nep-pbe New Economics Papers
on Public Economics
Issue of 2013‒05‒24
nineteen papers chosen by
Keunjae Lee
Pusan National University

  1. Can Labor Market Imperfections Cause Overprovision of Public Inputs? By Martinez, Diego; Sjögren, Tomas
  2. Optimal Dynamic Nonlinear Income Taxes: Facing an Uncertain Future with a Sluggish Government By Berliant, Marcus; Fujishima, Shota
  3. Making the Property Tax Work By Roy Kelly
  4. Who participates in corporate income tax consolidation? Evidence from Japan By Kazuki Onji
  5. Taxing the Small: Fostering Tax Compliance Among Small Enterprises in Developing Countries By William F. Fox; Matthew Murray
  6. The Impact of Tax Incentives to Stimulate Investment in South Africa By Estian Calitz; Sally Wallace; Le Roux Burrows
  7. Municipal Consolidation and Local Government Behavior: Evidence from Japanese Voting Data on Merger Referenda By Miyazaki, Takeshi
  8. Measuring tax effort: Does the estimation approach matter and should effort be linked to expenditure goals? By Musharraf Cyan; Jorge Martinez-Vazquez; VIoleta Vulovic
  9. On the Size and Determinants of Inter-regional Redistribution in European Countries over the Period 1995-2009 By Santiago Lago-Peñas; Albino Prada; Alberto Vaquero
  10. “The Impact of Micro-simulation and CGE modeling on Tax Reform and Tax Advice in Developing Countries”: A Survey of Alternative Approaches and an Application to Pakistan By Andrew Feltenstein; Luciana Lopes; Janet Porras Mendoza; Sally Wallace
  11. Estate vs. capital gains taxation: an evaluation of prospective policies for taxing wealth at the time of death By Robert B. Avery; Daniel Grodzicki; Kevin B. Moore
  12. Environmental Taxation Evolution in Ukraine: Trends, Challenges and Outlook By Shkarlet, Serhiy; Petrakov, Iaroslav
  13. Does Municipal Amalgamation Strengthen the Financial Viability of Local Government? A Canadian Example By Enid Slack; Richard M. Bird
  14. Tax Policy in an Economic Federation With Proportional Membership Fees By Sjögren, Tomas
  15. Economics as victim between lawyers and mathematics: An explanation for the tax credit, Bulgarian potential fraud, European unemployment and the economic crisis By Colignatus, Thomas
  16. Mobility in China By Yi Chen; Frank A Cowell
  17. Why Theory and Practice are Different: The Gap Between Principles and Reality in Subnational Revenue Systems By Paul Smoke
  18. Forecasting fiscal variables: Only a strong growth plan can sustain the Greek austerity programs-Evidence from simultaneous and structural models By Nicholas Apergis; Arusha Cooray
  19. Foreign Advice and Tax Policy in Developing Countries By Richard M. Bird

  1. By: Martinez, Diego (Department of Economics, University Pablo de Olavide); Sjögren, Tomas (Department of Economics, Umeå School of Business and Economics, Umeå University)
    Abstract: This paper concerns provision of productive public inputs in the presence of unemployment. It is shown that if the government is able to implement optimal taxes on labor income and profit income, respectively, then the public input will be underprovided. On the other hand, if the government is not able to implement an optimal tax on labor income, e.g. because the labor income tax is determined at another level in the public sector (e.g. the municipal or the state level), then overprovision may occur. We derive an equation which links overprovision of the public input to (i) the employment rate and to (ii) the deviation of the actual labor income tax from the optimal level.
    Keywords: Public Inputs; Trade Unions
    JEL: H41 J51
    Date: 2013–05–16
  2. By: Berliant, Marcus; Fujishima, Shota
    Abstract: We consider the optimal nonlinear income taxation problem in a dynamic, stochastic environment when the government is sluggish in the sense that it cannot change the tax rule as uncertainty resolves. We argue that the zero top marginal tax rate result in static models is of little practical importance because it actually holds only when the top earner in the initial period receives the highest shock in every period.
