nep-pbe New Economics Papers
on Public Economics
Issue of 2014‒05‒17
eighteen papers chosen by
Keunjae Lee
Pusan National University

  1. Fiscal equalisation schemes and sub-central government borrowing By Salvador Barrios; Diego Martínez
  2. Fairness in Tax compliance: A Political Competition Model By Ángel Solano García
  3. The behavioralist as tax collector: Using natural field experiments to enhance tax compliance By Michael Hallsworth; John List; Robert Metcalfe; Ivo Vlaev
  4. Tax Competition with Heterogeneous Firms By Richard E. Baldwin; Toshihiro Okubo
  5. Uncertainty and fiscal cliffs By Davig, Troy A.; Foerster, Andrew T.
  6. Tax Enforcement, Technology, and the Informal Sector By Ceyhun Elgin; Mario Solis-Garcia
  7. Publicly Provided Private Goods and Optimal Taxation when Consumers Have Positional Preferences By Aronsson, Thomas; Johansson-Stenman, Olof
  8. Long Run Trends in the Distribution of Income and Wealth By Roine, Jesper; Waldenström, Daniel
  9. Creating Fiscal Space for Investment by Sub-National Governments: The Role of Institutions By Camila Vammalle; Claudia Hulbert; Rudiger Ahrend
  10. Exploring Policy Options to include Petroleum, Natural Gas and Electricity under the Proposed Goods and Services Tax (GST)Regime in India. By Mukherjee, Sacchidananda; Rao, R. Kavita
  11. Elections and de facto Expenditure Decentralization in Canada By Mario Jametti; Marcelin Joanis
  12. Dependence of States on Central Transfers: State-wise Analysis. By Rao, C. Bhujanga; Srivastava, D.K.
  13. Green Technology and Optimal Emissions Taxation By Stuart McDonald; Joanna Poyago-Theotoky
  14. Consumer Demand System Estimation and Value Added Tax Reforms in the Czech Republic By Petr Jansky
  15. Fiscal Stimulus and Unemployment Dynamics By Chun-Hung Kuo; Hiroaki Miyamoto
  16. Transfer Payments and the Macroeconomy: The Effects of Social Security Benefit Changes, 1952-1991 By Christina D. Romer; David H. Romer
  17. Individual heterogeneity, nonlinear budget sets, and taxable income By Soren Blomquist; Anil Kumar; Che-Yuan Liang; Whitney Newey
  18. Financial Stress and the Impact of Public Debt on UK Growth in High versus Low-Growth Regimes: 1850-2013 By Costas Milas

  1. By: Salvador Barrios; Diego Martínez
    Abstract: We analyse the role played by fiscal equalisation schemes in determining sub-national borrowing. We test econometrically the link between the regional government primary fiscal balances and the GDP per capita in Canada, Germany and Spain. We find that either poor or rich regions can display higher regional public borrowing on average and explain how these results can be linked to the institutional design of regional equalisation systems in place in these countries. Particularly, elements such as tax effort and fiscal capacities play a relevant role in this regard. Reforms of these schemes can therefore prove instrumental in reducing regional heterogeneity in public borrowing.
    Keywords: fiscal equalisation, public deficit, fiscal capacity, taxation.
    JEL: H7 H6
    Date: 2014–04
  2. By: Ángel Solano García (Department of Economic Theory and Economic History, University of Granada.)
    Abstract: This paper analyzes the political economy of income redistribution when voters are concerned about fairness in tax compliance. We consider a two stage-model where there is a two-party competition over the tax rate and over the intensity of the tax enforcement policy in the first stage, and voters decide about their level of tax compliance in the second stage. We find that if the concern about fairness in tax compliance is high enough, a liberal middle-income majority of voters may block any income redistribution policy. Alternatively, we find an equilibrium in which the preferences of the median voter are ignored in favor of a coalition formed by a group of relatively poor voters and the richest voters. In this equilibrium income redistribution prevails with no tax enforcement.
    Keywords: tax evasion, political parties, income redistribution, fairness.
