nep-pbe New Economics Papers
on Public Economics
Issue of 2013‒05‒19
twenty-one papers chosen by
Keunjae Lee
Pusan National University

  1. Yardstick Competition among Portuguese Municipalities: The Case of Urban Property Tax (IMI) By José da Silva Costa; Armindo Cravalho
  2. Tax Rates as Strategic Substitutes By Ruud A. de Mooij; Hendrik Vrijburg
  3. 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
  4. Capital Gains Taxation and the Cost of Capital: Evidence from Unanticipated Cross-Border Transfers of Tax Bases By Harry Huizinga; Johannes Voget; Wolf Wagner
  5. The Non-Equivalence of Labor Market Taxes: A Real-Effort Experiment By Matthias Weber; Arthur Schram
  6. Female Labour Supply, Human Capital and Welfare Reform By Blundell, Richard; Costa Dias, Monica; Meghir, Costas; Shaw, Jonathan
  7. Tax evasion,tax corruption and stochastic growth By Fred Celimene; Gilles Dufrenot; Gisele Mophou; Gaston N'Guerekata
  8. The Fiscal Theory of the Price Level When All Income is Taxed By Pedro Gomis-Porqueras; Solmaz Moslehi; Vivianne Vilar
  9. Complex Tax Incentives: An Experimental Investigation By Abeler, Johannes; Jäger, Simon
  10. Taxation, match quality and social welfare By Brendan Epstein; Ryan Nunn
  11. The Impact of Indonesian Political Reform on Public Goods Provision; Market Efficiency; Security, Law and Order; and Political Participation By Muliadi Widjaja
  12. Do Higher Corporate Taxes Reduce Wages? Micro Evidence from Germany By Fuest, Clemens; Peichl, Andreas; Siegloch, Sebastian
  13. Isolated Capital Cities, Accountability and Corruption: Evidence from US States By Filipe R. Campante; Quoc-Anh Do
  14. Families, Taxes and the Welfare System By Simpson, Nicole B.
  15. Car User Taxes, Quality Characteristics and Fuel Efficiency: Household Behavior and Market Adjustment By Bruno de Borger; Jan Rouwendal
  16. Rising Inequalities in Income and Health in China: Who is left behind? By Steef Baeten; Tom Van Ourti; Eddy Van Doorslaer
  17. Providing negative cost public projects under a fair mechanism: An experimental analysis By Werner Güth; Anastasios Koukoumelis; M. Vittoria Levati; Matteo Ploner
  18. On the Size of the Government Spending Multiplier in the Euro Area By Fève, Patrick; Sahuc, Jean-Guillaume
  19. Bargaining and Wealth Accumulation By Byeongju Jeong
  20. The Law of Urban Growth and the Local Public Sector By John Hartwick
  21. The Marginal Income Effect of Education on Happiness: Estimating the Direct and Indirect Effects of Compulsory Schooling on Well-Being in Australia By Powdthavee, Nattavudh; Lekfuangfu, Warn N.; Wooden, Mark

  1. By: José da Silva Costa (Faculdade de Economia, Universidade do Porto.); Armindo Cravalho (Faculdade de Economia, Universidade do Porto.)
    Abstract: In this paper we gather empirical evidence on the existence of strategic interaction among Portuguese municipal executives when they set rates of property tax and in particular if we are in the presence of yardstick competition. For that purpose, we adopted the assumption of geographic interaction among Portuguese municipalities when setting rates of property tax. We have estimated, for evaluated and non-evaluated urban property, spatial lag models with two spatial dependency regimes (municipalities with and without a solid majority) and cross-section fixed effects coefficients. The results provide strong empirical evidence on the existence of strategic interaction among Portuguese municipalities when setting rates of municipal taxes and on the yardstick hypothesis.
    Keywords: Yarstick competition; Local Governments; Portugal.
