nep-pbe New Economics Papers
on Public Economics
Issue of 2013‒08‒05
seventeen papers chosen by
Keunjae Lee
Pusan National University

  1. Economic Growth, Tax Evasion and Tax Monitoring Expenses: An Empirical Analysis in OECD Countries By Konstantinos Chatzimichael; Pantelis Kalaitzidakis; Vangelis Tzouvelekas
  2. Redistribution and Tax Evasion: an Asymmetric Information Approach By Silvia Platoni; Francesco Timpano
  3. Tax Me If You Can! Optimal Nonlinear Income Tax between Competing Governments By LEHMANN, Etienne; Simula, Laurent; TRANNOY, Alain
  4. Taxing Hard-to-Tax Markets By Marcelo Arbex; Enlinson Mattos; Laudo M. Ogura
  5. The impact of taxation on international assignment decisions: A principal-agent approach By Martini, Jan Thomas; Niemann, Rainer
  6. Should Oklahoma Be More Like Texas? A Taxing Decision By Rickman, Dan
  7. Predation, Taxation, Investment and Violence: Evidence from the Philippines By Eli Berman; Joseph Felter; Ethan Kapstein; Erin Troland
  8. How do Different Government Spending Categories Impact on Private Consumption and the Real Exchange Rate? By Baldi, Guido
  9. Evaluating the Evidence on Income Inequality in Australia in the 2000s By Roger Wilkins
  10. Fiscal multipliers in a small euro area economy: How big can they get in crisis times? By Gabriela Lopes de Castro; Ricardo Mourinho Félix; Paulo Júlio; José R. Maria
  12. Twin Deficits: An Alternative Framework from General Equilibrium Perspective with U.S. Results By Tuck Cheong Tang
  13. Corruption, Accountability and Efficiency. An Application to Municipal Solid Waste Services By Graziano Abrate; Federico Boffa; Fabrizio Erbetta; Davide Vannoni
  14. Fiscal Policy Institutions and Economic Transition in North Africa By Baldi, Guido
  15. Are state governments roadblocks to federal stimulus? Evidence from highway grants in the 2009 Recovery Act By Sylvain Leduc; Daniel Wilson
  16. The politics of public debt: Neoliberalism, capitalist development, and the restructuring of the state By Streeck, Wolfgang
  17. Public Spending on Health and Childhood Mortality in India By Kaushal, Kaushalendra Kumar; F Ram, Faujdar Ram; Abhishek, Abhishek Singh

  1. By: Konstantinos Chatzimichael (Dept of Economics, University of Crete, Greece); Pantelis Kalaitzidakis (Dept of Economics, University of Crete, Greece); Vangelis Tzouvelekas (Department of Economics, University of Crete, Greece)
    Abstract: Using Kalaitzidakis and Kalyvitis (2004) approach, we extent Roubini and Sala-i-Martin (1993) endogenous growth model to analyse empirically the relationship between economic growth, announced tax rate and tax monitoring expenses using data from OECD countries during the 1999-2007 period. Our results indicate that high announced tax rates above the elasticity of public capital and excess expenses on tax auditing as means of reducing tax evasion are not effective deepening rather recession.
    Keywords: announced tax rate, tax monitoring, tax evasion, GDP growth
    JEL: H21 H26 H54
    Date: 2013–06–29
  2. By: Silvia Platoni (DISCE, Università Cattolica); Francesco Timpano (DISCE, Università Cattolica)
    Abstract: The article studies the optimal redistribution system, achieved by direct taxation, indirect taxation and public provision of the pseudo-necessary good, when individuals, who differ in productivity, can take hidden actions (tax evasion by moral hazard) and have hidden information (tax evasion by adverse selection). It proves that any Government willing to effectively reallocate resources among individuals has to undertake measures against tax evasion, i.e. to establish tax evasion fines.
    Keywords: Redistribution; Tax Evasion; Asymmetric Information.