    JEL: D72 H26
    Date: 2014–04–15
  3. By: Michael Hallsworth; John List; Robert Metcalfe; Ivo Vlaev
    Abstract: Tax collection problems date back to the earliest recorded history of mankind. This paper begins with a simple theoretical construct of paying (rather than declaring) taxes, which we argue has been an overlooked aspect of tax compliance. This construct is then tested in two large natural field experiments. Using administrative data from more than 200,000 individuals in the UK, we show that including social norms and public goods messages in standard tax payment reminder letters considerably enhances tax compliance. The field experiments increased taxes collected by the Government in the sample period and were cost-free to implement, demonstrating the potential importance of such interventions in increasing tax compliance.
    Date: 2014
  4. By: Richard E. Baldwin; Toshihiro Okubo
    Abstract: This paper studies tax competition in an economic geography model that allows for agglomeration economies with trade costs and heterogeneous firms. We find that the Nash equilibrium involves the large country charging a higher tax than the small nation, with this rate being too low from a social point of view. Lower trade costs lead to an intensification of competition, a drop in Nash tax rates, and a narrowing of the gap. Since large, productive firms are naturally more sensitive to tax differences in our model, large firms are the crux of tax competition in our model. This also means that tax competition has consequences for the average productivity of the big and small nations‟ industry; by lowering tax rates, the small nation can attract high-productivity firms.
    Keywords: firm heterogeneity, spatial sorting, Nash equilibrium tax, tax cooperation, average productivity
    JEL: H32 P16
    Date: 2014–05
  5. By: Davig, Troy A. (Federal Reserve Bank of Kansas City); Foerster, Andrew T. (Federal Reserve Bank of Kansas City)
    Abstract: Motivated by the US Fiscal Cliff in 2012, this paper considers the short- and longer- term impact of uncertainty generated by fiscal policy. Empirical evidence shows increases in economic policy uncertainty lower investment and employment. Investment that is longer-lived and subject to a longer planning horizon responds to policy uncertainty with a lag, while capital that depreciates more quickly and can be installed with few costs falls immediately. A DSGE model incorporating uncertainty over future tax regimes produces responses to fiscal uncertainty that match key features of the data. The model features uncertainty over the average tax rate and rational expectations about the resolution of uncertainty with specific outcomes and timing. Uncertainty injects noise into the economy and lowers the level of economic activity.
    Keywords: Fiscal policy; Uncertainty; Distorting taxation
    Date: 2014–04–01
  6. By: Ceyhun Elgin; Mario Solis-Garcia
    Date: 2014–05
  7. By: Aronsson, Thomas (Department of Economics, Umeå School of Business and Economics); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law)
    Abstract: This paper analyzes optimal differential commodity taxation, together with optimal nonlinear income taxation, in order to deal with positional preferences. It also derives the optimal public provision of private goods both when differential commodity taxation is feasible and when it is not. It is shown that publicly provided non-positional private goods which are (possibly imperfect) substitutes for positional private goods should be used as a corrective instrument even if the tax system is optimal, i.e. even when differential commodity taxation is feasible. An exception is the special case where all consumers contribute equally much to the positional externality, in which the commodity tax constitutes a perfect instrument for internalizing the positional externality.
    Keywords: Public provision of private goods; income taxation; commodity taxation; relative consumption; asymmetric information; status; positional goods
    JEL: D62 H21 H23 H41
    Date: 2014–05–06
  8. By: Roine, Jesper (Stockholm School of Economics); Waldenström, Daniel (Department of Economics, Uppsala University)
    Abstract: This paper reviews the long run developments in the distribution of personal income and wealth. It also discusses suggested explanations for the observed patterns. We try to answer questions such as: What do we know, and how do we know, about the distribution of income and wealth over time? Are there common trends across countries or over the path of devel-opment? How do the facts relate to proposed theories about changes in inequality? We present the main inequality trends, in some cases starting as early as in the late eighteenth century, combining previous research with recent findings in the so-called top income literature and new evidence on wealth concentration. The picture that emerges shows that inequality was historically high almost everywhere at the beginning of the twentieth century. In some coun-tries this situation was preceded by increasing concentration, but in most cases inequality seems to have been relatively constant at a high level in the nineteenth century. Over the twentieth century inequality decreased almost everywhere for the first 80 years, largely due to decreasing wealth concentration and decreasing capital incomes in the top of the distribution. Thereafter trends are more divergent across countries and also different across income and wealth distributions. Econometric evidence over the long run suggests that top shares increase in periods of above average growth while democracy and high marginal tax rates are associat-ed with lower top shares.
