nep-pbe New Economics Papers
on Public Economics
Issue of 2013‒10‒18
thirty papers chosen by
Keunjae Lee
Pusan National University

  1. The impact of tax incentives to stimulate investment in South Africa By Estian Calitz; Sally Wallace; Le Roux Burrows
  2. Fiscal dynamics in a dollarized, oil-exporting country: Ecuador By María Lorena Marí Del Cristo; Marta Gómez-Puig
  3. Taxation of Domestic Dividend Income and Foreign Investment Holdings By Mishra, Anil V; Ratti, Ronald A
  4. Do the Laws of Tax Incidence Hold? Point of Collection and the Pass-Through of State Diesel Taxes By Kopczuk, Wojciech; Marion, Justin; Muehlegger, Erich; Slemrod, Joel
  5. Social Spending, Taxes and Income Redistribution in Uruguay By Marisa Bucheli; Nora Lustig; Máximo Rossi; Florencia Amábile
  6. The optimal distribution of the tax burden over the business cycle By Konstantinos Angelopoulos; Stylianos Asimakopoulos; James Malley
  7. When You Know Your Neighbor Pays Taxes: Information, Peer Effects, and Tax Compliance By James Alm; Kim M. Bloomquist; Michael McKee
  8. Taxes and the choice of organizational form by entrepreneurs in Sweden By Edmark, Karin; Gordon, Roger
  9. Corporate Governance, Incentives, and Tax Avoidance By Armstrong, Christopher S.; Blouin, Jennifer L.; Jagolinzer, Alan D.; Larcker, David F.
  10. Efficient tax reporting: The effects of taxpayer information services By Christian A. Vossler; Michael McKee
  11. Fiscal Multipliers in Good Times and Bad Times By Faik Koray; K. Peren Arin; Nicola Spagnolo
  12. The Incidence of Non-Linear Consumption Taxes By Clément Carbonnier
  13. Taxpayer confusion over predictable tax liability changes: evidence from the Child Tax Credit By Naomi E. Feldman; Peter Katuscak; Laura Kawano
  14. Beyond the Labour Income Tax Wedge: The Unemployment-Reducing Effect of Tax Progressivity By Etienne Lehmann; Claudio Lucifora; Simone Moriconi; Bruno Van Der Linden
  15. Tax Benefits for Graduate Education: Incentives for Whom? By Bednar, Steven; Gicheva, Dora
  16. Investor Valuations of Japan's Adoption of a Territorial Tax Regime: Quantifying the Direct and Competitive Effects of International Tax Reform By Bradley, Sebastien; Dauchy, Estelle; Hasegawa, Makoto
  17. Explaining Rising Income Inequality in Germany, 1991-2010 By Kai Daniel Schmid; Ulrike Stein
  18. Asset Prices, Business Cycles, and Markov-Perfect Fiscal Policy when Agents are Risk-Sensitive By Richard Dennis
  19. The role of information in tax compliance: Evidence from a natural field experiment By Tuomas Kosonen; Olli Ropponen
  20. Rethinking the political economy of fiscal consolidation in two recessions in Ireland By Niamh Hardiman
  21. On optimal emission control – Taxes, substitution and business cycles By Lintunen , Jussi; Vilmi, Lauri
  22. On Refunding of Emission Taxes and Technology Diffusion By Coria, Jessica; Mohlin, Kristina
  23. Political Cycles in Public Expenditure: Butter vs Guns By Bove, Vincenzo; Efthyvoulou, Georgios
  24. Effects of Fiscal Policy in a Small Open Transition Economy: Case of Croatia By Milan Deskar-Škrbić; Hrvoje Šimović; Tomislav Ćorić
  25. Housing transfer taxes and household mobility: Distortion on the housing or labour market? By Teemu Lyytikäinen; Hilber; A. L. Christian
  26. Learning and the Size of the Government Spending Multiplier. By E. QUAGHEBEUR
  27. The relevance of commuting zones for regional spending efficiency By António Afonso; Ana Venâncio
  28. Religious Identity and the Provision of Public Goods: Evidence from the Indian Princely States. By Latika Chaudhary; Jared Rubin
  29. More haircut after VAT cut? On the efficiency of service sector consumption taxes By Tuomas Kosonen
  30. Fiscal Imbalances and Current Account Adjustments in the European Transition Economies By Mirdala, Rajmund

  1. By: Estian Calitz (Department of Economics, University of Stellenbosch); Sally Wallace (Department of Economics, Georgia State University); Le Roux Burrows (Department of Economics, University of Stellenbosch)
    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 analyse 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. A classification of different tax incentives is provided, with reference to their acceptability in the economic literature and with an indication of their occurrence in South Africa. The cost of tax incentives to manufacturing in South Africa is estimated by sector of economic activity, indicating a sizeable drain on the national budget, and a multiplier analysis of current tax incentives is undertaken.
