nep-pbe New Economics Papers
on Public Economics
Issue of 2014‒12‒29
twenty-two papers chosen by
Thomas Andrén

  1. The tax-rate elasticity of local business profits By Fossen, Frank M.; Steiner, Viktor
  2. The Occurrence of Tax Amnesties. Theory and Evidence By Ralph-C. Bayer; Harald Oberhofer; Hannes Winner
  3. Fiscal Policy, Debt Constraint and Expectation-Driven Volatility By Kazuo Nishimura; Thomas Seegmuller; Alain Venditti
  4. High Marginal Tax Rates on the Top 1%? Lessons from a Life Cycle Model with Idiosyncratic Income Risk By Kindermann, Fabian; Krueger, Dirk
  5. Optimal taxation with home production By Conny Olovsson
  6. The optimal distribution of the tax burden over the business cycle By Konstantinos Angelopoulos; Stylianos Asimakopoulos; James Malley
  7. Income redistribution and changes in inequality in New Zealand from 2007 to 2011: Alternative distributions and value judgements By Creedy, John; Eedrah, Jesse
  8. Optimal Taxation with Rent-Seeking By Rothschild, Casey; Scheuer, Florian
  9. Optimal progressive taxation in a model with endogenous skill supply. By Angelopoulos, Kostantinos; Asimakopoulos, Stylianos; Malley, James
  10. What Do We Know About Evolution of Top Wealth Shares in the United States? By Wojciech Kopczuk
  11. Gender Bias in Tax Systems Based on Household Income By Andrienko, Yuri; Apps, Patricia; Rees, Ray
  12. Policy outcomes of single and double-ballot elections By Massimiliano Ferraresi; Leonzio Rizzo; Alberto Zanardi
  13. Thomas Piketty’s Capital in the 21st Century By Estrada, Fernando
  14. Trends in Income Inequality and its Impact on Economic Growth By Federico Cingano
  15. Income inequality from a lifetime perspective By Corneo, Giacomo
  16. The State of the Economy and Economic Policy By Michael J. Boskin
  17. Can active labor market policy be counter-productive? By Saint-Paul, Gilles
  18. Relative Effects of Labor Taxes and Unemployment Benefits on Hours Worked per Worker and Employment By Been-Lon Chen; Mei Hsu; Chih-Fang Lai
  19. Do Entrepreneurs Really Earn Less? By Sorgner, Alina; Fritsch, Michael; Kritikos, Alexander S.
  20. Household Debt and Local Public Finances By Whitaker, Stephan; Cheung, Ron; Cunningham, Chris
  21. On the origins and main consequences of fiscal illusion. a short tribute to a big Economist: James Buchanan By Vicini, Andrea
  22. The Effect of Population Aging on Economic Growth By Nicole Maestas; Kathleen Mullen; David Powell

  1. By: Fossen, Frank M.; Steiner, Viktor
    Abstract: Local business profits respond to local business tax (LBT) rates that vary across municipalities. We estimate that a one percent increase in the LBT rate decreases the LBT base by 0.45 percent, based on the universe of German LBT return files, which include corporations and unincorporated businesses. However, the fiscal equalization scheme largely compensates municipalities for the loss in the LBT base when they increase the LBT rate. Our estimates suggest that using tax revenue data instead of tax return data, as commonly done in the literature, results in a significant bias of the elasticity away from zero.
    Keywords: local business tax,corporate tax,tax responsiveness,tax-rate elasticity
    JEL: H25 H71
    Date: 2014
  2. By: Ralph-C. Bayer; Harald Oberhofer; Hannes Winner (WIFO)
    Abstract: This paper presents a theoretical model and empirical evidence to explain the occurrence of tax amnesties. We treat amnesties as endogenous, resulting from a strategic game between many tax payers discounting future payments from punishment and a government that trades off costs and benefits of amnesty programmes. From the model we derive hypotheses about the factors that should influence the occurrence of tax amnesties. For our empirical test we rely on amnesty information from US states between 1981 and 2011. In line with the theoretical model, our empirical findings suggest that the likelihood of amnesties is mainly driven by a government's fiscal requirements and the taxpayers' expectations on future amnesties.
