nep-pbe New Economics Papers
on Public Economics
Issue of 2014‒02‒15
twenty-one papers chosen by
Keunjae Lee
Pusan National University

  1. An Empirical Model of Tax Convexity and Self-Employment By Jean-Francois Wen; Daniel V. Gordon
  2. The impact of redistributive policies on inequality in OECD countries By Doerrenberg, Philipp; Peichl, Andreas
  3. The Foreign Investment Effects of Tax Treaties By Arjan Lejour
  4. Optimal Tax Progressivity: An Analytical Framework By Heathcote, Jonathan; Storesletten, Kjetil; Violante, Giovanni L.
  5. Fiscal Rules and Public Spending: Evidence from Italian Municipalities By W. D. Gregori
  6. A Theory of Top Income Taxation and Social Insurance By Francisco M. Gonzalez; Jean-Francois Wen
  7. Econometric analysis of regime switches and of fiscal multipliers By Sylvérie Herbert
  8. Tax-price elasticity of charitable donations: Evidence from the German taxpayer panel By Adena, Maja
  9. Property Tax Delinquency - Social Contract in Crisis: The Case of Detroit By Alm, James; Hodge, Timothy R.; Sands, Gary; Skidmore, Mark
  10. Fiscal Sustainability and Economic Growth in Bolivia By Rodolfo Mendez-Marcano; Jose Pineda
  11. Could a Universal Family Payment improve gender equity and reduce child poverty in Australia? A microsimulation analysis By Hayes, Phillip; Redmond, Gerry
  12. More than You Can Handle Decentralization and Spending Ability of Peruvian Municipalities By Loayza, Norman V.; Rigolini , Jamele; Calvo-Gonzlez, Oscar
  13. The Effect of Income Heterogeneity in An Experiment with Global and Local Public Goods By Kohei Nitta
  14. Assessing the Short-Term Effects on Output of Changes in Federal Fiscal Policies: Working Paper 2012-08 By Felix Reichling; Charles Whalen
  15. Minority Policies of Turkey and Wealth Tax of 1942 By Kaya, Furkan
  16. (In)equality in Education and Economic Development By Petra Sauer; Martin Zagler
  17. Is Agricultural Productivity Growth Good for Industrialization? Infrastructures and the Welfare Maximizing Tax Rate By Kamei, Keita; Sasaki, Hiroaki
  18. Ambiguity on audits and cooperation in a public goods game By Zhixin Dai; Robin M. Hogarth; Marie Claire Villeval
  19. Incentives for Prosocial Behavior: The Role of Reputations By Christine Exley
  20. Prospective Ageing and Economic Growth in Europe By Jesus Crespo Cuaresma; Martin Lábaj; Patrik Pruzinský
  21. Reconciling the Rawlsian and the utilitarian approaches to the maximization of social welfare By Stark, Oded; Jakubek, Marcin; Falniowski, Fryderyk

  1. By: Jean-Francois Wen (University of Calgary); Daniel V. Gordon
    Abstract: Do progressive marginal income tax rates discourage self-employment? We assume risk neutrality to construct an implicit surtax on stochastic income relative to steady income, arising from a convex tax schedule. It is computed as part of a structural probit model with earnings equations and a tax simulator. The tax convexity variable and the net-of-tax income difference between self- and paid-employment have the predicted signs and high levels of statistical signifi…cance for the probability of self-employment. A simulated ‡at tax reform suggests the tax effects are small.
    Date: 2014–02–03
  2. By: Doerrenberg, Philipp; Peichl, Andreas
    Abstract: Due to behavioral effects triggered by redistributional interventions, it is still an open question whether government policies are able to effectively reduce income inequality. We contribute to this research question by using different country-level data sources to study inequality trends in OECD countries since 1980. We first investigate the development of inequality over time before analyzing the question of whether governments can effectively reduce inequality. Different identification strategies, using fixed effects and instrumental variables models, provide some evidence that governments are capable of reducing income inequality despite countervailing behavioral responses. The effect is stronger for social expenditure policies than for progressive taxation. --
    Keywords: Inequality,Redistribution,Social Expenditure,Progressive Taxation
    JEL: D31 D60 H20
    Date: 2014
  3. By: Arjan Lejour
    Abstract: We examine the impact of bilateral and multilateral tax treaties on bilateral FDI stocks. First, we present panel regressions of the effects of treaties on FDI based on an extensive database of all OECD countries from 1985 onwards. We use geographic instruments to correct for the endogeneity of tax treaties. In contrast to many papers, we find that these treaties increase bilateral FDI significantly. The increase is about 16 percent and for new treaties this is even 21 percent. Moreover, the EU parent subsidiary directive doubles bilateral FDI stocks. Second, we analyse the effects of treaty shopping on FDI using the number of tax treaties as a proxy for the attractiveness of a country for establishing a holding. This indicator has a significant impact on FDI: twenty extra tax treaties increase bilateral FDI stocks by about 50 percent. Lower withholding tax rates of dividends do also attract FDI.
