nep-pbe New Economics Papers
on Public Economics
Issue of 2013‒03‒23
nineteen papers chosen by
Keunjae Lee
Pusan National University

  1. The Impact of Tax Knowledge and Budget Spending Influence on Tax Compliance By Djawadi, Behnud Mir; Fahr, René
  2. The System of Revenue Sharing and Fiscal Transfers in China By Xiao Wang; Richard Herd
  3. The Potential Impact of Tax Reform on Farm Businesses and Rural Households By Williamson, James M.; Durst, Ron L.; Farrigan, Tracey L.
  4. Entrepreneurs and income-shifting: Empirical evidence from a Finnish tax reform By Jarkko Harju; Tuomas Matikka
  5. Political Competition, Tax Salience and Accountability: Theory and Some Evidence from Italy By Bracco, Emanuele; Porcelli, Francesco; Redoano, Michela
  6. The impact of tax incentives on the economic activity of entrepreneurs By Tuomas Kosonen; Jarkko Harju
  7. Alternative strategies to reduce public deficits: Taxes vs. spending By Oscar Bajo-Rubio; Antonio G. Gómez-Plana
  8. Sub-National Finances and Fiscal Consolidation: Walking on Thin Ice By Camila Vammalle; Claudia Hulbert
  9. Migration and Wage Effects of Taxing Top Earners: Evidence from the Foreigners' Tax Scheme in Denmark By Henrik Jacobsen Kleven; Camille Landais; Emmanuel Saez; Esben Anton Schultz
  10. The Ability of Banks to Shift Corporate Income Taxes to Customers By Gunther Capelle-Blancard; Olena Havrylchyk
  11. How Windfall Income Increases Gambling at Poker Machines By Hielke Buddelmeyer; Kyle Peyton
  12. The quest for cost-efficient local government in New England: what role for regional consolidation? By Yolanda K. Kodrzycki
  13. Creating Conditions for Effective Public Investment:: Sub-National Capacities in a Multi-Level Governance Context By Lee Mizell; Dorothée Allain-Dupré
  14. The determinants of macroeconomic forecasts and the Stability and Growth Pact By Patricia Martins; Leonida Correia
  15. The Earned Income Tax Credit, Health, and Happiness By Boyd-Swan, Casey; Herbst, Chris M.; Ifcher, John; Zarghamee, Homa
  16. A disaggregated approach to the government spending shocks: an theoretical analysis By Cortuk, Orcan; Güler, Mustafa Haluk
  17. U.S. State and Local Fiscal Policies and Nonmetropolitan Area Economic Performance: A Spatial Equilibrium Analysis By Yu, Yihua; Rickman, Dan S.
  18. Does the method adopted for distribution of services by amalgamating municipalities affect expenditure after amalgamation? Evidence from Japan By Katsuyoshi Nakazawa; Tomohisa Miyashita
  19. Cost Inefficiency of Municipalities after Amalgamation By Katsuyoshi Nakazawa

  1. By: Djawadi, Behnud Mir (University of Paderborn); Fahr, René (University of Paderborn)
    Abstract: We investigate the impact of trust in authorities on tax compliance within a controlled laboratory setting. Embedded in two hypothetical tax systems with high and low power of authorities respectively, we gradually increase trust in authorities in form of tax knowledge about public expenditures and by allowing taxpayers to decide on what public goods they want their tax dollars to be spend for. To clearly disentangle any effects from factors that are known to influence tax compliance from previous studies, we control for tax commitment, risk attitude, income and effort exerted to earn the income which the taxpayers report truthfully or underreport to the tax authority. Non-parametric statistical analyses as well as multivariate regressions provide clear evidence that tax compliance is higher in tax systems with low power of authorities when providing complete transparency on public expenditures and when taxpayers are given the possibility to decide on the use of their taxes. With a powerful tax authority in place which is reflected in high audit rates, compliance does not change when increasing trust in authorities. Our results have important policy implications as the mere hypothetical possibility to express preferences on budget spending influences tax compliance.
