nep-pbe New Economics Papers
on Public Economics
Issue of 2014‒07‒05
eighteen papers chosen by
Keunjae Lee
Pusan National University

  1. Government spending shocks, wealth effects and distortionary taxes By James Cloyne
  2. Vertical externalities revisited: new results with public inputs and unit taxation. By Diego Martínez
  3. Taxes and International Risk Sharing By Epstein, Brendan; Mukherjee, Rahul; Ramnath, Shanthi
  4. Tax reforms in EU Member States subce rhe turn of the New centuri: selected observations By Bernardi, Luigi
  5. Tax without design: recent developments in UK tax policy By Paul Johnson
  6. Fiscal Consolidation and Implications of Social Spending for Long-Term Fiscal Sustainability By Merola, Rossana; Sutherland, Douglas
  7. Morale in the Market By Ognedal, Tone
  8. Comparing Itemized Tax Deductions across States: A Simple Decomposition Applied to Mortgage Interest Deductions By Wodon, Quentin
  9. Accounting for Trends in Charitable Tax Deductions: Framework and Application to the District of Columbia By Wodon, Quentin; Alleyne, Betty; Cong, Lin; Mulusa, Judy; Niami, Farhad
  10. Coordination arrangements across government sub-sectors in EU Member States By Georges Tournemire
  11. The “Business Climate” and Economic Inequality By David Neumark; Jennifer Muz
  12. Effects of Payroll Tax Cuts for Young Workers By Skedinger, Per
  13. Income Inequality Developments in the Great Recession By Thomas Hellebrandt
  14. The Effect of Green Taxation and Economic Growth on Environment Hazards: The Case of Malaysia By Nanthakumar, Loganathan; Shahbaz, Muhammad; Taha, Roshaiza
  15. The impact of national fiscal rules on the stabilisation function of fiscal policy By Sacchi, Agnese; Salotti, Simone
  16. Electoral politics and regional development. Assessing the geographical allocation of public investment in Turkey By Davide Luca; Andrés Rodríguez-Pose
  17. Fiscal Forecast Errors: Governments Versus Independent Agencies? By Merola, Rossana; Pérez, Javier J.
  18. A Time Series and Panel Analysis of Government Spending and National Income By Alimi, R. Santos

  1. By: James Cloyne (Bank of England; Centre for Macroeconomics (CFM))
    Abstract: The size and sign of the government spending multiplier crucially depends on how the spending is financed and how consumers respond to implied future tax increases. I investigate this issue in an estimated New Keynesian DSGE model with distortionary labor and capital taxes and, importantly, with preferences that allow the wealth effect on labor supply to vary. Specifically I assess whether the model can explain the empirical evidence for the United States and examine the transmission mechanism, for realistic policy rules. I show that the model can match the positive empirical response of key variables including output, consumption and the real wage. I find that the role of the wealth effect on labor supply is small and that while tax rates rise following a spending shock these increases are modest, with debt rising. Deficit financed spending increases are therefore expansionary, but this is due to sticky prices rather than the wealth effect channel.
    Keywords: Fiscal policy, government spending shocks, spending multiplier, business cycles
    JEL: E20 E32 E62 H20
    Date: 2014–05
  2. By: Diego Martínez
    Abstract: This paper studies the provision of public inputs in a federal system with unit taxation on labor. We use a model with vertical tax and expenditure externalities to analyze the e¢ ciency of equilibria under di¤erent settings, particularly Nash and Stackelberg equilibria. Our results discuss some ?ndings from the previous literature. First, both vertical externalities are interrelated each other. Second, the condition for production e¢ ciency in the public sector becomes irrelevant to assess optimality. And third, the replication of the second-best outcome by the federal government behaving as Stackelberg leader crucially depends on the states?reaction function.
    Keywords: Fiscal federalism, vertical externality, productive public spending.
    JEL: H2 H4 H7
    Date: 2014–06
  3. By: Epstein, Brendan (Board of Governors of the Federal Reserve System (U.S.)); Mukherjee, Rahul (IHEID); Ramnath, Shanthi (U.S. Treasury Department)
    Abstract: We examine the extent to which differences in international tax rates may account for the small correlations of per capita consumption fluctuations across countries. Theory implies a close relationship between relative consumption growth, and consumption and capital income tax rate differentials. We find strong empirical evidence for this relationship. Idiosyncratic output fluctuations account for the majority of cross country consumption growth variability, but trends in tax differentials are informative about the dynamic evolution of international risk sharing. In particular, adjusting for capital taxes reveals an intuitive positive relationship between financial connectedness and risk sharing that is absent in baseline measures.