    JEL: H23 H42 H26 D82
    Date: 2013–07
  3. By: LEHMANN, Etienne (CRED (TEPP), Universit´e Panth´eon-Assas & CREST); Simula, Laurent (Uppsala Center for Fiscal Studies); TRANNOY, Alain (Aix-Marseille Universit´e (Aix-Marseille School of Economics), CNRS & EHESS)
    Abstract: We investigate how the optimal nonlinear income tax schedule is modified when taxpayers can evade taxation by emigrating. We consider two symmetric countries with Maximin governments. Workers choose their labor supply along the intensive margin. The skill distribution is continuous, and, for each skill level, the distribution of migration cost is also continuous. We show that optimal marginal tax rates are nonnegative at the symmetric Nash equilibrium when the semi-elasticity of migration is decreasing in the skill level. When the semi-elasticity of migration is increasing in the skill level, either optimal marginal tax rates are positive everywhere or they are positive for the lower part of the skill distribution and then negative. Numerical simulations are calibrated using plausible values of the semi-elasticity of migration for top income earners. We show that the shape of optimal tax schedule varies significantly, depending on the profile of the semi-elasticity of migration over the entire skill distribution - a profile over which we lack empirical evidence.
    Keywords: Optimal Income Tax; Income Tax competition; Migration; Labor Mobility; Nash-Equilibrium Tax Schedules
    JEL: D82 H21 H87
    Date: 2013–07–24
  4. By: Marcelo Arbex (Department of Economics, University of Windsor); Enlinson Mattos (São Paulo School of Economics, Getulio Vargas Foundation); Laudo M. Ogura (Economics Department, Grand Valley State University)
    Abstract: Tax enforcement costs constrain the government?s ability to observe economic transactions, giving rise to hard-to-tax (HTT) markets. In these markets transactions are untaxed and consumers are better off than in taxed markets. This paper studies a novel approach to combat evasion in HTT markets: consumer auditing, which rewards consumers for requesting transaction receipts. We develop a Hotelling-type spatial model of sales taxation to analyze the welfare and distributional effects of the implementation of this policy. We find that consumer auditing allows for a lower tax rate and greater provision of the public good in the economy. We show that this policy not only can enhance welfare, but also equalize utilities of consumers across markets.
    Keywords: taxation; hard-to-tax; tax evasion.
    JEL: H1 H21 H26
    Date: 2013–08
  5. By: Martini, Jan Thomas; Niemann, Rainer
    Abstract: In many industries like management consulting, IT consulting, or construction highly qualified employees, i.e., experts or executive managers, have to be assigned to temporary projects. In firms with many employees and various different projects, this assignment decision involves a complex optimization procedure. Obviously, the employees' productivities in the respective projects are crucial for the employer's optimal assignment decision, but assignment can also be affected by risk-incentive trade-offs. Moreover, taxation can alter the assignment decision, especially if employees are sent abroad as expatriates so that international tax law has to be taken into account. To address these issues simultaneously, we combine a human resource assignment problem with a principal-agent problem of the LEN type. Both wage taxation at the agents' level and corporate taxation at the principal's level are integrated. We show that national tax rules aswell as the methods for avoiding double taxation and the agents' tax characteristics are important determinants for international assignment decisions. The effects of tax rate variations can be ambiguous and depend on whether the exemption method or the credit method are applied, in particular if agents make differing choices of residence. From a tax policy perspective, the exemption method should be preferred because the tax effects are more transparent than under the credit method. Special deductions for incoming expatriates have only little effects on the optimal assignment decision. --
    Keywords: Assignment,Expatriates,International taxation,Principal-agent model,LEN model
    JEL: H24 H25 M41
    Date: 2013
  6. By: Rickman, Dan
    Abstract: This paper considers whether Texas should serve as the economic policy model for Oklahoma, particularly in terms of reducing or eliminating the state income tax. I compare Oklahoma’s recent economic performance to that of Texas and other adjacent states. Comparisons are made at both the state and county levels, for different time periods, and for several economic indicators. County level regression analysis, of all counties, and separately for only border counties, both explicitly and implicitly controls for potential non-policy growth influences. Overall, I conclude that there is not sufficient evidence to warrant Oklahoma emulating Texas economic policies.
