nep-pbe New Economics Papers
on Public Economics
Issue of 2014‒03‒01
twenty-one papers chosen by
Keunjae Lee
Pusan National University

  1. Taxable Income Elasticity and the Anatomy of Behavioral Response: Evidence from Finland By Tuomas Matikka
  2. Balanced budget stimulus with tax cuts in a liquidity constrained economy By Vivek Prasad
  3. A 150-year Perspective on Swedish Capital Income Taxation By Du Rietz, Gunnar; Johansson, Dan; Stenkula, Mikael
  4. Changes in Income Distributions and the Role of Tax-benefit Policy During the Great Recession: An International Perspective By Bargain, Olivier; Callan, Tim; Doorley, Karina; Keane, Claire
  5. Tax Increment Financing in Pakistan By Shaikh, Salman
  6. A Theory of Income Taxation under Multidimensional Skill Heterogeneity By Casey Rothschild; Florian Scheuer
  7. Local air pollution and global climate change taxes: a distributional analysis By Xaquín Garcia-Muros; Mercedes Burguillo; Mikel Gonzalez-Eguino; Desiderio Romero-Jordán
  8. On the (de)Stabilizing Effect of Public Debt In a Ramsey Model with Heterogeneous Agents By Kazuo Nishimura; Carine Nourry; Thomas Seegmuller; Alain Venditti
  9. The composition of government spending and the multiplier at the Zero Lower Bound By Julien Albertini; Arthur Poirier; Jordan Roulleau-Pasdeloup;
  11. Social Esteem versus Social Stigma: the role of anonymity in an income reporting game. By Sandro Casal; Luigi Mittone
  12. Market vs. Residence Principle: Experimental Evidence on the Effects of a Financial Transaction Tax By Huber, Jürgen; Kirchler, Michael; Kleinlercher, Daniel; Sutter, Matthias
  13. Fiscal Multipliers in Japan By Alan J. Auerbach; Yuriy Gorodnichenko
  14. To Save or Save Not: Intergenerational Neutrality and the Expansion of New Zealand Superannuation By Andrew Coleman
  15. Electoral accountability and local government spending in Indonesia By Skoufias, Emmanuel; Narayan, Ambar; Dasgupta, Basab; Kaiser, Kai
  16. When Identifying Contributors is Costly: An Experiment on Public Goods By Anya Savikhin Samek; Roman M. Sheremeta
  17. Does Japan have a Gray Democracy? An empirical analysis of prefectural data By Shimasawa, Manabu; Oguro, Kazumasa; Toyoda, Nao
  18. What drives small municipalities to cooperate? Evidence from Hessian municipalities By Frederic Blaeschke
  19. Soft budget constraints in a federation: the effect of regional affiliation By Willem SAS
  20. "Crowding in"and the returns to government investment in low-income countries By Eden, Maya; Kraay, Aart
  21. Globalisation and the future of the welfare state By Yu-Fu Chen; Holger Görg; Dennis Görlich; Hassan Molana; Catia Montagna; Yama Temouri

  1. By: Tuomas Matikka
    Abstract: This paper uses extensive Finnish panel data from 1995?2007 to analyze the elasticity of taxable income (ETI). I use individual changes in flat municipal income tax rates as an instrument for the overall changes in marginal tax rates. This instrument is not a function of individual income, which is the basis for an exogenous instrument in the taxable income model. In general, instruments used in previous studies do not have this feature. Furthermore, I estimate behavioral responses using smaller subcomponents of taxable income, such as working hours, fringe benefits and tax deductions. This ?anatomy? of overall ETI has rarely been studied in the literature. The results show that the average ETI estimate in Finland is 0.35?0.60, depending on the empirical specification and the degree of regional controlling. Subcomponent analysis suggests that neither work effort nor labor supply respond actively to tax changes. In contrast, it seems that fringe benefits and deductions from taxable income might have a larger effect.
