nep-pbe New Economics Papers
on Public Economics
Issue of 2015‒01‒26
23 papers chosen by
Thomas Andrén

  1. Optimal Spatial Taxation: Are Big Cities too Small? By Jan Eeckhout; Nezih Guner
  2. Constrained inefficiency and optimal taxation with uninsurable risks By Gottardi, Piero; Kajii, Atsushi; Nakajima, Tomoyuki
  3. A wind of change? Reforms of Tax Systems since the launch of Europe 2020 By Gaëlle Garnier; Endre György; Kees Heineken; Milena Mathé; Laura Puglisi; Savino Rua; Agnieszka Skonieczna; Astrid Van Mierlo
  4. The output effect of fiscal consolidation plans By Alesina, Alberto; Favero, Carlo; Giavazzi, Francesco
  5. Government Spending and Inclusive Growth in Developing Asia By Hur, Seok-Kyun
  6. Generating Larger Tax Revenue in South Asia By Gupta, Poonam
  7. Redistributive Policies for Sustainable Development: Looking at the Role of Assets and Equity By Pierre Kohler
  8. Tax and Transfer Policies and the Female Labor Supply in the EU By Klara Kaliskova
  9. Measuring Tax Complexity By David Ulph
  10. Income Instability and Fiscal Progression By B. Cecilia Garcia-Medina; Jean-Francois Wen
  11. The Returns to the Federal Tax Credits for Higher Education By George B. Bulman; Caroline M. Hoxby
  12. Raise Top Tax Rates, Not the GST By Patricia Apps; Ray Rees
  13. Pensions, Education, and Growth: A Positive Analysis By Tetsuo Ono; Yuki Uchida
  14. Medicaid as an Investment in Children: What is the Long-Term Impact on Tax Receipts? By David W. Brown; Amanda E. Kowalski; Ithai Z. Lurie
  15. Benefit Incidence of Public Transfers: Evidence from the People’s Republic of China By Ke, Shen; Lee, Sang-Hyop
  16. Public debt, economic growth and public sector management in developing countries: is there a link? By Megersa, Kelbesa; Cassimon, Danny
  17. Effects of taxes and subsidies on media services By Kind, Hans Jarle; Møen, Jarle
  18. Governance,Governmentality and Governability: Constraints and Possibilities of Decentralization in South Asia By Sharma, Chanchal Kumar
  19. Waste disposal and decentralisation: a welfare approach By Laura Levaggi; Rosella Levaggi; Carmine Trecroci
  20. Population Aging and Growth: the Effect of PAYG Pension Reform By Ken Tabata
  21. Defence Budgets in the Post-Cold War Era: A Spatial Econometrics Approach By Skogstad, Karl
  22. Productivity and the Welfare of Nations By Susanto Basu
  23. Optimal pay-as-you-go social security when retirement is endogenous and labor productivity depreciates By Miyazaki, Koichi

  1. By: Jan Eeckhout; Nezih Guner
    Abstract: We analyze the role of optimal income taxation across different local labor markets. Should labor in large cities be taxed differently than in small cities? We find that a planner who needs to raise revenue and is constrained by free mobility of labor across cities does not choose equal taxes for cities of different sizes. The optimal tax schedule is location specific and tax differences between large and small cities depends on the level of government spending and on the concentration of housing wealth. Our estimates for the US implies higher marginal rates in big cities, but lower than what is observed. Simulating the US economy under the optimal tax schedule, there are large effects on population mobility: the fraction of population in the 5 largest cities grows by 8.0% with 3.5% of the country-wide population moving to bigger cities. The welfare gains however are smaller. Aggregate consumption goes up by 1.53%. This is due to the fact that much of the output gains are spent on the increased costs of housing construction in bigger cities. Aggregate housing consumption goes down by 1.75%.
