nep-pbe New Economics Papers
on Public Economics
Issue of 2014‒11‒17
24 papers chosen by
Keunjae Lee
Pusan National University

  2. Myths and Misconceptions in the Tax Mix Debate By Smyth, Russell
  3. Tax Revenue and Economic Growth in Ghana: A Cointegration Approach By Takumah, Wisdom
  4. Fiscal Policy and Growth in Developing Asia By Abdon, Arnelyn May; Estrada, Gemma Esther; Lee, Minsoo; Park, Donghyun
  5. Corruption, Tax Evasion and Social Values By Litina, Anastasia; Palivos, Theodore
  6. When a Price is Enough: Implementation in Optimal Tax Design By Renes, Sander; Zoutman, Floris T.
  7. A General Microsimulation Model for the EU VAT with a specific Application to Germany By Lars-H. R. Siemers
  8. Sectoral Labor Market Effects of Fiscal Spending By Wesselbaum, Dennis
  9. Effect of corporate tax on sector specific foreign direct investment in Ghana By Obeng, Camara Kwasi
  10. Tax Power and Economics By Estrada, Fernando; González, Jorge Iván
  11. Towards a quantitative theory of automatic stabilizers: the role of demographics By Alexandre Janiaka; Paulo Santos Monteiro
  12. Income and Wealth Distributionin Germany: A Macro-Economic Perspective By Jan Behringer; Thomas Theobald; Till van Treeck
  13. Welfare Effects of Distortionary Tax Incentives under Preference Heterogeneity: An Application to Employer-provided Electric Cars By Alexandros Dimitropoulos; Jos N. van Ommeren; Paul Koster; Piet Rietveld†
  14. The Dynamic Causal Relationship between Government Revenue and Government Expenditure Nexus in Ghana By Takumah, Wisdom
  15. Which economic states are sustainable under a slightly constrained tax-rate adjustment policy By Krawczyk, Jacek B.; Judd, Kenneth L.
  16. Signaling with Audits: Mimicry, Wasteful Expenditures, and Non-compliance in a Model of Tax Enforcement By Kotowski, Maciej H.; Weisbach, David A.; Zeckhauser, Richard J.
  17. Leaders as Role Models for the Voluntary Provision of Public Goods By Simon Gaechter; Elke Renner
  18. The Effects of a Money-Financed Fiscal Stimulus By Jordi Galí
  19. An Analysis of Optimal Government Size for Growth: A Case Study of Pakistan By Zareen, Shumaila; Qayyum, Abdul
  20. A model of technology transfer under taxation By Michelacakis, Nickolas
  21. Does Fiscal Consolidation Really Get You Down? Evidence from Suicide Mortality By Antonakakis, Nikolaos; Collins, Alan
  22. The societal benefits of a financial transaction tax By Aleksander Berentsen; Samuel Huber; Alessandro Marchesiani
  23. Personal Income Inequality and Aggregate Demand By Laura Carvalho; Armon Rezai
  24. “Income inequality in Europe. Analysis of recent trends at the regional level” By Raul Ramos; Vicente Royuela

  1. By: Dahlberg, Mattias (Tax Law, Uppsala University); Önder, Ali Sina (Uppsala Center for Fiscal Studies)
    Abstract: Due to the Nordic Tax Treaty, commuters pay their income taxes where they earn income. This creates problems in local government finances in Scania County of Sweden, because the number of commuters received on both sides of the Öresund Strait is not symmetric, but the flow from Scania County of Sweden into Copenhagen County of Denmark is about 25 times as large as the other way around. This paper aims to document as ymmetries in commuter flows in the Öresund Region and the loss in income tax revenue due to the asymmetric magnitudes in the flow of commuters. We propose renewed negotiations between Sweden and Denmark on the income taxation in the Öresund Region in order to sustain local public services in the region.
