nep-pbe New Economics Papers
on Public Economics
Issue of 2014‒03‒22
sixteen papers chosen by
Keunjae Lee
Pusan National University

  1. Topics in Fiscal Policy: Evidence from a Representative Survey of the German Population By Bernd Hayo; Matthias Uhl
  2. Tax Principles and Tariff-Tax Reforms under International Oligopoly By Kenji Fujiwara
  3. The asymmetric nature of fiscal decentralization: theory and practice By Sacchi, Agnese; Salotti, Simone
  4. Investment stimuli under government present-biased time preferences By Di Corato, Luca
  5. Do Large Governments Decrease Happiness? By Sequeira, Tiago; Minas, Tiago; Ferreira-Lopes, Alexandra
  6. Can fiscal decentralization alleviate government consumption volatility? By Furceri, Davide; Sacchi, Agnese; Salotti, Simone
  7. Decentralization, Vertical Fiscal Imbalance, and Political Selection By Massimo Bordignon; Matteo Gamalerio; Gilberto Turati
  8. Short- and long-term growth effects of special interest groups in the U.S. states: A dynamic panel error-correction approach By Cole, Ismail M.
  9. Health responses to a wealth shock: Evidence from a Swedish tax reform By Erixson, Oscar
  10. Opportunity for all: How to think about income inequality By Kevin A. Hassett; Aparna Mathur; Arthur C. Brooks; Jonah Goldberg; Michael R. Strain; James Pethokoukis; Sita Nataraj Slavov; W. Bradford Wilcox
  11. The Contribution of Research and Innovation to Productivity and Economic Growth By Amani Elnasri; Kevin J. Fox
  13. Migration: a burden or a blessing for natives? By Jean J. Gabszewicz; Skerdilajda Zanaj
  14. Natural disasters and macroeconomic performance: The role of residential investment By Holger Strulik; Timo Trimborn
  15. Inequality and Debt in a Model with Heterogeneous Agents By Federico Ravenna; Nicolas Vincent
  16. Fiscal rules and government size in the European Union By Suari Andreu, Eduard; Mierau, Jochen O.

  1. By: Bernd Hayo (University of Marburg); Matthias Uhl (University of Marburg)
    Abstract: Using a representative survey of the German population, this paper studies individual consumption responses to a recent payroll tax reduction. Our results show that 55% of the respondents spend the extra money, indicating considerable potential for tax changes to affect consumption and economic activity. Our analysis of the socio-demographic and economic determinants of consumption responses suggests that temporary and permanent tax changes have a similar impact, that interest rates are an important determinant of consumption responses to tax changes, and that households with higher income have a higher propensity to consume.
    Keywords: Survey evidence Fiscal policy Public debt Public preferences Consumption Labour supply
    JEL: E21 E62 H30 J22
    Date: 2014
  2. By: Kenji Fujiwara (School of Economics, Kwansei Gakuin University)
    Abstract: This paper, in a two-country duopoly model, compares destination- and origin-based commodity taxes in a context of a unilateral tariff-tax reform that fixes the world price and foreign welfare. We find that the proposed reform reduces domestic welfare, and hence is strictly Pareto-deteriorating under the destination principle while the opposite holds under the origin principle. Moreover, it is shown that this ranking is reversed if exports are taxed. In short, which is preferable between destination and origin taxation depends on the tax principle and which between imports and exports are taxed.
    Keywords: tax principles, tariff-tax reform, destination-based consumption tax, origin-based production tax
    JEL: F12 F13 H2
    Date: 2014–03
  3. By: Sacchi, Agnese; Salotti, Simone
    Abstract: A relevant mismatch between tax and expenditure decentralization characterizes many industrialized countries. The former is usually less pronounced than the latter, resulting in asymmetric fiscal decentralization arrangements. We investigate the nature of this asymmetry using a theoretical framework that explains why it is difficult to tackle it, despite a consensus on the benefits of a well-balanced decentralization process. We find that asymmetry is intrinsic to fiscal decentralization, even in a scenario where clear advantages from well-developed decentralized systems arise. This implies that both empirical and theoretical contributions would benefit by taking into account the welfare-reducing asymmetric nature of fiscal decentralization.