    JEL: H71 H73
    Date: 2013–05
  2. By: Ruud A. de Mooij (IMF); Hendrik Vrijburg (Erasmus University Rotterdam)
    Abstract: This paper analytically derives the conditions under which the slope of the tax reaction function is negative in a classical tax competition model. If countries maximize welfare, we show that a negative slope (reflecting strategic substitutability) occurs under relatively mild conditions. Simulations suggest that strategic substitutability occurs under plausible parameter configurations. The strategic tax response is crucial for understanding tax competition games, as well as for assessing the welfare effects of partial tax unions (whereby a subset of countries coordinate their tax rates). Indeed, contrary to earlier findings that have assumed strategic complementarity in tax rates, we show that partial tax unions might reduce welfare under strategic substitutability.
    Keywords: Strategic Substitutes, Asymmetry, Strategic Tax Response, Tax Coordination
    JEL: E62 F21 H25 H77
    Date: 2012–10–02
  3. 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
  4. By: Harry Huizinga (Tilburg University, and CEPR); Johannes Voget (University of Mannheim, Oxford University Centre for Business Taxation,CentER Tilburg University); Wolf Wagner (Tilburg University, Duisenberg School of Finance)
    Abstract: In a cross-border takeover, the tax base associated with future capital gains is transferred from target shareholders to acquirer shareholders. Crosscountry differences in capital gains tax rates enable us to estimate the discount in target valuation on account of future capital gains. A one percentage point increase in the capital gains tax rate reduces the value of equity by 0.225%. The implied average effective tax rate on capital gains is 7% and it raises the cost of capital by 5.3% of its no-tax level. This indicates that capital gains taxation is a significant cost to firms when issuing new equity.
    Keywords: Capital gains taxation, Cost of capital, International takeovers
    JEL: G32 G34 H25
    Date: 2012–09–27
  5. By: Matthias Weber (CREED, University of Amsterdam); Arthur Schram (CREED, University of Amsterdam)
    Abstract: In a competitive market with taxed transactions, it does not matter under full rationality which side of the market legally transfers the taxes. In the labor market, a tax levied on employers and a corresponding income tax levied on employees are equivalent. With boundedly rational agents, this equivalence is no longer obvious. If people react differently to the two taxes this has direct impact on policy making, political economics, and optimal taxation theory. This paper examines how people react to these duties in a real effort laboratory experiment. We study the differential effects of the two types of taxes on preferences concerning the size of the public sector, subjective well-being, labor supply, and on-the-job performance. To elicit public-sector-size preferences in the laboratory we introduce a novel, incentive compatible approach. Our findings suggest that employer-side taxes induce preferences for a larger public sector. Our findings also sugges t that subjective well-being is higher while both labor supply and on-the-job performance are lower when the taxes are levied on employers. Furthermore, there are gender effects, e.g., women's subjective well-being appears to be more sensitive to framing than men's, while men's labor supply is more sensitive to framing than women's.
    Keywords: tax perception, liability side equivalence, political economy, labor supply
    JEL: C91 H22 H30
    Date: 2013–02–19
  6. By: Blundell, Richard (University College London); Costa Dias, Monica (Institute for Fiscal Studies, London); Meghir, Costas (Yale University); Shaw, Jonathan (Institute for Fiscal Studies, London)
    Abstract: We consider the impact of tax credits and income support programs on female education choice, employment, hours and human capital accumulation over the life-cycle. We analyze both the short run incentive effects and the longer run implications of such programs. By allowing for risk aversion and savings, we quantify the insurance value of alternative programs. We find important incentive effects on education choice and labor supply, with single mothers having the most elastic labor supply. Returns to labor market experience are found to be substantial but only for full-time employment, and especially for women with more than basic formal education. For those with lower education the welfare programs are shown to have substantial insurance value. Based on the model, marginal increases to tax credits are preferred to equally costly increases in income support and to tax cuts, except by those in the highest education group.
    Keywords: labour supply, human capital, welfare reform
    JEL: J22 J24 H31
    Date: 2013–04
  7. By: Fred Celimene (CEREGMIA, Université des Antilles et de la Guyane); Gilles Dufrenot (Aix-Marseille Université); Gisele Mophou (CEREGMIA, Université des Antilles et de la Guyane); Gaston N'Guerekata (Morgan State University, Baltimore, MD, USA)
    Abstract: This paper presents a continuous time stochastic growth model to study the effects of tax evasion and tax corruption on the level and volatility of private investment and public spending. Our results suggest that there do exist several regimes of mean growth and growth volatility, depending upon the consumer's degree of risk aversion, the tax income yield, the risk-adjusted return of the agent's portfolio, the productivity of public spending. We find that public spending is described asymptotically by an incomplete upper Gamma distribution, while private capital is described by a power law distribution. Depending upon the values of the parameters of these distributions, growth can be characterized by extreme values (high volatility) when the return to taxation lies under a certain threshold and/or when the risk-adjusted return of investing the proceeds of illegal activities evolves above a given threshold. We provide an empirical illustration of the model.