    Keywords: optimal income taxation; new dynamic public finance
    JEL: H21
    Date: 2013–05–17
  3. By: Roy Kelly (Duke Center for International Development Sanford School of Public Policy, Duke University)
    Abstract: As with any reform, making the property tax work requires visionary leadership, an appropriate policy framework, strong administrative capacity, and appropriate incentives to mobilize the political, administrative and popular support needed to enhance property tax revenues, equity and efficiency. This paper focuses on these requirements for successful property tax reform, identifying the key policy and administrative components and possible strategies needed to make the property tax work. Part 1 outlines the broader public sector reform environment needed to facilitate and support sustainable property tax reform. Part 2 identifies the policy and administration determinants affecting the realization of property tax revenue, equity and efficiency outcomes. Part 3 focuses on the ingredients needed to design a successful reform implementation strategy, while Part 4 summarizes the key recommendations for making the property tax work, especially in transitional and developing countries.
    Date: 2013–04–07
  4. By: Kazuki Onji
    Abstract: When a group of affiliated corporations have the option to file a single tax return based on a combined income, what types of groups would take up the option? This study empirically analyses decisions to participate in a single-jurisdiction consolidated tax filing. The data consists of 2,782 Japanese corporate groups headed by publicly-traded corporations observed over 2002-2007. Results indicate higher likelihood of participation among groups characterised by low correlation in returns among group members, high variance in returns, large number of subsidiaries, and losses accumulated in parents. The significant influence of variance and covariance of returns suggests that a consolidation scheme improves the efficiency of corporate income tax through reducing profit shifting.
    Keywords: corporate group, profit shifting, survival analysis
    JEL: G34 H25 K34
    Date: 2013
  5. By: William F. Fox (Center for Business and Economic Research and Department of Economics, University of Tennessee.); Matthew Murray (Baker Center for Public Policy, Center for Business and Economic Research and Department of Economics, University of Tennessee)
    Abstract: We first discuss a more nuanced view of the tax compliance game from the evolving perspective of behavioral economics. This discussion is followed by a more traditional analysis of issues related to taxation of the small drawing on recent insights and policy interventions. Our discussion generally blends issues of tax structure with various facets of tax administration and enforcement. In most instances the tax instrument in question is the VAT since it is the dominant revenue source in most developing countries, though we recognize there are compliance problems with all revenue instruments.
    Date: 2013–04–07
  6. By: Estian Calitz (University of Stellenbosch, South Africa); Sally Wallace (Andrew Young School of Policy Studies, Georgia State University); Le Roux Burrows (University of Stellenbosch, South Africa)
    Abstract: The purpose of this paper is, very generally, to provide a framework and potential methodology of analysis of tax incentives in one country — South Africa. As incentives are often specific and targeted, the precise methods needed to analyze the effectiveness of incentives may well differ among types of incentives. However, by positing a framework for evaluation based on basic economic principles, we believe that transparency, accountability and rigorous evaluation of individual incentives or regarding the choice of incentives may be enhanced.
    Date: 2013–04–07
  7. By: Miyazaki, Takeshi
    Abstract: The empirical literature investigating the role of key features of local governments regarding decisions on consolidation tends to use a dummy that takes 1 if adjacent local governments decide to merge. Under the estimation method, it is difficult to identify which governments have no incentive to merge. The current study presents an empirical test of decision on consolidation using voting data from Japanese local referenda that distinctively identify the preferences of specific individual municipalities. I find evidence that municipalities that could enjoy large economies of scale from a merger prefer consolidation, and large and small municipalities are likely to merge.
