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on Public Economics |
| By: | Neumann, Dirk; Bargain, Olivier; Dolls, Mathias; Fuest, Clemens; Peichl, Andreas |
| Abstract: | One central lesson of the sovereign debt crisis is that the Eurozone (and the EU) needs institutional reform. Many observers argue that the monetary union should be complemented by a fiscal union . In this paper we provide the first quantitative analysis of important economic effects of an EU income tax. Using the European tax-benefit calculator EUROMOD, we simulate detailed individual budget curves in order to estimate an average EU tax system . Three key issues are analyzed: firstly, we assess the direct distributional implications of an EU tax (partly) replacing national tax systems. Applying different voting schemes, we especially investigate whether such a step could find political support in each country and the EU as a whole. Secondly, by using behavioral simulation techniques we analyze the impact of introducing a common tax on economic efficiency and adjust the distributional effects accordingly. Thirdly, we investigate the potential of an EU income tax to act as an automatic fiscal stabilizer in the event of an asymmetric shock. We derive crucial policy implications from our simulation exercise for the reform of the Eurozone and shed some light on a very important set of questions: How would further fiscal integration economically affect different households in the different member states? How would it affect automatic stabilizers in the EU? -- |
| JEL: | H20 H31 J22 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc12:66063&r=pbe |
| By: | Gerhard Glomm (Department of Economics, Towson University); Juergen Jung (Department of Economics, Towson University); Chung Tran (Research School of Economics, The Australian National University) |
| Abstract: | We study the macroeconomic and welfare effects of decumulating government debt in an overlapping generations model with skill heterogeneity and productive and non-productive government programs. Our results are: First, in the small open economy model calibrated to Greece, the spending-based austerity reform dominates the tax-based reform with respect to income effects but not with respect to the welfare effect. A mixed reform combining the tax-based and spending-based measures results in the largest welfare effects of up to 1.8 percent of pre-reform consumption. Second, the welfare effects vary significantly along the transition to the post reform steady state, depending not only on fiscal austerity measures, but also on skill types, working sectors and generations. When consumption taxes adjust the aggregate welfare effects are positive but the current old and middle age generations experience welfare losses while current young workers and future generations are beneficiaries. Third, interactions between fiscal distortions and the risk premium as well as accessibility to international capital markets strongly influence the effects of fiscal austerity. Larger growth and welfare effects are observed when the risk premium is larger than zero and when access to international capital markets is restricted. |
| Keywords: | Fiscal consolidation, welfare, distributional effects, overlapping generations, dynamic general equilibrium. |
| JEL: | E21 E63 H55 J26 J45 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:tow:wpaper:2013-01&r=pbe |
| By: | Runkel, Marco; Hoffmann, Magnus |
| Abstract: | This paper contributes to resolving the puzzle that in practice most countries use ad valorem (corporate income) taxation, while a large part of the tax competition literature views business taxes as unit (wealth) taxation. We point to the dual role that corporate taxation plays in attracting mobile capital, on the one hand, and in absorbing economic rents, on the other hand. In contrast to the previous literature, we show (i) that detrimental tax competition may be less severe in a system of ad valorem taxes than in a system of unit taxes and (ii) that ad valorem taxation may be the equilibrium outcome in a decentralized world where countries decide themselves on the tax system. Interestingly, the decentralized choice of the ad valorem system may be a prisoner's dilemma since the countries' welfare may be higher if they choose unit taxes. -- |
| JEL: | H21 H25 H77 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc12:62079&r=pbe |
| By: | Simone Moriconi (Catholic University of Milan, ITEMQ and CREA, University of Luxembourg); Pierre M. Picard (CREA, University of Luxembourg); Skerdilajda Zanaj (CREA, University of Luxembourg) |
| Abstract: | This paper studies competition in regulation and commodity taxation between trading countries. We present a general equilibrium model in which destination based consumption taxes finance public goods, while regulation of entry determines the number of firms in the markets. We find (i) no strategic interaction in commodity taxes; (ii) regulation leads to lower commodity tax rates if demand for public goods is more sensitive to income than demand for private goods and (iii) regulation policy is a strategically complement instrument if consumers do not over value product diversity. In the empirical part of the paper, we test our predictions using panel data for 21 OECD countries over the period 1990-2008. |
