nep-pbe New Economics Papers
on Public Economics
Issue of 2014‒06‒22
fourteen papers chosen by
Keunjae Lee
Pusan National University

  1. When are the Effects of Fiscal Policy Uncertainty Large? By Johannsen, Benjamin K.
  2. Comparing the Incidence of Taxes and Social Spending in Brazil and the United States - Working Paper 360 By Sean Higgins, Nora Lustig, Whitney Ruble, and Timothy Smeeding
  3. Optimal taxation with home production By Olovsson, Conny
  4. The Effect of Capital Taxes on Household's Portfolio Composition and Intertemporal Choice: Evidence from the Dutch 2001 Capital Income Tax Reform By Zoutman, Floris T.
  5. The Choice of the Personal Income Tax Base By Roger H. Gordon; Wojciech Kopczuk
  6. Transfer Pricing and Debt Shifting in Multinationals By Schindler, Dirk; Schjelderup, Guttorm
  7. Optimal Tax Base with Administrative Fixed Costs By Stéphane Gauthier
  8. The elasticity of Informality to Taxes and tranfers By Jorge Alonso-Ortiz; Julio Leal
  9. A Microsimulation model of the Slovak Tax-Benefit System By Zuzana Siebertova; Norbert Svarda; Jana Valachyova
  10. Payroll tax reductions and job flows in France By Richard Duhautois; Fabrice Gilles
  11. Property Taxation, Bounded Rationality and House Prices By Elinder, Mikael; Persson, Lovisa
  12. Fiscal Policy in an Unemployment Crisis By Pontus Rendahl
  13. A lost decade? Decomposing the effect of 2001-11 tax-benefit policy changes on the income distribution in EU countries By John Hills; Alari Paulus; Holly Sutherland; Iva Tasseva
  14. State Formation And Frontier Society: An Empirical Examination By Roberto Foa; Anna Nemirovskaya

  1. By: Johannsen, Benjamin K. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Using a new-Keynesian model with endogenous capital accumulation, I show that uncertainty about fiscal policy can cause large declines in consumption, investment, and output when the zero lower bound (ZLB) binds, but has modest effects when the monetary authority is not constrained by the ZLB. I study uncertainty about the level of government spending and uncertainty about tax rates on consumption, wages, capital income, and investment. In my model, uncertainty about government spending and the wage tax rate has particularly large effects. I show that the effects of fiscal policy uncertainty are largest when the nominal interest rate is on the cusp of the ZLB and also that delaying fiscal policy uncertainty diminishes its effects only if the resolution of uncertainty occurs after ZLB no longer binds.
    Keywords: Fiscal policy; zero lower bound; uncertainty
    Date: 2014–05–22
  2. By: Sean Higgins, Nora Lustig, Whitney Ruble, and Timothy Smeeding
    Abstract: We perform the first comprehensive fiscal incidence analyses in Brazil and the US, including direct cash and food transfers, targeted housing and heating subsidies, public spending on education and health, and personal income, payroll, corporate income, property, and expenditure taxes. In both countries, primary spending is close to 40 percent of GDP. The US achieves higher redistribution through direct taxes and transfers, primarily due to underutilization of the personal income tax in Brazil and the fact that Brazil’s highly progressive cash and food transfer programs are small while larger transfer programs are less progressive. However, when health and non-tertiary education spending are added to income using the government cost approach, the two countries achieve similar levels of redistribution. This result may be a reflection of better-off households in Brazil opting out of public services due to quality concerns rather than a result of government effort to make spending more equitable.
    Keywords: inequality, fiscal policy, taxation, social spending
    JEL: D31 H22 I38
    Date: 2014–03
  3. By: Olovsson, Conny (Research Department, Central Bank of Sweden)
    Abstract: Optimal taxes for Europe and the U.S. are derived in a realistically calibrated model in which agents buy consumption goods and services and use home capital and labor to produce household services. The optimal tax rate on services is substantially lower than the tax rate on goods. Specifically, the planner cannot tax home production directly and instead lowers the tax rate on market services to increase the relative price of home production. The optimal tax rate on the return to home capital is strictly positive and the welfare gains from switching to optimal taxes are large.