    Keywords: misallocation, taxation, population mobility, city size, general equilibrium
    JEL: H21 J61 R12 R13
    Date: 2014–12
  2. By: Gottardi, Piero (European University Institute); Kajii, Atsushi (Kyoto University); Nakajima, Tomoyuki (Federal Reserve Bank of Atlanta)
    Abstract: When individuals' labor and capital income are subject to uninsurable idiosyncratic risks, should capital and labor be taxed, and if so, how? In a two-period general equilibrium model with production, we derive a decomposition formula of the welfare effects of these taxes into insurance and distribution effects. This method allows us to determine how the sign of the optimal taxes on capital and labor depends on the nature of the shocks, the degree of heterogeneity among consumers' income, and the way in which the tax revenue is used to provide lump sum transfers to consumers. When shocks affect primarily labor income and heterogeneity is small, the optimal tax on capital is positive. However, in other cases, a negative tax on capital improves welfare.
    JEL: D52 H21
    Date: 2014–11–01
  3. By: Gaëlle Garnier (European Commission); Endre György (European Commission); Kees Heineken (European Commission); Milena Mathé (European Commission); Laura Puglisi; Savino Rua (European Commission); Agnieszka Skonieczna (European Commission); Astrid Van Mierlo (European Commission)
    Abstract: This paper reviews the tax reforms implemented by EU Member States since the adoption of the first country-specific recommendations in the framework of the Europe 2020 strategy. Even though there is a need for more action, as evidenced by the number of tax recommendations, overall many Member States have put in place reforms that follow the logic of the EU policy recommendations in most priority areas. A large number of Member States have recently introduced targeted reductions in the tax burden on labour and have shifted the tax burden towards less detrimental tax bases, although these changes have been of a limited magnitude. Tax incentives to support research and development have grown in importance, and have contributed to sustaining R&D investment during the crisis. Regarding private debt, which was one of the roots of the crisis, several Member States have taken measures to reduce the debt bias in their tax system. Almost half of the Member States have shifted some of the tax burden to recurrent immovable property taxes, even if significant increases were only observed in a few countries. Finally, many Member States have worked on strengthening tax compliance with some of them reporting tangible financial results. However, progress has been more limited in relation to environmental tax reforms and VAT.
    Keywords: European Union; European Semester; taxation, tax policy; VAT; fraud; corporate taxation; personal income taxation; environment; research and development; compliance
    JEL: H11 H20 H24 H25 H26 H27 H87
    Date: 2014–11
  4. By: Alesina, Alberto; Favero, Carlo; Giavazzi, Francesco
    Abstract: We show that the correct experiment to evaluate the effects of a fiscal adjustment is the simulation of a multi year fiscal plan rather than of individual fiscal shocks. Simulation of fiscal plans adopted by 16 OECD countries over a 30-year period supports the hypothesis that the effects of consolidations depend on their design. Fiscal adjustments based upon spending cuts are much less costly, in terms of output losses, than tax-based ones and have especially low output costs when they consist of permanent rather than stop and go changes in taxes and spending. The difference between tax-based and spending-based adjustments appears not to be explained by accompanying policies, including monetary policy. It is mainly due to the different response of business confidence and private investment.
    Keywords: confidence,fiscal adjustment,investment
    JEL: H60 E62
    Date: 2014
  5. By: Hur, Seok-Kyun (Chung-Ang University)
    Abstract: This paper assesses the effects of fiscal policy on both equity and growth, specifically whether it is possible to design fiscal spending so that it enhances equity without sacrificing economic growth and vice versa. A cross-country panel vector autoregression (PVAR) using the World Development Indicators confirms the growth effects of individual fiscal spending items as anticipated whereas distributional effects were either temporarily positive or negligible for most fiscal items. However, compared with Organisation for Economic Co-operation and Development members, spending on public health and public education appeared to alleviate income inequality significantly in the Asian Development Bank members. This implies that fiscal expenditure policies may contribute more to inclusive growth in developing economies than in advanced ones.
    Keywords: Gini coefficient; government spending; inclusive growth; Panel Vector Autoregression
    JEL: E62 H50
    Date: 2014–11–01
  6. By: Gupta, Poonam
    Abstract: Despite repeated attempts, South Asian countries have managed only limited and sporadic success in mobilizing larger tax revenue. Tax-to-GDP ratios in most countries in the region remain below cross country averages and are considered inadequate to meet their financing needs. Underperformance in tax revenue generation does not seem due to paucity of tax policy reforms. South Asian countries have undertaken considerable reforms in the last decade, and their tax structures have converged with the rest of the world. But they have been less successful in widening their tax base, in strengthening tax administration, and in improving compliance. Additionally, structural factors such as large share of agriculture, low literacy, and large informal sectors have hindered tax collection. Further efforts in the region to increase tax revenue ought to be wider in scope than before and should extend to the subnational and local governments. They should focus on simplifying tax systems, strengthening tax administration, and broadening the tax base. These efforts should be situated within a wider reform program that aims to strengthen governance, improve business environment and help formalize their economies.
