nep-pbe New Economics Papers
on Public Economics
Issue of 2013‒01‒07
twenty-two papers chosen by
Keunjae Lee
Pusan National University

  1. The economics of taxing net wealth: A survey of the issues By Schnellenbach, Jan
  2. Optimal Factor Tax Incidence in Two-sector Human Capital-based Models By Been-Lon Chen; Chia-Hui Lu
  3. Non-linear Effects of Taxation on Growth By Jaimovich, Nir; Rebelo, Sérgio
  4. Indirect taxation of monopolists: A tax on price By Vetter, Henrik
  6. Optimal Participation Taxes and Efficient Transfer Phase-Out By Normann Lorenz; Dominik Sachs
  7. Solving the Yitzhaki Paradox By Gwenola Trotin
  8. Fiscal consolidation in a currency union: spending cuts vs. tax hikes By Christopher J. Erceg; Jesper Lindé
  9. Efficient Fiscal Spending by Supranational Unions By Simon, Jenny; Valasek, Justin
  10. The tax shift from labor to consumption in Italy: a fiscal microsimulation analysis using EUROMOD By Andrea Taddei
  11. Fiscal consolidation using the example of Germany By Tobias Cwik
  12. The long run effect of taxes on the distribution of top income shares: an empirical investigation By Christoph Gorgas; Christoph A. Schaltegger
  13. The Effect of Endogenous Human Capital Accumulation on Optimal Taxation By William Peterman
  14. “The determinants of contractual choice for private involvement in infrastructure projects in the United States” By Daniel Albalate; Germà Bel; R. Richard Geddes
  15. Fiscal Decentralisation, Local Institutions and Public Goods Provision: Evidence from Indonesia By Pal, Sarmistha; Wahhaj, Zaki
  16. Estimating dynamic income responses to tax changes Massarrat-Mashhadi: Evidence from Germany By Massarrat-Mashhadi, Nima; Werdt, Clive
  17. Social Fragmentation, Public Goods and Elections: Evidence from China By Gerard Padro i Miquel; Nancy Qian; Yang Yao
  18. 18 billion at one blow: Evaluating Germany's twenty biggest tax expenditures By Thöne, Michael
  19. Growth and Income Redistribution Components of Changes in Poverty: A Decomposition Analysis for Ireland, 1987-2005 By Wasiu Adekunle Are
  20. Political Stability, Corruption and Trust in Politicians By Ingmar Schumacher
  21. Gauging the effects of fiscal stimulus packages in the Euro area By Gunter Coenen; Roland Straub; Mathias Trabandt
  22. Social Spending and Income Redistribution in Argentina During the 2000s: the Rising Role of Noncontributory Pensions. Extended Version By Nora Lustig; Carola Pessino

  1. By: Schnellenbach, Jan
    Abstract: This paper surveys possible motivations for having a net wealth tax. After giving a short overview over the state of wealth taxation in OECD countries, we discuss both popular arguments for such a tax, as well as economic arguments. It is argued that classical normative principles of taxation known from public economics cannot give a sound justification for a net wealth tax. The efficiency-related effects are also discussed and shown to be theoretically ambiguous, while empirical evidence hints at a negative effect on GDP growth. Finally, it is argued that despite of widespread and persistent lobbying for a revitalization of the net wealth tax, this is unlikely to happen due to political economy constraints. --
    Keywords: net wealth tax,wealth,inequality,redistribution
    JEL: H24 D31 H23 H21 H22
    Date: 2012
  2. By: Been-Lon Chen (Institute of Economics, Academia Sinica, Taipei, Taiwan); Chia-Hui Lu (Department of Economics, National Taipei University)
    Abstract: This paper studies the optimal factor tax incidence in a standard two-sector, human capital-based endogenous growth model elucidated by Lucas (1988). Capital income taxes generate dynamic inefficiency for capital accumulation and labor income taxes create dynamic inefficiency for human capital accumulation. A factor tax incidence is a tradeoff between these two inefficiencies. A switch from capital income taxes to labor income taxes reduces the long-run welfare coming from lower leisure and increases the long-run welfare originated from higher economic growth and higher consumption. Because the representative agent’s learning time and human capital are inseparable and thus affect learning activities at the same degree, we find that based on the current US income tax code, it is optimal to first tax capital income, and to resort to taxing labor income only when tax revenue is insufficient to cover government expenditure.