    Keywords: South African tax incentives, Investment incentives, tax policy, tax incentives, tax expenditure
    JEL: H2 H25 H3
    Date: 2013
  2. By: María Lorena Marí Del Cristo (Economic Theory Department. Universitat de Barcelona); Marta Gómez-Puig (Economic Theory Department. Universitat de Barcelona and Risk Center-IREA)
    Abstract: This paper examines the relationship between fiscal variables and economic activity in Ecuador. We use a macro-level dataset covering twelve years of full dollarization to explore the link between government spending, oil revenues, non-oil tax revenues and the economic activity index. The cointegrated VAR approach is adopted to identify the permanent and transitory shocks that affect both fiscal and macroeconomic variables. We identify two forces that push the fiscal system out of equilibrium: namely, economic activity and fiscal spending. The tax revenues variable is purely adjusting, consistent with the tax smoothing theory (Barro, 1979), but risking fiscal discipline. In a dollarized country, since there is no possibility of earning the “inflation tax” or printing new money, taxes should not be the adjusting forces, but the pushing ones. Our results suggest that Ecuador should recover control of its monetary policy to enable and promote both economic and tax diversification in order to find a substitute for oil exports, the main source of government revenues.
    Keywords: Cointegrated VAR, fiscal sustainability, fiscal shocks, debt, Ecuador
    JEL: C32 E62 H60
    Date: 2013–09
  3. By: Mishra, Anil V; Ratti, Ronald A
    Abstract: In this paper it is argued that the heavier is domestic taxation of domestic dividend income, the more attractive is foreign investment to domestic agents. Dividend imputation schemes play an important role in this discussion. Dividend imputation eliminates the double taxation of domestic income, reduces the effective tax rate on domestic investment and makes investment in foreign securities less attractive. A fall of 10% in effective tax rate on domestic dividend income reduces foreign equity investment by about 5%. Domestic investors paid dividends under a dividend imputation system receive a credit for the tax paid at the company level and this reduces the effective tax rate. Cross-border equity investment is increased if tax credit rises for taxes paid overseas. Empirical analysis is based on bilateral investments among 23 mature economies over 2001-2011. Results are robust to consideration of the global financial crisis and the role of double taxation treaties.
    Keywords: Foreign equity investment; Domestic Dividend Taxes; Dividend Imputation Schemes
    JEL: F21 F30 G15
    Date: 2013–10–04
  4. By: Kopczuk, Wojciech (Columbia University); Marion, Justin (University of CA, Santa Cruz); Muehlegger, Erich (Harvard University); Slemrod, Joel (University of MI)
    Abstract: The canonical theory of taxation holds that the incidence of a tax is independent of the side of the market which is responsible for remitting the tax to the government. However, this prediction does not survive in certain circumstances, for example when the ability to evade taxes differs across economic agents. In this paper, we estimate in the context of state diesel fuel taxes how the incidence of a quantity tax depends on the point of tax collection, where the level of the supply chain responsible for remitting the tax varies across states and over time. Our results indicate that moving the point of tax collection from the retail station to higher in the supply chain substantially raises the pass-through of diesel taxes to the retail price. Furthermore, tax revenues respond positively to collecting taxes from the distributor or prime supplier rather than from the retailer, suggesting that evasion is the likely explanation for the incidence result.