    Keywords: International risk sharing; business cycle accounting; taxes
    JEL: F41 F44 H29
    Date: 2014–06–09
  4. By: Bernardi, Luigi
    Abstract: The aim of this paper is to discuss certain critical aspects of the tax reform process that has been taking place in the EU MS since the beginning of the new century. Two separate periods may be identified here. The first -from 2000 to 2011- witnessed very few tax reforms: according to the EU Commission itself, tax reforms were episodic, sparse and generally of a limited nature, To check this hypothesis, the present paper analyzes tax trends during the period 2000-2011, both at aggregate EU level and by disaggregating such trends into those pertaining to each EU MS. In the wake of the great economic crisis, there has been a broader process of tax reform in almost all EU Member Countries, albeit characterized by a reluctance to accept the tax reforms that the European Commission has been recommending to certain specific countries for a number of years now. The final, concluding issue dealt with briefly in this paper, is that of the various obstacles to tax reforms, starting from a recent OECD study of the matter.
    Keywords: Taxation policy, Tax reforms, EU Member States Taxation policy, Tax reforms, EU Member States
    JEL: H20
    Date: 2014–06–25
  5. By: Paul Johnson (Institute for Fiscal Studies)
    Abstract: This paper considers the development of tax policy in the UK over the last decade or so and assesses policy change against a low bar- consistency and coherence. While this government has followed some consistent policies- notably, in some aspects of corporation tax and in increasing the income tax personal allowance- there are few signs of a wider coherent strategy. The same has been true of other recent governments. Many aspects of the system have become more complex. There have been numerous policy reversals. And few of those aspects of the system in most need of reform have been tackled. The need for reform, and a clear strategy for reform, remain as pressing as ever.
    Date: 2014–05
  6. By: Merola, Rossana; Sutherland, Douglas
    Date: 2014–02
  7. By: Ognedal, Tone (Dept. of Economics, University of Oslo)
    Abstract: There is a growing interest in morale as a potential substitute for sanctions, encouraged by exerimental evidence that people's morale affect their economic decisions. I show that while morale may be a substitute for sanctions for each citizen, it is not a substitute in the market. In a model where employed and self-employed differ in their opportunities for tax evasion, I demonstrate that a higher fraction of tax compliant citizens may reduce social surplus and tax revenues. In contrast to sanctions, morale usually differ between individuals and this distorts the ranking of costs among sellers and willingness to pay among consumer. Tax evading sellers crowd out tax compliant sellers with higher productivity. Tax evading buyers crowd out tax compliant buyers with higher willingness to pay. As a result, improved tax morale may lead to less efficient production and exchange. Experiments show how sanctions crowd out morale in some settings. My paper points to the opposite problem in markets: Low sanctions may crowd out morale. While the paper explores the effects of tax morale only, the results apply to a wide range of areas where morale matters for peoples choices in he market, such as environmental and safety regulation.
    Keywords: Tax morale; Tax evasion; Norms; Sanctions
    JEL: D01 H26 K42
    Date: 2014–07–04
  8. By: Wodon, Quentin
    Abstract: This paper proposes a simple multiplicative decomposition that can help in comparing the levels of mortgage interest tax deductions observed in different states or areas, and some of the reasons leading to different levels of deductions. The key parameters in the decomposition are a state’s population, its number of tax filers, the share of filers claiming a specific deduction, the average taxes paid by filers, and the average deduction among claimants. The idea is that such simple decompositions can be useful for states and local authorities to better understand some of the reasons why they may have comparatively high or low deductions in their state, and whether the levels of deductions observed are as one might have expected given their overall tax receipts.
