due to being subject to third-party-reporting. We first set up a theoretical model to formally show that labor supply responses depend on access to evasion. The model is then tested in a lab experiment in which all participants undertake a real-effort task over several rounds. Subjects face a tax rate, which varies across rounds and are required to pay taxes on earned income. The treatment group is given the opportunity to underreport income while the control group is not. We find zero labor effort responses to tax rates in the control group and positive statistically significant adjustments in the treatment group; suggesting that both groups indeed react differently to taxes. |
| Keywords: | Tax Evasion, Labor Supply, Taxable Income, Lab Experiment, Taxes |
| JEL: | H2 J2 |
| Date: | 2012–09–18 |
| URL: | http://d.repec.org/n?u=RePEc:cgr:cgsser:03-10&r=pbe |
| By: | Carolina Torres |
| Abstract: | This paper considers the influence of taxes on the financial incentive to invest in human capital and explores the tax treatment of private investment by individuals and employers in post-compulsory education and lifelong learning in 31 OECD countries, India and South Africa. The paper describes targeted personal, corporate and value added tax measures related to education and training and analyses them in terms of their impacts on the incentive to acquire skills and their distributional effects. The desirability of different forms of tax relief for skills formation is examined from the point of view of efficiency, equity and administrative simplicity within the broader context of fiscal policy and the role of government in skills formation beyond compulsory education. |
| Keywords: | human capital, tax policy, OECD countries, skills formation, tax incentives, education finance |
| JEL: | H21 H24 H25 I22 J24 |
| Date: | 2012–09–17 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ctpaaa:13-en&r=pbe |
| By: | Naomi E. Feldman (Research Division Federal Reserve Board Washington, D.C.); Bradley J. Ruffle (BGU) |
| 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. |
| Keywords: | experimental economics, sales tax, VAT, tax salience. |
| JEL: | C91 H20 H31 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bgu:wpaper:1207&r=pbe |
| By: | Charles Ka Yui Leung (City University of Hong Kong); Sinan Sarpca (Koc University); Kuzey Yilmaz (University of Rochester) |
| Abstract: | We develop a general equilibrium model of residential choice and study the effects of two housing aid policies, public housing units and housing vouchers. Land is differentiated by both residential accessibility and local public goods, and the provision levels of local public goods are determined by property tax revenues and neighborhood compositions. Households differ in their incomes and preferences for local public goods. Housing aid policies are financed by general income taxes. We discuss how the location of public housing units is a fundamental policy variable, in addition to the numbers and sizes of units, and argue that vouchers not only cause less distortion for social welfare compared to public housing, but may also improve overall welfare. |
| Keywords: | Public housing, housing vouchers, housing policy, welfare, residential location choice, local public goods, endogenous sorting |
| JEL: | H40 D60 H82 R13 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:roc:rocher:574&r=pbe |
| By: | Florian Scheuer |
| Abstract: | In many countries, taxes on businesses are less progressive than labor income taxes. This paper provides a justification for this pattern based on adverse selection that entrepreneurs face in credit markets. Individuals choose between becoming entrepreneurs or workers and differ in their skill in both of these occupations. I find that endogenous cross-subsidization in the credit market equilibrium results in excessive (insufficient) entry of low-skilled (high-skilled) agents into entrepreneurship. This gives rise to a corrective role for differential taxation of entrepreneurial profits and labor income. In particular, a profit tax that is regressive relative to taxes on labor income restores the efficient occupational choice. |
| JEL: | D82 E22 E44 G11 G14 H21 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18406&r=pbe |
| By: | Raúl A. Ponce-Rodríguez (Department of Economics, Universidad Autónoma de Ciudad Juárez); Charles R. Hankla (Department of Political Science, Georgia State University); Jorge Martinez-Vazquez (International Center for Public Policy. Andrew Young School of Policy Studies, Georgia State University); Eunice Heredia-Ortiz (Development Alternatives Inc., DAI Author) |
| Abstract: | Decentralization is among the most important global trends of the new century, yet there is still no consensus on how to design political institutions to realize its benefits. In this paper, we investigate the political conditions under which decentralization will improve the delivery of public goods. We begin by incorporating insights from political science and economics into a rigorous and formal extension of the “decentralization theorem”. Our extension assumes inter-jurisdictional spillovers and suggests that the interaction of democratic decentralization (popularly elected sub-national governments) and party centralization (the power of national party leaders over subnational office-seekers) will produce the best outcomes for public service delivery. To test this argument empirically, we make use of a new dataset of sub-national political institutions created for this project. Our analyses, which allow us to examine educational outcomes in more than 125 countries across more than 25 years, provide support for our theoretical expectations. |