    Date: 2013–09
  5. By: Marisa Bucheli (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República); Nora Lustig (Department of Economics, Stone Center for Latin American Studies and CIPR, Tulane University); Máximo Rossi (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República); Florencia Amábile (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República)
    Abstract: How much redistribution does Uruguay accomplish through social spending and taxes? How progressive are revenue collection and social spending? A standard fiscal incidence analysis shows that Uruguay achieves a nontrivial reduction in inequality and poverty when all taxes and transfers are combined. In comparison with other five countries in Latin America, it ranks first (poverty reduction) and second (inequality reduction), and first in terms of poverty reduction effectiveness and third in terms of overall (including transfers in kind) inequality reduction effectiveness. Direct taxes are progressive and indirect taxes are regressive. Social spending on direct transfers, contributory pensions, education and health is quite progressive in absolute terms except for tertiary education, which is almost neutral in relative terms
    Keywords: poverty, inequality, Uruguay, social spending, taxes
    JEL: I3 H2 H5
    Date: 2012–09
  6. By: Konstantinos Angelopoulos; Stylianos Asimakopoulos; James Malley
    Abstract: This paper analyses optimal income taxes over the business cycle under a balanced-budget restriction, for low, middle and high income agents. A model incorporating capital-skill complementarity in pro- duction and differential access to capital and labour markets is de- veloped to capture the cyclical characteristics of the US economy, as well as the empirical observations on wage (skill premium) and wealth inequality. We fi…nd that the tax rate for high income agents is opti- mally the least volatile and the tax rate for low income agents the least countercyclical. In contrast, the path of optimal taxes for the middle income group is found to be the most volatile and counter-cyclical. We further fi…nd that the optimal response to output-enhancing capi- tal equipment technology and spending cuts is to increase the progres- sivity of income taxes. Finally, in response to positive TFP shocks, taxation becomes more progressive after about two years.
    Keywords: optimal taxation, business cycle, skill premium, income distribution
    JEL: E24 E32 E62
    Date: 2013–10
  7. By: James Alm; Kim M. Bloomquist; Michael McKee
    Abstract: In this paper, we argue that individuals are affected in their compliance behavior by the behavior of their “neighbors”, or those about whom they may have information, whom they may know, or with whom they may interact on a regular basis. Individuals seem more likely to file and to report their taxes when they believe that other individuals are also filing and reporting their taxes; conversely, when individuals believe that others are cheating on their taxes, they may well become cheaters themselves. We use experimental methods to test the role of such information about peer effects on compliance behavior. In one setting, we inform individuals about the frequency that their neighbors submit a tax return. In a second setting, we inform them about the number of their neighbors who are audited, together with the penalties that they pay. In both cases, we examine the impact of information on filing behavior and also on subsequent reporting behavior. We find that providing information on whether one’s neighbors are filing returns and/or reporting income has a statistically significant and economically large impact on individual filing and reporting decisions. However, this “neighbor” information does not always improve compliance, depending on the exact content of the information. Key Words: Tax evasion; Tax compliance; Behavioral economics; Experimental economics
    JEL: H26 C91
    Date: 2013
  8. By: Edmark, Karin (Research Institute of Industrial Economics); Gordon, Roger (University of California)
    Abstract: This paper estimates the role of both tax and non-tax determinants in the choice in Sweden to be a closely-held corporation vs. a proprietorship, using individual data for 2004 to 2008 on owners of closely-held businesses. While lower-income individuals face relatively neutral incentives, higher income individuals face strong tax incentives to be corporate. The data suggest a relatively strong correlation between these tax incentives and the likelihood that a firm is corporate. Many conventional non-tax determinants are confirmed in the data as well.
    Keywords: self-employment; entrepreneurship; taxation of closely-held businesses; business organizational form
    JEL: G32 G38 H25
    Date: 2013–10–02
  9. By: Armstrong, Christopher S. (University of PA); Blouin, Jennifer L. (University of PA); Jagolinzer, Alan D. (University of CO); Larcker, David F. (Stanford University)
    Abstract: This paper examines the link between corporate governance, managerial incentives, and tax avoidance. Similar to other investment opportunities, unresolved agency problems may cause managers to over- or under-invest in tax avoidance relative to the preferences of shareholders. Using quantile regression, we find that the impact of corporate governance on tax avoidance is most pronounced in the upper and lower tails of the tax avoidance distribution, but not at the mean or median of this distribution. Specifically, we find a positive relation between the financial sophistication and independence of boards and tax avoidance in the upper tail of the tax avoidance distribution, but a negative relation in the lower tail of the tax avoidance distribution. However, we find no relation between corporate governance and tax avoidance and either the conditional mean or median of the tax avoidance distribution. These results suggest that corporate governance tends to decrease extremely high levels of tax avoidance and increase extremely low levels of tax avoidance, which may be symptomatic of over- and under-investment, respectively, by managers. Our results also suggest that inferences about these relations that are drawn from the conditional mean and median and unlikely to be representative across the entire tax avoidance distribution.
