nep-pbe New Economics Papers
on Public Economics
Issue of 2015‒05‒16
twenty-one papers chosen by
Thomas Andrén

  1. Optimal Taxation and Productive Social Expenditure By Thomas Bassetti; Luciano Greco
  2. An Assessment of the Performance of the Italian Tax Debt Collection System By Margherita Ebraico; Savino Rua
  3. A Study on R&D Tax Incentives - Final report By The Consortium consisting of CPB, CAPP, CASE, CEPII, ETLA, IFO, IFS, IHS
  4. Improving VAT compliance – random awards for tax compliance By Jonas Fooken; Thomas Hemmelgarn; Benedikt Herrmann
  5. Boring Banks and Taxes By Rafael Aigner; Felix Bierbrauer
  6. Stimulus versus Austerity: The Asymmetric Government Spending Multiplier By Barnichon, Régis; Matthes, Christian
  8. Optimal Monetary and Fiscal Policy in an Economy with Endogenous Public Debt By Luk, Paul; Vines, David
  9. Fiscal Consolidation and Expenditure Arrears: Evidence from Local Governments’ Investments By Paolo Chiades; Luciano Greco; Vanni Menegotto; Luigi Moretti; Paola Valbonesi
  10. VAT notches By Li Liu; Ben Lockwood
  11. The effects of fiscal autonomy on the size of public sector and the strength of political budget cycles in local expenditure By Köppl Turyna, Monika; Kula, Grzegorz; Balmas, Agata; Waclawska, Kamila
  12. Colonial New Jersey's Provincial Fiscal Structure, 1709-1775: Spending Obligations, Revenue Sources, and Tax Burdens in War and in Peace By Farley Grubb
  13. Optimal Savings for Retirement: The Role of Individual Accounts By Julia Le Blanc; Almuth Scholl
  14. To Work or Not to Work? Updated Estimates of Labour Supply Elasticities By Zuzana Siebertova; Matus Senaj; Norbert Svarda; Jana Valachyova
  15. Health, responsibility and taxation with a fresh start By Aitor Calo-Blanco
  16. G20 Agenda for the World Economy: Asia-pacific Perspectives By Sudip Ranjan Basu; Alberto Isgut; Daniel Jeongdae Lee
  17. Austerity, cyclical adjustment and the remaining leeway for expansionary fiscal policies within the current EU fiscal framework By Truger, Achim
  18. Wealth Effects on Consumption across the Wealth Distribution: Empirical Evidence. By L. Arrondel; P. Lamarche; F. Savignac
  19. Does Regulation Matter? Riskiness in Pension Asset Allocation By Sandra Rigot
  20. Does Extending Unemployment Benefits Improve Job Quality? By Nekoei, Arash; Weber, Andrea
  21. How Health Plan Enrollees Value Prices Relative to Supplemental Benefits and Service Quality By Bunnings, C,;; Schmitz, H,;; Tauchmann, H,;; Ziebarth, N.R,;

  1. By: Thomas Bassetti (University of Padova); Luciano Greco (University of Padova)
    Abstract: This paper characterizes the optimal tax and expenditure policies in economies where households’ unobservable gross earnings depend on exogenous (or inherited) capabilities and input investments. In a two-class economy, optimal redistribution relies on non-linear income taxation and input public provision only if the poor households demand less input than the rich. In a multi-class economy, optimal redistribution is implemented by usual-shape, non-linear income taxation and uniform public provision of input, if inherited capability and input are economic substitutes. But, when capability and input are complements, optimal redistribution relies only on non-linear income taxation. Numerical analyses show that, when individual productivity is separable in input and capability, these factors are economic substitutes (or complements) if preferences take into account (or not) the income effects.
    Keywords: In-kind redistribution; Non-linear income tax; Public provision of private goods; Opting out; Topping up; Numerical simulations
    JEL: H42 H21
    Date: 2015–04
  2. By: Margherita Ebraico (Italian Revenue Agency); Savino Rua (European Commission)
    Abstract: This paper provides a comparable estimate of the magnitude of tax debt in Italy and investigates which administrative factors would contribute to explain it. It is inspired by the work of the OECD on comparative tax administration. Our findings show that the level of undisputed tax debt in Italy is close to the EU average, with a decreasing trend since 2008. No more gaps are found in the administration of tax debt management in Italy, when comparing it with that of other EU Member States. The use of technology emerges as a possible area of further attention.
