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on Public Economics |
| By: | Haufler, Andreas; Lülfesmann, Christoph |
| Abstract: | The tax competition for mobile capital, in particular the reluctance of small countries to agree on measures of tax coordination, has ongoing political and economic fallouts within Europe. We analyse the effects of introducing a two tier structure of capital taxation, where the asymmetric member states of a union choose a common, federal 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. Moreover, it distributes the gains across the heterogeneous states in a way that yields a strict Pareto improvement over a one tier system of purely local tax choices. Finally, we present simulation results, and show that a dual structure of capital taxation has advantages even when side payments are feasible. |
| Keywords: | capital tax competition; dual tier taxation; international unions |
| JEL: | H25 H77 H87 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:14358&r=pbe |
| By: | Haufler, Andreas; Mardan, Mohammed |
| Abstract: | Following recent court rulings, cross-border loss compensation for multinational firms will likely be introduced, at least in Europe. This paper analyzes the effects of introducing a coordinated cross-border tax relief in a setting where multinational firms choose the size of a risky investment and host countries endogenously choose tax rates. We show that coordinated cross-border loss compensation is likely to intensify tax competition when, following current international practice, the parent firm's home country bases the tax rebate for a loss-making subsidiary on its own tax rate. In equilibrium, tax revenue losses will then be even higher than is implied by the direct effect of the reform. In contrast, tax competition will be mitigated when the home country bases its loss relief on the tax rate in the subsidiary's host country. |
| Keywords: | cross-border loss relief; tax competition; profit shifting |
| JEL: | H32 F23 H25 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:14362&r=pbe |
| By: | T. BUYSE; F. HEYLEN |
| Abstract: | We study the effects of fiscal consolidation within a dynamic general equilibrium model with overlapping generations. Our contribution to the theoretical consolidation literature is threefold. (i) Individual decisions of time allocation between work, leisure and education are fully endogenous in our model. (ii) We pay particular attention to also modeling public employment and production. We distinguish public employees in the construction of infrastructure, in education, and in the production of useful public consumption goods. (iii) We go beyond the analysis of the usual economic aggregates (such as GDP) and also look at the welfare impact of different fiscal consolidation strategies on current and future generations of both high and low-ability individuals. Our main findings are as follows. As to output effects, we confirm that expenditure based consolidation is better than labor or capital tax based consolidation. Truly expansionary output effects after spending cuts, however, can only be observed for private output. We do generally not observe them when we consider GDP and include the value added produced by public employees. Our results for welfare bring even more nuance on the possibility of expansionary fiscal consolidation. When aggregated over all generations that are alive at the time consolidation is started, almost all consolidation strategies bring about net negative welfare effects. Only the youngest and future generations experience positive welfare effects. Interestingly, the positive effects for these generations are smaller under spending based adjustments in the area of education, investment, and overall public employment, than under tax based adjustments. Robustness tests by changing key assumptions of our model never imply changes of these conclusions, quite on the contrary. |
| Keywords: | Employment by age, Endogeous growth, Fiscal consolidation, Overlapping generations |
| JEL: | E62 H63 J22 O41 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:12/826&r=pbe |
| By: | Stefan Lutz (University of Manchester, UK; Universidad Complutense de Madrid, Spain; ICER, Torino, Italy; I.R.E.F., Luxembourg) |
| Abstract: | Important determinants of multinational firms’ choice of location include, besides resource cost and infrastructure, the taxation regime through its effects on international pricing and profits. This paper investigates the effects of tax rates on firms’ profits and financing decisions by analyzing a panel of several hundred thousand European firms for the years 1985 to 2010. Results indicate that taxation has a negative effect on overall firm profits but not on returns on shareholder funds. This is consistent with the observed positive effect of corporate taxation rates on the gearing ratio, i.e. the higher corporate tax rates in a particular jurisdiction the lower the share of equity financing of firms residing in that jurisdiction. This may indicate that high-tax jurisdictions deter valuable investment by multinational enterprises because they provide incentives to locate value-driving business parts requiring more equity financing elsewhere. |