    Keywords: Labor Taxation; Commuting; Model Tax Convention; Nordic Tax Treaty; Source vs.Residence Principle
    JEL: H24 H61 H71 J61 K34
    Date: 2014–09–08
  2. By: Smyth, Russell
    Abstract: Recently, the Australian states supported an increase in the Goods and Services Tax (GST) as a means to increase revenue available to them. This would entail further tax mix reform in favour of taxing consumption. This paper considers the merits of tax reform, drawing on the earlier Australian debates on the topic from the 1990s and the associated academic literature. While it is argued that the benefits of tax mix reform are often overstated, if increasing the GST rate is marketed as part of a package to broaden the income tax base, it offers a vehicle to bring about tax reform.
    Keywords: Tax mix switch, Broad-based consumption tax, GST
    JEL: H2 H22
    Date: 2014–10–10
  3. By: Takumah, Wisdom
    Abstract: This study examines the effect of tax revenue on economic growth in Ghana using quarterly data for the period 1986 to 2010 within the VAR framework. The study found that there exist both short run and long run relationship between economic growth and tax revenue. The result indicated a unidirectional causality between tax revenue and economic growth and it flows from tax revenue to economic growth. The result suggests that tax revenue exerted a positive and statistically significant effect on economic growth both in the long-run and short-run implying that tax revenue enhances economic growth in Ghana. The study recommended that the tax base need to be widened and the tax rates reduced in order to generate more revenue. It was recommended that the government should improve tax collection measures in order to generate more revenue so as to increase economic growth in Ghana.
    Keywords: Tax revenue, Economic Growth, Cointegration, Causality, Ghana
    JEL: C3 E6 H2
    Date: 2014–09–12
  4. By: Abdon, Arnelyn May; Estrada, Gemma Esther (Asian Development Bank); Lee, Minsoo (Asian Development Bank); Park, Donghyun (Asian Development Bank)
    Abstract: In this paper we empirically explore the relationship between fiscal policy and economic growth in developing Asia. The region’s overall level of taxes and government spending are substantially lower than those prevailing in advanced economies. Nevertheless, there are conceptual grounds why fiscal policy, including the composition of taxes and government spending, can have a significant effect on growth, as our empirical analysis shows. In line with economic theory, property taxes have a more benign impact on growth than direct taxes, and spending more on education has a sizable positive impact on growth.
    Keywords: fiscal policy; growth; taxation; government spending; Asia
    JEL: H20 H50
    Date: 2014–10–01
  5. By: Litina, Anastasia; Palivos, Theodore
    Abstract: We provide empirical support and a theoretical explanation for the vicious circle of political corruption and tax evasion in which countries often fall into. We address this issue in the context of a model with two distinct groups of agents: citizens and politicians. Citizens decide the fraction of their income for which they evade taxes. Politicians decide the fraction of the public budget that they peculate. We show that multiple self-fulfilling equilibria with different levels of corruption can emerge based on the existence of strategic complementarities, indicating that corruption may corrupt. Furthermore, we find that standard deterrence policies cannot eliminate multiplicity. Instead, policies that impose a strong moral cost on tax evaders and corrupt politicians can lead to a unique equilibrium.
    Keywords: Corruption, Tax Evasion, Multiple Equilibria, Stigma
    JEL: D73 E62 H26
    Date: 2014–09–09
  6. By: Renes, Sander (University of Mannheim); Zoutman, Floris T. (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: This paper studies the design of tax systems that implement a planner's secondbest allocation in a market economy. An example shows that the widely used Mirrleesian (1976) tax system cannot implement all incentive-compatible allocations. Hammond's (1979) "principle of taxation" proves that any incentive-compatible allocation can be implemented through at least one tax system. However, this tax system is often undesirable since it severely restricts the choice space of agents in the economy. In this paper we derive necessary and sufficient conditions to verify whether a given tax system can implement a given incentive-compatible allocation. We show that when an incentive-compatible allocation is on the Pareto frontier, and/or surjective onto the choice space, a tax system that equates the marginal tax rates to the optimal wedges can implement the second best, without restricting the choice space of the agents. It follows that the Mirrleesian tax system can successfully implement the second best in the identified classes. Since the secondbest allocation of welfarist planners is always on the Pareto frontier, our results (ex post) validate most tax systems proposed in the literature. Outside of the identified classes, the planner may need to restrict the choice space of agents to implement its second best in the market. This sheds new light on rules, quotas and prohibitions used in real-world tax and benefit systems.
