nep-pbe New Economics Papers
on Public Economics
Issue of 2014‒10‒22
fourteen papers chosen by
Keunjae Lee
Pusan National University

  1. Water Taxation and the Double Dividend Hypothesis By Nicholas Kilimani
  2. The Political Economy of Growth, Inequality, the Size and Composition of Government Spending By Klaus Schmidt-Hebbel; José Carlos Tello
  3. Does Corporate Taxation Deter Multinationals? Evidence from a Historic Event in Ireland By Holger Görg; Eric Strobl
  4. Progressive Taxation, Endogenous Growth, and Macroeconomic (In)stability By Jang-Ting Guo; Shu-Hua Chen
  5. Foreign Direct Investment and Fiscal Policy - A Literature Survey By António Jacinto Simões; José Ventura; Luís A. G. Coelho
  6. Norway: Selected Issues Paper By International Monetary Fund. European Dept.
  7. Equilibria Under Monetary and Fiscal Policy Interactions with Distortionary Taxation By Gliksberg, Baruch
  8. Tax-adjusted Q Model with Intangible Assets: Theory and Evidence from Temporary Investment Tax Incentives By Estelle P. Dauchy; Sophia Chen
  9. Citizen Candidates and Voting Over Incentive-Compatible Nonlinear Income Tax Schedules By Craig Brett; John A Weymark
  10. Fiscal multipliers in a small euro area economy: How big can they get in crisis times? By Gabriela Castro; Ricardo M. Felix; Paulo Julio; Jose R. Maria
  11. Financial disruption as a cost of soverign default: a quantative assessment By Andre Diniz; Bernardo Guimaraes
  12. Change and Persistence in the Economic Status of Neighborhoods and Cities By Stuart S. Rosenthal; Stephen L. Ross
  13. Excess control, agency costs and the probability of going private in France By Mohamed Belkhir; Sabri Boubaker; Wael Rouatbi

  1. By: Nicholas Kilimani
    Abstract: The double dividend hypothesis contends that environmental taxes have the potential to yield multiple benefits for the economy. However, empirical evidence of the potential impacts of environmental taxation in developing countries is still limited. This paper seeks to contribute to the literature by exploring the impact of a water tax in a developing country context, with Uganda as a case study. Policy makers in Uganda are exploring ways of raising revenue by taxing environmental goods such as water. Whereas their primary focus is to raise revenue, we demonstrate how taxes on environmental goods can yield other benefits beyond addressing a country’s fiscal needs. This study employs a computable general equilibrium model to shed light on the impact of a water tax policy when a tax is accompanied by a recycling scheme of the same magnitude. We seek to establish whether taxation and recycling can induce more growth, employment and industry output. The results show that a mechanism which leaves a neutral fiscal balance yields dividends for the economy. In other words, whatever the degree of regressivity resulting from the environmental tax, it is possible to design a recycling scheme that renders the tax policy to be beneficial to the economy.
    Keywords: Environmental Taxation, Revenue recycling, Double dividend, Economic growth
    JEL: C68 H23 E62 Q52
    Date: 2014
  2. By: Klaus Schmidt-Hebbel (Universidad Catolica de Chile); José Carlos Tello (Departamento de Economía de la PUC del Perú)
    Abstract: This paper develops a dynamic general-equilibrium political-economy model for the optimal size and composition of public spending. An analytical solution is derived from majority voting for three government spending categories: public consumption goods and transfers (valued by households), as well as productive government services (complementing private capital in an endogenous-growth technology). Inequality is re ected by a discrete distribution of innitely-lived agents that dier by their initial capital holdings. In contrast to the previous literature that derives monotonic (typically negative) relations between inequality and growth in one-dimensional voting environments, this paper establishes conditions, in an environment of multi-dimensional voting, under which a non-monotonic, inverted U-shape relation between inequality and growth is obtained. This more general result { that inequality and growth could be negatively or positively related { could be consistent with the ambiguous or inconclusive results documented in the empirical literature on the inequality-growth nexus. The paper also shows that the political-economy equilibrium obtained under multi-dimensional voting for the initial period is time-consistent. JEL Classification-JEL: D72, E62, H11, H31
    Keywords: Desigualdad, crecimiento endógeno, votación multidimensional, impuesto endógeno.