    Keywords: two-sector model, human capital, optimal factor tax incidence
    JEL: E62 H22 O41
    Date: 2012–12
  3. By: Jaimovich, Nir; Rebelo, Sérgio
    Abstract: We study a model in which the effects of taxation on growth are highly non-linear. Marginal increases in tax rates have a small growth impact when tax rates are low or moderate. When tax rates are high, further tax hikes have a large, negative impact on growth performance. We argue that this non-linearity is consistent with the empirical evidence on the effect of taxation and other disincentives to investment and innovation on economic growth.
    Keywords: growth; taxes
    JEL: H2 O4
    Date: 2012–12
  4. By: Vetter, Henrik
    Abstract: A digressive tax like a variable rate sales tax or a tax on price gives firms an incentive for expanding output. Thus, unlike unit and ad valorem taxes which amplify the harm from monopoly, a digressive tax lessens the harm. We analyse a tax on price with respect to efficiency and practical policy appeal. Using a tax on price in combination with ad valorem taxation it is possible to achieve the Ramsey solution. That is, the combination of the two taxes secures tax revenue in the least distortive way. We also show how tax reforms based only on observation of price and quantity can make use of a tax on price in order to improve welfare. That is, it is practical to use a tax on price. --
    Keywords: tax on price,ad valorem tax,tax incidence
    JEL: H21 L31
    Date: 2012
  5. By: Patrick Fève (Toulouse School of Economics)
    Abstract: This paper examines quantitative issues related to the Laffer curve in a neoclassical growth model with endogenous labor supply and complete or incomplete financial markets where distortionary taxes on labor, capital and consumption are used to finance government consumption, lump-sum transfers and debt repayments. We show that the shape of the Laffer curve related to each type of taxation differs a lot for the two model versions, especially when public debt is adjusted to fulfill the government budget constraint. In the incomplete markets setup, a given level of the fiscal revenues can be associated to three different levels of labor or capital income taxes. This finding occurs because the tax rates change non monotonically with public debt when markets are incomplete.
    Date: 2012
  6. By: Normann Lorenz (Volkswirtschaftslehre, Universität Trier, Germany); Dominik Sachs (Department of Economics, University of Konstanz, Germany)
    Abstract: We analyze the optimal design of income transfer programs with a special focus on participation taxes and the marginal tax rates in the phase-out region. The analytical framework incorporates labor supply responses along the intensive and extensive margin, where the latter is due to a minimum hours constraint. All results are expressed in reduced form, i.e. in terms of intensive and extensive labor supply elasticities. We derive a formula for the optimal participation taxes and provide a condition under which negative participation taxes are never part of the optimal tax schedule. Concerning the marginal tax rates in the phase-out region, we develop a test for a tax-transfer system to be beyond the top of the Laffer curve and thus to be (second-best) Pareto inefficient. In such a case there would be room for tax cuts (or increases in transfers) which are self-financing and therefore constitute a Pareto improvement. Applying this test to Germany, our analysis suggests that the structure of marginal tax rates in the transfer phase-out region is (second-best) Pareto inefficient.
    Keywords: Optimal taxation, participation taxes, extensive margin, Laffer curve, multidimensional screening
    JEL: H21 H23
    Date: 2012–12–17
  7. By: Gwenola Trotin (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS)
    Abstract: This paper examines the determinants of tax evasion under prospect theory. For prospect theory, reference dependence is a fundamental element (the utility function depends on gains and losses relative to a reference point and not on final wealths as in expected utility theory). In order to identify the determinants of the income tax evasion decision, a general reference income is used. We show that results obtained under expected utility theory are not robust. In particular, tax evasion is increasing in the tax rate as soon as a suitable relative risk aversion measure is larger with auditing, than without. With this simple and testable condition, prospect theory provides a general framework consistent with empirical evidence for the tax evasion behaviour problem.
    Keywords: Tax evasion; Prospect theory; Reference dependence; Decision weights.
