nep-pbe New Economics Papers
on Public Economics
Issue of 2014‒04‒29
seventeen papers chosen by
Keunjae Lee
Pusan National University

  1. Implications of Recent Federal Personal Income Tax Increases for Income Tax Evasion, Tax Revenues, and Budget Deficits By Cebula, Richard; Boylan, Robert; Foley, Maggie; Isard, Douglass
  2. Efficiency in public input provision in two asymmetric jurisdictions with imperfect labour markets By Gillet, Holger; Pauser, Johannes
  3. Taxation of Real Estate in Sweden from 1862 to 2010 By Stenkula, Mikael
  4. The Political Economy of Property Tax Reform By Enid Slack; Richard M Bird
  5. Greening the Property Tax By Nicola Brandt
  6. Tax evasion and cognitive dissonance By Beckmann, Klaus; Gattke, Susan
  7. Asset-Centred Redistributive Policies for Sustainable Development By Kohler, Pierre
  8. TA Big Data Approach to Optimal Sales Taxation By Christian Baker; Jeremy Bejarano; Richard W. Evans; Kenneth L. Judd; Kerk L. Phillips
  9. Revisiting the Classical View of Benefit-Based Taxation By Matthew C. Weinzierl
  10. The economic spillovers from resource extraction: a partial resource blessing at the subnational level? By James CUST; Ridwan D. RUSLI
  11. Single Mothers and the Earned Income Tax Credit: Insurance Without Disincentives? By Artheya, Kartik; Reilly, Devin; Simpson, Nicole B.
  13. Political knowledge and attitudes toward (de)centralization in Europe By Floriana Cerniglia; Laura Pagani
  14. Longevity, Working Lives and Public Finances By Lassila, Jukka; Valkonen, Tarmo
  15. Sand in the Wheels or Wheels in the Sand? Tobin Taxes and Market Crashes By Hynek Lavicka; Tomas Lichard; Jan Novotny
  16. Does Redistribution Increase Output? The Centrality of Labor Supply By Artheya, Kartik; Owens, Andrew; Schwartzman, Felipe
  17. Strategic Carbon Taxation and Energy Pricing: The Role of Innovation By Zhang, Xiao-Bing

  1. By: Cebula, Richard; Boylan, Robert; Foley, Maggie; Isard, Douglass
    Abstract: In 2013, federal personal income tax increases were implemented in the U.S. under provisions of two federal statutes: the American Taxpayer Relief Act of 2012 and the Patient Protection and Affordable Care Act of 2010. Based on our analysis of data for the time period 1970-2008, we argue that the incentives to engage in federal personal income tax evasion have been increased as a direct consequence of the public tax-increase policies manifested in these two statutes. To demonstrate this conclusion in the present study, we first present evidence that strongly suggests that personal income tax evasion has been an increasing function of the maximum marginal federal personal income tax rate over the period 1970-2008, which constitutes the most current data currently available on aggregate personal income tax evasion. This evidence leads us then to conclude that the federal personal income tax increases implemented effectively in 2013 under provisions of the two aforementioned statutes will result in increased tax evasion behavior and hence lower tax collections. Among other things, then, this public-policy-induced increase in personal income tax evasion also implies that the federal budget deficits in coming years will be greater than projected by the CBO and various government agencies. We also find that, among other things, federal personal income tax evasion has been an increasing function of the unemployment rate. Thus, among other things, there is also evidence that continued high unemployment rates may increase tax evasion and hence the size of federal budget deficits.
    Keywords: underground economy; tax evasion; income tax increases
    JEL: H24 H26 H31 H62
    Date: 2014–04–11
  2. By: Gillet, Holger; Pauser, Johannes (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany])
    Abstract: This paper examines efficiency in public input provision in two large jurisdictions with imperfect labour markets. It analyses how equilibrium capital tax rates and public input provision levels differ between asymmetric jurisdictions that can strategically influence the interest rate on the common capital market in an international tax competition setting. In contrast to the scenario assuming competitive labour markets, the non-cooperative equilibrium is inefficient also when governments have capital and head taxes at disposal. As a source of both the distortion in the capital allocation between jurisdictions and the inefficiency in public input provision, which can be determined in at least one of the jurisdictions, we identify the governments' incentives to decrease unemployment, and a pecuniary externality [De- Pater, J., Myers, G., 1994. Strategic capital tax competition: a pecuniary externality and a corrective device. Journal of Urban Economics 36, 66-78.] in both jurisdictions. Efficiency in public input provision can be restored, however, if the set of fiscal instruments available for regional policy makers is extended by a labour tax.
