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on Public Economics |
| By: | James Alm (Department of Economics, Tulane University); Jorge Martinez-Vazquez (International Center for Public Policy. Andrew Young School of Policy Studies, Georgia State University); Chandler McClellan (Georgia State University) |
| Abstract: | Although corruption and tax evasion are distinct and separate problems, they can easily become intertwined and reinforcing. A society that is more corrupt may enable more tax evasion as corrupt officials seek more income via bribes; conversely, higher levels of tax evasion may drive corruption by offering more opportunities for bribes. While a large body of work on each subject separately has emerged, the relationship between the two problems has remained a largely unexplored area. In particular, there is no theoretical work that examines the relationship between corruption and firm tax evasion, focusing on how the potential for bribery of tax officials affects a firm’s tax evasion decisions, and there is no empirical work that examines these linkages. This paper develops a theoretical model that incorporates the potential for bribery in a firm’s tax reporting decisions, and then tests the main results of the theory using firm level information on reporting obtained from the World Enterprise Survey and the Business Environment and Enterprise Performance Survey. Estimation methods include both instrumental variable methods and propensity score matching methods, and also control for potential endogeneity of evasion and corruption. Results demonstrate that it is corruption that largely drives higher levels of evasion; that is, corruption of tax officials is a statistically and economically significant determinant of tax evasion. Tax inspectors who request bribes result in reduction of sales reported for taxes of between 4 and 10 percentage points. Additionally, larger bribes result in higher levels of evasion, at least up to some point. These results indicate that governments seeking to increase their tax revenues must work first to ensure an honest tax administration. |
| Keywords: | Tax compliance; corruption. |
| Date: | 2014–05–22 |
| URL: | http://d.repec.org/n?u=RePEc:ays:ispwps:paper1422&r=pbe |
| By: | Cebula, Richard; Foley, Maggie |
| Abstract: | The purpose of this pedagogical study is to provide a straightforward and easily understood framework that can be used to teach the economic behavior underlying income tax evasion. We begin with presenting a brief background that reflects the research that had been done, especially for the case of the United States, on income tax evasion. This brief section is meant to provide the student with some overall perspective on the issue. Once this literature overview is completed, the main section of this study provides a framework, based in cost-benefit analysis, to enable the student to easily understand factors underlying personal income tax evasion. |
| Keywords: | underground economy; income tax evasion; pedagogy |
| JEL: | D14 D73 D78 E26 H24 H26 M42 |
| Date: | 2013–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:56784&r=pbe |
| By: | Kreiner, Claus Thustrup (University of Copenhagen); Munch, Jakob R. (University of Copenhagen); Whitta-Jacobsen, Hans Jørgen (University of Copenhagen) |
| Abstract: | Inspired by Hayek (1945), we study the distortionary effects of taxation on labor mobility and the long run allocation of labor across different profitable opportunities. These effects are not well detected by the methods applied in the large public finance literature estimating the elasticity of taxable income and quantifying the efficiency loss from taxation. Our analysis builds on a standard search theoretic framework where workers are continually seeking better paid jobs, but are also fired from time to time because of economic development and productivity shocks. We incorporate non-linear taxation into this setting and estimate the structural parameters of the model using employer-employee register based data for the full Danish population of workers and workplaces for the years 2004-2006. Our results indicate that along the intensive margin the Danish taxation generates an overall efficiency loss corresponding to a 12 percent reduction in total income. It is possible to reap 4/5 of this potential efficiency gain by going from a high-tax Scandinavian system to a level of taxation in line with low-tax OECD countries such as the United States. The tax-responsiveness of labor mobility and allocation corresponds to an elasticity of taxable income with respect to the net-of-tax rate in the range 0.15-0.35. |
| Keywords: | tax distortions, labor mobility, elasticity of taxable income |
| JEL: | J62 H24 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp8246&r=pbe |
| By: | Omura, Makiko |