    Keywords: tax amnesties, strategic game, US states
    Date: 2014–12–02
  3. By: Kazuo Nishimura (RIEB, Kobe University & KIER, Kyoto University); 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: 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
    JEL: E32 H20 H68
    Date: 2014–06
  4. By: Kindermann, Fabian; Krueger, Dirk
    Abstract: In this paper we argue that very high marginal labor income tax rates are an effective tool for social insurance even when households have preferences with high labor supply elasticity, make dynamic savings decisions, and policies have general equilibrium effects. To make this point we construct a large scale Overlapping Generations Model with uninsurable labor productivity risk, show that it has a wealth distribution that matches the data well, and then use it to characterize fiscal policies that achieve a desired degree of redistribution in society. We find that marginal tax rates on the top 1% of the earnings distribution of close to 90% are optimal. We document that this result is robust to plausible variation in the labor supply elasticity and holds regardless of whether social welfare is measured at the steady state only or includes transitional generations.
    Keywords: income inequality; progressive taxation; social insurance; top 1%
    JEL: E62 H21 H24
    Date: 2014–10
  5. By: Conny Olovsson (Sveriges riksbank)
    Abstract: Optimal taxes for Europe and the U.S. are derived in a realistically calibrated model where agents buy consumption goods and services, and use home capital and labor to produce household services. The optimal tax rate on services is substantially lower than the tax rate on goods. Specifically, the planner cannot tax home production directly and instead lowers the tax rate on market services to increase the relative price of home production. The optimal tax rate on the return to home capital is strictly positive, and the welfare gains from switching to optimal taxes are large.
    Date: 2014
  6. By: Konstantinos Angelopoulos; Stylianos Asimakopoulos; James Malley
    Abstract: This paper analyses optimal income taxation over the business cycle for households di¤erentiated by labour skill, income and wealth. A model incorporating capital-skill complementarity in production and di¤erential access to labour and capital markets is developed to capture the cyclical characteristics of the US economy, as well as the empirical observations on wage (skill premium) and wealth inequality. We …rst …nd that, under a fully ‡exible budget, the income taxation burden over the business cycle is spread roughly equally across the high-, middle- and low-income households. However, under a balanced budget restriction, the burden is distributed least favourably to the middle-income and most favourably to the high income households.
    Keywords: optimal taxation, business cycle, skill premium, income distribution
  7. By: Creedy, John; Eedrah, Jesse
    Abstract: This paper illustrates the effects of using different distributions and summary measures, using New Zealand data for the period 2007 to 2011. Using an annual accounting period, alternative welfare metrics and units of analysis are investigated. In addition, the sensitivity to assumptions about economies of scale within households is examined, and changes in inequality are decomposed into those arising from population and tax structure changes. When considering the period 2007 to 2010 all measures agree that inequality fell, although the extent of the reduction varies. For the period 2007 to 2011 (after the tax reforms of 2010) the answer to the question of whether inequality in New Zealand has risen or fallen depends crucially on the combination of welfare metric, income unit, adult equivalent scale and inequality measure used. In empirical studies it is therefore important to explore a wide range of alternative approaches, providing information for readers to make their own judgements.
    Keywords: Income distribution, New Zealand, Inequality,
    Date: 2014
  8. By: Rothschild, Casey; Scheuer, Florian
    Abstract: We develop a framework for optimal taxation when agents can earn their income both in traditional activities, where private and social products coincide, and in rent-seeking activities, where private returns exceed social returns either because they involve the capture of pre-existing rents or because they reduce the returns to traditional work. We characterize Pareto optimal non-linear taxes when the government does not observe the shares of an individual’s income earned in each of the two activities. We show that the optimal externality correction typically deviates from the Pigouvian correction that would obtain if rent-seeking incomes could be perfectly targeted, even at income levels where all income is from rent-seeking. If rent-seeking externalities primarily affect other rent-seeking activity, then the optimal externality correction lies strictly below the Pigouvian correction. If the externalities fall mainly on the returns to traditional work, the optimal correction strictly exceeds it. We show that this deviation can be quantitatively important.
    Keywords: Multidimensional screening; Rent-seeking; Tax policy
    JEL: D5 D8 E6 H2 J6
    Date: 2014–11
  9. By: Angelopoulos, Kostantinos; Asimakopoulos, Stylianos; Malley, James
    Abstract: This paper examines whether efficiency considerations require that optimal labour income taxation is progressive or regressive in a model with skill heterogeneity, endogenous skill acquisition and a production sector with capital-skill complementarity. We find that wage inequality driven by the resource requirements of skill-creation implies progressive labour income taxation in the steady-state as well as along the transition path from the exogenous to optimal policy steady-state. We find that these results are explained by a lower labour supply elasticity for skilled versus unskilled labour which results from the introduction of the skill acquisition technology.
