nep-pbe New Economics Papers
on Public Economics
Issue of 2015‒02‒22
twenty-six papers chosen by
Thomas Andrén

  1. Optimal taxation under regional inequality By Zoubek, Malte; Kessing, Sebastian G.; Lipatov, Vilen
  2. Optimal Income Taxation: Mirrlees Meets Ramsey By Heathcote, Jonathan; Tsujiyama, Hitoshi
  3. Fiscal federalism and tax enforcement By Bönke, Timm; Jochimsen, Beate; Schröder, Carsten
  4. The Distribution of Household Income and Federal Taxes, 2011 By Congressional Budget Office
  5. Tax mimicking in the short- and long-run: Evidence from German reunification By Baskaran, Thushyanthan
  6. Transitional Dynamics and Long-Run Optimal Taxation under Incomplete Markets By Omer Acikgoz
  7. What drives tax refund maximization from inter-temporal loss usage? Evidence from the German taxpayer panel By Werdt, Clive
  8. On The Ambiguous Sign of the Optimal Utilitarian Marginal Income Tax By Hansen, Emanuel
  9. The Global Effects of R&D Tax Incentives: Evidence from Micro-Data By Knoll, Bodo; Baumann, Martina; Riedel, Nadine
  10. The distributional impact of fiscal policy in South Africa By Inchauste, Gabriela; Lustig, Nora; Maboshe, Mashekwa; Purfield, Catriona; Woolard, Ingrid
  11. Shifting Taxes from Labour to Property. A Simulation under Labour Market Equilibrium By Coda Moscarola, Flavia; Colombino, Ugo; Figari, Francesco; Locatelli, Marilena
  12. When Trade Leads to Inefficient Public Good Provision: a Tax competition model. By Emmanuelle Taugourdeau; Abderrahmane Ziad
  13. Designing Efficient Education and Tax Policies By Sachs, Dominik; Findeisen, Sebastian
  14. The Occurrence of Tax Amnesties: Theory and Evidence By Ralph-C. Bayer
  15. Local Political Budget Cycles in a Federation: Evidence from West German Cities By Furdas, Marina; Homolkova, Katerina; Kis-Katos, Krisztina
  16. Optimal Income Taxation with Asset Accumulation By Köhne, Sebastian; Abraham, Arpad; Pavoni, Nicola
  17. The Fiscal Multiplier and Economic Policy Analysis in the United States: Working Paper 2015-02 By Felix Reichling; Charles Whalen
  18. Reforming Public Service Provision: What have we learned? By Peter Birch Sørensen
  19. Proportional influence? Electoral rules and special interest spending By Köthenbürger, Marko; Egger, Peter; Smart, Michael
  20. Higher taxes, more evasion? Evidence from border differentials in TV license fees By Berger, Melissa; Fellner-Röhling, Gerlinde; Sausgruber, Rupert; Traxler, Christian
  21. Intergovernmental Grants as Signals and the Alignment Effect: Theory and Evidence By Bracco, Emanuele; Lockwood, Ben; Porcelli, Francesco; Redoano, Michela
  22. State Capacity and Public Debt: A political economy analysis By Esslinger, Christoph; Mueller, Cornelius
  23. CBO’s 2014 Long-Term Projections for Social Security: Additional Information By Congressional Budget Office
  24. A Pareto Efficiency Rationale for the Welfare State By Napel, Stefan
  25. Temporary Assistance for Needy Families: Spending and Policy Options By Congressional Budget Office
  26. Optimal Unemployment Insurance and Welfare Benefits in a Life-cycle model of Family Labor Supply and Savings By Haan, Peter; Prowse, Victoria

  1. By: Zoubek, Malte; Kessing, Sebastian G.; Lipatov, Vilen
    Abstract: Regional productivity di erences are large and provide scope for productivity-enhancing inter-regional labor mobility. Using an optimal taxation framework that combines an intensive labor supply margin with an extensive, productivity- enhancing migration margin, we explore the implications of regional productivity differences for the design of optimal tax transfer-schemes. Regional inequality poses an additional restriction on the government which can limit optimal redistribution. With intra-regional migration marginal tax rates tend to be reduced and negative tax rates are possible. Our simulations indicate that the additional restriction can be quantitatively important and that negative tax rates can occur for empirically plausible cases.