    Keywords: state income tax, Oklahoma, Texas
    JEL: H30 R51 R58
    Date: 2013–07–21
  7. By: Eli Berman; Joseph Felter; Ethan Kapstein; Erin Troland
    Abstract: This paper explores the relationship between investment and political violence through several possible mechanisms. Investment as a predictor of future violence implies that low private sector investment today provides a robust indicator of high violence tomorrow. “Rent-capture” or predation asserts that investment increases violence by motivating extortion by insurgents. A “hearts and minds” approach links investment to political violence in two possible ways: through an opportunity cost mechanism by which improved economic conditions raise the cost of rebel recruitment; and through a psychological “gratitude” effect which reduces cooperation of noncombatants with rebels. Finally, tax capture implies that government will increase coercive enforcement in an attempt to control areas where increased investment increases tax revenue. We lay out these mechanisms in a framework with strategic interaction between rebels, communities, government and firms within an information-centric or “hearts and minds” counterinsurgency model. We test these mechanisms in the context of the Philippines in the first decade of this century, using information on violent incidents initiated by both rebels and government and new data on industrial building permits, an indicator of economic investment. Increases in investment are positively correlated with both rebel and government initiated violence. In the context of our theory that constitutes unequivocal evidence of predation, is consistent with tax capture, and weighs against predictive investment, opportunity costs or gratitude being a dominant effect.
    JEL: F52 F54 H22 H25 H41 H56 K42 N47 O1
    Date: 2013–07
  8. By: Baldi, Guido
    Abstract: The macroeconomic literature has found puzzling effects of government spending on private consumption, the real exchange rate and the terms of trade. Some authors find that private consumption increases after a shock to government spending, while others report a decrease. The same ambiguity can be found for the real exchange rate and the terms of trade. Our paper offers an intuitive explanation for these divergent results by distinguishing between productive and unproductive government spending. We show within a calibrated two-sector DSGE model that the two government spending categories have different effects on private consumption, the real exchange rate and the terms of trade. Hence, our findings suggest that the composition of government spending matters not only for long-run growth, but also impacts on the short-run.
    Keywords: Fiscal Policy, Productive Public Capital, Government Spending, Open Economy Macroeconomics
    JEL: E62 F41 H11
    Date: 2013–07
  9. By: Roger Wilkins (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)
    Abstract: Published ABS data from the Survey of Income and Housing (SIH) show a substantial increase in income inequality between 2001 and 2010. However, almost all of the increase occurred over a period when changes in survey methodology and income concept were occurring. I document these changes, present results of analysis of the SIH unit record data, and present independent evidence on income inequality trends using the HILDA Survey, tax records and National Accounts. I conclude that the SIH overstates the growth in income inequality, even when the income variable examined is notionally consistently defined across surveys. The extent of overstatement is uncertain, however, reflecting ambiguity about the nature and extent of changes to the distribution of household market income.
    Keywords: Income inequality, household surveys, decomposition
    JEL: D3
    Date: 2013–07
  10. By: Gabriela Lopes de Castro; Ricardo Mourinho Félix; Paulo Júlio; José R. Maria
    Abstract: Using PESSOA, a small open economy DSGE model, we analyze the size of short-runfiscal multipliers associated with fiscal consolidation under two distinct alternative scenarios, viz "normal times" and "crisis times." The crisis times scenario embodies a higher share of hand-to-mouth households, stronger nominal rigidities, and more severe financial frictions, which purportedly better refflect the underlying economic environment during the "Great Recession." Results show that fiscal multipliers can be twice as large in crisis times, being approximately 2 for a government consumptionbased fiscal consolidation in the first year. One-year ahead effects are also substantially larger if this type of consolidation is performed in crisis times. Revenue-based fiscal consolidations are also more recessive in crisis times, though the differences against normal times are less pronounced.