    Keywords: Personal income taxation, Elasticity of taxable income, Deadweight loss
    JEL: H24 H21 H31
    Date: 2014–02–11
  2. By: Vivek Prasad (Department of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: This paper examines the macroeconomic effects of unexpected, exogenous, simultaneous, temporary cuts to income tax rates in an economy when the government follows a balanced budget fiscal rule and keeps money supply constant, and private agents face constraints on the ability to finance investments. The main results are that the tax cuts increase output, private consumption, and investment; the increases in output and consumption are significant and long-lasting; and the liquidity constraints play a major role in the shock's long-term persistence. Results are obtained from calibrating a modified version of the DSGE model of liquidity and business cycles by Kiyotaki and Moore (2012). The modifications are twofold: (i) distortionary taxes to labour and dividend incomes are added, and (ii) the government follows a balanced budget fiscal rule and keeps money supply constant. Results are qualitatively robust, but quantitatively sensitive, to assumptions regarding structural parameter values, and qualitatively and quantitatively sensitive to significant variations in the persistence of tax shocks.
    Keywords: Fiscal policy, taxation, balanced budget, liquidity constraints.
    JEL: E10 E20 E30 E44 E50 E62 H30
    Date: 2014–01
  3. By: Du Rietz, Gunnar (Research Institute of Industrial Economics (IFN)); Johansson, Dan (Örebro University School of Business); Stenkula, Mikael (Research Institute of Industrial Economics (IFN))
    Abstract: This paper describes the evolution of capital income taxation, including corporate, dividend, interest, capital gains and wealth taxation, in Sweden between 1862 and 2010. To illustrate the evolution, we present annual time-series data on the marginal effective tax rates on capital income (METR) for a marginal investment financed with new share issues, retained earnings or debt. Tax tables covering the period are presented. These data are unique in their consistency, thoroughness and time span covered. The METR is low, is stable and does not exceed five percent until World War I, when it starts to drift somewhat upward and vary depending on the source of finance. The outbreak of World War II starts a period when the magnitude and variation of the METR sharply increases. The METR peaks during the 1970s and 1980s and often exceeds 100 percent. The 1990–1991 tax reform and lower inflation reduce the magnitude and variation of the METR. The METR varies between 15 and 40 percent at the end of the examined period.
    Keywords: cost of capital; marginal effective tax rates; marginal tax wedges; tax reforms
    JEL: H21 H31 N44
    Date: 2014–02–21
  4. By: Bargain, Olivier; Callan, Tim; Doorley, Karina; Keane, Claire
    Abstract: This paper examines the impact on inequality and poverty of the economic crisis in four European countries, namely France, Germany, the UK and Ireland, and the contribution of tax and benefit policy changes. The period examined, 2008 to 2010, was one of great economic turmoil, yet it is unclear whether changes in inequality and poverty rates over this time period were mainly driven by changes in market income distributions or by tax- benefit policy reforms. We disentangle these effects by producing counterfactual ("no reform") scenarios using tax-benefit microsimulation and representative household surveys of each country. For the period under study, we find that the policy reaction has contributed to stabilizing or even decreasing inequality and relative poverty in the UK, France and especially in Ireland, a country where rising unemployment would have otherwise increased poverty. Market income inequality has nonetheless pushed up inequality and relative poverty in France. Relative poverty and, notably, child poverty, have increased in Germany due to policy responses combined with the increasing inequality of market income.
    Keywords: Tax-benefit policy; Inequality; Poverty; Decomposition; Microsimulation; Crisis.