    Keywords: Tax deductions, Mortgage interest, District of Columbia
    JEL: H24
    Date: 2014–04
  9. By: Wodon, Quentin; Alleyne, Betty; Cong, Lin; Mulusa, Judy; Niami, Farhad
    Abstract: Charitable tax deductions are one of the largest tax expenditures at the state and federal levels, and they are also crucial for the sustainability of the charitable nonprofit sector. Understanding some of the factors that drive changes in charitable tax deductions over time is needed to inform policy. This paper uses a simple multiplicative decomposition to analyze trends in charitable tax deductions with an application to data from the District of Columbia over the period 2001-2011, thus including the recent recession. The decomposition shows how changes in the District’s population, the share of the population that files tax returns, the share of filers that claim the deduction, the average adjusted gross income of filers, and the average deduction claimed by claimants all contributed to the overall changes in the level of the deductions. The decomposition is applied for the District’s population as a whole as well as by income group.
    Keywords: Charitable Giving, Tax Deduction, District of Columbia
    JEL: H24
    Date: 2014–04
  10. By: Georges Tournemire
    Abstract: Coordination arrangements should ensure that fiscal policy is conducted in a consistent manner across the various public entities and sub-sectors of general government. This dimension has gained in relevance as recent fiscal governance reforms in the European Union have put a premium on sound coordination. Using information from the Commission Fiscal Governance database, the note identifies hard and soft coordination instruments and discusses their respective design and merits. Overall, it is found that subnational government is being equipped with specific fiscal rules in a growing number of Member States. Soft coordination mechanisms for their part are becoming more structured and results-oriented with in particular improved monitoring procedures. The note finally suggests a number of avenues to improve existing coordination mechanisms to integrate further domestic budgetary timelines and ensure a genuine involvement of subnational government within the annual budget cycle.
    JEL: E02 E61 E62 E63 H77
    Date: 2014–06
  11. By: David Neumark; Jennifer Muz
    Abstract: “Business climate indexes” characterize state economic policies, and are often used to try to influence economic policy debate. However, they are also useful in research as summaries of a large number of state policies that cannot be studied simultaneously. Prior research found that business climate indexes focused on productivity and quality of life do not predict economic growth, while indexes emphasizing taxes and costs of doing business indicate that low-tax, low-cost states have faster growth of employment, wages, and output. In this paper, we study the relationship between these two categories of business climate indexes and the promotion of equality or inequality. We do not find that the productivity/quality-of-life indexes predict more equitable outcomes, although some of the policies underlying them suggest they might. We do find, however, that the same tax-and-cost related indexes that are associated with higher economic growth are also associated with increases in inequality.
    JEL: H71 J38
    Date: 2014–06
  12. By: Skedinger, Per (Research Institute of Industrial Economics (IFN))
    Abstract: In response to high and enduring youth unemployment, large payroll tax cuts for young workers were implemented in two Swedish reforms in 2007 and 2009. This paper analyses the effects of the reforms on worker outcomes and firm performance in the retail industry, an important employer of young workers. In general, the estimated effects on job accessions, separations, hours and wages, are small. For workers close to the minimum wage the estimates suggest larger, but still modest, effects on the probability of job accession. There is also some evidence on increasing profits in a subsample of firms that employed relatively many young workers before the first reform, with estimated effects commensurate with small behavioural effects of the payroll tax cuts. The conclusion is that reducing payroll taxes is a costly means of improving employment prospects for the young.
    Keywords: Tax subsidy; Labour costs; Minimum wages; Retail industry
    JEL: H21 H25 H32 J38
    Date: 2014–06–27
  13. By: Thomas Hellebrandt
    Abstract: The Great Recession has increased concerns over the fairness of the distribution of wealth and income in many societies. Using data on eight advanced economies (Germany, Greece, Ireland, Italy, Slovakia, Spain, the United Kingdom, and United States) between 2007 and 2010, I show how the Great Recession affected income inequality in different countries and how families and the state tried to mitigate its impact - though redistributing income within households and through the tax and benefit system. In most countries redistribution within household, through the social safety net and through direct taxes has been largely successful in offsetting the effect on income inequality of increased earnings inequality caused by the rise in unemployment in this pre-austerity period. I discuss some policy lessons that emerge from the varying experiences of different countries.