    Keywords: South Asia, Tax Revenue, Tax Policy
    JEL: H2 H24 H26 H6
    Date: 2015–01
  7. By: Pierre Kohler
    Abstract: Analyses of redistributive policies often focus on income flows to examine the nexus between redistribution and economic growth. With strengthening signs of growing economic inequality in many countries, an increasing number of economists investigated the existence and nature of a hypothetical trade-off between economic growth and equity. As signs of unsustainable development are strengthening more generally, this paper proposes to look at the broader nexus between redistribution, equity and sustainable development, emphasizing its social and environmental dimensions. It does so by first proposing an analytical framework defining the role of redistributive policies in shaping the private income cycle as well as the public revenue-expenditure cycle. This framework distinguishes between the stock of income-generating assets (such as human capital and wealth, including land and industrial and financial capital) and deriving income flows in order to clarify the difference between the two sides of in-equity (i.e. in-equality of opportunity and in-equality of outcome), which remain intertwined in the growth-equity trade-off debate. This stock-flow approach is then used to outline key linkages between redistributive policies, in-equity and un-sustainable development. Contrasting the potential scope of redistributive policies with the more narrow set of policies that have been implemented in most countries/regions over the last 30 years, the paper discusses 14 avenues for redistributive policies to promote greater equity, economic empowerment and sustainable development.
    Keywords: Income, wealth, inequality, fiscal policy, redistributive policy, public social spending, revenue mobilization, progressive tax system, net wealth tax, carbon tax, international tax cooperation, unitary taxation, formulary apportionment, post-2015
    JEL: D31 H2 H3 H4 H41 H71 H82 H87
    Date: 2015–01
  8. By: Klara Kaliskova
    Abstract: This study contributes to the female labor supply responsiveness literature by measuring the eect of tax-benefit policies on female labor supply based on a broad sample of 26 European countries in 2005-2010. The tax-benefit microsimulation model EUROMOD is used to calculate the measure of extensive margin work incentives - the participation tax rate, which is then used as the main explanatory variable in a female participation equation. This allows me to deal with the endogeneity of income in a new way by a simulated instrumental variable based on a fixed EU-wide sample of women. Results suggest that a 10 percentage point increase in the participation tax rate decreases the female employment probability by 2 percentage points. The effect is higher for single mothers, for women in the middle of the skills distribution, and in countries that have lower rates of female participation.
    Keywords: female labor supply; tax and benefit system; Europe; instrumental variable;
    JEL: C25 H24 H31 J22
    Date: 2014–12
  9. By: David Ulph (University of St Andrews)
    Abstract: This paper critically examines a number of issues relating to the measurement of tax complexity. It starts with an analysis of the concept of tax complexity, distinguishing tax design complexity and operational complexity. It considers the consequences/costs of complexity, and then examines the rationale for measuring complexity. Finally it applies the analysis to an examination of an index of complexity developed by the UK Office of Tax Simplification (OTS).
    Keywords: Complexity; Design Complexity; Tax Equivalence; Distortions; Legal Uncertainty, Compliance Costs; Avoidance
    JEL: H11 H2 H8
    Date: 2014–10–01
  10. By: B. Cecilia Garcia-Medina; Jean-Francois Wen (University of Calgary)
    Abstract: We construct the ratio of the post-fisc transitory income variance to the pre-fisc transitory income variance of family incomes as a measure of fiscal progressivity in Canada between 1993 and 2008. This ratio can be interpreted as measuring the extent to which the fiscal system attenuates personal income instability. We find that the tax and transfer system has been less effective in stabilizing market incomes after 1998 compared to the previous years. This is attributable to the provincial and federal tax reforms from 1999-2001, which particularly affected families headed by individuals with less than high school education. While the reforms reduced the effective marginal tax rates faced across all educational groups, the reduction is relatively larger among families with highly educated main earners. Moreover, the group with less than high school education is distinct in that the average effective tax burden in this group increased. Changes to Social Assistance also appear to have played a role.
