nep-pbe New Economics Papers
on Public Economics
Issue of 2014‒03‒15
25 papers chosen by
Keunjae Lee
Pusan National University

  1. The Distribution of Household Income and Federal Taxes, 2008 and 2009 By Congressional Budget Office
  2. Effective Marginal Tax Rates for Low- and Moderate-Income Workers By Congressional Budgete Office
  3. Equilibrium Tax Rates and Income Redistribution: A Laboratory Study By Marina Agranov; Thomas R. Palfrey
  4. A Complete Example of an Optimal Two-Bracket Income Tax By Jean-Francois Wen
  5. Tax Amnesties By Marchese, Carla
  6. Model Uncertainty and Intertemporal Tax Smoothing By Luo, Yulei; Nie, Jun; Young, Eric
  7. Direct democracy and local government efficiency By Asatryan, Zareh; De Witte, Kristof
  8. Average Effective Tax Rates on Consumption for Turkey : New Data and a Comparative Analysis By Murat Ungor
  9. "Volatility and Quantile Forecasts by Realized Stochastic Volatility Models with Generalized Hyperbolic Distribution" By Nobuki Mochida
  10. Effects of Tax Incentives on Sales of Eco-Friendly Vehicles: Evidence from Japan By Ibrahim Alhulail; Kenji Takeuchi
  11. Decentralization and Spatial Allocation Policy of Public Investment in Indonesia and Japan By Mitsuhiko Kataoka; Kodrat Wibowo
  12. The Political Economy of Publicly Provided Private Goods By Dotti, Valerio
  13. Transparency in financial reporting: Is country-by-country reporting suitable to combat international profit shifting? By Evers, Maria Theresia; Meier, Ina; Spengel, Christoph
  14. Decentralization and the Welfare State: What Do Citizens Perceive? By Diaz-Serrano, Luis; Rodríguez-Pose, Andrés
  15. Circumstantial risk: Impact of future tax evasion and labor supply opportunities on risk exposure By Doerrenberg, Philipp; Duncan, Denvil; Zeppenfeld, Christopher
  17. Raising the Excise Tax on Cigarettes: Effects on Health and the Federal Budget By Congressional Budget Office
  18. Consolidation under the Europe’s New Fiscal Rules: Analyzing the Implied Minimum Fiscal Effort By Kuusi, Tero
  19. Corporate Taxes and the Growth of the Firm By Federica Liberini
  20. The Economics of Work Schedules under the New Hours and Employment Taxes By Casey B. Mulligan
  21. Micro to macro models for income distribution in the absence and in the presence of tax evasion By Maria Letizia Bertotti; Giovanni Modanese
  22. Exchange Rate Regime, Fiscal Foresight and the Effectiveness of Fiscal Policy in a Small Open Economy By Virkola, Tuomo
  23. Economic growth and crime against small and medium sized enterprises in developing economies By Islam, Asif
  24. The Missing "Missing Middle" By Chang-Tai Hsieh; Benjamin A. Olken
  25. Globalization, Infrastructure, and Inclusive Growth By L. Alan Winters

  1. By: Congressional Budget Office
    Abstract: The recent recession has had a substantial impact on income, the amount of taxes owed, and average tax rates. Changes in households’ before-tax income and average tax rates in 2008 and 2009 were substantial and differed markedly across the income distribution.
    Date: 2012–07–10
  2. By: Congressional Budgete Office
    Abstract: Effective marginal tax rates among low- and moderate-income workers are about 30 percent, on average, with about one-third of that rate stemming from the federal income tax, more than a third from federal payroll taxes, and the remainder from state income taxes and the phaseout of SNAP benefits (formerly known as food stamps).
    Date: 2012–11–15
  3. By: Marina Agranov; Thomas R. Palfrey
    Abstract: This paper reports results from a laboratory experiment that investigates the Meltzer-Richard model of equilibrium tax rates, inequality, and income redistribution. We also extend that model to incorporate social preferences in the form of altruism and inequality aversion. The experiment varies the amount of inequality and the collective choice procedure to determine tax rates. We report four main findings. First, higher wage inequality leads to higher tax rates. The effect is significant and large in magnitude. Second, the average implemented tax rates are almost exactly equal to the theoretical ideal tax rate of the median wage worker. Third, we do not observe any significant differences in labor supply or average implemented tax rates between a direct democracy institution and a representative democracy system where tax rates are determined by candidate competition. Fourth, we observe negligible deviations from labor supply behavior or voting behavior in the directions implied by altruism or inequality aversion.
