nep-pbe New Economics Papers
on Public Economics
Issue of 2015‒02‒16
twenty-two papers chosen by
Thomas Andrén

  1. Fiscal Equalization, Tax Salience, and Tax Competition By Altemeyer-Bartscher, Martin
  2. Smoothing state tax revenues over the business cycle: gauging fiscal needs and opportunities By Kodrzycki, Yolanda
  3. Behavioral Responses to Local Tax Rates: Quasi-Experimental Evidence from a Foreigners Tax Scheme in Switzerland By Slotwinski, Michaela; Schmidheiny, Kurt
  4. Taxing Capital Income: Effective Marginal Tax Rates Under 2014 Law and Selected Policy Options By Congressional Budget Office
  5. Constrained Inefficiency and Optimal Taxation with Uninsurable Risks By Piero Gottardi; Atsushi Kajii; Tomoyuki Nakajima
  6. Do tax cuts increase consumption? An experimental test of Ricardian Equivalence By Rostam-Afschar, Davud; Meissner, Thomas
  7. Mid-term Effects of the Flat Rate Personal Income Tax in Hungary By Bartha, Zoltán
  8. Resource Misallocation and Aggregate Productivity under Progressive Taxation By Jang-Ting Guo; Yutaro Izumi; Yi-Chan Tsai
  9. Baumol’s cost disease and the sustainability of the welfare state By Torben M. Andersen; Claus T. Kreiner
  10. Taxes and Economic Growth in Developing Countries : A Dynamic Panel Approach By NANTOB, N'Yilimon
  11. Household bargaining and the design of couples' income taxation By Roeder, Kerstin; Cremer, Helmuth; Lozachmeur, Jean-Marie; Maldonado, Dario
  12. What blows in with the wind? By Dakshina De Silva; Robert P. McComb; Anita Schiller
  13. The elasticity of taxable income for Germany and its sensitivity to the appropriate model By Werdt, Clive
  14. Financial inclusion, rather than size, is the key to tackling income inequality By David Martinez Turegano; Alicia Garcia-Herrero
  15. Product Diversity, Demand Structures and Optimal Taxation By Winkler, Roland; Lewis, Vivien
  16. Is there a Gender Gap in Preferences for Public Spending? Evidence from Germany By Haußen, Tina
  17. Human Capital and Optimal Redistribution By Koeniger, Winfried
  18. Too many to fail - How bonus taxation prevents gambling for bailouts By Hilmer, Michael
  19. The Great Schism in the Theory of Public Finance. A Treatise in the Theory of Economic Thought By Blankart, Charles B:
  20. On the Consequences of Eliminating Capital Tax Differentials By Slavik, Ctirad; Yazici, Hakki
  21. Biased Perceptions of Income Inequality and Redistribution By Engelhardt, Carina; Wagener, Andreas
  22. Effect of Income on Trust: Evidence from the 2009 Crisis in Russia By Sergei Guriev; Maxim Ananyev

  1. By: Altemeyer-Bartscher, Martin
    Abstract: This paper analyzes the efficiency consequences of local revenue policies if jurisdictions try to attenuate the pressures of inter-regional competition for mobile factors by substituting attention-grabbing tax instruments that spotlight an additional tax burden with rather inconspicuous ones. We show that the substitution of tax instruments with the view to reduce the perceived tax price may suppress the under-exploitation of tax bases that typically goes along with fiscal equalization.
    JEL: H77 H22 H30
    Date: 2014
  2. By: Kodrzycki, Yolanda (Federal Reserve Bank of Boston)
    Abstract: During the two most recent U.S. recessions in 2001 and in 2007–2009, state governments experienced an unusually high degree of fiscal stress due to increased revenue cyclicality. Expanding upon the aggregate evidence, this paper explores the degree to which individual states have experienced fluctuating tax receipts over the business cycle. The findings provide state policymakers with information to better understand the extent and causes of this tax revenue cyclicality and, in the context of balanced budget requirements, the efficacy of alternative measures that might be employed to smooth the sensitivity of state resources to economic conditions.