    Date: 2015–01–12
  11. By: George B. Bulman; Caroline M. Hoxby
    Abstract: Three tax credits benefit households who pay tuition and fees for higher education. The credits have been justified as an investment: generating more educated people and thus more earnings and externalities associated with education. The credits have also been justified purely as tax cuts to benefit the middle class. In 2009, the generosity of and eligibility for the tax credits expanded enormously so that their 2011 cost was $25 billion. Using selected, de-identified data from the population of potential filers, we show how the credits are distributed across households with different incomes. We estimate the causal effects of the federal tax credits using two empirical strategies (regression kink and simulated instruments) which we show to be strong and very credibly valid for this application. The latter strategy exploits the massive expansion of the credits in 2009. We present causal estimates of the credits' effects on postsecondary attendance, the type of college attended, the resources experienced in college, tuition paid, and financial aid received. We discuss the implications of our findings for society's return on investment and for the tax credits' budget neutrality over the long term (whether higher lifetime earnings generate sufficient taxes to recoup the tax expenditures). We assess several explanations why the credits appear to have negligible causal effects.
    JEL: H2 H24 I22 I23 I28
    Date: 2015–01
  12. By: Patricia Apps; Ray Rees
    Abstract: This paper argues that increasing the GST, by raising the rate above 10 per cent while retaining the current tax base, or by broadening the base to include all forms of consumption expenditure, does not offer a solution to the widely perceived problems of the Australian tax system. The direct, regressive effects of such GST changes are well understood. We argue here that when we also take into account the effects of the measures, generally accepted as a corollary of the policy, that are required to compensate low income households, not only will the regressive distributional effects be exacerbated, but serious losses of economic efficiency will also result. Our analysis supports the proposition that raising tax rates across top incomes would be a far more equitable and less distortionary reform than raising the GST.
    Date: 2013–06
  13. By: Tetsuo Ono (Graduate School of Economics, Osaka University); Yuki Uchida (Graduate School of Economics, Osaka University)
    Abstract: This study presents an overlapping generations model to capture the nature of the competition between generations regarding two redistribution policies, public education and public pensions. In addition, we investigate the effects of population aging on these policies and economic growth from a political economy viewpoint. We show that two aging factors, longevity and the political power of the old, have op- posite effects on redistribution policies and economic growth. The relative strength between the two factors is negative for pensions, but hump-shaped patterns appear for public education and economic growth.
    Keywords: economic growth; population aging; public education; public pen-sions
    JEL: D78 E24 H55
    Date: 2014–12
  14. By: David W. Brown; Amanda E. Kowalski; Ithai Z. Lurie
    Abstract: We examine the long-term impact of expansions to Medicaid and the State Children's Health Insurance Program that occurred in the 1980's and 1990's. With administrative data from the IRS, we calculate longitudinal health insurance eligibility from birth to age 18 for children in cohorts affected by these expansions, and we observe their longitudinal outcomes as adults. Using a simulated instrument that relies on variation in eligibility by cohort and state, we find that children whose eligibility increased paid more in cumulative taxes by age 28. These children collected less in EITC payments, and the women had higher cumulative wages by age 28. Incorporating additional data from the Medicaid Statistical Information System (MSIS), we find that the government spent $872 in 2011 dollars for each additional year of Medicaid eligibility induced by the expansions. Putting this together with the estimated increase in tax payments discounted at a 3% rate, assuming that tax impacts are persistent in percentage terms, the government will recoup 56 cents of each dollar spent on childhood Medicaid by the time these children reach age 60. This return on investment does not take into account other benefits that accrue directly to the children, including estimated decreases in mortality and increases in college attendance. Moreover, using the MSIS data, we find that each additional year of Medicaid eligibility from birth to age 18 results in approximately 0.58 additional years of Medicaid receipt. Therefore, if we scale our results by the ratio of beneficiaries to eligibles, then all of our results are almost twice as large.