    Date: 2014
  3. By: Holger Görg; Eric Strobl
    Abstract: We use a unique exogenous corporate tax policy change in the Republic of Ireland to investigate how corporate taxation affects foreign direct investment at the extensive and intensive margin. To this end we construct exhaustive sectoral and plant level panel data and use difference-in-differences strategies. Our results do not provide strong evidence that the increase in corporate tax rates for exporters did affect the entry or exit of plants from the US or UK in Ireland. Entry rates of German firms seem to be negatively affected, however. At the intensive margin there is evidence that foreign plants in Ireland reduce the size of their operations in response to the tax change
    Keywords: multinational companies, foreign direct investment, corporate tax, Ireland, difference-in-differences
    JEL: F23 H25
    Date: 2014–09
  4. By: Jang-Ting Guo (Department of Economics, University of California Riverside); Shu-Hua Chen (National Taipei University)
    Abstract: In the context of a standard one-sector AK model of endogenous growth, we show that the economy exhibits equilibrium indeterminacy and belief-driven aggregate fluctuations under progressive taxation of income. When the tax schedule is regressive or flat, the economy's balanced growth path displays saddle-path stability and equilibrium uniqueness. These results imply that in sharp contrast to a conventional automatic stabilizer, progressive income taxation may destabilize an endogenously growing macroeconomy by generating cyclical fluctuations driven by agents' self-fulfilling expectations or sunspots.
    Keywords: Progressive Income Taxation, Endogenous Growth, Equilibrium (In)determinacy.
    JEL: E62 O41
    Date: 2014–09
  5. By: António Jacinto Simões (Management Department, Évora University); José Ventura (CEFAGE-UE and Management Department, Évora University); Luís A. G. Coelho (CEFAGE-UE and Management Department, Évora University)
    Abstract: This paper conducts a literature survey on Foreign Direct Investment (FDI) and its relation to fiscal policy. Geographical and cultural proximity between originating and host countries, market size of the host countries, as well as other exogenous variables have been pointed out by a significant part of the literature as crucial factors in FDI decisions. Fiscal policy, as an endogenous factor, is an increasingly important tool on the countries competitiveness for attracting FDI, mainly in the Euro-zone. The papers analyzed identify some areas of fiscal policy: most papers focus analysis of fiscal policy only on the tax rate – that is, on the relationship between the income tax rate in force in the country and FDI; other papers analyze the relationship between fiscal harmonization and FDI; some papers study the relationship between the complexity of the fiscal system and FDI; while others attempt to relate other specific areas of fiscal policy – e.g. fiscal regime of thin capitalization – with FDI decisions; various other studies show the relationship between territories with non-existent (or extremely low) fiscal regimes and FDI. It is expected that this characteristics of fiscal policy, will be relevant in the decision-making process, where countries are competing with each other as potential locations for FDI.
    Keywords: Foreign Direct Investment; Fiscal Policy; Corporate Income Tax Rate; Tax Harmonization; Tax Complexity; Tax Havens.
    JEL: H30 H21 H25 F21
    Date: 2014
  6. By: International Monetary Fund. European Dept.
    Keywords: Economic growth;Tax reforms;Tax system reviews;Public enterprises;Privatization;Immigration;Labor productivity;Global competitiveness;Selected Issues Papers;Norway;
    Date: 2014–08–29
  7. By: Gliksberg, Baruch (Department of Economics, University of Haifa)
    Abstract: This paper studies how the presence of an income tax changes the properties of general equilibrium models. It fi�nds that relative to the previous literature [following Leeper (1991)] a new area of determinacy exists where a passive �fiscal rule combined with a passive monetary rule can still deliver determinacy where the same area of the parameter space would lead to multiple solutions if taxes were lump sum. It characterizes analytically the extent to which tax cuts are self �financing and how the distortionary tax Laffer curve looks near the steady state in order to obtain the size of the passive �fiscal-passive monetary regime. In this regime, �scal limits bring about a Tobin effect and nominal prices are determined according to the quantity theory of money.
