nep-pbe New Economics Papers
on Public Economics
Issue of 2013‒03‒16
twenty-one papers chosen by
Keunjae Lee
Pusan National University

  1. Average Personal Income Tax Rate and Tax Wedge Progression in OECD Countries By Dominique Paturot; Kirsti Mellbye; Bert Brys
  2. How Elastic Are Preferences for Redistribution? Evidence from Randomized Survey Experiments By Ilyana Kuziemko; Michael I. Norton; Emmanuel Saez; Stefanie Stantcheva
  3. Short and Long-term Effects of Environmental Tax Reform By Walid Oueslati
  4. Taxation of Goods and Services from 1862 to 2010 By Stenkula, Mikael
  5. Publicly Provided Private Goods and Optimal Taxation when Consumers Have Positional Preferences By Aronsson, Thomas; Johansson-Stenman, Olof
  6. Ideology and fiscal policy: quasi-experimental evidence from the German States By Baskaran, Thushyanthan
  7. On Revenue Recycling and the Welfare Effects of Second-Best Congestion Pricing in a Monocentric City By Ioannis Tikoudis; Erik T. Verhoef; Jos N. van Ommeren
  8. Are financial advisors useful? Evidence from tax-motivated mutual fund flows By Cici, Gjergji; Kempf, Alexander; Sorhage, Christoph
  9. Piecemeal Reform of Domestic Indirect Taxes toward Uniformity in the Presence of Pollution: with and without a Revenue Constraint By Michael S. Michael; Sajal Lahiri; Panos Hatzipanayotou
  10. A Theory of Public Debt Overhang By Kobayashi, Keiichiro
  11. A History of Tax Legislation in the Federal Republic of Germany By Matthias Uhl
  12. Endogenous fertility, endogenous lifetime and economic growth: the role of child policies By Fanti, Luciano; Gori, Luca
  13. Cooperation among local governments to deliver public services : a "structural" bivariate response model with fixed effects and endogenous covariate By Edoardo Di Porto; Vincent Merlin; Sonia Paty
  14. Rational choice of itemized deductions By Wrede, Matthias
  15. Relative Consumption, Optimal Taxation and Public Provision of Private Goods By Koenig, Tobias; Lausen, Tobias
  16. The Welfare Impact of Indirect Pigouvian Taxation: Evidence from Transportation By Christopher R. Knittel; Ryan Sandler
  17. Immigration, growth and unemployment: Panel VAR evidence from OECD countries. By Ekrame Boubtane; Dramane Coulibaly; Christophe Rault
  18. Comparing Inequality Aversion across Countries When Labor Supply Responses Differ By Bargain, Olivier; Dolls, Mathias; Neumann, Dirk; Peichl, Andreas; Siegloch, Sebastian
  19. Effects of political rivalry on public educational investments and income inequality: evidence from empirical data By Elena Sochirca; Óscar Afonso; Sandra Silva
