nep-pbe New Economics Papers
on Public Economics
Issue of 2015‒03‒22
twenty-two papers chosen by
Thomas Andrén

  1. Tax Aversion, Laffer Curve, and the Self-financing of Tax Cuts By Soldatos, Gerasimos T.
  2. Modelling the Impact of Direct and Indirect Taxes Using Complementary Datasets By Savage, Michael; Callan, Tim
  3. The True Levels of Government and Social Expenditures in Advanced Economies By Jacob Funk Kirkegaard
  4. The fiscal effects of work-related tax expenditures in Europe By Salvador Barrios; Serena Fatica; Diego Martinez; Gilles Mourre
  5. Local neutrality of Corporate Tax systems By Pablo Gutierrez; Ramon E. Lopez; Eugenio Figueroa
  6. An Earned Income Tax Proposal for Chile By Claudio A Agostini; Marcela Perticara; Javiera Selman
  7. Taxation and the User Cost of Capital: An Introduction By John Creedy; Norman Gemmell
  8. Assessing Fiscal Sustainability for SAARC and IMT-GT Countries By Syed, Munawar-Shah; Mariani, Abdul-Majid; Syed, Hussain-Shah
  9. Taxation and the International Mobility of Inventors By Ufuk Akcigit; Salomé Baslandze; Stefanie Stantcheva
  10. Life-Cycle Labor Supply with Human Capital: Econometric and Behavioral Implications By Michael P. Keane
  11. The Effects of Fiscal Policy on Employment: an Analysis of the Aggregate Evidence By Andrea Tafuro
  12. Public Capital Expenditure and Debt Dynamics: Evidence from the European Union By Bhatt Hakhu, Antra; Piergallini, Alessandro; Scaramozzino, Pasquale
  13. Do Taxes Crowd Out Intrinsic Motivation? Field-Experimental Evidence from Germany By Pierre C. Boyer; Nadja Dwenger; Johannes Rincke
  14. Intergovernmental transfers and public spending in Brazilian municipalities By Paulo Arvate; Enlinson Mattos, Fabiana Rocha
  15. Aggregate Effects of a Universal Social Insurance Fiscal Reform By Antón Arturo; Leal-Ordoñez Julio C.
  16. Inequality, Recessions and Recoveries By Fabrizio Perri
  17. The discretionary fiscal effort: an assessment of fiscal policy and its output effect By Nicolas Carnot; Franciso de Castro
  18. Earnings, Disposable Income, and Consumption of Allowed and Rejected Disability Insurance Applicants By Kostol, Andreas Ravndal; Mogstad, Magne
  19. The Taxation of Single-Employer Target Benefit Plans – Where We Are and Where We Ought To Be By Jana R. Steele; Barry Gros; Karen J. Hall; Ian McSweeney
  20. Intergovernmental (Dis)incentives, Free-Riding, Teacher Salaries and Teacher Pensions By Maria D. Fitzpatrick
  21. How Individuals Smooth Spending: Evidence from the 2013 Government Shutdown Using Account Data By Michael Gelman; Shachar Kariv; Matthew D. Shapiro; Dan Silverman; Steven Tadelis
  22. The Effect of Public Pension Wealth on Saving and Expenditure By Marta Lachowska; Michal Myck

  1. By: Soldatos, Gerasimos T.
    Abstract: High taxation is found to lead not to less labor supply but to more tax evasion and/or black labor. Investigating next what this implies for the course of the tax revenue and subsequently for the shape of the Laffer curve, this curve is found to change with the tax induced change of taxpayer preferences over tax compliance and tax aversion. Hence, the relevant Laffer curve when contemplating tax cuts should be the one after the last tax increase and cannot thereby be fully self-financed.
    Keywords: Laffer curve, Tax evasion/black labor, Self-financing tax cuts
    JEL: E62 H26 J22
    Date: 2015–05
  2. By: Savage, Michael (University College Dublin); Callan, Tim (Economic and Social Research Institute, Dublin)
    Abstract: Comprehensive modelling of the impact of taxes and tax policy options requires data on the impact at micro-level of both direct and indirect taxes. There are, however, limits on the amount of data that can be gathered by any one survey. With some exceptions, most notably the Living Costs and Food Survey (LCF) in the UK, most national expenditure surveys are not suitable for use in detailed modelling of the direct tax and welfare system. This makes approaches which impute expenditure data into detailed income surveys of considerable interest. In this paper, we assess the sensitivity of the distributional effects of indirect taxes to the choice between actual, estimated and imputed expenditure data. By doing so, the analysis here serves as an updated picture of the distributional effects of the indirect tax system in Ireland, as well as a base for future microsimulation analysis of simultaneous direct tax, indirect tax and welfare reform.