| Keywords: | MNE, DCF, Capital structure, Corporate income tax, Transfer pricing. |
| JEL: | G0 H3 F2 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:ucm:doicae:1304&r=pbe |
| By: | Meißner, Fabian; Schneider, Georg; Sureth, Caren |
| Abstract: | In this paper we investigate the incentive effects of corporate taxes in an agency setting with a principal facing an investment opportunity including an abandonment option. We are particularly interested in the interplay of taxation and the real option on the principal's incentives to motivate the agent to work hard. First, we extend the well-known studies on tax effects on decision making under uncertainty to moral hazard settings. In a benchmark case we find that, as confirmed in current literature, the corporate income tax has no incentive effect. If the principal accounts for the real option we show that paradoxical tax effects may occur. Also, with respect to the effect of the real option on the incentive problem we show that the option makes it less attractive for the principal to induce the agent to exert a high effort. -- |
| Keywords: | Tax Effects,Real Options,Moral Hazard,Investment Decisions |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:arqudp:141&r=pbe |
| By: | Margarita Katsimi (Athens University of Economics and Business and CESifo); Vassilis Sarantides (Department of Economics, The University of Sheffield) |
| Abstract: | A growing body of literature suggests that office-motivated politicians manipulate fiscal policy instruments in order to seek their re-election. This paper directly examines the impact of the electoral manipulation of the level and composition of fiscal policy on incumbents’ re-election prospects. This impact is estimated through a panel of 21 OECD countries over the period of 1972-1999. Our results suggest that increased public investment during the term in office as well as a shift in expenditures toward public investment can improve re-election prospects. To the contrary, results seem to verify the assumption of low visibility of capital spending, since election year manipulation via public investment does not affect re-election prospects. We also find that voters disfavour politicians who create deficits during elections, while deficit creation over the term in office and preceding the election year (when it is financed by equal proportions of public investment and consumption expenditures) does not seem to affect re-election prospects. |
| Keywords: | political budget cycles; elections; quality of public expenditure; public investment |
| JEL: | D72 E62 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:shf:wpaper:2013004&r=pbe |
| By: | Nora Lustig (Department of Economics, Tulane University); Carola Pessino (School of Government and Executive Director, Centro de Investigaciones y Evaluación en EconomÃa Social para el Alivio de la Pobreza, Universidad Torcuato Di Tella, Buenos Aires, Argentina) |
| 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 sizable 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 |
| URL: | http://d.repec.org/n?u=RePEc:tul:wpaper:1221&r=pbe |
| By: | François Facchini; Mickael Melki; Andrew Pickering |
| Abstract: | The size of government depends positively on the labor share given price-inelastic demand for public services. OECD data support this hypothesis and also show a stronger dependence under left-wing ideology because larger government employs a larger workforce. A permanent one standard deviation increase in the labor share is found on average to increase government size by about 9% of GDP, with increases of 6% in right-wing countries and 12% in left-wing countries. Contrary to Baumol's cost-disease the relationship is estimated to be independent of income. Recent reductions in the labor-share have substantially slowed the growth of government in many countries. |
| Keywords: | Size of government, labor share, Baumol's cost disease |
| JEL: | H10 H50 O41 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:13/02&r=pbe |
| By: | Oshio, Takashi; Urakawa, Kunio |
| Abstract: | Previous studies have shown that income inequality in society is negatively associated with individuals’ subjective well-being (SWB), such as their perceived happiness and self-rated health (SRH). However, it is not realistic to assume that individuals have precise information about actual income distribution measured by the Gini coefficient or other statistical measures. In the current study, we examined how perceived income inequality, rather than actual inequality, was associated with SWB, using cross-sectional data collected from a nationwide, Internet survey conducted in Japan (N = 10,432). We also examined how this association was confounded by individuals’ objective and subjective income status, considering the possibility that individuals with lower income status are more inclined to both perceive income inequality and feel unhappy/unhealthy. In our analysis, we focused on the perception of a widening income inequality (as perceived income inequality), perceived happiness and SRH (as SWB), and household income and living standards compared with one year ago and compared with others (as income status). We also controlled for personality traits. We obtained three key findings: (1) perceived income inequality was negatively associated with SWB; (2) both perceived income inequality and SWB were associated with income status; and (3) the association between perceived income inequality and SWB was attenuated after controlling for income status, but not fully for perceived happiness. These findings suggest that perceived income inequality, which links actual income inequality to SWB, should be further studied. |
