nep-pbe New Economics Papers
on Public Economics
Issue of 2012‒10‒13
thirty-one papers chosen by
Keunjae Lee
Pusan National University

  1. Are Local Tax Rates Strategic Complements or Substitutes? By Raphael Parchet
  2. Measuring Revenue Responses to Tax Rate Changes in Multi-Rate Income Tax Systems: Behavioural and Structural Factors By Creedy, John; Gemmell, Norman
  3. Optimal income taxation with tax competition By Vilen Lipatov; Alfons Weichenrieder
  4. Unit Tax versus Ad Valorem Tax: A Tax Competition Model with Cross-border Shopping By Hikaru Ogawa; Hiroshi Aiura
  5. Income Taxation and Business Incorporation: Evidence from the Early Twentieth Century By Li Liu
  6. Revenue-Maximising Elasticities of Taxable Income in Multi-Rate Income Tax Structures By Creedy, John; Gemmell, Norman
  7. Does fiscal decentralization foster regional investment in productive infrastructure? By Andreas Kappeler; Albert Solé-Ollé; Andreas Stephan; Timo Välilä
  8. Fiscal Reforms during Fiscal Consolidation: The Case of Italy By Giampaolo Arachi; Valeria Bucci; Ernesto Longobardi; Paolo Panteghini; Maria Laura Parisi; Simone Pellegrino; Alberto Zanardi
  9. With Which Countries Do Tax Havens Share Information? By Katarzyna Anna Bilicka; Clemens Fuest
  10. The Effect of Tax Rates and Tax Bases on Corporate Tax Revenues: Estimates with New Measures of the Corporate Tax Base By Laura Kawano; Joel Slemrod
  11. REGIONAL COMPETITION ON TAX ADMINISTRATION By Luca Salvadori; José María Durán-Cabré; Alejandro Esteller-Moré
  12. Fiscal Harmonization: Credible Goal or Trojan Horse? By Enrico Colombatto
  13. Territoriality, Worldwide Principle, and Competitiveness of Multinationals: A Firm-level Analysis of Tax Burdens. By Giorgia Maffini
  14. Exploring the Role Delaware Plays as a Tax Haven By Scott D. Dyreng; Bradley P. Lindsey; Jacob R. Thornock
  15. Capital Gains Taxation and the Cost of Capital: Evidence from Unanticipated Cross-Border Transfers of Tax Bases By Huizinga, Harry; Voget, Johannes; Wagner, Wolf
  16. Tax Rates as Strategic Substitutes By Ruud A. de Mooij; Hendrik Vrijburg
  17. A Journey from a Corruption Port to a Tax Haven By Shafik Hebous; Vilen Lipatov
  19. The Elasticity of Taxable Income in New Zealand By Claus, Iris; Creedy, John; Teng, Josh
  20. Average Marginal Income Tax Rates in New Zealand, 1907-2009 By Bandyopadhyay, Debasis; Barro, Robert; Couchman, Jeremy; Gemmell, Norman; Liao, Gordon; McAlister, Fiona
  21. The Composition of Government Expenditure with Alternative Choice Mechanisms By Creedy, John; Moslehi, Solmaz
  22. Fiscal Consolidation in a Currency Union: Spending Cuts vs. Tax Hikes By Erceg, Christopher; Lindé, Jesper
  23. The Tax Gap: A Methodological Review By Gemmell, Norman; Hasseldine, John
  24. The Impact of Tax Incentives on the Economic Activity of Entrepreneurs By Jarkko Harju; Tuomas Kosonen
  25. Agglomeration, Inequality and Economic Growth: Cross-section and panel data analysis By David Castells; Vicente Royuela
  26. Balanced Budget Government Spending in a Small Open Regional Economy By Peter McGregor; Patrizio Lecca; Kim Swales
  27. Fiscal Federalism in Times of Crisis By Foremny, Dirk; von Hagen, Jürgen
  28. The Determinants of Compliance on Environmental Tax: The Insights of Theoretical and Experimental Approaches Motivated by the Case of Indonesia By Iskandar, Deden Dinar; Wuenscher, Tobias; Badhuri, Anik
  29. Coping with Structural Change – the Regional Effects of Decentralisation in Finland By Antti Simola; Juha Honkatukia; Jouko Kinnunen; Jussi Ahokas
  30. Fiscal income inequalities in Brazilian municipalities and its consequences: identification and efficiency By Bernardo Furtado
  31. The Dynamics of Productivity in the Swiss and German University Sector: A Non-Parametric Analysis that Accounts for Heterogeneous Production By Maria Olivares; Andrea Schenker-Wicki

  1. By: Raphael Parchet
    Abstract: The identification of strategic interactions among local governments is typically plagued by endogeneity problems. This paper proposes a quasi-experimental strategy to identify independent personal income tax setting by Swiss municipalities making use of the multi-tier federal system. State (cantonal) borders spatially bound the effects of canton-level fiscal reforms in areas that are otherwise highly integrated. Fiscal reforms at the canton level provide an exogenous source of variation in municipal tax rates, and are thus a valid instrument to identify strategic interactions among municipalities located at a cantonal border. In contrast to most of the existing empirical literature, I find that tax reaction functions have a negative slope and that taxes rates are strategic substitutes rather than strategic complements. This is compatible with a model of local tax setting in which governments primarily target expenditure rather than tax receipts. JEL codes: H24, H71, H77 Keywords: tax competition, fiscal federalism
    Date: 2012–10
  2. By: Creedy, John; Gemmell, Norman
    Abstract: This paper shows how income changes in response to changes in marginal income tax rates (MTRs) translate into tax revenue changes for the familiar multi-step income tax function used in many countries. Previous literature has focused on the relatively straightforward case of a proportional income tax or the top MTR only. The paper examines revenue responses at both the individual and aggregate levels, and it is shown that for individual MTRs within a multi-rate regime, simple expressions for tax revenue responsiveness can be derived that nevertheless capture the various behavioural and structural responses to income tax reforms involving changes to multiple rates and thresholds. Illustrations are provided using changes to the New Zealand income tax structure in the 2010 Budget. This reduced all marginal tax rates while leaving income thresholds unchanged.
