nep-pbe New Economics Papers
on Public Economics
Issue of 2012‒12‒15
thirteen papers chosen by
Keunjae Lee
Pusan National University

  1. The role of direct taxes in fiscal decentralization By Luca Gandullia
  2. 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
  3. Human Capital Formation and Tax Evasion By Laszlo Goerke
  4. The Effect of Political and Economic Factors on Corporate Tax Rates By Hansson, Åsa; Porter, Susan; Perry Williams, Susan
  5. Macroeconomic implications of the dynamics between power and trust: a theoretical formalisation of the ‘slippery slope’ framework By Gaetano Lisi
  6. Earnings Shocks and Tax-Motivated Income-Shifting: Evidence from European Multinationals By Dhammika Dharmapala; Nadine Riedel
  7. The ARRA: Some Unpleasant Welfare Arithmetic By Casey B. Mulligan
  8. Causal Link between Central Government Revenue and Expenditure: Evidence for India By Yashobanta, Yashobanta Parida; smruti, Smruti Ranjan Behera
  9. Bunching and Non-Bunching at Kink Points of the Swedish Tax Schedule By Spencer Bastani; Håkan Selin
  10. Optimal Fiscal Policy and the Banking Sector By Matthew Schurin
  11. Generosity and Political Preferences By Dawes, Christopher T.; Johannesson, Magnus; Lindqvist, Erik; Loewen, Peter; Östling, Robert; Bonde, Marianne; Priks, Frida
  12. Fiscal Decentralisation and Fiscal Outcomes By Matteo Governatori; David Yim
  13. Output Spillovers from Fiscal Policy By Alan J. Auerbach; Yuriy Gorodnichenko

  1. By: Luca Gandullia (University of Genoa, Italy)
    Abstract: The aim of the paper is to review the economic theory of tax assignment across levels of government and the international experience in the use of direct taxes – personal income taxes and taxes on profits and on business value added – for fiscal decentralization. We highlight that as for other options of local taxation there are merits but also drawbacks in the use of direct taxes as a source of financing for sub-central governments and so the final choice about their use or not is a matter of judgment and depends on the political priority to be attached to different objectives, such as efficiency, equity, accountability, tax competition, administrative feasibility and revenue adequacy.
    Keywords: direct taxes, fiscal decentralization, tax assignment
    JEL: H24 H25 H71 H73
    Date: 2012–09
  2. By: Giampaolo Arachi; Valeria Bucci; Ernesto Longobardi; Paolo Panteghini; Maria Laura Parisi; Simone Pellegrino; Alberto Zanardi
    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: H20 D22 D31
    Date: 2012
  3. By: Laszlo Goerke
    Abstract: A strictly risk-averse individual with an exogenous gross income in period one can acquire human capital in the same period and evade taxes. Period-two income rises with educational investments in period one and can also be hidden from tax authorities. It is shown that a greater tax deductibility of educational investments and higher individual ability induce a positive correlation between tax evasion and educational investments in period two, whereas the relationship in period one is ambiguous. These theoretical predictions can explain diverse empirical findings on the correlation between education and tax evasion.
    Keywords: human capital, income tax, tax evasion
    JEL: H24 H26 I20
    Date: 2012
  4. By: Hansson, Åsa (Research Institute of Industrial Economics (IFN)); Porter, Susan (McIntire School of Commerce); Perry Williams, Susan (McIntire School of Commerce)
    Abstract: Economists and political scientists have long been interested in factors that affect the statutory tax rate on businesses set by federal governments. In this study, we examine the impact of political and economic factors on several measures of tax rates and tax incentives offered across 19 developed countries for the years 1979 through 2005. Our results indicate that while economic conditions such as openness, strategic interaction, budget constraints, economic downturns and an aging population all influence the rate of tax set by governments, the political structure of the federal government has a significant impact in the form of economic stimulus given. Importantly, our results suggest that different economic and political structures affect the level of incentives offered beyond those factors that affect the level of tax rates. These results are relevant to the current tax debate facing many governments as they consider implementing new policies to attract foreign direct investment and retain and grow domestic business. <p> The impact of the political structure on the ability to enact legislation is significant after controlling for economic factors. This indicates that as the marketplace continues to become more international, it will become increasingly important for governments to find opportunities to work within their systems to enact legislation that enables their business community to compete internationally.