    Keywords: Optimal non-linear taxation; redistribution; tax system; market implementation; price mechanism; private information
    JEL: D82 H21 H22 H24
    Date: 2014–09–24
  7. By: Lars-H. R. Siemers (University of Siegen)
    Abstract: The sales taxes in the EU|and in several other countries|are practiced as value-added tax of the consumption type with invoice method. Literature on microsimulation models (MSM) for this type of VAT is rare, though the importance of VAT has continuously increased. We discuss the issues of VAT-MSM in detail and develop a basic general VAT-MSM, applicable to the EU member states (and beyond). To illustrate the functioning of the general model, we apply it in detail to the specific case of Germany. We provide comprehensive estimation results for the distributional and fiscal effects of the German VAT. Finally, we simulate the effects of a small VAT reform in 2010, comparing static and behavioral response simulations.
    Keywords: VAT microsimulation VAT exemption RWI-VAT-SIM EU
    JEL: C6 D12 D31 D63
    Date: 2014
  8. By: Wesselbaum, Dennis
    Abstract: This paper studies sectoral effects of fiscal spending. We estimate a New Keynesian model with search and matching frictions and two sectors. Fiscal spending is either wasteful (consumption) or productivity enhancing (investment). Using U.S. data we find significant differences across sectors. Further, we show that government investment rather than consumption shocks are driver of fluctuations in sectoral and aggregate outputs and labor market variables. Finally, government investment shocks are much more effective in stimulating the economy than spending shocks. However, this comes at the cost of a very persistent increase in debt.
    Keywords: Government Consumption, Government Investment, Search and Matching, Sectoral Effects.
    JEL: C1 C11 E32 E62 H5 H50
    Date: 2014–09–09
  9. By: Obeng, Camara Kwasi
    Abstract: There has been intense competition among developed and developing countries to attract foreign direct investment (FDI) in recent years. This competition for FDI is due to the fact that foreign capital creates employment and economic growth, augments the productive capital of a country, promotes transfer of technology and skills to the host country, and hence helps alleviate poverty, among other benefits. The competition, among other things, has taken the form of reduction in the corporate tax rate. Over the past two decades there has been a downward trend in corporate tax rate and an upward trend in FDI inflow in Ghana. Empirical evidence point to the fact FDI inflow to Ghana is not influenced by lower corporate tax rates. What is more, no study has explored quantitatively the effect of corporate tax on the inflow of FDI to the various sectors of the economy of Ghana. This study, therefore, examined the effect of corporate tax reduction on sector-specific FDI inflow in Ghana. Specifically, the study investigated the effect of corporate tax on FDI inflow into the mining sector, manufacturing sector, and service sector of the economy. Using the Johansen cointegration technique, the study found that corporate tax influences FDI inflow in the all the sectors. The study recommends that government should maintain a low corporate tax rate to attract more FDI.
    Keywords: Corporate tax, Foreign Direct Investment, Cointegration, Ghana
    JEL: F21 F23 H25 H32
    Date: 2014–09–09
  10. By: Estrada, Fernando; González, Jorge Iván
    Abstract: The article is divided into two parts. The first describes Hayek's critique of the progressive tax system since its conception of social order and fiscal rationality. Hayek thinks about a key principle in liberal democracies: majority rule. And stretching comments to the influence of morality in taxation decisions. The second is aimed at analyzing the reception of Hayek in constitutional economics Brennan and Buchanan. However, in the interpretation of tax policy has decisively if governments reflect a tyrant or benevolent Leviathan State. The Fiscal Constitution must be accompanied by a monetary constitution. Both constitutional forms are related and prevent leviathánico power of governments, especially when they are short stay. Although, for the authors, the Fiscal Constitution has important implications for monetary constitution.