    Keywords: Income Tax Revenue, Elasticity of taxable income, revenue elasticity,
    Date: 2012–09–24
  3. By: Vilen Lipatov (Goethe University Frankfurt); Alfons Weichenrieder (Goethe University Frankfurt, Vienna University of Economics and Business, and CESifo)
    Abstract: We introduce tax competition for mobile labor into an optimal- taxation model with two skill levels and analyze a symmetric subgame- perfect Nash equilibrium of the game between two governments and two taxpayer populations. Tax competition reduces the distortion from the informational asymmetry and increases employment of the less productive individuals. When countries are heterogeneous, this e¤ect is more pronounced in the smaller country.
    Keywords: optimal income tax, migration, unemployment, tax competition, Leviathan government
    JEL: H21 F22
    Date: 2012
  4. By: Hikaru Ogawa; Hiroshi Aiura
    Abstract: Within the framework of spatial tax competition with cross-border shopping, we examine the choice of tax method between ad valorem tax and unit (specific) tax. The paper shows that governments endogenously choose ad valorem tax not because of a classic welfare reason, but because it is a good strategy in competing for mobile customers. Another key finding is that while governments are committed to the ad valorem tax method, the choice is not efficient; Tax-cutting competition becomes more serious when countries adopt ad valorem tax, and competition in ad valorem tax yields smaller payoffs than competition in unit tax.
    Date: 2012–10
  5. By: Li Liu (Centre for Business Taxation, University of Oxford)
    Abstract: If the corporate income tax is set at a different rate from non-corporate income tax, it can play an important role in a firm's choice of organizational form. The impact and interdependency of income tax incentives are crucial factors to take into account when designing efficient tax policies. In this paper I exploit the substantial variation in income taxes across U.S. states in the early twentieth century to estimate these sensitivities. The potential endogeneity of state taxes is addressed using an IV approach. The results demonstrate that the relative taxation of corporate to personal income has a significant impact on the corporate share of economic activities. Raising the entrepreneur's tax cost of incorporation by 10% decreases the mean corporate share of economic activities by about 11-18%. In addition, higher personal tax rates may affect the share of corporate activities through tax evasion and tax progressivity.
    Keywords: Corporate income tax; Personal income tax; Incorporation; Early Twentieth Century
    JEL: H25 H32 H71
    Date: 2012
  6. By: Creedy, John; Gemmell, Norman
    Abstract: The empirical literature on the elasticity of taxable income (ETI) sometimes questions whether estimated values are consistent with being on the revenueincreasing section of the Laffer curve, usually in the context of a single rate tax system or for top marginal rates. This paper develops conceptual expressions for this ‘Laffer-maximum’ or revenue-maximising ETI for the multi-rate income tax systems commonly used in practice. Using the New Zealand income tax system in 2010 to illustrate its properties, the paper demonstrates that a wide range of revenue-maximising ETI values can be expected across individual taxpayers, across tax brackets and in aggregate.
