nep-pbe New Economics Papers
on Public Economics
Issue of 2015‒01‒31
twenty-one papers chosen by
Thomas Andrén

  1. Optimal Spatial Taxation By Nezih Guner ; Jan Eeckhout
  2. Optimal taxation and debt with uninsurable risks to human capital accumulation By Gottardi, Piero ; Kajii, Atsushi ; Nakajima, Tomoyuki
  3. Fiscal Resources for Inclusive Growth By Das-Gupta, Arindam
  4. Zipf's Law, Pareto¡¯s Law, and the Evolution of Top Incomes in the U.S. By Shuhei Aoki ; Makoto Nirei
  5. Capital Taxation in the 21st Century By Alan J. Auerbach ; Kevin Hassett
  6. Family Ties and Underground Economy By Mauro Marè ; Antonello Motroni ; Francesco Porcelli
  7. The Danish tax on saturated fat - demand effects for meat and dairy products By Jensen, Jørgen Dejgaard ; Smed, Sinne ; Aarup, Lars ; Nielsen, Erhard
  8. Fiscal Policy for Inclusive Growth: An Overview By Estrada, Gemma ; Lee, Sang-Hyop ; Park, Donghyun
  9. Debt Bias in Corporate Taxation and the Costs of Banking Crises in the EU By Sven Langedijk ; Gaëtan Nicodème ; Andrea Pagano ; Alessandro Rossi
  10. Local Government Investments and Ineffectiveness of Fiscal Stimulus during Japan's Lost Decades By Funashima, Yoshito ; Horiba, Isao ; Miyahara, Shoichi
  11. Intergenerational Politics, Government Debt, and Economic Growth By Tetsuo Ono
  12. Fiscal Policy and Inclusive Growth in Advanced Countries: Their Experience and Implications for Asia By Heshmati, Almas ; Kim, Jungsuk ; Park, Donghyun
  13. Employer-Sim Microsimulation Model: Model Development and Application to Estimation of Tax Subsidies to Health Insurance By G. Edward Miller ; Thomas M. Selden ; Jessica S. Banthin
  14. Reforming US public sector plans : Truths and consequences By Beetsma, R.M.W.J. ; Lekniute, Z. ; Ponds, E.H.M.
  15. The time for austerity: Estimating the average treatment effect of fiscal policy By Jordà, Òscar ; Taylor, Alan M.
  16. The United States Sweetener Excise Tax Policy Analysis By Lakkakula, Prithviraj
  17. Designing Policies in the Presence of Hawala Markets. By Rao, R. Kavita ; Tandon, Suranjali
  18. The Effects of School Spending on Educational and Economic Outcomes: Evidence from School Finance Reforms By C. Kirabo Jackson ; Rucker C. Johnson ; Claudia Persico
  19. Gatekeeping versus monitoring: Evidence from a case with extended self-reporting of sickness absence By Torsvik, Gaute ; Vaage, Kjell
  20. Nominal Idiosyncratic Shocks and Optimal Monetary Policy By Eisei Ohtaki
  21. Welfare criteria from choice: the sequential solution By HORAN, Sean ; SPRUMONT, Yves

  1. By: Nezih Guner (Universitat Autonoma de Barcelona ); Jan Eeckhout (University College London and GSE-UPF )
    Abstract: We analyze the role of optimal income taxation across different locations. Existing federal income tax schedules have a distortionary effect and result in the misallocation of labor across cities of different size. Because of higher productivity in big cities, wages for identically skilled workers are larger than in small cities. Progressive taxation thus implies that citizens in big cities pay higher taxes than in small cities. With mobility, utility is equalized, and the taxes are reflected in equilibrium wages and house prices. We solve for the optimal level of progressiveness. We find that the optimal level is not zero, but that it is less than what is observed in the US economy. Simulating the US economy under the optimal tax schedule, we find large effects on output and population mobility. GDP increases are in the range of 2.6–8.8%, and the fraction of population in 5 largest cities grows between 1.5–4.9%. The welfare effects however are small, 0.008–0.067%. This is due to the fact that the big output gains are lost in increased costs of living.
    Date: 2014
  2. By: Gottardi, Piero (European University Institute ); Kajii, Atsushi (Kyoto University ); Nakajima, Tomoyuki (Federal Reserve Bank of Atlanta )
    Abstract: We consider an economy where individuals face uninsurable risks to their human capital accumulation and study the problem of determining the optimal level of linear taxes on capital and labor income together with the optimal path of the debt level. We show both analytically and numerically that in the presence of such risks it is beneficial to tax both labor and capital income and to have positive government debt.