    Keywords: optimal progressive taxation, skill premium, allocative efficiency,
    Date: 2014
  10. By: Wojciech Kopczuk
    Abstract: I discuss available evidence about the evolution of top wealth shares in the United States over the last one hundred years. The three main approaches – Survey of Consumer Finances, estate tax multiplier techniques and capitalization method – generate generally consistent findings until mid-1980s but diverge since then, with capitalization method showing a dramatic increase in wealth concentration and the other two methods showing at best a small increase. I discuss strengths and weaknesses of different approaches. The increase in capitalization estimates since 2000 is driven by a dramatic and surprising increase in fixed income assets. There is evidence that estate tax estimates may not be sufficiently accounting for mortality improvements over time. The non-response and coverage issues in the SCF are a concern. I conclude that changing nature of top incomes and the increased importance of self-made wealth may explain difficulties in implementing each of the methods and account for why the results diverge.
    JEL: D31
    Date: 2014–12
  11. By: Andrienko, Yuri (University of Sydney); Apps, Patricia (University of Sydney); Rees, Ray (University of Munich)
    Abstract: The assumption that household income is strongly and positively correlated with a household's real standard of living provides the basis for the joint taxation of families, which has the effect of discriminating against married women as second earners. This paper shows, in the context of a model of the household with young children present, that this assumption is not tenable. The fact that there is considerable heterogeneity in female labour supply which cannot be explained by wage rates and the number and ages of children requires us to look for other explanations, and we argue that these can be found in the variation of child care costs and productivities across households. When these are taken into account, we show, by theoretical modelling and numerical simulations based on survey data, that household income is a poor indicator of household well-being.
    Keywords: gender, discrimination, household taxation, child care, female labour supply, household production, inequality
    JEL: H24 H31 J13 J16 J22 D13
    Date: 2014–11
  12. By: Massimiliano Ferraresi (University of Ferrara, Italy); Leonzio Rizzo (University of Ferrara, Italy); Alberto Zanardi (University of Bologna, Italy)
    Abstract: We use data for all Italian municipalities from 2001-2007 to empirically test the extent to which two different electoral rules, which hold for small and large municipalities, affect fiscal policy decisions at local level. Municipalities with fewer than 15,000 inhabitants elect their mayors in accordance with a single-ballot plurality rule where only one list can support her/him, while the rest of the municipalities uses a run-off plurality rule where multiple lists can support her/him. Per capita total taxes, charges and current expenditure in large municipalities are lower than in small ones.
    Keywords: federal budget, double-ballot, coalition, list, taxes, expenditure
    JEL: H3 H21 H77
    Date: 2014–12
  13. By: Estrada, Fernando
    Abstract: This review of the book by Thomas Piketty, The capital in the XXI century, presents the central themes of the work and exposes its scope on the relationship between inequality and wealth. In particular a positive reflections on the progressive tax is added.
    Keywords: Piketty, Capital, Distribution, Wealth, Fairness
    JEL: B1 B13 B15 B16 B22 B23 B24 B25 B41 B52 C21 C22 C82 E62 E64 H23 H26 N1 O1
    Date: 2014
  14. By: Federico Cingano
    Abstract: In most OECD countries, the gap between rich and poor is at its highest level since 30 years. Today, the richest 10 per cent of the population in the OECD area earn 9.5 times the income of the poorest 10 per cent; in the 1980s this ratio stood at 7:1 and has been rising continuously ever since. However, the rise in overall income inequality is not (only) about surging top income shares: often, incomes at the bottom grew much slower during the prosperous years and fell during downturns, putting relative (and in some countries, absolute) income poverty on the radar of policy concerns. This paper explores whether such developments may have an impact on economic performance.<P> Drawing on harmonised data covering the OECD countries over the past 30 years, the econometric analysis suggests that income inequality has a negative and statistically significant impact on subsequent growth. In particular, what matters most is the gap between low income households and the rest of the population. In contrast, no evidence is found that those with high incomes pulling away from the rest of the population harms growth. The paper also evaluates the “human capital accumulation theory” finding evidence for human capital as a channel through which inequality may affect growth. Analysis based on micro data from the Adult Skills Survey (PIAAC) shows that increased income disparities depress skills development among individuals with poorer parental education background, both in terms of the quantity of education attained (e.g. years of schooling), and in terms of its quality (i.e. skill proficiency). Educational outcomes of individuals from richer backgrounds, however, are not affected by inequality.