    Keywords: Income inequality; Income distribution; Wealth distribution; Economic history; Top incomes; Welfare state; Taxation
    JEL: D31 H20 J30 N30
    Date: 2014–05–05
  9. By: Camila Vammalle; Claudia Hulbert; Rudiger Ahrend
    Abstract: Sub-national governments (SNGs) are key players for public investment in OECD countries, responsible for nearly two-thirds of it. At the same time, both the well-being of the population and economic performance depend on an adequate provision of public services, which require public facilities and thus public investment. Ensuring that sub-national governments command the resources for necessary public investment is hence important. While in the immediate, the fiscal space of a SNG for public investment is basically determined by its current fiscal capacities, in a longer-term perspective the evolution of fiscal space comes to depend increasingly on the institutional context. This includes the national framework of fiscal relations across levels of government, the nature and characteristics of SNGs’ revenue sources and spending responsibilities, SNGs resilience to crises, and their structural ability to borrow. This paper explores the institutional ability of SNGs to influence their fiscal space for public investment. In this context, it also analyses the main challenges to be faced by SNG finances in the decades to come, as well as recent reforms implemented by SNGs to tackle these specific issues. Les gouvernements infranationaux, responsables de deux tiers de l’investissement public dans les pays de l’OCDE, jouent un rôle crucial en matière d’investissement. Le bien-être de la population et la performance économique reposent en partie sur une provision adéquate de services publics, et réclament des infrastructures et équipements efficaces, financés à travers l’investissement public. S’assurer que les gouvernements infranationaux ont à leur disposition des ressources suffisantes pour investir constitue donc un enjeu de taille. A court terme, leur marge de manoeuvre budgétaire disponible pour l’investissement est déterminée, en grande part, par leur capacité financière immédiate. Cependant dans une perspective de long terme, l’évolution de cette marge de manoeuvre repose davantage sur le contexte institutionnel – relations budgétaires entre niveaux de gouvernement, nature et caractéristiques des sources de revenus et de dépenses infranationales, résilience des gouvernements infranationaux aux crises, capacité structurelle à emprunter. Cet article analyse la capacité institutionnelle d’un gouvernement infranational à influencer sa marge de manoeuvre budgétaire disponible pour l’investissement. Pour ce faire, il étudie les principaux défis que devraient rencontrer les gouvernements infranationaux dans les décennies à venir, ainsi que les réformes introduites récemment pour y répondre.
    Keywords: institutions, sub-national government, fiscal space, fiscal relations across levels of government, public investment, public services, investissement public, gouvernements infra-nationaux, marge de manoeuvre budgétaire, relations budgétaires entre niveaux de gouvernement, services publics, institutions
    JEL: G28 H41 H71 H74 H77
    Date: 2014–04–22
  10. By: Mukherjee, Sacchidananda (National Institute of Public Finance and Policy); Rao, R. Kavita (National Institute of Public Finance and Policy)
    Abstract: The study analyses the impact of keeping crude petroleum, natural gas, motor spirit (gasoline/ petrol), high speed diesel (diesel), aviation turbine fuel (ATF) and electricity out of the Value Added Tax (VAT) scheme. Specifically, the study finds that keeping these items out of the input tax credit mechanism (either partially or fully) would result in cascading. Through an input-output framework, this study proposes some alternatives to the proposed design of GST and assesses the implications for cascading and prices. It captures the degree of cascading across 48 sectors under different scenarios and explores alternative policy options to phase out under-recoveries of oil market companies on account of sales of diesel and petrol under the administered pricing mechanism.