    JEL: G34 H25 H26 K34 M41
    Date: 2013–04
  10. By: Christian A. Vossler; Michael McKee
    Abstract: As policy makers recognize the complexity of the tax system can result in some “evasion” being due to errors, there has been increasing focus on the role of taxpayer services as a tool in the enforcement regime. Such programs can improve the image of the tax agency but the critical issue is the effect on tax reporting. While the earlier focus has been on tax evasion, tax overreporting is also an issue since it leads to inefficient resource allocation. Thus, the present paper focusses on the effectiveness of taxpayer service programs in enhancing tax reporting. Data are collected on tax reporting decisions via laboratory experiments designed to implement the tax reporting task. To investigate the effects of taxpayer services, we “complicate” these compliance decisions of subjects, and then provide “services” from the “tax administration” that allow subjects to compute more easily their tax liabilities. Briefly, we find that our subjects are less likely to file when tax liability is uncertain but the provision of information offsets this effect; it appears that simply providing the service, even an imperfect service, increases the propensity to file and the accuracy of the filing. Key Words: tax information services; tax reporting; behavioral economics; experimental economics
    JEL: H2 H26 C91
    Date: 2013
  11. By: Faik Koray; K. Peren Arin; Nicola Spagnolo
    Abstract: This paper estimates the magnitudes of government spending and tax multipliers within a regime-switching framework for the U.S economy during the period 1949:1- 2006:4. Our results show that the magnitudes of spending multipliers are larger during periods of low economic activity, while the magnitudes of tax multipliers are larger during periods of high economic activity. We also show that the magnitudes of fiscal multipliers got smaller for episodes of low growth, while they got larger for episodes of high growth in the post 1980 period.
  12. By: Clément Carbonnier (THEMA - Théorie économique, modélisation et applications - CNRS : UMR8184 - Université de Cergy Pontoise)
    Abstract: The present article generalyses economic litterature on consumption tax incidence to general forms of consumption taxes. Previous studies were limited to the cases of per unit and ad valorem taxes. Three main contributions are provided. From a methodological point of view, the elasticity of the tax function is introduced as a new parameter to take the shape of general consumption tax schedules into account in different models of imperfect competition in tractable manner. From a theoretical point of view, existing results on the difference of incidence of ad valorem and per unit consumption taxes are generalized to non-linear consumption taxes: the larger the elasticity of the tax function the weaker the share of the consumption tax beared by consumers. From an applied public economic point of view, it is shown how the regulator may put downwards prices on very uncompetitive markets by increasing the elasticity of the consumption tax on a targeted window of producer prices.
    Keywords: Consumption taxes; Imperfect Competition; Tax Incidence; Efficiency.
    Date: 2013–04–06
  13. By: Naomi E. Feldman; Peter Katuscak; Laura Kawano
    Abstract: We develop a model of how taxpayers update beliefs over their tax rates when they encounter a non-salient tax liability change. We test the model's hypotheses using the loss of the Child Tax Credit when a child turns 17. Because this tax liability change is lump-sum and predictable, there should be no reaction in labor income if taxpayers are fully informed. Using this age discontinuity, we find, however, that losing the credit reduces household labor income. This finding suggests that taxpayers misperceive the source of tax liability changes, leading to under- or over-reactions to changes in marginal tax rates.
    Date: 2013
  14. By: Etienne Lehmann (TEPP - Travail, Emploi et Politiques Publiques - CNRS : FR3435 - Université Paris-Est Marne-la-Vallée (UPEMLV), CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, ERMES - Equipe de recherche sur les marches, l'emploi et la simulation - CNRS : UMR7017 - Université Paris II - Panthéon-Assas); Claudio Lucifora (Università Cattolica di Milano - Università Cattolica di Milano); Simone Moriconi (Università Cattolica di Milano - Università Cattolica di Milano); Bruno Van Der Linden (ACE - Applied and Computational Electromagnetics - Université de Liège - Institut Montefiore - Département d'Electricité, Electronique et Informatique (Liège) - Fonds de la Recherche Scientifique [FNRS])
    Abstract: This paper argues that, for a given overall level of labour income taxation, a more progressive tax schedule reduces the unemployment rate and increases the employment rate. From a theoretical point of view, higher progressivity induces a wage-moderation e ect and increases overall employment since employment of low-paid workers is more responsive. We test these theoretical predictions on a panel of 21 OECD countries over 1998-2008. Controlling for the burden of taxation at the average wage, we show that a more progressive taxation reduces the unemployment rate and increases the employment rate. These ndings are con rmed when we account for the potential endogeneity of both average taxation and progressivity. Overall our results suggest that policy-makers should not only focus on the detrimental e ects of tax progressivity on in-work e ort.