  20. The dark side of fiscal stimulus By Strulik, Holger; Trimborn, Timo
  21. Happiness, Growth, and Public Policy By Easterlin, Richard A.

  1. By: Dominique Paturot; Kirsti Mellbye; Bert Brys
    Abstract: The statutory progressivity of the income taxes paid by wage earners, net of the standard cash benefits they receive, depend on the design and interaction of personal income taxes, social security contributions (SSCs) and cash benefits. In order to capture their combined impact, this paper presents statutory tax progressivity indicators for the 34 OECD member countries on the basis of average effective income tax rates and tax wedges which are calculated using the OECD’s Taxing Wages framework. The analysis shows a decreasing pattern of tax progressivity across income levels. In some countries, the tax system becomes regressive when the SSC ceiling has been reached. Also, child benefits increase progressivity (especially at low income levels) and their effect is larger than the flattening impact of SSCs, except at top income levels. Reductions in SSCs targeted at low-incomes and dependant spouse allowances increase progressivity in some OECD countries. Income-splitting systems typically have the opposite effect.<P>Progression des taux moyens de l'impôt sur le revenu des personnes physiques et du coin fiscal dans les pays de l'OCDE<BR>La progressivité légale des impôts sur le revenu payés par les salariés, après déduction des prestations en espèces qu’ils perçoivent, dépend de la conception des impôts sur le revenu des personnes physiques, des cotisations de sécurité sociale (CSS) et des prestations en espèces ainsi que de leurs interactions. Afin de déterminer leur effet combiné, cette étude présente des indicateurs de la progressivité légale des impôts pour les 34 pays membres de l’OCDE, en s’appuyant sur les taux moyens effectifs de l’impôt sur le revenu et sur les coins fiscaux calculés en utilisant le modèle établi par la publication de l’OCDE « Les impôts sur les salaires ». L’analyse révèle que la progressivité diminue à mesure que les niveaux de revenu augmentent. Dans certains pays, le système fiscal devient régressif lorsque le plafond des CSS est atteint. De même, les allocations familiales augmentent la progressivité (surtout pour les bas revenus), et leur incidence est supérieure à l’effet d’atténuation des CSS, sauf pour les hauts salaires. Les réductions de CSS ciblant les bas revenus et les indemnités pour conjoint à charge augmentent la progressivité dans certains pays de l’OCDE. En général, le régime du quotient familial produit l’effet inverse.
    Keywords: personal income tax, tax progressivity, social security contributions, progressivité de l’impôt, cotisations de sécurité sociale, impôt sur le revenu des personnes physiques
    JEL: H24 H55
    Date: 2013–02–20
  2. By: Ilyana Kuziemko; Michael I. Norton; Emmanuel Saez; Stefanie Stantcheva
    Abstract: This paper analyzes the effects of information about inequality and taxes on preferences for redistribution using randomized online surveys on Amazon Mechanical Turk (mTurk). About 5,000 respondents were randomized into treatments providing interactive information on U.S. income inequality, the link between top income tax rates and economic growth, and the estate tax. We find that the informational treatment has very large effects on whether respondents view inequality as an important problem. By contrast, we find quantitatively small effects of the treatment on views about policy and redistribution: support for taxing the rich increases slightly, support for transfers to the poor does not, especially among those with lower incomes and education. An exception is the estate tax — we find that informing respondents that it affects only the very richest families has an extremely large positive effect on estate tax support, even increasing respondents' willingness to write to their U.S. senator about the issue. We also find that the treatment substantially decreases trust in government, potentially mitigating respondents' willingness to translate concerns about inequality into government action. Methodologically, we explore different strategies to lower attrition in online survey platforms and show our main results are robust across methods. A small follow-up survey one month later reveals that our results persist over time. Finally, we compare mTurk with other survey vendors and provide suggestions to future researchers considering this platform.
    JEL: D63 D72 H2 I3
    Date: 2013–03
  3. By: Walid Oueslati (Centre for Rural Economy, Newcastle University)
    Abstract: This paper examines the macroeconomic effects of an environmental tax reform in a growing economy. A model of endogenous growth based on human capital accumulation is used to numerically simulate the growth effects of different environmental tax reforms and compute their impact on welfare in the short and the long-term. Our results suggest that the magnitude of these effects depends on the type of tax reform. Thus, only environmental tax reform that aims to use the revenue from environmental tax to reduce wage tax and increase the proportion of public spending within GDP, enhances both growth and welfare in the long-term. However, the short-term effect remains negative.
    Keywords: Tax reform, Endogenous Growth, Human Capital, Environmental Externality, Transitional Dynamics, Welfare cost
    JEL: E62 I21 H22 Q28 O41 D62
    Date: 2013–01
  4. By: Stenkula, Mikael (Research Institute of Industrial Economics (IFN))
    Abstract: This paper presents annual Swedish time series data on consumption taxes, i.e. the indirect taxation of goods and services, between 1862 and 2010. As a share of total state tax revenues, consumption taxes were very high at the beginning of the period, though as a share of GDP it was rather low. At this time, customs duties and specific consumption taxes on alcohol and sugar were the most important tax revenues. The importance of consumption taxes decreased during the World Wars, in particular during World War I. However, between the Wars the consumption taxes were still important and vehicle taxation as well as tobacco taxation now also contributed significantly to the tax revenues. After World War II and the 1940s, the tax revenues from consumption taxes has increased slightly again. However, as a share of GDP it increased sharply. On the other hand, importance of specific consumption taxes and, in particular, customs duties has fallen dramatically. The mix of the specific consumption taxes has also changed with and increased emphasis on energy and environmental taxes. A permanent general consumption tax was introduced in 1960 and its importance has increased sharply since then.