    JEL: C92 D63 D72 H23
    Date: 2014–02
  4. By: Jean-Francois Wen (University of Calgary)
    Abstract: I provide a simple model that is solved analytically to yield tidy expressions for the Pareto efficient tax structures and the optimal two-bracket marginal tax rates. It is for the special case of equally-sized groups of two skill types and no exogenous spending requirements of the government. The results and the exposition give a self-contained treatment of the central ideas of optimal income taxation.
    Date: 2014–03–07
  5. By: Marchese, Carla
    Abstract: A tax amnesty can be a useful tax policy tool when exploited in exceptional circumstances. Amnesties can also be used systematically as a discriminatory mechanism to improve the efficiency or even the equity of the tax system, but only if government commitment to enforcing tax law is credible. If such credibility is lacking, amnesties may actually undermine future tax revenue by breaching the implicit, psychological contract between taxpayers and the state, thus reducing taxpayers’ internal motivation for compliance. Amnesties also have important political implications, because they can signal intertemporal inconsistency in government decision-making and may be linked to the political business cycle. Amnesties respond to externalities among states or layers of government deriving from tax and enforcement policies, and network effects in these fields can trigger waves of amnesties.
    Keywords: tax amnesty, tax evasion, tax policy
    JEL: H20 H26 K34
    Date: 2014–03
  6. By: Luo, Yulei; Nie, Jun; Young, Eric
    Abstract: In this paper we examine how model uncertainty due to the preference for robustness (RB) affects optimal taxation and the evolution of debt in the Barro tax-smoothing model (1979). We first study how the government spending shocks are absorbed in the short run by varying taxes or through debt under RB. Furthermore, we show that introducing RB improves the model's predictions by generating (i) the observed relative volatility of the changes in tax rates to government spending, (ii) the observed comovement between government deficits and spending, and (iii) more consistent behavior of government budget deficits in the US economy.
    Keywords: Robustness, Model Uncertainty, Taxation Smoothing
    JEL: D8 H3 H5
    Date: 2014
  7. By: Asatryan, Zareh; De Witte, Kristof
    Abstract: This paper studies the role of direct democracy in ensuring efficient and cost effective provision of goods and services in the public sector. The sample consists of the population of municipalities in the German State of Bavaria, where in the mid-1990s considerable direct democratic reforms granted citizens with wide opportunities to directly participate in local affairs through binding initiatives. Using information on the municipal resources and the municipal provision of public goods, and applying a fully non-parametric approach to estimate local government overall efficiency, the analysis shows that more direct democratic activity is associated with higher government efficiency. This result suggests that more inclusive governance through direct decision-making mechanisms may induce more accountable and less inefficient governments. --
    Keywords: Direct democracy,Public sector efficiency,Conditional efficiency
    JEL: C14 D7 H7
    Date: 2014
  8. By: Murat Ungor
    Abstract: [EN] Consumption taxes are the most important source of revenues used to finance public spending in Turkey, where the share of taxes on consumption (general and specific) is more than 40%. This study computes the average effective tax rates on consumption for Turkish economy and provides a glimpse of how Turkey stands in comparison with other OECD countries. We provide new estimates, in a comparative perspective, using national income accounts and tax revenue statistics. Average effective tax rates on consumption increased from around 10.5% in 1998 to around 15.5-16.5% in 2012. Turkey has one of the lowest average effective tax rates on consumption in the OECD and the calculated tax rates are very similar to those for Greece in recent years. We present an exercise and show the importance of time-variant consumption taxes to understand the changes in aggregate labor supply in Turkey. We also note that the revision to the national accounts has effects on the calculated tax rates. [TR] Turkiye’de, tuketim (genel ve ozel) uzerindeki vergiler, yuzde 40’in uzerinde bir pay ile kamu harcamalarini finanse etmek icin kullanilan vergi gelirlerinin en onemli kaynagidir. Bu calisma, milli gelir hesaplari ve vergi hasilati istatistiklerini kullanarak, Turkiye ekonomisi icin, diger OECD ulkeleri ile karsilastirmali bir bicimde, tuketim uzerindeki ortalama efektif vergi oranlarini sergilemektedir. Hesaplanan vergi oranlari kullanilarak, tuketim uzerindeki efektif vergi oranlarinin tuketim-calisma uzerine etkileri incelenmektedir. Turkiye ve diger ulkeler icin rapor edilmis olan seriler, ulke karsilastirmalarini iceren degisik calismalarda kullanilabilir.