    JEL: H11 H21 R12
    Date: 2014
  2. By: Heathcote, Jonathan; Tsujiyama, Hitoshi
    Abstract: What structure of income taxation maximizes the social benefits of redistribution while minimizing the social harm associated with distorting the allocation of labor input? Many authors have advocated scrapping the current tax system, which redistributes primarily via marginal tax rates that rise with income, and replacing it with a flat tax system, in which marginal tax rates are constant and redistribution is achieved via non-means-tested transfers. In this paper we compare alternative tax systems in an environment with distinct roles for public and private insurance. We evaluate alternative policies using a social welfare function designed to capture the taste for redistribution reflected in the current tax system. In our preferred specification, moving to the optimal flat tax policy reduces welfare, whereas moving to the optimal fully nonlinear Mirrlees policy generates only tiny welfare gains. These findings suggest that proposals for dramatic tax reform should be viewed with caution.
    Keywords: flat tax; Mirrlees taxation; optimal income taxation; private insurance; Ramsey taxation; social welfare functions; tax progressivity
    JEL: E62 H21 H23 H31
    Date: 2015–02
  3. By: Bönke, Timm; Jochimsen, Beate; Schröder, Carsten
    Abstract: In many federations, fiscal equalization schemes soften fiscal imbalances across the member states. Such schemes usually imply that a member state internalizes only a small fraction of the additional tax revenue from an expansion of the state-specific tax base, while the remainder of the additional tax revenue is redistributed horizontally or vertically. We address the question as to which extent state-level authorities in such a federation under-exploit their tax bases. By means of a stylized model we show that the state authorities in such a federation have incentives to align the effective tax rates of the state residents to the internalized marginal return from a stricter enforcement of the tax law. We empirically test the model using two approaches. In a state-level approach, we explore whether the state-specific internalized marginal returns matter for the states investments in tax enforcement. In a micro-econometric approach, using OLS regressions and natural-experiments, we explore whether internalized marginal returns matter for the effectiveness of the states tax enforcement activities, captured by the tax deductions granted to tax units. All our estimates support the results from our theoretical model.
    JEL: H21 H77 C21
    Date: 2014
  4. By: Congressional Budget Office
    Abstract: Because higher-income households receive a much greater share of the nation’s before-tax income and pay higher average federal tax rates on that income, they pay much more in federal taxes than lower-income households do. In 2011, households in the top quintile received 52 percent of before-tax income and paid 69 percent of federal taxes; households in the bottom quintile received 5 percent of before tax-income and paid 1 percent of federal taxes.
    JEL: H20 H24 H50 J30
    Date: 2014–11–12
  5. By: Baskaran, Thushyanthan
    Abstract: This paper uses the quasi-experiment of Germany´s reunification to identify local tax mimicking by municipalities in Eastern-Germany. After reunification, East-German municipalities were allowed to independently set, for the first time in decades, local business and property tax rates. I explore whether the tax rates chosen by East-German border municipalities were influenced by the tax rates of adjacent West-German municipalities. To obtain causal estimates, I rely on instrumental variables regressions within the spatial lag framework, using West-German border municipalities - tax rates in 1989 as instruments for their post-reunification tax rates. The results suggest that East-German municipalities mimicked business tax rates immediately after reunification, but not in later years. I find no evidence of mimicking for property taxes. These results indicate that mimicking is not an important determinant of local tax policy.
    Keywords: tax mimicking,business taxes,property taxes,German reunification
    JEL: H20 H71 H77
    Date: 2015
  6. By: Omer Acikgoz (Yeshiva University)
    Abstract: Aiyagari (1995) showed that long-run optimal fiscal policy features a positive tax rate on capital income in Bewley-type economies with heterogeneous agents and incomplete markets. However, determining the magnitude of the optimal capital income tax rate was considered to be prohibitively difficult due to the need to compute the optimal tax rates along the transition path. This paper shows that, in this class of models, long-run optimal fiscal policy and the corresponding allocation can be studied independently of the initial conditions and the transition path. Numerical methods based on this finding are used on a model calibrated to the U.S. economy. I find that the observed average capital income tax rate in the U.S. is too high, the average labor income tax rate and the debt-to-GDP ratio are too low, compared to the long-run optimal levels. The implications of these findings for existing literature on the optimal quantity of debt and constrained efficiency are also adressed.