| Date: | 2012–08–11 |
| URL: | http://d.repec.org/n?u=RePEc:ays:ispwps:paper1227&r=pbe |
| By: | Alton, Theresa; Arndt, Channing; Davies, Rob; Hartley, Faaiqa; Makrelov, Konstantin |
| Abstract: | South Africa is considering introducing carbon taxes to reduce greenhouse gas emissions. We evaluate potential impacts using a dynamic economy-wide model linked to an energy sector model. Simulation results indicate that a phased-in carbon tax that reache |
| Keywords: | carbon tax; growth; employment; income distribution; South Africa |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp2012-46&r=pbe |
| By: | Hendel, Ulrich |
| Abstract: | Common tax competition models suggest that welfare states will undercut each other's tax rate to attract taxpayers and keep welfare recipients at bay. This will lead to a zero-taxation outcome in the absence of migration costs or other barriers to migration. This paper develops a two-country framework with mobile altruistic taxpayers and immobile welfare recipients. It shows that under the assumption of taxpayers motivated by warm glow altruism, tax competition leads to unique pure strategy Nash equilibria in taxation which are different from zero given sufficiently strong altruistic preferences. If countries are asymmetric with respect to the number of welfare recipients, pure altruism and inequity aversion preferences support additional unique pure strategy Nash equilibria in which the country with the fewer poor attracts more taxpayers and sets higher taxes. This implies that rich countries may benefit from tax competition. |
| Keywords: | tax competition; welfare state; altruism |
| JEL: | H73 D64 H20 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:13999&r=pbe |
| By: | Dietrichson, Jens (Department of Economics, Lund University); Ellegård, Lina Maria (Department of Economics, Lund University) |
| Abstract: | Central government bailouts of local governments are commonly viewed as a recipe for local fiscal indiscipline, as local governments learn that the center will come to rescue in times of trouble. Little is however known about whether such tendencies can be dampened if assistance is made conditional upon the local governments' own fiscal efforts. We examine a case in which the Swedish central government provided conditional grants to 36 financially troubled municipalities: to receive the grant, municipalities first had to cut costs and balance their budgets. For each municipality, we estimate the long run program effect on per capita costs of services using the synthetic control method for case studies (Abadie and Gardeazabal, 2003; Abadie et al., 2010). The number of municipalities that substantially reduce their costs after the program is much larger than the number that substantially increase their costs, and there is a cost reducing effect on average. Fixed effects estimations with net revenues as measure of fiscal performance corroborate these findings for costs. Conditional bailouts need thus not erode fiscal responsibility and may even induce fiscal discipline. |
| Keywords: | Bailouts; local governments; fiscal performance; synthetic control method |
| JEL: | D23 H61 H62 H72 H77 |
| Date: | 2012–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2012_024&r=pbe |
| By: | Pablo Simón-Cosano (Universitat Pompeu Fabra); Santiago Lago-Peñas (REDE, IEB and University of Vigo); Alberto Vaquero (University of Vigo) |
| Abstract: | This paper studies the effect of political variables on the gains obtained by Spanish regions in periodical bargaining of the intergovernmental financing agreements and on the regional distribution of discretional earmarked grants over the period 1987-2008. First, we find that the relationship between gains in transferred revenues and on regional public debt stocks depends on the period and the specific issues discussed in the corresponding negotiation, aside from political affinity. Second, we show that the most discretional program of earmarked grants is strongly driven by electoral strategy. National incumbents tend to allocate intergovernmental transfers where there are competitive regional elections. Moreover, we show that earmarked grants are allocated in those regions where the incumbent performs better in national elections and, especially, in those where there are more seats to be won. Hence we prove that both strategies are complementary rather than exclusive. |
| Keywords: | Intergovernmental grants, party systems, elections, subcentral public debt. |
| Date: | 2012–09–19 |
| URL: | http://d.repec.org/n?u=RePEc:ays:ispwps:paper1230&r=pbe |
| By: | Gustav Ranis (Economic Growth Center, Yale University) |
| Abstract: | Vertical decentralization, either at the deconcentration, delegation or, more rarely, the devolution level, has been instituted in most countries of Sub-Saharan Africa. It usually has the effect of increasing the quantity as well as the quality, in terms of health and education, of public goods. More neglected in the literature is the issue of horizontal decentralization, shifting the decision-making power from the central ministry of finance to the ministries of education and health, as well as strengthening the legislative and judicial branches of government. We examine the relationship between horizontal decentralization with its important ethnic dimension and vertical decentralization. Local governments are accountable to the center under vertical and to democratic forces and civil society under horizontal decentralization. Smaller local units are more likely to be more homogeneous ethnically, leading to a larger quantity and higher quality of public goods. |