    Date: 2014–01
  5. By: Shaikh, Salman
    Abstract: Markets fail in the provision of public goods. Public goods are non-rival and non-exclusive. It creates the problem of free riding. Hence, public goods and infrastructure is often provided by the governments. As discussed in endogenous growth models, the public infrastructure and capital goods can enable the private sector’s production processes to experience increasing returns to scale. This can result in permanent source of economic growth in an economy. Given that public infrastructure is important for economic growth, the issue is how the government of Pakistan can mobilize enough resources to improve the public infrastructure and expand it. We argue that by way of tax increment financing, it can achieve sufficient funds through which the public infrastructure can be provided in urban centers. The rationale for tax increment financing rests on the fact that public infrastructure development leads to positive externalities. If Government owns the unused land which can potentially be used for commercial and residential use, it can lease it on long term basis and generate sufficient lease income. By issuing public securities, it can generate the seed capital and which can be serviced via these lease payments. The seed capital can also come from tax increment financing. This new proposal can help in reducing i) urban congestion, ii) urban crimes, iii) reduce prices of real estate, iv) widen the urban centers, v) generate employment in new urban centers, vi) facilitate closer migration to wide choice of urban centers, vii) create new growth nodes and production zones and viii) reduce ethnical conflicts that arise from ethnical diversity in congested urban centers.
    Keywords: Public Goods, Tax Increment Financing, Property Tax, Public Infrastructure
    JEL: Q42 Q43 Q48
    Date: 2014–01–01
  6. By: Casey Rothschild; Florian Scheuer
    Abstract: We develop a unifying framework for optimal income taxation in multi-sector economies with general patterns of externalities. Agents in this model are characterized by an N-dimensional skill vector corresponding to intrinsic abilities in N potentially externality-causing activities. The private return to each activity depends on individual skill and an aggregate activity-specific return, which is a fully general function of the economy-wide distribution of activity-specific efforts. We show that the N dimensional heterogeneity can be collapsed to a one-dimensional, endogenous statistic sufficient for screening. The optimal tax schedule features a multiplicative income specific correction to an otherwise standard tax formula. Because externalities change the relative returns to different activities, corrective taxes induce changes in the across activity allocation of effort. These relative return effects cause the optimal correction to diverge, in general, from the Pigouvian tax that would align private and social returns. We characterize this divergence and its implications for the shape of the tax schedule both generally and in a number of applications, including externality free economies, increasing and decreasing returns to scale, zero-sum activities such as bargaining or rent extraction, and positive or negative spillovers.
    Date: 2014–01
  7. By: Xaquín Garcia-Muros; Mercedes Burguillo; Mikel Gonzalez-Eguino; Desiderio Romero-Jordán
    Abstract: Local air pollution and global climate change are two significant environmental problems which are interrelated. Some recent papers examine them together, but most of the relevant literature has focused either on climate change alone or on the ancillary benefits of mitigating it (in terms of air pollution). In regard to distribution, most publications have focused on the impacts of climate change-related taxes such as excise duties on CO2, energy or fuels. This paper explores the distributional implications of policies for taxing local air pollution and compares them with climate change taxes. The framework of taxation on air pollution is based on the estimated damage associated with the main local air pollutants, while the climate change framework is based on a CO2 tax. The case of Spain is examined, using an Input-Output model in combination with a micro-simulation model. The distributional implications of a revenue-neutral tax reform are also explored. We find that taxes on local pollutants are more regressive than those levied on climate change pollutants, because the goods implicitly taxed have a greater weight in the consumer basket of low income groups, even if the tax revenues are recycled.
    Keywords: Environmental Tax Reform; Distributional Impact; Local air pollution taxes; global climate change taxes
    Date: 2014–02
  8. By: Kazuo Nishimura (Research Institute for Economics & Business Administration (RIEB), Kobe University, and KIER, Kyoto University); Carine Nourry (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & Institut Universitaire de France); Thomas Seegmuller (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM & EHESS); Alain Venditti (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & EDHEC)
    Abstract: We introduce public debt in a Ramsey model with heterogenous agents and a public spending externality a ecting utility which is nanced by income tax and public debt. We show that public debt considered as a xed portion of GDP can have a stabilizing or destabilizing e ect depending on some fundamental elasticities. When the public spending externality is weak and the elasticity of capital labor substitution is low enough, public debt can only be destabilizing, generating damped or persistent macroeconomic uctuations. Whereas when the public spending externality and the elasticity of capital labor substitution are strong enough, public debt can be stabilizing, driving to monotone convergence an economy experiencing damped or persistent uctuations without debt.