| Keywords: | income status, perceived income inequality, personality traits, self-rated health, subjective well-being |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:hit:cisdps:579&r=pbe |
| By: | Kar, Saibal (Centre for Studies in Social Sciences, Calcutta); Saha, Shrabani (Edith Cowan University) |
| Abstract: | A number of recent studies for Latin America show that as the size of the informal economy grows, corruption is less harmful to inequality. We investigate if this relationship is equally compelling for developing countries in Asia where corruption, inequality and shadow economies are considerably large. We use Panel Least Square and Fixed Effects Models for Asia to find that both 'Corruption Perception Index' and 'ICRG' index are sensitive to a number of important macroeconomic variables. We find that in the absence of the shadow economy, corruption increases inequality. However, with larger shadow economies in South Asia, the income inequality tends to fall. |
| Keywords: | corruption, inequality, shadow economy, panel data, South Asia |
| JEL: | J48 K42 O17 O53 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7106&r=pbe |
| By: | Manoel Bittencourt (Department of Economics, University of Pretoria) |
| Abstract: | We investigate in this paper whether income growth has played any role on inequality in all nine young South American democracies during the period 1970-2007. The results, based on dynamic panel time-series analysis, robustly suggest that income growth has indeed played a progressive role in reducing inequality during the period. Moreover, the results suggest that this negative relationship is even stronger in the 1990s and early 2000s, a period in which the continent achieved macroeconomic stabilisation, political consolidation and much improved economic performance. On the contrary, during the 1980s (the so-called "lost decade"), the negative income growth experienced by the continent at the time has hit the poor the hardest, or alternatively speaking, it has played a regressive role on inequality. All in all, we suggest that consistent growth, and all that it encompasses, is an important equaliser which should not be discarded as a serious option by policy makers interested in a more equal income distribution. |
| Keywords: | Growth, inequality, South America |
| JEL: | E20 O11 O15 O54 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201301&r=pbe |
| By: | Konstantin Gluschenko |
| Abstract: | A popular methodology of studying spatial income inequality is analysis of beta-convergence (i.e. an inverse relationship between current income per capita and its initial level). Its widespread use is based on a belief that the economic growth theory predicts income convergence among economies (countries or regions within a country), and that beta-convergence suggests decreasing income inequality. This article demonstrates that these are nothing but myths; hence, analyzing of betaconvergence cannot serve as an adequate methodology for studying and predicting the evolution of spatial income inequality. |
| Keywords: | spatial income inequality, convergence, economic growth |
| JEL: | D63 O11 O40 |
| Date: | 2012–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2012-1040&r=pbe |
| By: | Becchetti, Leonardo (University of Rome Tor Vergata); Massari, Riccardo (Sapienza University of Rome); Naticchioni, Paolo (University of Cassino) |
| Abstract: | This paper identifies and quantifies the contribution of a set of covariates in affecting levels and over time changes of happiness inequality. Using a decomposition methodology based on RIF regression, we analyse the increase in happiness inequality observed in Germany between 1992 and 2007, using the German Socio-Economic Panel (GSOEP) database, deriving the following findings. First, trends in happiness inequality are mainly driven by composition effects, while coefficient effects are negligible. Second, among composition effects, education has an inequality-reducing impact, while the increase in unemployment contributes to the rise in happiness inequality. Third, the increase in average income has a reducing impact on happiness inequality, while the raise in income inequality cannot be considered as a driver of happiness inequality trends. A clear cut policy implication is that policies enhancing education and economic performance contribute to reduce happiness inequality and the potential social tensions arising from it. |
| Keywords: | happiness inequality, income inequality, education, decomposition methods |
| JEL: | I31 I28 J17 J21 J28 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7153&r=pbe |