    Keywords: Income Tax Revenue, Elasticity of taxable income, revenue elasticity, Laffer Curve,
    Date: 2012–09–24
  7. By: Andreas Kappeler; Albert Solé-Ollé; Andreas Stephan; Timo Välilä
    Abstract: Spending on productive infrastructure is seen as an important contributor to long term economic growth. Several authors have documented a downward trend in public investment during the last three decades and warned about its possible detrimental effects on the economy. A not well-realized fact is that productive infrastructure investment is mostly provided by sub-national governments. The aim of this paper is to analyze the effect of revenue decentralization on the provision of infrastructure at the sub-national level. We estimate the effects of revenue decentralization and earmarked grant financing on the level of sub-national infrastructure investment in 20 European countries over the period 1990-2009. The findings are compared to those obtained when using sub-national investment in redistribution, for which the theory predictions are different. To account for the high auto-correlation in the dependent variable, we apply a dynamic panel data approach. In particular, we use a Corrected Least Squares Dummy Variable (LSDVC) estimator with the lagged dependent variable included to account for the dynamic character of the dependent variable. The empirical analysis shows that decentralisation in terms of tax shares increases public investment in infrastructure; public investment in redistribution is not significantly affected by decentralisation. The positive link between total regional investment and decentralisation suggests that decentralisation on regional infrastructure investment is additional and does not go hand in hand with a considerable reduction in other types of regional investment, such as health, education or safety. As to investment grants, they have a positive impact on both types of regional investment. The negative interaction between investment grants and decentralisation for regional infrastructure investment suggest that the impact of tax decentralisation on regional infrastructure investment declines with increasing receipts of investment grants by regional governments. This result is intuitive. As the significance of the tax-decentralisation parameter suggests, higher regional decision autonomy leads to more investment in infrastructure. Attempts to undermine the power of regions through the backdoor - e.g. by introducing conditional transfers - will at least partly offset the positive effect of decentralisation.
    Date: 2012–10
  8. By: Giampaolo Arachi (Deparment of Economics and Mathematical Statistics, University of Salento); Valeria Bucci (Deparment of Economics and Mathematical Statistics, University of Salento); Ernesto Longobardi (Department of Economics and Quantitative Methods, University of Bari); Paolo Panteghini (Department of Economics, University of Brescia); Maria Laura Parisi (Department of Economics, University of Brescia); Simone Pellegrino (Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy); Alberto Zanardi (Department of Economics, University of Bologna)
    Abstract: In this paper we aim to discuss the strengths and weaknesses of the fiscal consolidation package adopted recently by the Italian Government in order to achieve a balanced budget by 2013. Revenues are forecasted to increase by more than 3.3 GDP percentage points; these stem mostly from indirect and property taxation. The analysis of the Italian case is interesting since it seems to be consistent with a recent strand of the literature which, in order to foster both short and long-term economic growth, advocated a shift of the tax burden from capital and labour income to consumption and property. Through a set of micro simulation models, this paper evaluates the effects of the Italian fiscal package on households and firms. We show that, in respect of households’ income, indirect and property tax reforms are highly regressive, whilst the reform makes limited resources available for growth enhancing policies (reduction in the effective corporate tax burden). Then, we propose an alternative fiscal package. We show that a less regressive reform on households can be obtained by shifting taxation from personal and corporate income tax to indirect taxation. Our proposal allows the tax burden on firms to be reduced substantially and, in the meantime, offers lower personal income tax rates on households in the lowest deciles of income distribution since they are penalized most by the increase in indirect taxation.
    Keywords: Tax reforms, Fiscal consolidation, Micro simulation models, Italy
    JEL: H2 D22 D31
    Date: 2012–02
  9. By: Katarzyna Anna Bilicka (Centre for Business Taxation, University of Oxford); Clemens Fuest (Centre for Business Taxation, University of Oxford)
    Abstract: In recent years tax havens and o¤shore ?nancial centres have come under increasing political pressure to cooperate with other countries in matters of taxation and e¤orts to crowd back tax evasion and avoidance. As a result many tax havens have signed tax information exchange agreements (TIEAs). In order to comply with OECD standards tax havens are obliged to sign at least 12 TIEAs with other countries. This paper investigates how tax havens have chosen their partner countries. We ask whether they have signed TIEAs with countries to which they have strong economic links or whether they have systematically avoided doing this, so that information exchange remains ine¤ective. We analyse 555 TIEAs signed by tax havens in the years 2008-2011 and ?nd that on average tax havens have signed more TIEAs with countries to which they have stronger economic links. Our analysis thus suggests that tax havens do not systematically undermine tax information exchange by signing TIEAs with irrelevant countries. However, this does not mean that they exchange information with all important partner countries.
    Keywords: tax havens, tax information exchange agreements, tax evasion
    JEL: H26 H77 H87
    Date: 2012
  10. By: Laura Kawano; Joel Slemrod
    Abstract: Several recent analyses have suggested that the revenue-maximizing corporate tax rate resides in the low-30's. We challenge this result by re-examining this relationship using a new compilation of changes in corporate tax base definitions for OECD countries between 1980 and 2004. By considering tax base changes in addition to tax rate changes, we can address the estimation bias that applies to tax rates absent their consideration. We find that the relationship between corporate tax rates and corporate tax revenues is tenuous. The large behavioral response to corporate tax rates implied in the literature does not obtain when accounting for persistent differences in tax policy and business environments across countries.