    Keywords: indirect tax, imputation, distribution, microsimulation
    JEL: D30 H22 H23 H24
    Date: 2015–02
  3. By: Jacob Funk Kirkegaard (Peterson Institute for International Economics)
    Abstract: Much of the conventional wisdom concerning social spending is faulty, especially in the United States. Analyses typically focus on readily available information about direct government social expenditures and overlook how tax systems and private spending affect the level of social spending in different societies. By taking the full effects of tax systems and social spending from both private and public sources into account, Jacob Funk Kirkegaard finds that the true level of US social expenditures is fully comparable to European spending—and yet yields worse outcomes than in Europe. Any debate in the United States on social spending should thus focus not on how much is spent but on how and for whose benefit the money is spent. High aggregate social spending in the United States has a very low impact on overall income inequality and healthcare outcomes. Adopting some best practices from other countries in health care could thus led to substantial efficiency gains, not to mention better health outcomes. Lastly, the relatively large scale of tax breaks for social purposes and the associated overall poor social outcomes in the United States indicates an excessively reliance on the tax system to the detriment of fiscal sustainability, transparency, and redistributive fairness. Improving the overall quality of US social spending therefore requires an overhaul of the US tax code.
    Date: 2015–02
  4. By: Salvador Barrios; Serena Fatica; Diego Martinez; Gilles Mourre
    Abstract: Work-related tax incentives can have a significant effect on how much, if at all, certain individuals decide to work. This paper examines the fiscal impacts and associated welfare costs of reforms to such tax relief measures in five European countries, France, Spain, the United Kingdom, Hungary and Slovakia. It finds that at least a quarter of the extra tax revenue raised by lowering work-related tax incentives tends to get lost, as individuals react by working less or withdrawing altogether. The revenue gain is particularly limited following the removal of tax incentives targeting the very lowest earners, which may even lead to revenue losses in some cases. Reducing work-related tax reliefs also has significant negative welfare effects.
    JEL: H24 H31 J20
    Date: 2015–02
  5. By: Pablo Gutierrez; Ramon E. Lopez; Eugenio Figueroa
    Abstract: This paper shows one important result, namely, that corporate tax systems that allow at least for two sources of investment tax deductions (e.g., accelerated arbitrary investment depreciation and deductibility of part of interest payments on the firm`s debt) can be, under certain plausible conditions, locally neutral. That is, they allow for the existence of at least one positive corporate tax rate that renders the user cost of capital equal to the undistorted (without taxes) level of this cost.
    Date: 2014–10
  6. By: Claudio A Agostini (Escuela de Gobierno, Universidad Adolfo Ibáñez); Marcela Perticara; Javiera Selman
    Date: 2014–09
  7. By: John Creedy; Norman Gemmell (The Treasury)
    Abstract: The aim of this paper is to provide an introduction to the concept of user cost and its determinants. Particular attention is given to the influence of taxation. The concept of user cost relates to the rental, the rate of return to capital, that arises in a profit maximising situation in which further investment in capital produces no additional profit. This paper sets out in some detail the range of assumptions involved in obtaining alternative expressions for the user cost. The user cost refers to a before-tax capital rental, the rate of return that ensures that the (after-tax) cost of capital is equal to the post-tax returns over its life. Hence, associated with the user cost measure is an effective marginal tax rate. This can differ substantially from the statutory marginal rate applicable to the investor. A related effective average tax rate is also defined.
    Date: 2015–03
  8. By: Syed, Munawar-Shah; Mariani, Abdul-Majid; Syed, Hussain-Shah
    Abstract: This study examines the fiscal sustainability of SAARC and Asian Growth-Triangle countries using Fisher and IPS tests of panel unit root and Pedroni test of panel cointegration. The tests are applied to the relationships, in terms of GDP ratios, between, i) the debt and primary surplus, and ii) government expenditure and revenues. Both models show consistent results suggesting that fiscal policy for the low-income countries is sustainable whereas it may not be sustainable for the high-income countries. This also indicates that the fiscal policy can be sustainable (non-sustainable) even for the debt above (below) 60 percent of the GDP.