    Keywords: Power Tax, Hayek, Buchanan, Brennan, Progressive Tax.
    JEL: B13 B15 B25 B41 E42 E62 E64 H3
    Date: 2014
  11. By: Alexandre Janiaka; Paulo Santos Monteiro
    Abstract: Employment volatility is larger for young and old workers than for prime aged. At the same time, in economies with high tax rates, the share of total hours supplied by the young/old workers is smaller. These two observations imply a negative correlation between government size (measured by the share of taxes in total output) and aggregate output volatility. This paper assesses in a calibrated heterogenous agent, overlapping generations model the quantitative importance of these two facts to account for the empirical relation between government size and macroeconomic stability. The baseline calibration accounts correctly for the quantitative relation between output volatility and government size observed in the data.
    Keywords: Automatic Stabilizers; Distortionary Taxes; Demographics
    JEL: E32 E62 H30 J10 J21
    Date: 2014–10
  12. By: Jan Behringer; Thomas Theobald; Till van Treeck
    Abstract: Household surveys like the German Socio-Economic Panel (SOEP) notoriously underestimate the degree of income and wealth inequality at the upper end of the distribution. A new approach developed by Thomas Piketty and co-authors therefore analyses tax return data in an attempt at better measuring top incomes and wealth. In the case of Germany, however, this approach faces a number of difficulties. Since 2009, capital incomes are subject to a flat rate withholding tax, levied at source. Moreover, Germany abandoned the wealth tax in 1997. This makes it difficult to measure the distribution of wealth and capital incomes. Moreover, at the conceptual level, top household income shares underestimate the rise of inequality in Germany because much of the shift in income distribution since the early 2000s has taken the form of rising corporate profits, which in large part have been retained by firms and hence are not counted as household income. Despite these problems, measures of income and wealth inequality can be developed by combining information from household surveys and national accounts data. The article also argues that reducing inequality would contribute to reducing Germany's export surplus and thereby enhance macroeconomic stability.
    Date: 2014
  13. By: Alexandros Dimitropoulos; Jos N. van Ommeren; Paul Koster; Piet Rietveld† (VU University Amsterdam)
    Abstract: This paper presents an approach for the estimation of welfare effects of tax policy changes under heterogeneity in consumer preferences. The approach is applied to evaluate the welfare effects of current tax advantages for electric vehicles supplied as fringe benefits by employers. Drawing on stated preferences of Dutch company car drivers, we assess the short-run welfare effects of changes in the taxation of the private use of these vehicles. We find that the welfare gain of a marginal increase in the taxation of electric company cars is substantial and even outweighs the marginal tax revenue raised.
    Keywords: Social welfare, Latent class, Stated preference, Company car, Electric vehicle, Plug-in hybrid
    JEL: D12 H23 H24 H31 O33 Q58 R41
    Date: 2014–06–02
  14. By: Takumah, Wisdom
    Abstract: The relationship between government revenue and government expenditure has been an important topic in public economics, given its relevance for policy especially with respect to the budget deficit. The purpose of this paper is to investigate the relationship between government revenue and government expenditure in Ghana for the period of 1986 - 2012. We include GDP as a control variable into the model. Data properties were analyzed to determine their stationarity using the DF-GLS and PP unit root tests which indicated that the series are I(1). We find a cointegration relationship between government revenue and government expenditure. The causality tests indicate that there is a bidirectional causal relationship between government expenditure and revenues in both the long and the short run hence confirming the Fiscal synchronization hypothesis. The policy implication of the results suggests that there is interdependence between government expenditure and revenues. The government makes its expenditure and revenues decision simultaneously. Under this scenario the fiscal authorities of these countries with budget deficits should raise revenues and decrease spending simultaneously in order to control their budget deficits.
    Keywords: Government revenue, Government expenditure; Cointegration; Causality, Budget Deficit, Fiscal synchronization, Fiscal policy.