    JEL: H25
    Date: 2012–10
  11. By: Luca Salvadori; José María Durán-Cabré; Alejandro Esteller-Moré
    Abstract: The tax auditing parameters have scarcely been analyzed by the literature as relevant policy-making instruments; however the enforcement strategies are crucial elements of the tax burden. In this paper we show that in a federal framework the tax auditing policies could represent additional tools on which regional institutions can interact between them. We investigate the presence of this interaction by means of a spatial econometric approach. We employ a time-space recursive model that accounts for sluggish adjustment in the auditing policies obtaining results congruent with standard theory and corroborating the presence of horizontal competition between regions on tax auditing policies. Moreover we find that once regional governments have legal power, the opaque competition on enforcement policies disappears and supposedly it switches to a more transparent competition on statutory tax parameters. Keywords: tax administration and auditing, fiscal competition, fiscal federalism JEL Classification: H71, H77, H83
    Date: 2012–10
  12. By: Enrico Colombatto (Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy)
    Abstract: The supply-side literature underscores two main concepts. Taxation usually harms growth and fiscal competition provides effective protection against excessive fiscal pressure. Understandably, governments tend to dislike fiscal competition, and strive to create fiscal cartels justified by the general principle of fiscal harmonization. This paper argues that, from the policymakers’ standpoint, fiscal harmonization is inferior to automatic exchange of information among fiscal authorities and also to schemes of anonymous withholding taxes. By contrast, fiscal harmonization could be a useful instrument that international bureaucrats resort to in order to obtain fiscal centralization. We conclude that their chances to succeed largely depend on the rent-seeking strategies pursued by the national decision-makers and on the perceived legitimacy of the federal authorities.
    Keywords: Laffer curve, taxation, fiscal harmonization, legitimacy, consensus, rent-seeking
    JEL: H3 H7 H8
    Date: 2012–07
  13. By: Giorgia Maffini (Centre for Business Taxation, University of Oxford)
    Abstract: Using consolidated firm-level accounting data for about 3,400 companies in 15 OECD countries from ORBIS (2003-2007), this paper compares the tax burden of companies headquartered in worldwide countries with that of companies headquar- tered in territorial countries. The tax burden is measured by a marginal effective tax rate (METR) and, employing a new methodology, by a marginal eective tax base (METB) which controls for statutory corporate tax rates. A higher METR for entities headquartered in worldwide jurisdictions is explained by higher corporate statutory tax rates rather than by the difference in the taxation of foreign profits. The METB of companies headquartered in worldwide countries is not statistically different from that of companies headquartered in territorial countries. Using corporate presence in tax havens, the paper also investigates the vulnerability of territorial jurisdictions to tax avoidance. The results show that offshore low-tax operations reduce the METR and the METB of multinationals more in territorial systems than in worldwide systems.
    Keywords: Corporation Income Tax; Multinationals; Territoriality; Worldwide Principle; Profit Shifting; Tax Avoidance; Tax Havens
    JEL: F23 H25 H32
    Date: 2012
  14. By: Scott D. Dyreng (Duke University); Bradley P. Lindsey (North Carolina State University); Jacob R. Thornock (University of Washington)
    Abstract: We examine whether Delaware serves as a domestic tax haven. We find that taxes play an important role in determining whether U.S. firms locate subsidiaries in Delaware and that these tax factors are economically important when compared to the legal and governance factors considered in prior research. In addition, we find that U.S. firms most likely to implement a Delaware–based state tax avoidance strategy have state effective tax rates that range between 0.7 and 1.1 percentage points lower than other firms on average. The tax savings represent a 15 – 24% decrease in the state tax burden, and translate to an increase in net income of between 1.04% and 1.47%. We also find that the tax benefits of using Delaware tax strategies are diminishing over time and we provide evidence this decline is partially attributable to efforts by states to limit the multi-state tax avoidance of U.S. firms.
    Keywords: Delaware, Tax Haven, Corporate Governance, Corporate Tax Avoidance.
    JEL: G38 H25 H71 K22
    Date: 2012
  15. By: Huizinga, Harry; Voget, Johannes; Wagner, Wolf
    Abstract: In a cross-border takeover, the tax base associated with future capital gains is transferred from target shareholders to acquirer shareholders. Cross-country differences in capital gains tax rates enable us to estimate the discount in target valuation on account of future capital gains. A one percentage point increase in the capital gains tax rate reduces the value of equity by 0.225%. The implied average effective tax rate on capital gains is 7% and it raises the cost of capital by 5.3% of its no-tax level. This indicates that capital gains taxation is a significant cost to firms when issuing new equity.
    Keywords: Capital gains taxation; Cost of capital; International takeovers; Takeover premium
    JEL: G32 G34 H25
    Date: 2012–09
  16. By: Ruud A. de Mooij (IMF); Hendrik Vrijburg (Erasmus University Rotterdam)
    Abstract: This paper analytically derives the conditions under which the slope of the tax reaction function is negative in a classical tax competition model. If countries maximize welfare, we show that a negative slope (reflecting strategic substitutability) occurs under relatively mild conditions. Simulations suggest that strategic substitutability occurs under plausible parameter configurations. The strategic tax response is crucial for understanding tax competition games, as well as for assessing the welfare effects of partial tax unions (whereby a subset of countries coordinate their tax rates). Indeed, contrary to earlier findings that have assumed strategic complementarity in tax rates, we show that partial tax unions might reduce welfare under strategic substitutability.