    Keywords: wage moderation; employment; taxation
    Date: 2013–07–15
  15. By: Bednar, Steven (Elon University); Gicheva, Dora (University of North Carolina at Greensboro, Department of Economics)
    Abstract: Numerous studies have examined the enrollment responses of traditional undergraduate students to the introduction of government-provided tuition subsidies, but far less attention has been devoted to the elasticity of demand for graduate education. This paper examines how the tax code and government education policies affect graduate enrollment and persistence rates along with the ways in which students fund their graduate education. Our empirical methodology is based on exogenous variations in the availability of an income tax exemption for employer- provided tuition assistance for graduate courses. We find that graduate attendance among full-time workers age 24-30 is higher when the tax exemption is available, mostly due to higher persistence in public universities and vocational course work. The use of employer aid for individuals enrolled in full-time and public part-time graduate programs also increases. We present some evidence that universities may adjust tuition to capture part of the incidence.
    Keywords: Educational Finance; Tax Code; Graduate Education; Employer- Provided Tuition Subsidies
    JEL: H52 I22 I28 J32
    Date: 2013–10–07
  16. By: Bradley, Sebastien (Drexel University); Dauchy, Estelle (New Economics School); Hasegawa, Makoto (National Graduate Institute for Policy Studies)
    Abstract: Globalization of firm operations has brought the issue of multinational taxation to the forefront of tax reform debates worldwide, with countries paying increasingly close attention to tax developments elsewhere around the world. Using an event study methodology that emphasizes specific firm attributes, we examine investor reactions in both the Japanese and U.S. stock markets to nine events leading up to the enactment of the 2009 Japanese dividend exemption in order to measure the perceived gains in short- and long-term after-tax profitability resulting from this reform. We thus aim to provide a comprehensive evaluation of the full range of direct tax savings effects and indirect effects associated with changes in firm competitiveness and international tax competition. Preliminary results suggest that investors capitalized gains of over 1 percent and 0.3 percent on the date that the bill was finally passed in the Japanese and U.S. markets, respectively, with further pronounced gains arising in the aftermath of select earlier events associated with the revelation of significant new information. Direct tax savings are responsible for a significant proportion of estimated abnormal returns across multiple event dates, even for U.S. firms where these effects are necessarily largely in anticipation of the adoption of a similar territorial regime. Strikingly, the largest beneficiaries of the Japanese reform appear to be firms with less elaborate tax minimization strategies or with no foreign operations altogether, whereas U.S. multinationals with subsidiaries located in tax havens appear more heavily favored.
    Keywords: territorial taxation; international tax reform; dividend exemption; tax competition; tax avoidance
    JEL: F23 H25 H32
    Date: 2013–08–01
  17. By: Kai Daniel Schmid; Ulrike Stein
    Abstract: In Germany, inequality of net equivalized income increased noticeably in the first half of the new millennium. We aim to identify the main drivers of this rise in income inequality since the early 1990s. We provide a broad overview of the circumstances under which inequality evolved, i.e. which changes in the German economy are most likely to provide an explanation for changes in income concentration. To explain the development of the distribution of net equivalized income we analyze changes in the distribution of market income as well as shifts in the effectiveness of public redistribution mechanisms. We find that cyclical and structural changes in the labor market, the increasing relevance of capital income as well as the decreasing effectiveness of the public mechanisms of income redistribution are the main explanatory factors for the development of income inequality. In addition to this, we discuss several issues that are of high relevance for the distribution of economic resources but are not directly covered in the analysis of net equivalized income. Most significantly, the design of the tax and social security contributions burden as well as the rising relevance of value-added taxes have exhibited negative redistributive effects for low income households.
    Keywords: Income Inequality, Redistribution, SOEP
    JEL: D31 I30 J30
    Date: 2013
  18. By: Richard Dennis
    Abstract: We study a business cycle model in which a benevolent fiscal authority must determine the optimal provision of government services, while lacking credibility, lump-sum taxes, and the ability to bond finance deficits. Households and the fiscal authority have risk sensitive preferences. We find that outcomes are affected importantly by the household’s risk sensitivity, but not by the fiscal authority’s. Further, while household risk-sensitivity induces a strong precautionary saving motive, which raises capital and lowers the return on assets, its effects on fluctuations and the business cycle are generally small, although more pronounced for negative shocks. Holding the stochastic steady state constant, increases in household risk-sensitivity lower the risk-free rate and raise the return on equity, increasing the equity premium. Finally, although risk-sensitivity has little effect on the provision of government services, it does cause the fiscal authority to lower the income tax rate. An additional contribution of this paper is to present a method for computing Markov-perfect equilibria in models where private agents and the government are risk-sensitive decision makers.