    Keywords: Boundary reform, economics of scale, local referenda, median voter model, municipal consolidation
    JEL: H11 H76 H77
    Date: 2013–05
  8. By: Musharraf Cyan (International Center for Public Policy. Andrew Young School of Policy Studies, Georgia State University); Jorge Martinez-Vazquez (International Center for Public Policy. Andrew Young School of Policy Studies, Georgia State University); VIoleta Vulovic (International Center for Public Policy. Andrew Young School of Policy Studies, Georgia State University)
    Abstract: In this paper we attempt to take a fresh look at the classical question of the determinants of tax effort. Our goal is to better understand the fundamental economic logic of the different approaches that have been used in the previous literature, consider alternative measurements which may provide a more direct intuition of what the concept of tax effort attempts to measure, and to compare quantitatively the rankings of tax effort produced by all these different approaches. As we see it, the fundamental issue is how to move forward toward a definition of tax effort that has a higher relevance to the developmental needs and budgetary ambitions of a country and as an indicator of potential tax reform needs. Fundamentally, all tax effort indicators are calculated by comparing actual collection performance against a measure of potential collections. This definitional choice lays out several dimensions for the conduct of tax policy in a country. These include the need for reform to raise revenues with reference to some potential, the desirable timing and urgency of those reforms, and the extent of the gains in national welfare that are achievable with these reforms. While the first two dimensions have been examined in different ways in the previous literature, in this paper, for the first time in this literature, we will examine how much the two different approaches to estimation of tax effort matter as compared to those conventionally used. In addition, and also for the first time in this literature, in this paper we argue for the need to explicitly link the adequacy of tax effort with the specific expenditure goals of government and their associated gains in national welfare.
    Date: 2013–04–07
  9. By: Santiago Lago-Peñas (REDE, IEB and University of Vigo); Albino Prada (ERENEA and University of Vigo); Alberto Vaquero (REDE and University of Vigo)
    Abstract: The aim of this paper is to analyse cross-country differences in the degree of inter-regional redistribution achieved by means of taxes and expenditures in 21 European countries over the period 1995-2009. We rely on a standard approach based on the observation and comparison of both primary and disposable household income at regional scale. Once the redistributive effect in each country is quantified, we try to explain the drivers of cross-country time-series differences. According to our estimates, cross-national standard deviation is significant and much higher than time variation. Secondly, inter-regional redistribution is strongly and positively related to personal redistribution by means of taxes and social benefits in cash; and is negatively related to both the extent of regional disparities in primary income and to the degree of political and fiscal decentralization.
    Keywords: Inter-regional redistribution, regional fiscal imbalance, European Union.
    Date: 2013–03–12
  10. By: Andrew Feltenstein (Andrew Young School of Policy Studies, Georgia State University); Luciana Lopes; Janet Porras Mendoza (International Center for Public Policy. Andrew Young School of Policy Studies, Georgia State University); Sally Wallace (Andrew Young School of Policy Studies, Georgia State University)
    Abstract: Computational general equilibrium models (CGE) and micro-simulation models (MSM) each have their own sets of strengths and weaknesses. Both have been widely used for the analysis of fiscal policies in developing countries, and many attempts have been made to link the two models, thereby combining their relative strengths. We survey a broad literature that uses a variety of approaches to apply linked CGE and MSM models to analyze fiscal policies, in particular taxes and tariffs, in developing countries. We conclude that the “top down” approach, in which the aggregate outputs of the CGE model feed into the MSM, is the most commonly used. Nonetheless, a “bottom up” approach, in which the MSM generates estimated parameters, such as effective tax rates, which are then used as inputs to the CGE, may also be quite useful. As an example, we also develop both CGE and MSM models of Pakistan in order to indicate the relative uses of each model, although we have not at this time linked the two models.
    Keywords: Computable General Equilibrium, Micro-simulation, Fiscal Policy, Pakistan
    Date: 2013–04–07
  11. By: Robert B. Avery; Daniel Grodzicki; Kevin B. Moore
    Abstract: Debate over the U.S. federal estate tax has intensified recently as a result of the sunset provisions in the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 and changes in law passed in conjunction with the "fiscal cliff" at the end of 2012. Despite recent changes in the law, there remains an open debate regarding the extent to which prospective estates comprise assets that have been taxed previously. Using wealth data on U.S. households, we forecast changes in household wealth in the coming decade and calculate the importance of untaxed wealth in bequeathed estates. Connecting further to the debate, we investigate the impact of various policies on U.S. households. In particular, we compare policies in which the entire estate is taxed at death (estate tax) to those in which only the unrealized capital gains portion is subject to tax (capital gains tax). We estimate that the average unrealized capital gains in estates monotonically increases with the size of the estate, ranging from 13% for estates under $2 million to 55% for estates over $100 million. We also find that policies aimed at taxing the entire estate raise more revenue than those aimed at taxing unrealized gains. However, policies that tax only gains concentrate a larger portion of the tax burden on high wealth households.