    Keywords: state tax policy; revenue cyclicality; tax volatility; individual income tax
    JEL: H2 H7
    Date: 2014–10–30
  3. By: Slotwinski, Michaela; Schmidheiny, Kurt
    Abstract: For a long time two main obstacles have prevented researchers from empirically identifying the causal effect of income taxes on individuals behavior: omitted variable bias and the inherent reverse causality between income taxes and the tax base. This paper exploits an institutional feature of Swiss tax law concerning the income taxation of foreign employees living in Switzerland (Quellenbesteuerung). The implied discontinuities (tax notches) allow us to draw causal inferences on behavioral reactions of individuals to taxation within a quasi-random setting. We study the effect of local taxes on individuals location choice and income adjustment to preferential tax schemes at such institutional tax notches. We find strong evidence that foreigners with income around the tax notch strategically adjust their income. We do not find evidence that local income tax rates affect the initial location choice of newly arriving foreigners. However, we do find significant effects of local income tax rates on the location choice once these foreigners receive permanent residence status after 5 years of arrival. These effects materialize mainly for high income earners.
    JEL: J22 H24 J61
    Date: 2014
  4. By: Congressional Budget Office
    Abstract: An effective marginal tax rate (ETR) measures an investor’s tax burden on returns from an investment. CBO estimates that the ETR, on average, for all capital income is 18 percent. ETRs on returns from investment vary by sector, ranging from 29 percent for businesses to virtually zero for owner-occupied housing. In this report, CBO estimates ETRs under current law and eight policy options for taxing capital income.
    JEL: H25
    Date: 2014–12–18
  5. By: Piero Gottardi (European University Institute and Universita Ca' Foscari, Venice); Atsushi Kajii (Kyoto University and Singapore Management University); Tomoyuki Nakajima (Kyoto University and CIGS)
    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 allows us to determine how the sign of the optimal taxes on capital and labor depend on the nature of the shocks, the degree of heterogeneity among consumers' income as well as on 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 is welfare improving.
    Keywords: optimal linear taxes, incomplete markets, constrained efficiency
    JEL: D52 H21
    Date: 2015–02
  6. By: Rostam-Afschar, Davud; Meissner, Thomas
    Abstract: This paper tests whether the Ricardian Equivalence proposition holds in a life cycle consumption laboratory experiment. This proposition is a fundamental assumption underlying numerous studies on intertemporal choice and has important implications for tax policy. Using nonparametric and panel data methods, we find that the Ricardian Equivalence proposition does not hold in general. Our results suggest that taxation has a significant and strong impact on consumption choice. Over the life cycle, a tax relief increases consumption on average by about 22% of the tax rebate. A tax increase causes consumption to decrease by about 30% of the tax increase. These results are robust with respect to variations in the difficulty to smooth consumption. In our experiment, we find the behavior of about 62% of our subjects to be inconsistent with the Ricardian proposition. Our results show dynamic effects; taxation inuences consumption beyond the current period.
    Keywords: Ricardian Equivalence,Taxation,Life Cycle,Consumption,Laboratory Experiment
    JEL: D91 E21 H24 C91
    Date: 2014
  7. By: Bartha, Zoltán
    Abstract: The objective of the paper is to examine whether the advantages and disadvantages mentioned in the literature of the flat rate income tax could be observed in Hungary. Personal income tax data provided by the Hungarian National Tax and Customs Administration was used to check the arguments. It was found that the flat tax indeed favours richer taxpayers, and because of the family tax credits, it heavily favours families with children. Tax revenues declined as tax rates were cut, while the GDP growth rate was close to stagnant. Both of these developments go against the expectations of the flat tax supporters, although it has to be mentioned that the changes were made in the midst of a European- and world-wide depression, which could have distorted the pure effects of the new tax code. Although in many countries the flat rate tax was a positive signal for investors boosting foreign direct investments, the Hungarian government introduced extra taxes on some of the transnational companies in order to balance the budget (and compensate for the lost personal income tax revenues), which meant that there was a decline in the mood of the investors. There is some indication that some illegal activities are shifted to the legal domain: the ratio of those tax reporters who earned an annual income of HUF 2 million or higher has gone from 62.5% to 66.6% in the period of 2010-12.
