nep-pbe New Economics Papers
on Public Economics
Issue of 2012‒10‒20
sixteen papers chosen by
Keunjae Lee
Pusan National University

  1. Sub-national Revenue Mobilization in Latin America and Caribbean Countries: The Case of Venezuela By German Rios; Federico Ortega; J. Sebastian Scrofina
  2. Portugal - Solid Foundations for a Sustainable Fiscal Consolidation By David Haugh; Stéphane Sorbe
  3. Shadow Economies in Highly Developed OECD Countries: What Are the Driving Forces? By Schneider, Friedrich; Buehn, Andreas
  4. Social Spending, Taxes and Income Redistribution in Uruguay By Marisa Bucheli; Nora Lustig; Maximo Rossi; Florencia Amabile
  5. Demystifying China's fiscal stimulus By Fardoust, Shahrokh; Lin, Justin Yifu; Luo, Xubei
  6. Capital Mobility—a resource curse or blessing? How, when, and for whom? By OGAWA Hikaru; OSHIRO Jun; SATO Yasuhiro
  7. Income Taxation in a Life Cycle Model with Human Capital By Michael P. Keane
  8. Optimal capital taxation with idiosyncratic investment risk By Vasia Panousi; Catarina Reis
  9. Employment and Taxes in Latin America: An Empirical Study of the Effects of Payroll, Corporate Income and Value-Added Taxes on Labor Outcomes By Eduardo Lora; Deisy Johanna Fajardo
  10. Estimating dynamic tax revenue elasticities for Germany By Koester, Gerrit B.; Priesmeier, Christoph
  11. Tax incentives and capital structure choice: Evidence from Germany By Hartmann-Wendels, Thomas; Stein, Ingrid; Stöter, Alwin
  12. Choosing the Pace of Fiscal Consolidation By Łukasz Rawdanowicz
  13. The Impact of Redistribution on Income Inequality in Canada and the Provinces, 1981-2010 By Andrew Sharpe; Evan Capeluck
  14. More than Revenue: Main Challenges for Taxation in Latin America and the Caribbean By Teresa Ter-Minassian
  15. The Impact of Policy Diffusion on Optimal Emission Taxes By Peter Michaelis; Thomas Ziesemer
  16. Portugal - Assessing the Risks Around the Speed of Fiscal Consolidation in an Uncertain Environment By Stéphane Sorbe

  1. By: German Rios; Federico Ortega; J. Sebastian Scrofina
    Abstract: This paper analyzes the high fiscal dependence of Venezuelan states and municipalities on the central government and the political economy process embedded in the interaction between the central government and sub-national entities. Also explored is whether there is scope to increase sub-national governments’ revenues, improve the current intergovernmental transfer system, and reduce horizontal imbalances; of particular importance is analyzing the impact of current transfer mechanisms on sub-national governments’ revenues volatility. Following a presentation of Venezuela’s economic background, public sector and fiscal variables, the paper describes the process of decentralization, inter-governmental transfer mechanisms and revenue volatility, and local governments’ own revenues. Subsequently presented are sub-national governments’ fiscal dependence and its determinants, followed by options for revenue mobilization and improving the transfer mechanism. The paper concludes with a summary and policy recommendations.