    Keywords: Strategic Substitutes; Asymmetry; Strategic Tax Response; Tax Coordination
    JEL: E62 F21 H25 H77
    Date: 2012–10–02
  17. By: Shafik Hebous (Goethe University Frankfurt); Vilen Lipatov (Goethe University Frankfurt)
    Abstract: We sketch a model according to which tax havens attract corporate income generated in corrupted countries. We consider the choice of optimal bribes by corrupt o¢ cials and the share of the proceeds of corruption that will be concealed in tax havens. In our framework, tax havens have two opposite e¤ects on welfare. First, tax havens?services have a positive e¤ect on welfare through encouraging investment by ?rms fearing expropriation and bribes in corrupt countries. Second, by supporting corruption and the concealment of o¢ cials?bribes, tax havens discourage the provision of public goods and hence have also a negative e¤ect on welfare. The net welfare e¤ect depends on the speci?ed preferences and parameters. One source of this ambiguity is that the presence of multinational ?rms in corrupted countries is positively associated with demanding tax havens?operations. Using fi?rm-level data, we provide empirical support for this hypothesis.
    Keywords: Tax Havens, Tax Avoidance, Tax Evasion, Multinational Firms, Corruption
    JEL: F23 H25 H32
    Date: 2012
  18. By: Luis Diaz-Serrano; Andrés Rodríguez-Pose
    Abstract: This paper analyses whether the different powers and resources at the disposal of local and regional governments across Europe deliver greater satisfaction with political institutions and lead to greater personal happiness. The analysis uses microdata from the four available waves of the European social survey (2002, 2004, 2006 and 2008), including more than 160,000 observations of individuals living in 29 European countries. Our results reveal that fiscal and some forms of political decentralization have a positive and significant effect on the overall subjective well-being of individuals. However, fiscal decentralization has a different effect on the perception of institutions depending on whether we consider subnational expenditure or revenues. Similarly, the effect of political decentralization on the level of satisfaction with institutions also varies depending on whether the capacity of local governments to influence national politics or to exert authority over their own citizens is considered. The results also show that citizens seem to be happier with the actual capacity of their local governments to deliver than with the general principle that they can have a say on their daily politics and policies. Keywords: Happiness, subjective well-being, satisfaction, fiscal and political decentralization, Europe. JEL codes: H11, H77
    Date: 2012–10
  19. By: Claus, Iris; Creedy, John; Teng, Josh
    Abstract: This paper reports estimates of the elasticity of taxable income with respect to the net-of-tax rate for New Zealand taxpayers. The relative stability of the New Zealand personal income tax system, in terms of marginal rates, thresholds and the tax base, provides helpful conditions for deriving these estimates. The elasticity of taxable income was estimated to be substantially higher for the highest income groups. Changes in the timing of income flows for the higher income recipients were found to be an important response to the announcement of a new higher-rate bracket. The marginal welfare costs of personal income taxation were consistent across years, being relatively small for all but the higher tax brackets. For the top marginal rate bracket of 39 per cent, the welfare cost of raising an extra dollar of tax revenue was estimated to be well in excess of a dollar.
    Keywords: Income taxation, Taxable income, Elasticity of taxable income, Excess burden of taxation,
    Date: 2012–09–21
  20. By: Bandyopadhyay, Debasis; Barro, Robert; Couchman, Jeremy; Gemmell, Norman; Liao, Gordon; McAlister, Fiona
    Abstract: Estimates of marginal tax rates (MTRs) faced by individual economic agents, and for various aggregates of taxpayers, are important for economists testing behavioural responses to changes in those tax rates. This paper reports estimates of a number of personal marginal income tax rate measures for New Zealand since 1907, focusing mainly on the aggregate income-weighted average MTRs proposed by Barro and Sahasakul (1983, 1986) and Barro and Redlick (2011). The paper describes the methodology used to derive the various MTRs from original data on incomes and taxes from Statistics New Zealand Official Yearbooks (NZOYB), and discusses the resulting estimates.
    Keywords: Average marginal tax rates, New Zealand, behavioural responses,
    Date: 2012–09–19
  21. By: Creedy, John; Moslehi, Solmaz
    Abstract: This paper investigates the choice of the composition of government expenditure using both positive and normative approaches. The former involves aggregation over selfish voters (simple majority voting and stochastic voting are examined), while the latter involves the choice by a single disinterested individual (considered to maximise a social welfare function). The approach allows direct comparisons of the choice mechanisms. The structures examined include a transfer payment combined with a pure public good, and a transfer payment with tax-financed education. Explicit solutions are obtained for the choice of expenditure components, and these are shown to depend on the proportional difference between the arithmetic mean and another measure of location of incomes, where the latter depends on the choice mechanism. In each case the expenditure composition depends on an inequality measure defined in terms of the proportional difference between a measure of location of the income distribution and the arithmetic mean, where the location measure depends on the decision mechanism.
