nep-pbe New Economics Papers
on Public Economics
Issue of 2012‒11‒03
seventeen papers chosen by
Keunjae Lee
Pusan National University

  1. Tax Evasion and Optimal Environmental Taxes By Liu, Antung Anthony
  2. Fiscal Incentives and Environmental Infrastructure in China By Liu, Antung Anthony; Zhang, Junjie
  3. Tax Multipliers: Pitfalls in Measurement and Identification By Daniel Riera-Crichton; Carlos A. Vegh; Guillermo Vuletin
  4. Tax capacity and tax effort : extended cross-country analysis from 1994 to 2009 By Le, Tuan Minh; Moreno-Dodson, Blanca; Bayraktar, Nihal
  5. Fiscal sustainability using growth-maximising debt targets By Cristina Checherita-Westphal; Andrew Hughes Hallett; Philipp Rother
  6. Taxation and public service provision: Taxes on road transport and fuel in Congo By Kambale Mirembe, Omer
  7. Government Spending Reloaded: Fundamentalness and Heterogeneity in Fiscal SVARs By Ricco, Giovanni; Ellahie, Atif
  8. Tax-Subsidized Underpricing: Issuers and Underwriters in the Market for Build America Bonds By Cestau, Dario; Green, Richard; Schürhoff, Norman
  9. Fiscal consolidation in reformed and unreformed labour markets: A look at EU countries By Alessandro Turrini
  10. Performance Evaluation of Urban Local Governments: A Case for Indian Cities By Simanti Bandyopadhyay
  11. Budget transparency and fiscal performance: Do open budgets matter? By Sedmihradská, Lucie; Haas, Jakub
  12. Fiscal consolidations and banking stability By Cimadomo, Jacopo; Hauptmeier, Sebastian; Zimmermann, Tom
  13. Pollution, mortality and optimal environmental policy By Goenka, A.; Jafarey, S.; Pouliot, W.
  14. Pension reform in an OLG model with heterogeneous abilities By T. BUYSE; F. HEYLEN; R. VAN DE KERCKHOVE
  15. Broadband Infrastructure and Economic Growth: A Panel Data Analysis of OECD Countries By Atif, Syed Muhammad; Endres, James; Macdonald, James
  16. Chinese direct investment in Australia : public reaction, policy response, investor adaptation By Luke Hurst; Peter Yuan; Christopher Findlay
  17. The Effect of Social Fragmentation on Public Good Provision: an Experimental Study By Surajeet Chakravarty; Miguel A. Fonseca

  1. By: Liu, Antung Anthony (Resources for the Future)
    Abstract: This paper introduces a new argument to the debate about the role of environmental taxes in modern tax systems. Some environmental taxes, particularly taxes on gasoline or electricity, are more difficult to evade than taxes on labor or income. When the tax base is shifted in a revenue-neutral manner toward these environmental taxes, the result is a net reduction in the amount of tax evasion. Using a carbon tax as a motivating example, the "tax evasion effect" is shown to sharply reduce the welfare cost of controlling emissions. A simple computable general equilibrium model suggests that the impact of considering tax evasion can be large: costs are lowered by 28 percent in the United States, by 89 percent in China, and by 97 percent in India. In countries with high levels of pre-existing tax evasion, a carbon tax will pay for itself through improvements in the efficiency of the tax system.
    Keywords: environmental regulation, Pigouvian tax, tax evasion, green tax swap, tax interactions
    JEL: H21 H26 Q53 Q54
    Date: 2012–09–14
  2. By: Liu, Antung Anthony (Resources for the Future); Zhang, Junjie
    Abstract: This paper provides evidence that China's system of tax revenue sharing is an important explanation for differences in the rate of sewage treatment plant construction among its cities. As a result of the 1994 tax reform, Chinese cities retained different shares of their value-added tax (VAT). Exploiting the persistence of this sharing system, we use the VAT share in 1995 as an instrument for the present fiscal incentives. We find that a 10 percentage point increase in the VAT sharing rate resulted in a 13.8 percent increase in the construction of sewage treatment capacity. This result suggests that fiscal incentives can play an important role in the provision of pollution-reducing infrastructure.