    JEL: D52 D60 D90 E20 E62 H21 O40
    Date: 2014–11–01
  3. By: Das-Gupta, Arindam (Goa Institute of Management )
    Abstract: This paper develops a framework to assess the growth and distribution effects of fiscal resources. Resources are classified as debt, other capital receipts, foreign aid and other unilateral grants, non-tax revenue, including resource rents, seigniorage, and taxes. The framework is used to assess the fiscal resource bases of economies in developing Asia to the extent permitted by available data. Although there is great diversity in the amount of resources raised in terms of the importance of different revenue sources and in the sophistication of revenue administrations, the analysis suggests that in order to expand their relatively low fiscal resource bases, developing Asian economies need to pay greater attention to non-tax revenue and to taxes other than broad-based taxes on income and consumption, such as property taxes and corrective taxes.
    Keywords: fiscal policy; fiscal resources; taxes; non-tax revenue; growth effects; distribution effects; developing Asia
    JEL: H20 O40 O53
    Date: 2014–11–01
  4. By: Shuhei Aoki ; Makoto Nirei
    Abstract: This paper presents a tractable dynamic general equilibrium model of income and firm-size distributions. The size and value of firms result from idiosyncratic, firm-level productivity shocks. CEOs can invest in their own firms¡¯ risky stocks or in risk-free assets, implying that the CEO's asset and income also depend on firm-level productivity shocks. We analytically show that this model generates the Pareto distribution of top income earners and Zipf¡¯s law of firms in the steady state. Using the model, we evaluate how changes in tax rates can account for the recent evolution of top incomes in the U.S. The model matches the decline in the Pareto exponent of income distribution and the trend of the top 1% income share in the U.S. in recent decades. In the model, the lower marginal income tax for CEOs strengthens their incentive to increase the share of their firms¡¯ risky stocks in their own asset portfolios. This leads to both higher dispersion and concentration of income in the top income group. Length: 54 pages
  5. By: Alan J. Auerbach ; Kevin Hassett
    Abstract: In his influential book, Capital in the 21st Century, Thomas Piketty argues forcefully that rising wealth and wealth inequality is an inherent characteristic of capitalist economies and calls for strong policy responses, in particular a substantial wealth tax implemented globally. This paper takes issue with the facts, logic, and policy conclusions in Piketty’s book, suggesting that the factors needed to support the inexorable rise in capital’s share and concentration are lacking and that among tax policy reforms aimed at dealing with economic inequality a wealth tax finds little support either in Piketty’s own work or elsewhere in the literature.
    JEL: H21 P17
    Date: 2015–01
  6. By: Mauro Marè (Tuscia University, Italy ); Antonello Motroni (Mefop, Rome, Italy ); Francesco Porcelli (University of Exeter, UK )
    Abstract: This paper reports empirical evidence supporting the hypothesis that family ties should be listed among the causes of tax evasion. In societies where the power of the family is very high, the quality of public institutions tends to be low. This connection shapes the behavior of taxpayers and generates underground economy. The econometric analysis is based on linear panel data models, and a new dataset that combines data on personal values, social capital, and tax morale, in combination with an index of the shadow economy. The final results show that countries where family ties are stronger also exhibit higher underground economy.
    Keywords: family ties, tax evasion, corruption, panel data
    JEL: H26 D73 J12
  7. By: Jensen, Jørgen Dejgaard ; Smed, Sinne ; Aarup, Lars ; Nielsen, Erhard
    Abstract: Denmark introduced a tax on saturated fat in food products with effect from October 2011. This paper makes an effect assessment of this tax for some product categories affected by the new tax: meats and dairy products. This assessment is done by conducting an econometric analysis on monthly food retail sales data from a major retail chain in Denmark (Coop Danmark), spanning the period from January 2010 until October 2012.The econometric analysis suggests that the introduction of the tax on saturated fat led to a decrease in the intake of saturated fat from cream products, but not from minced beef.