    Keywords: Endogenous cycles, heterogeneous agents, public spending, public debt, borrowing constraint
    JEL: C62 E32 H23
    Date: 2014–02
  9. By: Julien Albertini; Arthur Poirier; Jordan Roulleau-Pasdeloup;
    Abstract: We investigate the size of the multiplier at the ZLB in a New keynesian model. It ranges from around -0.25 to +1.5, depending on the extent to which government spending is productive, substitutable or not for private consumption.
    Keywords: Zero lower bound, New Keynesian, Government spending multiplier
    JEL: E31 E32 E52 E62
    Date: 2014–02
  10. By: Jean M. Abraham, Ph.D.; Roger Feldman, Ph.D.; Peter Graven, M.S.
    Abstract: Economic incentives such as the preferential tax treatment of premiums and economies of scale encourage employers to provide health insurance through the workplace. The employer’s decision to offer health insurance depends on how much workers value insurance relative to wages, and that value is likely to vary, given the composition of the establishment´s workforce. Using the 2008-2010 MEPS Insurance Component augmented with information from other data sources, we generate new estimates of employers’ price-sensitivity of offering insurance. Our results suggest that employers are sensitive to changes in the tax price of insurance, with very small employers exhibiting the largest price-sensitivity. Employer size, workforce composition, and local labor market conditions also influence the employer’s decision to offer insurance. New evidence can inform policy discussions about the implications of broad-based reforms that change marginal tax rates as well as targeted strategies that address the tax-exempt status of premiums.
    Date: 2014–01
  11. By: Sandro Casal; Luigi Mittone
    Abstract: When the phenomenon of tax evasion is discussed, both scholars and authorities agree on the fact that, although essential, classical enforcements are not enough to ensure tax compliance: some other forms of incentives must be adopted. The paper’s aim is to experimentally test the role of different non- monetary incentives for tax compliance: participants have been treated with different experimental conditions, which differ in the role played by anonymity. Indeed, subjects have been informed on the possibility of revealing their identity and their choices through the publication of their pictures, as a consequence of the result of the auditing process. As expected, anonymity plays an important role in the decision to pay taxes; in addition, we find that negative non-monetary incentive increases tax compliance more effectively than positive non-monetary incentive. We find also that the effect of these non-monetary incentives is mitigated, when too many information are made available. Finally, results show that, when evasion is made public, tax-dodgers are willing to pay in order to keep secret their cheating behavior and avoid public shame.
    Keywords: Tax Evasion, Non-monetary incentives, Anonymity, Experimental Economics
    Date: 2014
  12. By: Huber, Jürgen (University of Innsbruck); Kirchler, Michael (University of Innsbruck); Kleinlercher, Daniel (University of Innsbruck); Sutter, Matthias (European University Institute)
    Abstract: While politically attractive in order to generate tax revenues, the effects of a financial transaction tax (FTT) are scientifically disputed, not the least because seemingly small details of its implementation may matter a lot. In this paper, we provide experimental evidence on the different effects of a FTT, depending on whether it is implemented as a tax on markets, on residents, or a combination of both. We find that the effects of a tax on markets are different from a tax on residents, with negative effects of a market tax on volatility and trading volume. The residence principle shows none of these undesired effects. In addition to studying aggregate market outcomes, we investigate how individual traders react to different forms of a FTT and whether their risk attitude is related to these reactions. We find no such relationship, meaning that a FTT affects traders with different risk tolerances similarly.
