nep-pbe New Economics Papers
on Public Economics
Issue of 2014‒09‒29
23 papers chosen by
Keunjae Lee
Pusan National University

  1. Are Local Tax Rates Strategic Complements or Strategic Substitutes? By Raphael Parchet; Massimiliano Vatiero
  2. The distributional effects of personal income tax expenditure By Avram, Silvia
  3. Taxation and the Sustainability of Collusion: Ad Valorem versus Specific Taxes By Azacis, Helmuts; Collie, David R.
  4. Fiscal Policy, Debt Constraint and Expectation-Driven Volatility By Kazuo Nishimura; Thomas Seegmuller; Alain Venditti
  5. Stable and sustainable global tax coordination with Leviathan governments By Thomas Eichner; Rüdiger Pethig
  6. Tax Evasion by Individuals By Laszlo Goerke
  7. Dynamic effects of anticipated and temporary tax changes in a R&D-based growth model By Kizuku Takao
  8. On the (De)Stabilizing Effect of Public Debt in a Ramsey Model with Heterogeneous Agents By Kazuo Nishimura; Carine Nourry; Thomas Seegmuller; Alain Venditti
  9. NAMOD: a Namibian tax-benefit microsimulation model By Wright, Gemma; Noble, Michael; Barnes, Helen
  10. Fiscal Policy and Equality of Opportunity in Uruguay By Marisa Bucheli
  11. Dynamic Nonlinear Income Taxation with Quasi-Hyperbolic Discounting and No Commitment By Jang-Ting Guo; Alan Krause
  12. Income Taxation, Transfers and Labour Supply at the Extensive Margin By Benczúr, P.; Kátay, G.; Kiss, A.; Rácz , O.
  14. Labeling by a private certifier and public regulation By Barry, I.; Bonroy, O.; Garella, P.G.
  15. Microsimulation and policy analysis By Figari, Francesco; Paulus, Alari; Sutherland, Holly
  16. Does Firm Heterogeneity Impact the Effectiveness of Carbon Taxes? Experiments in Argentina and Mexico By Omar O. Chisari; Sebastián J. Miller
  17. Political Institutions and Corruption:An Experimental Examination of the "Right to Recall" By Sarah Mansour; Vjollca Sadiraj; Sally Wallace
  18. Science, Innovation and National Growth By Thomas Brenner
  19. Infrastructure, growth, and inequality : an overview By Calderon, Cesar; Serven, Luis
  20. Megan Sheahan economy of MGNREGS spending in Andhra Pradesh By Megan Sheahan; Yanyan Liu; Christopher B. Barrett; Sudha Narayanan
  21. The political economy of public transport pricing and supply decisions By Bruno DE BORGER; Stefan PROOST
  22. Export Taxes and Consumption: A ‘Natural Experiment’ from Côte d'Ivoire By Souleymane Soumahoro
  23. A New Architecture for Public Investment in Europe By Natacha Valla; Thomas Brand; Sébastien Doisy

  1. By: Raphael Parchet (Department of Economics, University of Siena, Italy); Massimiliano Vatiero (IRE and IdEP, Università della Svizzera italiana, Lugano, Switzerland)
    Abstract: The identification of strategic interactions among local governments is typically plagued by endogeneity problems. This paper proposes an identification strategy that makes use of a multi-tier federal system. State-level fiscal reforms provide an arguably exogenous source of variation in tax rates of local jurisdictions. Moreover, state borders spatially bound the effects of state-level fiscal reforms across areas that are otherwise highly integrated. Using the fact that local jurisdictions located close to a state border have some neighbors in another state, I propose to instrument the (average) tax rate of neighbor jurisdictions with the state-level tax rate of the neighboring state. I use this instrument to identify strategic personal income tax setting by local jurisdictions in Switzerland. In contrast to most of the existing empirical literature and to all results based on standard instruments, I find that tax rates are strategic substitutes in most cases. Tax rates are found to be strategic complements only in the context of large tax cuts.