    Keywords: Tax administration, Tax debt, Tax collection
    JEL: H11 H71 H83 K34 K40
    Date: 2015–01
  3. By: The Consortium consisting of CPB, CAPP, CASE, CEPII, ETLA, IFO, IFS, IHS
    Abstract: Investment in research and innovation plays a critical role in kick-starting smart growth and upgrading the competitiveness of European companies. In the post-crisis world, Europe needs innovation more than ever before to keep up with the rapid technology advances and growing global competition. R&D tax incentives are an important innovation policy tool widely used in Europe. In some countries, during the crisis, tax instruments have become increasingly important for stimulating private R&D than direct funding. The recent study conducted jointly by DG TAXUD and DG GROW finds fiscal incentives for R&D expenses to be effective in stimulating investment in R&D. The size of the effect varies across countries which can be linked to country specific features, but, crucially, also to differences in the design and organisational practices of the fiscal schemes. The study identifies what are good designs for R&D tax incentives and which features are to be avoided. To answer this question, the study benchmarks the 80 existing R&D tax incentives in 33 countries (including all EU Member States) based on a number of identified good practices in design and administration.
    Keywords: European Union, taxation, R&D tax incentives
    JEL: H20 H29
    Date: 2015–01
  4. By: Jonas Fooken (European Commission – Joint Research Center); Thomas Hemmelgarn (European Commission); Benedikt Herrmann (European Commission – Joint Research Center)
    Abstract: The use of receipt-based tax lotteries to increase (VAT) tax compliance has been of growing interest amongst EU Member States. Some countries have introduced such lottery schemes, namely Malta in 1997, Slovakia in 2013 and Portugal in 2014. Others have been intrigued about the possibility of introducing a lottery. The use of tax lotteries also has a history outside of Europe, notably in Taiwan since the 1950s. While there is growing interest in the use of tax lotteries throughout Europe, the understanding of best practises and success factors, is still limited. Therefore, this workshop brought together countries with experience and those interested in running tax lotteries. TAXUD and the JRC in this context coordinated, establishing a platform for discussion amongst the Member States. This report summarises the workshop, following a pyramidal approach. In the following section the motivation and elements of the workshop are summarised briefly.
    Keywords: behavioural economic, tax compliance, tax lotteries
    JEL: D03 H26 H41
    Date: 2015–01
  5. By: Rafael Aigner (University of Bonn); Felix Bierbrauer (University of Cologne)
    Abstract: How do taxes in the financial sector affect economic outcomes? We analyze a simple general equilibrium model with financial intermediation. We formalize a trade-off between tax policies that burden the owners of banks and tax policies that burden households. We also study the implications of the financial sector's exemption from value added taxation (VAT). Main results are that an increased taxation of the banks' profits goes together with a larger financial sector, as measured by the volume of loans and the employment in banking. We also show that the general presumption that the VAT-exemption is beneficial for banks is unjustified.
    Keywords: Taxation of the financial sector, Financial activities tax, Value added taxation
    JEL: H21 G21 H22
    Date: 2015–04
  6. By: Barnichon, Régis; Matthes, Christian
    Abstract: Despite intense scrutiny estimates of the government spending multiplier remain highly uncertain with values ranging from 0.5 to 2. While a fiscal consolidation is generally assumed to have the same (mirror-image) effect as a fiscal expansion, we show that relaxing this assumption is crucial to understanding the effects of fiscal policy. The government spending multiplier is substantially below 1 for fiscal expansions, but the multiplier is substantially above 1 for fiscal consolidations.
    Keywords: fiscal policy; Gaussian Mixture Approximation
    JEL: C32 E62
    Date: 2015–05
  7. By: Giuseppe Di Liddo (University of Salento); Cosimo Magazzino (University of Roma Tre); Francesco Porcelli (University of Exeter)
    Abstract: The aim of this study is to empirically assess the existence of the BARS curve (Barro, Armey, Rahn, and Scully), as well as the relationship between public expenditure and decentralization, for Italian regions in the 1997-2009 period. Using panel data methodologies, we inspect the nexus between Regional government size (measured by the share of public expenditure on GDP) and the economic growth rate. The main results are twofold. First, when the degree of decentralization is reasonably low (below the 31% of expenditure decentralization), a BARS curve has been successfully discovered, and the optimal government size remains almost constant, assuming a value close to the 52%. The second one concerns the fact that, even though the optimal government size is almost constant, decentralization has a positive effect on economic activity. Finally, decentralization attenuates the negative impact of sub-optimal expenditure policy on growth process. Therefore, our results suggest that decentralization exerts a positive impact on public sector efficiency, contributing to stimulate the income growth.