    JEL: F21 F23 H25
    Date: 2014–02
  4. By: Heathcote, Jonathan (Federal Reserve Bank of Minneapolis); Storesletten, Kjetil (University of Oslo); Violante, Giovanni L. (New York University)
    Abstract: What shapes the optimal degree of progressivity of the tax and transfer system? On the one hand, a progressive tax system can counteract inequality in initial conditions and substitute for imperfect private insurance against idiosyncratic earnings risk. At the same time, progressivity reduces incentives to work and to invest in skills, and aggravates the externality associated with valued public expenditures. We develop a tractable equilibrium model that features all of these trade-offs. The analytical expressions we derive for social welfare deliver a transparent understanding of how preferences, technology, and market structure parameters influence the optimal degree of progressivity. A calibration for the U.S. economy indicates that endogenous skill investment, flexible labor supply, and the externality linked to valued government purchases play quantitatively similar roles in limiting desired progressivity.
    Keywords: Progressivity; Income distribution; Skill investment; Labor supply; Partial insurance; Valued government expenditures; Welfare
    JEL: D30 E20 H20 H40 J22 J24
    Date: 2014–01–31
  5. By: W. D. Gregori
    Abstract: The aim of this paper is to investigate the extent to which local budget spending composition reacts to fiscal rules variations. I consider the budget of Italian municipalities and exploit specific changes in the Domestic Stability Pact’s rules, to perform a difference-in-discontinuities analysis. The results show that not all rules are equally effective: imposing a cap on the total amount of consumption and investment is not as binding as two caps, one specific for consumption and a different one for investment spending. More specifically, the consumption variation is triggered by changes in the level of wages and services spending, while investment relies on infrastructure movements. In addition, there is evidence that when an increase in investment is achieved, there is also a higher budget deficit level.
    JEL: C21 C23 H72 H74 H77
    Date: 2014–02
  6. By: Francisco M. Gonzalez; Jean-Francois Wen (University of Calgary)
    Abstract: The development of the welfare state in the Western economies between 1930 and 1990 coincided with a puzzling pattern in the taxation of top incomes. Effective tax rates at the top increased sharply but then gradually decreased, even as social transfers continued rising. We propose a new theory of the development of the welfare state to explain these facts. Our main insight is that social insurance and top income taxation are substitutes for averting social confl‡ict. We emphasize the role of the Great Depression as a source of aggregate risk, and argue that the rise of the welfare state can be understood as a process of exploiting efficiency gains in response to gradual technological improvements in the provision of social insurance. Our detailed arguments build on the policy histories of the United States, Great Britain, and Sweden.
    Date: 2014–02–03
  7. By: Sylvérie Herbert (Sciences-po)
    Abstract: Debates on the appropriate response of fiscal policy to economic downturns, such as the debates on the merits of austerity measures in Europe, have been centered on the size of the fiscal multipliers. Indeed, empirical and theoretical evidence suggests larger multipliers at times of recession than in expansions,thereby conditioning the success of fiscal consolidation - the higher the multiplier,the more costly the austerity would be in terms of growth of output. We extend the technique of vector autoregressions (VARs) to account for the possibility of time-variant fiscal multipliers for France, Germany, Italy and the United States. We estimate a 3-variable non linear smooth transition vector autoregression, following Auerbach and Gorodnichenko (2012a) Our results suggest that the output multiplier of government purchases is significantly higher in recessions than expansions for the United States.France,and Germany.
    Keywords: Fiscal policy, smooth transition vector autoregression STVAR, fiscal multipliers, impulse response function,monetary policy.