    JEL: H21 H71 J64
    Date: 2014–04–17
  3. By: Stenkula, Mikael (Research Institute of Industrial Economics (IFN))
    Abstract: This paper surveys the development and role of the real estate tax in Sweden between 1862 and 2010. The possibility to tax real estate has been used at both the local and state level throughout history. Its importance is difficult to assess directly due to limited data availability and the specific construction of the local tax system after 1920. The real estate tax was supposed to provide the municipalities with a stable tax base, but its importance in this role seems to have diminished over time. After the tax reform of 1990–1991 real estate tax was levied exclusively at the national level. At most, this tax contributed to no more than five percent of total central government tax revenues, and the amount raised occasionally exceeded 1 percent of GDP. In 2008, part of the tax was transformed to a “local fee”.
    Keywords: Real estate tax; Property tax; Tax reforms
    JEL: H20 N43 N44
    Date: 2014–04–14
  4. By: Enid Slack; Richard M Bird
    Abstract: Property taxes are generally considered by economists to be good taxes, and many countries are being advised to increase and improve their property taxes. In practice, however, property tax reforms have often proved to be difficult to carry out successfully. This paper discusses why property taxes are particularly challenging to reform and suggests several ways in which efforts to reform this tax may become more successful in the future. After a brief introductory section on the ‘disconnect’ between the economics and the politics of property tax reform, Section 2 summarizes recent experiences in five OECD countries with property tax reform. Against this background, Section 3 sets out the key elements of a good property tax reform and Section 4 discusses several aspects of property tax reform that seem to have derailed or distorted reforms in practice. Unfortunately, some of the solutions countries have adopted to deal with such problems are themselves problematic, either because they do not really solve the problem or because they hamper rather than work towards the establishment of a good property tax. Fortunately, as Section 5 outlines, it is possible to devise strategies for property tax reform that incorporate more acceptable solutions to most problems. As Section 6 concludes, good property tax reform is not easy. But it can definitely be achieved if an appropriately designed reform package is properly introduced and implemented.
    Keywords: tax reform, political economy, property tax
    JEL: D78 H24 H25 H71
    Date: 2014–04–09
  5. By: Nicola Brandt
    Abstract: This paper reviews the literature and policy discussions about the role of the property tax for land use. Various externalities of the development of land, such as new infrastructure needs, the loss of open space or air pollution due to longer commutes as people locate far from city centres, are not internalised fully by property taxes or other policy instruments and this is often thought to contribute to excessive land use and urban sprawl. The impact of property taxes on land use intensity and sprawl is ambiguous in theory, however, and it depends on tax design, as well as land use regulation policies and other taxes that can influence municipalities’ incentives to convert land for development. Yet, there is some evidence suggesting that higher property taxes can limit urban sprawl, in particular when the tax on land is higher than on structures, although effects are small given relatively given a limited price elasticity of land use. Various property tax design options are discussed that may help to better internalise land use related externalities.
    Keywords: land use, fiscal zoning, property tax, urban sprawl
    JEL: R14 R38 R51 R52
    Date: 2014–04–08
  6. By: Beckmann, Klaus (Helmut Schmidt University, Hamburg); Gattke, Susan (Helmut Schmidt University, Hamburg)
    Abstract: We introduce public signals and cognitive dissonance into the standard Allingham-Sandmo- Yitzhaki (ASY) model of tax evasion. It turns out that the pres- ence of cognitive dissonance attenuates tax evasion as individuals dislike allowing their true bevhaviour to diverge from their public statement of the “admissible” degree of tax evasion, which, in turn, they use to influence the probability of detection. Some potential policy conclusions and extensions are discussed.