    Keywords: BARS curve, decentralization, Italian Regions, public expenditure, economic growth, panel data
    JEL: H11 H50 H77 O43 R10 R50
    Date: 2015
  8. By: Luk, Paul; Vines, David
    Abstract: This paper uses a New Keynesian framework to study the coordination of fiscal and monetary policies, in response to an inflation shock when the policymaker acts with commitment. We first show that, in the simplest New Keynesian model, fiscal policy plays no part in the optimal policy response, because of the comparative advantage which monetary policy has in the control of inflation. We then add endogenous public debt and show that the above result is no longer true. When the initial stock of debt is low, it is optimal for government spending to remain largely inactive, but when the initial stock of debt is high, government spending should play a significant stabilisation role in the first period. This finding is robust to adding endogenous capital accumulation and inflation persistence in the Phillips curve.
    Keywords: fiscal policy; government debt; monetary policy; New Keynesian model
    JEL: E4 E5 E6
    Date: 2015–05
  9. By: Paolo Chiades (Bank of Italy); Luciano Greco (University of Padova); Vanni Menegotto (Bank of Italy); Luigi Moretti (University of Padova); Paola Valbonesi (University of Padova)
    Abstract: In this paper we investigate how tightening fiscal constraints (e.g., through intergovernmental transfer cuts) can lead local governments to postpone investments’ payments. We first provide a simple model showing how local governments can use arrears to relax their short-run financial constraints. We then empirically assess our theoretical prediction, using information from accounting and financial reports of all Italian municipalities for the period 2003-2010. Exploiting the long-lasting effect of 1979 structural reform of Italian local public finance, we employ an instrumental variable approach to face endogeneity concerns. We find robust evidence that tighter fiscal and financial conditions of the local governments determine larger arrears for public investment expenditures.
    Keywords: Intergovernmental Grants, Payment in Government to Business (G2B) Transactions, Instrumental Variables, Panel Data.
    JEL: H30 H72 H77 C33 C36
    Date: 2015–04
  10. By: Li Liu (Centre for Business Taxation, University of Oxford); Ben Lockwood (University of Warwick)
    Abstract: We develop a conceptual framework which captures the effect of the VAT system on profit by two effective taxes. This allows (i) predictions of the determinants of voluntary registration and bunching at the registration threshold; (ii) develops a formula for estimating the elasticity of value-added with respect to the statutory tax. We show that the marginal excess burden of the tax on suppliers is measured by this elasticity, extending Feldstein's analysis of the elasticity of taxable income to an indirect tax setting. We bring the theory to the data, using linked administrative VAT and corporation tax records in the UK from 2004-2009. Consistently with the theory, voluntary registration is positively related to the intensity of input use and negatively related to the share of B2C transactions. There is bunching at the VAT threshold, and the amount of bunching is negatively related to the intensity of input use and positively related to the share of B2C transactions, again consistently with the theory. We provide an estimate of the elasticity of the VAT tax base in the range of 0.09 and 0.18.
    Date: 2015
  11. By: Köppl Turyna, Monika; Kula, Grzegorz; Balmas, Agata; Waclawska, Kamila
    Abstract: We analyze the effects of political business cycles and fiscal autonomy on the expenditure categories of Polish municipalities. Using System GMM technique, we find convincing evidence for strong political business cycles in almost all expenditure categories, and in particular for the categories of expenditure relevant for electoral success such as infrastructure and social expenditure. Transfers to municipalities from the central government accentuate the strength of the electoral cycles, but surprisingly are associated with lower expenditure levels outside of the election periods. The latter results are the main finding: fiscal autonomy although not necessarily reducing the levels of local expenditure, does reduce the level of political manipulation of the budgets.
    Keywords: local expenditure, political business cycles, fiscal autonomy, decentralization
    JEL: D72 H72 H75 H77
    Date: 2015–03–01
  12. By: Farley Grubb
    Abstract: The spending obligations and revenue sources of colonial New Jersey’s provincial government for the years 1704 through 1775 are reconstituted using forensic accounting techniques from primary sources. Such has not been done previously for any British North American colony. These data are used to assess colonial New Jersey’s provincial fiscal structure. The methods for raising revenue to meet normal peacetime and emergency wartime expenses are identified and analyzed. The provincial tax burdens imposed on New Jersey’s subjects are calculated. How the British interfered with New Jersey’s provincial fiscal structure is identified. What revenues and tax burdens would have been without this interference are estimated.