    Keywords: Distorting Taxes; Dynamic Laffer Curve; Equilibrium Determinacy;
    JEL: C60 E60 H60
  8. By: Estelle P. Dauchy (New Economic School); Sophia Chen (Research Department, International Monetary Fund)
    Abstract: We propose a tax-adjusted q model with physical and intangible assets and estimate the effect of bonus depreciation in the United States in the early 2000s. We find that investment responds moderately to tax incentives; however allowing for heterogeneity reveals that intangible-intensive firms are more responsive than physical-intensive firms and their differences increase with firm size. Accounting for intangible assets increases the estimated total investment response from 3.7 to 14.3 percent among the largest 500 firms. Our results imply that understanding the behavior of large and intangible-intensive firms has important implications for the design and evaluation of investment policy.
    Keywords: investment tax incentives, intangible assets, q model of investment, bonus depreciation
    JEL: H25 G31 E01
    Date: 2014–09
  9. By: Craig Brett (Mount Allison University); John A Weymark (Vanderbilt University)
    Abstract: Majority voting over the nonlinear tax schedules proposed by a continuum of citizen candidates is considered. The analysis extends the finite-individual model of Röell (unpublished manuscript, 2012). Each candidate proposes the tax schedule that is utility maximal for him subject to budget and incentive constraints. Each of these schedules is a combination of the maxi-min and maxi-max schedules along with a region of bunching in a neighborhood of the proposer's type. Techniques introduced by Vincent and Mason (1967, NASA Contractor Report CR-744) are used to identify the bunching region. As in Röell's model, it is shown that individual preferences over these schedules are single-peaked, so the median voter theorem applies. In the majority rule equilibrium, marginal tax rates are negative for low-skilled individuals and positive for high-skilled individuals except at the endpoints of the skill distribution where they are typically zero.
    Keywords: bunching, citizen candidates, ironing, majority voting, nonlinear income taxation
    JEL: H2 D7
    Date: 2014–09–26
  10. By: Gabriela Castro (Economics and Research Department, Banco de Portugal); Ricardo M. Felix (Economics and Research Department, Banco de Portugal); Paulo Julio (Economics and Research Department, Banco de Portugal; and CEFAGE); Jose R. Maria (Economics and Research Department, Banco de Portugal)
    Abstract: Using PESSOA, a DSGE model for a small euro area economy, we analyze the size of fiscal multipliers associated with a large fiscal consolidation in "normal times" and in "crisis times." The crisis times scenario embodies a temporary increase in nominal rigidities and in financial frictions, purportedly better reflecting the underlying economic environment during the "Great Recession." Results show that impact multipliers are around 50-70 percent larger in crisis times for expenditure-based fiscal consolidations. A government consumption-based adjustment yields the highest impact multiplier (1.8 in crisis times vis-à-vis 1.2 in normal times). Revenue-based fiscal consolidations are also more recessive in crisis times, though the differences against normal times are less pronounced. Length: 37 pages
    Keywords: Fiscal multipliers; crisis; DSGE model; euro area; monetary union; small open economy.
    JEL: E62 F41 H62
    Date: 2014
  11. By: Andre Diniz (Escola de Economia de São Paulo (EESP) Fundação Getulio Vargas); Bernardo Guimaraes (Escola de Economia de São Paulo (EESP) Fundação Getulio Vargas)
    Abstract: The recent European debt crisis has sparked a heated debate on the merits of fiscal austerity. Since the main objective of the proposed fiscal tightenings is to reduce sovereign default risk, the solution to this debate depends on the costs of a sovereign debt restructuring. One important cost is its negative effect on the banking system. This paper extends an off-the-shelf macroeconomic model with financial frictions in order to quantitatively assess the costs of financial disruption ensuing from a sovereign debt restructuring. Results show that the losses from financial disruption are offset by the benefits of a less contractionary fiscal policy. Government size is crucial for the relative effects of financial disruption as austerity becomes substantially more costly when tax rates are large.