    Keywords: tax evasion, tax compliance, tax knowledge, budget spending, real effort, experimental economics
    JEL: H26 C91
    Date: 2013–02
  2. By: Xiao Wang; Richard Herd
    Abstract: The main features of China’s current sub-national finance arrangements date back to the 1994 tax reform. China has a multi-level government structure that shares national tax revenues through a system of tax sharing and transfers, and divides spending assignments and responsibilities. Local governments have hardly any discretionary power to modify taxation, though they have some non-tax revenue from fees, levies and penalties. They can also spend the profit from the sale of land-use rights subject to central government restrictions. As the 1994 tax reform recentralised revenues and decision-making power, vertical gaps between revenue and expenditure at sub-national levels have grown. In order to accommodate this, the central government has raised the scale of transfers. Over the past decade, China’s transfer policy has addressed the horizontal imbalances and become markedly more redistributive. Nevertheless, fiscal disparities within provinces remain high and are much greater than between regions in OECD countries. The extent of fiscal equalisation within provinces varies, thus affecting the delivery of services. The government’s plan to equalise service provision across the country therefore calls for fine-tuning the transfer system and improving local revenue. Some local governments are testing a residential property tax but not in a form that would substantially raise tax revenue. A significant property tax would tend to lower the revenue from the sale of land-use rights and would, in general, improve the fiscal position of those local governments that already have strong budgets. This Working Paper relates to the 2013 OECD Economic Survey of China (<P>Le système de partage des recettes et des transferts budgétaires en Chine<BR>Les principales caractéristiques des accords de financement infranationaux actuels en Chine remontent à la réforme fiscale de 1994. La Chine possède une structure administrative à plusieurs niveaux qui partage les recettes fiscales nationales par le biais d'un système de répartition des recettes fiscales et de transferts, et qui attribue les missions et responsabilités en matière de dépense. Les collectivités locales n'ont guère de pouvoir discrétionnaire afin de modifier la fiscalité, même si elles collectent des recettes non fiscales provenant de divers droits, prélèvements et amendes. Elles peuvent aussi dépenser les recettes provenant de la vente de droits d'usage des terrains sous réserve de restrictions imposées par le gouvernement central. Comme la réforme fiscale de 1994 a centralisé de nouveau les recettes et le pouvoir de décision, les déséquilibres verticaux entre recettes et dépenses au niveau infranational se sont accentués. Afin d'en tenir compte, le gouvernement central a augmenté le volume des transferts. Au cours de la décennie passée, la politique des transferts en Chine a répondu aux déséquilibres horizontaux et est devenue nettement plus redistributive. Néanmoins, les disparités fiscales au sein des provinces demeurent élevées et sont beaucoup plus grandes qu'entre régions des pays de l'OCDE. Le degré de péréquation au sein des provinces varie, ce qui affecte la prestation de services. Afin d’égaliser cette dernière dans tout le pays, le plan du gouvernement appelle donc à peaufiner le système de transferts et à améliorer les recettes locales. Certaines autorités locales sont en train de tester un impôt foncier résidentiel, mais pas sous une forme qui permettrait d'augmenter considérablement les recettes fiscales. Un impôt foncier important aurait tendance à réduire les recettes provenant de la vente de droits d'usage des terrains et, plus généralement, améliorerait la situation financière des administrations locales déjà dotées de solides budgets. Ce Document de travail a trait à l’Étude économique de l’OCDE de la Chine, 2013 (
    Keywords: public finances, local government, China, tax sharing, property taxation, intergovernmental transfers, fiscal disparities, service equalisation, land-use rights, finances publiques, transferts intergouvernementaux, collectivités locales, impôt foncier, Chine, répartition des recettes fiscales, disparités fiscales, égalisation service, droits d'usage des terrains