    Keywords: Optimal Taxation; Household Production; Time Allocation; Labor Supply
    JEL: D13 H21 J22
    Date: 2014–04–01
  4. By: Zoutman, Floris T. (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: This paper estimates the effect of capital taxation on portfolio composition and savings using quasi-experimental variation generated by the Dutch 2001 capital tax reform. The reform drove a wedge between the taxation of housing and financial wealth and in addition affected the after-tax return on all assets. I use unique administrative household panel data with information on capital income, wealth and portfolio shares to exploit this variation. I derive and estimate a semi-structural model which directly relates the share invested in financial wealth to the after-tax return on financial and housing wealth. In addition, I link accumulated wealth in the reform-period to the change in the after-tax return on total wealth. Elasticities have the expected sign but are modest in size. I find some evidence for heterogeneity in the behavioral response. In particular, rich and single households seem to be more responsive in terms of both portfolio composition and wealth accumulation, than other households. The estimated elasticities can be used in capital tax models to calibrate the optimal tax rate.
    Keywords: Tax Reform; Capital Taxation of Households; Portfolio Composition; Intertemporal Behavior
    JEL: G11 G18 H24 H31
    Date: 2014–06–11
  5. By: Roger H. Gordon; Wojciech Kopczuk
    Abstract: Starting with Vickrey (1945) and Mirrlees (1971), the optimal tax literature has studied the design of a personal income tax. The assumed ideal would be to tax earnings ability. Earnings ability is unobservable for tax purposes, however. Past papers have focused instead on designing a tax on labor income. Existing tax bases, though, depend on a broader range of information about each individual than just labor income. In principle, this supplementary information can help in designing a tax that has more attractive distributional properties, by more closely approximating an ability tax. The objective of this paper is to lay out theoretically and estimate empirically how to make best use of available information about each individual in addition to earnings, in a setting where the first-best tax would be an ability tax. The theory lays out an equity/efficiency trade off when choosing the tax base. In the empirical work, we find the tax base that is best on equity grounds alone. We find that the choice to tax couples based on their joint income, and the inclusion of dividends, interest income, and a dependents' deduction in the tax base in roughly their current form can be rationalized simply based on their value in better approximating an ability tax, without any need for supplementary motivations for these provisions. However, the inclusion of mortgage and property tax payments in the list of itemized deductions cannot be defended on these grounds.
    JEL: H21 H23
    Date: 2014–06
  6. By: Schindler, Dirk (Dept. of Accounting, Auditing and Law, Norwegian School of Economics); Schjelderup, Guttorm (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: There is a growing concern that governments lose substantial corporate tax revenue due to transfer pricing and debt shifting strategies. Existing literature studies debt shifting and transfer pricing separately. In practice, however, the choice of debt-to-asset ratios in affiliates and the transfer price of internal debt are interrelated management decisions that are also mutually affected by government regulation. This paper models these strategies as intertwined. We find that the tax sensitivity of the corporate tax base depends on whether debt shifting and transfer pricing are cost complements or substitutes. A second result is that stricter regulation of debt shifting and transfer pricing may have the effect of fostering such activities.
    Keywords: Multinational corporations; profit shifting; debt shifting; concealment costs
    JEL: D21 F23 H25
    Date: 2014–05–30
  7. By: Stéphane Gauthier (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: This note characterizes the optimal base for commodity taxation in the presence of administrative fixed costs varying across goods. For low tax rates, the optimal base only comprises commodities whose discouragement index is greater than the ratio of their administrative costs to the tax they yield. An illustration with UK data shows that a category of goods should be taxed only if the revenue generated on this category is at least ten times greater than its administrative fixed cost. The cost imputable to the category of goods taxed at the standard rate would be at most 6 percent of total VAT revenue.The administration cost associated with categories of goods currently tax free could justify exemption.