    Date: 2014
  7. By: Werdt, Clive
    Abstract: This paper investigates the inter-temporal loss usage of tax units in Germany. Tax units that experience a loss in a year can offset that loss with positive income from adjacent year to receive a tax refund. Similar to companies, tax units can employ losses as carry-back in the year before the loss or as carry-forward in the year following the loss. The tax code does not force a particular loss usage but provides tax units with freedom to allocate the losses between carry-back and carry-forward. Choosing an individual appropriate allocation of carry-back and carry-forward creates a maximal tax refund. Intertemporal loss usage is a special case of tax avoidance: tax units receive a tax refund from loss usage as carry-forward (carry-back) but forfeit the alternative refund from carry-back (carry-forward). Estimations show that the probability of maximizing the tax refund highly depends on the difference of the tax rates from the loss adjacent years. An increase of 10 percentage points of the tax rate difference increases the probability of tax refund maximization by 24.5%. This confirms that tax avoidance is strong in case of significant tax incentives.
    Keywords: losses,tax planing,taxpayer panel,administrative data
    JEL: H24 H63 D14
    Date: 2015
  8. By: Hansen, Emanuel
    Abstract: The paper studies optimal income taxation in a model with labor supply responses at the intensive and the extensive margin. It is shown that a utilitarian desire for redistribution does not pin down the sign of the optimal marginal tax rate: labor supply may be downward distorted, undistorted, or even upward distorted at both margins. The paper provides suffi cient conditions for the optimality of an EITC-style tax/transfer scheme under which labor supply is upward distorted at both margins for some skill groups. Furthermore, the paper shows optimal upward distortions at the intensive margin are driven by a non-standard tradeoff between effi ciency at the intensive margin and effi ciency at the extensive margin.
    JEL: H21 H23 D82
    Date: 2014
  9. By: Knoll, Bodo; Baumann, Martina; Riedel, Nadine
    Abstract: Recent years have seen an unprecedented increase in the provision of R&D tax incentives. A growing empirical literature suggests that R&D tax incentives are instrumental in raising domestic R&D activity. In policy debates this fi nding is often interpreted to lend support to the notion that R&D tax incentives increase national welfare by internalizing knowledge spillovers to other agents in the economy and raising ineffi ciently low R&D levels. Our paper stresses that much of the observed increase in R&D activities in response to R&D tax incentives is in fact related to R&D activities that are attracted from abroad. Using unique panel data on R&D activities of European multinational fi rms, we test for a potential impact of both, R&D tax incentives in the affi liate's host country and R&D tax incentives at other locations of the multinational group. In line with theoretical predictions, we fi nd a positive impact of domestic R&D subsidies and a negative one for foreign subsidies provided at other group locations. Quantitatively, the fi ndings suggest that around 80% of the observed increase in R&D activities is related to relocations of R&D across country borders.
    JEL: H25 H71 D62
    Date: 2014
  10. By: Inchauste, Gabriela; Lustig, Nora; Maboshe, Mashekwa; Purfield, Catriona; Woolard, Ingrid
    Abstract: This paper uses the 2010/11 Income and Expenditure Survey for South Africa to analyze the progressivity of the main tax and social spending programs and quantify their impact on poverty and inequality. The paper also assesses the redistributive effectiveness of fiscal interventions given the resources used. Because it applies the Commitment to Equity methodology, the results for South Africa can be compared with other middle-income countries for which the framework has also been applied. The main results are twofold. First, the burden of taxes -- namely the personal income tax, the value added tax, excises on alcohol and tobacco, and the fuel levy -- falls on the richest in South Africa and social spending results in sizable increases in the incomes of the poor. In other words, for the components examined, the tax and social spending system is overall progressive. Second, for these elements, fiscal policy in South Africa achieves appreciable reductions in income inequality and poverty. Moreover, these reductions are the largest achieved in the emerging market countries that have so far been included in the Commitment to Equity project. Although fiscal policy is equalizing and poverty-reducing, the levels of inequality and poverty that remain still rank among the highest in middle-income countries. Looking ahead, as South Africa grapples with slow economic growth, a high fiscal deficit, and a rising debt burden, addressing the twin challenges of high inequality and poverty will require not only much improved quality of public services, but also higher and more inclusive economic growth.