    Keywords: sewage, water pollution, China pollution, fiscal federalism, tax sharing, tax federalism, China VAT sharing
    JEL: H4 H54 H77 Q53 Q56
    Date: 2012–09–21
  3. By: Daniel Riera-Crichton; Carlos A. Vegh; Guillermo Vuletin
    Abstract: We contribute to the literature on tax multipliers by analyzing the pitfalls in identification and measurement of tax shocks. Our main focus is on disentangling the discussion regarding the identification of exogenous tax policy shocks (i.e., changes in tax policy that are not the result of policymakers responding to output fluctuations) from the discussion related to the measurement of tax policy (i.e., finding a tax policy variable under the direct control of the policymaker). For this purpose, we build a novel value-added tax rate dataset and the corresponding cyclically-adjusted revenue measure at a quarterly frequency for 14 industrial countries for the period 1980-2009. We also provide complementary evidence using Romer and Romer (2010) and Barro and Redlick (2011) data for the United States. On the identification front, our findings favor the use of narratives à la Romer and Romer (2010) to identify exogenous fiscal shocks as opposed to the identification via SVAR. On the (much less explored) measurement front, our results strongly support the use of tax rates as a true measure of the tax policy instrument as opposed to widely-used, revenue-based measures, such as cyclically-adjusted revenues.
    JEL: E32 E62 F3 H20
    Date: 2012–10
  4. By: Le, Tuan Minh; Moreno-Dodson, Blanca; Bayraktar, Nihal
    Abstract: One of the important factors for economic development is the existence of an effective tax system. This paper deals with the concept and empirical estimation of countries'taxable capacity and tax effort. It employs a cross-country study from a sample of 110 developing and developed countries during 1994-2009. Taxable capacity refers to the predicted tax-to-gross domestic product ratio that can be estimated empirically, taking into account a country's specific macroeconomic, demographic, and institutional features, which all change through time. Tax effort is defined as an index of the ratio between the share of the actual tax collection in gross domestic product and taxable capacity. The use of tax effort and actual tax collection benchmarks allows the ranking of countries into four different groups: low tax collection, low tax effort; high tax collection, high tax effort; low tax collection, high tax effort; and high tax collection, low tax effort. The analysis provides broad guidance for tax reforms in countries with various levels of taxable capacity and revenue intake.
    Keywords: Taxation&Subsidies,Subnational Economic Development,Debt Markets,Emerging Markets,Economic Theory&Research
    Date: 2012–10–01
  5. By: Cristina Checherita-Westphal (European Central Bank); Andrew Hughes Hallett (Harvard Kennedy School); Philipp Rother (European Central Bank)
    Abstract: This paper highlights the importance of debt-related fiscal rules and derives growth-maximising public debt ratios from a simple theoretical model. On the basis of evidence on the productivity of public capital, we estimate public debt targets that governments should try to maintain if they wish to maximise growth for panels of OECD, EU and euro area countries, respectively. These are not arbitrary numbers, as many of the fiscal rules in the literature suggest, but are founded on long-run optimising behaviour, assuming that governments implement the so-called golden rule over the cycle; that is, they contract debt only to finance public investment. Our estimates suggest that the euro area should target debt levels of around 50% of GDP if member states are to have common targets. That is about 15 percentage points lower than the estimate for the growth-maximising debt ratio in our OECD sample and comfortably within the Stability and Growth Pact’s debt ceiling of 60% of GDP. We also indicate how forward looking budget reaction functions fit into a debt targeting framework. JEL Classification: H63, E22, O40
    Keywords: Public debt, public capital, economic growth
    Date: 2012–09
  6. By: Kambale Mirembe, Omer
    Keywords: Taxation, DRC, Congo
    Date: 2012–10
  7. By: Ricco, Giovanni; Ellahie, Atif
    Abstract: Using a large information approach and full Bayesian VAR techniques, we study the economic effects of fiscal policy shocks in the U.S. over the last five decades. We find that omitted variables can explain the well known sample instability of the estimates for the fiscal multiplier. We also find evidence of fiscal foresight and anticipation of the government spending shocks recovered from small Structural VARs (SVARs). Despite incorporating forecasts of government spending, Expectational VARs (EVARs) also show signs of fiscal foresight and anticipation. Conversely, the fiscal shocks recovered from a large information BVAR do not exhibit the same problem. Moreover, large information SVARs and EVARs deliver identical dynamic responses to fiscal shocks. Finally, we report multipliers and impulse response functions for aggregate government spending as well as for components of government spending, and find remarkably heterogeneous responses.