    Date: 2014
  9. By: Nobuki Mochida (Faculty of Economics, The University of Tokyo)
    Abstract:    The original intention of this article is to explore what are the driving forces for the local tax structures. Is tax policy determining the local expenditure portfolio, or is the relationship the other way around? We expect some research venturing to explore the interplay between the local expenditure responsibilities and tax policy. This article examines these fresh issues in the light of Japan's recent experiences, and tries to bring not only analytical framework but also qualify information on local tax structures. The motivation is that we can test causality through regression models using the notion of Granger causality. So far it is often said that expenditure has not been decided by making tax revenue given, instead expenditure may be decided for a certain reason and for financing it corresponding revenue is 'guaranteed' in Japan. As local public sector has evolved from 'agency' model to 'autonomy' model, this stereotypical way of thinking will come into question. This article shows that it is possible to have some repercussions from the tax structure to expenditures.
    Date: 2014–02
  10. By: Ibrahim Alhulail (Graduate School of Economics, Kobe University); Kenji Takeuchi (Graduate School of Economics, Kobe University)
    Abstract: This study examines the effects of economic incentives on the sales of ecofriendly vehicles in Japan. We focus on the Tonnage and Acquisition Tax Cuts for Eco-Friendly Vehicles and the two waves of Eco-Car Subsidies implemented in Japan. We use the monthly sales data of 10 vehicles from April 2006 to March 2013. We find that the effects of the tax incentives were more significant than the effect of gasoline price. This is in contrast to results from the United States and Canada, where gasoline prices have had a larger effect on increasing the adoption levels of hybrid electric vehicles. The difference is due to the structure of the tax cut. Japanfs policy of taxes paid upon purchase was more effective compared to the policies in the United States and Canada, where certain tax cuts were on income taxes.
    Keywords: Eco-Friendly Vehicle, Hybrid Electric Vehicle, Tax Cuts, Subsidy, Gasoline Prices
    JEL: L62 Q55 Q58
    Date: 2014–03
  11. By: Mitsuhiko Kataoka (Department of Economics, Chiba Keizai University, Chiba, Japan); Kodrat Wibowo (Department of Economics, Padjadjaran University)
    Abstract: Public investment is a fundamental response of government to the existing imbalances between subnational regions. Especially, the question concerning the allocation policy of public investment more receives a great deal of public attentions along with the decentralization process, because economic growth is inevitably uneven in its subnational impacts and decentralization has effects on the change in the allocations across the subnational governments and regions. This study explores the public investment allocation policy that either emphasizes efficiency, equity, or redistribution or strives to strike a balance between these three policy directions under the trade-off restrictions. We employ a new benchmark index, “equity–growth allocation share,” defining regional public investment allocation, given equal public capital growth across regions. We apply this method to Indonesia’s and Japan’s pre- and post-decentralization eras, beset by efficiency–equity trade-offs between uneven regional development and balanced growth policy. We found two major observations that contrast between two countries. First, as excessive economic activity regions in two countries, the capital region in Japan mostly shows the highest returns on public capital where the Java-Bali region does not. Second, Indonesia shows a structural change investment concentration in the Java-Bali region before and after decartelization regime while the Japan’s government pursues the pro-efficiency allocation policy under the decentralization process.