    Keywords: Asset prices, business cycles, risk-sensitivity, Markov-Perfect fiscal policy
    JEL: E63 C61
    Date: 2013–10
  19. By: Tuomas Kosonen; Olli Ropponen
    Abstract: It is challenging to distinguish the role of information in tax compliance from other factors affecting it. This paper utilizes a novel natural field experiment design to study the issue. In the experiment firms reporting their VAT were sent a letter asking them questions about their attitude towards the tax authority. The introductions to the questions provided candid information about VAT rules for a randomized treatment group, while a randomized control group was only asked questions without additional information. We observe the effects of the treatments directly from firm-level tax records. Providing information did reduce the noncompliance in tax reporting, which indicates that there were unintentional errors. The experimental design also allows us to study whether the difficulty and novelty of the tax code plays any role in tax compliance. The results indicate that tax reporting changes when new and easy information is provided.
    Keywords: tax compliance, information, field experiment
    JEL: C93 H26 H25
    Date: 2013–09–16
  20. By: Niamh Hardiman (School of Politics and International Relations, University College Dublin, UCD Geary Institute)
    Abstract: Ireland has been taken to be an exemplary case of successful growth-promoting fiscal retrenchment, not once but twice – first, in the fiscal consolidation undertaken in the late 1980s, which was taken as one of the classic original instances of ‘expansionary fiscal contraction’, and again now, in the context of meeting the fiscal deficit targets set by the current EC-ECB-IMF loan conditions. This paper argues that many of the apparent lessons drawn from Ireland’s experience turn out to be more complex and even misplaced upon closer inspection. Ireland was never an instance of ‘expansionary fiscal contraction’ in the sense in which it now understood, in the late 1980s; and the conditions that facilitated the restoration of growth at that time are no longer possible now.Firstly, the paper shows that standard methodologies for identifying the object of interest in fiscal consolidation misses out on what is really central, which is the ongoing politics of ‘fiscal effort’. Secondly, this approach challenges conventional ideas about the primacy of spending cuts over tax increases. Thirdly, Ireland’s fiscal stabilization in the earlier period depended on devaluation, international growth, and strong social pacts. None of these conditions is present in the ‘internal devaluation’ under way since 2008. Ireland has committed to fulfilling the terms of the EU-ECB-IMF loan programme, but there are few grounds for anticipating that this will of itself result in the resumption of growth. Fiscal adjustment efforts are much more painful without the growth-promoting contextual conditions that were present in the earlier period.
    Keywords: fiscal policy, fiscal consolidation, austerity, political parties, Ireland
    JEL: H24 H63
    Date: 2013–10–08
  21. By: Lintunen , Jussi (Finnish Forest Research Institute); Vilmi, Lauri (Bank of Finland, Monetary Policy and Research Department)
    Abstract: This paper studies the cyclical properties of optimal emission taxes and emissions using a real business cycle model with a stock pollutant. We derive conditions for the procyclicality of optimal emission tax and show that the tax is in typical conditions procyclical. The possibility of a countercyclical behavior of the emission tax increases if 1) the pollution is short-lived and the emission transfer into environmental damages rapidly 2) emissions are countercyclical, 3) marginal damages are strongly increasing and 4), in disutility case, the marginal utility of consumption increases with the increase in the intensity of the harmful environmental process. In the climate change context we show that the optimal carbon tax is procyclical irrespectively on the production technology. Instead, the technology is a key determinant of the cyclicality of the emissions. The optimal carbon tax correlates almost fully with the consumption and as a rule-of thumb, it could be indexed to the consumption level of the economy. The relative scale of tax deviations relative to the consumption deviations is determined by the inverse of the intertemporal elasticity of substitution. Comparison between the optimal emission tax and an optimally set constant emission tax shows that the constant tax leads to very slightly higher emissions but the general economic effects are next to negligible.
    Keywords: optimal emission tax; cyclical properties
    JEL: E32 Q54 Q58
    Date: 2013–10–09
  22. By: Coria, Jessica (Department of Economics, School of Business, Economics and Law, Göteborg University); Mohlin, Kristina (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: We analyze diffusion of an abatement technology in an imperfectly competitive industry under a standard emission tax compared to an emission tax which is refunded in proportion to output market share. The results indicate that refunding can speed up diffusion if firms do not strategically influence the size of the refund. If they do, it is ambiguous whether diffusion is slower or faster than under a non-refunded emission tax. Moreover, it is ambiguous whether refunding continues over time to provide larger incentives for technological upgrading than a non-refunded emission tax, since the effects of refunding dissipate as the overall industry becomes cleaner.