    JEL: H70 H72 H77
    Date: 2012–08
  2. By: David Haugh; Stéphane Sorbe
    Abstract: Owing to slow growth and a relatively weak fiscal position, Portugal’s public debt had been rising for almost a decade when the global crisis struck, sharply increasing the deficit. The loss of confidence in Portuguese and other euro area sovereign bonds required international financial support. Weak fiscal performance reflects a wide range of fiscal structural problems resulting in poor control of expenditure. At both the central and local levels, this was compounded by the non-transparent accumulation of payment arrears, future spending obligations via Public-Private Partnerships (PPPs) and off-balance sheet debt in state-owned enterprises (SOEs). In line with the EU-IMF programme, the government is steadfastly implementing an ambitious front-loaded consolidation plan underpinned by a wide range of structural reforms. In a context of weak private sector demand, the government’s ability to regain control over public debt dynamics depends crucially on avoiding spending overruns. This will require reinforcing the fiscal framework to improve expenditure control, tackling payment arrears and avoiding further negative surprises from loss-making SOEs, PPPs and local governments. The success of the programme will also require maintaining social consensus around it, notably through continuous attention to its implications for the poorest. If growth is far lower than projected in the programme, the automatic stabilisers could be allowed to operate at least partially to reduce the risks of a deeper recession and higher unemployment. This Working Paper relates to the 2012 OECD Economic Survey of Portugal (<P>Portugal : Mettre en place des bases solides pour un assainissement budgétaire durable<BR>En raison de la lenteur de la croissance et d’une situation budgétaire relativement médiocre, la dette publique du Portugal était en augmentation depuis près d’une décennie lorsque la crise mondiale a frappé, creusant sensiblement le déficit. La perte de confiance dans les obligations souveraines du Portugal et des autres pays de la zone euro a exigé un soutien financier international. Les mauvais résultats budgétaires reflètent un large éventail de problèmes structurels se traduisant par un contrôle déficient des dépenses. Au niveau central comme au niveau local, ce dérapage des dépenses a été aggravé par l’accumulation non transparente d’arriérés de paiement, d’obligations de dépenses futures au titre des partenariats public-privé (PPP) et de dettes extrabudgétaires contractées par les entreprises publiques. En application du programme UE-FMI, les pouvoirs publics s’emploient à mettre en oeuvre un plan d’assainissement ambitieux, intensif dans sa phase initiale et étayé par un large éventail de réformes structurelles. Face à la faiblesse de la demande du secteur privé, la capacité des pouvoirs publics de regagner la maîtrise de l’évolution de la dette publique dépend de façon cruciale de la possibilité d’éviter des dépassements de dépenses. Il faudra pour cela renforcer le cadre budgétaire afin d’améliorer le contrôle des dépenses, de limiter les arriérés de paiement et d’éviter d’autres mauvaises surprises du côté des entreprises publiques déficitaires, des PPP et des collectivités locales. Pour aboutir, le programme devra aussi préserver le consensus social dont il fait l’objet, notamment en tenant compte continument de ses incidences pour les pauvres. Si la croissance est bien inférieure aux prévisions du programme, on pourrait laisser jouer les stabilisateurs automatiques au moins en partie pour réduire les risques d’un approfondissement de la récession et d’une aggravation du chômage. Ce Document de travail se rapporte à l’Étude économique de l’OCDE du Portugal, 2012 (
    Keywords: automatic stabilisers, Portugal, local government, fiscal rules, public-private partnerships, state-owned enterprises, fiscal frameworks, fiscal council, public debt sustainability, budgeting, EU funds, Madeira, entreprise publique, stabilisateurs automatiques, Portugal, partenariats public-privé, règles budgétaires, collectivités locales, cadre budgétaire, conseil budgétaire, viabilité de la dette publique, procédure budgétaire, fonds structurels européens, Madère
    JEL: E62 H54 H61 H63 H70
    Date: 2012–09–13
  3. By: Schneider, Friedrich (University of Linz); Buehn, Andreas (Utrecht University)
    Abstract: In this paper the main focus lies on 'driving forces' of the development and size of the shadow economy in highly developed 39 OECD countries. The influential factors on the shadow economy are tax policies and state regulation, which, if they rise, increase the shadow economy, but also other factors like economic ones (unemployment) are considered, too. Specifically it is shown that the main driving forces are unemployment, self-employment and the tax burden, which have different weights in these 39 countries. Between 1999 and 2010 indirect taxes have by far the largest relative impact (29.4%), followed by self-employment (22.2%), unemployment (16.9%), personal income taxes (13.1%) and tax morale (9.5%).