    Keywords: structural VARs; large Bayesian VARs; fiscal shocks; government spending; government spending news; fiscal foresight; survey of professional forecasters
    JEL: C32 E62 E32
    Date: 2012–04–01
  8. By: Cestau, Dario; Green, Richard; Schürhoff, Norman
    Abstract: Build America Bonds (BABs) were issued by states and municipalities for twenty months as an alternative to tax-exempt bonds. The program was part of the 2009 fiscal stimulus package. The bonds are taxable to the holder, but the federal Treasury rebates 35% of the coupon payment to the issuer. The stated purpose of the program was to provide municipal issuers with access to a more liquid market by making them attractive to foreign, tax-exempt, and tax-deferred investors. We evaluate one aspect of the liquidity of the bonds---the underpricing when the bonds are issued. We show that the structure of the rebate creates additional incentives to underprice the bonds when they are issued, and that the underpricing is larger for BABs than for traditional municipals, controlling for characteristics such as size of the issue or the trade. This suggests that the bonds are not more liquid, contrary to the stated purpose of the program, or that issuers and underwriters are strategically underpricing the bonds to increase the tax subsidy, or both. Several findings point to strategic underpricing. There is a negative correlation between the underwriter's spread and the underpricing. The underpricing for BABs is quite evident for institutional and interdealer trades, while that for tax-exempts is primarily for smaller sales to customers. Counterfactuals for our estimated structural model also suggest strategic underpricing.
    Keywords: Build America bonds; financial intermediation; incentive conflicts; municipal finance; underpricing
    JEL: E44 E63 G23 H74
    Date: 2012–10
  9. By: Alessandro Turrini
    Abstract: This paper estimates the impact of fiscal consolidation on unemployment and job market flows across EU countries using a recent database of consolidation episodes built on the basis of a “narrative” approach (Devries et al., 2011). Results show that the impact of fiscal consolidation on cyclical unemployment, is temporary and significant mostly for expenditure measures. As expected, the impact of fiscal policy shocks on job separation rates is much stronger in low-EPL countries, while high-EPL countries suffer from a stronger reduction in the rate at which new jobs are created. Since a reduced job-finding rate corresponds to a longer average duration of unemployment spells, fiscal policy shocks also tend to raise the share of long-term unemployment if EPL is stricter. Results are broadly confirmed when using "top-down" fiscal consolidation measures based on adjusting budgetary data for the cycle.
    Date: 2012–07
  10. By: Simanti Bandyopadhyay (Indian Council For Research On International Economic Relations)
    Abstract: The paper assesses the performances of the urban local bodies in the state of Karnataka in India.We use non parametric Data Envelopment Analysis as a tool to measure technical efficiencies of the ULBs. If we compare the services in a particular size class of city with the norms we find that in the smallest size class it is water supply which has the minimum shortfall from norms, in the medium size cities it is road density which is closest to the norms and in the largest city size class it is the solid waste management which performs the best with zero shortfall from norms. On an average for all the services there is a shortage of 57 per cent of the ONM expenditure norms, the shortage being the highest (64 per cent) in the biggest size class of cities. If we compare across size classes we find that bigger cities have on an average higher proportions of ONM expenditures while both salary and establishment components show higher proportions in smaller cities. This is indicative to the fact that bigger cities are incurring more productive expenses than the smaller ones. We find that the overall average collection efficiency of property taxes is only 62 per cent which is the lowest in the smallest size class and the highest in the medium size class with little variation across cities. We find that only 27.5 per cent of the ONM expenditure requirements can be fulfilled by the own revenues once the potential for the latter is fully realised. This proportion is higher in bigger cities with moderately high variation across cities. As far as the ONM cost coverage is concerned we find that on an average the ULBs in Karnataka can finance 50 per cent of the ONM costs on basic services through their own revenues with a very high variation in the proportions across cites. We find that the ULBs on an average can reduce 27 per cent of their expenditures on ONM, labor and establishment to provide the same levels of services provided currently by them. We also find that there can be additional savings particularly on establishment and labor expenditures to operate at the maximum efficiency levels. We find that the extent of problem of unproductive spending and under-provision of services is more pronounced in smaller cities.