| Keywords: | decentralization, ethnicity, development, Sub-Saharan Africa |
| JEL: | O11 O17 O18 O55 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:egc:wpaper:1017&r=pbe |
| By: | Jacob, Martin (WHU-Otto Beisheim School of Management); Södersten, Jan (Department of Economics) |
| Abstract: | This article reconsiders the role of dividend taxation and its effect on the cost of capital of small firms. Using a simple portfolio model for small open economies, we show that a decrease in dividend taxes on large companies unambiguously increases the required rate of return for small companies. A dividend tax cut for both, large and small companies may however lead to the counter-intuitive result of increasing cost of capital for small firms. For different small open economies, we further provide statistics on the correlation between the return of large and small firms that drives the counter-intuitive result. Our results suggest that mitigating payout taxes in small open economies can have ambiguous effects on the cost of capital of small, domestically owned firms. This is particularly relevant when tax reforms are designed to stimulate investments by small firms scarce in internal funds. |
| Keywords: | Shareholder taxation; corporate-personal tax integration; open economy; investment incentives; small firms |
| JEL: | H24 H25 |
| Date: | 2012–09–10 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:uunewp:2012_012&r=pbe |
| By: | Frankel, Jeffrey A. (Harvard University); Schreger, Jesse (Harvard University) |
| Abstract: | Why do countries find it so hard to get their budget deficits under control? Systematic patterns in the errors that official budget agencies make in their forecasts may play an important role. Although many observers have suggested that fiscal discipline can be restored via fiscal rules such as a legal cap on the budget deficit, forecasting bias can defeat such rules. The members of the eurozone are supposedly constrained by the fiscal caps of the Stability and Growth Pact. Yet ever since the birth of the euro in 1999, members have postponed painful adjustment by making overly optimistic forecasts of future growth and budget positions and arguing that the deficits will fall below the cap within a year or two. The new fiscal compact among the euro countries is supposed to make budget rules more binding by putting them into laws and constitutions at the national level. But what is the record with such national rules? Our econometric findings are summarized as follows: -Governments' budget forecasts are biased in the optimistic direction, especially among the Eurozone countries, especially when they have large contemporaneous budget deficits, and especially during booms. -Governments' real GDP forecasts are similarly over-optimistic during booms. -Despite the well-known tendency of eurozone members to exceed the 3% cap on budget deficits, often in consecutive years, they almost never forecast that they will violate the cap in the coming years. This is the source of the extra bias among eurozone forecasts. If euro area governments are not in violation of the 3% cap at the time forecasts are made, forecasts are no more biased than other countries. -Although euro members without national budget balance rules have a larger over-optimism bias than non-member countries, national fiscal rules help counteract the wishful thinking that seems to come with euro membership. The reason is that when governments are in violation of the 3% cap the national rules apparently constrain them from making such unrealistic forecasts. -Similarly, the existence of an independent fiscal institution producing budget forecasts at the national level reduces the over-optimism bias of forecasts made when the countries are in violation of the 3% cap. |
| JEL: | E62 H20 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:harjfk:rwp12-041&r=pbe |
| By: | Quentin Frère (INRA, UMR1041 CESAER – Université de Bourgogne, 26 bd du Dr Petitjean, Dijon, France); Matthieu Leprince (CREM (CNRS et université de Rennes 1), 7 Place Hoche, Rennes, France); Sonia Paty (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France) |
| Abstract: | The purpose of this paper is to assess the effects of inter-municipal fiscal cooperation on municipal public spending, based on the French experience. We estimate a model of municipal spending choice using panel data and spatial econometrics for municipalities over the period 1994-2003. We provide two main results. First, inter-municipal cooperation has no significant impact on the level of municipal public spending, which suggests that cooperation does not achieve its goal of reducing municipal spending by the sharing of local responsibilities. Second, there are no spending interactions between municipalities belonging to the same inter-municipal community. This is in line with the goal assigned to cooperation in terms of internalization of spatial externalities. However, our results show that benefit spillovers remain highly significant outside inter-municipal communities, suggesting that inter-municipal communities remain too small. |
| Keywords: | public spending, local governments, inter-municipal cooperation, panel data |
| JEL: | C2 H2 H4 H7 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:1225&r=pbe |
| By: | Timothy J. Gronberg (Department of Economics, Texas A&M University); R. Andrew Luccasen (Mississippi University for Women); Theodore L. Turocy (School of Economics and CBESS, University of East Anglia); John B. Van Huyck (Department of Economics, Texas A&M University) |