    Keywords: Financial Transaction Tax, experimental finance, residence principle, market principle
    JEL: C91 G10 E62
    Date: 2014–02
  13. By: Alan J. Auerbach; Yuriy Gorodnichenko
    Abstract: In this paper, we estimate government purchase multipliers for Japan, following the approach used previously for a panel of OECD countries (Auerbach and Gorodnichenko, 2013). This approach allows multipliers to vary smoothly according to the state of the economy and uses real-time forecast data to purge policy innovations of their predictable components. For a sample period extending from 1960 to 2012, estimates for Japan are quite consistent with those previously estimated for the OECD as well as those estimated using a slightly different methodology for the United States (Auerbach and Gorodnichenko, 2012). However, estimates based only on more recent observations are less stable and provide weaker support for the effectiveness of government purchases at stimulating economic activity, particularly in recession, although cyclical patterns in Japan make the dating of recessions a challenge.
    JEL: E62
    Date: 2014–02
  14. By: Andrew Coleman (The Treasury)
    Abstract: Increases in longevity mean the size of New Zealand’s public retirement income programme, New Zealand Superannuation, will automatically expand unless the age of eligibility is increased. This paper analyses the consequences of expanding New Zealand Superannuation on a save-as-you-go basis through the New Zealand Superannuation Fund rather than on a pay-as-you-go basis. These funding mechanisms differ in terms of their effects on different cohorts, on long run tax rates, on capital accumulation, and on risk. The paper argues that an automatic pay-as-you-go funded expansion of New Zealand Superannuation is unattractive on many grounds, even if pay-as-you-go funding remains for much of the programme. In addition to reducing long run tax rates, the use of save-as-you-go funding through the New Zealand Superannuation Fund provides households with a means of reducing income risk over the course of their lives.
    Keywords: Retirement income policy; prefunding; intergenerational economics
    JEL: E21 H55
    Date: 2014–02
  15. By: Skoufias, Emmanuel; Narayan, Ambar; Dasgupta, Basab; Kaiser, Kai
    Abstract: This paper takes advantage of the exogenous phasing of direct elections in districts and applies the double-difference estimator to measure impacts on (i) human development outcomes and (ii) the pattern of public spending and revenue generation at the district level. The analysis reveals that four years after the switch to direct elections, there have been no significant effects on human development outcomes. However, the estimates of the impact of Pilkada on health expenditures at the district level suggest that directly elected district officials may have become more responsive to local needs at least in the area of health. The composition of district expenditures changes considerably during the year and sometimes the year before the elections, shifting toward expenditure categories that allow incumbent district heads running as candidates in the direct elections to"buy"voter support. Electoral reforms did not lead to higher revenue generation from own sources and had no effect on the budget surplus of districts with directly elected heads.
    Keywords: Subnational Economic Development,Parliamentary Government,E-Government,Public Sector Expenditure Policy,Debt Markets
    Date: 2014–02–01
  16. By: Anya Savikhin Samek (School of Human Ecology, University of Wisconsin-Madison); Roman M. Sheremeta (Weatherhead School of Management, Case Western Reserve University and the Economic Science Institute, Chapman University,)
    Abstract: Studies show that identifying contributors significantly increases contributions to public goods. In practice, however, viewing identifiable information is costly, which may discourage people from accessing such information. To address this question, we design a public goods experiment in which participants can pay a fee to view information about identities and corresponding contributions of their group members. We then compare this to a treatment in which there is no identifiable information, and a treatment in which all contributors are freely identified. Our main findings are that: (1) contributions in the treatment with costly information are as high as those in the treatment with free information, (2) participants choose to view the information about 10% of the time, and (3) being a high contributor is positively correlated with choosing to view identifiable information about others. Thus, it seems that having access to information is important even when such information is rarely viewed. Or findings have practical implications for non-profit organizations with a large pool of donors and for designers of recognition systems, especially in online communities with many participants.
    Keywords: public-goods, information, experiments
    JEL: C72 C91 H41
    Date: 2014
  17. By: Shimasawa, Manabu; Oguro, Kazumasa; Toyoda, Nao
    Abstract: This study examines whether or not aging is increasing the political influence wielded by Japan’s elderly and promoting a so-called “gray democracy.” Using a median voter model based on data from Japan’s 47 prefectures during the period from 2000 to 2010, we examined the relationship between aging and geriatric expenditures. As a result, controlling income, expenditures, economic conditions, and political factors, we found that geriatric welfare expenditures increase along with median age. The findings utilizing this median voter model imply that the aging median voter may be able to gain substantial benefit through voting. If this prefectural-level relationship between aging and increasing geriatric expenses is reflected on a national level, one may conclude that Japan’s continued aging will likely strengthen the political influence of the elderly with respect to increased social security benefits.