    Keywords: Government expenditure, Majority voting, Stochastic voting, Public goods, Social welfare,
    Date: 2012–09–24
  22. By: Erceg, Christopher; Lindé, Jesper
    Abstract: This paper uses a two country DSGE model to examine the effects of tax-based versus expenditure-based fiscal consolidation in a currency union. We find three key results. First, given limited scope for monetary accommodation, tax-based consolidation tends to have smaller adverse effects on output than expenditure-based consolidation in the near-term, though is more costly in the longer-run. Second, a large expenditure-based consolidation may be counterproductive in the near-term if the zero lower bound is binding, reflecting that output losses rise at the margin. Third, a "mixed strategy" that combines a sharp but temporary rise in taxes with gradual spending cuts may be desirable in minimizing the output costs of fiscal consolidation.
    Keywords: DSGE Model; Fiscal Policy; Liquidity Trap; Monetary Policy; Open Economy Macroeconomics; Zero Bound Constraint
    JEL: E32 F41
    Date: 2012–09
  23. By: Gemmell, Norman; Hasseldine, John
    Abstract: The global economic crisis has highlighted the continuing problem of tax evasion. For tax agencies to respond, an important antecedent necessitates knowing the extent of the problem. This study is the first to comprehensively review recent research on the tax gap. Our primary contributions are two-fold. First we argue that the tax gap, as conventionally defined, is conceptually flawed because it fails to capture behavioral responses by taxpayers adequately. Our second contribution is to review methods for measuring the tax gap and compare empirical estimates. We suggest that many of the most trenchant criticisms of conventional tax gap measurement (and the ‘hidden economy’ measures that underlie them) leave only microdatabased measures of tax non-compliance as likely to deliver more reliable tax gap estimates. Even here, however, further work is required, on both conceptual and empirical aspects, before tax gaps suitable for policy analysis (e.g. implications for enforcement policy) are likely to be delivered.
    Keywords: tax evasion, tax gap, behavioral responses,
    Date: 2012–09–24
  24. By: Jarkko Harju; Tuomas Kosonen
    Abstract: Based on existing evidence, we know little about how the taxation of small business owners affects their economic activity. This paper studies the effect of two Finnish tax reforms, in 1997 and 1998, on the effort decisions of the owners of small businesses utilizing both theoretical model and empirical data. The reforms reduced the income tax rates of small business owners and applied only to unincorporated firms, leaving corporations out. We use a difference-in-differences strategy to estimate the causal impact of tax incentives on the economic activity of small businesses. The results imply that lighter taxation leads to an increase in the turnover of firms that we interpret as an increase in effort exerted by their owners.
    JEL: H22 H24 H25
    Date: 2012–10
  25. By: David Castells; Vicente Royuela
    Abstract: The effects of inequality on economic growth depend on several factors. On one hand, they depend on the time horizon considered, on the initial level of income and on its initial distribution. But, on the other hand, as growth and inequality are also uneven across space, it also seems relevant to wonder about the effects of the geographic agglomeration of economic activity. Moreover, it seems relevant to consider not only the levels of inequality and agglomeration, but also their change -their evolution within countries- and the interaction between both processes. By considering different econometric specifications and introducing different measures for agglomeration at country level, especially urbanization and urban concentration rates, this work analyzes how increasing inequality and increasing agglomeration influence economic growth depending on the level of development and on the initial distribution of income. Our results suggest that while high inequality levels are a limiting factor for long-run growth -consistent with previous literature-, increasing inequality and increasing agglomeration have the potential to enhance growth in low-income countries where income distribution remains relatively equal, but can degenerate in congestion diseconomies in high-income ones, especially if income distribution becomes too unequal. The policy implications differ according to the level of development. For low-income countries, on one hand it has been argued that these countries should pursue growth first and then, just when growth is secured, attend distributional aspects; the recurrently argued trade-off between efficiency and equity in economics. This acknowledges the empirical fact that growth is by nature, and at least in the short-run, uneven. This unevenness is crucially spatial too; associated to the geographic concentration of economic activity (WDR 2009). On the other hand, however, it seems also quite clear that inequality becomes, sooner or later, a handicap for growth; developing countries that face high income inequalities are indeed also facing greater obstacles to achieve sustained long-run economic growth. Both facts together mean that while achieving higher economic growth may imply higher inequality due to higher geographic concentration of economic activity in the short-run, it also implies efforts for better income distribution in the long-run as a reinforcing, instead of confronting, objective to economic growth. For high-income countries congestion diseconomies seem to be a relevant issue to be addressed. A more balanced urban system, where small to medium size cities play a fundamental role, seem to be a better strategy than intense urban concentration (OCDE 2009). Finally, the fact that the benefits from agglomeration seem to depend on income distribution is likely to be signaling the relevance of good institutions in the process of development, in particular in what relates to economic geography. Surely the topic deserves more analysis and further research.