    Keywords: tax, demand response, price response, beef, cream, retail sales, Demand and Price Analysis, Health Economics and Policy,
    Date: 2014–08
  8. By: Estrada, Gemma (Asian Development Bank ); Lee, Sang-Hyop (University of Hawaii at Manoa ); Park, Donghyun (Asian Development Bank )
    Abstract: In recent years, inequality has risen in the region alongside rapid economic growth. The widening income gap strengthens the case for a government response, and fiscal policy is one of the most suitable policy instruments to promote a more equitable society that provides opportunities for all. Developing Asia has trailed other parts of the world in equity-promoting fiscal expenditures, namely education, health care, and social protection, and thus the region needs to do more. Expanding public expenditures without boosting fiscal resources can, however, jeopardize fiscal sustainability. The key challenge is how to use fiscal policy to make growth more inclusive while maintaining fiscal sustainability.
    Keywords: fiscal policy; inclusive growth; Asia; economic growth; equity
    JEL: D31 H20 H50
    Date: 2014–12–01
  9. By: Sven Langedijk (European Commission – Joint Research Center ); Gaëtan Nicodème (European Commission ); Andrea Pagano (European Commission – Joint Research Center ); Alessandro Rossi (European Commission – Joint Research Center )
    Abstract: During the period 2008-2012, EU governments incurred substantial costs bailing out banks. As corporate income taxation (CIT) in most countries still favors debt- over equityfinancing, reducing or eliminating this debt bias would complement regulatory reforms reducing costs of financial crises. To estimate this effect, we use a two-step approach. First, using panel regressions on a dataset of 32,833 bank-year observations we find sizable long-run effects of CIT on leverage in the EU. Second, we simulate the effect of tax reforms on bank losses using a Vasicek-based model with actual banks’ balance sheets to estimate costs of systemic crises for six large EU member states. Even if the tax elasticity of bank leverage is taken at the lower end of the ranges found in recent literature, eliminating the debt bias could lead to reductions of public finance losses in the range of 60 to 90%. The results hold even when considering much smaller effects for banks that are close to the regulatory minimum capital requirement of the Basel III framework. Even when asset portfolio risk is allowed to increase endogenously and considering conservative ranges of the parameter space, we conclude that tax reforms to remove the debt bias can result in very sizable reductions in risks and costs of financial crises.
    Keywords: Debt bias; Systemic crisis; Capital structure; Taxation; Allowance for Corporate Equity; Public finance; Bail out
    JEL: G01 G28 G32 H25
    Date: 2014–10
  10. By: Funashima, Yoshito ; Horiba, Isao ; Miyahara, Shoichi
    Abstract: This paper provides an explanation of the reason why previous works suggest that the effect of fiscal stimulus measure is, if any, small during the lost decades in Japan. To show this, it focuses on public investment by local governments which occupies a substantial portion of the total investment. Specifically, we divide it into subsidized and non-subsidized expense, and empirically study the differences between their decision-making processes from the perspective of fiscal stimulus measures. The results of this analysis reveal that subsidized expense is countercyclical to the economic situation of the nation as a whole, but on the other hand, no connection with business cycles is seen at prefectural level. Contrastingly, non-subsidized expense shows no reaction to the state of the macro economy. In the 2000s, in particular, it is shown to be procyclical in relation to economic fluctuation at prefectural level, due to the fiscal rigidity of local governments. Based on the fact that the majority of Japan's public investment is carried out by local governments, it becomes clear that, as a problem prior to the evaluation of its policy effects, public investment is not implemented with adequate timing to offset business cycles in the first place.
    Keywords: Local governments, Public investment, Subsidized expense, Non-subsidized expense, Lost decades
    JEL: E62 H72
    Date: 2015–01
  11. By: Tetsuo Ono (Graduate School of Economics, Osaka University )
    Abstract: This study presents a two-period overlapping-generations model featuring en- dogenous growth and intergenerational conflict over fiscal policy. In particular, we characterize a Markov-perfect political equilibrium of the voting game between gen- erations, and show the following results. First, population aging incentivizes the government to invest more in capital for future public spending, and thus produces a positive effect on economic growth. Second, when the government finances its spending by issuing bonds, an introduction of a balanced budget rule results in a higher growth rate. Third, to obtain a normative implication of the political equi- librium, we compare it to an allocation chosen by a benevolent planner who takes care of all future generations. Here, we show that the political equilibrium attains a lower growth rate than that in the planner's allocation.