    Keywords: tax competition, fiscal federalism
    JEL: H24 H71 H77
    Date: 2014
  2. By: Avram, Silvia
    Abstract: Using EUROMOD, this study investigates the size and distributional effects of tax allowances and tax credits in 6 European countries. It also examines whether instrument design matters in shaping the redistributive effect, paying attention to both categorical and explicit income targeting .With few exceptions the impact of tax allowances and tax credits on inequality is small. Tax credits are generally more progressive than tax allowances. The design of the allowances/credits appears to be less important than the characteristics of the population they are targeting and/or other features of the income tax system in determining the redistributive effect. Consequently, tax concessions appear ill-suited to target resources towards households in the bottom part of the income distribution.
    Date: 2014–07–15
  3. By: Azacis, Helmuts (Cardiff Business School); Collie, David R. (Cardiff Business School)
    Abstract: Assuming constant marginal cost, it is shown that a switch from specific to ad valorem taxation has no effect on the critical discount factor required to sustain collusion. This result is shown to hold for Cournot oligopoly as well as for Bertrand oligopoly when collusion is sustained with Nash-reversion strategies or optimal-punishment strategies. In a Cournot duopoly model with linear demand and quadratic costs, it is shown that the critical discount factor is lower with an ad valorem tax than with a specific tax. However, in contrast to Colombo and Labrecciosa (2013), it is shown that revenue is always higher with an ad valorem tax than with a specific tax.
    Keywords: Taxes; Imperfect Competition; Oligopoly; Cartel; Supergame
    JEL: H21 H22 L13 L41 C72 C73
    Date: 2014–09
  4. By: Kazuo Nishimura (RIEB, Kobe University - Kobe University, KIER, Kyoto University - Kyoto University); Thomas Seegmuller (AMSE - Aix-Marseille School of Economics - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM)); Alain Venditti (AMSE - Aix-Marseille School of Economics - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM), EDHEC Business School - Département Comptabilité, Droit, Finance et Economie)
    Abstract: Imposing some constraints on public debt is often justified regarding sustainability and stability issues. This is especially the case when the ratio of public debt over GDP is restricted to be constant. Using a Ramsey model, we show that such a constraint can however be a fundamental source of indeterminacy, and therefore, of expectation-driven fluctuations. Indeed, through the intertemporal budget constraint of the government, income taxation negatively depends on future debt, i.e. on the expected level of production. This mechanism ensures that expectations on the future tax rate may be self-fulfilling. We show that this is promoted by a larger ratio of debt over GDP.
    Keywords: indeterminacy; endogenous cycles; public debt; income taxation
    Date: 2014–06
  5. By: Thomas Eichner; Rüdiger Pethig
    Abstract: Itaya et al. (2014) study the conditions for sustainability and stability of capital tax coordination in a repeated game model with tax-revenue maximizing governments. One of their major results is that the grand tax coalition is never stable and sustainable. The purpose of this note is to prove that there are conditions under which the grand tax coalition is stable and sustainable in Itaya et al.’s model.
    Keywords: global tax coordination, repeated game, sustainability, stability
    JEL: H71 H77
    Date: 2014
  6. By: Laszlo Goerke (Institute for Labour Law and Industrial Relations in the EU, University of Trier)
    Abstract: The basic deterrence model of tax evasion is described, its main predictions are derived and limitations and flexibility are outlined. Further, the model is interpreted in light of some key institutional features characterising tax enforcement in OECD countries. Throughout the survey, findings originating from the deterrence model are contrasted with predictions which result from a simple model of criminal activity and law enforcement.