    Keywords: tax evasion; cognitive dissonance; public signals
    JEL: D03 H26 H30
    Date: 2014–04–17
  7. By: Kohler, Pierre
    Abstract: The objective of this discussion paper is to propose an asset-centred analytical framework for (i) mapping the most important redistributive policy tools that shape the distribution of income and income-generating assets (such as human capital and wealth, including land, industrial or financial capital) across individuals as well as between the private and the public sector and (ii) outlining key linkages between redistributive policies, equity and sustainable development by looking at how they can shape a socio-economic context and incentives that are conducive to financial stability and economic development, political inclusion, gender equality and social mobility, as well as environmental sustainability. The paper further aims at (iii) contrasting the potential scope of redistributive policies with the more narrow set of policies that have been implemented in most countries/regions over the last 30 years in order to (iv) derive recommendations for redistributive policies in support of greater equity and sustainable development in the post-2015 context. Conceptualizing redistributive policies from a stock-flow perspective reveals an artificial blind spot of the prevailing approach to redistribution and development: wealth redistribution. The prevailing approach generally covers income redistribution and the provision of public goods as a means to foster human capital accumulation (e.g., the MDGs approach), but it ignores wealth redistribution. This omission impoverishes the understanding of redistribution and hampers the design of redistributive policies in pursuit of development objectives (e.g., efficient taxation, progressive and increased revenue mobilization, poverty reduction, equality of opportunity, etc.). Furthermore, conceptualizing redistributive policies in light of their linkages to equity and sustainable development is increasingly needed given the upcoming transition from the MDGs to SDGs in a context characterised by sustainability challenges, such as rising income inequality, wealth concentration and growing carbon emissions. In this regard, an asset-centred model allows thinking beyond redistributive policy options affecting production and consumption incentives (e.g., progressive environmental taxes) in order to consider possible asset transfers between the private and public sector (e.g., socialization of natural resource ownership, etc.). Based on these premises, this paper suggests a number of steps for developing a more comprehensive approach to redistribution and moving towards a framework enabling asset-centred redistributive policies for greater equity, economic democracy and sustainable development.
    Keywords: Income, wealth, inequality, redistribution, public social spending, revenue mobilization, progressive tax system, net wealth tax, carbon tax, international tax cooperation, MDGs, SDGs, post-2015
    JEL: D31 H2 H3 H4 H41 H71 H82 H87
    Date: 2014–04
  8. By: Christian Baker (Department of Economics, Brigham Young University); Jeremy Bejarano (Department of Economics, University of Chicago); Richard W. Evans (Department of Economics, Brigham Young University); Kenneth L. Judd (Hoover Institution, Stanford University); Kerk L. Phillips (Department of Economics, Brigham Young University)
    Abstract: We characterize and demonstrate a solution method for an optimal commodity (sales) tax problem consisting of multiple goods, heterogeneous agents, and a nonconvex policy maker optimization problem. Our approach allows for more dimensions of heterogeneity than has been previously possible, incorporates potential model uncertainty and policy objective uncertainty, and relaxes some of the assumptions in the previous literature that were necessary to generate a convex optimization problem for the policy maker. Our solution technique involves creating a large database of optimal responses by different individuals for different policy parameters and using ``big data'' techniques to compute policy maker objective values over these individuals. We calibrate our model to the United States and test the effects of a differentiated optimal commodity tax versus a flat tax and the effect of exempting a broad class of goods (services) from commodity taxation. We find that only a potentially small amount of tax revenue is lost for a given societal welfare level by departing from an optimal differentiated sales tax schedule to a uniform flat tax and that there is only a small loss in revenue from exempting a class of goods such as services in the United States.
    Keywords: lOptimal tax, sales tax, commodity tax, big data, robustness
    JEL: C61 C63 D31 E62 H21
    Date: 2014–03
  9. By: Matthew C. Weinzierl (Harvard Business School, Business, Government and the International Economy Unit)
    Abstract: This paper explores how the persistently popular "classical" logic of benefit based taxation, in which an individual's benefit from public goods is tied to his or her income-earning ability, can be incorporated into modern optimal tax theory. If Lindahl's methods are applied to that view of benefits, first-best optimal policy can be characterized analytically as depending on a few potentially estimable statistics, in particular the coefficient of complementarity between public goods and innate talent. Constrained optimal policy with a Pareto-efficient objective that strikes a balance-controlled by a single parameter-between this principle and the familiar utilitarian criterion can be simulated using conventional constraints and methods. A wide range of optimal policy outcomes can result, including those consistent with existing policies. To the extent that such an objective reflects the mixed normative reasoning behind prevailing policies, this model may offer a useful approach to a positive optimal tax theory.