    Keywords: Public investment, Decentralization, Efficiency–equity trade-off,Indonesia, Japan
    JEL: N95 O23 R11 R53
    Date: 2014–02
  12. By: Dotti, Valerio
    Abstract: Abstract Traditional Political Economy models typically imply a strong relationship between income inequality and public intervention in redistributive policies. Empirical evidence suggests that this may hold true only for certain kinds of policies, for instance cash transfers or education, but in the case of other policies with redistributive effects such as social security and some publicly provided private goods this may not hold true. Abstract In this paper I develop a method to derive the sign of the relationship between income inequality and degree of public intervention in education in a Probabilistic Voting model in which the consumers-voters are also allowed to choose other forms of redistribution. Abstract I show that the relationship between income inequality and governmental intervention implied in the traditional literature is mainly a result of the restrictive assumptions of those models. Abstract I also show that this method can deliver sharp predictions even in presence of those non-convexities in individual preferences that are usually described as a feature induced by public provision of education in the traditional literature in Public Economics. Abstract I argue that the relationship between income inequality and public intervention in schooling is a natural and promising field in which the tool proposed can be useful for empirical purposes and that can help to better explain some patterns described in the literature about public intervention in education.
    Keywords: Keywords: Political Economy; Probabilistic models; public provision; income inequality
    JEL: H44 H52
    Date: 2014–02–27
  13. By: Evers, Maria Theresia; Meier, Ina; Spengel, Christoph
    Abstract: Aggressive tax planning efforts of highly profitable multinational companies (Base Erosion and Profit Shifting (BEPS)) have recently become the subject of intense public debate. As a response, several international initiatives and parties have called for more transparency in financial reporting, especially by means of a country-specific reporting of certain tax information (Country-by-Country Reporting (CbCR)). In our paper, we demonstrate that neither consolidated nor individual financial accounts seem to be an appropriate platform to provide such country-specific information and, therefore, that CbCR cannot be based on extended financial accounting standards. Moreover, we argue that even separate CbCR templates do not prevent multinationals from profit shifting, since their common tax minimization strategies are mainly based on the legal exploitation of gaps and loopholes in national and international tax law. In that regard, we show that expected costs for CbCR would exceed expected benefits and therefore contend that CbCR cannot be regarded as a convincing measure to combat international profit shifting. Instead, we argue that tax legislators should limit profit shifting by enforcing national and international tax rules and by closing gaps in tax law. In particular, we call for more tightened and standardized transfer pricing regulations to be adopted at an international level. --
    Keywords: tax avoidance,profit shifting,multinational firms,tax reform,tax reporting,country-by-country reporting,international transfer pricing
    JEL: H20 H26 F23 K34 M41
    Date: 2014
  14. By: Diaz-Serrano, Luis; Rodríguez-Pose, Andrés
    Abstract: Trust in public institutions and public policies are generally perceived as a precondition for economic recovery in times of recession. Recent empirical evidence tends to find a positive link between decentralization and trust. But our knowledge about whether decentralization – through increased trust – improves the perception of the delivery and effectiveness of public policies is still limited. In this paper we estimate the impact of fiscal and political decentralization on the perception of the state of the education system and of health services, by using the 2002, 2004, 2006 and 2008 waves of the European social survey. The analysis of the views of 160,000 individuals in 31 European countries indicates that while the effect of fiscal decentralization on the perception of the state of the health and education system is unambiguously positive, political decentralization affects citizen’s satisfaction with education and health delivery in different ways. The influence of political decentralization, however, is highly contingent on whether we consider the capacity of the local or regional government to exercise authority over its citizens (self-rule) or to influence policy at the national level (shared-rule).
    Keywords: Education, health, satisfaction, fiscal and political decentralization, Europe
    JEL: H11 H77
    Date: 2014–03–05
  15. By: Doerrenberg, Philipp; Duncan, Denvil; Zeppenfeld, Christopher
    Abstract: This paper examines whether risk-taking in a lottery depends on the opportunity to respond to the lottery outcome through additional labor effort and/or tax evasion. Previous empirical attempts to answer this question face identification issues due to self selection into jobs that facilitate tax evasion and labor effort exibility. We address these identification issues using a laboratory experiment (N = 180). Subjects have the opportunity to invest earned income in a lottery and, depending on randomly assigned treatment states, have the opportunity to respond to the lottery outcome through evasion and/or extra labor effort. We find strong evidence that ex-post access to labor opportunities reduces ex-ante risk willingness while access to tax evasion has no effect on risk behavior. We discuss possible explanations for this result based on the existing literature. --
    Keywords: Tax Evasion,Labor Supply,Risk Behavior,Lab Experiment
    JEL: G11 H21 H24 H26 J22
    Date: 2014
    Date: 2014
  17. By: Congressional Budget Office
    Abstract: CBO has analyzed the impact of a hypothetical increase in the federal excise tax on cigarettes to demonstrate the complex links between policies that aim to improve health and effects on the federal budget.