    Keywords: Emerging Markets,Debt Markets,Economic Theory&Research,Taxation&Subsidies,Public Sector Economics
    Date: 2015–02–01
  11. By: Coda Moscarola, Flavia; Colombino, Ugo; Figari, Francesco; Locatelli, Marilena (University of Turin)
    Abstract: A tax shifting from labour income to housing taxation is generally advocated on efficiency grounds. However, most of the empirical literature focuses on the distributional implications of property tax reforms without paying much attention to potential consequences on the labour market. The aim of this paper is to fill this gap by investigating the effects of at ax shifting from labour income to property, guaranteeing revenue neutrality, and to assess the consequences of labour market equilibrium, both on occupation rates and income distribution. We propose to consider a hypothetical tax reform in Italy which uses the revenue of the tax on house property (actually implemented in 2012) for increasing tax credits on low incomes and making them refundable. In order to evaluate the reform we have developed a structural model of household labour supply which takes into account the labour market equilibrium conditions. Overall, the simulated policy provides a more effective income support and better incentives to work for low wage households and determines an improvement in inequality indexes.
    Date: 2015–01
  12. By: Emmanuelle Taugourdeau (Centre d'Economie de la Sorbonne - Paris School of Economics); Abderrahmane Ziad (CREM - Université de Caen)
    Abstract: This paper analyses the tax competition mechanisms in a context of commodity trade. We show that the trade market equilibrium may restore the efficiency of the public good provision when agents from different countries have symmetric preferences. Asymmetry in preferences implies over or underprovision in public goods depending on the degree of asymmetry between countries. In both cases, the price adjustment leaves the capital stock unchanged so that the stock of capital is not affected by the taxes. Finally, we show that the centralized choice does not systematically restore the efficiency of the public good provision.
    Keywords: Tax competition, Nash equilibrium, Interregional Trade.
    JEL: H21 H41 E62 F12
    Date: 2015–02
  13. By: Sachs, Dominik; Findeisen, Sebastian
    Abstract: We study education and income tax policies in a model with endogenous selection into college. Our framework is strongly influenced by the empirical college literature and incorporates heterogenous returns and tastes for college, earnings risk (implying uncertain returns to college) and potentially borrowing constraints. We (i) calculate revenue effects of various policy reforms starting from the current system and (ii) derive conditions for optimal education and tax policies with various degrees of sophistication: optimal college subsidies for given income taxes and vice versa, jointly optimal taxes and subsidies, and optimal education dependent taxes. We estimate the relevant parameters of the model for quantitative analysis. We find that the endogeneity of the college choice has only a small impact on optimal taxes and increasing subsidies to their optimal level leads to large welfare gains. Finally, we find that for the current US policies, an increase in education subsidies is self-financing via higher tax revenue in the future; if we allow grants to condition on parental background, this effect gets even stronger and children with poor academic background should receive higher subsidies for pure efficiency reasons -- efficient policies favor social mobility.
    JEL: H21 H23 I22
    Date: 2014
  14. By: Ralph-C. Bayer (School of Economics, University of Adelaide)
    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 taxpayers discounting future payments from punishment and a government that balances costs and benefits of amnesty programs. From the model we derive hypotheses about the factors that should influence the occurrence of tax amnesties. To test these predictions empirically, 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 governmentÂ’s fiscal requirements and the taxpayersÂ’ expectations on future amnesties.
