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

  1. Tax Evasion and Public Expenditures on Tax Collection Services in an Endogenous Growth Model By Sifis Kafkalas; Pantelis Kalaitzidakis; Vangelis Tzouvelekas
  2. The tax and the mighty: Tax payer concentration lowers local business taxation in German Municipalities By Ivo Bischoff; Stefan Krabel
  3. The Hated Property Tax: Salience, Tax Rates, and Tax Revolts By Marika Cabral; Caroline Hoxby
  4. Policy Responses to Fiscal Restraints: A Difference-in-Discontinuities Design By Grembi, Veronica; Nannicini, Tommaso; Troiano, Ugo
  5. The redistribution of trade gains and the equity-efficiency trade-of By Marco de Pinto
  6. Disentangling income inequality and the redistributive effect of taxes and transfers in 20 LIS countries over time By Caminada, Koen; Goudswaard, Kees; Wang, Chen
  7. The Effect of Age-Targeted Tax Credits on Retirement Behavior By Laun, Lisa
  8. Fiscal Consolidation in Reformed and Unreformed Labour Markets: A Look at EU Countries By Turrini, Alessandro
  9. How can growth be accelerated in Europe? By Viren , Matti
  10. Economic ideas and tax policy: The introduction of progressivity in tax systems in Western Europe. The cases of France and Spain By Javier San Julian Arrupe (Universitat de Barcelona)
  11. Immigration, Growth and Unemployment: Panel VAR Evidence from OECD Countries By Boubtane, Ekrame; Coulibaly, Dramane; Rault, Christophe
  12. Property tax in the Czech Republic and Slovakia since 1993 By Sedmihradská, Lucie
  13. Gauging the effects of fiscal stimulus packages in the euro area By Günter Coenen; Roland Straub; Mathias Trabandt
  15. Tax Reform in Georgia and the Size of the Shadow Economy By Karine Torosyan; Randall K. Filer
  16. Central government control and fiscal adjustment : Norwegian evidence By Arnt Ove Hopland
  17. Globalization and Income Inequality: A Panel Data Analysis of 68 Countries By Atif, Syed Muhammad; Srivastav, Mudit; Sauytbekova, Moldir; Arachchige, Udeni Kathri
  18. The Effects of Decentralization on Schooling: Evidence from the Sao Paulo State's Education Reform By Ricardo A. Madeira
  19. Convergence between Russian regions By Sergei Guriev; Elena Vakulenko
  20. Models of government expenditure multipliers By Sebastian Dyrda; Jose-Victor Rios-Rull

  1. By: Sifis Kafkalas (University of Crete); Pantelis Kalaitzidakis (Dept of Economics, University of Crete, Greece); Vangelis Tzouvelekas (Department of Economics, University of Crete, Greece)
    Abstract: This paper analyzes the relationship between tax evasion and the two main policy instruments affecting evasion rates, namely, the announced tax rate and the share of tax revenues allocated to tax monitoring mechanisms. For doing so, we adopt a simple one-sector endogenous growth model modified under tax evasion following Roubini and Sala-i-Martin (1993) analysis on income taxes and tax evasion. Our model confirms Barro�s (1990) theoretical finding stating that the optimal tax rate is equal to the elasticity of private capital. However, when tax evasion matters to the social welfare, the effective tax rate is lower than the output elasticity in line with Futagami et al., (1993) and Turnovsky (1997) theoretical results. Our model is then calibrated using data from 145 developed and developing countries for 2011. Simulation results suggest that both tax evasion and output growth are decreasing with the share of tax revenues allocated to monitoring expenses, while welfare maximizing policies imply an announced tax rate lower from the elasticity of public capital and a share of monitoring expenses around 6.0%.
    Keywords: tax evasion, tax monitoring, effective tax rate, social loss.
    JEL: H21 H26 H54
    Date: 2012–04–26
  2. By: Ivo Bischoff (University of Kassel); Stefan Krabel (University of Kassel)
    Abstract: We analyze the impact of large firms on business tax rates using data from German mu-nicipalities in Hesse in 1998-2005. Results suggest that business tax rates decrease with tax-payers’ concentration, indicating strong local lobbying power of large firms.