| Keywords: | Regulation, commodity tax, strategic interactions, fiscal federalism |
| JEL: | F0 H1 H7 H87 L5 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:luc:wpaper:12-15&r=pbe |
| By: | Strecker, Nora; Egger, Peter; Radulescu, Doina |
| Abstract: | Profit taxes are widely acknowledged to influence the location of firms' headquarters. This paper sheds light on the role of aspects of labor taxation for the international location of headquarters. We construct a unique data set of effective labor taxes in 120 countries and use data on the location of 35,206 firms to analyze the impact of labor income tax rates, the progressivity of the income tax schedule, and social security contributions on firms' decisions where to locate their headquarters. The findings suggest that both a higher progressivity of the tax system and higher (employee- and employer-borne) social security contributions negatively influence a country's attractiveness for headquarters location. A one percentage point increase in a country's average labor income tax rate reduces its probability to be chosen as the headquarters location for the average firm by about 1.2 percentage points. -- |
| JEL: | H24 C25 H22 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc12:62086&r=pbe |
| By: | Haufler, Andreas; Lülfesmann, Christoph |
| Abstract: | We analyze the effects of introducing a two tier structure of capital taxation, where the asymmetric member states of a union choose a common, central tax rate in the first stage, and then non-cooperatively set local tax rates in the second stage. We show that this mechanism effectively reduces competition for mobile capital between the members of the union. Even without side payments, the gains from partial coordination are distributed across the heterogeneous members in a way that yields a strict Pareto improvement over a one tier system of purely local tax choices. Finally, we show that a dual structure of capital taxation has advantages even in a setting where costly side payments are feasible. -- |
| JEL: | H25 H77 H87 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc12:62082&r=pbe |
| By: | Giacomo De Luca (University of York, United Kingdom); Anastasia Litina (CREA, University of Luxembourg); Petros G. Sekeris (FNRS and CRED, University of Namur, Belgium) |
| Abstract: | In this paper we show that in highly unequal societies, different societal groups may support a rent-seeking dicator serving their interests better than the median voter in a democratic regime. Importantly, it is the stakes of dictator in the economy, in the form of capital ownership, that drives the support of individuals. In particular, in highly societies ruled by a capital-rich dictator endowed with the power to tax and appropriate at will, the elites support dictatorial policies that generate higher growth rates than the ones obtained under democracy. Such support arises despite the total absence of checks and balances on the dictator. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:luc:wpaper:12-13&r=pbe |
| By: | Patrice Pieretti (CREA, University of Luxembourg); Skerdilajda Zanaj (CREA, University of Luxembourg); Benteng Zou (CREA, University of Luxembourg) |
| Abstract: | In this paper, we analyze the long run economic performance of a small economy open to foreign investments. Policy instruments used to attract investments are taxes and attractive public infrastructures, whereas the policy choices of the rest of the world are taken as given. Applying the Pontryagin’s maximum principle, we first show that there exists one long run optimal size of the small economy which is saddle-point stable. The transitional path is two-dimensional, if the small economy is patient enough. Then, we show that the share of tax income allocated to the infrastructure expenditures plays an important role in attaining such a steady state. However, a deviation from this policy path can lead to an eventual economic collapse. |
| Keywords: | economic dynamics, spatial dynamic competition, public goods, competition, foreign direct investments |
| JEL: | O30 O43 H25 H73 F13 F15 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:luc:wpaper:12-14&r=pbe |
| By: | Norman Gemmell; Richard Kneller; Danny McGowan; Ismael Sanz |