    Keywords: Economics of Crime, Income Tax, Tax Evasion
    JEL: H24 H26 K34
    Date: 2014–08
  7. By: Kizuku Takao
    Abstract: Tax changes are often announced before their implementation and are not permanent, but rather only temporary. Accordingly, R&D firms will optimally adjust their investment decisions to fit tax schedule changes. This study analyzes how changes in various tax rates relevant to corporate activities affect growth and welfare, considering their methods of implementation. For this purpose, we consider adjustment costs involved in the investment process and allow firms to make a forward looking investment decision in a R&D-based endogenous growth model. Calibrating the model with U.S. data, we find that a dividend tax cut reduces the level of welfare irrespective of implementation method. On the other hand, a capital gains tax cut and a rise in the R&D tax credit rate enhance the level of welfare irrespective of implementation. However, the announcement of these tax changes prior to implementation reduces their effectiveness.
    Date: 2014–08
  8. By: Kazuo Nishimura (RIEB, Kobe University & KIER, Kyoto University); Carine Nourry (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & Institut Universitaire de France); Thomas Seegmuller (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM & EHESS); Alain Venditti (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & EDHEC)
    Abstract: We introduce public debt in a Ramsey model with heterogenous agents and a public spending externality affecting utility which is financed by income tax and public debt. We show that public debt considered as a fixed portion of GDP can have a stabilizing or destabilizing effect depending on some fundamental elasticities. When the public spending externality is weak and the elasticity of capital labor substitution is low enough, public debt can only be destabilizing, generating damped or persistent macroeconomic fluctuations. Whereas when the public spending externality and the elasticity of capital labor substitution are strong enough, public debt can be stabilizing, driving to monotone convergence an economy experiencing damped or persistent fluctuations without debt.
    Keywords: endogenous cycles, heterogeneous agents, public spending, public debt, borrowing constraint
    JEL: C62 E32 H23
    Date: 2014–06
  9. By: Wright, Gemma; Noble, Michael; Barnes, Helen
    Abstract: This paper provides an account of the construction of a tax-benefit microsimulation model for Namibia (NAMOD) which is based on the EUROMOD platform F6.0. Previous research on social security provision in Namibia is reviewed and the current social security, personal income tax and value added tax arrangements are outlined. Various strengths and weaknesses of the Namibian Household Income and Expenditure Survey (NHIES) as an underpinning dataset for NAMOD are highlighted. In particular, the income data in the NHIES is problematic and so analysis of the impact of policies on poverty should be treated with caution. In spite of these challenges, NAMOD provides a starting point from which government can explore issues such as promoting take-up of grants or making changes to the social security system.
    Date: 2014–04–25
  10. By: Marisa Bucheli (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República)
    Abstract: According to the standard indicators of distributive effect, Uruguayan fiscal policy (in particular, social spending) is progressive. The aim of this paper is to compare this result with the conclusions derived from the perspective of equality of opportunity. Under this view, fiscal policy should equalize not the overall income but eliminate the effect of factors beyond the responsibility of individuals (circumstances). To assess the distributive effect of fiscal policy we calculate the Gini index for different income concepts which take into account different programs of the tax-benefit system. Then, we calculate the equality of opportunity for each income concept. Circumstances identified in this paper are the level of education attained by parents and self-reported ethnicity. To analyze the robustness of the results, we calculate several measures used in the empirical literature of equality of opportunities. Though according to the welfarist analysis we conclude that the tax-benefit system has an equalizing effect, we cannot conclude that it compensates the disadvantages due to circumstances.
    Keywords: equality of opportunity, distributive effect, fiscal policy
    JEL: D3 D63 H5
    Date: 2014–02
  11. By: Jang-Ting Guo (Department of Economics, University of California Riverside); Alan Krause (University of York, UK)
    Abstract: This paper examines a dynamic model of nonlinear income taxation in which the government cannot commit to its future tax policy, and individuals are quasi-hyperbolic discounters who cannot commit to future consumption plans. The government has both paternalistic and redistributive objectives, and therefore uses its taxation powers to maximize a utilitarian social welfare function that reflects individuals' true (long-run) preferences. Under first-best taxation, quasi-hyperbolic discounting exerts no effect on the level of social welfare attainable. Under second-best taxation, quasi-hyperbolic discounting increases (resp. decreases) the level of social welfare attainable when separating (resp. pooling) taxation is optimal. In stark contrast to previous studies, this result implies that some individuals can actually be better-off in the long run as a result of their short-run impatience.