    Keywords: indirect taxation; VAT; tax base; administrative costs
    Date: 2013–12
  8. By: Jorge Alonso-Ortiz (Centro de Investigación Económica (CIE), Instituto Tecnológico Autónomo de México (ITAM)); Julio Leal (Banco de México)
    Abstract: We study the impact on the size of the informal sector of a tax levied on formal workers, and transfers that may be distributed to both formal and informal workers alike. We build a search model that features an informal sector and we calibrate it to data from Mexico. We investigate whether changes in size and distribution of transfers between formal and informal workers have a signicant impact on the size of the informal sector. We nd that changes in the distribution, for a given size, create a range of variation of 19.35pp. Analogously, changes in size create a range of variation of 5.7pp, resulting in a total range of variation of 51.2pp. This implies that it is possible to substantially increase formalization by rising extra tax resources as long as they accrue to formal workers. We illustrate the validity of our approach simulating the introduction of Seguro Popular.
    Keywords: Informal Sector, Search, Tax and Transfer Programs, Seguro Popular
    JEL: E24 E26 E62 J64 J65
    Date: 2013
  9. By: Zuzana Siebertova (Council for Budget Responsibility); Norbert Svarda (Council for Budget Responsibility); Jana Valachyova (Council for Budget Responsibility)
    Abstract: This paper sets out in detail a microsimulation model of the Slovak tax and transfer system that builds on the existing EUROMOD platform. The objective is to give an overview of the development process, and to discuss differences relative to EUROMOD. In a validation exercise, we demonstrate that refinements to the current version of the EUROMOD can improve the match between simulated output, underlying data and official statistics. It is concluded that the model is a valid tool to conduct tax and benefit simulation exercises in the context of Slovakia.
    Keywords: microsimulation, EUROMOD, tax and benefit policy,Slovakia
    JEL: C81 I38 H24
    Date: 2014–06
  10. By: Richard Duhautois (CEE - Centre d'études de l'emploi - Ministère de l'Enseignement supérieur et Recherche - Ministère du Travail, de l'Emploi et de la Santé, ERUDITE - Equipe de Recherche sur l'Utilisation des Données Individuelles Temporelles en Economie - Université Paris-Est Créteil Val-de-Marne (UPEC) : EA437 - Université Paris-Est Marne-la-Vallée (UPEMLV)); Fabrice Gilles (EQUIPPE - ECONOMIE QUANTITATIVE, INTEGRATION, POLITIQUES PUBLIQUES ET ECONOMETRIE - Université Lille I - Sciences et technologies - Université Lille II - Droit et santé - Université Lille III - Sciences humaines et sociales - PRES Université Lille Nord de France, TEPP - Travail, Emploi et Politiques Publiques - CNRS : FR3435 - Université Paris-Est Marne-la-Vallée (UPEMLV))
    Abstract: In France, policies that aim at reducing labour cost have extended to more and more workers since the beginning of the 90s. Evaluations of the effect of payroll tax reduction often use estimations of labour demand equations. In this paper, we consider the impact of labour tax cuts on job creations and destructions through the Fillon reform (2003), by using a fixed effect instrumental variable approach and a sectora l pseudo panel dataset. Over 2002-2005, our estimates show that PTR let job flows unchanged.