    Keywords: state regulation, tax pressure, tax morale, shadow economy, undeclared work
    JEL: K42 H26 D78
    Date: 2012–10
  4. By: Marisa Bucheli (Economics Department, Universidad de la Republica, Uruguay); Nora Lustig (Department of Economics, Tulane University); Maximo Rossi (Economics Department, Universidad de la Republica, Uruguay); Florencia Amabile (Economics Department, Universidad de la Republica, Uruguay)
    Abstract: We apply a standard tax and benefit incidence analysis to estimate the impact on inequality and poverty of direct taxes, indirect taxes and subsidies, and social spending (cash and food transfers and in-kind transfers in education and health). The extent of inequality reduction induced by direct taxes and transfers is rather small (2 percentage points on average) especially when compared with that found in Western Europe (15 percentage points on average). What prevents Argentina, Bolivia and Brazil from achieving similar reductions in inequality is not the lack of revenues but the fact that they spend less on cash transfers-especially transfers that are progressive in absolute terms--as a share of GDP. Indirect taxes result in that net contributors to the fiscal system start at the fourth, third and even second decile on average, depending on the country. When in-kind transfers in education and health are added, however, the bottom six deciles are net recipients. The impact of transfers on inequality and poverty reduction could be higher if spending on direct cash transfers that are progressive in absolute terms is increased, leakages to the nonpoor are reduced and coverage of the extreme poor by direct transfer programs is expanded.
    Keywords: poverty, inequality, Uruguay, social spending
    JEL: I3 H2 H
    Date: 2012–08
  5. By: Fardoust, Shahrokh; Lin, Justin Yifu; Luo, Xubei
    Abstract: China's government economic stimulus package in 2008-09 appears to have worked well. It seems to have been about the right size, included a number of appropriate components, and was well timed. Its subnational component was designed to maximize the impact of the stimulus package on the economy and minimize the potential procyclical elements that are usually built into subnational fiscal mechanisms in federal countries. Moreover, China's massive fiscal stimulus played an important role in the overall recovery of the global economy. Using a simple analytical framework, this paper focuses on two key factors behind the success of the stimulus: investments in bottleneck-easing infrastructure projects and countercyclical nature of subnational spending based on the assumption that well-chosen infrastructure projects could improve business climate and thereby crowd in the private investment. The paper concludes that the expansionary subnational government spending played a key role in strengthening the overall impact of the stimulus and sustaining growth. It also highlights the importance of public investment quality and cautions about the sustainability of local government financing through the domestic banking system and increases in local governments off balance sheet or contingent liabilities. These lessons may be of particular relevance today for China, as well as other countries, in formulating policy response to another global economic slowdown or crisis, possibly as a result of the Eurozone turmoil. For China, investing in urban infrastructure and green economy, as well as in higher quality and better targeted social services, will be crucial for improving income inequality and inducing a more inclusive growth path.
    Keywords: Debt Markets,Subnational Economic Development,Banks&Banking Reform,Economic Theory&Research,Emerging Markets
    Date: 2012–10–01
  6. By: OGAWA Hikaru; OSHIRO Jun; SATO Yasuhiro
    Abstract: This paper investigates which of the two types of countries—resource-rich or resource-poor—gains from capital market integration and capital tax competition. We develop a framework involving vertical linkages through resource-based inputs as well as international fiscal linkages between resource-rich and resource-poor countries. Our analysis shows that capital market integration causes capital flows from the latter to the former and thus improves production efficiency and global welfare. However, such gains accrue only to resource-poor countries, and capital mobility might even negatively affect resource-rich countries. In response to capital flows, the governments of both types of countries have an incentive to tax capital. We thus conclude that such taxation enables resource-rich countries to exploit their efficiency gains through capital market integration and become winners in the tax game.
    Date: 2012–10
  7. By: Michael P. Keane (Nuffield College, University of Oxford)
    Abstract: I examine the effect of labor income taxation in life-cycle models where work experience builds human capital. In this case, the wage no longer equals the opportunity cost of time – which is, instead, the wage plus returns to work experience. This has a number of interesting consequences. First, the data appear consistent with much larger labor supply elasticities than most prior work suggests. Second, again contrary to conventional wisdom, permanent tax changes can have larger effects on current labor supply than temporary tax changes. Third, human capital amplifies the labor supply response to permanent tax changes in the long-run, as a permanent tax reduces the rate of human capital accumulation (reducing worker productivity). Fourth, for plausible parameter values, welfare losses from proportional income taxation are likely to be much larger than conventional wisdom suggests.