    Date: 2014–04
  10. By: James CUST (University of Oxford & University of Luxembourg); Ridwan D. RUSLI (Division of Economics, School of Humanities and Social Sciences, Nanyang Technological University, Singapore, 637332.)
    Abstract: We examine the economic consequences of resource extraction and associated revenue windfalls, measured at the subnational level. Our analysis focuses on variations across Indonesian districts and municipalities to estimate the spillover effects on economic activity, measured in terms of local GDP. Two important channels are identified: direct spillover eects from extraction activity, and the fiscal spillovers from local government spending associated with revenue windfalls from extraction activity. We use Indonesia's fiscal sharing rules to quantify and disentangle these two channels by application of an instrumental variable. We show that the main economic gains accrue via transfers to, and spending by, local government. While direct project-level investments and production contribute to measures of overall GDP, these are found to be largely due driven by the value of oil extraction, with only limited evidence for a direct impact on non-oil GDP. In contrast to other works, it appears that regionally decentralized government spending can be growth-enhancing over the decade surveyed. We argue that resource endowments do contribute to increased economic activity at the subnational level in Indonesia, but may lower the overall growth eect of spending.
    Date: 2014–02
  11. By: Artheya, Kartik (Federal Reserve Bank of Richmond); Reilly, Devin (University of Pennsylvania); Simpson, Nicole B. (Colgate University)
    Abstract: The Earned Income Tax Credit (EITC) is the single most important transfer program in place in the United States. An aspect of the EITC that has received little attention thus far is its role as a public insurance program. Yet, the structure of the EITC necessarily protects its primary class of recipients, unskilled single mothers, against major risks they face to both wages and changes in family structure. Our study provides the first quantitative statement about the insurance provided by the EITC. We study a dynamic model of consumption, savings, and labor supply in which households face wage and demographic risk, but have only limited self-insurance capacity. We use the model to compare outcomes under the EITC to the counterfactual in which it is completely eliminated. We find that the EITC provides substantial insurance to unskilled single mothers: The program reduces consumption volatility, as measured by the coefficient of the variation, by 12 percentage points or more, even as it allows these households to save less. Importantly, this insurance provision may not be compromising incentives to work: The model suggests that the EITC increases the labor supply of unskilled single mothers substantially at the extensive margin.
    Keywords: Taxation and Subsidies; Labor Supply; Insurance
    JEL: H22 H24 J22
    Date: 2014–04–14
  12. By: Alfredo Marvão Pereira (Department of Economics, The College of William and Mary); Jorge M. Andraz (Faculdade de Economia, Universidade do Algarve)
    Abstract: We estimate the long-term impact of social security and social protection spending in a set of twelve EU countries. We estimate country-specific VARs relating GDP, unemployment, savings, and social spending. We find that social spending has a negative effect in most countries while the effects on savings are either not significant or positive but small. In turn, the negative effects on output are significant and in some cases large. Unemployment is the dominant channel through which social spending affects output. Our results imply that any increase in generosity would, under the current situation, bring detrimental macroeconomic effects. In addition, a less distortionary tax mix should be used to finance redistributive spending and the insurance component of the systems should be changed in the direction of a capitalization regime based on defined contributions. Obviously, this transition would take time and would not be costless but neither is maintaining the status quo.
    Keywords: Social security spending, unemployment, saving, output, fiscal multipliers, VAR, EU.
    JEL: C32 C51 C52 H55
    Date: 2014–04–12
  13. By: Floriana Cerniglia; Laura Pagani
    Abstract: The allocation of competences between the EU and Member States is one of most burning issues in the history of the European integration. From a theoretical economic perspective, this ongoing process calls into question the theory of fiscal federalism. In this paper, we study empirically the impact of European citizens’ knowledge about the EU on their attitudes toward the allocation of competences. We use micro-data from the Eurobarometer survey. We find that more knowledgeable citizens are more willing to favour centralization of competences to the EU in areas where public intervention by individual Member States causes externalities, where scale economies in the provision of public goods are important and where redistributive and stabilization functions have to be pursued.