    Keywords: tax competition, yardstick competition, local business taxation, large firms, Germany
    JEL: F1 F16 H2
    Date: 2012
  3. By: Marika Cabral; Caroline Hoxby
    Abstract: Because of the manner in which it is normally paid, the property tax is almost certainly the most salient major tax in the U.S. The property tax is also the least popular tax and the only major tax whose revenues have declined as a share of income. We hypothesize that high salience explains the unpopularity of the property tax, the level of the property tax, and prevalence of property tax revolts. To identify variation in the salience of the property tax over local jurisdictions and over time, we exploit conditionally random variation in tax escrow. Tax escrow is a method of paying the property tax that makes it much less salient–as we demonstrate using survey evidence. We find that areas in which the property tax is less salient are areas in which property taxes are higher and property tax revolts are less likely to occur. We present several specification tests, including spatial correlation tests and instruments based on bank branches, that suggest that our results are valid. An implication of our results is that voters facing a non-benevolent government may wish to keep taxes' salience high even if, as a result, they hate their highly salient taxes.
    JEL: B12 H2 H24 H3 H71 P16
    Date: 2012–11
  4. By: Grembi, Veronica (Catholic University Milan); Nannicini, Tommaso (Bocconi University); Troiano, Ugo (Harvard University)
    Abstract: We evaluate the effect of relaxing fiscal rules on policy outcomes applying a quasi-experimental research design. In 1999, the Italian central government introduced fiscal rules aimed at imposing fiscal discipline on municipal governments, and in 2001 the rules were relaxed for municipalities below 5,000 inhabitants. This institutional change allows us to implement a "difference-in-discontinuities" design by combining the before/after with the discontinuous policy variation. Our estimates show that relaxing fiscal rules triggers a substantial deficit bias, captured by a shift from a balanced budget to a deficit that amounts to 2 percent of the total budget. The deficit comes primarily from reduced revenues as unconstrained municipalities have lower real estate and income tax rates. Finally, we investigate the heterogeneity in policy responses across municipalities to provide new evidence about the costs and benefits of restricting fiscal policy. The impact is larger if the mayor can run for reelection, the number of political parties seated in the city council is higher, voters are older, the performance of the mayor in providing public good is lower, and cities are characterized by historical deficit, consistently with models on the political economy of fiscal adjustment.
    Keywords: fiscal rules, local government finance, difference-in-discontinuities
    JEL: C21 C23 H62 H72 H77
    Date: 2012–10
  5. By: Marco de Pinto (University of Trier)
    Abstract: The contribution of this paper is to derive an optimal redistribution scheme for trade gains in the case of a governments objective function that explicitly accounts for the equity-efficiency trade-o¤. The government pays unemployment benefits (UB) either .financed by a wage tax, a payroll tax or a pro.t tax paid by exporters only. Using a Melitz -type framework with unionized labor markets and heterogeneous workers we show that there is a clear-cut ranking of the redistribution schemes in terms of welfare level: 1. UB .financed by a pro.t tax paid by exporters, 2. UB .financed by a wage tax, 3. UB .financed by a payroll tax.
    Keywords: trade liberalization, heterogeneous firms, trade unions, income inequality, unemployment benefits, taxes
    JEL: F1 F16 H2
    Date: 2012
  6. By: Caminada, Koen; Goudswaard, Kees; Wang, Chen
    Abstract: In most OECD countries the gap between rich and poor has widened over the past decades. This paper analyzes whether and to what extent taxes and social transfers have contributed to this trend. Has the redistributive power of different social programs changed over time? The paper contributes to the literature by disentangling several parts of fiscal redistribution in a comparative setting. We use micro-data from the Luxembourg Income Study to examine household market inequality, redistribution from transfers and taxes, and the underlying social programs that drive the changes, for 20 countries from the mid-1980s to mid-2000s. The contribution of each program is estimated using a sequential accounting budget incidence decomposition technique. The aim of this paper is to offer detailed information on the redistributive impact of social transfer programs. We focus on changes in fiscal redistribution of 13 different social programs and taxes. We observe a sizeable increase in primary household inequality in all 20 countries over the last 25 years (except Ireland). In most countries, the extent of redistribution has increased too. Tax-benefit systems have offset two-third of the average increase in primary income inequality, although they appear to have become less effective in doing so since the mid-1990s. We find that the public old age pensions and the survivors scheme attribute 60 percent to the increase of redistribution during the period 1985-2005 for a subset of countries considered (with full tax/benefit information). Social assistance accounts for 20 percent, and the benefits for sickness, disease, and disability account for around 13 percent of the total increase in redistribution. Other transfers (invalid career benefits, education benefits, child care cash benefits and other child and family benefits) account for 22 percent of the total increase in redistribution. On the contrary, taxes slowed down redistribution by 17 percent during 1985-2005.