    Keywords: Debt, Fiscal Policy, Sustainability, Panel Unit Roots, Panel Cointegration
    JEL: E62 H63
    Date: 2014
  9. By: Ufuk Akcigit; Salomé Baslandze; Stefanie Stantcheva
    Abstract: This paper studies the effect of top tax rates on inventors' mobility since 1977. We put special emphasis on "superstar" inventors, those with the most and most valuable patents. We use panel data on inventors from the United States and European Patent Offices to track inventors' locations over time and combine it with international effective top tax rate data. We construct a detailed set of proxies for inventors' counterfactual incomes in each possible destination country including, among others, measures of patent quality and technological fit with each potential destination. We find that superstar top 1% inventors are significantly affected by top tax rates when deciding where to locate. The elasticity of the number of domestic inventors to the net-of-tax rate is relatively small, between 0.04 and 0.06, while the elasticity of the number of foreign inventors is much larger, around 1.3. The elasticities to top net-of-tax rates decline as one moves down the quality distribution of inventors. Inventors who work in multinational companies are more likely to take advantage of tax differentials. On the other hand, if the company of an inventor has a higher share of its research activity in a given country, the inventor is less sensitive to the tax rate in that country.
    JEL: F22 H21 H24 H31 J61 O33 O38
    Date: 2015–03
  10. By: Michael P. Keane
    Abstract: I examine the econometric and behavioral implications of including human capital in the life-cycle labor supply model. With human capital, the wage no longer equals the opportunity cost of time – which is, instead, the wage plus returns to work experience. This has a number of important implications, of which I highlight four: First, labor supply elasticities become functions of both preference and wage process parameters. Thus, one cannot estimate elasticities without also specifying and estimating the wage process. Second, once human capital is accounted for, the data appear consistent with much larger labor supply elasticities than most prior work suggests. Third, contrary to much conventional wisdom, permanent tax changes can have larger effects on current labor supply than temporary tax changes. Fourth, human capital amplifies the labor supply response to permanent tax changes in the long-run, because a permanent tax reduces the rate of human capital accumulation, slowing the growth of wages.
    Date: 2015–03–17
  11. By: Andrea Tafuro (Department of Economics, University Of Venice Cà Foscari)
    Abstract: This study investigates whether fiscal policy is able to affect the trend of employment rate, triggering hysteresis independently from GDP behavior. I attempt to shed a light on this issue analyzing a Panel of 17 OECD countries, covering the period 1980-2009 with annual data. The effects of fiscal policy are estimated with a SVAR, where the exogenous fiscal shock is identified employing a recent dataset provided by the IMF, containing predetermined fiscal policy changes due to fiscal consolidation issues. My results suggest that a fiscal shock can modify the employment equilibrium level even without influencing potential output. The fiscal multiplier for the employment rate trend after two years is -0.55 and accounts for almost half of the multiplier for overall employment rate (which is -1.10), while is -0.11 – and not significant – for the potential output. The multiplier for the real per capita GDP is -1.04, which sharply contrasts with the “expansionary austerity” hypothesis. Various extensions are presented, considering the role of composition, monetary policy, and state-dependency. Spending cuts affect employment more than tax increases, while tax effects are larger on real per capita GDP. Such a result may be explained by different reactions of monetary policy. The evidence advocates that the multiplier is state-dependent, i.e. larger during recessions, and such effect is stronger on employment trend.
    Keywords: fiscal policy, labor market, narrative approach, panel data, hysteresis
    JEL: C23 E24 E62
  12. By: Bhatt Hakhu, Antra; Piergallini, Alessandro; Scaramozzino, Pasquale
    Abstract: This paper investigates the relationship between public capital expenditure and public debt in the European Union (EU) on a panel of fifteen countries over the sample period 1980-2013. We find robust evidence of a negative cointegrating relation, according to which increases in the capital expenditure-GDP ratio cause reductions in the debt-GDP ratio in the long run. Our empirical results suggest that current EU fiscal austerity can trigger upward debt spirals if cuts in total expenditure disregard its composition. Consistently with the “golden rule of public finance”, EU fiscal rules should allow for higher levels of capital expenditure in order to foster debt consolidation through growth dividends.
    Keywords: Fiscal sustainability, EU, panel cointegration, public expenditure, public debt.
    JEL: C23 E62 H62 H63
    Date: 2014
  13. By: Pierre C. Boyer; Nadja Dwenger; Johannes Rincke
    Abstract: This paper studies how imposing norms on contribution behavior affects individuals' intrinsic motivation. We consider an urban area in Germany where the Catholic Church collects a local church levy as a charitable donation, despite the fact that the levy is legally a tax. In cooperation with the church, we design a natural randomized field experiment with letter treatments informing individuals that the church levy is in fact a tax. Guided by a simple theoretical model, we use baseline contribution behavior to measure individuals' intrinsic motivation and demonstrate that treatment effects differ strongly across motivational types. Among weakly intrinsically motivated individuals, communicating the existence of a legal norm results in a significant crowd-out of intrinsic motivation. In contrast, strongly intrinsically motivated individuals do not show any treatment response. We cross-validate our findings using alternative motivational measures derived from an extensive post-treatment survey.