<P> It follows that policies to reduce income inequalities should not only be pursued to improve social outcomes but also to sustain long-term growth. Redistribution policies via taxes and transfers are a key tool to ensure the benefits of growth are more broadly distributed and the results suggest they need not be expected to undermine growth. But it is also important to promote equality of opportunity in access to and quality of education. This implies a focus on families with children and youths – as this is when decisions about human capital accumulation are made -- promoting employment for disadvantaged groups through active labour market policies, childcare supports and in-work benefits.<BR>Dans la plupart des pays de l'OCDE, le fossé entre riches et pauvres est à son plus haut niveau depuis 30 ans. Aujourd'hui, dans la zone de l'OCDE, les 10% de la population les plus riches gagnent 9,5 fois le revenu des 10 % les plus pauvres; dans les années 1980, ce ratio s'élevait à 7: 1 et il a augmenté de façon continue depuis. Toutefois, la hausse de l'inégalité de revenu n'est pas (seulement) relative à la flambée de la part des plus hauts revenus : souvent, les revenus les plus bas ont augmenté beaucoup plus lentement pendant les années prospères, et sont tombés en période de ralentissement économique, mettant la pauvreté monétaire relative (et, dans certains pays, absolue) sur le radar des préoccupations politiques. Ce document cherche à savoir si ces évolutions peuvent avoir un impact sur la performance économique.<P> S'appuyant sur des données harmonisées couvrant les pays de l'OCDE au cours des 30 dernières années, l'analyse économétrique suggère que les inégalités de revenus ont un impact négatif et statistiquement significatif sur la croissance ultérieure. En particulier, ce qui importe le plus est l'écart entre les ménages à faible revenu et le reste de la population. En revanche, aucune preuve n'est trouvée sur le fait que les personnes ayant des revenus élevés s'élevant loin du reste de la population nuit à la croissance. Le document évalue également la «théorie de l'accumulation du capital humain" montrant le capital humain comme un canal par lequel les inégalités peuvent affecter la croissance. L'analyse fondée sur les micro données de l'Enquête sur les compétences des adultes (PIAAC) montre que l'augmentation des disparités de revenus inhibent le développement des compétences chez les personnes dont les parents ont un faible niveau d'instruction, aussi bien sur le plan quantitatif du niveau de scolarité atteint (par exemple, en années de scolarité), qu'en termes de qualité (niveau de compétences). Les résultats scolaires des personnes issues de milieux les plus riches, toutefois, ne sont pas affectés par les inégalités.<P> Il s'ensuit que les politiques visant à réduire les inégalités de revenus ne doivent pas seulement être poursuivies pour améliorer les résultats sociaux, mais aussi pour soutenir la croissance à long terme. Les politiques de redistribution via les impôts et les transferts sont un outil essentiel pour s'assurer que les bénéfices de la croissance sont plus largement distribués et les résultats suggèrent qu'on ne doit pas forcément s'attendre à ce que la redistribution nuise à la croissance. Mais il est également important de promouvoir l'égalité des chances dans l'accès et la qualité de l'éducation. Ceci implique de mettre l'accent sur les familles avec enfants et les jeunes - car c'est lorsque les décisions sur l'accumulation de capital humain sont prises - par la promotion de l'emploi pour les groupes défavorisés, grâce à des politiques actives du marché du travail, des supports de gardes d'enfants et des prestations d'activité.
    JEL: H23 J62 O15 O47
    Date: 2014–12–09
  15. By: Corneo, Giacomo
    Abstract: Studying lifetime income inequality for individuals who belong to the same cohort can contribute valuable insights that cannot be obtained by usual analyses of annual incomes. Data from the social security system indicates that in West Germany, over the cohorts born between 1935 and 1972, lifetime earnings inequality has strongly increased. For male baby-boomers, lifetime inequality is predicted to be 85 % larger than in the case of their fathers. This is larger than the increase of inequality in the cross-section and points to dramatic intergenerational changes in the German labor market.
    Date: 2014
  16. By: Michael J. Boskin (Department of Economics, Stanford University)
    Abstract: This testimony before the Joint Economic Committee of the United States Congress discusses the state of the economy, evaluates U.S. economic policy, and offers suggestions for strengthening economic growth.
    Date: 2013–02
  17. By: Saint-Paul, Gilles
    Abstract: We study active labor market policies (ALMP) in a matching model. ALMPs are modelled as a subsidy to job search. Workers differ in their productivity, and search takes place along an extensive margin. An additional job seeker affects the quality of unemployed workers. As a result, the Hosios conditions are no longer valid. To replicate the optimum the worker share in bargaining must exceed the Hosios level, and one must impose a tax on job search activity. The coalition in favor of ALMP is also studied.