    Date: 2013
  12. By: Shkarlet, Serhiy; Petrakov, Iaroslav
    Abstract: Recent development trends of environmental taxation in Ukraine in context of the 2011 Tax Reform are analysed. Institutional, fiscal and security challenges for green taxes evolution during economic downturn and recession are summarized. Further modernization outlook for environment-oriented fiscal instruments in Ukraine considering European experience is suggested.
    Keywords: environmental taxes, fiscal instruments, trends, challenges
    JEL: H23 O13 O44 P28 P48 Q53 Q56 Q58
    Date: 2013–01–15
  13. By: Enid Slack (Institute on Municipal Finance and Governance); Richard M. Bird (University of Toronto)
    Abstract: Municipal amalgamation is often seen as one way to ensure that municipalities are large enough to be financially and technically capable of providing the extensive array of services with which they are charged. The idea is presumably that municipalities will be able not only to reap economies of scale, but also to coordinate service delivery over the enlarged territory as well as share costs equitably and reduce (even eliminate) spillovers of service delivery across local boundaries. This paper evaluates the extent to which municipal amalgamation in Toronto, Canada’s largest city, in 1998 achieved the provincially-stated objective of saving costs as well as its impact on taxes, financial viability, and local access and responsiveness. We conclude that the end result was the creation of a city that manages to be both too small and too big at the same time. The amalgamation probably increased the financial viability of at least the smaller and poorer municipalities in the newly created City of Toronto by increasing their access to the tax base of the amalgamated city as a whole and it also equalized local services so that everyone can enjoy a similar level of services. However, it had no significant effect on either the financial sustainability of Toronto or its capacity to deal with financial crises, nor did it achieve cost savings or solve any of the problems that the city and region faced in the last decade and continue to face in this one. The new city remains much too small to address the regional issues that plague the greater Toronto region (such as transportation and land use planning and economic development) while resulting in resulted in reduced access and participation by residents in local decision-making. On balance, it seems unlikely that anyone looking back with knowledge of the small and questionable gains that appear to have been realized would willingly have undertaken the complex, extended and painful process of metropolitan amalgamation.
    Keywords: local government, metropolitan area, amalgamation, municipal reorganization
    Date: 2013–03–25
  14. By: Sjögren, Tomas (Department of Economics, Umeå School of Business and Economics, Umeå University)
    Abstract: A significant part of the revenue in the EU budget is raised via a GNI-based resource. The purpose of this paper is to analyze how this way of raising funds to the central authority in an economic federation affects the tax policy implemented by the lower level jurisdictions. This question is analyzed both when labor is immobile, as well as mobile, between the jurisdictions. A key result is that if the government in a lower level jurisdiction acts as a Nash follower, then it has an incentive to implement a distortionary tax on labor whereas if the lower level government is able to act as a strategic leader within the federation, then the incentive to distort the labor market may be redundant.
    Keywords: efficiency; optimal taxation; economic federation
    JEL: H21 H41 H70
    Date: 2013–05–16
  15. By: Colignatus, Thomas
    Abstract: (1) The basic problem in OECD countries is the tax void. (2) A tax system with an exemption is more transparant than a system with a tax credit. (3) Exemption should be at the level of the net minimum wage so that such workers can work at net = gross. (4) A tax credit is a sufficient but not a necessary condition for vertical translation of a piecewise-linear tax system. (5) The Tax Plan for the 21st Century of 1998-2001 contained a deliberate misrepresentation. (6) The issue is important for the current economic crisis and European unemployment: (6a) The analysis is an element in the explanation of the aggressive export policies of Northern Europe via their low wage policies. (6b) Given the similarity of the tax policies in the OECD countries we find an explanation for the Great Stagflation since 1970 that was masked by financial deregulation. (6c) One should hope that Jeroen Dijsselbloem, the Dutch minister of Finance and chairperson of the Eurogroup, understands this issue. (7) A root cause lies in the handling of economic science in Holland. Though other countries can already benefit from the analysis presented here, it still remains better that the integrity of economic science is restored in Holland so that the full analysis becomes available.