    JEL: E42 E60 H20 H60 N11 N21 N41
    Date: 2015–05
  13. By: Julia Le Blanc (Deutsche Bundesbank, Frankfurt a. Main, Germany); Almuth Scholl (Department of Economics, University of Konstanz, Germany)
    Abstract: We employ a life-cycle model with income risk to analyze how tax-deferred individual accounts affect households’ savings for retirement. We consider voluntary accounts as opposed to mandatory accounts with minimum contribution rates. We contrast add-on accounts with carve-out accounts that partly replace social security contributions. Quantitative results suggest that making add-on accounts mandatory has adverse welfare effects across income groups. Carve-out accounts generate positive welfare across all income groups but gains are lower for low income earners. Default investment rules in individual accounts have a modest impact on welfare.
    Keywords: individual retirement accounts, household portfolio choice, consumption and saving over the life-cycle
    JEL: E21 H55 G11
  14. By: Zuzana Siebertova (Council for Budget Responsibility); Matus Senaj (Council for Budget Responsibility); Norbert Svarda (Council for Budget Responsibility); Jana Valachyova (Council for Budget Responsibility)
    Abstract: This paper provides a revised microeconometric analysis of extensive margin labour supply elasticities in Slovakia. Compared to earlier analysis, we estimate the elasticities for males and females separately. We find that a one percent increase in net wage increases the probability of economic activity by 0.21 and 0.4 percentage points for males and females, respectively. Taking into account tax and transfer system details valid in Slovakia in 2009-2012, a one percent increase in transfers decreases the semi-elasticity of labour force participation by 0.03 percentage points for males and 0.05 percentage points for females. These results are broadly in line with the elasticities usually reported in the literature. Our results show that low-skilled, females and the elderly are the groups that are particularly responsive to changes in taxes and transfers. Labour market policies aimed to boost employment should concentrate on increasing marginal gains to work, especially for low-educated individuals and women.
    Keywords: labour supply elasticity, extensive margin, Heckman model, probit
    JEL: H31 H53 I38 J21
    Date: 2015–05
  15. By: Aitor Calo-Blanco (Dpto. de Análisis Económico y Admon. de Empresas. University of A Coruña)
    Abstract: In a model where individuals differ in both their health care needs and their lifestyle preferences, we study the fair provision of health care with fresh starts. Grounded on basic ethical principles, we axiomatically derive social preferences that allow us to make welfare assessments when agents who regret their initial decisions may be granted a fresh start. Such preferences give top priority to that individual with the highest well-being difference between her actual choice and an ideal situation that entails neither regret nor health disabilities. Next, we characterise a schedule of taxes and health treatments that satisfies this social ordering. Limited by incentive-compatibility and health care needs heterogeneity, this schedule advocates balancing additional health treatments and reductions in non-medical consumption.
    Keywords: Health, Lifestyle Preferences, Fairness, Fresh Start, Taxation.
    JEL: D63 D71 H20 I10
    Date: 2015–05
  16. By: Sudip Ranjan Basu (Macroeconomic Policy and Development Division, United Nations Economic and Social Commission for Asia and the Pacific); Alberto Isgut (Macroeconomic Policy and Development Division, United Nations Economic and Social Commission for Asia and the Pacific); Daniel Jeongdae Lee (Macroeconomic Policy and Development Division, United Nations Economic and Social Commission for Asia and the Pacific)
    Abstract: This paper examines the agenda of this year’s G20 Brisbane summit namely, to promote strong economic growth and employment outcomes and to make the global economy more resilient to future shocks – in the context of key policy debates in the Asia-Pacific region, as well as discussions on the United Nations post-2015 development agenda. In particular, priority areas related to investment and infrastructure, trade, employment, financial inclusion and remittances, financial regulatory reforms, international tax cooperation and anti-corruption measures, and energy markets are explored. The paper finds that several issues addressed by the G20, including infrastructure financing and tax cooperation, are highly relevant for developing countries in the Asia-Pacific region and that there is significant room for synergy between the UN and G20 processes.
    Keywords: G20, Financing, Infrastructure, Post-2015 development agenda, Asia-Pacific.