    Keywords: Consumption taxes; Taxation of goods and services; Excise duties; Customs duties; VAT
    JEL: H20 N43 N44
    Date: 2013–02–20
  5. By: Aronsson, Thomas (Dept of Economics, Umeå University); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: This paper analyzes optimal differential commodity taxation, together with optimal nonlinear income taxation, in order to deal with positional preferences. It also derives the optimal public provision of private goods both when differential commodity taxation is feasible and when it is not. It is shown that publicly provided non-positional private goods which are (possibly imperfect) substitutes for positional private goods should be used as a corrective instrument even if the tax system is optimal, i.e. even when differential commodity taxation is feasible. An exception is the special case where all consumers contribute equally much to the positional externality, in which the commodity tax constitutes a perfect instrument for internalizing the positional externality.<p>
    Keywords: Public provision of private goods; income taxation; commodity taxation; relative consumption; asymmetric information; status; positional goods
    JEL: D62 H21 H23
    Date: 2013–03–08
  6. By: Baskaran, Thushyanthan
    Abstract: Is government ideology important for fiscal policy? I study this question with data from all German States over the period 1975-2005. To identify the effect of ideology, I rely on a fuzzy regression discontinuity design. I find that left-wing state governments spend more than state governments with right-wing and mixed ideology. Deficits of left-wing governments are larger than those of right-wing governments but smaller than those of governments with mixed ideology. These results are robust to sensitivity tests. --
    Keywords: government ideology,fiscal policy,fiscal federalism
    JEL: D72 D78 E62 H72
    Date: 2012
  7. By: Ioannis Tikoudis (VU University Amsterdam); Erik T. Verhoef (VU University Amsterdam); Jos N. van Ommeren (VU University Amsterdam)
    Abstract: This paper explores the interactions between congestion pricing and a tax-distorted labor market within a monocentric urban equilibrium model. We compute the efficiency gains of various second-best policies, i.e. combinations of toll schemes and revenue recycling programs, with a predetermined level of public revenue. We find that 35% of the space-varying road tax does not reflect marginal external congestion costs, but rather functions as a Ramsey-Mirrlees tax, i.e. an efficiency enhancing mechanism allowing space differentiation of the labor tax. Such a space-varying tax adds a quite different motivation to road pricing, since it can produce large welfare gains even in the absence of congestion. We show that both a cordon toll and a flat kilometer tax achieve over 80% of these gains when combined with specific types of revenue recycling, such as labor tax cuts or public transport subsidies. Sensitivity analysis shows that the optimal type of revenue recycling depends on the level of inefficiency in the provision of public transport prior to the introduction of congestion pricing.
    Keywords: Second-best road pricing; revenue recycling; monocentric city
    JEL: R41 R48 H23 H76 J20 R13 R14
    Date: 2013–02–21
  8. By: Cici, Gjergji; Kempf, Alexander; Sorhage, Christoph
    Abstract: This study shows that financial advisors provide useful tax advice to their clients, being the first to provide evidence of tangible benefits delivered by financial advisors in the U.S. We find that investors who purchase mutual fund shares through financial advisors exhibit a stronger tendency of avoiding taxable distributions than investors who buy shares directly. This differential is more pronounced for distributions that have large tax implications and are hard-to-predict. Furthermore, the differential gets stronger in December but only when investors face large capital losses, consistent with financial advisors helping the former investors engage in tax-loss selling. --
    Keywords: mutual funds,taxable fund distributions,financial advisors,after-tax returns
    JEL: G11 G24 H24
    Date: 2013
  9. By: Michael S. Michael; Sajal Lahiri; Panos Hatzipanayotou
    Abstract: The literature on indirect tax reforms in pollution-ridden economies is quite limited. This paper, using a general equilibrium model of a perfectly-competitive small open economy with both production and consumption generated pollution, considers the welfare implications of tax reforms that take the structure of consumption and production taxes toward uniformity. Specifically, both in the presence and absence of a binding government revenue constraint, we derive sufficient conditions for welfare improvement in the case where we implement (i) reforms in either production or consumption taxes, and (ii) reforms in both consumption and production taxes.