    Keywords: intrinsic motivation, crowding out, charitable giving, taxes, public goods, natural randomized field experiment
    JEL: C93 D03 H26 H41
    Date: 2014–12
  14. By: Paulo Arvate; Enlinson Mattos, Fabiana Rocha
    Abstract: We estimate the effects of unconditional (full fiscal decentralization) versus conditional (partial fiscal decentralization) block grants on local public spending in Brazilian municipalities. Our results suggest that the effect of unconditional and conditional transfers do not differ statistically. Their combination promotes a full crowding-in effect on aggregate public spending — i.e., for $1 of unconditional and conditional grant receipts; we find $1 of additional local public expenditures, greater than the corresponding effect of local income, providing further evidence for the flypaper effect. Moreover, the effect of unconditional transfers on education (health) spending is smaller than the effect of conditional education (health) transfers but greater than the corresponding effect of local income. We consider four strategies to identify causal effects of federal grants and the local income on fiscal responses regarding Brazilian local governments: (i) a fuzzy regression discontinuity design, (ii) Redistributive rules of education funds, (iii) Oil and Gas production, and (iv) Rainfall deviations from the historical mean.
    Keywords: Unconditional and Conditional Grants; Local Government; Crowding-out Effect; Crowding-in Effect (Flypaper Effect)
    JEL: H72 H77
    Date: 2015–03–06
  15. By: Antón Arturo; Leal-Ordoñez Julio C.
    Abstract: In a typical developing country, coverage of the contributory social security system is low. We analyze the aggregate effects of a revenue-neutral fiscal-cum-social policy reform that consists of: 1) the implementation of universal social insurance to replace the system with low coverage; and 2) the elimination of the social security payroll tax to replace it with a generalized VAT. We find that this reform increases productivity by 2 percent and output by 3 percent as it improves the allocation of resources across firms and sectors, and generates a substantial change in occupational choices. Thus, wages (before transfers) increase for all employees. Also, due to the reconfiguration of transfers, earnings (wages after transfers) for informal employees increase relative to the earnings of formal employees, which decreases inequality. However, the reform could affect some groups in the population, given the regressive nature of VAT and heterogeneity in the valuation of transfers across workers.
    Keywords: Universal Social Insurance;Fiscal Reform;Inequality;VAT;Allocation of Resources across Firms and Sectors.
    JEL: E62 H55 O17 O47
    Date: 2015–02
  16. By: Fabrizio Perri (University of Minnesota)
    Abstract: The paper shows that inequality in private income among US households is, in the aftermath of the Great Recession, at its postwar highs, both at the bottom and at the top of the distribution. The increase in inequality at the bottom seems to be tightly linked to the historically high level of long term unemployment, which depresses the income of the bottom part of the distribution. The paper also shows that, exactly during the Great Recession, the redistributive scope of government policies (tax and transfers) has increased to historical highs, again both at the bottom and at the top of the distribution, so disparities in disposable income have not grown much over the past 10 years. <P> More specific to the recession recovery cycle, we compare the Great Recession and its aftermath with the recession of 1980-82 and its aftermath and found that the distributional impact of the recent recession has been much smaller, precisely because of stronger role played by redistributive policies. Five years after the start of the 1980-82 recession, incomes at the top of the distribution were growing, and incomes at the bottom were falling, so society was much more unequal that it was at the start of the recession. Five years after the onset of the Great Recession, most segments of the disposable income distribution are still well below the pre-recession level; the society is poorer, but only marginally more unequal, due to redistribution. <P> This generalized stagnation is apparent also in the distribution of expenditures, which have been falling uniformly across the entire distribution. In the final part of the paper we have followed households through time to ask whether redistribution can also shield individual households from adverse shocks to private resources. The answer to the question is no. As the Great Recession has progressed there has been more redistribution, but at the same time households have lost the ability of self insure against shocks, and shocks to their disposable resources have affected their expenditures.