    Date: 2015–02
  15. By: Furdas, Marina (University of Freiburg); Homolkova, Katerina (University of Kiel); Kis-Katos, Krisztina (University of Freiburg)
    Abstract: This paper analyzes the occurrence of political budget cycles in 604 West German cities between 1975 and 2007. Due to the idiosyncratic timing of state and local elections, the budgetary changes before elections at two tiers of the federalist government can be separately estimated and can also be distinguished from common time effects. Both local and state elections result in pre-election manipulation of the local finances of moderate size. Before both types of elections, we observe an increase in building investments, accompanied by increasing intergovernmental grants for investment purposes but also a halt in the increase of local tax rates. By contrast, elections at the two tiers of the government affect the size of the current budget differently: current revenues and expenditures decrease before local but increase before state elections, suggesting a difference in the tightness of the local budget constraint. The extent of these political budget cycles is more pronounced in municipalities that are politically aligned with the state governments and are politically more contested.
    Keywords: political budget cycles, German cities, municipal finances, local and state elections
    JEL: D72 H71 H72
    Date: 2015–01
  16. By: Köhne, Sebastian; Abraham, Arpad; Pavoni, Nicola
    Abstract: Several frictions restrict the government s ability to tax assets. First of all, it is very costly to monitor trades on international asset markets. Moreover, agents can resort to non-observable low-return assets such as cash, gold or foreign currencies if taxes on observable assets become too high. This paper shows that limitations in asset observability have important consequences for the taxation of labor income. Using a dynamic moral hazard model of social insurance, we find that optimal labor income taxes typically become less progressive when assets are imperfectly observed. We evaluate the effect quantitatively in a model calibrated to U.S. data.
    JEL: H21 E21 D82
    Date: 2014
  17. By: Felix Reichling; Charles Whalen
    Abstract: The recession from 2007 to 2009 sparked wide interest in the economic effects of fiscal policy. That interest is reflected in an ongoing debate over the size of the fiscal multiplier. This working paper addresses three questions: What models do economists use to estimate that multiplier? Why do estimates of it vary widely? How can economists use those estimates to judiciously analyze U.S. economic policy??
    JEL: E62 H30
    Date: 2015–02–03
  18. By: Peter Birch Sørensen (Department of Economics, University of Copenhagen)
    Abstract: The essay discusses some key features of the wawe of public sector reforms that has swept through the OECD area during the last three decades under the heading of New Public Management. I review what economic theory and the empirical evidence can say about the effects of introducing pay for performance, performance measurement and various forms of competition in the public sector. I also review some evidence on the growing bureaucratization of the public sector and discuss the drivers behind this trend. The final part of the essay draws some implications for the design of public sector reforms.
    Keywords: : Public sector reform, New Public Management, Bureaucracy
    JEL: H1 H4 H83
    Date: 2015–02–04
  19. By: Köthenbürger, Marko; Egger, Peter; Smart, Michael
    Abstract: Conventional wisdom has it that proportional representation leads to more coalition governments and so to greater government spending, especially in redistributive categories favoured by special-interest groups. In contrast, we show in a theoretical model that first-past-the-post systems of government may give special interests greater influence in the winning electoral coalition than they would have in the corresponding legislative coalition under proportional representation. Evidence from a quasi-experimental reform in German local government supports this view. Introduction of a mayor directly elected under first-past-the-post rules caused a significant increase in local government expenditure, particularly in redistributive spending categories.
    JEL: H20 D72 H11
    Date: 2014
  20. By: Berger, Melissa; Fellner-Röhling, Gerlinde; Sausgruber, Rupert; Traxler, Christian
    Abstract: This paper studies the evasion of TV license fees in Austria. We exploit border differentials to identify the effect of fees on evasion. Comparing municipalities at the low- and high-fee side of state borders reveals that higher fees trigger significantly more evasion. The central estimate from a spatial regression discontinuity design indicates that a one percent increase in fees raises the evasion rate by 0.3 percentage points. The positive effect of fees on evasion is confirmed in different parametric and non-parametric approaches and survives several robustness checks.