    JEL: E62 F41 H62
    Date: 2013
  11. By: Liyanage Devangi H. Perera; Grace H.Y. Lee
    Abstract: While economic growth has been cited as one of the main factors behind the reduction in absolute poverty, the persisting problem of poverty in developing countries has raised doubts about the efficacy of economic growth in its reduction. Recent evidence revealed that growth in Asia has been accompanied by an increase in relative poverty, or income inequality. High income inequality can slow the rate of poverty reduction, and create social unrest and anxiety. The quality of institutions may also influence the extent to which economic growth reduces poverty. This study examines the effects of economic growth and institutional quality on poverty and income inequality in nine developing countries of Asia for the period 1985-2009. The System Generalized Method of Moments (GMM) estimation method is employed to estimate the equations. While economic growth does not appear to have an effect on income inequality, the results confirm that such growth leads to poverty reduction. Although improvements in government stability and law and order are found to reduce poverty, improvements in the level of corruption, democratic accountability, and bureaucratic quality appear to increase poverty levels. Similarly, the results also show that improvements in corruption, democratic accountability, and bureaucratic quality are associated with a worsening of the income distribution. This study recommends that measures taken to improve the level of institutional quality in developing countries of East and South Asia should address the problems of poverty and income distribution, while adopting policies to support informal sector workers who may be affected by institutional reform.
    Keywords: income inequality, poverty, growth, institution quality
    JEL: D3 I3 O1
    Date: 2013–07
  12. By: Tuck Cheong Tang
    Abstract: This study proposes an alternative theoretical framework for testing twin deficits hypothesis from the general equilibrium perspective (income-expenditure equilibrium) that takes both the behavioural variables - saving and investment into consideration. Empirically, the cointegration tests show U.S. fiscal balance, current account balance, real GDP and interest rates (short- and long-run) are co-moved over the periods 1970Q2 - 2011Q4. The real income and interest rates from the saving and investment channels, are important variables in explaining the U.S. current account deficit. The empirical results validate the twin deficits hypothesis in U.S. Some policy implications have been drawn – “fiscal cliffâ€. This study also suggests the profolio balance approach from the general equilibrium perspective for future twin deficits analysis.
    Keywords: Budget deficit; Current account balance; General equilibrium perspective; U.S.
    JEL: F32
    Date: 2013–07
  13. By: Graziano Abrate (Department of Business Management and Environment, University of Eastern Piedmont); Federico Boffa (Department of Law and Economics, University of Macerata); Fabrizio Erbetta (Department of Business Management and Environment, University of Eastern Piedmont); Davide Vannoni (Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy)
    Abstract: This paper explores the link between accountability, corruption and efficiency in the context of a career concern model where politically connected local monopolies are in charge of the provision of a local public service. We find that both corruption and a low degree of accountability induce managers to reduce effort levels, thereby contributing to drive down efficiency. Our predictions are tested using data on solid waste management services provided by a large sample of Italian municipalities. The results of the estimation of a stochastic cost frontier model provide robust evidence that high corruption levels and low degrees of accountability substantially increase cost inefficiency. Finally, we show that the negative impact of corruption is weaker for municipalities ruled by left-wing parties, while the positive impact of accountability is stronger if the refuse collection service is managed by limited liability companies.
    Keywords: corruption, accountability efficiency, solid waste.
    JEL: D24 D72 D73 L25 Q53
    Date: 2013–07
  14. By: Baldi, Guido
    Abstract: Sound public finances are crucial for ensuring a successful transformation of transition countries to democratic market economies. The transition countries in North Africa are an important example for this. These countries experienced increasing budget deficits in 2011 and 2012. Public finances will probably remain a serious issue in the coming years due to political uncertainties, distributional struggles and weak world economic growth. What kind of institutional rules for the budget process are suitable to limiting the size of these potential budget deficits in a new democracy? In this paper, I argue that numerical fiscal restraints are not the right tool to reduce budget deficits in a new and fragile democracy. Instead, I hold the view that a strong finance minister and a transparent budget process are much more important than numerical fiscal rules. Assigning prerogatives to the finance minister allows limiting the political deficit bias that may arise due to distributional struggles over government spending and revenue. History has shown that numerical policy rules on their own do not lead to desirable outcomes if they are not supported and embedded by the main political parties. If there are weak institutions, fiscal policy rules might even have a perverse effect when politicians – in trying to comply with the rules – use optimistic forecasts and creative accounting, which would lead to a deterioration of the actual budget situation. Therefore, transition countries should first focus on improving the transparency and accountability of the budget process.