    Keywords: active labor market policies; Hosios condition; job matching
    JEL: E24 E32 J41 J63 J64
    Date: 2014–11
  18. By: Been-Lon Chen (Institute of Economics, Academia Sinica, Taipei, Taiwan); Mei Hsu (College of Management, National Taiwan Normal University); Chih-Fang Lai (Institute of Economics, Academia Sinica, Taipei, Taiwan)
    Abstract: Labor supply in Europe was declined by about 30% relative to the US over the past 3 decades. The decline comes from hours per worker and employment. This paper studies a matching model and the effects of labor taxes and unemployment benefits. Labor taxes decrease hours and employment, with overstated adverse effects on hours if extensive margins are not considered. Unemployment benefits decrease employment and increase hours, with understated adverse effects on employment if intensive margins are not considered. In baseline, labor taxes and unemployment benefits together explain about 75% of declining labor supply in Europe relative to the US.
    Keywords: search, labor taxes, adverse labor markets, hours worked per worker and employment
    JEL: E24 E60
    Date: 2014–11
  19. By: Sorgner, Alina (University of Jena); Fritsch, Michael (University of Jena); Kritikos, Alexander S. (University of Potsdam, DIW Berlin)
    Abstract: Based on representative micro data for Germany, we compare the incomes of self-employed with those of wage workers. Our results show that the median self-employed entrepreneur with employees earns significantly more than the median salaried employee, while the median solo entrepreneur earns less. However, solo entrepreneurship pays for those with a university entrance degree but no further professional qualification as well as for those who were in the upper percentiles of the income distribution in their previous salaried job. Surprisingly, the variation in hourly incomes of solo entrepreneurs is higher than that of entrepreneurs with employees.
    Keywords: income, entrepreneurship, self-employment, start-ups, Germany
    JEL: L26 D22
    Date: 2014–11
  20. By: Whitaker, Stephan (Federal Reserve Bank of Cleveland); Cheung, Ron (Oberlin College); Cunningham, Chris (Federal Reserve bank of Atlanta)
    Abstract: In the wake of the Great Recession, steep declines in state and local government expenditures and employment were a large and persistent source of economic weakness. The business cycle was also characterized by large increases and decreases in household debt. We estimate the extent to which variation in local government revenues and expenditures can be explained by variation in the expansion of household debt from 2002 to 2007, and the contraction thereafter. We merge individual credit balance data with municipal financial data from the Census of Governments. Using Census block indicators, we are able to place approximately 12 million credit bureau records into over 6,000 cities and 4,500 school districts. Our results indicate that a one percent additional increase in mortgage debt caused a 0.15 percent increase in local governments’ own revenue and a 0.17 to 0.21 percent increase in expenditures. These relationships were evident during the expansion and contraction of mortgage debt. We also find evidence linking nonmortgage debt to municipal finances.
    Keywords: Consumer Credit; Public financial management; Leverage cycles
    JEL: H71 H72 R51
    Date: 2014–12–02
  21. By: Vicini, Andrea
    Abstract: This paper analyze the historical origin of Fiscal illusion, and introduce to the contribution of Public Choice and in particular James Buchanan which systematized all these concept in a coherent framework. Even the critiques and application of this Theory are mentioned.
    Keywords: Public Choice, James Buchanan, Fiscal Illusion.
    JEL: H11 H3
    Date: 2011–04
  22. By: Nicole Maestas (RAND Economics); Kathleen Mullen (RAND Economics); David Powell (RAND Economics)
    Abstract: Population aging is widely expected to have detrimental effects on aggregate economic growth. However, we have little empirical evidence about the actual existence or magnitude of such effects. In this paper, we exploit differential aging patterns at the state level in the United States between 1980 and 2010. Many states have already experienced high growth rates of the 60+ population, comparable to the predicted national growth rate over the next several decades. Furthermore, these differential growth rates occur partially for reasons unrelated to economic growth, providing a natural approach to isolate the impact of aging on growth. We predict the magnitude of population aging at the state-level given the state’s age structure in an initial period and exploit this predictable differential growth to estimate the impact of population aging on Gross Domestic Product (GDP) growth, and its constituent parts, labor force and productivity growth. We estimate that a 10% increase in the fraction of the population ages 60+ decreases GDP per capita by 5.7%. We find that this reduction in economic growth caused by population aging is primarily due to a decrease in growth in the supply of labor. To a lesser extent, it is also due to a reduction in productivity growth. We present evidence of ownward adjustment of earnings growth to reflect the reduction in productivity.
    Keywords: population aging, GDP growth, demographic transitions
    JEL: J11 J14 J23 J26 O47
    Date: 2014–11

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