    Date: 2012–10
  26. By: Peter McGregor; Patrizio Lecca; Kim Swales
    Abstract: Balanced Budget Government Spending in a Small Open Regional Economy P. Lecca, P.G. McGregor and J.K. Swales Department of Economics, University of Strathclyde Abstract Scotland is engaged in a lively and on-going debate on greater fiscal autonomy and independence, which is politically controversial, especially in respect of tax-varying powers. The Scottish Parliament has the power to make a balanced-budget adjustment in public expenditure by varying the basic rate of income tax. While this power has not so far been used, there is considerable pressure further to increase the fiscal powers of the Scottish Government. The object of this paper is to explore and quantify a number of typical balanced-budget government spending shocks. Here we seek to draw on lessons from recent macroeconomic analyses of fiscal policy, but we adapt them to an explicitly regional context. The regional dimension of the analysis is captured through application to a regional economy characterised by: highly open goods markets in which import and export to GDP ratios are much higher than for the national economy; highly open labour markets characterised by the presence of migration and national and regional wage bargaining institutions; financial markets that are perfectly integrated with the national economy with which the region shares a permanently fixed exchange rate. Furthermore, the macroeconomic “closures†of the model are those appropriate to a region, reflecting an institutional structure in which, for example, the system of national transfers moderates the operation of regional adjustment mechanisms. We develop an intertemporal variant of, AMOS, a computable general equilibrium (CGE) model for Scotland to explore the kinds of balanced-budget fiscal expansions that the Scottish Government could pursue. In response to a balanced budget fiscal expansion the model suggests that: an increase in current government purchase in goods and services has negative multiplier effects only if the elasticity of substitution between private and public consumption is high enough to move downward the marginal utility of private consumers; public capital expenditure crowds in consumption and investment but crowding out effects might arise in the short-run if agents are myopic. The distinctive results for public capital expenditure suggest that the current restriction on the composition of Scottish government expenditures is a very significant one. JEL Classifications: C68, D58, H71, H72, R13, R50. Key words: regional computable general equilibrium analysis, fiscal federalism, fiscal policy.
    Date: 2012–10
  27. By: Foremny, Dirk; von Hagen, Jürgen
    Abstract: We study the subnational fiscal adjustment to the Great Recession in a sample of European countries. We find that there are important differences between unitary and federal countries. Subnational governments in federal states reacted to the Great Recession by running larger budget deficits driven by increased spending particularly on social protection and weak revenue performance. In contrast the revenues of subnational governments in unitary states increased during the Great Recession due to larger transfers from central governments. Subnational government deficits increased much less in unitary states as real spending growth fell. In unitary states that fell into a debt crisis after 2009, the central government failed to shield local governments against the adverse macro economic consequences of the Great Recession, forcing them to adjust real spending to falling real revenues. This result suggests that sound public finances at the central level are critical to assure that subnational governments can deliver their allocative functions efficiently in the face of adverse macro economic conditions. In fact, our results call for tighter controls on expenditure growth during goods times and better protection against falling subnational revenues in bad times. We find that the countries that fell into a debt crisis after 2009 are characterized by weaker fiscal discipline at the subnational level already in the decade or so before the Great Recession. This observation suggests that the sustainability of subnational public finances is an important prerequisite for a country to maintain sustainable public finances at the level of general government.
    Keywords: European public debt crisis; fiscal federalism; Great Recession; vertical imbalance
    JEL: H12 H71 H72
    Date: 2012–09
  28. By: Iskandar, Deden Dinar; Wuenscher, Tobias; Badhuri, Anik
    Abstract: This study is intended to provide the clue regarding the determinants of compliance with environmental tax under imperfect monitoring and the presence of bribery, motivated by the case of Indonesia. The study is expected to contribute on environmental policy and tax compliance literatures, particularly by examining the impact of financial reward under the presence of bribery, aside of others conventional compliance instruments such as tax rate, audit, and sanction. In addition to financial reward, this study also incorporates the bribe explicitly as a determinant of compliance. The study employs theoretical and experimental approaches. While theoretical analysis find that the compliance will decrease with tax rate and increase with audit, sanction, financial reward, and the bribe rate; the experiment findings indicate that the impact of each determinant are vary according to the existence of bribery. Despite the difference, both approaches show that the bribery indeed hampers the compliance on environmental tax. The bribery encourages the polluting firms to aggressively evade the environmental tax as the tax rate increase and curbs the positive impact of financial reward in enhancing the compliance.