    Date: 2012–10–15
  8. By: Vasia Panousi; Catarina Reis
    Abstract: We examine the optimal taxation of capital in a Ramsey setting of a general-equilibrium heterogeneous-agent economy with uninsurable idiosyncratic investment or capital-income risk. We prove that the ex ante optimal tax, evaluated at steady state, maximizes human wealth, namely the present discounted value of agents' income from sources that are not subject to capital risk. Furthermore, when the amount of idiosyncratic risk in the economy is higher than a minimum lower bound, the optimal tax is positive and it is precisely the tax that maximizes the economy-wide aggregates, such as the capital stock and output. By contrast, when the amount of risk is exogenously very low, the social planner finds it optimal to increase social risk taking by subsidizing investment in capital.
    Date: 2012
  9. By: Eduardo Lora; Deisy Johanna Fajardo
    Abstract: This paper empirically explores the effects of payroll taxes, value-added taxes and corporate income taxes on a variety of labor market outcomes such as employment, unemployment, informality, and wages. Using national-level data on labor variables for 15 Latin American countries, the results indicate that the effects of each tax are distinctly different and may depend on several aspects of labor and tax institutions. Payroll taxes reduce employment and increase labor costs when their benefits are not valued by workers, but otherwise increase labor participation and do not raise labor costs. Value-added taxes increase informality and reduce skilled labor demand. In contrast, corporate income taxes may help reduce informality, especially among low-education workers but, when tax enforcement capabilities are strong, may reduce labor participation and employment of medium- and high-education workers.
    JEL: H24 H25 J21 J30 J32
    Date: 2012–09
  10. By: Koester, Gerrit B.; Priesmeier, Christoph
    Abstract: We analyse tax revenue elasticities by applying dynamic models to a new disaggregated dataset for Germany, which is adjusted for the effects of tax reforms. We estimate long-run elasticities that are substantially lower than in comparable studies for profit-related taxes and are slightly lower for value-added taxes, whereas the long-run elasticity for wage taxes is close to the consensus estimate in the literature. Additionally, we find that differences between short- and long-run elasticities are particularly important with respect to profit-related taxes. Here we estimate a far lower contemporaneous response to tax base changes than other studies and a dynamic reaction pattern spanning several years, which can be explained, for example, by tax collection lags. --
    Keywords: Dynamic tax revenue elasticities,Disaggregated analysis,Error correction models
    JEL: H2 H24 H25 E26
    Date: 2012
  11. By: Hartmann-Wendels, Thomas; Stein, Ingrid; Stöter, Alwin
    Abstract: This paper provides new evidence that taxes affect capital structure choice, using a unique and comprehensive panel data set which covers 86,173 German non-financial firms over the years 1973-2008. Following the Graham methodology to simulate marginal tax rates, we find a statistically and economically significant positive relationship between the marginal tax benefit of debt (net and gross of investor taxes) and the debt ratio. A 10% increase in the net (gross) marginal tax benefit of debt causes a 1.5% (1.6%) increase in the debt ratio, ceteris paribus. The results are robust to various specifications like using changes in debt or debt to capital ratios. A significantly positive effect of taxes on the debt ratio can also be identified in a partial adjustment model. --
    Keywords: debt,capital structure,marginal tax rate,corporate taxes,personal taxes
    JEL: G32 H20
    Date: 2012
  12. By: Łukasz Rawdanowicz
