nep-pbe New Economics Papers
on Public Economics
Issue of 2015‒05‒30
nineteen papers chosen by
Thomas Andrén

  1. Towards an International Tax Order for the Taxation of Retirement Income By Bernd Genser
  2. Frictional Unemployment and Fiscal Policy By Ikeda Ryouichi
  3. Cultural Norms, the Persistence of Tax Evasion, and Economic Growth By Dimitrios Varvarigos
  4. Optimal taxation and debt with uninsurable risks to human capital accumulation By Piero Gottardi; Atsushi Kajii; Tomoyuki Nakajima
  5. Management Compensation, Monitoring and Aggressive Corporate Tax Planning By Melanie Steinhoff
  6. The effect of state taxes on the geographical location of top earners: evidence from star scientists By Moretti, Enrico; Wilson, Daniel J.
  7. Handling amenities in income taxation: Analysis of tax distortions in a migration equilibrium model By Jørn Rattsø; Hildegunn E Stokke
  8. Optimal Taxation and Human Capital Policies over the Life Cycle By Stefanie Stantcheva
  9. Indirect Tax Incidence under Inelastic Underground Economy Demand By Soldatos, Gerasimos
  10. Welfare and Tax Policies in a Neoclassical Growth Model with Non-unitary Discounting By Ryoji Ohdoi; Koichi Futagami; Takeo Hori
  11. Soda Taxes and the Prices of Sodas and Other Drinks: Evidence from Mexico By Jeffrey Grogger
  12. Illegal Immigration and Fiscal Competition By Bandyopadhyay, Subhayu; Pinto, Santiago M.
  13. Fiscal Policy under Long-run Stagnation: A New Interpretation of the Multiplier Effect By Ryu-ichiro Murota; Yoshiyasu Ono
  14. The income distribution in the UK: A picture of advantage and disadvantage By Stephen P Jenkins
  15. A Rational Economic Model of Paygo Tax Rates By Shehsinski, Eytan; de Menil, Georges; Murtin, Fabrice
  16. A Normative Analysis of Local Public Utilities: Investments in Water Networks By Alberto Cavaliere; Mario Maggi; Francesca Stroffolini
  17. Income insurance: a theoretical exercise with empirical application for the euro area By Nicolas Carnot; Phil Evans; Serena Fatica; Gilles Mourre
  18. Inequalities in an OLG economy with heterogeneity within cohorts and an obligatory pension systems By Marcin Bielecki; Joanna Tyrowicz; Krzysztof Makarski; Marcin Waniek
  19. Work and Welfare Reform: Impacts in the South West By Eileen Herden; Anne Power; Bert Provan

  1. By: Bernd Genser (Department of Economics, University of Konstanz, Germany)
    Keywords: income tax reform, taxation of pensions, deferred income taxation
    JEL: H2 H24 H55
    Date: 2015–05–26
  2. By: Ikeda Ryouichi (Graduate School of Economics, Osaka University)
    Abstract: In this paper, following the previous researches and considering the ease of the analysis, I researched about the relationship between consumption tax hike and frictional unemployment and economic growth. The largest differences from previous researches are that in this paper I consider consumption tax hike and that I consider three cases in that consumption tax gained from the tax increase is (1)cash backed to the household in the lump-sum manner, (2)used in the increase of unemployment benefit and (3)decrease of the rate of other taxes. The effect of consumption tax hike to the growth rate and employment depends on how the increased consumption tax is used. Especially, the decrease of capital tax (corporate tax) has a positive effect to the growth rate but itfs because of that effect that it decreases the employment rate.