| Abstract: | This paper examines the evolution of alcoholic beverage sectors and the effects of tax policies on these sectors as well as the alcohol beverage demand systems in Japan utilising data from 1948 to 2011. In tax policy analyses, liquor tax policies are found to have differential effects on the production and consumption of different types of alcohol. Although sectoral growth and general economic performance in terms of final consumption expenditure per capita are found to be significant, with major positive effects, tax rates are found to have mixed effects, depending on the type of alcohol considered. The analyses suggest that preferential tax rates may be beneficial for boosting the sectoral performance of certain types of alcoholic beverages. The results, based on double-log and demand system equation estimations for five types of alcoholic beverages, suggest that all alcoholic beverages, except for shōchu, are normal goods with positive expenditure elasticities. Although the results suggest that shōchu may be the safest taxable subject in a Ramsey sense, the own-price elasticity estimates provide less coherent results depending on the model applied. |
| Keywords: | liquor/alcohol tax, panel analysis, time-series analysis, AIDS, QUAIDS, dynamic AIDs, Japan, Food Consumption/Nutrition/Food Safety, Political Economy, Research Methods/ Statistical Methods, H29, K34, N55, |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aesc14:170487&r=pbe |
| By: | Cogan, John F.; Taylor, John B.; Wieland, Volker; Wolters, Maik Hendrik |
| Abstract: | Recently, we evaluated a fiscal consolidation strategy for the United States that would bring the government budget into balance by gradually reducing government spending relative to GDP to the ratio that prevailed prior to the crisis (Cogan et al, JEDC 2013). Specifically, we published an analysis of the macroeconomic consequences of the 2013 Budget Resolution that was passed by the U.S. House of Representatives in March 2012. In this note, we provide an update of our research that evaluates this year’s budget reform proposal that is to be discussed and voted on in the House of Representative in March 2013. Contrary to the views voiced by critics of fiscal consolidation, we show that such a reduction in government purchases and transfer payments can increase GDP immediately and permanently relative to a policy without spending restraint. Our research makes use of a modern structural model of the economy that incorporates the long-standing essential features of economics: opportunity costs, efficiency, foresight and incentives. GDP rises because households take into account that spending restraint helps avoid future increases in tax rates. Lower taxes imply less distorted incentives for work, investment and production relative to a scenario without fiscal consolidation and lead to higher growth. -- |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:imfswp:68&r=pbe |
| By: | Julio C. Leal-Ordoñez |
| Abstract: | Some authors argue that informality is associated with distorted firm decisions and inefficiency. In this paper, I assess the quantitative effect of incomplete tax enforcement on aggregate output and productivity using a dynamic general equilibrium framework. I calibrate the model using data for Mexico and investigate the effects of introducing enforcement improvements. Under complete enforcement, labor productivity and output would be 19% higher under perfect competition and 34% higher under monopolistic competition. The source of this gain is the removal of distortions induced by incomplete enforcement of taxes which affect the economy in three ways: by reducing the capital-labor ratios of informal establishments; by allowing low-productive entrepreneurs to enter; and by misallocating resources towards low-productive establishments. I isolate the effects of pure factor misallocation, distorted occupational choices, capital accumulation, and complementarities. |
| Keywords: | Tax enforcement, TFP, the informal sector |
| JEL: | E23 E26 O17 O40 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdm:wpaper:2013-22&r=pbe |
| By: | Giovanni Caggiano (University of Padova); Efrem Castelnuovo (University of Padova); Valentina Colombo (University of Padova); Gabriela Nodari (University of Verona) |
| Abstract: | We estimate nonlinear VARs to assess to what extent fiscal spending multipliers are countercyclical in the United States. We deal with the issue of nonfundamentalness due to fiscal foresight by appealing to sums of revisions of expectations of fiscal expenditures. This measure of anticipated fiscal shocks is shown to carry valuable information of future dynamics of public spending. Results based on generalized impulse responses suggest that fiscal spending multipliers in recessions are greater than one, but not statistically larger than in expansions. However, nonlinearities arise when focusing on deep recessions vs. strong expansionary periods. |
| Keywords: | Fiscal news, Fiscal foresight, Fiscal spending multipliers, Smooth Transition Vector-AutoRegressions. |
| JEL: | C32 E32 E52 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0179&r=pbe |
| By: | Richard M. Bird (University of Toronto) |
| Abstract: | This paper considers several distinct but related aspects of what we are doing when we attempt to measure and evaluate the fiscal health of cities: How is the fiscal health of cities defined in the literature? How is this concept related to fiscal sustainability? How may fiscal health be measured in practice? And to what extent may fiscal health indicators be interpreted as representing local fiscal effort or performance? |