    Keywords: tax credit, tax void, exemption, tax law, premium, insurance, fraud, lies, irregularity, boycott, Bulgaria, Holland, Europe, economic crisis, unemployment, tax harmonisation, basic income, basic benefit, heterogenous labour, minimum wage, productivity, equity, efficiency, transparancy, free lunch, political popularity, welfare state, poverty, surplus, external account, export, low wage policy, stagflation, financial deregulation, scientific integrity
    JEL: A10 H24 P16
    Date: 2013–05–18
  16. By: Yi Chen; Frank A Cowell
    Abstract: We examine the evidence on rank and income mobility in China during the decades immediately preceding and immediately following the millennium using panel data from the China Health and Nutrition Survey. We show that rank mobility changed markedly over the period: in this respect China is becoming markedly more rigid. By contrast income mobility has carried on increasing; so has income inequality.
    Keywords: Mobility Measurement, Income Distribution
    JEL: D63
    Date: 2013–04
  17. By: Paul Smoke (NYU)
    Abstract: Ensuring adequate subnational revenue is a core concern of fiscal decentralization. Public finance principles for selecting and designing subnational revenue sources have been widely used during the prominent wave of decentralization efforts in developing countries over the past three decades. Available empirical literature, however, suggests that subnational revenue generation often fails to meet needs and expectations, even where normative advice has been or seems to have been followed. Are the principles inappropriate, or are they just poorly applied? This paper argues that both factors are often at play. Basic principles are valuable, but they can be challenging to use and do not cover certain critical factors. Even if the principles are relevant and well applied, implementation commonly faces powerful constraints. Yet despite unsatisfying performance, revenue system design remains substantially based on a conceptually narrow normative framework that lacks a sense of pragmatic strategy and is often overwhelmed in practice by contextual factors it fails to or only weakly considers.
    Date: 2013–04–07
  18. By: Nicholas Apergis; Arusha Cooray
    Abstract: The goal of the present paper is to investigate not only the dynamics of the Greek public debt, but also the appropriate measures required for achieving fiscal consolidation. The empirical estimation is carried out using a macroeconomic dataset spanning the period 1980-2008 and both the 3SLS methodological approach on a theoretical model and the structural VAR methodology to perform forecast tests and to calibrate the future paths of the public debt variable up to 2020. The results suggest that only an aggressive growth policy could permit the country to achieve debt sustainability. The results are expected to have important implications to policy makers for designing effective macroeconomic policy in terms of achieving sustainable levels of public debt.
    Keywords: primary balance, public debt, structural modeling, Greece
    JEL: E62 C51 C30 E27
    Date: 2013–05
  19. By: Richard M. Bird (University of Toronto)
    Abstract: Fifty years of experience tells us that the right game for tax researchers and outside agencies interested in fostering better sustainable tax systems in developing countries researchers is not the short-term political game in which policy decisions are made. The right game for them is instead the long-term one of building up the institutional capacity both within and outside governments to articulate relevant ideas for change, to collect and analyze relevant data, and of course to assess and criticize the effects of such changes as are made. Tax researchers in developing countries can and should play an active role in all these activities. To do so, however, they often need considerably more and more sustained support from academic institutions abroad as well as from international agencies than is now available. Such long-term ‘institution-building’ activities are seldom immediately rewarding. They appear at present to be out of fashion with international agencies concerned with development, where most efforts at present seem to focus on designing and implementing ever more rigorous ‘benchmarking’ schemes. Nonetheless, the long-term institution-building approach seems still to provide the most useful way in which foreigners may perhaps be able to assist in the formidable and on-going task of achieving more efficient, equitable, effective, and sustainable tax systems in developing countries.
    Date: 2013–04–07

This nep-pbe issue is ©2013 by Keunjae Lee. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.