    Keywords: welfare states; social income transfers; inequality; Gini coefficient; LIS
    JEL: H55 H53 I32
    Date: 2012–09–10
  7. By: Laun, Lisa (Dept. of Economics, Stockholm University)
    Abstract: This paper analyzes the effect of two age-targeted policy initiatives to delay retirement that were simultaneously implemented in Sweden in 2007: an earned income tax credit and a payroll tax credit. Both policies were targeted at workers aged 65 or above at the beginning of the tax year. The paper exploits that the special rules for elderly were governed by the year of birth while the social security system is governed by age at retirement, i.e., the day of birth, in analyzing the effect of the new policies. The results suggest that the age-targeted tax credits increased employment in the year following the 65th birthday by 1.5 percentage points among individuals with annual earnings above the 2007 tax liability threshold three to five years earlier. An analysis of fiscal implications indicates, however, that the increase in employment was not large enough to offset the implied decrease in tax revenues.
    Keywords: Labor supply; Retirement; Earned income tax credit; Payroll taxes
    JEL: H24 J14 J18 J21
    Date: 2012–10–29
  8. By: Turrini, Alessandro (European Commission)
    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 have a stronger impact on 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.
    Keywords: fiscal consolidation, unemployment, job market flows, employment protection legislation, labour market reforms
    JEL: E62 J63 J65
    Date: 2012–10
  9. By: Viren , Matti (Department of Economics and the PCRC in the University of Turku, Finland; Monetary Policy and Research, Bank of Finland)
    Abstract: This paper deals with economic growth in Europe. The special emphasis is in key institutional factors that are commonly assumed to affect aggregate growth: functioning of labor markets, availability of labor and capital, and the size of government. For more explicit measures, we use the data on profit rates, average working hours, dependency ratios, tax rates and other measures of the size of government (e.g. employment shares), measures of price competitiveness, and finally the structure of production. The data also include the terms of trade, interest rates, and foreign demand as control variables. Empirical analysis makes use of cross-country panel data for EU15 countries for 1971–2010. The results suggest that profitability and competitiveness do indeed constitute the main determinants of growth. However, also other variables like working hours and the size of government appear to affect growth in an important manner. All in all, slowdown of growth in Europe does not appear to be a paradox but at least with some margin something can be done in achieving more ambitious growth rates.
    Keywords: growth; working hours; taxes; competitiveness
    JEL: O40 O43
    Date: 2012–10–24
  10. By: Javier San Julian Arrupe (Universitat de Barcelona) (Universitat de Barcelona)
    Abstract: In the last decade of the 19th century, the United Kingdom, France and Spain established progressive rates in their succession taxes. This paper compares the legislative processes that France and Spain countries followed in this matter. In both cases politicians arguments for and against progressive taxation were similar, and backed by well-known economic ideas and authors. The process in France was leaded by a majority of MPs believing that progressive taxes aided in the achievement of real justice in taxpaying. In Spain, there was not this majority, but the reform passed due to other circumstances. This would be one step in the application of new insights on tax fairness; however, proportionality as the right technique of taxation and government refrain from modifying distribution were still predominant.
    Keywords: parliament, public finance, inheritance tax, progressivity, political economy, liberalism
    JEL: K34 B12 N43 A11 H24
    Date: 2012
  11. By: Boubtane, Ekrame (University Paris 1); Coulibaly, Dramane (CEPII, Paris); Rault, Christophe (University of Orléans)
    Abstract: This paper examines empirically the interaction between immigration and host country economic conditions. We employ panel VAR techniques to use a large annual dataset on 22 OECD countries over the period 1987-2009. The VAR approach allows to addresses the endogeneity problem by allowing the endogenous interaction between the variables in the system. Our results provide evidence of migration contribution to host economic prosperity (positive impact on GDP per capita and negative impact on aggregate unemployment, native- and foreign-born unemployment rates). We also find that migration is influenced by host economic conditions (migration responds positively to host GDP per capita and negatively to host total unemployment rate).