    Keywords: flat rate income tax, Hungary, tax statistics, income distribution
    JEL: E64 H24
    Date: 2014–09
  8. By: Jang-Ting Guo (Department of Economics, University of California Riverside); Yutaro Izumi (Northwestern University); Yi-Chan Tsai (National Taiwan University)
    Abstract: This paper quantitatively examines the long-run macroeconomic effects of resource misallocation in an otherwise standard one-sector neoclassical growth model with heterogeneous firms being subject to progressive taxation as well as endogenous entry and exit decisions. Under a progressive fiscal policy rule, capital and labor inputs move from more productive firms to less productive establishments as the latter face a lower or negative tax rate. We find that since low-productivity firms use an inefficiently high level of productive resources when there are no entry and exit decisions, the overall production and aggregate productivity will fall as the tax progressivity rises. By contrast, more progressive taxation may raise the economy's total output and aggregate productivity when endogenous entry and exit decisions are allowed and the household's labor supply is postulated to be fixed. Our analysis therefore shows that the quantitative implications of progressive taxation are sensitive to the variability of hours worked and the presence of entry regulations.
    Keywords: Resource Misallocation, Aggregate Productivity, Progressive Taxation, Idiosyncratic Distortions.
    JEL: E6 H21 H25 O4
    Date: 2015–02
  9. By: Torben M. Andersen (Department of Economics and Business, Aarhus University); Claus T. Kreiner (Department of Economics, University of Copenhagen)
    Abstract: If productivity increases more slowly for services than for manufactured goods then services suffer from Baumol’s cost disease and tend to become relatively more costly over time. Since the welfare state in all countries is an important supplier of tax financed services, this translates into a financial pressure which seems to leave policymakers with a trilemma; increase taxes (and hence tax distortions), cut spending or redistribute less. Under the assumptions underlying Baumol’s cost disease, we show that these dismal implications are not warranted. The welfare state is sustainable and Baumol growth leaves scope for Pareto improvements.
    Keywords: : Public sector, Baumol cost disease, welfare state sustainability
    JEL: H4 H21
    Date: 2015–02–09
  10. By: NANTOB, N'Yilimon
    Abstract: This paper looks at the effects of taxes increase on economic growth of 47 developing countries. In developing countries, there is no magic tax strategy to encourage economic growth. Some countries with high tax burdens have high growth rates and some countries with low tax burdens have low growth rates. Despite much theoretical and empirical inquiry as well as political and policy controversy, no simple answer exists concerning the relationship of taxes on economic growth in developing countries. The research takes an empirical approach to analyze the effects of four types of taxes namely taxes revenue, taxes on goods and services, taxes on income, profits, and capital gains and taxes on international trade on economic growth. Mobilizing a dynamic panel data over the period 2000–2012 and using the system GMM estimator to address endogeneity issues, the econometric results yield that (i) there is a non-linear relationship between taxes revenue and economic growth, specifically, these taxes increase economic growth at short run and this effect then increases over time as these taxes increase, and (ii) there is a non-linear (U-shaped) relationship between taxes on income, profits and capital gains, taxes on international trade and economic growth, specifically, these taxes lower economic growth at short run and these effects then diminish over time as these taxes increase.
    Keywords: Taxes, Economic growth, Developing counties, Dynamic panel data
    JEL: C33 H20 H21 H27 O40
    Date: 2014–10–22
  11. By: Roeder, Kerstin; Cremer, Helmuth; Lozachmeur, Jean-Marie; Maldonado, Dario
    Abstract: The paper studies the design of couples income taxation when consumption and labor supply decisions within the couple are made in a cooperative way according to some bargaining scheme. Specifically, the couple maximizes a weighted sum of the spouses utilities. In the first part of the paper, the spouses bargaining weights (specific to each couple) are exogenously given. In the second part, these bargaining weights are endogenous, and depend on the spouses respective contributions to total family income. The information structure is the traditional one in Mirrleesian nonlinear income tax models. However, while the household s total consumption is publicly observable, the consumption levels of the individual spouses are not observable. The social welfare function is utilitarian. We show that the expression for a spouses marginal income tax rate includes a Pigouvian (paternalistic) and an incentive term. With exogenous weights the Pigouvian term favors a marginal subsidy (tax) for the high-weight (lowweight) spouse, whose labor supply otherwise tends to be too low (high). In some cases both terms have the same sign and imply a positive marginal tax for the low-weight spouse and a negative one for the high-weight spouse.