    Keywords: Dynamic taxation, Quasi-Hyperbolic Discounting, Commitment.
    JEL: D91 H21 H24
    Date: 2014–09
  12. By: Benczúr, P.; Kátay, G.; Kiss, A.; Rácz , O.
    Abstract: This paper estimates the effect of income taxation and transfers on labour supply at the extensive margin, i.e., the labour force participation. We extend existing structural form methodologies by considering the effect of both taxes and transfers. Non-labour income contains the (hypothetical) transfer amount someone gets when out of work, while the wage is replaced by the difference between net wages and the amount of lost transfers due to taking up a job (gains to work). To incorporate these components of the budget set, we employ a detailed tax-benefit model. Using data from the Hungarian Household Budget Survey (HKF), we find that participation probabilities are strongly influenced by transfers and the gains to work, particularly for low-skill groups and the elderly. Moreover, the same change in the net wage leads to a much larger change in the gains to work for low earners, making them even more responsive to wages and taxation. Overall, we find that a single equation can capture a large heterogeneity of individual responsiveness to taxes and transfers. Our parametric estimates can be readily utilized in welfare evaluations, or microsimulation analyses of tax and transfer reforms.
    Keywords: participation decision, taxation, transfers.
    JEL: H24 H31 H53 I38 J21
    Date: 2014
  13. By: Oscar Bajo-Rubio (Universidad de Castilla-La Mancha); Carmen Díaz-Roldán (Universidad de Castilla-La Mancha); Vicente Esteve (Universidad de Valencia, Universidad de La Laguna and Universidad de Alcalá)
    Abstract: In this paper, we provide a test of the sustainability of the Spanish government deficit over the period 1850-2000, emphasizing the role played by monetary and fiscaldominance in order to get fiscal solvency. Since the condition of fiscal solvency was satisfied, government deficit would have been sustainable along the sample period. In addition, the whole period can be characterized as one of fiscal dominance.
    Keywords: Fiscal policy, Sustainability, Fiscal Theory of the Price Level, Monetary dominance, Fiscal dominance.
    JEL: E62 H62
    Date: 2014–08
  14. By: Barry, I.; Bonroy, O.; Garella, P.G.
    Abstract: This paper considers the effects of labels in a vertically differentiated duopoly. A label certifies the level of a product's measurable characteristic. It is shown that the certification label chosen by a private (for profit) certifier is lower than both the socially optimal and the firm's preferred one. Public policies that lead to an increase in the label can improve welfare - while also potentially benefiting firms. We fin that: (i) if public and private certification are offered, an indirect regulatory outcome is achieved (a second best) where the private certifier raises the standard of this label - even though no firm adopts the public label; (ii) two common tools, like a per unit tax on the unlabeled product or a subsidy in favor of the labeled one, lead to lower private certification standard with ambiguous effects on welfare; (iii) and ad valorem tax on the unlabeled product, by contrast, increases welfare.
    JEL: L13 L15 L5
    Date: 2014
  15. By: Figari, Francesco; Paulus, Alari; Sutherland, Holly
    Abstract: We provide an overview of microsimulation approaches to assess the effects of policy on the income distribution. We focus mainly on the role of tax-benefit policies and review the concept of microsimulation and how it contributes to the analysis of the income distribution in general and policy evaluation in particular. We consider the main challenges and limitations and discuss directions for future developments.
    Date: 2014–06–09
  16. By: Omar O. Chisari; Sebastián J. Miller
    Abstract: This paper examines the effectiveness of carbon taxes on macroeconomic performance when manufacturing firms have the opportunity to change their scale of operation and degree of formality. The hypothesis is that when tax evasion or elusion is possible, it cannot be ruled out that emissions increase rather than decrease due to the reallocation of resources from the rest of manufacturing towards informal small-scale firms. When informality is high, industry could adapt to carbon taxes by reducing the scale of operation of big firms and increasing the number of small firms. However, when taxes are enforceable in all types of firms, there is a cost in terms of GDP and employment, since small-scale firms are more labor intensive. For numerical experiments, two CGE models calibrated for Argentina and Mexico are used. The 'domestic leakage' is found to be more relevant for Argentina than for Mexico.