    Date: 2012–10–20
  11. By: Sedmihradská, Lucie; Haas, Jakub
    Abstract: Existing published research of the relationship between budget transparency and fiscal performance confirms the expectations that higher budget transparency is associated with smaller budget deficits and lower public debt. However, our previous research did not bring such clear results and raised a fundamental question: Why should greater transparency improve fiscal performance? The objective of the proposed paper is to evaluate the relationship between budget transparency and fiscal performance. Based on the literature review we have identified three channels through which increased transparency may limit excessive public expenditures resulting in budget deficit and public debt: (1) reduce fiscal illusion, (2) decrease information asymmetry between politicians and voters which may improve accountability and increase political competition, and (3) strengthen the enforcement of fiscal rules. The results of statistical analysis (conditional means analysis for 2008 and correlation and regression analysis for 2003 to 2009) did not prove any significant negative relationship between budget transparency, measured by the Open Budget Index, and budget deficit or public debt.
    Keywords: budget transparency; fiscal performance; Open Budget Index
    JEL: J88 H61
    Date: 2012–03–15
  12. By: Cimadomo, Jacopo; Hauptmeier, Sebastian; Zimmermann, Tom
    Abstract: We empirically investigate the effects of fiscal policy on bank balance sheets, focusing on episodes of fiscal consolidation. To this aim, we employ a very rich data set of individual banks' balance sheets, combined with a newly compiled data set on fiscal consolidations. We find that standard capital adequacy ratios such as the Tier-1 ratio tend to improve following episodes of fiscal consolidation. Our results suggest that this improvement results from a portfolio re-balancing from private to public debt securities which reduces the risk-weighted value of assets. In fact, if fiscal adjustment efforts are perceived as structural policy changes that improve the sustainability of public finances and, therefore, reduces credit risk, the banks' demand for government securities increases relative to other assets.
    Keywords: Fiscal consolidations; bank balance sheets; portfolio re-balancing; banking stability
    JEL: E62 G11 H30 G21
    Date: 2012–10–23
  13. By: Goenka, A.; Jafarey, S.; Pouliot, W.
    Abstract: We study an overlapping generations economy in which environmental degradation results from economic activity and affects agents' uncertain lifetimes. Life expectancy depends positively on economic activity and negatively on the stock of pollution. This can make the growth-survival relationship convex over some region and lead to two non-trivial steady states, with one a poverty trap. Uniform abatement taxes can cause the poverty trap to widen while increasing incomes at the high steady state. We also study the properties and dynamics of an optimal second-best abatement tax. It is non-homogeneous and increasing in the capital stock, and leads to a variety of dynamic possibilities, including non-existence and multiplicity of steady states, and cycles around some of the steady states, where there were none under exogenous taxes. Thus, optimal taxes can be an independent source of non-linearities.