    Keywords: Expenditure decentralization, fiscal mismatch, local revenue, tax autonomy
    JEL: H71 H72 H77
    Date: 2014–02
  4. By: Di Corato, Luca (Department of Economics, Swedish University of Agricultural Sciences)
    Abstract: This paper examines the net benefit accruing to a present-biased government contemplating the option of speeding up investment using a tax cut or an investment subsidy as an incentive. The literature generally suggests the use of an investment subsidy rather than a tax cut. However, this study shows that, depending on the degree of present-biasedness, it may be more advantageous for the government to provide a tax cut.
    Keywords: Investment; Tax reduction; Investment subsidy; Quasi-hyperbolic discounting; Real options;
    JEL: C61 H20
    Date: 2014–03–13
  5. By: Sequeira, Tiago; Minas, Tiago; Ferreira-Lopes, Alexandra
    Abstract: Until now there was little evidence of the influence of large governments on happiness and when it existed, it was positive. We show that structural government consumption and other measures of long-term government imbalances significantly decrease happiness and life satisfaction in European countries. In some cases there is evidence of an inverted U-shaped relationship between the Government burden and happiness, for which the negative relationship begin just before the median. This evidence may lead European politicians to reject the idea that bigger Governments lead to higher people satisfaction and to win elections. This result is consistent with people valuing (negatively) expectations for future tax increases, macroeconomic imbalances, and austerity.
    Keywords: Happiness; Life Satisfaction; Government Size; Fiscal Deficits; Public Debt; Europe
    JEL: C21 D60 H30 I31 O52
    Date: 2014
  6. By: Furceri, Davide; Sacchi, Agnese; Salotti, Simone
    Abstract: We analyse how fiscal decentralization affects the volatility of government consumption extending the existing literature that mainly deals with the effects of the former on government size. Using data for 97 developed and developing countries from 1971 to 2010, we find that a higher degree of fiscal decentralization leads to lower government consumption volatility. This result holds for the sub-sample of advanced economies, while it is not confirmed for those less-developed. This mechanism seems to work mainly through a lower volatility of the non-discretionary spending, which typically belongs to the central government’s policy. We also confirm existing findings according to which country size lowers government spending volatility. Thus, given a minimum level of development, fiscal decentralization reforms can reduce spending volatility by distributing power to sub-central governments, particularly in smaller countries which are usually more prone to volatility.
    Keywords: Fiscal policy, fiscal decentralization, spending volatility, automatic stabilisers, country size
    JEL: E62 H60 H71 H72
    Date: 2014–03
  7. By: Massimo Bordignon (Department of Economics and Public Finance, Catholic University, Milano, Italy); Matteo Gamalerio (Department of Economics, University of Warwick, Coventry, UK); Gilberto Turati (Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy)
    Abstract: In a career-concern model of politics with endogenous candidacy and different types of politicians, following a decentralization reform, politicians with different skills are elected in municipalities characterized by different levels of autonomous resources. As an effect, consumer welfare increases only, or mainly, in richer municipalities. We test these predictions by exploiting the differentiated reduction in Vertical Fiscal Imbalance in Italian municipalities, due to the strong difference in the tax base, following the decentralization reforms of the '90s. Results strongly support our predictions and are robust to several alternative stories.