    Keywords: Goods and services tax, Value added tax, Tax cascading, Tax incidence analysis, Ad valorem tax, Input-output analysis, Revenue neutral rates, Taxation of petroleum products, India
    Date: 2014–05
  11. By: Mario Jametti (University of Lugano); Marcelin Joanis (Université de Sherbrooke)
    Abstract: This paper empirically investigates the underlying determinants of expenditure decentralization, based on the predictions of a new political economy model of partial decentralization. The analysis is based on an agency model, in which two levels of government are involved in the provision of a public good and voters are imperfectly informed about each government's contribution to the good, creating a shared accountability problem. Under shared expenditure responsibility, the degree of decentralization is endogenous and depends on the relative political conditions prevailing at each level of government. Consistent with the model's predictions, empirical results from a panel of Canadian provinces show that decentralization in a province increases with the electoral strength of the provincial government and decreases with the electoral strength of the federal government, in addition to being affected significantly by the partisan affiliation of both levels of government. A series of alternative empirical specifications, including an IV regression exploiting campaign spending data, are presented to assess the robustness of these results.
    Keywords: Fiscal decentralization; Fiscal federalism; Vertical interactions; Partial Decentralization; Elections
    JEL: R50 H77 D72
    Date: 2014
  12. By: Rao, C. Bhujanga (National Institute of Public Finance and Policy); Srivastava, D.K. (Madras School of Economics)
    Abstract: This paper examines the dependence of states on central fiscal transfers. The pattern of dependence of states on central transfers is studied with respect to five groups of states, namely, high, middle and low income general category states and two groups of special category states categorized into high and low income states. We make a distinction between transfers that are in the form of an entitlement like states' share in central taxes or statutory grants vis-a-vis transfers that are discretionary and depend on centre's decisions. In terms of groups of states, the extent of dependence is relatively quite high for the special category states and the low income states. The extent of dependence was lowest during the period covered under the Tenth Finance Commission period. It has since increased, for all states considered together, by about 3.5 percentage points, from 37.4 percent to 40.9 percent of states' revenue receipts. This increase comes both from entitlement transfers and discretionary transfers to the extent of 2.1 and 1.3 percentage points, respectively.
    Keywords: Central transfers, Tax devolution
    JEL: H11 H77
    Date: 2014–05
  13. By: Stuart McDonald (School of Economics, The Universty of Queensland, Australia); Joanna Poyago-Theotoky (School of Economics, La Trobe University, Australia; Rimini Centre for Economic Analysis (RCEA), Italy)
    Abstract: We examine the impact of an optimal emissions tax on research and development of emission reducing green technology (E-R&D) in the presence of R&D spillovers. We show that the size and eectiveness of the optimal emissions tax depends on the type of the R&D spillover: input or output spillover. In the case of R&D input spillovers (where only knowledge spillovers are accounted for), the optimal emissions tax required to stimulate R&D is always higher than when there is an R&D output spillover (where abatement and knowledge spillovers exist simultaneously). We also nd that optimal emissions taxation and cooperative R&D complement each other when R&D spillovers are small, leading to lower emissions.
    Keywords: Environmental R&D, Green Technology, R&D Spillover, Emissions Tax
    JEL: H23 L11 Q55
    Date: 2014–03
  14. By: Petr Jansky (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic and CERGE-IE, a joint workplace of Charles University and the Economics Institute of the Academy of Sciences of the Czech Republic)
    Abstract: The rates of value added tax (VAT) have recently changed in the Czech Republic, and I simulate the impact of these reforms. They are an example of changes in indirect taxes that change the prices of goods and services, to which households can respond by adjusting their expenditures. I first estimate the behavioural response of consumers to price changes in the Czech Republic by applying a consumer demand model of the quadratic almost ideal system (QUAIDS) on the basis of the Czech Statistical Office household expenditure and price data for the period from 2001 to 2011. I derive estimates of own- and cross-price and income elasticities for individual households. I then use these elasticities to estimate the impact of the changes in VAT rates that were proposed or implemented between 2011 and 2013, on households’ quantity demanded and government revenues. One of the main findings is that the estimated increases in government revenues that take the consumer responses into account are more than a quarter lower than the estimates that use the static simulation.