    JEL: D81 H26 K42
    Date: 2012–09–03
  8. By: Christopher J. Erceg; Jesper Lindé
    Abstract: This paper uses a two country DSGE model to examine the effects of tax-based versus expenditure-based fiscal consolidation in a currency union. We find three key results. First, given limited scope for monetary accommodation, tax-based consolidation tends to have smaller adverse effects on output than expenditure-based consolidation in the near-term, though is more costly in the longer-run. Second, a large expenditure-based consolidation may be counterproductive in the near-term if the zero lower bound is binding, reflecting that output losses rise at the margin. Third, a "mixed strategy" that combines a sharp but temporary rise in taxes with gradual spending cuts may be desirable in minimizing the output costs of fiscal consolidation.
    Date: 2012
  9. By: Simon, Jenny (Stockholm Institute of Transition Economics); Valasek, Justin (Social Science Research Center Berlin (WZB))
    Abstract: We use a novel approach to address the question of whether a union of sovereign countries can efficiently raise and allocate a budget, even when members are purely self-interested and participation is voluntary. The main innovation of our model is to explore the link between budget contributions and allocation that arises when countries bargain over union outcomes. This link stems from the distribution of bargaining power being endogenously determined. Generically, it follows that unstructured bargaining gives an inefficient result. We find, however, that efficiency is achieved with fully homogenous countries, and when countries have similar incomes and the union budget is small. Moreover, some redistribution arises endogenously, even though nations are purely self-interested and not forced to participate in the union. A larger union budget, however, entails a trade-off between equality and efficiency. We also analyze alternative institutions and find that majority rule can improve efficiency if nations who prefer projects with high public good spillovers are endogenously selected to the majority coalition. Exogenous tax rules, such as the linear tax rule in the EU, which is designed to increase efficiency on the contribution margin, can also improve overall efficiency despite decreasing the efficiency of the allocation of funds.
    Keywords: International Unions; Efficiency; Public Goods; Redistribution; Federalism; Legislative Bargaining
    JEL: D71 H77 H87
    Date: 2012–12–10
  10. By: Andrea Taddei (University of Genoa, Italy)
    Abstract: The aim of this paper is to simulate a tax shift reform from labor to consumption in Italy and observe the distributional impact of this policy on households. The microsimulation model used is EUROMOD, which is uniquely focused on direct taxes, social contributions and benefits. Through a two steps matching between the Italian income survey (IT-SILC) and the Households Budget Survey (Indagine sui consumi delle famiglie italiane – ISTAT), the model was enriched with data on consumption and it has been possible to simulate also indirect taxes (VAT and excises). Once calculated the baseline, the reform has been simulated by a decrease in social security contributions paid by employees, compensated with a rise in standard VAT in order to obtain Government budget neutrality. The main finding is that the simulated reform increase the regressive of the system without changes in the redistribution strategies or with a more progressive income taxation. To obtain a measure of the change in households wealth, has been used the Welfare Gain index which considered both consumption and income changes. The results are also shown at regional level.
    Keywords: direct and indirect taxation, fiscal microsimulation, progressivity, tax reform, redistribution
    JEL: C81 D12 D63 H22 H31
    Date: 2012–12
  11. By: Tobias Cwik
    Abstract: After the run up in debt-to-GDP ratios around the world in the aftermath of the financial crisis and the associated lower fiscal space, the question of prudent fiscal consolidation is back on the agenda. In this paper, I study the macroeconomic implications of fiscal consolidation triggered by the newly introduced "debt brake" in Germany, which dampens the accumulation of debt. I address this question using a medium-size new Keynesian DSGE model for Germany. The model includes the government debt-to-GDP ratio, government transfers, labour income tax, consumption tax and capital tax revenues. I find that the "debt brake" enforces fiscal consolidation in times of economic expansions without constraining fiscal policy makers in times of recessions. I also find that the debt brake raises the government spending multiplier initially but not over time. Finally, the debt brake, with a fiscal consolidation on the government spending and transfers side, leads to a significant stabilization of the private sector without increasing the volatility of the fiscal instruments.
    Date: 2012
  12. By: Christoph Gorgas; Christoph A. Schaltegger
    Abstract: We provide empirical evidence on the impact of personal income taxes and tax competition on income concentration in Switzerland. The fact that Swiss cantons have considerable taxing power enables us to study the effect of differences in the tax burden as well as in the pressure of tax competition on the distribution of top income shares within Switzerland. Using panel regressions covering all 26 Swiss cantons over the years 1917 to 2007 we find substantial evidence that tax competition is a major driving force behind the cantonal tax setting behaviour shaping cantonal income concentration for the very top incomes significantly.