    Abstract: In many OECD countries debt has soared to levels threatening fiscal sustainability, necessitating its reduction over the medium to longer term. This paper uses stylised simulations in a small, calibrated macroeconomic model which features endogenous interactions between fiscal policy, growth and financial markets. Simulations are done for a hypothetical economy, reflecting key characteristics of fiscally stressed OECD countries. Given the assumed objective to stabilise debt at a 60% of GDP target within 20 years, a consolidation path is chosen by maximising cumulative GDP growth and minimising cumulative squared output gaps. The simulations highlight four issues. First, lowering the debt-to-GDP ratio within a finite horizon requires big initial consolidation which can be largely unwound if debt is to be stabilised at a lower level. Second, some frontloading of the adjustment turns out to be optimal in case of an interest rate shock. Third, debt reduction with high fiscal multipliers, hysteresis effects and adverse market reactions involves protracted large negative output gaps and deflation. This stresses the importance of selecting reasonable fiscal targets consistent with market conditions. Fourth, delaying the attainment of the debt target by two years has generally little implications for initial consolidation, though under adverse conditions this would result in much higher debt and slower growth.<P>Choisir le rythme de l'assainissement budgétaire<BR>Dans de nombreux pays de l'OCDE, la dette a atteint des niveaux menaçant la viabilité budgétaire, nécessitant sa réduction à moyen et à long terme. Ce document utilise des simulations stylisées mises en oeuvre avec un petit modèle macroéconomique calibré qui tient compte des interactions endogènes entre la politique budgétaire, la croissance et les marchés financiers. Les simulations sont réalisées pour une économie fictive reflétant les principales caractéristiques des pays de l'OCDE en difficulté budgétaire. Compte tenu de l'objectif de stabiliser la dette à 60% du PIB à horizon de 20 ans, le chemin de l’assainissement est choisi par la maximisation de la croissance cumulée du PIB et par la minimisation des carrés des écarts de production. Les simulations mettent en évidence quatre problèmes. Tout d'abord, l'abaissement du ratio dette sur PIB à horizon fini exige une grande consolidation initiale qui peut être largement annulée par la suite si la dette doit être stabilisée à un niveau inférieur. Deuxièmement, une montée en charge plus rapide de l’assainissement est optimale en cas de chocs de taux d'intérêt. Troisièmement, en cas de multiplicateurs fiscaux élevés, de phénomènes d'hystérèse et de réactions défavorables des marchés, la réduction de la dette implique des périodes prolongées d’écarts de production négatifs importants et de déflation. Cela souligne l'importance de choisir des objectifs budgétaires raisonnables et compatibles avec les conditions de marché. Quatrièmement, reporter l'assainissement et l’atteinte des objectifs de dette de deux ans a généralement des répercussions légères sur la consolidation initiale, mais dans des conditions défavorables, il en résulte une dette beaucoup plus élevée et une croissance beaucoup plus lente.
    Keywords: fiscal rules, fiscal consolidation, sovereign debt, government budget balance, assainissement budgétaire, règle budgétaire, dette souveraine, équilibre budgétaire du gouvernement
    JEL: E61 E62 H6
    Date: 2012–09–24
  13. By: Andrew Sharpe; Evan Capeluck
    Abstract: The objective of this report is to provide an overview of trends in income inequality, defined as the Gini coefficient, in Canada and the provinces over the 1981-2010 period and to investigate the impact of redistributive policies – namely, taxes and transfers – on these trends.Income inequality is measured in terms of market income, total income, and after-tax income, with the latter considered the most important from a well-being perspective.
    Date: 2012–09
  14. By: Teresa Ter-Minassian
    Abstract: This paper aims to provide an overview of the current state of taxation in the Latin America and Caribbean (LAC) region, and its main reform needs and options. It previews the findings of recent studies prepared or commissioned by the Inter-American Development Bank (IDB) for its forthcoming flagship publication More than Revenue: Taxation as a Development Tool in the -Development in the Americas- series. Reflecting fiscal consolidation imperatives, the main objective of fiscal policies in the region in recent decades has been revenue mobilization, often at the expense of efficiency and equity objectives. This paper analyzes the region’s taxation in regard to revenue adequacy, efficiency, vertical and horizontal equity, ease of administration and compliance, and degree of fiscal decentralization, concluding that there is significant scope for reforms that would result in simultaneous improvement on several of these fronts. Although the paper does not provide a specific blueprint for reforms, which would need to be designed on a country-by-country basis, it identifies directions for reform that are relevant for most of the region.