    Keywords: European Union, Information, Policy opinions, Political Economy
    JEL: H7 D8
    Date: 2014–04
  14. By: Lassila, Jukka; Valkonen, Tarmo
    Abstract: Can longer working lives bring sufficient tax revenues to pay for the growing public health and care expenditure that longer lifetimes cause? We review studies concerning retirement decisions and pension policies, the role of mortality in health and long-term care costs, and errors in mortality projections. We combine key results into a numerical OLG model where changes in mortality have direct effects both on working careers and on per capita use of health and long-term care services. The model has been calibrated to the Finnish economy and demographics. Although there are huge uncertainties concerning future health and long-term care expenditure when people live longer, our simulations show that without policies directed to disability admission rules and old-age pension eligibility ages, working lives are unlikely to extend sufficiently. But, importantly, with such policies it seems quite possible that generations enjoying longer lifetimes can also pay for the full costs by working longer.
    Keywords: life expectancy, working careers, health and long-term care expenditure, fiscal sustainability
    JEL: H30 H63 H68 J11
    Date: 2014–04–09
  15. By: Hynek Lavicka; Tomas Lichard; Jan Novotny
    Abstract: The recent crisis revived interest in financial transaction taxes (FTTs) as a means to offset negative risk externalities. However, up-to-date academic research does not provide sufficient insights into the effects of transaction taxes on financial markets as the literature has here-to-fore been focused too narrowly on Gaussian variance as a measure of volatility. In this paper, we argue that it is imperative to understand the relationship between price jumps, Gaussian variance, and FTTs. While Gaussian variance is not necessarily a problem in itself, the non-normality of return distribution caused by price jumps affects not only the performance of many risk-hedging algorithms but directly influences the frequency of catastrophic market events. To study the aforementioned relationship, we use an agent-based model of financial markets. Its results show that FTTs may increase the variance while decreasing the impact of price jumps. This result implies that regulators may face a trade-off between overall variance and price jumps when designing optimal tax. However, the results are not robust to the size of the artificial market as non-linearities emerge when the size of the market is increased.
    Keywords: price jumps; financial transaction taxes; agent-based modeling; Monte Carlo; volatility;
    JEL: C15 C16 C61 G17 G18 H23
    Date: 2014–03
  16. By: Artheya, Kartik (Federal Reserve Bank of Richmond); Owens, Andrew (Federal Reserve Bank of Richmond); Schwartzman, Felipe (Federal Reserve Bank of Richmond)
    Abstract: The aftermath of the recent recession has seen numerous calls to use transfers to poorer households as a means to enhance aggregate activity. We show that the key to understanding the direction and size of such interventions lies in labor supply decisions. We study the aggregate impact of short-term redistributive economic policy in a standard incomplete-markets model. We characterize analytically conditions under which redistribution leads to an increase or decrease in effective hours worked, and hence, output. We then show that under the parameterization that matches the wealth distribution in the U.S. economy (Castaneda et al., 2003), wealth redistribution leads to a boom in consumption, but not in output.
    Keywords: Multipliers; Redistribution; Labor supply; Idiosyncratic Risk
    JEL: D90 E21 E25 E63
    Date: 2014–02–28
  17. By: Zhang, Xiao-Bing (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: This paper investigates the strategic interactions between carbon taxation by a resource-consumers’ coalition and (wellhead) energy pricing by a producers’ cartel under possible innovation in a cheap carbon-free technology through a dynamic game. The arrival time of innovation is uncertain, but can be affected by the amount spent on R&D. The results show that the expectation of possible innovation decreases both the initial carbon tax and producer price, resulting in higher initial resource extraction or carbon emissions. Even though this 'green paradox' effect will appear in the cooperative case (no strategic interactions) as well, the presence of strategic interactions between resource producers and consumers can somewhat restrain such an effect. The optimal R&D to stimulate innovation is an increasing function of the initial CO2 concentration for both the resource consumers and a global planner. However, the resource consumers can over-invest in R&D (compared with the global efficient investment.
    Keywords: Carbon taxation; Innovation; Uncertainty; Dynamic game
    JEL: C73 H21 Q23 Q54
    Date: 2014–04

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