    JEL: H2 I1 I38
    Date: 2015–01
  15. By: Ke, Shen (Demographic Research Institute, Fudan University); Lee, Sang-Hyop (Center for Korean Studies, University of Hawaii at Manoa)
    Abstract: Benefit incidence analyses provide important insights into problems facing any government struggling to deliver essential and equitable social services. Utilizing the framework of the National Transfer Accounts Project, this paper analyzes the benefit incidence of public transfers across generations and socioeconomic groups in the People’s Republic of China in 2009. Public education transfers were equally distributed by residence, gender, and income groups at the primary and secondary levels but favored city dwellers, females, and the wealthy at the tertiary level. Public health-care programs tended to equally target the young and middle-aged from different socioeconomic groups but tilted toward urban dwellers, males, and higher income groups at older ages. Public pension spending strongly favored high-income groups, with rural residents, females, and lower income groups receiving greatly reduced benefits. Our results also indicate that total public spending favored elderly people as spending per person 65 years and older was twice that per child younger than 19. In the next 10 or 20 years, the government should endeavor to improve and strengthen public support systems. In addition to this effort, the currently fragmented health insurance system and pension system should move toward a unified system to reduce inequalities in benefit incidence across socioeconomic groups.
    Keywords: benefit incidence; public transfers; the People’s Republic of China
    JEL: E62 H53 O15
    Date: 2014–11–01
  16. By: Megersa, Kelbesa; Cassimon, Danny
    Abstract: The paper investigates whether differences in public sector management quality affect the link between public debt and economic growth in developing countries. For this purpose, we primarily use World Bank’s institutional indices of public sector management (PSM). Using PSM thresholds, we split our panel into country clusters and make comparisons. Our linear baseline regressions reveal a significant negative relationship between public debt and growth. The various robustness exercises that we perform also confirm these results. When we dissect our dataset into ‘weak’ and ‘strong’ county clusters using public sector management scores, however, we find different results. While public debt still displayed a negative relationship with growth in countries with ‘weak’ public sector management quality, it generally displayed a positive relationship in the latter group. The tests for non-linearity shows evidence of an ‘inverse-U’ shape relationship between public debt and economic growth. However, we fail to see a similar significant relationship on country clusters that account for PSM quality. Yet, countries with well managed public sectors demonstrate a higher public debt sustainability threshold.
    Keywords: public debt, economic growth, public sector management, developing countries
    JEL: E62 F34 H63 H83 O11
    Date: 2014–12
  17. By: Kind, Hans Jarle (Dept. of Economics, Norwegian School of Economics); Møen, Jarle (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: We start out reviewing the justification for press subsidies. The social value of journalism can be larger than what the newspapers are able to extract because of knowledge externalities, public good characteristics of investigative journalism and nonappropriability of consumer surplus. A free market will then underinvest in journalism. Problems related to economies of scale and scope further imply that the number of newspapers and their circulations may be too small, while advertising can give newspapers too strong incentives to aim for the mass market. According to the media economics literature, a preferential VAT regime provides higher differentiation incentives for existing newspapers, while a tax deduction for editorial expenses is well suited to increase journalistic investments. Micro economic theory further indicates that fixed transfers is the most efficient instrument to reduce entry barriers and avoid newspaper mortality, and that a subsidy per copy sold will increase circulation. We end the article by summarizing empirical evidence on the effects of media support.
    Keywords: Media support; Two sided markets; VAT exemption; Tax credit; Direct and indirect subsidies
    JEL: H00 H20
    Date: 2014–12–19
  18. By: Sharma, Chanchal Kumar
    Abstract: This paper presents an integrated analytical framework for the study of participatory local democracy weaved around the concepts of Governance, Governability and Governmentality. Drawing lessons from international experience, It focuses on the key determinants of the success of the local governments, in the absence of which all the cosmetic attempts to betray institutional semblance to democratic decentralization will fall short of delivering welfare enhancing outcomes.