    Keywords: Evasion,TV License Fees,Border Tax Differentials,Regression Discontinuity Design
    JEL: H26 H27
    Date: 2015
  21. By: Bracco, Emanuele; Lockwood, Ben; Porcelli, Francesco; Redoano, Michela
    Abstract: This paper provides a simple political agency model to explain the effect of political alignment between different tiers of government on intergovernmental grants and election outcomes. Key features of the model are: (i) rational voters interpret public good provision as a signal of incumbent competence, and (ii) realistically, grants are unobservable to voters. In this setting, the national government will use the grant as an instrument to manipulate the public good signal for the benefit of aligned local incumbents and challengers. Then, aligned municipalities receive more grants, with this effect being stronger before elections, and the probability that the aligned local incumbent is re-elected is higher. These predictions are tested using a regression discontinuity design on a new data-set on Italian municipalities. At a second empirical stage, the national grant to municipalities is instrumented with an alignment indicator, allowing estimation of a flypaper effect for Italian municipalities.
    Keywords: accountability; fiscal federalism; flypaper effect; political competition
    JEL: D7 H2 H77 H87
    Date: 2015–02
  22. By: Esslinger, Christoph; Mueller, Cornelius
    Abstract: High public debt combined with low capacities of the state to raise taxes and to support markets can put even developed countries into turmoil. However, the existing political economy literature of state capacity, pioneered by Besley and Persson (2009), does not investigate the interaction of these capacities with public debt. This paper studies the incentives behind raising debt and building state capacity in an integrated analytical framework. We examine the impact of political stability, cohesiveness of institutions, and income fluctuations on the political outcome, while allowing for sovereign default. We investigate when public debt and state capacity investments move in the same or opposite directions in response to exogenous parameter changes. This allows us to show when a state will simultaneously accumulate high public debt and invest only little in its capacities to raise taxes and to support markets, leading to a positive probability of sovereign default.
    JEL: H20 H60 H11
    Date: 2014
  23. By: Congressional Budget Office
    Abstract: This report presents additional information about CBO’s long-term projections of revenues and outlays for Social Security and provides information on Social Security benefits and payroll taxes for people born in different years and at different earnings levels. CBO has made a number of changes in the presentation and methodology of its distributional estimates since last year’s report. Lifetime Social Security benefit-to-tax ratios are higher this year as a result of those changes.
    JEL: H55 H60 H68 J26
    Date: 2014–12–18
  24. By: Napel, Stefan
    Abstract: Can fiscal policy raise utility for all in dynamic economies with unobservable agent heterogeneity, when missing credit and insurance markets affect incentives to invest in human capital? If so, should the state provide transfers to the poor in the form of cash or in kind? In an occupational choice model, we show (a) every competitive equilib- rium is interim-Pareto dominated by a policy providing education subsidies financed by income taxes, and (b) transfers conditional on educational investments similarly dom- inate unconditional transfers. The policies also result in macroeconomic improvements (higher per capita income and upward mobility, lower wage dispersion).
    JEL: C72 C73 D82
    Date: 2014
  25. By: Congressional Budget Office
    Abstract: Temporary Assistance for Needy Families (TANF) is a federal program administered by states that provides cash assistance, work support, and other services to some low-income families. This report examines spending on TANF, how TANF compares to other federal programs for low-income families, and the effects of TANF on employment. CBO also analyzes policy options that would change the program’s federal funding and requirements for states regarding employment and nonfederal funding.
    JEL: H53 I30 I38
    Date: 2015–01–21
  26. By: Haan, Peter; Prowse, Victoria
    Abstract: We specify and estimate a dynamic structural life-cycle model of labor supply, retirement and savings decisions of single-adult and couple households. Drawing on our model, we study the interplay between family labor supply and public insurance mechanisms. By including family labor supply, we recognize that the incentive effects and optimal design of public insurance programs may be impacted by a household's ability to adjust either one spouse's or both spouses' labor supply in response to wage and employment shocks. The analysis sheds new light on the optimal trade-off between insurance and incentives. In particular we show that family labor supply has quantitatively important implications for the optimal design of public insurance programs.
    JEL: J22 C35 H31
    Date: 2014

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