    JEL: E20 E60 G00 H54
  17. By: Truger, Achim
    Abstract: Fiscal policy in the Euro area is still dominated by austerity measures implemented under the institutional setting of the 'reformed' stability and growth pact, and the even stricter 'fiscal compact'. At the same time, calls for a more expansionary fiscal policy to overcome the economic crisis have recently become more frequent. In his Jackson Hole speech Mario Draghi, the president of the ECB, called for a more expansionary fiscal stance for the Euro area as a whole and a public investment programme on the European level insisting, however, that the existing rules of the Stability and Growth Pact be respected. The European Council at its meeting in June 2014 also saw the need to stimulate growth, but insisted as well that this be realised within the current institutional framework. Recently, the EU-Commission in this spirit has launched the Juncker-Plan to stimulate (public) investment and is using a less strict interpretation of the Stability and Growth Pact in order to provide more fiscal leeway for countries under unfavourable economic circumstances. The paper argues that these steps do not go far enough and that a truly expansionary fiscal policy in the dimension of two to three per cent of Euro area GDP for a few years is possible even within the existing institutional framework. Special emphasis is put on the method of cyclical adjustment employed by the European Commission in order to assess member states' fiscal position and effort as well as on ways to increase public investment. It will be shown that even in the existing framework the leeway for a macro economically and socially more sensible fiscal policy using the interpretational leeway inherent in the rules could be quite substantial.
    Keywords: fiscal policy,austerity,cyclical adjustment of public finances,Euro area
    JEL: E61 E62 E65 H62 H63
    Date: 2015
  18. By: L. Arrondel; P. Lamarche; F. Savignac
    Abstract: This paper studies the heterogeneity of the marginal propensity to consume out of wealth using French household surveys. We find decreasing marginal propensity to consume out of wealth across the wealth distribution for all net wealth components. The marginal propensity to consume out of financial assets tend to be higher compared with the effect of housing assets, excepted in the top of the wealth distribution. Consumption is less sensitive to the value of the main residence than to other housing assets. We also investigate the heterogeneity arising from indebtedness and from the role of housing assets as collateral.
    Keywords: Consumption, Marginal propensity to consume out of wealth, Policy distributive effects, Households survey.
    JEL: D12 E21 C21
    Date: 2015
  19. By: Sandra Rigot (University Paris North)
    Abstract: We investigate the influence of investment regulations on the riskiness and procyclcality of defined-benefit (DB) pension funds' asset allocations. We provide a global comparison of the regulatory framework for public, corporate and industry pension funds in the US, Canada and the Netherlands. Derived from panel data analysis of a unique set of close to 600 detailed funds’ asset allocations, our results highlight that regulatory factors are vitally important – more so than the funds’ individual and institutional characteristics, in shaping these asset allocations. In particular, risk-based capital requirements, balance sheet recognition of unfunded liabilities, lower liability discount rates, and shorter recovery periods lead pension funds to decrease their asset allocation to risky assets. Risk-based capital requirements reduce overall risky asset allocation by as much as 5%, but they do not affect the asset classes identically. While equities, real estate and mortgages are at a disadvantage, high yield bonds and commodities are slightly favored.
    Keywords: Solvency, Pension funds, Defined Benefit, Liability discount rate, Valuation requirements, Financial stability, Regulation
    JEL: G28 G11
  20. By: Nekoei, Arash (IIES, Stockholm University); Weber, Andrea (University of Mannheim)
    Abstract: Contrary to standard search model predictions, prior studies failed to estimate a positive effect of unemployment insurance (UI) on reemployment wages. This paper estimates a positive UI wage effect exploiting an age-based regression discontinuity in Austrian administrative data. A search model incorporating duration dependence determines the UI wage effect as the balance between two offsetting forces: UI causes agents to seek higher-wage jobs, but also reduces wages by lengthening unemployment. This implies a negative relationship between the UI unemployment duration and wage effects, which holds empirically both in our sample and across studies, reconciling disparate wage-effect estimates. Empirically, UI raises wages by improving reemployment firms' quality and attenuating wage drops.
    Keywords: unemployment insurance, job-search, wages
    JEL: H5 J3 J6
    Date: 2015–04
  21. By: Bunnings, C,;; Schmitz, H,;; Tauchmann, H,;; Ziebarth, N.R,;
    Abstract: This paper empirically assesses the relative role of health plan prices, service quality and optional benefits in the decision to choose a health plan. We link representative German SOEP panel data from 2007 to 2010 to (i) health plan service quality indicators, (ii) measures of voluntary benefit provision on top of federally mandated benefits, and (iii) health plan prices for almost all German health plans. Mixed logit models incorporatea total of 1,700 health plan choices with more than 50 choice sets for each individual. The findings suggest that, compared to prices, health plan service quality and supplemental benefits play a minor role in making a health plan choice.
    Keywords: service quality; non-essential benefits; prices; health plan switching; German sickness funds; SOEP
    JEL: D12 H51 I11 I13 I18
    Date: 2015–02

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