    Keywords: Economic Growth; Government Debt; Overlapping Generations; Pop- ulation Aging; Voting
    JEL: D72 D91 H63
    Date: 2014–06
  12. By: Heshmati, Almas (Sogang University ); Kim, Jungsuk (Sogang University ); Park, Donghyun (Asian Development Bank )
    Abstract: Advanced economies have a significantly longer history of using fiscal policy to tackle inequality and promote inclusive growth than those in developing Asia. Therefore, as developing Asia explores the more active use of fiscal policy for inclusive purposes, it can learn from the experiences of advanced countries. Those experiences clearly suggest that fiscal policy can have a significant effect on inequality which provides some cause for optimism about its equity-promoting potential. Nevertheless, that optimism should be tempered by the different circumstances of advanced versus developing economies along with the need for developing Asia to maintain fiscal sustainability and economic growth.
    Keywords: fiscal policy; inequality; inclusive growth; advanced countries; developing Asia
    JEL: D31 H20 H50
    Date: 2014–12–01
  13. By: G. Edward Miller ; Thomas M. Selden ; Jessica S. Banthin
    Abstract: Employment-related health coverage is the predominant form of health insurance in the nonelderly, US population. Developing sound policies regarding the tax treatment of employer-sponsored insurance requires detailed information on the insurance benefits offered by employers as well as detailed information on the characteristics of employees and their familes. Unfortunately, no nationally representative data set contains all of the necessary elements. This paper describes the development of the Employer-Sim model which models tax-based health policies by using data on workers from the Medical Expenditure Panel Survey Household Component (MEPS HC) to form synthetic workforces for each establishment in the Medical Expenditure Panel Survey Insurance Component (MEPS IC). This paper describes the application of Employer-Sim to estimating tax subsidies to employer-sponsored health insurance and presents estimates of the cost and indcidence of the subsidy for 2008. The paper concludes by discussing other potential applications of the Employer-Sim model.
    Date: 2014–12
  14. By: Beetsma, R.M.W.J. (Tilburg University, School of Economics and Management ); Lekniute, Z. ; Ponds, E.H.M. (Tilburg University, School of Economics and Management )
    Abstract: Most public-sector pension plans in the United States provide quite generous defined benefits. Long-term projections show that full payment of these promises threatens the finances of many state and local employers, which implies that taxes will have to be increased or pensions and/or other public expenditures reduced. This article analyzes the effectiveness of measures aimed at improving the sustainability of these plans.We consider the impact of contribution increases, benefit reductions, and adjustments in the pension fund’s investment strategy. Since a pension fund can be seen as a zero-sum game, these interventions imply value redistributions among current and future plan participants and current and future tax payers. We use the value-based asset–liability management (ALM) method to estimate the value of those transfers. These imply massive value redistributions from taxpayers to plan participants that could exceed 20% of American GDP. Hence, plan sustainability may be achieved only through either substantially higher contributions or lower benefits.
    Date: 2014
  15. By: Jordà, Òscar ; Taylor, Alan M.
    Abstract: After the Global Financial Crisis a controversial rush to fiscal austerity followed in many countries. Yet research on the effects of austerity on macroeconomic aggregates was and still is unsettled, mired by the difficulty of identifying multipliers from observational data. This paper reconciles seemingly disparate estimates of multipliers within a unified and state-contingent framework. We achieve identification of causal effects with new propensity-score based methods for time series data. Using this novel approach, we show that austerity is always a drag on growth, and especially so in depressed economies: a one percent of GDP fiscal consolidation translates into 4 percent lower real GDP after five years when implemented in the slump rather than the boom. We illustrate our findings with a counterfactual evaluation of the impact of the U.K. government's shift to austerity policies in 2010 on subsequent growth.
    Keywords: Rubin Causal Model,allocation bias,average treatment effect,booms,fiscal multipliers,identification,inverse probability weighting,local projection,matching,output fluctuations,propensity score,regression adjustment,slumps
    JEL: C54 C99 E32 E62 H20 H5 N10
    Date: 2014
  16. By: Lakkakula, Prithviraj
    Abstract: The United States accounts for one of the highest per-capita caloric sweetener consumption in the world. The American Heart Association recommends a maximum of around 6 to 9 teaspoons of per-capita sweetener consumption per day (equivalent to 23.8 pounds to 35.71 pounds per-capita, per year). The current US per-capita sweetener consumption is approximately 19 teaspoons/day. This high sweetener consumption is often linked to major health ailments such as obesity, Type 2 diabetes, and cardiovascular diseases. This study uses a supply and demand framework to evaluate the amount of excise tax on major sweeteners (sugar and high fructose corn syrup) sufficient to reduce excess sweetener consumption to the recommended level. Results suggest a maximum consumer tax of 12 cents per pound on both sugar and HFCS sufficient to reduce consumption to the recommended level. Also, a maximum producer tax of 25 cents per pound on sugar and 95 cents per pound on HFCS is suggested to reduce consumption to the recommended level.