    JEL: H21 H31 D10
    Date: 2014
  12. By: Dakshina De Silva; Robert P. McComb; Anita Schiller
    Abstract: The shift toward renewable forms of energy for electricity generation in the electricity generation industry has clear implications for the spatial distribution of generating plant. Traditional forms of generation are typically located close to the load or population centers, while wind and solar-powered generation must be located where the energy source is found. In the case of wind, this has meant significant new investment in wind plant in primarily rural areas that have been in secular economic decline. This paper investigates the localized economic impacts of the rapid increase in wind power capacity at the county level in Texas. Unlike Input-Output impact analysis that relies primarily on levels of inputs to estimate gross impacts, we use traditional econometric methods to estimate net localized impacts in terms of employment, personal income, property tax base, and key public school expenditure levels. While we find evidence that both direct and indirect employment impacts are modest, significant increases in per capita income accompany wind power development. County and school property tax rolls also realize important benefits from the local siting of utility scale wind power although peculiarities in Texas school funding shift localized property tax benefits to the state.
    Keywords: wind energy, industry studies, per capita income, public sector revenues and expenditure
    JEL: H23 H72 Q42 Q48 R11
    Date: 2015
  13. By: Werdt, Clive
    Abstract: This paper provides new empirical insights on the elasticity of taxable income for Germany. Using a rich panel of German income tax return data, the tax reforms of 2004 and 2005 are exploited implementing a new dynamic income model. Showing and discussing potential estimation problems of the most prominent model in the literature by Gruber and Saez (2002), this dynamic model delivers significant smaller estimates of the elasticity of taxable income. The overall estimate is 0.36 and robust against a number of sensitivity checks including non linear income controls. Elasticities differ between married and single assessed taxpayers with an elasticity of 0.17 for single and 0.44 for married taxpayers. These elasticities are similar to recent German results and considerablly smaller than recent results for the US from Weber(2014).
    Keywords: taxable income elasticity,dynamic panel data estimation,income tax return data,administrative data
    JEL: C26 H21 H61
    Date: 2015
  14. By: David Martinez Turegano; Alicia Garcia-Herrero
    Abstract: In this paper we assess empirically whether financial inclusion contributes to reducing income inequality when controlling for other key factors, such as economic development and fiscal policy. We conclude that financial inclusion contributes to reducing income inequality to a significant degree, while the size of the financial sector does not. The policy implication of this result is that financial inclusion should be at the forefront of government policies to reduce income inequality in a given economy. Given the broad way in which we have defined inequality in our empirical analysis, this means facilitating the use of credit to both households, especially low-income ones, as well as to small and medium-sized enterprises.
    Keywords: Emerging Economies, Financial Inclusion, Research, Working Paper
    JEL: D63 G21 H23 O15
    Date: 2015–02
  15. By: Winkler, Roland; Lewis, Vivien
    Abstract: This paper studies optimal taxation in a general equilibrium macro model with endogenous entry. We compare the constant elasticity of substitution (CES) model to three alternative demand structures: oligopolistic competition in prices, oligopolistic competition in quantities, and translog preferences. Our economy is characterized by two distortions: a labor distortion due to the misalignment of markups on goods and leisure, and an entry distortion due to the misalignment of the consumer surplus effect and the profit destruction effect of entry. The two distortions interact in determining the wedge between the market-driven and optimal level of product diversity. We show how optimal labor and entry taxes depend upon the prevailing demand structure, the nature and size of entry costs, and the degree of substitutability between goods.
    JEL: E22 E61 H21
    Date: 2014
  16. By: Haußen, Tina
    Abstract: In several empirical contributions researchers have found a gender gap in preferences for public spending. This paper analyzes the persistence of these gender gaps when income differences between individuals are taken into consideration. Using survey data from the years 1996 and 2006 of German respondents, we show that gender gaps in preferences vanish when we control for individual income relative to the German median income. The larger this income ratio, the lower the preferences for social security (health care, retirement and unemployment) but the larger the preferences for education spending. Controlling for pseudo individual income (the actual available income if income is shared between all household members), gender gaps in health care and retirement reappear. This may reflect an insurance motive of women who fear to lose the benefits from sharing income within the household.