    Date: 2014
  17. By: Nicolas Carnot; Franciso de Castro
    Abstract: This paper presents an indicator of the fiscal stance that combines features of the bottom-up, narrative approach on the revenue side with a refined version of the top-down, traditional approach of the structural balance on the expenditure side. With these characteristics the indicator offers an image of fiscal policy that avoids both the 'endogeneity problems' of the structural balance and the 'indeterminacy' of the narrative approach. This indicator is used to shed light on EU fiscal policies and estimate the average short-term output effects of fiscal policy. Results suggest that, with exceptions, fiscal policy has been conducted in a more stop and go and pro-cyclical fashion over the past decade than suggested by traditional indicators. The average fiscal multiplier is estimated at a bit below unity on average, with higher (resp. lower) multipliers associated with expenditure (resp. revenue) shocks, and higher (resp. lower) multipliers in times of declining (resp. increasing) output gaps.
    JEL: E62 H60
    Date: 2015–02
  18. By: Kostol, Andreas Ravndal (University of Bergen); Mogstad, Magne (University of Chicago)
    Abstract: Two key questions in thinking about the size and growth of the disability insurance program are to what extent it discourages work, and how valuable the insurance is to individuals and families. These questions motivate our paper. We begin by describing the earnings, disposable income and consumption of awarded and rejected DI applicants, before and after the disability onset and the allowance decision. Next, we discuss how these descriptive results can be interpreted through the lens of alternative empirical approaches. Our analysis uses a Norwegian population panel data set with detailed information about every individual and household.
    Keywords: disability insurance, labor supply, benefit substitution, disposable income
    JEL: I38 J62 H53
    Date: 2015–02
  19. By: Jana R. Steele; Barry Gros; Karen J. Hall; Ian McSweeney
    Keywords: Governance and Public Institutions, Pension Papers
    JEL: J32
    Date: 2015–03
  20. By: Maria D. Fitzpatrick (Cornell University)
    Abstract: In this paper, I document evidence that intergovernmental incentives inherent in public sector defined benefit pension systems distort the amount and timing of income for public school teachers. This intergovernmental incentive stems from the fact that, in many states, local school districts are responsible for setting the compensation that determines the size of pensions, but are not required to make contributions to cover the resulting pension fund liabilities. I use the introduction of a policy that required experience-rating on compensation increases above a certain limit in a differences-in-differences framework to identify whether districts are willing to pay the full costs of their compensation promises. In response to the policy, the size and distribution of compensation changed significantly. On average, public school employees received lower wages largely through the removal of retirement bonuses. However, the design of the policy led some districts to increase compensation, rendering the policy less effective that it might have otherwise been.
    Keywords: Intergovernmental Incentives, Teacher Compensation, Teacher Retirement
    JEL: H75 H72 H77 J26 I21 I28
    Date: 2014–07
  21. By: Michael Gelman; Shachar Kariv; Matthew D. Shapiro; Dan Silverman; Steven Tadelis
    Abstract: Using comprehensive account records, this paper examines how individuals respond to a temporary drop in income following the 2013 U.S. Federal Government shutdown. Affected employees saw their income decline by 40% on average, which was recovered within two weeks. Despite having no effect on lifetime earnings, spending dropped sharply, implying a naïve estimate of the marginal propensity to spend of 0.57. This estimate overstates how consumption responded. To smooth consumption, individuals adjusted by delaying recurring payments such as mortgages and credit card balances. Those with the least liquidity struggled most to smooth spending and were left holding more debt months after the shutdown.
    JEL: D12 D91 E21 H31
    Date: 2015–03
  22. By: Marta Lachowska (W.E. Upjohn Institute for Employment Research); Michal Myck (Centre for Economic Analysis)
    Abstract: In order to study whether public pension systems displace private saving, we use the quasi-experimental variation in pension wealth created by Poland’s 1999 pension reform. Using the 1997–2003 Polish Household Budget Surveys, we begin by estimating “difference-in-differences” regressions, where we compare household saving and expenditure across time and between cohorts affected and unaffected by the reform. Next, we estimate the extent of crowd-out by using two-stage least squares. We identify the effect of pension wealth on private saving by using the cohort-by-time variation in pension wealth that is explained by the reform. We find that one additional Polish zloty, or PLN, of pension wealth crowds out about 0.24 PLN in household saving. We also find heterogeneity in responses. For the middle-aged cohorts, we find a large public pension crowd-out of private saving (about 0.54 PLN of private saving for each 1 PLN of public pension wealth), while the crowd-out for younger cohorts equals about 0.30 PLN of private saving per 1 PLN. Finally, we find a close-to-complete crowd-out among highly-educated households.
    Keywords: Pension reforms, crowd-out effect, retirement saving, difference-in-differences, natural experiment
    JEL: E21 H55 I38 P35
    Date: 2015–02

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