    Date: 2012–06–13
  18. By: Kuusi, Tero
    Abstract: The new EU fiscal framework builds on several overlapping target measures and convergence rules. Thus, it is not clear how strict goals the framework sets for public finances. In this paper we build a simulation framework that solves the minimum fiscal effort under different assumptions on the initial state of the economy and the expected economic conditions during the consolidation. We then use the model to analyze several fiscal consolidations. We find that Germany, France, Spain and Italy are currently in compliance with our measure of minimum fiscal effort, but Spain is at risk of falling behind the required pace of consolidation in the near future. As a historical reference we revisit the Finnish Great Depression of the early 1990s. We find that the consolidation was in compliance with the fiscal rules, but during the first years of the consolidation the difficulty of detecting the phase of the business cycle could have considerably increased the restrictiveness of the rules. Finally, we address the looming sustainability gap in the Finnish public finances that reflects the cost of aging population. Under no policy change the required correction is found to become substantial by 2030.
    JEL: E61 E62 H6
    Date: 2014–02–28
  19. By: Federica Liberini (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: It is desirable to reduce the number of "artificial" merger and acquisitions (MA) designed to escape from high tax jurisdictions, without discouraging domestic firms from growing into highly productive multinational corporations. This paper studies the effect of corporate taxes on the headquarter's decision to expand its extensive margins through the acquisition of pre-existing firms. A model for the investment behaviour of heterogeneous firms is built, and Corporate taxes are introduced. The model shows that higher home statutory corporate tax rates make exports relatively more expensive, making firms more likely to serve foreign demand through cross-border acquisitions. The model's predictions are tested on a dynamic random parameter probit model estimated on firm-level data. The model's predictions are confirmed by the results from the empirical investigation. The data also support the hypothesis that there are sunk costs associated with becoming a multinational corporation, and that domestic firm that overcome these costs and acquire their first foreign subsidiary are more likely to complete further acquisitions. In addition, the inability to shift profit to foreign locations makes domestic firms more sensitive to home corporate taxes, as their capacity to capture investment opportunity is negatively affected by a reduction in net tax profit.
    Keywords: Corporate Taxation, Merger and Acquisitions, Dynamic Probit Model
    JEL: C25 G34 H25 H32
    Date: 2014–03
  20. By: Casey B. Mulligan
    Abstract: Hours, employment, and earnings taxes are economically distinct, and all three are either introduced or expanded by the Affordable Care Act beginning in 2014. The tax wedges push some workers to work more hours per week (for the weeks that they are on a payroll), and others to work less, with an average weekly hours effect that tends to be small and may be in either direction. A conservative estimate of the law’s average employment rate impact is negative two or three percent. The ACA’s tax wedges and ultimately its behavioral effects vary substantially across groups, with the elderly experiencing hardly any new disincentive and unmarried household heads experiencing tax wedges that are about twice the average. My estimates suggest that 3-4 percent of the workforce will work less than the legislated 30-hour threshold solely to avoid the implicit and explicit full-time employment taxes.
    JEL: E24 I13 J22
    Date: 2014–02
  21. By: Maria Letizia Bertotti; Giovanni Modanese
    Abstract: We investigate the effect of tax evasion on the income distribution and the inequality index of a society through a kinetic model described by a set of nonlinear ordinary differential equations. The model allows to compute the global outcome of binary and multiple microscopic interactions between individuals. When evasion occurs, both individuals involved in a binary interaction take advantage of it, while the rest of the society is deprived of a part of the planned redistribution. In general, the effect of evasion on the income distribution is to decrease the population of the middle classes and increase that of the poor and rich classes. We study the dependence of the Gini index on several parameters (mainly taxation rates and evasion rates), also in the case when the evasion rate increases proportionally to a taxation rate which is perceived by citizens as unfair. Finally, we evaluate the relative probability of class advancement of individuals due to direct interactions and welfare provisions, and some typical temporal rates of convergence of the income distribution to its equilibrium state.