    JEL: E62 E63 H50
    Date: 2014–02
  8. By: Adena, Maja
    Abstract: I estimate permanent and transitory tax-price and income elasticity of charitable giving in Germany using a rich panel data of tax return for the years 2001-2006. Income tax reforms were implemented in 2004 and 2005. The results suggest that the permanent tax-price elasticity varies significantly by income class, ranging from -0.2 for low incomes to -1.6 for higher incomes. Permanent income elasticity does not vary much among income classes, is rather low, and ranges between 0.2-0.3. The donors adjust their donations gradually after changes in the tax schedule and respond to future predictable changes in price. They respond to changes in current and, to a smaller extent, in future income. -- In dieser Studie wurde die permanente und transitorische Steuerpreis- und Einkommenselastizität der Spenden in Deutschland geschätzt. Basis für die Schätzung ist das umfangreiche Taxpayer-Panel, welches alle Steuermerkmale der Steuerzahler in Deutschland für die Jahre 2001-2006 erfasst. Die Ergebnisse suggerieren, dass die permanente Steuerpreiselastizität, je nach Einkommensklasse, sich stark unterscheidet; sie reicht von -0.2 für niedrige Einkommen bis -1.6 für höhere Einkommen. Dahingegen ist die permanente Einkommenselastizität für unterschiedliche Einkommensklassen ähnlich; insgesamt ist sie sehr niedrig und liegt zwischen 0.2 und 0.3. Spender passen ihre Spendenentscheidung nach Steueränderungen verzögert an, sie reagieren auch auf zukünftige vorausschaubare Preisänderungen. Sie reagieren auf aktuelle und weniger auf zukünftige Änderungen des Einkommens.
    Keywords: charitable giving,price elasticity,tax incentives
    JEL: H24 H31 D12
    Date: 2014
  9. By: Alm, James; Hodge, Timothy R.; Sands, Gary; Skidmore, Mark
    Abstract: In this paper we develop a theoretical model of the individual decision to become delinquent on one’s property tax payments. We then apply the model to the City of Detroit, Michigan, USA, where the city is in the midst of bankruptcy proceedings, and a rate of property tax delinquency of 48 percent, resulting in uncollected tax revenues of about 20 percent. We use detailed parcellevel data for Detroit to evaluate the factors that affect both the probability that a property owner is tax delinquent and, conditional upon delinquency, the magnitude of the delinquency. Our estimates show that properties that have lower value, longer police response times, are nonhomestead (non-owner occupied residential properties), have a higher statutory tax rate, have a higher assessed value relative to sales price, are owned by a financial institution or by a Detroit resident, are delinquent on water bills, and for which the probability of enforcement is low are more likely to be tax delinquent These findings can be used to inform policies targeted at improving tax compliance within the City.
    Keywords: Property tax, Delinquency, Tax compliance,
    Date: 2014
  10. By: Rodolfo Mendez-Marcano; Jose Pineda
    Abstract: In this paper we analyze the role played by fiscal sustainability shocks on the Bolivian economic growth performance. To do this, we impose restrictions on a VAR for the Bolivian economy that allow us to identify fiscal sustainability shocks. We argue that imposing long run identification restrictions in our tructural VAR is a new (applied to fiscal issues) and useful way to identify the macroeconomic impact of shocks on fiscal sustainability. Our results show a significant lost in the level of GDP in the Bolivian economy as a consequence of the sequence of adverse fiscal sustainability shocks this economy has experienced. Although, fiscal sustainability shocks have not permanent effect on Bolivia’s economic growth, the fact that adverse fiscal sustainability shocks has occurred during the period studied (in a significant way at least during the late 70s early 80s and at the late 90s early 2000s) have negatively affected Bolivian economic growth. Our results also show that inflation has been affected by fiscal sustainability shocks, especially the adverse shocks experienced during the period from 1977 to 1986, which ended in the hyperinflation in 1985.
    Keywords: SVAR; identifying restrictions; small open economies; fiscal policy; debt
    JEL: E32 E62 F41 H62 H63 O11
    Date: 2014–02
  11. By: Hayes, Phillip; Redmond, Gerry
    Abstract: The Australian income tax and transfer system has undergone considerable reform since the mid 1980s. As a number of commentators have pointed out, one impact of reforms to cash transfers for families, as well as of some reforms to direct taxes, has been the evolution of a defacto system of family taxation, with negative consequences, in terms of incentives to earn (and consequent deadweight loss), for parents, and especially for secondary earners in couple families with children. In this paper, we use a new Australian microsimulation model, ATM, built on the EUROMOD platform to examine the extent to which policies to support families with children through the tax and transfer system have been achieved at the expense of gender equity, and how the system could be better designed to achieve child poverty reduction with gender equity. Our analysis suggests that the institution of a universal family payment that would both improve incentives and reduce child poverty is potentially affordable, even before reduction of deadweight loss under the current system is taken in to account. However, such reforms as are modelled here would be politically difficult, since the main gainers would be families with children in the top half of the income distribution, and the main losers would be taxpayers who do not have dependent children.