    Date: 2013–02
  8. By: Pedro Gomis-Porqueras; Solmaz Moslehi; Vivianne Vilar
    Abstract: In this paper we explore how the nature of the equilibria changes when the interest income from nominal bond holdings is also taxed in an fully flexible endowment economy. We find that the stability properties of this economy depend on the slope and the intercept of both monetary and fiscal policy rules. Thus, the parameter space consistent with locally determinate equilibria is much larger compared to that of Leeper (1991). For instance, deviations from the Taylor principle can still yield determinate equilibria even when fiscal policy does not aggressively respond to rises in debt levels. In addition, we show that if the government taxes all sources of income and the fiscal authority sets taxes taking into account the level of debt, then the economy exhibits a Laffer curve yielding multiple steady states. As we can see, ignoring the tax treatment of interest income generated by bond holdings is not as innocuous as it may seem.
    Keywords: Taxes, Bond Income, Laffer Curve, Monetary and Fiscal Policy Interactions.
    JEL: C11 E32 E62
    Date: 2013–05
  9. By: Abeler, Johannes (University of Oxford); Jäger, Simon (Harvard University)
    Abstract: How does the tax system's complexity affect people's reaction to tax changes? To answer this question, we conduct a real-effort experiment in which subjects receive a piece rate and face a set of taxes. In one treatment the tax system is simple; in the other treatment it is highly complex. The payoff-maximizing effort level and the incentives around this optimum are, however, identical across treatments. We then introduce the same sequence of additional tax rules in both treatments. We find that subjects in the complex treatment adjust their effort provision less in response to a new tax than subjects in the simple treatment. Many subjects in the complex treatment even ignore the new rule entirely, repeating their previous choice. Contrary to predictions from models of rational inattention, we find no evidence that subjects are less likely to ignore larger changes in incentives. Our results suggest that the effect of a newly introduced tax will be attenuated in a more complex tax system.
    Keywords: complexity, taxation, attention, salience, laboratory experiment
    JEL: C91 D03 H31 J22
    Date: 2013–04
  10. By: Brendan Epstein; Ryan Nunn
    Abstract: A large public finance literature argues that taxable income elasticities are a sufficient statistic for the social welfare consequences of taxation. We develop calibrations that show such deadweight loss calculations are overestimates proportional to the quantitative significance of heterogeneity in amenities across job matches. In particular, the endogenous supply of amenities can substantially exacerbate this overestimation in both static and dynamic environments. Given the possibility of gradual migration of workers into more amenity-focused job matches in response to tax increases, welfare calculations based on long-run taxable income elasticities can be more misleading than those based on short-run elasticities.
    Date: 2013
  11. By: Muliadi Widjaja (Department of Economics, Faculty of Economics, University of Indonesia)
    Abstract: The purpose of this paper is to observe how the changes of political regime, fiscal decentralization, degree of openness in Indonesia after the 1998 political turbulence affect the economic institution and public goods provision. Because available time series data are limited, estimation on individual country parameter is obtained by applying panel data regional convergence method. The findings are that, while the changes of political settings from dictatorial to democracy worsen economic institution in Indonesia, it does not change the public goods provision in Indonesia.
    JEL: B52
    Date: 2013–04
  12. By: Fuest, Clemens (ZEW Mannheim); Peichl, Andreas (IZA); Siegloch, Sebastian (IZA)
    Abstract: Because of endogeneity problems very few studies have been able to identify the incidence of corporate taxes on wages. We circumvent these problems by using an 11-year panel of data on 11,441 German municipalities' tax rates, 8 percent of which change each year, linked to administrative matched employer-employee data. Consistent with our theoretical model, we find a negative effect of corporate taxation on wages: a 1 euro increase in tax liabilities yields a 77 cent decrease in the wage bill. The direct wage effect, arising in a collective bargaining context, dominates, while the conventional indirect wage effect through reduced investment is empirically small due to regional labor mobility. High and medium-skilled workers, who arguably extract higher rents in collective agreements, bear a larger share of the corporate tax burden.