    JEL: D63 E62 H11 H24 H25 H27 H51 H52 H60 H61 H71 H72 H73 H74 H77 R52
    Date: 2013–02–27
  3. By: Williamson, James M.; Durst, Ron L.; Farrigan, Tracey L.
    Abstract: Several proposals calling for fundamental reform of the Federal income tax system have been put forth, including a report by the co-chairs of the National Commission on Fiscal Responsibility. The primary elements of reform—eliminating tax preferences, restructuring capital gains and dividend tax rates, lowering rates on individual income, and reducing the number of tax brackets—could have a signifi cant impact on the after-tax income and well-being of both farm businesses and rural households. This report uses published and special tabulation data obtained from the Internal Revenue Service, farm-level data from USDA’s Agricultural Resource Management Survey, and data from the American Housing Survey to examine the current tax situation for farm households and to evaluate the importance of various Federal income tax policies. For farm households, the effect of reform will primarily depend upon changes to existing treatment of investment and business income, including several important business deductions. In contrast, changes to existing individual tax credits, especially refundable tax credits, will likely be of greater signifi cance to nonfarm rural households.
    Keywords: farm households, tax reform, income tax, tax rates, Federal tax policy, farm losses, refundable credits, tax deductions, rural households, tax preferences, Agricultural Finance, Public Economics,
    Date: 2013–02
  4. By: Jarkko Harju; Tuomas Matikka
    Abstract: This study examines the extent of direct tax avoidance through income-shifting between wages and dividends, and approximates the deadweight loss due to this behavior for the owners of privately held corporations. The dual income tax system in Finland offers noticeable incentives for income-shifting. The extensive dividend tax reform of 2005 enables us to study how this particular form of tax avoidance reacts to an exogenous change in tax rates. Our results support highly active income-shifting, and the apparent tax avoidance behavior has considerable welfare effects. We also find evidence that costs related to income-shifting behavior affect the effectiveness of taxation.
    Keywords: Tax avoidance, income shifting, entrepreneurs, dual income tax
    JEL: H32 H21 H25
    Date: 2013–01–14
  5. By: Bracco, Emanuele (University of Lancaster); Porcelli, Francesco (University of Warwick); Redoano, Michela (University of Warwick)
    Abstract: This paper argues that high political competition does not necessarily induce policy makers to perform better as previous research has shown. We develop a political economy model and we show that when political competition is tight, and elected politicians can rely on more tax instruments, they will substitute salient taxes with less salient ones, which are not necessarily preferable. These predictions are largely confirmed using a dataset on Italian municipal elections and taxes.
    Keywords: Political Competition, Government, Accountability, Tax Salience.
    Date: 2013
  6. By: Tuomas Kosonen; Jarkko Harju
    Abstract: Based on existing evidence, we know little about how the taxation of small business owners affects their economic activity. This paper studies the effect of two Finnish tax reforms, in 1997 and 1998, on the effort decisions of the owners of small businesses, utilizing both theoretical model and empirical data. The reforms reduced the income tax rates of small business owners and applied only to unincorporated firms, leaving out corporations. We use a difference-indifferences strategy to estimate the causal impact of tax incentives on the economic activity of small businesses. The results imply that lighter taxation leads to an increase in the turnover of firms that we interpret as an increase in effort exerted by their owners.
    Keywords: Entrepreneurs, small businesses, tax incidence
    JEL: H22 H24 H25
    Date: 2013–01–10
  7. By: Oscar Bajo-Rubio (Universidad de Castilla-La Mancha); Antonio G. Gómez-Plana (Universidad Pública de Navarra)
    Abstract: In this paper, we examine the effects of several alternative measures intended to reduce government deficits, distinguishing between those acting through either taxes or spending, for the case of Spain. The empirical methodology is based on a computable general equilibrium model. All the simulated policies lead to a decrease in the levels of output and employment, and to a higher unemployment rate. Spending cuts show greater contractionary effects than tax increases, and are associated with a worsening in the distribution of income for labour. These effects are stronger in the case of spending cuts in Public education.
    Keywords: Computable general equilibrium, Government deficit, Taxes, Spending
    JEL: C68 H62 H20 H50
    Date: 2013–02
  8. By: Camila Vammalle; Claudia Hulbert
    Abstract: Recent crises and national consolidation packages affected sub-national finances. In many OECD countries, central governments introduced reductions in transfers to sub-national governments, and established expenditure and/or deficit objectives to be met by local or regional authorities. Such measures have reduced the financial room of sub-national governments for implementing key public services or investments.<P> In parallel, borrowing conditions deteriorated for many sub-national governments, as banks and financial markets became increasingly reluctant to lend. Since late 2008, financial markets started discriminating between high- and low-quality SNG bonds, and yields reached record-high levels for sub-national governments perceived as less creditworthy.<P> Facing degraded finances, upward pressure on expenditures and deteriorated borrowing conditions, many sub-national governments have used public investment as an adjustment variable to reduce their budget deficits and preserve their spending on welfare, health or education. However, such policies may hinder long-term growth perspectives.