    Keywords: Corporate tax rates; Tax competition; Political structure
    JEL: D72 H25 H73
    Date: 2012–11–22
  5. By: Gaetano Lisi
    Abstract: This paper aims to provide a thorough theoretical formalisation of the ‘slippery slope’ framework in order to highlight the effects and the macroeconomic implications of the dynamics between power and trust. In particular, the proposed model is able to differentiate between coercive and legitimate power, thus elucidating the dynamics between power and trust and its influence on tax climate and tax compliance. Also, by introducing trust in tax authorities as a determinant of tax compliance, the decision to under-report income is no longer based on expected profits maximisation and thus the tax compliance problem can not be explained by a pure economic approach. The main results of the model are the following: (i) trust-building actions are better than deterring measures for overall tax compliance, since they establish a cooperative tax climate and lead to a legitimate power, while too much power corrodes trust; (ii) in a society where trust is maximised and tax authority benefits from a legitimate power, both employment and economic growth are higher since tax evasion and shadow economy are lower and the level of taxation can be reduced.
    Keywords: trust (in) and power (of) tax authorities, tax compliance, tax evasion macroeconomics variables.
    JEL: A12 A13 E26 H26 K34 K42
    Date: 2012–11–21
  6. By: Dhammika Dharmapala; Nadine Riedel
    Abstract: This paper presents a new approach to estimating the existence and magnitude of tax-motivated income shifting within multinational corporations. Existing studies of income shifting use changes in corporate tax rates as a source of identification. In contrast, this paper exploits exogenous earnings shocks at the parent firm and investigates how these shocks propagate across low-tax and high-tax multinational subsidiaries. This approach is implemented using a large panel of European multinational affiliates over the period 1995-2005. The central result is that parents’ positive earnings shocks are associated with a significantly positive increase in pretax profits at low-tax affiliates, relative to the effect on the pretax profits of high-tax affiliates. The result is robust to controlling for various other differences between low-tax and high-tax affiliates and for country-pair-year fixed effects. Additional tests suggest that the estimated effect is attributable primarily to the strategic use of debt across affiliates. The magnitude of income shifting estimated using this approach is substantial, but somewhat smaller than that found in the previous literature.
    Keywords: international taxation, income-shifting, multinational firms, earnings shocks
    JEL: H25
    Date: 2012
  7. By: Casey B. Mulligan
    Abstract: Distributions of marginal labor income tax rates for unemployed household heads and spouses are estimated for three benefit and tax rule scenarios: actual rules under the American Reinvestment and Recovery Act, rules as they would have been if they had not been changed since 2007, and rules as they might have been with a bigger fiscal stimulus. About three million unemployed, with a variety of tax situations, had more disposable income while unemployed than they would have by accepting a job that paid 80-100 percent of their previous one. The number would have been less than one million under 2007 rules, and about eight million under a bigger stimulus. Tax obligations and foregone unemployment insurance about equally erode the rewards from retaining a job, or starting a new one.
    JEL: E24 H31 I38
    Date: 2012–12
  8. By: Yashobanta, Yashobanta Parida; smruti, Smruti Ranjan Behera
    Abstract: This paper attempts to analyze the causal relationship between central government revenue and expenditure for India using annual data over the period 1970-2008. The Johansen cointegration test suggests that there is a long-run relationship between central government revenue and expenditure. The result from Granger causality test based on Vector Error Correction Models (VECM) suggests bidirectional causality between central government revenues and expenditures in the long-run supporting Fiscal Synchronization hypothesis. Under this hypothesis, our finding indicates that the fiscal authority of India should try to raise revenue and cut expenditure simultaneously in order to control the respective fiscal deficit. The short-run Granger causality test based on WALD test restriction suggests unidirectional causality from expenditure to revenue supporting “Spend-and-Tax” hypothesis. This hypothesis suggests that the unsustainable fiscal imbalances can be mitigated by policies that adjusted government expenditure.