    Keywords: decentralization, South Asia, local governance, governmentality, governability, democracy
    JEL: H7 H70 H77 I0
    Date: 2014–11–12
  19. By: Laura Levaggi (Libera Università di Bolzano, Italy); Rosella Levaggi (Università di Brescia, Italy); Carmine Trecroci (Università di Brescia, Italy)
    Abstract: Since the seminal work of Oates (1972) on scal federalism, a central question of public finance has been which level of a federation should be as- signed the provision of public goods. In this paper we study the problem of a government that is to choose the optimal centralization/decentralization mechanism for the final treatment of municipal solid waste. We analyze incentives, equilibria and implications of the governance framework for the disposal of waste. The key decisions revolve around the mobility of waste and the externalities (pollution) associated with its disposal, be it incineration or landfill. Moreover, if the Regions are characterized by different levels of efficiency in the processes they apply to the final treat- ment of waste, in theory a certain degree of waste mobility across regions should allow to reap the benefits of higher efficiency. On the other hand, as transportation and other environmental costs implied by mobility and concentration are significant, a trade-off emerges. Our model evaluates the implications of that trade-off for the optimal degree of decentralization in waste management.
    Keywords: waste disposal, cross border shopping, decentralisation, welfare
    JEL: H70 D62 Q20
  20. By: Ken Tabata (School of Economics, Kwansei Gakuin University)
    Abstract: This paper examines how pay-as-you-go (PAYG) pension reform from a defined-benefit scheme to a defined-contribution scheme affects economic growth in an overlapping generations model with endogenous growth. We show that in economies in which the old-age dependency ratio is relatively high and the size of pension benefits under a defined-benefit scheme is relatively large, PAYG pension reform from a defined-benefit scheme to a defined-contribution scheme mitigates the negative growth effect of population aging caused by a decline in the population growth rate or an increase in life expectancy.
    Keywords: Population aging, PAYG pensions, Defined-benefit schemes, Definedcontribution schemes
    JEL: D91 H55 O41
    Date: 2015–01
  21. By: Skogstad, Karl
    Abstract: This paper examines the determinants of national defence budgets in the post-Cold War era using a spatial econometric framework. Using data for 124 countries over a 16 year time period, I examine spatial relationships in defence spending to investigate how countries account for the military spending of other countries when setting their budgets. Using specially developed weighting matrices, the regression results indicate that defence budgets are positively spatially correlated. These results provide support for the use of "external" factors when examining defence budgets over this time period. The importance of a country's spatial location when setting its budget is further examined through the identification of regions of high and low defence spending.
    Keywords: Defence Budgets; Spatial; External Factors
    JEL: F52 H56
    Date: 2015–01–09
  22. By: Susanto Basu (Boston College)
    Abstract: We show that the welfare of a countrys infinitely-lived representative consumer is summarized, to a first order, by total factor productivity (TFP) and by the capital stock per capita. These variables suffice to calculate welfare changes within a country, as well as welfare differences across countries. The result holds regardless of the type of production technology and the degree of product market competition. It applies to open economies as well, if TFP is constructed using domestic absorption, instead of gross domestic product, as the measure of output. Welfare relevant TFP needs to be constructed with prices and quantities as perceived by consumers, not firms. Thus, factor shares need to be calculated using after-tax wages and rental rates, and will typically sum to less than one. These results are used to calculate welfare gaps and growth rates in a sample of advanced countries with high-quality data on output, hours worked, and capital. We also present evidence for a broader sample that includes both advanced and developing countries.
    Date: 2014
  23. By: Miyazaki, Koichi
    Abstract: This paper considers an overlapping-generations model with pay-as-you-go social security and retirement decision making by an old agent. In addition, the paper assumes that labor productivity depreciates. Under this setting, socially optimal allocations are examined. The first-best allocation is an allocation that maximizes welfare when a social planner distributes resources and forces an old agent to work and retire as she wants. The second-best allocation is an allocation that maximizes welfare when she can use only pay-as-you-go social security in a decentralized economy. The paper finds a range of an old agent's labor productivity such that the first-best allocation is achieved in the decentralized economy. This differs from the finding in Michel and Pestieau (2013) that the first-best allocation cannot be achieved in the decentralized economy.
    Keywords: Overlapping-generations model, pay-as-you-go social security, endogenous retirement, depreciation of labor productivity, first-best allocation, second-best allocation
    JEL: D91 H21 H55 J26
    Date: 2014–12–12

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