    Keywords: Overlapping generations model; poverty traps; non-convexities; multiple steady states; pollution; optimal environmental policy; optimal abatement tax
    Date: 2012
    Abstract: We study the effects of pension reform in a four-period OLG model for an open economy where hours worked by three active generations, education of the young, the retirement decision of older workers, and aggregate growth, are all endogenous. Within each generation we distinguish individuals with high, medium or low ability to build human capital. This extension allows to investigate also the effects of pension reform on the income and welfare levels of different ability groups. Particular attention goes to the income at old-age and the welfare level of low-ability individuals. Our simulation results prefer an intelligent pay-as-you-go pension system above a fully-funded private system. When it comes to promoting employment, human capital, growth, and aggregate welfare, positive effects in a pay-as-you-go system are the strongest when it includes a tight link between individual labor income (and contributions) and the pension, and when it attaches a high weight to labor income earned as an older worker to compute the pension assessment base. Such a regime does, however, imply welfare losses for the current low-ability generations, and rising inequality in welfare. Complementing or replacing this ‘intelligent’ pay-as-you-go system by basic and/or minimum pension components is negative for aggregate welfare, employment and growth. Better is to maintain the tight link between individual labor income and the pension also for low-ability individuals, but to strongly raise their replacement rate.
    Keywords: employment by age; endogenous growth; retirement; pension reform; heterogeneous abilities; overlapping generations
    JEL: E62 H55 J22 J24
    Date: 2012–08
  15. By: Atif, Syed Muhammad; Endres, James; Macdonald, James
    Abstract: Broadband infrastructure facilitates the generation and distribution of decentralised information and ideas in a knowledge economy comprising of markets that rely on information as an input. This paper analyses the effect of broadband penetration on output per capita by estimating a static fixed effects model and a basic linear dynamic model using an annual panel of 31 OECD countries over a period from 1998 to 2010. The results suggest that broadband penetration has had a positive impact on economic growth, and a 10 percent increase in the growth of broadband penetration will raise economic growth per employee by approximately 0.035 percentage points. The conclusion adds further weight to calls for Governments to adopt policies that accelerate broadband penetration and promote investment in broadband infrastructure. --
    Keywords: Endogenous Growth,Broadband,OECD
    JEL: O11 O33
    Date: 2012–10–24
  16. By: Luke Hurst (Crawford School of Public Policy); Peter Yuan (The Australian National University); Christopher Findlay (The Age)
    Abstract: China’s overseas direct investment (ODI) in Australia has attracted adverse public reaction, similar to the reaction to Japanese investment in the late 1980s. Publicly aired concerns focus on Chinese ODI which is predominantly from state-owned enterprises and is perceived as a risk to Australia’s control over its wealth-creating assets. This perception is exacerbated by a lack of understanding of the institutional environment within which China’s state owned investors operate and the scale of investment. The current Australia—China investment relationship has involved an awkward interaction between public reaction, policy response in Australia, and adaptation by Chinese investors and institutions. Adaptation by Chinese investors has seen increased attempts to gain local legitimacy but has also potentially diverted largescale resource investments to other resource rich countries such as Guinea and Mongolia. Resolution of this reaction, response and adaptation process will require a deeper bilateral policy dialogue and increased investment transparency from state-owned investors and the related institutions on both sides.
    Keywords: Chinese ODI in Australia, state owned investors, public perception of Chinese investment in Australia, public reaction, policy response, investor adaptation, Australia—China investment relationship
    Date: 2012–10
  17. By: Surajeet Chakravarty (Department of Economics, University of Exeter); Miguel A. Fonseca (Department of Economics, University of Exeter)
    Abstract: We study the role of social identity in determining the impact of social frag- mentation on public good provision using laboratory experiments. We nd that as long as there is some degree of social fragmentation, increasing it leads to lower public good provision. This is mainly because the share of those who contribute fully to the public good diminishes with social fragmentation, while the share of free-riders is unchanged, which suggests social identity preferences drive our result, as opposed to self-interest. Importantly, socially homogeneous groups do not generate the highest contributions: some social diversity is actually welfare-improving. Finally, social fragmentation is felt differently for visible minorities, whose contributions are higher than minority groups whose actions are not identiable.
    Keywords: Social Identity, Public Goods, Social Fragmentation, Experiments.
    JEL: C92 D02 D03 H41
    Date: 2012

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