    Keywords: public debt, sub-national government, bailouts, fiscal stress
    JEL: H12 H70 H74 H81
    Date: 2013–03–11
  9. By: Henrik Jacobsen Kleven; Camille Landais; Emmanuel Saez; Esben Anton Schultz
    Abstract: This paper analyzes the effects of income taxation on the international migration and earnings of top earners using a Danish preferential foreigner tax scheme and population-wide Danish administrative data. This scheme, introduced in 1991, allows new immigrants with high earnings to be taxed at a preferential flat rate for a duration of three years. We obtain three main results. First, the scheme has doubled the number of highly paid foreigners in Denmark relative to slightly less paid ineligible foreigners, which translates into a very large elasticity of migration with respect to the net-of-tax rate on foreigners, between 1.5 and 2. Hence, preferential tax schemes for highly paid foreign workers could create severe tax competition between countries. Second, we find compelling evidence of a negative effect of scheme-induced increases in the net-of-tax rate on pre-tax earnings at the individual level. This finding cannot be explained by the standard labor supply model where pay equals marginal productivity, but it can be rationalized by a matching frictions model with wage bargaining where there is a gap between pay and marginal productivity. Third, we find no evidence of positive or negative spillovers of the scheme-induced influx of high-skilled foreigners on the earnings of highly paid natives.
    JEL: H24 J61
    Date: 2013–03
  10. By: Gunther Capelle-Blancard; Olena Havrylchyk
    Abstract: In the context of the financial crisis, many projects of bank levies have emerged. Yet, there is very little evidence on the incidence of bank taxes and, hence, it is not clear who will bear the burden of the new taxes. In this paper, we investigate the ability of banks to shift corporate income taxes to their clients and we consider whether tax incidence is influenced by market competition and banks’ market power. Our sample consists of 1,411 European commercial banks over the period 1992-2008. To measure competition we rely on a large number of indicators, such as banks’ market share, the Herfindhal index, the Lerner index and the Panzar and Rosse h-statistic. We find that even in uncompetitive markets banks are not able to shift corporate income taxes to their customers. Our results contradict earlier papers that find a significant pass-through, and we argue that previous studies suffer either from endogeneity problems or from the wrong specification of the tax burden.
    Keywords: Bank taxation;Bank levy;Net interest margin;European banks;Banking;market structure;Corporate tax incidence
    JEL: G21 H25
    Date: 2013–02
  11. By: Hielke Buddelmeyer (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Kyle Peyton (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)
    Abstract: In December 2008 and March-April 2009 the Australian Government used fiscal stimulus as a short-run economic stabilization tool for the first time since the 1990s. In May-June 2012, households received lump sum cheques as compensation for the introduction of the Carbon Tax scheduled for 1 July 2012. This paper examines the relationship between these financial windfalls and spending at electronic gaming machines (EGMs) using data from 62 local government areas in Victoria, Australia. The results show large increases in spending at EGMs during the periods when Australian households received economic stimulus cheques. Increased spending at EGMs in December 2008 amounted to 1% of the total stimulus for that period. We conclude that the 2008-2009 stimulus packages substantially increased gambling at EGMs in Victoria. We find no unexpected increase in spending at EGMs in the months when Carbon Tax compensation cheques were paid.