    Date: 2014–02–10
  12. By: Loayza, Norman V. (The World Bank); Rigolini , Jamele (The World Bank); Calvo-Gonzlez, Oscar (The World Bank)
    Abstract: This paper builds on a comprehensive dataset for Peru that merges municipal fiscal accounts with information about municipalities’ characteristics such as population, poverty, education and local politics to analyze the leading factors affecting the ability of municipalities to execute the allocated budget. According to the existing literature and the Peruvian context, we divide these factors into four categories: the budget size and allocation process; local capacity; local needs; and political economy constraints. While we do find that all four factors affect decentralization, the largest determinant of spending ability is the adequacy of the budget with respect to local capacity. The results confirm the need for decentralization to be implemented gradually over time in parallel with strong capacity building efforts.
    Keywords: Decentralization, Spending, Capacity, Governance
    JEL: H7 H83 O11 O23
    Date: 2014–01
  13. By: Kohei Nitta (Department of Economics, University of Hawaii at Manoa)
    Abstract: Public goods such as national defense or climate change mitigation affect people in multiple locations. We report on a linear public goods experiment, where subjects can contribute not only to a local public good but also to a global public good. We study the effects of endowment heterogeneity by comparing a setting where two localities have the same income (homogeneous treatment) with a setting where the localities differ in income (heterogeneous treatment). We find that: 1) social efficiency is higher in the homogeneous treatment than in the heterogeneous treatment; 2) the efficiency difference comes from two aspects: the shift from global to local public good contribution and lower total public goods provision in the heterogeneous treatment; and 3) inequality aversion and reciprocity play a role in contribution behavior in the heterogeneous treatment; however these social preferences do not fully counter the efficiency loss caused by the endowment heterogeneity. Our findings suggest that policy interventions may be necessary to increase social efficiency with heterogeneous wealth and multiple public goods.
    Keywords: Voluntary contribution mechanism; Multiple public goods; Income heterogeneity; Inequality; Reciprocity
    JEL: C92 D63 D64 H41
    Date: 2014–02
  14. By: Felix Reichling; Charles Whalen
    Abstract: Changes in federal fiscal policies can have both short-term and long-term effects on output. The Congressional Budget Office’s analysis of the short-term effects focuses on the impact on the demand for goods and services. That impact can be decomposed into direct effects and indirect effects: Direct effects consist of changes in purchases of goods and services by federal agencies and by the people and organizations who are recipients of federal payments or payers of federal taxes; indirect effects enhance or offset the direct effects. The indirect effects can be summarized by a demand multiplier, defined as the total change in gross domestic product per dollar of direct effect on demand. This paper presents the ranges of demand multipliers that CBO uses in its analyses and reviews evidence on the size of those multipliers.
    Date: 2012–05–25
  15. By: Kaya, Furkan
    Abstract: This paper focuses on minorities in Turkey and influences of Second World War period which caused internal discomforts and inequalities upon Turkish minorities. First i review the position of minorities and contribute the framework for understanding the place of non-Muslim groups in Turkey, their challenges and dissapointments as well. Then try to enlighten effects of Second World War period on Turkish minorities and responses in Turkish society. Basically, Jewish people who escaped from Holocaust, the recruitment process of minorities and economic Turkification period, such as; Welath Tax of 1942 are handled in this article.
    Keywords: Minorities, Wealth Tax, Turkey, Jews,
    JEL: B00 H2
    Date: 2014–02–12
  16. By: Petra Sauer (Department of Economics, Vienna University of Economics and Business); Martin Zagler (Department of Economics, Vienna University of Economics and Business)
    Abstract: This paper investigates the relationship between economic development and the average level of education as well as the degree of inequality in the distribution of education, respectively. Approaching this question in a dynamic panel over 60 years and 143 countries with a system GMM estimator reveals strong support for the inclusion of an interaction term between the education Gini coeffcient and average years of schooling, indicating the existence of nonlinear effects. We contribute to the literature in providing strong evidence that more schooling is good for economic growth - irrespective of its distribution - but that the coeffcient is variable and substantially declining in inequality. On the other hand, inequality is positively related to economic growth for low average levels of education, whereas highly educated countries exhibit a statistically insignificant negative relationship between inequality and economic growth. From this it follows that at least a slight increase in the degree of inequality is necessary in order to haul initially poor and low educated economies out of the poverty trap. However, as economies become educated, the effect of educational inequality mainly works indirectly. Accordingly, countries that show greater educational inequality experience lower macro economic returns to education than more equal economies, on average.