    Keywords: Environmental taxes, Tax evasion, Taxation, Argentina, Mexico, Informality, Carbon taxes, General Equilibrium Model (CGE)
    Date: 2014–08
  17. By: Sarah Mansour; Vjollca Sadiraj; Sally Wallace
    Abstract: Countries around the world are concerned with corruption as it potentially undermines confidence in government and may reduce the efficiency of public goods provision. While there has been a significant amount of research devoted to identifying the causes of corruption there has been little empirical research on the impact of political institutions on corruption. Given that many nascent governments are establishing new political systems, the time is right for understanding the role that political institutions may play in enhancing or mitigating corruption. This paper uses a series of laboratory experiments to examine the impact of the right to recall government officials' on the level of government corruption. We find experimental evidence suggesting that such an institution can decrease the level of corruption in government through the increased accountability it imposes on elected politicians, and equity of the system, in terms of income distribution, may also be enhanced.
    Keywords: Political economy, corruption, transition economies, experiment, public goods
    Date: 2014–09
  18. By: Thomas Brenner (Economic Geography and Location Research, Philipps-University, Marburg)
    Abstract: This paper studies the effects of public research (publications) and innovation output (patents) on national economic growth with the help of a GMM panel regression including 114 countries. Effects on productivity growth and capital and labor inputs are distinguished. Furthermore, different time lags are examined for the various analyzed effects and two time periods as well as less and more developed countries are studied separately. The results confirm the effect of innovation output on productivity for more developed countries. Simultaneously, innovation output is found to have negative impacts on capital and labor inputs, while public research is found to have positive impacts on labor inputs.
    Keywords: national growth, innovation, public research, growth
    JEL: O11 O31 E10 C23
    Date: 2014–09–14
  19. By: Calderon, Cesar; Serven, Luis
    Abstract: Academics and policy makers have long considered an adequate supply of infrastructure services to be essential for economic development. This paper reviews recent theoretical and empirical literature on the effects of infrastructure development on growth and income distribution. The theoretical literature has employed a variety of analytical settings regarding the drivers of income growth, the degree to which infrastructure represents a public or a private good, and the extent of market distortions, notably in capital markets. In turn, the empirical literature has used various econometric methodologies on time-series and cross-section macro and microeconomic data to test for the effects of infrastructure development. However, these empirical tests face challenging issues of measurement, identification, and heterogeneity. Overall, the literature finds positive effects of infrastructure development on income growth and, more tentatively, on distributive equity. Still, the precise mechanisms through which these effects accrue, and their full impact on welfare, remain relatively unexplored.
    Keywords: Transport Economics Policy&Planning,Banks&Banking Reform,Public Sector Economics,Economic Theory&Research,Infrastructure Economics
    Date: 2014–09–01
  20. By: Megan Sheahan (Cornell University); Yanyan Liu (International Food Policy Research Institute); Christopher B. Barrett (Cornell University); Sudha Narayanan (Indira Gandhi Institute of Development Research)
    Abstract: Are ostensibly demand-driven public programs less susceptible to political clientelism even when private goods are allocated? We investigate this conjecture using expenditure data at the local level from India's National Rural Employment Guarantee Scheme. By focusing on one state where accountability and transparency mechanisms have been employed and implementation efforts have been applauded, we do not find evidence of blatant vote buying before the 2009 election but do find that patronage played a small part in fund distribution after the 2009 election. Indeed most variation in expenditure is explained by the observed needs of potential benficiaries, as the scheme intended.