    Keywords: business tax, wage incidence, administrative data, local taxation
    JEL: H2 H7 J3
    Date: 2013–05
  13. By: Filipe R. Campante; Quoc-Anh Do
    Abstract: We show that isolated capital cities are robustly associated with greater levels of corruption across US states, in line with the view that this isolation reduces accountability, and in contrast with the alternative hypothesis that it might forestall political capture. We then provide direct evidence that the spatial distribution of population relative to the capital affects different accountability mechanisms over state politics: newspaper coverage, voter knowledge and information, and turnout. We also find evidence against the capture hypothesis: isolated capitals are associated with more money in state-level campaigns. Finally, we show that isolation is linked with worse public good provision.
    JEL: D72 D73 L82 R12 R23 R50
    Date: 2013–05
  14. By: Simpson, Nicole B. (Colgate University)
    Abstract: In this paper, I will describe in detail both the Earned Income Tax Credit and the Child Tax Credit in the U.S., including their origins, their structure, and the effects they have on the labor market and family formation. I will then discuss the macroeconomic implications of U.S. welfare reform, and then conclude by analyzing the effectiveness of the U.S. safety net (broadly defined) during the Great Recession of 2007-2008.
    Keywords: taxes, welfare, families, EITC, child tax credit, TANF
    JEL: D1 H24 H53
    Date: 2013–04
  15. By: Bruno de Borger (University of Antwerp); Jan Rouwendal (VU University Amsterdam)
    Abstract: We study the impact of fuel taxes and kilometer taxes on households' choices of vehicle quality, on their demand for kilometers driven, and on fuel consumption. Moreover, embedding this information in a model of the car market, we analyze the implications of these taxes for the opportunity costs of owning cars of different quality. Higher quality raises the fixed cost of car ownership, but it may raise (engine size, acceleration speed, etc.) or reduce (fuel technology, etc.) the variable user cost. Our results show that kilometer charges and fuel taxes have very different implications. For example, a higher fuel tax raises household demand for more fuel efficient cars, provided that the demand for car use is inelastic; it reduces the demand for characteristics that raise variable user costs. Surprisingly, however, a kilometer tax unambiguously reduces the demand for more fuel efficient cars. Incorporating price adjustments at the market level, we find th at fuel taxes raise the <I>marginal</I> fixed opportunity cost of better fuel efficiency at all quality levels. <I>Total</I> annual opportunity costs of owning highly fuel efficient cars increase, while they decline for cars of low fuel efficiency. We further find that both a fuel tax and a kilometer charge reduce the <I>total</I> annual fixed ownership cost for car attributes that raise the variable cost of driving (engine power, acceleration speed, etc.). There is thus in general a trade-off between fixed and variable car costs: if the latter increase - due to higher fuel prices or a kilometer charge - total demand for cars decreases and a return to equilibrium is only possible by a decrease in fixed costs. All theoretical results are illustrated using a numerical version of the model. The analysis shows that modeling the effect of tax changes on household behavior alone can produce highly misleading results.
    Keywords: car market, car quality, fuel tax, kilometer charge, market equilibrium
    JEL: H22 L62
    Date: 2012–11–16
  16. By: Steef Baeten (Institute for Health Policy and Management, Erasmus University Rotterdam); Tom Van Ourti (Erasmus School of Economics (EUR)); Eddy Van Doorslaer (Erasmus School of Economics (EUR))
    Abstract: During the last decades, China has experienced double-digit economic growth rates and rising inequality. This paper implements a new decomposition on the China Health and Nutrition panel Survey (1991-2006) to examine the extent to which changes in level and distribution of incomes and in income mobility are related to health disparities between rich and poor. We find that health disparities in China relate to rising income inequality and in particular to the adverse health and income experience of older (wo)men, but not to the growth rate of average incomes over the last decades. These findings suggest that replacement incomes and pensions at older ages may be one of the most important policy levers in combating health disparities between rich and poor Chinese.