    Keywords: Indirect tax reforms, Production and consumption generated pollution, Welfare, Government tax revenues
    Date: 2013–03
  10. By: Kobayashi, Keiichiro
    Abstract: In this paper we analyze the effects of unsustainable public debt on technology choice and economic growth. Unsustainable public debt undermines the credibility of government policy because the government will do whatever necessary to postpone fiscal consolidation, as an incumbent government inevitably falls from power upon implementing fiscal consolidation. We show that the lack of commitment makes firms’ choice of technology inefficient. Fiscal consolidation can restore credibility and high growth in the baseline model, while with a different policy setting in the modified model fiscal consolidation may not be able to restore redibility and growth if it is implemented too late.
    Date: 2013–02
  11. By: Matthias Uhl (University of Marburg)
    Abstract: This paper presents a historical account of legislated tax changes in the Federal Republic of Germany from 1964 to 2010, thus establishing a database appropriate for the macroeconometric analysis of the fiscal policy transmission mechanism. Ninety-five quantitatively important pieces of tax legislation are identified and characterized along several dimensions: Tax changes are classified as “endogenous” or “exogenous” with regard to current macroeconomic conditions, and their revenue impact and timing is reported. The evolution of tax acts is described, capturing changes in tax measures and associated revenue impacts over the whole legislative process. The exposition is also a comprehensive qualitative description of major tax changes and the motivation behind them over the last four decades.
    JEL: E62 H20 K34 N00
    Date: 2013
  12. By: Fanti, Luciano; Gori, Luca
    Abstract: We examine the effects of child policies on both transitional dynamics and long-term demo-economic outcomes in an overlapping-generations neoclassical growth model à la Chakraborty (2004) extended with endogenous fertility under the assumption of weak altruism towards children. The government invests in public health, and an individual’s survival probability at the end of youth depends on health expenditure. We show that multiple development regimes can exist. However, poverty or prosperity do not necessarily depend on the initial conditions, since they are the result of how child policy is designed. A child tax for example can be used effectively to enable those economies that were entrapped in poverty to prosper. There is also a long-term welfare-maximising level of the child tax. We show that, a child tax can be used to increase capital accumulation, escape from poverty and maximise long-term welfare also when (i) a public pay-as-you-go pension system is in place, (ii) the government issues an amount of public debt. Interestingly, there also exists a couple child tax-health tax that can be used to find the second-best optimum optimorum. In addition, we show that results are robust to the inclusion of decisions regarding the child quantity-quality trade off under the assumption of impure altruism. In particular, there exists a threshold value of the child tax below (resp. above) which child quality spending is unaffordable (resp. affordable) and different scenarios are in existence.
    Keywords: Child policy; Endogenous fertility; Health; Life expectancy; OLG model
    JEL: I1 J13 O4
    Date: 2013–03–09
  13. By: Edoardo Di Porto (EQUIPPE - ECONOMIE QUANTITATIVE, INTEGRATION, POLITIQUES PUBLIQUES ET ECONOMETRIE - Université Lille I - Sciences et technologies); Vincent Merlin (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes 1 - Université de Caen Basse-Normandie); Sonia Paty (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure - Lyon)
    Abstract: Cooperation among local governments has been encouraged to enable the aggregation of resources and improved public sector efficiency. However, if cooperation through the joint delivery of local public services is likely to be welfare enhancing for the agglomeration, but will lead to losses for one of the parties, it is unlikely that the losing municipality will cooperate. Using a unique panel dataset of 30,000 French municipalities for 1995-2003, we estimate the relationship between cooperation decision and the fiscal revenues raised to provide local public goods. We employ a new econometric strategy based on Lee (1978), developing a non linear method controlling for fixed effect, endogenous covariates and cluster standard error. We find evidence that a positive difference between the expected fiscal revenues of a cooperating locality and the actual revenues realized by an isolated locality significantly increases the probability of joining an inter-municipal community.