    Keywords: Agricultural and Food Policy, Demand and Price Analysis, Health Economics and Policy,
    Date: 2015
  17. By: Rao, R. Kavita (National Institute of Public Finance and Policy ); Tandon, Suranjali (National Institute of Public Finance and Policy )
    Abstract: To deal with rising current account deficits, the government often uses instruments such as increase in customs tariffs. These are expected to induce an appreciation in the currency. In the presence of hawala markets which constitute an alternative payment mechanism, the control exerted by the customs tariffs is diluted, thereby reducing the effectiveness of this policy in controlling depreciation of the currency. The paper explores the impact of the existence of such a mechanism on the effectiveness of various policy instruments in influencing outcomes on the official foreign exchange markets and GDP.
    Keywords: Hawala Market ; Exchange Rate ; Direct Tax Rate ; Tax Administration ; Customs Tariff
    JEL: F31 F32 K42 H26
    Date: 2015–01
  18. By: C. Kirabo Jackson ; Rucker C. Johnson ; Claudia Persico
    Abstract: Since Coleman (1966), many have questioned whether school spending affects student outcomes. The school finance reforms that began in the early 1970s and accelerated in the 1980s caused some of the most dramatic changes in the structure of K–12 education spending in US history. To study the effect of these school-finance-reform-induced changes in school spending on long-run adult outcomes, we link school spending and school finance reform data to detailed, nationally-representative data on children born between 1955 and 1985 and followed through 2011. We use the timing of the passage of court-mandated reforms, and their associated type of funding formula change, as an exogenous shifter of school spending and we compare the adult outcomes of cohorts that were differentially exposed to school finance reforms, depending on place and year of birth. Event-study and instrumental variable models reveal that a 10 percent increase in per-pupil spending each year for all twelve years of public school leads to 0.27 more completed years of education, 7.25 percent higher wages, and a 3.67 percentage-point reduction in the annual incidence of adult poverty; effects are much more pronounced for children from low-income families. Exogenous spending increases were associated with sizable improvements in measured school quality, including reductions in student-to-teacher ratios, increases in teacher salaries, and longer school years.
    JEL: H0 I20 I24 J00 J1
    Date: 2015–01
  19. By: Torsvik, Gaute (University of Oslo ); Vaage, Kjell (University of Bergen )
    Abstract: We examine the impact of a policy reform that gave employees in a municipality extended rights to self-declare sickness absence. To identify the effect of bypassing the physician as an absence certifier we contrast the development of absence in the reform municipality with absence in similar municipalities. We use a standard difference–in–difference comparison and the synthetic control method to quantify the effect of the reform. Using these methods we find that the reform reduced sickness absence by more than 20%. It is the incidence of absence spells that declines, not their length. To explain this result, we emphasize that the reform not only removed the physician from the picture, it also put the employer more firmly into it by prescribing a detailed follow up scheme (phone calls, meetings, flowers) for the employer (the first line–leader) and the employee calling in sick. The combination of extended self–certification and employer involvement can be taken as a sign of trust and concern for the employees’ well-being or as enhanced monitoring. Both interpretations can explain the drop in absence we observe.
    Keywords: Sickness absence; Public reform; Gatekeeping; Trust; Monitoring
    JEL: C21 H55 J21
    Date: 2014–12–15
  20. By: Eisei Ohtaki
    Abstract: This article considers an overlapping generations model with nominal idiosyncratic shocks. Such shocks are described as if they are exogenous nominal taxes/subsidies and cause nondegenerate ex-post distributions of money. We then show that the optimal money growth rate exists and is greater than one.
  21. By: HORAN, Sean ; SPRUMONT, Yves
    Abstract: We study the problem of deriving a complete welfare ordering from a choice function. Under the sequential solution, the best alternative is the alternative chosen from the universal set; the second best is the one chosen when the best alternative is removed; and so on. We show that this is the only completion of Bernheim and Rangel's (2009) welfare relation that satisfies two natural axioms: neutrality, which ensures that the names of the alternatives are welfare-irrelevant; and persistence, which stipulates that every choice function between two welfare-identical choice functions must exhibit the same welfare ordering.
    Keywords: Choice-based welfare analysis; bounded rationality
    JEL: D01
    Date: 2015

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