    Keywords: Revenue; Expenditure; Deficit; Causality; Cointegration
    JEL: E62 O23 P35 H53 H68
    Date: 2012–10–30
  9. By: Spencer Bastani; Håkan Selin
    Abstract: Recent microeconometric studies of taxpayer’ responsiveness to taxation have shown that intensive margin labor supply and earnings elasticities typically are modest and sometimes equal to zero. However, a common view is that long-run responses might still be large since micro-estimates are downward biased owing to optimization frictions. In this paper we estimate the taxable income elasticity at a very large kink point of the Swedish tax schedule using the bunching method. During the period of study the change in the log net-of-tax rate reached a maximum value of 45.6%. Interestingly, we obtain a precise elasticity estimate of zero for wage earners at this large kink. The size of the kink allows us to derive tighter bounds on the long-run elasticity than previous studies. If wage earners on average tolerate 1% of their disposable income in optimization costs, the upper bound on the long-run taxable income elasticity is 0.39. We also evaluate the performance of the bunching estimator by performing Monte Carlo simulations.
    Keywords: bunching, taxable income, bounds, optimization frictions
    JEL: H21 H24 J22
    Date: 2012
  10. By: Matthew Schurin (University of Connecticut)
    Abstract: What should the government’s fiscal policy be when banks hold significant amounts of public debt and the government can default on its debt obligations? This question is addressed using a dynamic general equilibrium model where banks face constraints on their leverage ratios and adjust lending to satisfy regulatory requirements. In response to adverse real shocks, the government subsidizes banks and accelerates bond repayments to sustain private sector lending. When government consumption exogenously increases, however, the government optimally taxes banks and partially defaults on its debt. Debt issuance is procyclical to ensure equilibrium in the deposit market. With an opening of the economy, the government uses less aggressive tax and default policies. JEL Classification: E32, E62, F41, H21, H63 Key words: Business Fluctuations, Debt, Fiscal Policy, Government Bonds, Ramsey Equilibrium, Optimal Taxation
    Date: 2012–11
  11. By: Dawes, Christopher T. (Department of Politics); Johannesson, Magnus (Stockholm School of Economics); Lindqvist, Erik (Research Institute of Industrial Economics (IFN)); Loewen, Peter (Department of Political Science); Östling, Robert (Institute for International Economic Studies); Bonde, Marianne; Priks, Frida
    Abstract: We test whether generosity is related to political preferences and partisanship in Canada, Sweden, the United Kingdom and the United States using incentivized dictator games. The total sample consists of more than 5,000 respondents. We document that support for social spending and redistribution is positively correlated with generosity in all four countries. Further, we show that donors are more generous towards co-partisans in all countries, and that this effect is stronger among supporters of left-wing political parties. All results are robust to the inclusion to an extensive set of control variables, including income and education.
    Keywords: Generosity; Altruism; Political Preferences; Size of Government; Public Goods; Dictator Game; Ingroup Effect; Political Partisanship
    JEL: H11 H40
    Date: 2012–11–21
  12. By: Matteo Governatori; David Yim
    Abstract: In recent years, the concern that the behaviour of subnational governments may hinder the achievement of national budgetary targets has been increasingly raised across the EU. In this paper the relationship between fiscal decentralisation and budgetary outcomes of the general government is analysed. Results suggest that fiscal decentralisation is not harmful per se for budgetary discipline, although it is likely to have an adverse effect if predominantly financed by transfers from the central government rather than by subnational taxes and fees. Moreover, borrowing rules applying to subnational governments appear to partly counteract the adverse effect of transfers on fiscal balances. Therefore, policy concerns should not focus on decentralisation as such but rather on a 'bad' design of decentralisation, i.e. one which is not accompanied by subnational financial responsibility.
    JEL: E62 H62 H71 H72
    Date: 2012–11
  13. By: Alan J. Auerbach; Yuriy Gorodnichenko
    Abstract: In this paper, we estimate the cross-country spillover effects of government purchases on output for a large number of OECD countries. Following the methodology in Auerbach and Gorodnichenko (2012a, b), we allow these multipliers to vary smoothly according to the state of the economy and use real-time forecast data to purge policy innovations of their predictable components. We also consider the responses of other key macroeconomic variables. Our findings suggest that cross-country spillovers have an important impact, and also confirm those of our earlier papers that fiscal shocks have a larger impact when the affected country is in recession.
    JEL: E32 E62
    Date: 2012–11

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