    Keywords: education, economic growth, distribution of education
    JEL: D31 I00 O15
    Date: 2014–01
  17. By: Kamei, Keita; Sasaki, Hiroaki
    Abstract: This paper develops a dynamic Ricardian trade model that incorporates productive infrastructures into the manufacturing sector financed by tax. We investigate the relationship between the timing of opening trade and total welfare. We also compare the two kinds of total welfare: the total welfare that a country obtains by closing international trade until it has a comparative advantage in manufacturing and then engaging in free trade and the total welfare that the country obtains by specializing in agriculture according to the law of comparative advantage from the beginning. The main results are as follows: (1) there is the optimal tax rate maximizing the total welfare; (2) an increase in agricultural productivity can accelerate the timing of opening trade, which, however, does not necessarily improve the total welfare; and (3) the total welfare under specialization in manufacturing can be higher than that under specialization in agriculture depending on conditions.
    Keywords: productive infrastructure; industrialization; timing of opening trade; agricultural productivity
    JEL: F10 F43 O14
    Date: 2014–02–11
  18. By: Zhixin Dai (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France); Robin M. Hogarth (Department of Economics and Business, Universitat Pompeu Fabra and Barcelona Graduate School of Economics, Ramon Trias Fargas, 25–27, 08005 Barcelona, Spain); Marie Claire Villeval (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)
    Abstract: We investigate the impact of various audit schemes on the future provision of public goods, when contributing less than the average of the group is sanctioned exogenously and the probability of an audit is unknown. We study how individuals update their beliefs about the probability of being audited, both before and after audits are definitely withdrawn. We find that when individuals have initially experienced systematic audits, they decrease both their beliefs and their contributions almost immediately after audits are withdrawn. In contrast, when audits were initially less frequent and more irregular, they maintain high beliefs about the probability of being audited and continue cooperating long after audits have been withdrawn. Inconsistency in experiencing audits across time clearly increases the difficulty of learning the true audit probabilities. Thus, conducting less frequent and irregular audits with higher fines can increase efficiency dramatically.
    Keywords: Ambiguity, audits, sanctions, beliefs, cooperation, public goods, experiment
    JEL: C92 H41 D83
    Date: 2014
  19. By: Christine Exley (Stanford University)
    Abstract: In public settings, the impact of monetary incentives on prosocial behavior is empirically mixed. Existing theory explains these finding by noting that incentives can introduce public signals that may or may not crowd out motivation to volunteer. The strength of these public signals are normally unobserved by the researcher, so it remains unclear as to when significant crowding out is likely to occur and render incentives ineffective. I overcome this ambiguity by examining individuals for whom the signal strength is likely zero - those with strong public reputations. In a laboratory experiment, I show that the crowd out in response to public incentives is much less likely among those with public reputations as opposed to private reputations, particularly for women.
    Date: 2013–01
  20. By: Jesus Crespo Cuaresma (Department of Economics, Vienna University of Economics and Business); Martin Lábaj (Department of Economic Policy, Faculty of National Economy, University of Economics in Bratislava); Patrik Pruzinský (Department of Economic Policy, Faculty of National Economy, University of Economics in Bratislava)
    Abstract: We assess empirically the role played by prospective ageing measures as a predictor of income growth in Europe. We show that prospective ageing measures which move beyond chronological age and incorporate changes in life expectancy are able to explain better the recent long-run growth experience of European economies. The improvement in explanatory power of prospective ageing indicators as compared to standard measures based on chronological age is particularly relevant for long-run economic growth horizons.
    Keywords: Economic growth, ageing, prospective age, old age dependency ratio
    JEL: I15 O15 O52
    Date: 2014–01
  21. By: Stark, Oded; Jakubek, Marcin; Falniowski, Fryderyk
    Abstract: Under a deadweight loss of tax and transfer, there is tension between the optimal policy choices of a Rawlsian social planner and a utilitarian social planner. However, when with a weight greater than a certain critical value the individuals’ utility functions incorporate distaste for low relative income, a utilitarian will select exactly the same income distribution as a Rawlsian.
    Keywords: Maximization of social welfare, Rawlsian social welfare function, Utilitarian social welfare function, Deadweight loss, Distaste for low relative income, Institutional and Behavioral Economics, Labor and Human Capital, D31, D60, H21, I38,
    Date: 2014–01–24

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