    Date: 2013
  11. By: Elinder, Mikael (Department of Economics, Uppsala University); Persson, Lovisa (Department of Economics, Uppsala University)
    Abstract: In 2008, the Swedish property tax was reformed and a cap on yearly tax liabilities was introduced. A large fraction of owner occupied houses was subject to a substantial decrease in the tax. When the reform was announced, most analysts projected – in line with tax capitalization theory – that the tax decrease would lead to significant increases in house prices. We estimate price responses and capitalization degrees, using various DID strategies, in which the price dynamics of houses that were subject to a generous tax reduction are compared to the price dynamics of houses with a more modest reduction. Our results are largely inconsistent with capitalization theory. For the majority of properties, we find no evidence that the tax cut led to increases inhouse prices. However, we find evidence of partial capitalization in sub-markets with highly valued properties, highly educated citizens and were it is especially difficult to increase supply. We argue that theories of bounded rationality can help explain why house buyers may fail to take a tax decrease into account in the valuation of houses.
    Keywords: Announcement effects; Capitalization; Financial literacy; Housing market; Inattention; Saliency
    JEL: D01 D03 D04 D12 H22 H24 R21 R38
    Date: 2014–06–19
  12. By: Pontus Rendahl (University of Cambridge, Faculty of Economics; Centre for Macroeconomics (CFM))
    Abstract: This paper shows that large fiscal multipliers arise naturally from equilibrium unemployment dynamics. In response to a shock that brings the economy into a liquidity trap, an expansion in government spending increases output and causes a fall in the unemployment rate. Since movements in unemployment are persistent, the effects of current spending linger into the future, leading to an enduring rise in income. As an enduring rise in income boosts private demand, even a temporary increase in government spending sets in motion a virtuous employment-spending spiral with a large associated multiplier. This transmission mechanism contrasts with the conventional view in which scal policy may be ecacious only under a prolonged and committed rise in government spending, which engineers a spiral of increasing in ation.
    Keywords: Fiscal multiplier, liquidity trap, zero lower bound, unemployment inertia
    Date: 2014–05
  13. By: John Hills; Alari Paulus; Holly Sutherland; Iva Tasseva
    Abstract: This paper examines the extent to which tax and benefit policy changes introduced in the period 2001-11 had a poverty- or inequality-reducing effect. We assess whether the period was indeed a “missed opportunity” for policy changes to make a difference to poverty reduction since the Lisbon Treaty, given the general lack of improvement shown by poverty indicators. Our analysis uses the tax-benefit model EUROMOD and covers seven diverse EU countries: Belgium, Bulgaria, Estonia, Greece, Hungary, Italy and the United Kingdom. We apply the Bargain and Callan (2010) decomposition approach, extending it by separating the effect due to structural policy changes and the indexation effect. We find that the latter was typically more effective in alleviating poverty and inequality than changes to the structure of policies. In fact, most of the structural changes that governments introduced, especially in the 2007-11 crisis-onset period, had poverty and inequality-increasing effects. We find considerable variation between countries in how different policy instruments have been adjusted, and in the effects of these adjustments by income, by age and by household composition, showing the importance of understanding them together, rather than discussing just some in isolation.
    Keywords: tax-benefit policies, European Union, income distribution, income poverty, microsimulation, EUROMOD
    JEL: D31 H23 H53 I32
    Date: 2014–06
  14. By: Roberto Foa (Harvard University); Anna Nemirovskaya (National Research University Higher School of Economics)
    Abstract: How is state capacity consolidated? While there is a growing literature on state formation and the long-term rise of state capacity, this literature typically deals with differences between countries, neglecting the fact that state formation also occurs differentially within a country over time. This article examines legacies of state formation spatially, by looking at variation within "frontier" states - countries which in recent centuries have extended rule over new territories adjacent to their core regions. Frontier zones within such countries are found to have ongoing lower levels of public order and deficient public goods provision. Several theories are examined to explain this discrepancy, including internal resettlement, costs of monitoring and enforcement, and the relationship between settlers and the indigenous population. It is argued that the formation of strong social institutions among settlers leads to resistance to attempts to impose governance over frontier regions, and to `select for' lower fiscal capacity and lower provision of public goods.
    Keywords: State formation, settlement patterns, historical institutionalism, frontier thesis, public goods, rule of law, governance.
    JEL: Z13 N90 R23 H41
    Date: 2014

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