    JEL: J16 H50 D70
    Date: 2014
  17. By: Koeniger, Winfried
    Abstract: We show that more human capital improves incentives in a standard optimal taxation problem: common assumptions about preferences and technology imply that the disutility of labor decreases less strongly in unobserved ability if agents have more human capital. Human capital thus reduces the informational rents of high ability types and relaxes the incentive constraints. Since parents do not take the effect of human capital on incentives into account when choosing how much to invest into their children, there is a rationale for education subsidies.
    JEL: E24 H21 J24
    Date: 2014
  18. By: Hilmer, Michael
    Abstract: Using a simple symmetric principal-agent model of two banks, this paper studies the effects of both bailouts and bonus taxes on risk taking and managerial compensation. In contrast to existing literature, we assume financial institutions to be systemic only on a collective basis, implying support only if they collectively fail. This too-many-to-fail assumption generates incentives for herding and collective moral hazard. If banks can anticipate bailouts, they can coordinate on equilibrium where they collectively incentivize higher risk-taking. A bonus tax can prevent this market failure, even if it is implemented unilaterally: proper bonus taxation reduces risk-taking of the taxed bank and, consequentially, rules out the equilibrium with high risk-taking of both banks. In preventing market failure due to banks collective moral hazard, bonus taxation reestablishes market discipline.
    JEL: H24 M52 G38
    Date: 2014
  19. By: Blankart, Charles B:
    Abstract: In 1870 Menger, Jevons and Walras succeeded in explaining prices in a market economy. While most economists welcomed their achievement, economists of the theory of public finance split in a Great Schism. The dissent is on the two Gossen Laws on which the neoclassical revolution relies. Continental Europeans insist in the relevance of choice and therefore adopt both Gossen laws, meaning that of declining marginal utility and that of utility equalization at the margin. The Anglo-Saxons adopt only declining marginal utility because they found that individual choice does not work for public goods. The former became choice individualists, the latter utilitarians. The Schism was revitalized with the Mirrlees Review of 2010/2011, a monumental work by 63 renowned economists over 1880 pages on what a good tax system ought to be. The author argues that without choice, nothing can be said on a good tax system. Therefore the Mirrlees Review is rejected in favour of a choice alternative which is developed in this paper.
    JEL: A20 B50 H20
    Date: 2014
  20. By: Slavik, Ctirad; Yazici, Hakki
    Abstract: In the United States structure and equipment capital are e ffectively taxed at different rates. Recently, President Obama joined the group of policy makers and economists who propose to eliminate these di erentials. This paper analyzes the consequences of such a reform using an incomplete markets model with equipment-skill complementarity. We fi nd that the reform increases average welfare by 0.1%. Importantly, we fi nd that the reform does not involve the usual effi ciency vs. equality trade-o ff: it improves both.
    JEL: E62 H21 H25
    Date: 2014
  21. By: Engelhardt, Carina; Wagener, Andreas
    Abstract: When based on perceived rather than on objective income distributions, the Meltzer-Richards hypothesis and the POUM hypothesis work quite well empirically: there exists a positive link between perceived inequality or perceived upward mobility and the extent of redistribution in democratic regimes though such a link does not exist when objective measures of inequality and social mobility are used. These observations highlight that political preferences and choices might depend more on perceptions than on factual data.
    JEL: H53 D72 D31
    Date: 2014
  22. By: Sergei Guriev (Département d'économie); Maxim Ananyev (UCLA)
    Abstract: This paper draws on a natural experiment to identify the relationship between income and trust. We use a unique panel dataset on Russia where GDP experienced an 8 percent drop in 2009. The effect of the crisis had been very uneven among Russian regions because of their differences in industrial structure inherited from the Soviet times. We find that the regions that specialize in producing capital goods, as well as those depending on oil and gas, had a more substantial income decline during the crisis. The variation in the industrial structure allows creating an instrument for the change in income. After instrumenting average regional income, we find that the effect of income on generalized social trust (the share of respondents saying that most people can be trusted) is statistically and economically significant. Controlling for conventional determinants of trust, we show that 10 percent decrease in income is associated with 5 percentage point decrease in trust. Given that the average level of trust in Russia is 25%, this magnitude is substantial. We also find that post-crisis economic recovery did not restore pre-crisis trust level. Trust recovered only in those regions where the 2009 decline in trust was small. In the regions with the large decline in trust during the crisis, trust in 2014 was still 10 percentage points below its pre-crisis level.
    Date: 2015–02

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