    Date: 2012–12
  13. By: William Peterman (Federal Reserve Board of Governors)
    Abstract: This paper considers the impact of endogenous human capital accumulation on optimal tax policy in a life cycle model. Including endogenous human capital accumulation, either through learning-by-doing or learning-or-doing, is analytically shown to create a motive for the government to use age-dependent labor income taxes. If the government cannot condition taxes on age, then it is optimal to use a tax on capital in order to mimic such taxes. Quantitatively, introducing learning-by-doing or learning-or-doing increases the optimal tax on capital by forty or four percent, respectively. Overall, the optimal tax on capital is thirty five percent higher in the model with learning-by-doing compared to the model with learning-or-doing implying that how human capital accumulates is of significant importance when determining the optimal tax policy.
    Date: 2012
  14. By: Daniel Albalate (Faculty of Economics, University of Barcelona); Germà Bel (Faculty of Economics, University of Barcelona); R. Richard Geddes (Department of Policy Analysis & Management, College of Human Ecology, Cornell University)
    Abstract: Reliance on private partners to help provide infrastructure investment and service delivery is increasing in the United States. Numerous studies have examined the determinants of the degree of private participation in infrastructure projects as governed by contract type. We depart from this simple public/private dichotomy by examining a rich set of contractual arrangements. We utilize both municipal and state-level data on 472 projects of various types completed between 1985 and 2008. Our estimates indicate that infrastructure characteristics, particularly those that reflect “stand alone” versus network characteristics, are key factors influencing the extent of private participation. Fiscal variables, such as a jurisdiction’s relative debt level, and basic controls, such as population and locality of government, increase the degree of private participation, while a greater tax burden reduces private participation..
    Keywords: Privatization, Contracting, Infrastructure, Risk transfer. JEL classification: H4; H54; H7; L88; L9
    Date: 2012–12
  15. By: Pal, Sarmistha (University of Surrey); Wahhaj, Zaki (University of Kent)
    Abstract: Using data from the Indonesian Family Life Surveys, this paper studies the impact of fiscal decentralisation in Indonesia on local public spending across communities with different types of local institutions. Our results provide evidence of heterogeneity in access to public goods across communities in the period prior to fiscal decentralisation; with significantly greater spending on schools and health centres in communities which observe traditional adat laws (which promote an ethic of mutual cooperation), and less spending on roads, public transport, communications etc. in communities which have a democratic electoral system. Fiscal decentralisation led to an increase in the share of spending on physical infrastructure, as well as a convergence in spending across communities with different types of local institutions. We develop a theoretical model to argue that communities which enjoy a higher level of mutual cooperation would benefit less from investment in public goods which facilitate communication and exchange with outsiders – as these improve the outside options of community members and therefore makes it more difficult to sustain intra-community cooperation. Surprisingly, investment in communications and transport infrastructure in these communities were more restrained during the period of centralised fiscal control.
    Keywords: decentralisation, democratisation, mutual co-operation, social and physical infrastructure, local public spending, Indonesia
    JEL: D02 H41 O43
    Date: 2012–12
  16. By: Massarrat-Mashhadi, Nima; Werdt, Clive
    Abstract: This paper provides new empirical insights on the elasticity of taxable income to the net-oftax rate. Using a panel of German income tax return data, we followed taxpayers from 2001 to 2006 to analyze the effects of the German tax reforms of 2004 and 2005. Implementing a dynamic model as proposed by Holmlund and Söderström (2011), we are able to disentangle short-term and long-term responsiveness. These estimates allow us to distinguish between different dimensions of behavioral changes: short-term income reactions in contrast to 'real' changes in (reporting) behavior. We compare our results with recent German estimates from the established approach by Gruber and Saez (2002) applied by Gottfried and Witzcak (2009). Following Chetty's (2009) theoretical considerations, we use multiple (tax code related) income concepts and alternative sample choices. We provide several robustness and validity analyses of the most common income concept, i.e. taxable income excluding capital. Our preferred specification yields (very) high short-term yet small long-term elasticites. The latter range from 0 to 0.16, implying none or only modest persistent behavioral changes to marginal tax rate cuts. --
    Keywords: long-term income responses,taxable income elasticity,dynamic panel data estimation,income tax return data
    JEL: C26 H21 H53
    Date: 2012
  17. By: Gerard Padro i Miquel; Nancy Qian; Yang Yao
    Abstract: This study examines how the economic effects of elections in rural China depend on voter heterogeneity, for which we proxy with religious fractionalization. We first document religious composition and the introduction of village-level elections for a nearly nationally representative sample of over two hundred villages. Then, we examine the interaction effect of heterogeneity and the introduction of elections on village-government provision of public goods. The interaction effect is negative. We interpret this as evidence that voter heterogeneity constrains the potential benefits of elections for public goods provision.