    Keywords: Financial disruption, sovereign debt, sovereign default, Deleveraging
    JEL: E32 F34 G01 H63
    Date: 2014–08
  12. By: Stuart S. Rosenthal (Syracuse University); Stephen L. Ross (University of Connecticut)
    Abstract: This paper reviews recent literature that considers and explains the tendency for neighborhood and city-level economic status to rise and fall. A central message is that although many locations exhibit extreme persistence in economic status, change in economic status as measured by various indicators of per capita income is common. At the neighborhood level, we begin with a set of stylized facts, and then follow with discussion of static and dynamic drivers of neighborhood economic status. This is mirrored at the metropolitan level. Durable but slowly decaying housing, transportation infrastructure, and self-reinforcing spillovers, all influence local income dynamics, as do enduring natural advantages, amenities and government policy. Three recurring themes run throughout the paper: (i) Long sweeps of time are typically necessary to appreciate that change in economic status is common; (ii) history matters; and (iii) a combination of static and dynamic forces ensure that income dynamics can and do differ dramatically across locations but in ways that can be understood.
    Keywords: Neighborhood income dynamics; city income dynamics; durable housing; transportation infrastructure; spillovers; persistence, path dependence, and cycles.
    JEL: R0 R1 R2 R3 R4
    Date: 2014–09
  13. By: Mohamed Belkhir; Sabri Boubaker; Wael Rouatbi
    Abstract: The current study investigates the determinants of going private (GP) in France. It contrasts a sample of 161 firms that went private between 1997 and 2009 with a propensity-score-matched sample of firms that remained public during the same period. The results indicate that, unlike for firms that remain public, the largest controlling shareholders (LCSs) of GP firms control their firms using an incommensurately small fraction of ultimate cash flow rights. This is consistent with the view that agency problems between large and minority shareholders make public firms less attractive to investors, which reduces the benefits of staying public and encourages the LCSs to take their firms private or accept takeover offers. Additional results show that GP firms have more undervalued stock prices and higher free cash flows than non-GP firms. Expected interest tax shields, low growth opportunities, and pre-GP takeover interest do not seem to affect the probability of GP.
    Keywords: Going private; Ownership structure; Large shareholders; Corporate governance
    JEL: G32 G34
    Date: 2014–09–30
  14. By: Eva Koscher (Goethe University, Frankfurt, Germany)
    Abstract: Nowadays, corporations are facing an increased demand not only to achieve robust economic growth, but also to operate in a more ethical and responsible manner. But as long as the majority of economic agents place their own welfare above that of society, the question is: Which incentives does a company have to engage in CSR activities? Will companies benefit financially from their activities, or will they face mainly constraints by increased non-profitable spending? To answer this question, this paper examines the link between Corporate Social Responsibility (CSR) and Corporate Financial Performance (CFP). By using recent data from European companies, our paper extends prior large-scale Anglo-American research and tries to shed some light on the causal relationship between CSR and CFP as well as on country effects. We further introduce of a new measure for CSR to reduce the few-measure bias that has plagued the current body of research. By employing this new measure to established empirical methods, our approach allows for direct comparison with results from previous studies. Consistent with past studies, we find a positive relationship between CSR and CFP when we use traditional regression analysis. However, our results fail to lend support to the idea of a business case for CSR since we could not find a positive relationship between lagged CSR measures and current CFP when we use the Granger causality approach. Instead, our findings suggest that strong financial performance leads to more CSR activities (especially in the environmental field) as stated by the slack resources theory. Hence, companies who can afford CSR activities are good at being green/social. Our results indicate further that the institutional environment of the United Kingdom might be more favorable to honor responsible activities compared to other European countries.
    Date: 2013–09

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