| Keywords: | Social cohesion, FDI, Institutions, Religion in politics, Ethnic tensions, Conflicts, Panel data models, Fixed effects, Instrumental variables estimation, System GMM. |
| Date: | 2014–06–09 |
| URL: | http://d.repec.org/n?u=RePEc:ays:ispwps:paper1425&r=pbe |
| By: | Aoki, Masahiko (Asian Development Bank Institute) |
| Abstract: | Economists often identify a reduction in the share of agricultural employment as a quantitative indication of the economic growth of nations. But this process did not occur in earnest in the People’s Republic of China until the 1980s and to some extent in Japan until well into the mid-20th century. Were extractive political regimes, commonly regarded as the primary drivers of economic performance, solely responsible for the lateness of these developments? This paper deals with this question from a strategic perspective by examining the interactions between the polity and the economy in both countries. It begins by characterizing the complementary nature of the peasant-based economy and the agrarian-tax state in premodern China and Japan. It then describes how endogenous strategic forces evolved from among the intermediate organizations in each country to challenge the incumbent dynastic ruler in response to the commercialization of the peasant-based economy on one hand and the fiscal and military weakening of the agrarian-tax state on the other. The paper then introduces a three-person game model between a ruler and two challenging organizations, and derives conditions for multiple equilbria and their comparative static. The analytical results help to identify the endogenous strategic forces that led the Meiji Restoration and the Xinhai Revolution to move from a premodern state of play to nation-state building and modern economic regimes in each country. |
| Keywords: | endogenous institutional change; institutional complementarity; Chinese economy; Meiji Restoration; tax state; peasant-based economy; three person politico-economic game |
| JEL: | B52 C72 N40 N45 O10 P51 |
| Date: | 2014–06–19 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0486&r=pbe |
| By: | Chung Tran |
| Abstract: | In this paper we study the corrective role of income taxation in a model with the Gul and Pesendorfer type of temptation and self-control preferences embedded with labor/leisure choice. “Excessive” impatience created by the presence of temptation in preferences causes a bias in favour of present consumption and a two-dimensional problem: under-saving and over-supply-of-labor. In such an environment, the two-dimensional problem requires two-dimensional tax policy tools rather than one-dimensional ones. In particular, we first show that subsidizing savings alone improves welfare because it mitigates the under-saving problem i.e. inter-temporal allocation distortion; however, the optimal subsidy rate is not as high as in Krusell, Kuruscu and Smith (2010) because the savings subsidy amplifies the over-supply-of-labor problem, i.e. intra-temporal allocation distortion. Next, we find that labor income tax policy alone improves welfare because it mitigates the intra-temporal allocation distortion; however, its welfare gains are constrained by its adverse effects on savings. Finally, we demonstrate that a combination of capital and labor income taxation appears to be a more effective policy. |
| JEL: | D01 D91 H31 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2014-617&r=pbe |
| By: | Yongzheng Liu (School of Finance Renmin, University of China); Jorge Martinez-Vazquez (International Center for Public Policy. Andrew Young School of Policy Studies, Georgia State University); Baoyun Qiao (China Academy of Public Finance and Policy, Central University of Finance and Economics) |
| Abstract: | The main objective of the paper is to propose a framework in which fiscal health conditions can be assessed and the main determinants affecting fiscal health can be identified, inspite of severe data constraints. The paper draws on big urban agglomerations in India as well as smaller cities as a sample and attempts to identify the difference, if any, in the main determinants for variations in fiscal health conditions across different size classes of cities. To compensate for the lack of statistical rigor in the estimations of expenditure needs and revenue capacities, we propose a framework which analyses the ratio of expenditure needs to revenue capacity by fitting an econometric model. It is a two-step method, in the first stage we estimate the expenditure need and revenue capacity separately by simple methods discussed above. In the second stage we take the ratio of expenditure need and revenue capacity as an indicator of financial performance of a ULB and fit an econometric model to explain the performance of ULBs on the basis of factors which are likely to affect the performance of the ULBs. We find that the role of the higher tiers of the government is important in bigger and smaller size class of cities in their financial management. However, for bigger cities we find that the own source revenues can also play an important role in bringing down the fiscal ratio. In the smaller ULBs the role of the demand indicators is not that prominent but the cost indicators play a relatively prominent role. In case of bigger agglomerations, the demand indicators are more prominent than the cost indicators. |