| Abstract: | Firms that lay far behind the technological frontier have the most to gain from imitating the technology or management practices of others. That some firms converge relatively slowly to the productivity frontier suggests the existence of factors that cause them to under-invest in their productivity. In this paper we explore whether higher rates of corporate taxation affect firm productivity convergence because they reduce the after tax returns to productivity enhancing investments for small firms. Using data for 11 European countries we find evidence for such an effect; productivity growth in small firms is slower the higher are high corporate tax rates. Our results are robust to the use of instrumental variable and panel data techniques with quantitatively similar effects found from a natural experiment following the German tax reforms in 2001. |
| Keywords: | Productivity, taxation, convergence JEL classification: D24, H25, L11, O31 |
| URL: | http://d.repec.org/n?u=RePEc:not:notecp:12/06&r=pbe |
| By: | Roeder, Kerstin; Habla, Wolfgang |
| Abstract: | We analyze the German ecotax package in a model of overlapping generations and majority voting. The package consists of the ecotax rate and the budgetary rule which assigns a fraction of the tax revenue to the reduction of pension contributions while holding pension benefits constant. The old and the young generation have different preferences with respect to the tax rate and the use of the tax revenue. Our theoretical model as well as the calibration of our model show that the median voter s preferred tax rate may well exceed the efficient tax rate whenever his income is sufficiently high. This is the likelier the more CO2 is degraded and removed from the atmosphere. Furthermore, the median voter prefers earmarking of tax revenue to reductions in pension contributions. The latter is quite an accurate prediction of the situation in Germany where the share of tax revenue devoted to the pension scheme amounts to more than 90%. -- |
| JEL: | H23 H55 D78 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc12:62060&r=pbe |
| By: | Amnon Levy (University of Wollongong) |
| Abstract: | A rule for setting a tax on carbon emissions to limit their atmospheric stock to a predetermined level is developed for a world inhabited by uncoordinated, myopic, expected utility maximizing agents. In all locations, the mean of the marginal product of the carbon emitting input diminishes and the variance increases as climate deteriorates. The rule is illustrated for a world divided into poor countries and rich countries. The poor countries’ costs of non-compliance with the tax, in terms of per capita utility loss from diminished reputation, are negligible. The rich countries' costs of non-compliance and, consequently, inclination to pay the globally set tax can be substantial but not identical. The number of complying rich countries decreases with the tax level, but at a rate that is moderated by the range of the rich countries’ loss of per capita utility from abstinence. |
| Keywords: | Carbon Emissions; Climate Change; Uncertainty; Tax; Compliance |
| JEL: | Q52 Q54 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:uow:depec1:wp12-09&r=pbe |
| By: | Serena Brianzoni (Universita' Politecnica delle Marche); Raffaella Coppier (Universita' di Macerata); Elisabetta Michetti (Universita' di Macerata) |
| Abstract: | We study the relationship between corruption in public procurement and economic growth, within the Solow framework in discrete time, while assuming that the public good is an input in the productive process and that the State fixes a monitoring level on corruption depending on the tax revenues. The resulting model is a two-dimensional, continuous and piecewise smooth map describing the evolution of the capital per capita and that of the corruption level. We study model from the analytical point of view: we determine its fixed points, we study their local stability and, finally, we find conditions on parameters such that multiple equilibria co-exist. We also present numerical simulations useful to explain the role of parameters in the long{run path of the model and to analyze the structure of the basins of attraction when multiple equilibria emerge. Our study aims at demonstrating that stable equilibria with positive corruption may exist (according to empirical evidence), even though the State may reduce corruption by increasing the wage of the bureaucrat or by increasing the amount of tax revenues used to monitor corruption. |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:mcr:wpdief:wpaper00068&r=pbe |
| By: | Simone Moriconi (ITEMQ, Università Cattolica di Milano and CREA, University of Luxembourg) |
| Abstract: | This paper analyzes the impact of taxation on economic effciency when contracts are incomplete. We assume firms operate in a perfect competitive market and can choose between integrated or non-integrated governance to cope with contract incompleteness. Taxation reduces incentives to pursue intra-firm coordination, thus the effciency of firm's production process under non-integration. This is not the case under integration, since production decisions are transferred to the Headquarters, at a fixed integration cost. Taxation may then induce firms to change their organization at the industry equilibrium. We show that a tax that induces firms to choose integration rather than non-integration may serve a corrective function if integration costs and market prices are not too high. |