    JEL: O38 O43 P16 P35
    Date: 2012–12
  18. By: Thöne, Michael
    Abstract: --
    JEL: H24 H25
    Date: 2012
  19. By: Wasiu Adekunle Are (University College Dublin)
    Abstract: This study analysed the contribution of economic growth and redistribution components to aggregate poverty changes in Ireland from 1987-2005, using the Shapley value decomposition approach. The analysis used the household disposable income data from the Household Budget Survey to calculate poverty indices. The result of the Shapley value decomposition of poverty changes into growth and redistribution components revealed that the growth component dominates the redistribution component in bringing about the decline in poverty. This suggests that the drastic fall in absolute poverty over the survey period could be attributed to the increase in the household mean income rather than the redistributive policies of government transfer and income tax systems. We also investigated the extent to which economic growth experienced over the survey period has been pro- poor, by using the Growth Incidence Curve proposed by Ravallion and Chen (2003). It was found that economic growth was slightly pro-poor between 1987 and 1994 and generally anti-poor between 1994 and 1999.
    Keywords: economic growth, inequality, poverty decomposition, shapley value
    JEL: D31 D63 I32 P36
    Date: 2012–12–20
  20. By: Ingmar Schumacher (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, IPAG - Business School)
    Abstract: In this article we develop a dynamic model where an endogenous evolution of trust impacts a politician's choice for bribe-taking and tax re-distribution. The politician obtains utility from net income that comes from his wage income, tax embezzlements and bribe-taking, and he also has incentives for tax re-distribution. The higher the tax embezzlements and the more bribes the politician takes the lower his citizens' trust and the less likely will he be re-elected. We support the evolution of trust with an econometric investigation. We analyze the necessary and su cient conditions, and nd that withholding taxes and taking bribes may be complements or substitutes for a politician, depending on the politician's incentives for tax re-distribution. Without these incentives, tax embezzlement and bribe taking are necessarily substitutes. With su ciently strong incentives, we nd re-distribution and bribe-taking may become complements. Complements implies that the politician, at least partly, increases bribe-taking because this allows him to increase re-distribution, which aids his additional motives for tax re-distribution. Based on comparative statics at steady state we also nd that the higher the politician's wage the lower the bribe-taking and the higher the trust; stronger social capital leads to less bribe-taking and higher levels of trust; improvements in electoral accountability induce a decrease in bribing while trust increases.
    Keywords: : trust; corruption; political stability; bribe; dynamic model.
    Date: 2012–12–10
  21. By: Gunter Coenen; Roland Straub; Mathias Trabandt
    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 expenditure-based fiscal stimulus measures, the total multiplier is below unity.
    Date: 2012
  22. By: Nora Lustig (Tulane University and Center for Global Development and Inter-American Dialogue); Carola Pessino (Department of Economics at the Universidad del CEMA, Argentina and Center for Global Development, Washington, DC)
    Abstract: Between 2003 and 2009, Argentina’s social spending as a share of GDP increased by 7.6 percentage points. Marginal benefit incidence analysis for 2003, 2006, and 2009 suggests that the contribution of cash transfers to the reduction of disposable income inequality and poverty rose markedly between 2006 and 2009 primarily due to the launching of a noncontributory pension program – the pension moratorium – in 2004. Noncontributory pensions as a share of GDP rose by 2.2 percentage points between 2003 and 2009 and entailed a redistribution of income to the poor, and from the formal sector pensioners with above minimum pensions to the beneficiaries of the pension moratorium. The redistributive impact of the expansion of public spending on education and health was also sizeable and equalizing, but to a lesser degree. An assessment of fiscal funding sources puts the sustainability of the redistributive policies into question, unless nonsocial spending is significantly cut.
    Keywords: social spending, benefit incidence, inequality, poverty, Argentina.
    JEL: D31 H22 I38
    Date: 2012–11

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