    Keywords: unemployment, growth, immigration, panel VAR
    JEL: E20 F22 J61
    Date: 2012–10
  12. By: Sedmihradská, Lucie
    Abstract: In the early 1990´s it was expected that the property tax would play a significant role in the process of fiscal decentralization in the transition countries. Comparison of the development of legally granted and actually effected municipal autonomy regarding the property tax in the Czech Republic and Slovakia showed that increased autonomy led only to a limited extent to its effective exploitation and its contribution to increased accountability is questionable due to deteriorated transparency in the Czech Republic and significant tax exporting in Slovakia.
    Keywords: property tax; municipal fiscal autonomy; Czech Republic; Slovakia
    JEL: H71
    Date: 2012–04–10
  13. By: Günter Coenen (European Central Bank); Roland Straub (European Central Bank); Mathias Trabandt (Board of Governors of the Federal Reserve System)
    Abstract: We seek to quantify the impact on euro area GDP of the European Economic Recovery Plan (EERP) enacted in response to the financial crisis of 2008-09. To do so, we estimate an extended version of the ECB’s New Area-Wide Model with a richly specified fiscal sector. The estimation results point to the existence of important complementarities between private and government consumption and, to a lesser extent, between private and public capital. We first examine the implied present-value multipliers for seven distinct fiscal instruments and show that the estimated complementarities result in fiscal multipliers larger than one for government consumption and investment. We highlight the importance of monetary accommodation for these findings. We then show that the EERP, if implemented as initially enacted, had a sizeable, although short-lived impact on euro area GDP. Since the EERP comprised both revenue and expenditurebased fiscal stimulus measures, the total multiplier is below unity. JEL Classification: C11, E32, E62
    Keywords: Fiscal policy, fiscal multiplier, European Economic Recovery Plan, DSGE modelling, Bayesian inference, euro area
    Date: 2012–10
  14. By: Christoph Farquet (Université de Lausanne)
    Abstract: The history of tax havens during the decades before World War II is still little known. To date, the studies that have focused on the 1920s and 1930s have presented either a very general perspective on the development of tax havens or a narrow national point of view. Based on unpublished historical archives of five countries (Switzerland, Great Britain, Belgium, France, Germany), this paper offers therefore a new comparative appraisal of international tax competition during this period in order to answer the following question: What was the specificity of the Swiss case – already considered a quintessential tax haven at the time – in comparison to other banking centres? The findings of this research study are twofold. First, the 1920s and 1930s appear as something of a golden age of opportunity for avoiding taxation through the relocation of assets. Most of the financial centres granted consistent tax benefits for imported capital, while the limited degree of international cooperation and the usual guarantee of banking secrecy in European countries prevented the taxation of exported assets. Second, within this general environment, the fiscal strategies of a tax haven like Switzerland differed from those of a great financial power like Great Britain. Whereas the Swiss administration readily placed itself at the service of the banking community, British policy was more balanced between the contradictory interests of the Board of Inland Revenue, the Treasury, and the English business circles.
    JEL: G15 F39 F53 H26 H71 N24 N44
    Date: 2012–10
  15. By: Karine Torosyan (International School of Economics at TSU); Randall K. Filer (Hunter College)
    Abstract: This paper applies three different methods widely used in the literature to track changes in shadow economic activity in Georgia following a drastic tax reform in 2005. The first method is a currency demand approach based on macro level data. The second and third methods rely on micro data from household surveys. Overall, we find evidence that the amount of income underreporting decreased in the years following the reform. The biggest change is observed for households headed by a farmer, followed by “other” types of households where the head does not report any working status. Employed and self-employed households appear very similar before the tax reform and show minimal adjustment in income reporting in the post-reform period. Results, however, suggest that much of any difference may have come from increased enforcement efforts rather than rate changes.
    Keywords: hidden/shadow economy, tax reform, consumer behavior, transition economy
    JEL: E01 H26 J39
    Date: 2012
  16. By: Arnt Ove Hopland (Department of Economics, Norwegian University of Science and Technology)
    Abstract: Norwegian local governments that violate the balanced budget rule (BBR) are placed in a register. The consequence of being in the register is that the budget and resolutions to raise new loans must be approved by the county governor, the central government's representative in the county. Local governments in the register are subject to stronger central government control and must tighten their budgetary policy in order to be removed from the register. The findings suggest that local governments in the register improve their operating surplus, mainly due to cost reductions.