    Keywords: inter-municipal cooperation; fiscal revenues; bivariate response variable; panel data; endogeneity
    Date: 2013–02–12
  14. By: Wrede, Matthias
    Abstract: This paper analyzes the effect of standard deductions on itemized deductions. Using German income tax data, it shows that the distribution of itemized deductions above the level of the standard deduction is positively skewed, with the mode lying somewhat above the standard deduction. This pattern of claimed tax allowable expenses could be easily explained by the rational minimization of tax payments in excess of the costs of reporting these deductions. An alternative explanation, namely tax aversion, is unable to replicate this pattern, as tax aversion would predict bunching of taxpayers directly above the lump-sum deduction. --
    Keywords: tax compliance,tax allowable expenses,itemized deductions,simplification
    JEL: H24 H26
    Date: 2013
  15. By: Koenig, Tobias; Lausen, Tobias
    Abstract: This paper shows that public provision of private goods may be justified on pure efficiency grounds in an environment where individuals have relative consumption concerns. By providing private goods, governments directly intervene in the consumption structure, thereby having an instrument to correct for the excessive consumption of positional goods. We identify sufficient conditions where public provision of private goods is always part of the optimal policy mix, even when consumption taxes are available. In fact, with public provision of private goods, there are cases where the first-best allocation can be achieved, and (linear) consumption taxes can be redundant.
    Keywords: Public Provision, Social Preferences, Status, Optimal Taxation
    JEL: H42 D62
    Date: 2013–02
  16. By: Christopher R. Knittel; Ryan Sandler
    Abstract: A basic tenet of economics posits that when consumers or firms don't face the true social cost of their actions, market outcomes are inefficient. In the case of negative externalities, Pigouvian taxes are one way to correct this market failure, where the optimal tax leads agents to internalize the true cost of their actions. A practical complication, however, is that the level of externality nearly always varies across economic agents and directly taxing the externality may be infeasible. In such cases, policy often taxes a product correlated with the externality. For example, instead of taxing vehicle emissions directly, policy makers may tax gasoline even though per-gallon emissions vary across vehicles. This paper estimates the implications of this approach within the personal transportation market. We have three general empirical results. First, we show that vehicle emissions are positively correlated with vehicle elasticities for miles traveled with respect to fuel prices (in absolute value)—i.e. dirtier vehicles respond more to fuel prices. This correlation substantially increases the optimal second-best uniform gasoline tax. Second, and perhaps more importantly, we show that a uniform tax performs very poorly in eliminating deadweight loss associated with vehicle emissions; in many years in our sample over 75 percent of the deadweight loss remains under the optimal second-best gasoline tax. Substantial improvements to market efficiency require differentiating based on vehicle type, for example vintage. Finally, there is a more positive result: because of the positive correlation between emissions and elasticities, the health benefits from a given gasoline tax increase by roughly 90 percent, compared to what one would expect if emissions and elasticities were uncorrelated.
    JEL: H21 H23 L91 Q48 Q51 Q52 Q53 Q54 Q58
    Date: 2013–02
  17. By: Ekrame Boubtane (Centre d'Economie de la Sorbonne et CERDI - Université d'Auvergne); Dramane Coulibaly (EconomiX - Université de Paris Ouest Nanterre); Christophe Rault (LEO - Université d'Orléans et Toulouse Business School - France)
    Abstract: This paper examines empirically the interaction between immigration and host country economic conditions. We employ a 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: Immigration, growth, unemployment, panel VAR.