    Keywords: decentralization, vertical ?scal imbalance, quality of politicians
    JEL: D72 D78
    Date: 2014–03
  8. By: Cole, Ismail M.
    Abstract: The perception of special interest groups as a serious threat to economic growth has strengthened over the years; however, the vast empirical literature surrounding this claim has produced mixed and inconclusive results. This study re-examines the issue incorporating a potentially important aspect that has generally been ignored by previous studies, namely, the implicit suggestion by some of the theoretical works that the extent and the intensity of the growth effects of special interest groups may differ significantly over different time frames. Specifically, this study uses dynamic panel error-correction methods (Pesaran, Shin, and Smith (1999)) to properly determine whether these effects, if they exist, occur mostly in the short run or the long run based on data from a panel of 48 U.S. states for the years 1975 – 2004. The joint Hausman-type test selected the preferred model, which controls for human capital achievement, initial income, income inequality, and the tax burden. This model produced results which are in sharp contrast to the simple linearly negative or positive findings reported in much of the literature by indicating that special interest groups have significant non-linearly inverted U-shaped long-run effects on growth, and that it takes time (about 8 years) for the full effects to become evident. The results provide evidence that U.S. states face a threshold point below which special interest groups’ lobbying and rent-seeking activities boost long-run growth performance but above which they have damaging effects on long-run growth effort. This is confirmed by the Lind and Mehlum (2010) u-test which also suggests that the threshold point is reached when the activities and strength of special interest groups (measured by the percentage of each state’s public and private non-agricultural wage and salary employees who are union members, and which varies from 3.8% to 38.7%)) is at the 15.8% level.
    Keywords: Special interest groups; economic growth; labor unions; rent-seeking/
    JEL: O1 O15 O4 O43
    Date: 2014–02–03
  9. By: Erixson, Oscar (Uppsala Center for Fiscal Studies)
    Abstract: This essay contributes in two ways to the literature on the effects of economic circumstances on health. First, it deals with reverse causality and omitted variable bias by exploiting exogenous variation in inherited wealth generated by the unexpected repeal of the Swedish inheritance tax. Second, it analyzes responses in health outcomes from administrative registers. The results show that increased wealth has limited impacts on objective adult health over a period of six years. This is in line with what has been documented previously regarding subjective health outcomes. If anything, it appears as if the wealth shock resulting from the tax reform leads people to seek care for symptoms of disease, which result in that cancer is detected and possibly treated earlier. One possible explanation for this preventive response is that good health is needed for enjoying the improved consumption prospects generated by the wealth shock.
    Keywords: inheritances; tax reform; wealth shock; objective health
    JEL: D10 H30 I10 I12 I14
    Date: 2014–02–28
  10. By: Kevin A. Hassett (American Enterprise Institute); Aparna Mathur (American Enterprise Institute); Arthur C. Brooks (American Enterprise Institute); Jonah Goldberg (American Enterprise Institute); Michael R. Strain (American Enterprise Institute); James Pethokoukis (American Enterprise Institute); Sita Nataraj Slavov (American Enterprise Institute); W. Bradford Wilcox
    Abstract: Fighting to lift up vulnerable people is a mission with universal resonance. It is time for advocates of free enterprise to join the conversation, explain the truth about inequality and redistribution, and articulate the principles that will restore opportunity for all.
    Keywords: tax rates,poverty,opportunity,minimum wage,Income inequality,consumption
    JEL: A
    Date: 2014–03
  11. By: Amani Elnasri (School of Economics, Australian School of Business, the University of New South Wales); Kevin J. Fox (School of Economics, Australian School of Business, the University of New South Wales)
    Abstract: This paper examines the impact of investment in research and innovation on Australian market sector productivity. While previous studies have largely focused on a narrow class of private sector intangible assets as a source of productivity gains, this paper shows that there is a broad range of other business sector intangible assets that can significantly affect productivity. Moreover, the paper pays special attention to the role played by public support for research and innovation in the economy. The empirical results suggest that there are significant spillovers to productivity from public sector R&D spending on research agencies and higher education. No evidence is found for productivity spillovers from indirect public support for the business enterprise sector, civil sector or defence R&D. These findings could have implications for government innovation policy as they provide insights into possible productivity gains from government funding reallocations.