    Keywords: emisson tax; refund; abatement technolgy; technology diffusion; imperfect competition
    JEL: H23 O33 O38 Q52
    Date: 2013–10–09
  23. By: Bove, Vincenzo (University of Essex); Efthyvoulou, Georgios (University of Sheffield)
    Abstract: This paper investigates how the timing of elections and government ideological motivations influence the dynamics of social and military expenditure in a panel of 22 OECD countries over the period 1988-2008. Three basic results emerge: First, governments tend to bias outlays towards social expenditure and away from military expenditure at election times. Second, membership in the NATO alliance affects the timing of election-driven military spending manipulations. Third, partisan distinctions are clearly discernible but differ between the two types of expenditure: while certain categories of social expenditure are higher during left administrations, military expenditure are higher during right administrations.
    Keywords: elections; partisanship; social expenditure; military expenditure
    JEL: C33 D72 H53 H56 P16
    Date: 2013–10–09
  24. By: Milan Deskar-Škrbić (Arhivanalitika Ltd.); Hrvoje Šimović (Faculty of Economics and Business, University of Zagreb); Tomislav Ćorić (Faculty of Economics and Business, University of Zagreb)
    Abstract: In this paper we use structural VAR model to analyze dynamic effects of (discretionary) fiscal shocks on economic activity of private sector in Croatia from 2000Q1-2012Q2. Due to the fact that Croatia is a small open transition economy we assume that shocks of foreign origination can have notable effects on its performance. Therefore, original Blanchard-Perotti identification method is extended by introducing variables that represent external (foreign) demand shocks. The results show that the government spending has a positive and statistically significant effect on private aggregate demand and private consumption, and net (indirect) taxes have a negative and statistically significant effect on private consumption and private AD (statistically significant in the first quarter).
    Keywords: fiscal policy, small open economy, Croatia, SVAR
    JEL: E62 C32 H30 H20 H50
    Date: 2013–10–07
  25. By: Teemu Lyytikäinen; Hilber; A. L. Christian
    Abstract: We estimate the effect of the UK Stamp Duty Land Tax on household mobility using micro data. Exploiting a discontinuity in the tax schedule as a quasiexperimental setting, we isolate the impact of the stamp duty from other determinants of mobility. We compare homeowners with self-assessed house values on either sides of a cut-off value where the tax rate increases from 1 to 3 percent and find that a higher stamp duty strongly negatively affects their propensity to move. The 2 percentage-point increase in the stamp duty reduces the annual rate of mobility by between 2 and 3 percentage-points or about 30 percent. This adverse effect is confined to short-distance and non-job related moves, suggesting a distortion in the housing rather than the labour market. As a cross-validation check, we also analyse the distribution of actual transaction prices and find that the tax rate increase reduces the volume of sales by roughly 30 percent.
    Keywords: Stamp duty, housing transfer taxes, transaction costs, homeownership, household mobility
    JEL: R31 R21 J61 H27 H21 R38 D23
    Date: 2013–08–09
    Abstract: This paper examines the government spending multiplier when economic agents form their expectations based on an adaptive learning scheme. The learning mechanism is such that the agents forecast future values of forward-looking variables using a linear function of an information set that does not contain the fiscal shock. Our impulse response analysis shows that the effects of a government spending shock change substantially when the rational expectations hypothesis is replaced by this learning mechanism. In contrast to the dynamics under rational expectations, a government spending shock in a small-scale new Keynesian DSGE model with this adaptive learning mechanism crowds in private consumption and is associated with a positive comovement between real wages and hours worked. The learning model also relies less on consumption-leisure non-separability in utility and price stickiness to deliver high output multipliers, as opposed to the rational expectations benchmark. In the baseline calibration, the multiplier under learning is nearly twice as large as under rational expectations. These results are robust to a richer specification, irrespective of the financing strategy. An alternative adaptive learning model, where agents know the future path of taxes implied by the government spending shock, leads to results that differ to a large extent from those of the benchmark learning model and are largely incompatible with most of the empirical evidence
    Keywords: adaptive learning, DSGE, fiscal policy, fiscal multipliers, government spending
    JEL: E62 D83 D84 E32 E37
    Date: 2013–10
  27. By: António Afonso; Ana Venâncio
    Abstract: We use Data Envelopment Analysis (DEA) efficiency scores to show that clustering municipalities into encompassing regional clusters improves spending efficiency of single stand- alone municipalities. We propose a new geographic aggregation based on municipalities-to- municipalities commuting flows, defined using hierarchical cluster analysis. Our example for Portugal shows that from an output oriented perspective, between 85 and 95 percent of municipalities would increase their efficiency scores, while from an input oriented perspective, between 81 and 97 percent of municipalities would also be better off in terms of efficiency. Our strategy and results are naturally quite relevant in a context of public spending control.