| Keywords: | taxation, incomplete contracts and economic effciency |
| JEL: | H21 L22 H32 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:luc:wpaper:12-08&r=pbe |
| By: | Liberati, Paolo |
| Abstract: | This paper provides additional insights on the relationship between government size and trade openness using a panel of countries drawn from the World Development Indicators and the Penn World Tables 7.0 from 1962 to 2009. It is shown that the compensation hypothesis proposed by Rodrik (1998) and revisited by Alesina and Wacziarg (1998) and by Ram (2009) cannot be attributed general validity. Rather, it may be driven by specific geographical areas. |
| Keywords: | Openness; Compensation hypothesis; Government Consumption; Trade |
| JEL: | H77 H50 H11 |
| Date: | 2013–01–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:43561&r=pbe |
| By: | Arief Anshory Yusuf (Department of Economics, Padjadjaran University) |
| Abstract: | Economists have long argued that to increase households’ welfare, cash transfers are more efficient than commodities subsidies. However, not many studies address the indirect or economy-wide effect of such transfers especially in the context of poverty reduction programs in developing countries. In this paper, a 50 trillion rupiahs worth of cash transfers, roughly doubling the current level of government spending on poverty reduction program is simulated using a Computable General Equilibrium model of the Indonesian economy. The result suggests that such transfers reduce Indonesian GDP especially if domestically financed through increasing value added tax. However, the GDP reduction can be reduced to around half of that when financed by reducing distortionary fuel subsidy. Moreover, a cash transfers financed by reducing fuel subsidy also give the largest reduction in inequality. Various extents of the distribution of the transfers are compared, from giving it to the poorest 10% to distribute it equally to all households. It is found that the benefit of the transfers in terms of reduced poverty and inequality is smaller when we extend the beneficiaries toward the non-poor but its economy-wide cost in terms of the reduced GDP will be smaller. Policy implications are discussed. |
| Keywords: | Cash transfer, general equilibrium, Indonesia |
| JEL: | I38 O53 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:unp:wpaper:201305&r=pbe |
| By: | M. Emranul Haque; Babar Hussain |
| Abstract: | This paper provides an explanation for recent empirical evidence on the heterogeneous effects of human capital on economic growth in developing countries. In a two-period overlapping generations economy with physical and capital accumulation, state-appointed bureaucrats are responsible for procuring productive public goods. Corruption arises because of an opportunity for bureaucrats to misappropriate public funds. The decision of the corruptible bureaucrat affects public finances and hence the capital accumulation in the economy. Alongside the positive productivity enhancing effect, human capital is assumed to increase the efficiency of corrupt bureaucrats in embezzlement. If the latter dominates the former, the incentive for bureaucrats to acquire education rises. The net effect may result in an insignificant (or even negative) effect of human capital on growth. Our main results are as follows: (1) corruption is always bad for economic development, but its effect is worse in the economy with (more) human capital; (2) the incidence of corruption may, itself, be affected by both the development and human capital level of the economy; (3) education is good for development when accompanied by good governance, but may be bad for development when governance is bad; and (4) corruption and poverty may co-exist as permanent, rather than just transitory, fixtures of an economy. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:179&r=pbe |
| By: | Piper, Alan T. |
| Abstract: | This paper provides a sustained introduction for the use of dynamic panel methods when analysing life satisfaction. As well as being able to address the issue of serial correlation, dynamic panel analysis also has the advantage of being able to treat variables as exogenous or endogenous, important for happiness, and can generate both contemporaneous and long run estimates for independent variables. A key result found initially for young people, but which is robust to different age ranges and countries, is that happiness is largely contemporaneous although there is a small, persistent effect of the past on current happiness. Additionally, decision rules are provided for the analysis of happiness using dynamic panel analysis. |
| Keywords: | Dynamic Panel Analysis; Happiness; Life Satisfaction |
| JEL: | I31 C33 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:43248&r=pbe |