    Keywords: Gambling, stimulus, Australia, windfall income, electronic gaming
    JEL: E21 E62 H3 H5 L83
    Date: 2013–02
  12. By: Yolanda K. Kodrzycki
    Abstract: In the aftermath of the Great Recession, many local governments have experienced significant financial strain. Local governments’ financial challenges are likely to continue in the foreseeable future, as federal deficit-reducing measures trigger cuts in state and local aid and as all levels of government struggle to fund their medical and retirement obligations. In an effort to maintain service provision without significant tax increases, many cities and towns will be forced to consider a variety of cost-cutting measures, including joint service provision with other localities. ; This research examines the potential long term savings that could be realized through greater regional consolidation of select local government services, specifically emergency call handling and dispatch, public health, and high-level government administrative services. It focuses especially on the expected long term savings in the New England states, with specific estimates for Massachusetts and Connecticut. ; The report finds that regional service-sharing can be an effective means to achieve savings, particularly for services that rely on high levels of technology, capital, or specialized expertise. The author recommends that the state consider playing a stronger role in encouraging local regionalization through measures such as instituting quality standards and using funding to promote and facilitate consolidation.
    Keywords: Local government ; Local government - New England ; Local government - Connecticut ; Local finance ; Local finance - Massachusetts ; Local finance - New England ; Local finance - Connecticut ; Local government - Massachusetts ; Municipal finance ; Municipal finance - Massachusetts ; Municipal finance - New England ; Municipal finance - Connecticut
    Date: 2013
  13. By: Lee Mizell; Dorothée Allain-Dupré
    Abstract: Growth and jobs are top concerns for policy makers confronting difficult economic conditions in many OECD countries. Sub-national governments are important contributors to national growth, but in many cases their economies are struggling as well. Faced with tight fiscal conditions, all levels of government must achieve policy goals with fewer resources. This is particularly true for public investment, a potentially growth-enhancing form of public expenditure which numerous governments are reducing to meet other (current) financial obligations. Even where public investment is stable or increasing, governments may want to improve returns to public and private investment.<P> On average, nearly two-thirds of public investment in OECD countries occurs at the sub-national level. Clearly then, any discussion of improving returns to investment must address the capacities of sub-national governments to invest effectively. Unfortunately, the implementation of recovery packages across OECD countries revealed that both national and sub-national actors may lack the appropriate tools and governance arrangements to make the best use of investment funds. Taking this finding as its starting point, this paper seeks to 1) identify capacities that enable sub-national governments to design and implement sound public investment strategies for regional development, and 2) provide practical guidance for assessing and strengthening these capacities in a context of multi-level governance.
    Keywords: decentralisation, sub-national government, capacity, public investment, regional development, multi-level governance
    JEL: H1 H5 H7 R1 R5
    Date: 2013–03–19
  14. By: Patricia Martins; Leonida Correia
    Abstract: This paper identifies the determinants of macroeconomic forecasts (budget balance, public debt and real GDP growth), of the governments of the 15 EU countries. We have used the forecasts of the Stability and Convergence Programmes submitted between 1998/99 and 2008/09 and the European Commission’s. Results show that, in general, economic growth forecasts submitted by European governments are more optimistic than those published by the European Commission. The lack of accuracy of government forecasts is due to “misinformation” regarding the economic situation at the time of their publication. The differences between observed and forecast changes of budget balance and public debt are explained by the output growth forecast errors and the forecasts of the changes in the two fiscal indicators. These forecast changes tend to revise downwards the changes submitted in the previous Program. Therefore, the governments’ “bad intention” seems to result from their lack of commitment to the objectives of previous programs and it explains the recurrent delays in the implementation of their fiscal consolidation plans.
    Keywords: European Union, Stability and Growth Pact, forecast errors
    JEL: E62 H6
    Date: 2013–02
  15. By: Boyd-Swan, Casey (Arizona State University); Herbst, Chris M. (Arizona State University); Ifcher, John (Santa Clara University); Zarghamee, Homa (Barnard College)
    Abstract: This paper contributes to the small but growing literature evaluating the health effects of the Earned Income Tax Credit (EITC). In particular, we use data from the National Survey of Families and Households to study the impact of the 1990 federal EITC expansion on several outcomes related to mental health and subjective well-being. The identification strategy relies on a difference-in-differences framework to estimate intent-to-treat effects for the post-reform period. Our results suggest that the 1990 EITC reform generated sizeable health benefits for low-skilled mothers. Such women experienced lower depression symptomatology, an increase in self-reported happiness, and improved self-efficacy relative to their childless counterparts. Consistent with previous work, we find that married mothers captured most of the health benefits, with unmarried mothers' health changing very little following the 1990 EITC reform.