    Keywords: Fiscal Policy Institutions, Numerical Rules, Constitutional Economics
    JEL: E61 E62 H60
    Date: 2013–07
  15. By: Sylvain Leduc; Daniel Wilson
    Abstract: We examine how state governments adjusted spending in response to the large temporary increase in federal grants under the 2009 American Recovery and Reinvestment Act (ARRA). We concentrate our analysis on ARRA highway grants, which were especially likely to crowd out states’ own highway funding given the lack of matching requirements and according to past research on federal highway grants. The mechanism used to apportion ARRA highway grants to states allows us to isolate exogenous changes in these grants. In addition, we show that the original 1944 proposed layout of the interstate highway system strongly predicts the cross-state distribution of the ARRA highway grants and we use this layout as an alternative instrument. We find that states increased highway spending in 2010 nearly dollar-for-dollar with their apportioned grants, implying little if any crowd-out. Moreover, we find that over the entire 2009-2011 period, ARRA highway grants crowded in highway spending, resulting in roughly two dollars in spending for each dollar in grants. We show that our results are not unique to the ARRA period, but rather are consistent with a strong effect from grants dating back at least to the early 1980s. This latter result contrasts with earlier research (Knight 2002) and we document the sources of the difference.
    Keywords: Public investments ; Infrastructure (Economics) ; Roads ; State finance ; American Recovery and Reinvestment Act of 2009
    Date: 2013
  16. By: Streeck, Wolfgang
    Abstract: Rising public debt has been widespread in democratic-capitalist political economies since the 1970s, generally accompanied among other things by weak economic growth, rising unemployment, increasing inequality, growing tax resistance, and declining political participation. Following an initial period of fiscal consolidation in the 1990s, public debt took an unprecedented leap in response to the Great Recession. Renewed consolidation efforts, under the pressure of financial markets, point to a general decline in state expenditure, particularly discretionary and investment expenditure, and of extensive retrenchment and privatization of state functions. -- Steigende Staatsverschuldung ist in demokratisch-kapitalistischen Ländern seit den 1970er-Jahren verbreitet. Üblicherweise ist sie verbunden mit niedrigem Wirtschaftswachstum, steigender Arbeitslosigkeit, wachsender Ungleichheit, zunehmender Steuerfeindlichkeit sowie einem Rückgang politischer Beteiligung. Auf eine Phase anfänglicher fiskalischer Konsolidierung in den 1990er-Jahren folgte, in Reaktion auf die Große Rezession, ein sprunghafter Anstieg der öffentlichen Schulden. Die unter dem Druck der Finanzmärkte wieder aufgenommenen Konsolidierungsbemühungen lassen eine generelle Kürzung der Staatsausgaben - vor allem solcher diskretionärer und investiver Art - und darüber hinaus eine weitgehende Beschneidung und Privatisierung von Staatsaufgaben erwarten.
    Date: 2013
  17. By: Kaushal, Kaushalendra Kumar; F Ram, Faujdar Ram; Abhishek, Abhishek Singh
    Abstract: The present study attempts to investigate the association between public spending on health and childhood mortality in India; using time-series cross-sectional data from various government sources for the period 1985-2009. Infant and child (age 1 to 4 years) mortality rates were used as the indicators for childhood mortality. Ordinary least squares, generalized least squares and fixed effects regression models were used to investigate the association between public spending on health and childhood mortality. The findings suggest insignificant association between public spending on health and childhood mortality both at the country level and for the EAG states. On the contrary, per capita state income and female literacy were significantly associated with improved childhood survival. Percentage of the population living below the poverty line was significantly associated with infant and child mortality only in the EAG states. The findings call for a number of other measures along with increased public spending on health to reduce infant and child mortality in India.
    Keywords: Public spending, fixed effect, India, childhood
    JEL: H51 I18
    Date: 2013–01–09

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