    Date: 2014–01
  22. By: Virkola, Tuomo
    Abstract: This paper studies the effects of discretionary fiscal policy shocks under different exchange rate regimes within a structural vector autoregressive (SVAR) model. We first suggest that by estimating the effects of fiscal policy shocks in two structurally similar small open economies that have opted for different monetary policy regimes (Finland and Sweden), we may control for the economic environment and study the effect of exchange rate regime on fiscal policy transmission. Second, we propose to augment the baseline model with quarterly fiscal forecasts and study fiscal policy shocks under fiscal foresight, i.e., when economic agents may anticipate and respond to fiscal policy measures prior to their implementation. Our findings suggests that discretionary fiscal policy is more effective under a fixed exchange rate regime than under a floating exchange rate regime. This is consistent with the conventional wisdom inherited from the Mundell-Fleming framework and with recent evidence that suggests the effectiveness of fiscal policy depends on the degree of monetary policy accommodation. We also find evidence that unanticipated (as opposed to standard SVAR) fiscal policy shocks have a larger expansionary effect on output than in the baseline.
    Keywords: fiscal policy, exchange rate regime, fiscal foresight
    JEL: E62 E63 F41 H30
    Date: 2014–03–03
  23. By: Islam, Asif
    Abstract: Several studies have explored the relationship between economy-level crime rates or individual-level crime and economic growth. However, few studies have examined the relationship between economic growth and crime against firms. This study uses data for about 12,000 firms in 27 developing countries and finds that economic growth is negatively associated with crime. This relationship is stronger for small and medium firms than large firms. The study also explores several economy-wide factors and their influence on the growth-crime relationship for small and medium enterprises. The results are robust to various sensitivity checks.
    Keywords: Governance Indicators,Public Sector Corruption&Anticorruption Measures,Achieving Shared Growth,Population Policies,Gender and Law
    Date: 2014–02–01
  24. By: Chang-Tai Hsieh; Benjamin A. Olken
    Abstract: Although a large literature seeks to explain the “missing middle” of mid-sized firms in developing countries, there is surprisingly little empirical backing for existence of the missing middle. Using microdata on the full distribution of both formal and informal sector manufacturing firms in India, Indonesia, and Mexico, we document three facts. First, while there are a very large number of small firms, there is no “missing middle” in the sense of a bimodal distribution: mid-sized firms are missing, but large firms are missing too, and the fraction of firms of a given size is smoothly declining in firm size. Second, we show that the distribution of average products of capital and labor is unimodal, and that large firms, not small firms, have higher average products. This is inconsistent with many models in which small firms with high returns are constrained from expanding. Third, we examine regulatory and tax notches in India, Indonesia, and Mexico of the sort often thought to discourage firm growth, and find no economically meaningful bunching of firms near the notch points. We show that existing beliefs about the missing middle are largely due to arbitrary transformations that were made to the data in previous studies.
    JEL: E23 H25 O11 O47
    Date: 2014–03
  25. By: L. Alan Winters (Asian Development Bank Institute (ADBI))
    Abstract: This paper covers threes issues : first, defining and measuring inclusive growth; second, the relationship between international trade and inequality; and third, the links between infrastructure and inequality. Both international trade and infrastructure make it easier for people to exchange goods and services and to increase income by allowing specialization, economies of scale, variety, etc. The gains are important not only in aggregate, but also at an individual level, and different people’s ability to take advantage of them varies. Hence each can increase inequality. Critical to sharing the gains from trade is mobility—specifically labor mobility, which determines the capacity of people to move from areas, sectors, skills, or firms of low or declining opportunity to those of higher opportunity. In the context of inclusive growth, this constitutes a challenge. However, the answer should not be to eschew opening up the economy or building infrastructure, but to do so in an informed way and seek to undertake complementary policies that help the less well-off take advantage of them.
    Keywords: inclusive growth, international trade and inequality, infrastructure and inequality, Infrastructure, globalization
    JEL: F16 H54
    Date: 2014–02

This nep-pbe issue is ©2014 by Keunjae Lee. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.