    Keywords: Earned Income Tax Credit (EITC), happiness, health, subjective well-being
    JEL: I1 J00
    Date: 2013–03
  16. By: Cortuk, Orcan; Güler, Mustafa Haluk
    Abstract: We examine different types of government spending while literature usually treats government spending as a homogenous compound. We disaggregate the government spending into three parts; namely, government investment, government wage component consumption (i.e. wage expenditure) expenditure, and non-wage component consumption (i.e. purchases of goods and services). Next, we estimate a dynamic stochastic general equilibrium model that features a transmission mechanism with different types of government spending. In this regard, we manage to distinguish between different types of government spending where each type of spending has varied role in the economy. Such set up enables them produce different effects on macroeconomic variables.
    Keywords: Disaggregated government spending, Government investment, Government wage consumption, Government non-wage component consumption, DSGE model.
    JEL: E62 H50
    Date: 2013–03–13
  17. By: Yu, Yihua; Rickman, Dan S.
    Abstract: Faced with declining economic bases, many nonmetropolitan areas increasingly have become concerned about their future economic viability. A crucial dimension of this concern is the balancing of the need to be cost-competitive in terms of lower taxes against the need for provision of valued government services. Using a spatial equilibrium framework, this study econometrically examines the nexus between U.S. state and local fiscal policies and nonmetropolitan county growth in earnings and housing rents during the 1990s. The results suggest that state and local fiscal characteristics were important location determinants. Some characteristics could be clearly identified as having dominant firm profit effects while numerous others were identified as having household amenity effects. In addition, fiscal policies appeared to be more important for economic growth of nonmetropolitan counties which were remote from metropolitan areas than they were for counties adjacent to metropolitan areas.
    Keywords: Regional Fiscal Policies; Rural Development; Spatial Equilibrium
    JEL: H30 R51 R58
    Date: 2013–03–12
  18. By: Katsuyoshi Nakazawa (University of Toyo); Tomohisa Miyashita (PHP research institute)
    Abstract: Municipal boundary reform (municipal amalgamation) has been done in many countries in recent years as the result of a push to enlarge the size and coverage of local government units, which in turn is driven mainly by the prospect of economies of scale. However, in a notable body of previous literature, the enlargement of local government has not led to reduction of public expenditures. Decision-making before amalgamation might affect to public expenditure after amalgamation. This study uses Japanese municipal-level data and argues for a relation between the choice of public administration distribution method and expenditure after amalgamation. The results show that a plan for distributed or decentralized facility method is more likely to be adopted in a larger administrative jurisdiction and in one with large differences in finances or political structures between amalgamated sub-regions. In turn, a plan for distributed facilities has the effect of pushing up administrative expenditure.Length: 12 pages
    Keywords: local government amalgamation, consensus-building, multinomial logistic regression, local government expenditure
    JEL: D78 H72 H73 H77 R51
    Date: 2013
  19. By: Katsuyoshi Nakazawa (University of Toyo)
    Abstract: This paper focuses on the increase in slack costs due to municipality amalgamation, which is pushed forward in several countries to achieve economies of scale. Employing the stochastic frontier cost function to estimate the inefficiency of local public expenditure due to slack, this study investigated 479 Japanese municipalities that had amalgamated from 2000 to 2005. This work used the technical inefficiency variable “Number of municipalities that participated in an amalgamation” and a dummy variable for “The newly-established-municipality form of amalgamation.” Results show that these variables have an impact on the cost inefficiency of local public expenditure. Average efficiency scores in the two estimations carried out were 1.145 and 1.100. The estimation results showed that municipality amalgamation produces integration costs (slack) in an administrative organization. The degree of slack depends on the form of amalgamation.
    Keywords: Municipality amalgamation; Cost inefficiency; Slack cost; Stacastic frontier analysis; Japan
    JEL: E62 H20 K34 N00
    Date: 2013

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