    JEL: C32 E62 H20 H50 H62
    Date: 2014–09–14
  15. By: Krawczyk, Jacek B.; Judd, Kenneth L.
    Abstract: Viability theory is the study of dynamical systems that asks what set of initial conditions will generate evolutions which obey the laws of motion of a system and some state constraints, for the length of the evo- lution. We apply viability theory to Judd’s (JPE, 1987) dynamic tax model to identify which economic states today are sustainable under only slightly constrained tax-rate adjustments in the future, when the dynamic budget constraint and consumers’ transversality condition at infinity are satisfied. We call the set of such states the economic viability kernel. In broad terms, knowledge of the viability kernel can tell the planner what economic ob- jectives are achievable and assist in the choice of suitable controls to realise them. We observe, unsurprisingly, that a very high consumption economy lies outside such kernels, at least for annual tax-adjustment levels limited by 20%; higher consumption levels can only be sustained when capital is abundant. Furthermore, we notice that the sizes of the kernel slices for a given taxation level do not diminish as the tax rate rises, hence high taxation economies are not necessarily more prone to explode, or implode, than their low taxation counterparts. In fact, higher tax rates are neces- sary to keep many consumption choices viable, especially when capital approaches the constraint-set boundaries.
    Keywords: taxation policy, macroeconomic modeling, dynamic systems, vi- ability theory; VIKAASA
    JEL: C61 E61 E62
    Date: 2014
  16. By: Kotowski, Maciej H. (Harvard University); Weisbach, David A. (University of Chicago); Zeckhauser, Richard J. (Harvard University)
    Abstract: The audit policy of a tax authority can signal its audit effectiveness. We model this process and show that in limited circumstances an ineffective authority can masquerade as being effective. We show that high maximal penalties imply underreporting of income.
    JEL: C71 D82 D86
    Date: 2014–01
  17. By: Simon Gaechter (School of Economics, University of Nottingham); Elke Renner (School of Economics, University of Nottingham)
    Abstract: We investigate the link between leadership, beliefs and pro-social behavior. This link is interesting because field evidence suggests that people’s behavior in domains like charitable giving, tax evasion, corporate culture and corruption is influenced by leaders (CEOs, politicians) and beliefs about others’ behavior. Our framework is an experimental public goods game with a leader. We find that leaders strongly shape their followers’ initial beliefs and contributions. In later rounds, followers put more weight on other followers’ past behavior than on the leader’s current action. This creates a path dependency the leader can hardly correct. We discuss the implications for understanding belief effects in naturally occurring situations.
    Keywords: Leadership, beliefs, experiments, public goods, path dependency, public policy, management.
  18. By: Jordi Galí
    Abstract: I analyze the effects of an increase in government purchases financed entirely through seignorage, in both a classical and a New Keynesian framework, and compare them with those resulting from a more conventional debt-financed stimulus. My findings point to the importance of nominal rigidities in shaping those effects. Under a realistic calibration of such rigidities, a money-financed fiscal stimulus is shown to have very strong effects on economic activity, with relatively mild inflationary consequences. If the steady state is sufficiently inefficient, an increase in government purchases may increase welfare even if such spending is wasteful.
    Keywords: seignorage, government spending, fiscal multiplier
    JEL: E32 E52 E62
    Date: 2014–09
  19. By: Zareen, Shumaila; Qayyum, Abdul
    Abstract: The government size is important for the development of the economy. We estimated optimum government size for growth in Pakistan by using Heerden (2008) methodology for period from 1973 to 2012. The results for the optimal size of the government show that all the variables are significant. The optimal size of the government size or equivalently the optimal size of the public spending is found to be around 17 percent of the GDP. The actual size of the government spending in current years is 18 percent. This finding is very much interesting since it highlights that the current size of government in Pakistan is above the optimum level or size. There is scope of reduction in ratio of total government spending to the GDP in Pakistan.