    Keywords: public spending efficiency, local government, data envelopment analyis (DEA), commuting.
    JEL: C14 H72 R50
    Date: 2013–09
  28. By: Latika Chaudhary (Scripps College and Hoover Institute); Jared Rubin (Chapman University)
    Abstract: Religious identity affects preferences and can consequently affect policy. We propose two mechanisms through which a ruler's religious identity can affect public good provision: i) greater provision of goods in regions where more subjects are the ruler's co-religionists, and ii) lower provision of goods where private markets provide a substitute to the ruler's co-religionists. Empirically, identifying the causal effect of religious identity on policy is often impossible, since the religious identity of rulers rarely changes over time and place. We address this problem by exploiting the variation in the religion of rulers in the Indian Princely States in the early 20th century. The Indian Princely States had significant variation in the religion of the ruler (primarily Hindu and Muslim), often due to unique historical experiences. Using data from the 1911 census, we fin d that Muslim-ruled states had lower Hindu literacy but the religion of the ruler had no statistically significant impact on Muslim literacy, railroad ownership or post office provision. These results support the idea that rulers provide less public goods when religious institutions provide a substitute targeted at their co-religionists, but there is only weak evidence that rulers provide more public goods when more subjects share their religious identity.
    Keywords: identity, public goods, religion, Islam, Hinduism, literacy, India, Princely States
    JEL: H30 H41 H42 H52 H72 I28 N35 N45 N75 Z10
    Date: 2013
  29. By: Tuomas Kosonen
    Abstract: Consumption tax rates targeted at specific sectors are often reformed without empirical knowledge about the efficiency of these policies. This paper sheds light on the efficiency issue, the potential for welfare improving reform, by studying the incidence of value added taxes (VAT) on prices and quantities of barber services traded. I also study the incidence on the profits made by the targeted firms. I utilize a VAT reform targeted at a specific service sector which creates a natural experiment set up. VAT for hairdressing services in Finland was reduced from 22% to 8%, whereas the normal tax treatment still applied to beauty salons and other labor intensive services. The choice of the treatment and control groups was exogenous to circumstances in Finland, since these groups were selected in a more wider European setting. The results suggest that hairdressers cut their prices only by half of what complete pass-through would have implied, and that there was hardly any adjustment in the equilibrium quantity due to the reform. Instead of lowering prices, most hairdressers were able to increase their profits. There is important heterogeneity in the results according to firm size.
    Keywords: VAT reform, efficiency, tax incidence
    Date: 2013–09–26
  30. By: Mirdala, Rajmund
    Abstract: Origins and implications of twin deficits occurrence in a large scale of countries seems to be a center of rigorous empirical as well as theoretical investigation for decades. The reality of persisting fiscal and current account deficits became obvious in many advanced as well as advancing, emerging and low-income countries seemingly without a direct association with the phase of business cycle or trends in key fundamental indicators. European transition economies experienced current account deficits during the most of the pre-crisis period. Despite generally improved economic environment and high rates of economic growth it seems that countries with weaker nominal anchor experienced periods of persisting fiscal imbalances during the most of the pre-crisis period. Crises period affected both fiscal stance of government budgets and current account pre-crisis levels and trends in all countries from the group. As a result, leading path of both indicators significantly changed. In the paper we analyze effects of fiscal policies on current accounts in the European transition economies. Our main objective is to investigate causal relationship between fiscal policy discretionary changes and associated current account adjustments. We identify episodes of large current account and fiscal policy changes to provide an in-depth insight into frequency as well as parallel occurrence of deteriorations (improvements) in current accounts and fiscal stance of government budgets. From employed VAR model we estimate responses of current accounts in each individual country to the cyclically adjusted primary balance shocks.
    Keywords: fiscal imbalances, current account adjustments, economic crisis, vector autoregression, impulse-response function
    JEL: C32 E62 F32 F41 H60
    Date: 2013–08

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