    Keywords: China, income growth, income inequality, income mobility, health inequality
    JEL: C00 D30 D63 I14 I15
    Date: 2012–09–10
  17. By: Werner Güth (Max Planck Institute of Economics, Strategic Interaction Group); Anastasios Koukoumelis (Max Planck Institute of Economics, Strategic Interaction Group); M. Vittoria Levati (Max Planck Institute of Economics, Strategic Interaction Group, and Department of Economics, University of Verona); Matteo Ploner (DECO-CEEL, University of Trento)
    Abstract: This paper experimentally examines a procedurally fair provision mech- anism allowing members of a small community to determine, via their bids, which of four alternative public projects to implement. Previous experi- ments with positive cost projects have demonstrated that the mechanism is efficiency enhancing. Our experiment tests whether the mechanism re- mains conducive to efficiency when negative cost, but less efficient, projects are made available. We find that this is not the case. On the other hand, we detect no significant difference in bid levels depending on whether mixed feelings are present or absent, and on whether the others' valuations are known or unknown.
    Keywords: Public projects, Bidding behavior, Procedural fairness, Experiment
    JEL: C72 C92 D63 H44
    Date: 2013–05–13
  18. By: Fève, Patrick; Sahuc, Jean-Guillaume
    Abstract: This article addresses the existence of a wide range of estimated government spending multipliers in a dynamic stochastic general equilibrium model of the euro area. Our estimation results and counterfactual exercises provide evidence that omitting the interactions of key ingredients at the estimation stage (such as Edgeworth complementarity between private consumption and government expenditures, endogenous government spending policy and general time nonseparable preferences) paves the way for potentially large biases. We argue that uncertainty on the quantitative assessments of fiscal programmes could partly originate from these biases.
    Keywords: Government spending multiplier, DSGE models, Estimation bias, Euro area.
    JEL: C32 E32 E62
    Date: 2013–04
  19. By: Byeongju Jeong
    Abstract: I present a model in which randomly matched pairs of people bargain over the division of output in each period. Output can be consumed or stored for later consumption. People are identical except possibly in wealth (i.e., the stored output). The one-period utility is linear except for the starvation disutility (i.e., the additional drop in utility under no consumption). The starvation disutility weakens the bargaining position of a poor person and strengthens that of a rich person in an otherwise symmetric bargaining, providing the incentive to accumulate wealth. Policies that deincentivize wealth accumulation (e.g., wealth tax, progressive income tax) can make both the rich and the poor become better off. matters.
    Keywords: bargain; wealth accumulation; starvation disutility; wealth tax; income tax;
    JEL: C78 D31 E21 H21
    Date: 2013–01
  20. By: John Hartwick (Queen's University)
    Abstract: We set out a city as a price-taking exporter and importer with its own local structure (housing (land per household) and a local pure public good are produced endogenously). We improve labor efficiency in the export sector, observe a jump in the local wage, and trace the impact, particularly on production of the public good. In one case the population, output of the public good, and residential density expand (the law of urban growth) and in another, population, output of the public good and density contract.
    Keywords: small, open city, urban public sector, law of urban growth
    JEL: R23 H40 F43
    Date: 2013–05
  21. By: Powdthavee, Nattavudh (London School of Economics); Lekfuangfu, Warn N. (University College London); Wooden, Mark (Melbourne Institute of Applied Economic and Social Research)
    Abstract: Many economists and educators favour public support for education on the premise that education improves the overall well-being of citizens. However, little is known about the causal pathways through which education shapes people's subjective well-being (SWB). This paper explores the direct and indirect well-being effects of extra schooling induced through compulsory schooling laws in Australia. We find the net effect of schooling on later SWB to be positive, though this effect is larger and statistically more robust for men than for women. We then show that the compulsory schooling effect on male's SWB is indirect and is mediated through income.
    Keywords: schooling, indirect effect, well-being, mental health, windfall income, HILDA survey
    JEL: I20 I32 C36
    Date: 2013–04

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