    JEL: E20 F22 J61
    Date: 2013–02
  18. By: Bargain, Olivier (University of Aix-Marseille II); Dolls, Mathias (IZA); Neumann, Dirk (University of Cologne); Peichl, Andreas (IZA); Siegloch, Sebastian (IZA)
    Abstract: We analyze to which extent social inequality aversion differs across nations when control- ling for actual country differences in labor supply responses. Towards this aim, we estimate labor supply elasticities at both extensive and intensive margins for 17 EU countries and the US. Using the same data, inequality aversion is measured as the degree of redistribution implicit in current tax-benefit systems, when these systems are deemed optimal. We find relatively small differences in labor supply elasticities across countries. However, this changes the cross-country ranking in inequality aversion compared to scenarios following the standard approach of using uniform elasticities. Differences in redistributive views are significant between three groups of nations. Labor supply responses are systematically larger at the extensive margin and often larger for the lowest earnings groups, exacerbating the implicit Rawlsian views for countries with traditional social assistance programs. Given the possibility that labor supply responsiveness was underestimated at the time these programs were implemented, we show that such wrong perceptions would lead to less pronounced and much more similar levels of inequality aversion.
    Keywords: social preferences, redistribution, optimal income taxation, labor supply
    JEL: H11 H21 D63 C63
    Date: 2013–02
  19. By: Elena Sochirca (CEF.UP and FEP, Universidade do Porto); Óscar Afonso (CEF.UP and FEP, Universidade do Porto); Sandra Silva (CEF.UP and FEP, Universidade do Porto)
    Abstract: In this paper we intend to empirically examine how different political institutions may define the long-term economic development, determined by educational investments and income inequality. With this objective, we assess the impact of political rivalry on four selected macroeconomic variables: public investments in education, individual learning choice, GDP per capita and income inequality, motivated by previous theoretical results. We first construct a composite political rivalry indicator and examine how it varies across different groups of countries. Then, using cross-sectional data, we perform a series of regressions for examining political rivalry effects on the selected variables. Our empirical findings indicate that in lower income countries there is indeed a significant negative impact of political rivalry, which increases with the decrease in the development level. The same is not confirmed for higher-income countries, which may suggest that the relationship between political rivalry and the examined variables may, in fact, be weaker in these countries, or that relevant mechanisms may differ with the level of development.
    Keywords: economic development; human capital accumulation; inequality; institutions; political rivalry; public education.
    JEL: H21 H40 H52 E24 I24 O43 P0
    Date: 2013–02
  20. By: Strulik, Holger; Trimborn, Timo
    Abstract: Most of the discussion about fiscal stimulus focuses on the multiplier of government spending on impact. In this paper we shift the focus to the multiplier at the end, i.e. to the period in which a deficit spending program terminates. We show that recent time series analyses as well as economic models of different schools of thought predict that the multiplier turns negative before spending expires. This means that aggregate output at the time of expiry of fiscal stimulus is predicted to be lower than it could be without deficit spending. We set up a simple model that explains this phenomenon. Using phase diagram analysis we prove that the aggregate capital stock at the time of expiry of fiscal stimulus is lower than it would be without the deficit spending program. This fact explains why aggregate output is below its laissez faire level as well. We then calibrate an extended version of the model for the US and demonstrate how fiscal stimulus slows down recovery from a recession in the medium-run. --
    Keywords: fiscal stimulus,government spending,output multiplier,economic recovery
    JEL: E60 H30 H50 O40
    Date: 2013
  21. By: Easterlin, Richard A. (University of Southern California)
    Abstract: If society's goal is to increase people's feelings of well-being, economic growth in itself will not do the job. Full employment and a generous and comprehensive social safety net do increase happiness. Such policies are arguably affordable not only in higher income nations but also in countries that account for most of the population of the less-developed world. These conclusions are suggested by an analysis of a wide range of evidence on happiness in countries throughout the world.
    Keywords: happiness, life satisfaction, subjective well-being, economic growth, safety net policies, developed countries, transition countries, less developed countries, China
    JEL: I31 I38 O21 F20 D60 E60
    Date: 2013–02

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