| Date: | 2014–05–27 |
| URL: | http://d.repec.org/n?u=RePEc:ays:ispwps:paper1423&r=pbe |
| By: | Ferreira, Francisco H. G. (World Bank); Lakner, Christoph (World Bank); Lugo, Maria Ana (World Bank); Özler, Berk (University of Otago) |
| Abstract: | Income differences arise from many sources. While some kinds of inequality, caused by effort differences, might be associated with faster economic growth, other kinds, arising from unequal opportunities for investment, might be detrimental to economic progress. We construct two new metadata sets, consisting of 118 household surveys and 134 Demographic and Health Surveys, to revisit the question of whether inequality is associated with economic growth and, in particular, to examine whether inequality of opportunity – driven by circumstances at birth – has a negative effect on subsequent growth. Results are suggestive but not robust: while overall income inequality is generally negatively associated with growth in the household survey sample, we find no evidence that this is due to the component we attribute to unequal opportunities. In the DHS sample, both overall wealth inequality and inequality of opportunity have a negative effect on growth in some of our preferred specifications, but the results are not robust to relatively minor changes. On balance, although our results are suggestive of a negative association between inequality and growth, the data at our disposal does not permit robust conclusions as to whether inequality of opportunity is bad for growth. |
| Keywords: | inequality, inequality of opportunity, economic growth |
| JEL: | D31 D63 O40 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp8243&r=pbe |
| By: | Islam, Asif |
| Abstract: | Although several studies have found a negative relationship between government spending and entrepreneurship, much debate remains regarding the components of government spending responsible for this association. This paper contributes to the literature by specifically exploring the relationship between government private subsidies and entrepreneurship. By combining macroeconomic government spending data with individual level entrepreneurship data, the paper finds a negative association between the share of private subsidies and entrepreneurship. However, findings are less straightforward when the analysis delves deeper into the components of private subsidies and their association with different kinds of entrepreneurship. |
| Keywords: | Urban Economics,Taxation&Subsidies,Economic Theory&Research,Emerging Markets,Education for the Knowledge Economy |
| Date: | 2014–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6917&r=pbe |
| By: | David Kaplan (Department of Economics, University of Missouri-Columbia) |
| Abstract: | The literature has two types of fractional order statistics: an `ideal' (unobserved) type based on a beta distribution, and an observable type linearly interpolated between consecutive order statistics. From the nonparametric perspective of local smoothing, we examine inference on conditional quantiles, as well as linear combinations of conditional quantiles and conditional quantile treatment effects. This paper develops a framework for translating the powerful, high-order accurate IDEAL results (Goldman and Kaplan, 2012) from their original unconditional context into a conditional context, via a uniform kernel. Under mild smoothness assumptions, our new conditional IDEAL method's two-sided pointwise coverage probability error is O(n-2/(2+d)), where d is the dimension of the conditioning vector and n is the total sample size. For d ≤ 2, this is better than the conventional inference based on asymptotic normality or a standard bootstrap. It is also better for other d depending on smoothness assumptions. For example, conditional IDEAL is more accurate for d = 3 unless 11 or more derivatives of the unknown function exist and a corresponding local polynomial of degree 11 is used (which has 364 terms since interactions are required). Even as d → ∞, conditional IDEAL is more accurate unless the number of derivatives is at least four, and the number of terms in the corresponding local polynomial goes to infinity as d → ∞. The tradeoff between the effective (local) sample size and bias determines the optimal bandwidth rate, and we propose a feasible plug-in bandwidth. Simulations show that IDEAL is more accurate than popular current methods, significantly reducing size distortion in some cases while substantially increasing power (while still controlling size) in others. Computationally, our new method runs much more quickly than existing methods for medium and large datasets (roughly n ≥ 1000). We also examine health outcomes in Indonesia for an empirical example. |
| Keywords: | fractional order statistics, nonparametric statistics, quantile inference, quantile treatment effect |
| JEL: | C01 C12 C21 |
| Date: | 2013–09–05 |
| URL: | http://d.repec.org/n?u=RePEc:umc:wpaper:1316&r=pbe |