    Keywords: consumer behaviour; demand system; QUAIDS; tax reforms; value added tax
    JEL: D12 H20 H31
    Date: 2014–04
  15. By: Chun-Hung Kuo (International University of Japan); Hiroaki Miyamoto (The University of Tokyo)
    Abstract: Focusing on both hiring and firing margins, this paper revisits effects of fiscal expansion on unemployment. We provide evidence that an increase in government spending increases the job finding rate and reduces the separation rate, lowering unemployment in the U.S. by using a structural VAR model. We then develop a DSGE model with search frictions where job separation is endogenously determined. Our model can capture the empirical pattern of responses of the job finding, separation, and unemployment rates to a government spending shock. We also demonstrate that model's predictions are in contrast with earlier studies that assume exogenous separation.
    Keywords: Fiscal Policy, Unemployment, Labor market, Search and matching, Endogenous separation
    JEL: E24 E62 J64
    Date: 2014–05
  16. By: Christina D. Romer; David H. Romer
    Abstract: From the early 1950s to the early 1990s, increases in Social Security benefits in the United States varied widely in size and timing, and were only rarely undertaken in response to short-run macroeconomic developments. This paper uses these benefit increases to investigate the macroeconomic effects of changes in transfer payments. It finds a large, immediate, and statistically significant response of consumption to permanent changes in transfers. The response appears to decline at longer horizons, however, and there is no clear evidence of effects on industrial production or employment. These effects differ sharply from the effects of relatively exogenous tax changes: the impact of transfers is faster, but much less persistent and dramatically smaller overall. Finally, we find strong statistical and narrative evidence of a sharply contractionary monetary policy response to permanent benefit increases that is not present for tax changes. This may account for the lower persistence of the consumption effects of transfers and their failure to spread to broader indicators of economic activity.
    JEL: E21 E62 E63 H31 N12
    Date: 2014–05
  17. By: Soren Blomquist; Anil Kumar; Che-Yuan Liang; Whitney Newey (Institute for Fiscal Studies and MIT)
    Abstract: Given the key role of the taxable income elasticity in designing an optimal tax system there are many studies attempting to estimate this elasticity. To account for nonlinear taxes these studies either use instrumental variables approaches that are not fully consistent, or impose strong functional form assumptions. None allow for general heterogeneity in preferences. In this paper we derive the mean and distribution of taxable income, conditional on a nonlinear budget set, allowing general heterogeneity and optimization errors for the mean. We find an important dimension reduction and use that to develop nonparametric estimation methods. We show how to nonparametrically estimate the conditional mean of taxable income imposing all the restrictions of utility maximization and allowing for measurement errors. We apply this method to Swedish data and estimate for prime age males a significant net of tax elasticity of 0.6 and a significant income elasticity of -0.08.
    Date: 2014–05
  18. By: Costas Milas (University of Liverpool, UK; Rimini Centre of Economic Analysis, Italy)
    Abstract: Using a long historical dataset, we estimate a Threshold Vector Autoregression (T-VAR) model for the UK based on a financial stress measure, the debt-to-GDP ratio, borrowing costs and real GDP growth. Our model allows for the impact of debt/GDP to vary between periods of high and low economic growth. We find that financial stress depresses growth much more in the low as opposed to the high-growth regime. We also find that positive shocks to debt/GDP depress economic growth and raise borrowing costs; again, the impact is much stronger when growth is low. This is an important finding as economists and policy-makers are currently debating whether it makes sense to proceed swiftly with fiscal consolidation when economic conditions remain weak.
    Keywords: Debt, financial stress, GDP growth regimes
    JEL: C2 H3 H6
    Date: 2014–04

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