    Keywords: Fiscal adjustment, balanced budget regulations, fiscal federalism
    JEL: H71 H72 H74 H77
    Date: 2012–10–31
  17. By: Atif, Syed Muhammad; Srivastav, Mudit; Sauytbekova, Moldir; Arachchige, Udeni Kathri
    Abstract: The causal effect of globalization on income inequality is an issue of significant academic interest. On one hand globalization is considered to promote global economic growth and social progress, while on the other, it is blamed for growing income inequality and environmental degradation, causing social degeneration and difficulty of competition. This paper analyses the impact of globalization on income inequality by estimating static and dynamic models for panel data of 68 developing countries over the period of 1990-2010. The results conform to a priori expectations and it is suggested that an increase in globalization in developing countries leads to an increase in the level of income inequality. However, this analysis suffers from certain limitations, which lead to the conclusion that perhaps a simple, overarching relationship does not exist in the subject matter. Rather it is possible that the impact of globalization on income distribution varies between nations, depending on the structures and institutions that are in place in each country. --
    Keywords: Globalization,Income Inequality,Panel Data
    JEL: C33
    Date: 2012–10–29
  18. By: Ricardo A. Madeira
    Abstract: Decentralization of the delivery of public services provision is an important governance reform recently witnessed in many developing countries. Public education has been one of the key public services devolved to lower level governments. This paper uses an exclusive and rich longitudinal data on primary schools to evaluate the effects of the decentralization reform implemented on the State of Sao Paulo, Brazil, on several indicators of school performance and school resources. Specific aspects of the Sao Paulo’s State education reform combined with the data available allow me to deal with some common identification issues encountered by previous empirical studies on the subject. I find conflicting results for different school quality measures; decentralization increased dropout rates and failure rates across all primary school grades but improved several school resources. Further empirical investigation suggests that the worsening of these school performance indicators for the two first grades was partially driven by the democratization of the school access promoted by the education reform. Evaluation of the distributive outcome of the reform suggests that its effects were more perverse for schools located on rural and poor areas. I also find evidence that decentralization widened the gap between the “good” and “bad” schools. Moreover, I find no evidence that the municipalities’ administrative experience affected the program’s outcome.
    Keywords: Decentralization of Public Services, Education Economics, School Quality and
    JEL: I2 I28 H43 H7 C21
    Date: 2012–10–31
  19. By: Sergei Guriev (New Economic School); Elena Vakulenko (National Research University Higher School of Economics)
    Abstract: In this paper we study convergence among Russian regions. We find that while there was no convergence in 1990s, the situation changed dramatically in 2000s. While interregional GDP per capita gaps still persist, the differentials in incomes and wages decreased substantially. We show that fiscal redistribution did not play a major role in convergence. We therefore try to understand the phenomenon of recent convergence using panel data on the interregional reallocation of capital and labor. We find that capital market in Russian regions is integrated in a sense that local investment does not depend on local savings. We also show that economic growth and financial development has substantially decreased the barriers to labor mobility. We find that in 1990s many poor Russian regions were in a poverty trap: potential workers wanted to leave those regions but could not afford to finance the move. In 2000s (especially in late 2000s), these barriers were no longer binding. Overall economic development allowed even poorest Russian regions to grow out of the poverty traps. This resulted in convergence in Russian labor market; the interregional gaps in incomes, wages and unemployment rates are now below those in Europe. The results imply that economic growth and development of financial and real estate markets eventually result in interregional convergence.
    Keywords: Convergence, economic growth, Russian regions, financial development, migration.
    JEL: J61 R23
    Date: 2012–10
  20. By: Sebastian Dyrda; Jose-Victor Rios-Rull
    Abstract: In this note, we demonstrate and analyze the inability of standard neoclassical models to generate accurate estimates of the fiscal multiplier (that is, the macroeconomic response to increased government spending). We then examine whether estimates can be improved by incorporating recently developed theory on demand-induced productivity increases into neoclassical models. We find that neoclassical models modified in this fashion produce considerably better estimates, but they remain unable to generate anything close to an accurate value of the fiscal multiplier.
    Date: 2012

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