| Abstract: | We report the results of a laboratory experiment on crowd-out in a voluntary contribution mechanism public goods game. In our setting, a standard argument states that a tax should not be effective in raising contributions, because agents respond by reducing voluntary contributions by the amount of the tax. Our experimental design focuses in on this intuition by abstracting away from several potential confounds. We use a specification for the payoff function in which there is a dominant strategy for own-earnings maximizing agents, located interior to and in the upper half of the strategy space. The dominant strategy ensures that changes in contributions are attributable to the tax directly, rather than second-order effects due to responses to out-of-equilibrium play by other agents. The dominant strategy is made more transparent by the use of a novel graphical decision interface. We find that individuals robustly choose at or above the own-earnings dominant strategy level. Even with the controls of the design, crowd-out is incomplete, but the degree of crowd-out is higher than in previous studies. Analysis of individual-level decisions provides evidence of different player types. Behavior of subjects not choosing the dominant or Pareto-efficient contributions is well-organized by a model of warm-glow giving with a logit decision error. |
| Keywords: | Public goods, crowd-out, warm-glow, logit choice |
| Date: | 2012–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:uea:wcbess:12-02&r=pbe |
| By: | Eiji Yamamura; Haruo Kondoh |
| Abstract: | Since the end of the 1990s, local governments in Japan have enacted Information Disclosure Ordinances, which require the disclosure of official government information. This paper uses Japanese prefecture-level data for the period 1998–2004 to examine how this enactment affected the rate of government construction expenditure. The Dynamic Panel model is used to control for unobserved prefecture-specific effects and endogenous bias. The major finding is that disclosure of government information reduces the rate of government construction expenditure. This implies that information disclosure reduces losses from rent-seeking activity, which is consistent with public choice theory. |
| Keywords: | Information disclosure; Special interest group; Construction expenditure; Rent seeking. |
| JEL: | D73 D78 H79 |
| Date: | 2012–09–13 |
| URL: | http://d.repec.org/n?u=RePEc:eei:rpaper:eeri_rp_2012_13&r=pbe |
| By: | Thomakos, Dimitrios |
| Abstract: | While Greece’s recent elections have reassured the international markets for now, this confidence is likely to disappear once again if Greece does not undertake more reforms aimed at restarting growth. Dimitrios Thomakos argues that one of Greece’s major problems is the concentration of population around Athens. A targeted initiative of tax breaks for individuals and businesses in combination with the introduction of VAT-free trade areas may be able to encourage new businesses to start and encourage growth. |
| Date: | 2012–06–26 |
| URL: | http://d.repec.org/n?u=RePEc:ner:lselon:http://eprints.lse.ac.uk/46270/&r=pbe |
| By: | Hendel, Ulrich |
| Abstract: | This paper examines the interaction between a growth-oriented terrorist organization and an uninformed government based on a two-period signaling game. The terrorists, taking into account the government's counter-terrorism response to first period attacks, gain additional manpower from successful attacks and choose their strategy to maximize the available manpower at the end of period 2. The government tries to infer the terrorist organization's size from the terrorists' attack choice it observes in period 1 and adjusts its second period counter-terrorism spending according to the perceived threat of terrorism. Combining the signaling game and organizational growth approaches of previous contributions, this paper shows that, if a terrorist group follows a growth strategy, it has an incentive to appear weaker than it is by mimicking the behaviour of a smaller organization. Furthermore, depending on its beliefs about the extent of the terrorist threat it can be optimal for a government to spend more on second period counter-terrorism measures if it is not attacked than if it were attacked. The behaviour of contemporary terrorist groups suggests that the assumptions of a growth strategy and mimicking behaviour are justified. |
| Keywords: | terrorism; counter-terrorism; game theory |
| JEL: | H56 C72 D82 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:13998&r=pbe |
| By: | Begoña Dominguez; Pedro Gomis-Porqueras |
| Abstract: | This paper studies optimal monetary and fiscal policies in an economy à la Lucas and Stokey (1983) and Lagos and Wright (2005) with multiple cash and credit goods. We show that optimal policies are in general time inconsistent due to insufficient number of instruments to influence future government decisions. There are two important cases where time consistency can be restored. First, if taxes in the decentralized anonymous markets are not available, the multipliers on the decentralization constraints can be utilized as additional instruments to ensure time consistency. Second, if taxes in decentralized markets are available, time consistency arises when the different cash goods satisfy the conditions necessary for optimal uniform taxation. |
| Keywords: | optimal policy; time consistency; taxation; money; inflation; search. |
| JEL: | C70 E40 E61 E62 H21 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:mos:moswps:2012-31&r=pbe |