    Keywords: India, political economy, clientelism, project allocation, employment guarantee
    JEL: D73 H41 H42 H53 H54 I38 O12
    Date: 2014–07
  21. By: Bruno DE BORGER; Stefan PROOST
    Abstract: This paper studies the political economy of public transport pricing and quality decisions in urban areas. We consider a hypothetical two-region federation. In each region there is a demand for public transport and for car use, and the group mainly using public transport may be a majority or minority in the region; moreover, part of the users of both the public transport system and the road network may come from outside the region. In this setting, we compare regional and federal decision making on public transport fares and supply characteristics. Under regional decision-making we find that, first, the political process may result in very low public transport fares, even if car owners are a large majority of the population. The fare preferred by car owners is increasing in the toll on car use. Cost recovery always improves with the share of outside users. Second, imposing a zero deficit constraint on regional public transport operators implements the second-best welfare optimum, independent of whether car owners or non-car owners have the political majority. Third, compared to centralized decision making, decentralized decision making leads to higher fares and better cost recovery. Our findings are consistent with the lack of opposition to very large public transport subsidies in Europe, and they provide a potential explanation for the tendency towards decentralization of public transport policy-making observed in many countries over the last decades.
    Date: 2014–06
  22. By: Souleymane Soumahoro (University of Oklahoma)
    Abstract: TI exploit the emergence of two de facto states in Côte d'Ivoire during the 2002-2007 political crisis to examine the effects of an export tax reduction for cocoa beans on the living standards of farming households. Combining both spatial and temporal variations in exposure to a set of dichotomous tariff policies, I find that farmers in low tariff districts significantly increased their consumption expenditure relative to farmers in high tariff districts. I also provide evidence that the transmission of border prices to local farmers is a relevant mechanism through which the reduction of trade barriers enhances cocoa farmers' living standards.
    Keywords: Trade Liberalization; Agricultural Commodity; Household Consumption
    JEL: D60 F10 O10 Q10
    Date: 2014–09
  23. By: Natacha Valla; Thomas Brand; Sébastien Doisy
    Abstract: Some five years after the severe recession of 2009, private sector investment in Europe is still dangerously sluggish. And public sector investment has been cut, reinforcing the downward trend seen over the past thirty years. In this paper, we discuss the complementarity between private and public sector investment. Evidence suggests that in the medium term, public investment does not hinder, but fosters, the quantity and efficiency of private investment. Moreover, our fiscal multiplier for public investment (at 1.4, considerably above ‘breakeven’) is significantly stronger than those for other fiscal instruments. Taken together, these two findings suggest that the public sphere would be well advised to tilt spending towards investment in areas such as infrastructure and human capital, which represent an investment for future generations. A new European initiative might be needed to get investment back on track and thus protect future growth. To this end we propose establishing, by treaty, a Eurosystem of Investment Banks (ESIB), around a pan-European financial capacity that would coordinate the actions of the national public investment banks of Euro area member states and add to their funding capacity. The ESIB would channel the Euro area’s excess savings towards investment in the right places throughout the continent. To do so in an economically sustainable and financially profitable way, funding would be conditional on firm commitments to growth-enhancing structural reforms and economic policies. Our proposed Eurosystem of Investment Banks (ESIB) would be structured around a federal centre and national entities. The central node, the Fede Fund, would be created by restructuring the European Investment Bank into a truly federal entity. The Fede Fund would orchestrate the joint work of national investment and development banks with a clear European map in mind. The mandate of the ESIB, enshrined in the Treaty, would be to promote long-term growth, well-being and employment in Europe. The mandate would, by definition, reflect a political consensus emanating democratically from the people of the Euro area member states. The ownership and governance of the Fede Fund would be key in ring-fencing the investment process from national political agendas not linked to the promotion of long-term growth. We propose a structure with both public and private Fede shareholders, who would collectively elect the ESIB Board of Directors. The Fede Fund would also issue debt to finance investment at an economically relevant scale (10% of Euro area GDP, so around €1tn).
    Keywords: public investment;private investment;Europe;European Investment Bank
    JEL: E6 H54
    Date: 2014–07

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