    Keywords: aging, political aging, panel data, political economy, median voter model
    JEL: C23 H55 J18
    Date: 2014–02
  18. By: Frederic Blaeschke (University of Kassel)
    Abstract: This contribution studies the determinants of intermunicipal cooperation for small Hessian municipalities. Existing contributions have highlighted the role of cooperation demand factors, for example scal stress or demographic factors, on the one hand, and transaction cost issues on the other. This study asks how the spatial neighbourhood aects cooperation decision making taking characteristics of neighbouring municipalities into account (cooperation supply). The study focuses on intermunicipal cooperations in the eld of labor intensive public administration services, for example, management and accounting tasks, personnel administration or civil registry oces. We nd that the main driving forces are scal stress, population growth and size heterogeneity. Neighbourhood-related supply factors areonly weakly signicant. Cooperation is more likely for municipalities that are part of a set of neighbouring municipalities which are heterogeneous with respect to size.
    Keywords: Intermunicipal cooperation, neighbourhood structures, cooperation demand, cooperation supply, heterogeneity
    JEL: H11 H77 H83
    Date: 2014
  19. By: Willem SAS
    Abstract: This paper revisits the soft budget constraint problem, pushing sub-central (state) borrowing to the limit in multi-tiered countries. Accounting for the institutional design and political practice common to many federations, bargaining and log-rolling are introduced to the analysis. In our intertemporal model, a federal legislature of regionally elected representatives bargains on federal grants going to the states. As a result, voters will elect federal candidates in favour of looser state public spending than otherwise expected. This strategic voting not only leads to overly generous bailout policies. Also, and compared to a setting where federal decision making does not follow from bargaining and regional affiliation, states over-borrow more inefficiently. Allowing for heterogeneity in state income and population does not affect this inefficient outcome. Lower relative per capita incomes even boost federal generosity and subsequent over-borrowing by the states.
    Date: 2014–02
  20. By: Eden, Maya; Kraay, Aart
    Abstract: This paper estimates the effect of government investment on private investment in a sample of 39 low-income countries. Fluctuations in a predetermined component of disbursements on loans from official creditors to developing country governments are used as an instrument for fluctuations in public investment. The analysis finds evidence of"crowding in": an extra dollar of government investment raises private investment by roughly two dollars, and output by 1.5 dollars. To understand the implications for the return to public investment, a CES production function with public and private capital as inputs is calibrated. For most countries in the sample, the returns to government investment exceed the world interest rate. However, for some countries that already have high government investment rates, the return to further investment is below the world interest rate.
    Keywords: Debt Markets,Investment and Investment Climate,Access to Finance,Non Bank Financial Institutions,Emerging Markets
    Date: 2014–02–01
  21. By: Yu-Fu Chen; Holger Görg; Dennis Görlich; Hassan Molana; Catia Montagna; Yama Temouri
    Abstract: The conventional wisdom is that increasing globalisation requires a reduction in the provision of the welfare state among industrialised countries as the distortions resulting from this type of expenditure undermine international competitiveness and the ability of countries to attract and/or retain industries. However, there are empirical observations and theoretical models that are not in line with this conventional wisdom -- see for instance Molana and Montagna (2006) and Goerg, Molana and Montagna (2009). We will carry out an empirical study using multi-country data for selected OECD countries to investigate the link between two aspects of globalisation, namely international competitiveness and foreign direct investment, and the size of government expenditure on social policies. The paper will also take into account theoretical arguments and empirical evidence from related studies.
    Keywords: Challenges for welfare system, Globalisation, Welfare state
    JEL: F15 H11 H50
    Date: 2014–02

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