    Date: 2014
  14. By: Nanthakumar, Loganathan; Shahbaz, Muhammad; Taha, Roshaiza
    Abstract: This paper explores how carbon taxation and economic growth affect environment hazards in Malaysia using time series data over the period of 1974-2010. We applied cointegration and causality approaches to determine long term and the direction of causal relationship between these variables. Based on the results, we found the cointegration relationship between the variables. Furthermore, we noted that Kuznets’ theory i.e. inverted-U shaped curve between economic growth and CO2 emissions is valid for Malaysia but the carbon taxation policy is ineffective to control CO2 emissions. The causality analysis revealed that there is bidirectional relationship is found between carbon tax and CO2 emissions. Economic growth Granger causes CO2 emissions and carbon tax is Granger cause of economic growth. To enhance the awareness on pollution issues governments should rely on alternative instruments, which may give benefit not only to taxpayers but also to reduce pollution, which is the pivotal issue to be tackle globally.
    Keywords: economic growth, environment hazards
    JEL: C1
    Date: 2014–06–16
  15. By: Sacchi, Agnese; Salotti, Simone
    Abstract: We study the relationship between discretionary fiscal policy and macroeconomic stability in 21 OECD countries over the 1985-2012 period. The novelties of our contribution lie in the use of annual panel data, whereas most of the existing evidence is cross-sectional, and more importantly in the thorough investigation of how fiscal rules affect the policy-macroeconomic stability relationship. We find that the aggressive use of discretionary fiscal policy, particularly of government consumption items, leads to higher volatility of both output and inflation. However, when strict fiscal rules are introduced, discretionary policy becomes output-stabilising rather than destabilising. This result can be more easily achieved by rules on balanced budgets, rather than on expenditures, revenues, or debt. On the other hand, fiscal rules are unable to affect the inflation-destabilising nature of discretionary policy, probably because of the higher importance of central banks in that respect.
    Keywords: discretionary fiscal policy, macroeconomic volatility, fiscal rules, stabilisation function
    JEL: E32 E62 H60
    Date: 2014–06
  16. By: Davide Luca; Andrés Rodríguez-Pose
    Abstract: One of the most important decisions that governments face is how to allocate the public resources necessary for development, given each countrys budget constraints. According to the literature on the links between wealth and institutional performance, highly kleptocratic countries are expected to show higher levels of politicisation of the public purse. The article tests the extent to which socioeconomic criteria (equity and efficiency) or electoral concerns determined the geographical distribution of public investment in the 81 provinces of Turkey between 2004 and 2012. Our results show that, although electoral concerns mattered for the allocation, socioeconomic measures remained the most relevant predictors of investment. Moreover, in contrast to official regional development policy principles, the Turkish state tended to favour areas with a higher level of development over those with greater ‘socioeconomic need’. Our results therefore challenge much of the distributive politics literature, which has overly emphasised the role of pork-barrel in public policy-making. At the same time, they underline the need of paying more attention to the political economy of regional development strategies.
    Keywords: Regional development policies, distributive politics, public investments, political geography, Turkey.
    JEL: H76 O12 O53 R12 R58
    Date: 2014–06
  17. By: Merola, Rossana; Pérez, Javier J.
    Keywords: agency
    Date: 2014–01
  18. By: Alimi, R. Santos
    Abstract: This study examined the causal relationship between government spending and national income in panel of three African countries – Nigeria, Ghana and South Africa - during the period 1970 to 2012 using Johansen Fisher Panel Cointegration Test and then on a country-by-country basis using time series Johansen-Juselius cointegration techniques. The panel cointegration results indicate a long run relationship between government spending and national income in the whole panel. The Johansen-Juselius cointegration test suggests an existence of long run relationship between government spending and national income only for Ghana as predicted by Wagner, thus suggesting government spending is not an important factor in economic growth in the long run in Nigeria and South Africa. We found an evidence of bi-directional causality granger causality tests for the whole panel. Furthermore, the result from the causality test shows that there is a bi-directional causality that runs from national income to government expenditure and vice versa for Nigeria and South Africa. However, for Ghana, there was a uni-directional causality that runs from government expenditure to national income and there is no feed-back mechanism. We concluded that Government spending enhances National Income enormously and vice-versa in the short run for Nigeria and South Africa.
    Keywords: Government Expenditures, National Income, Panel Data Analysis
    JEL: C13 H5 O4
    Date: 2014–05

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