    JEL: H20 H21 H22 H23 H24 H25 H26
    Date: 2012–09
  15. By: Peter Michaelis (University of Augsburg, Department of Economics); Thomas Ziesemer (University of Augsburg, Department of Economics)
    Abstract: We incorporate the process of policy diffusion (i.e. the uncoordinated dissemination of policies among countries) into a probabilistic two-country-model of strategic environmental policy. Contrary to the usual setting with simultaneous decision making we consider the impact of sequential decision making: In the first step the domestic government introduces an emission tax, in the second step policy diffusion occurs with a certain probability and in the third step the firms decide on output quantities. Within this framework we analyze how the prospect of policy diffusion, motivated by a higher damage parameter in the domestic country, influences the optimal domestic emission tax. We show that if the damage parameter in the foreign country is sufficiently high policy diffusion will occur which leads to higher tax rates and higher welfare compared to the equilibrium resulting from simultaneous decision making. Moreover, we show that an increase in the domestic tax rate also increases the probability that the foreign country adopts the tax policy.
    Keywords: strategic environmental policy, emission tax, policy diffusion, sequential decision-making
    JEL: F18 Q55 Q58
    Date: 2012–10
  16. By: Stéphane Sorbe
    Abstract: This paper illustrates possible trade-offs between two different fiscal consolidation strategies in Portugal: sticking to the nominal fiscal targets in the EU-IMF programme or allowing automatic stabilisers to work, while sticking to the structural primary deficit targets implied by the programme. The analysis is based on stochastic simulations in which random shocks affect the main economic variables in the framework of a small macroeconomic model. The model captures the mutual interdependences between the fiscal position, financial conditions and activity and notably the impact of public debt developments on investors’ confidence and interest rates. Results suggest that under the large fiscal consolidation programme that is currently implemented, both fiscal policy strategies considered would in most cases result in sustainable debt dynamics. Both strategies also entail risks, but of a different nature: the risk of a deeper recession if sticking to nominal targets and the risk of higher debt if letting automatic stabilisers play. Sensitivity analyses show that these risks could be reduced by stimulating potential growth through structural reform and by choosing “growth friendly” fiscal consolidation instruments that have lower multipliers. By reducing recessionary risks, a small fiscal multiplier also increases the relative benefits of sticking to nominal deficit targets, while the benefits of automatic stabilisers are larger if the multiplier is high. This Working Paper relates to the 2012 OECD Economic Survey of Portugal (<P>Portugal : évaluer les risques autour du rythme d'assainissement budgétaire dans un environnement incertain<BR>Ce document illustre les compromis possibles entre deux stratégies de consolidation budgétaire au Portugal : respecter les cibles budgétaires nominales du programme de l’Union Européenne et du FMI ou laisser jouer les stabilisateurs automatiques tout en respectant les objectifs de déficit structurel primaire impliqués par le programme. L’analyse se fonde sur des simulations stochastiques dans lesquelles des chocs aléatoires affectent les principales variables économiques dans le cadre d’un petit modèle macroéconomique. Le modèle tient compte des interdépendances mutuelles entre la situation budgétaire, les conditions financières et l’activité, et notamment l’impact de l’évolution de la dette publique sur la confiance des investisseurs et les taux d’intérêt. Les résultats suggèrent que, dans le cadre du programme d’assainissement budgétaire important qui est actuellement mis en oeuvre, les deux stratégies budgétaires considérées se traduiraient dans la plupart des cas par une dynamique d’endettement soutenable. Ces deux stratégies comportent également des risques, mais de nature différente : le risque d’une récession plus marquée si les cibles nominales sont respectées et le risque d’une dette plus élevée en laissant jouer les stabilisateurs automatiques. Les analyses de sensibilité des résultats montrent que ces risques pourraient être réduits en stimulant le potentiel de croissance de l’économie par des réformes structurelles et en choisissant des instruments de consolidation budgétaires favorables à la croissance, c’est-à-dire avec de plus faibles multiplicateurs. En réduisant les risques de récession, un multiplicateur budgétaire faible augmente aussi les avantages relatifs de respecter les cibles budgétaires nominales, tandis que les avantages des stabilisateurs automatiques sont d’autant plus grands que le multiplicateur est élevé. Ce Document de travail se rapporte à l’Étude économique de l’OCDE du Portugal, 2012 (
    Keywords: automatic stabilisers, Portugal, fiscal multipliers, public debt sustainability, risk analysis, fan charts, stabilisateurs automatiques, Portugal, multiplicateurs budgétaires, viabilité de la dette publique, analyse de risques, graphiques en éventail
    JEL: C53 E62 H63
    Date: 2012–09–19

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