    Keywords: Productivity, Innovation, Intangible assets, Public support
    JEL: O3 O4 H4
    Date: 2014–01
  12. By: Nelson, Jon P.
    Abstract: Background: Heavy episodic (“binge”) drinking of alcohol has serious public health implications, especially for youth and young adults. However, previous reviews have failed to address in a comprehensive manner the effects of alcohol prices and taxes on binge drinking by gender and age group. Methods: A systematic review is performed for possible effects of alcohol prices and taxes on binge drinking for three age groups. Outcomes examined include binge participation, intensity and frequency. Fifty-six relevant economic studies were recovered, with results distributed equally among three age groups. Also recovered were five natural experiments for tax reductions and six field studies, which increased the country coverage. Criteria for inclusion/exclusion and potential sources of bias are discussed, including adequacy of price and tax data. Price-binge relationships are judged using a 95% confidence interval (p ≤ 0.05) for statistical significance. Results: More than half of economic studies report insignificant results for prices or taxes (30 null of 56 studies), with mixed results in 13 studies and significant results in only 13 studies. Null results are equally distributed across age groups, but some mixed results reflect different outcomes by gender. Prices or taxes are insignificant for 11 of 16 samples for men and 7 of 14 samples for women. Four of five natural experiments report null results for country-level tax cuts. Six field studies examine a variety of pricing methods and drink specials, but results are mixed. Conclusions: A large body of evidence now indicates that binge drinkers are not highly-responsive to increased prices or taxes, and may not respond at all. Nonresponsiveness holds generally for younger and older drinkers and for male and female binge drinkers alike. Increased alcohol prices or taxes are unlikely to be effective as a means to reduce binge drinking, regardless of gender or age group.
    Keywords: Binge Drinking, Alcohol Prices, Alcohol Taxes, Youth, Young Adults, Demand and Price Analysis, Health Economics and Policy,
    Date: 2014–02
  13. By: Jean J. Gabszewicz (CORE, Université Catholique de Louvain, Belgique); Skerdilajda Zanaj (CREA, Université de Luxembourg)
    Abstract: We analyse the effects of migration on the production of public goods, income taxes, and on the welfare of residents in the sending and in the receiving country. Migration is based on income differences between countries. Different alternative scenarios are considered. In the first, we assume fully flexible wages in both countries and we show that migration is welfare detrimental only for origin country. In the second scenario, wages are rigid. With upward wage rigidity, migration has detrimental effects for natives of the origin country but it brings benefits to the natives of the destination country. Finally, migration can be welfare detrimental for both countries, under downward wage rigidities.
    Keywords: migration, public goods, income taxes, labor market rigidities
    JEL: F2 H2 H4
    Date: 2014
  14. By: Holger Strulik; Timo Trimborn
    Abstract: Recent empirical research has shown that income per capita in the aftermath of natural disasters is not necessarily lower than before the event. Income remains in many cases not significantly affected or, perhaps even more surprisingly, it responds positively to natural disasters. Here, we propose a simple theory, based on the neoclassical growth model, that explains these observations. Specifically we show that GDP is driven above its pre-shock level when natural disasters destroy predominantly residential housing (or other durable goods). Disasters destroying mainly productive capital, in contrast, are predicted to reduce GDP. Insignificant responses of GDP can be expected when disasters destroy about twice as much residential structures as productive capital. We show that disasters, irrespective of whether their impact on GDP is positive, negative, or insignificant, entail considerable losses of aggregate welfare. --
    Keywords: natural disasters,economic recovery,residential housing,economic growth
    JEL: E20 O40 Q54 R31
    Date: 2014
  15. By: Federico Ravenna; Nicolas Vincent
    Abstract: We propose a DSGE model with income heterogeneity to help discriminate across competing explanations of the cross-sectional divergence in debt-to-income ratios in US data. We show that for a DSGE model to be consistent with the data, the divergence in income growth should not be anticipated and should happen in an economy with low cost of access to financial intermediation. Differential productivity growth across the top and bottom-income quantile of the population has a much smaller impact on debt accumulation by the bottom income-quantile relative to a cross-sectional tax reallocation.
    Keywords: Inequality, Debt, DSGE model
    JEL: E21 E32 E44
    Date: 2014
  16. By: Suari Andreu, Eduard; Mierau, Jochen O. (Groningen University)
    Abstract: This paper studies the impact of national fiscal rules on government size as measured by the ratio of government expenditures to gross domestic product. We develop a model of the budgetary process and show that a common pool problem may arise which can be mitigated through fiscal rules. We test the model?s predictions using a novel time-series cross-section dataset of 27 European Union members for the period between 1990 and 2011. Corroborating the model, we find that fiscal rules have a negative impact on government size. Contrasting the model, their impact becomes smaller as the number of ministers increases.
    Date: 2014

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