    Keywords: Environmental Tax, Compliance, Theoretical Approach, Laboratory Experiment, Environmental Economics and Policy,
    Date: 2012–04
  29. By: Antti Simola; Juha Honkatukia; Jouko Kinnunen; Jussi Ahokas
    Abstract: Regional, structural change is currently among the greatest challenges facing the public sector in many EU countries at the moment. In countries like Finland, where the public sectors have a large role in providing educational, health and social services, structural change rapidly becomes a fiscal problem. Demography is directly linked to the demand for public services and to the potential growth of regional economies. On the one hand, ageing increases the demand for age-related services; on the other, it decreases labour supply, limiting the growth potential of many regions. The state’s main tools for regional policies consist of both direct subsidies to the regions, as well as a mechanism reallocating tax revenues between poor and rich municipalities. However, the welfare costs of funding subsidies to poorer regions may be considerable. Thus, instruments not involving changes in spending have been preferred. Here, we consider the relocation of certain functions of the central government to the periphery – decentralization – as an instrument for coping with regional structural change. An improvement in regional municipal finances should also reduce the transfers received from the central government. This study aims at evaluating the effects of decentralization on regional development in recent years and in the near future. The study is related to an on-going evaluation of the financial relations between the central government and local authorities. Decentralization has in practice meant the relocation of central government jobs. We can cover the relocation of jobs quite accurately, and we also have the data of the number of employees that actually relocated with the jobs. Moreover, we are able to calculate state transfers to municipalities at the level of individual municipalities within each region. However, to capture all the implications of relocation to regional economies, we extend the model to take into account the average size and age profile of the families of those relocating. In this way, we obtain an estimate on the effects of decentralization on demand for public services locally, as well as on the overall effect on local population, labour supply and state, municipal and social security funds’ budget balances. We analyse decentralization at the level of the twenty regions of Finland, using a dynamic, regional, AGE model. We find that while decentralisation has been beneficial for many regions by creating new jobs and increasing municipal tax revenues, it has also entailed double efforts since there is only limited obligation for the employees to relocate with the jobs. Interestingly, however, this effect is partly off-set by a reduction of transfers to municipalities. Keywords: regional policies, structural change JEL codes: R13, R53
    Date: 2012–10
  30. By: Bernardo Furtado
    Abstract: Distribution of fiscal income among municipalities – which are constitutionally federal official entities in Brazil - is highly unequal. Given conurbation processes and intense urbanization in the second half of the past century, some municipalities concentrate resources and quality public services whereas neighboring municipalities harbor low-income workers who have to commute back to employment opportunities. As a result, urban landscape in Brazil is far from homogeneous displaying ruptures in level of poverty, criminality, access to transportation networks and leisure activities, among access to other public goods. Given this context, this paper has a threefold objective. Firstly, it identifies the magnitude of these fiscal income inequalities by municipalities using exploratory spatial analysis and detailed fiscal information for 5212 municipalities out of 5565 ones in Brazil. Secondly, this paper describes and characterizes the pairs of neighboring municipalities with high and low fiscal income vis-à-vis their population’s income and educational skills. Finally it tests the efficiency of public services offer using Data Envelopment Analysis (DEA). In order to do so, level of expenditures in health services per capita is used as input compared to quantity of health basic attention level services provided. This is done for the sample of extreme pairs of municipalities with high and low fiscal income per capita. Thus, this paper highlights two cumulative issues that municipalities as institutions have to face in order to provide quality service to its citizens: raw resources availability compared to need of inhabitants and efficiency to transform those resources into services. Preliminary results indicate that there are a large number of pairs of municipalities in which one of them concentrates income resources and the other low-income workers with low educational skills. Nevertheless, level of fiscal income does not seem to influence the efficiency of health services provided by municipalities. Therefore, we can provide two practical public policy recommendations to be enforced based on the results: a) better equalization of fiscal income to locations where there are concentration of inhabitants (rather than to locations where there is concentration of economic activity) and b) suggestion of exchange of experiences from successful efficiency programs that have enabled a limited number of municipalities to transform income into quality health public services.
    Date: 2012–10
  31. By: Maria Olivares (Disney Research Zurich); Andrea Schenker-Wicki (Department of Business Administration (IBW), University of Zurich)
    Abstract: Based on a disaggregate cross-country analysis, we investigate the performance of 10 public Swiss universities and 77 public German universities from 2001-2007. During this period the universities in both countries have faced two major reforms aimed at improving efficiency and productivity in the European higher education sector. We assess the change in productivity and its sources, that is technological change, technical efficiency change and scale effects, obtained by computing the non-parametric Malmquist productivity index by benchmarking the non-science disciplines and the science disciplines of both countries separately against a common frontier. Given the lack of statistical inference of non-parametric productivity analyses, we employ bootstrapping techniques and estimate confidence intervals, allowing us to verify the statistical significance of our results. The results indicate that improvements in technical efficiency were by far the most important driver for productivity growth, followed by gains realised through exploiting economies of scale; thereby technological change partly reduced the increases in productivity. Our findings, however, suggest reform-related differences between the Swiss and the German public university sector. Further, the results point to structural differences across the scientific disciplines, as we found divergent patterns for the development in productivity and its sources in the non-sciences and the sciences.
    Keywords: Higher Education, Cross-Country Analysis, Total Factor Productivity, Nonparametric Malmquist Productivity Index
    JEL: I23 I28 D24
    Date: 2012–08

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