    Keywords: Optimal Government Size, Economic Growth, Pakistan
    JEL: H5 O40 O53
    Date: 2014
  20. By: Michelacakis, Nickolas
    Abstract: In this paper, we construct a model to study the technology transfer decision of a monopolist, with access to a finite number of technologies, under taxation. It is shown that a policy maker in a low-wage developing country cannot always increase the number of technologies transferred from a developed country through a tax on wages-and-invest scheme. We provide conditions for such an intervention to be successful and show that there is no unique choice of tax for doing so.
    Keywords: technology transfer, multinational, tax, model
    JEL: D42 H21 O33
    Date: 2014–09
  21. By: Antonakakis, Nikolaos; Collins, Alan
    Abstract: While linkages between some macroeconomic phenomena (e.g. unemployment, GDP growth) and suicide rates in some countries have been explored, only one study, hitherto, has established a causal relationship between fiscal consolidation and suicide, albeit in a single country. This study examines the impact of budget consolidation on suicide mortality across all Eurozone peripheral economies, while controlling for various economic and socio-demographic differences. The impact of fiscal adjustments is found to be gender, age and time specific. In particular, fiscal consolidation has short-, medium- and long-run suicide increasing effects on the male population between 65 and 89 years of age. A one percentage point reduction in government spending is associated with an 1.39%, 2.35% and 2.64% increase in the short-, medium- and long-run, respectively, of male suicides rates between 65 and 89 years of age in the Eurozone periphery. These results are highly robust to alternative measures of fiscal consolidation. Unemployment benefits and substantial employment protection legislation seem to mitigate some of the negative effects of fiscal consolidation on suicide mortality. Plausible explanations for these impacts are provided and policy implications drawn.
    Keywords: Fiscal consolidation, Suicide, Eurozone periphery, Government policy, Labour market institutions
    JEL: C33 H30 H51 H55 H62 I18 I31
    Date: 2014–09–11
  22. By: Aleksander Berentsen; Samuel Huber; Alessandro Marchesiani
    Abstract: We investigate the positive and normative implications of a tax on financial market transactions in a dynamic general equilibrium model, where agents face idiosyncratic liquidity shocks and financial trading is essential. Our main finding is that agents' portfolio choices display a pecuniary externality which results in too much trading. We calibrate the model to U.S. data and find an optimal tax rate of 2.5 percent. Imposing this tax reduces trading in financial markets by 30 percent.
    Keywords: Tobin tax, financial transaction tax, OTC trading
    JEL: E44 E50 G18
    Date: 2014–10
  23. By: Laura Carvalho; Armon Rezai
    Abstract: This paper presents a theoretical and empirical investigation of how changes in the size distribution of income can affect aggregate demand and the demand regime of an economy. After presenting empirical evidence for the US economy that the propensity to save increases significantly from the bottom to the top quintile of wage earners, we demonstrate that more equal distributions always lead to higher output in the traditional neo-Kaleckian macroeconomic model. We also present conditions under which a reduction of income inequality among workers turns demand more wage-led. This view is supported by the results of an econometric study for the United States (1967-2010) which show that the rise after 1980 in income inequality has made the US economy more profit-led.
    Keywords: Income inequality; demand regimes; Neo-Kaleckian model; personal and functional income distribution
    JEL: D31 D33 E25 C32
    Date: 2014–10–29
  24. By: Raul Ramos (Faculty of Economics, University of Barcelona); Vicente Royuela (Faculty of Economics, University of Barcelona)
    Abstract: The evolution of income inequality is becoming a great concern all over the World, particularly since the start of the Great Recession. In this work we analyse the main trends of income inequality in Europe over the last decade, both at the national and regional level. Our results point to a large diversity in inequality patterns, as we observe both increases and decreases in inequality both at the regional and at the national level. The EU2020 Strategy aims achieving an inclusive economic growth, benefitting the largest possible number of people. We briefly analyse the main factors impacting inequality and finally derive several policy implications.
    Keywords: Inequality, Globalisation, Technological change, European regions. JEL classification: R11, R12, O15, O3, F61
    Date: 2014–10

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