    Keywords: consumption tax, corporate tax, tax reform, job search, frictional unemployment
    JEL: H20 H30 H50 H55 J64
    Date: 2015–05
  3. By: Dimitrios Varvarigos
    Abstract: I study the effects of tax evasion on economic growth by focusing on the cultural aspects of tax compliance and their effect on the extensive margin of tax evasion. A cultural norm that determines the contemptibility of tax dodging practices links the past incidence of tax evasion with the tax payers’ current incentives to conceal sources of income. This dynamic complementarity may lead to multiple equilibria in the evolution of tax evasion. Due to the latter’s effect on capital accumulation, this multiplicity may lead economies in divergent development paths, as long as they differ in the initial magnitude of tax evasion. This happens even though economies may be, on the outset, identical in terms of capital stock and structural characteristics, including those that govern tax enforcement.
    Keywords: Tax evasion; Economic Growth; Cultural Norms
    JEL: H26 O41 Z1
    Date: 2015–05
  4. By: Piero Gottardi (European University Institute); Atsushi Kajii (Kyoto University and Singapore Management University); Tomoyuki Nakajima (Kyoto University and CIGS)
    Abstract: We consider an economy where individuals face uninsurable risks to their human capital accumulation, and analyze the optimal level of linear taxes on capital and labor income together with the optimal path of government debt. We show that in the presence of such risks it is beneficial to tax both labor and capital and to issue public debt. We also assess the quantitative importance of these findings, and show that the benefits of government debt and capital taxes both increase with the magnitude of idiosyncratic risks and the degree of relative risk aversion.
    Keywords: incomplete markets; Ramsey equilibrium; optimal taxation; optimal public debt.
    JEL: D52 D60 D90 E20 E62 H21 O40
    Date: 2015–03
  5. By: Melanie Steinhoff
    Abstract: The empirical literature shows that management incentives often reduce corporate tax aggressiveness. Focussing on the riskiness of tax aggressiveness this paper offers one explanation for the observed negative relation. Using an agency framework, I analyze the manager's choice of effort dedication in other tasks and her explicit choice of the firm's tax risk. I show that corporate tax aggressiveness may decrease with compensation incentives. By choosing the tax risk, the manager (partly) determines her compensation risk. When the manager is assumed to be risk averse, an increase in compensation incentives motivates her to reduce her compensation risk through a less aggressive tax planning strategy. Further, a good governance structure may mitigate this effect of incentive compensation when marginal returns for tax planning are sufficiently low. I also demonstrate that the tax deductibility of performance-based pay yields less aggressive tax planning.
    Keywords: management incentives, hidden action, corporate tax planning
    JEL: H25 D82 D21
    Date: 2015–05
  6. By: Moretti, Enrico (University of California, Berkeley); Wilson, Daniel J. (Federal Reserve Bank of San Francisco)
    Abstract: Using data on the universe of U.S. patents filed between 1976 and 2010, we quantify how sensitive is migration by star scientists to changes in personal and business tax differentials across states. We uncover large, stable, and precisely estimated effects of personal and corporate taxes on star scientists’ migration patterns. The long run elasticity of mobility relative to taxes is 1.6 for personal income taxes, 2.3 for state corporate income tax and -2.6 for the investment tax credit. The effect on mobility is small in the short run, and tends to grow over time. We find no evidence of pre-trends: Changes in mobility follow changes in taxes and do not to precede them. Consistent with their high income, star scientists’ migratory flows are sensitive to changes in the 99th percentile marginal tax rate, but are insensitive to changes in taxes for the median income. As expected, the effect of corporate income taxes is concentrated among private sector inventors: no effect is found on academic and government researchers. Moreover, corporate taxes only matter in states where the wage bill enters the state’s formula for apportioning multi-state income. No effect is found in states that apportion income based only on sales (in which case labor’s location has little or no effect on the tax bill). We also find no evidence that changes in state taxes are correlated with changes in the fortunes of local firms in the innovation sector in the years leading up to the tax change. Overall, we conclude that state taxes have significant effect of the geographical location of star scientists and possibly other highly skilled workers. While there are many other factors that drive when innovative individual and innovative companies decide to locate, there are enough firms and workers on the margin that relative taxes matter.
    Date: 2015–04
  7. By: Jørn Rattsø (Department of Economics, Norwegian University of Science and Technology); Hildegunn E Stokke (Department of Economics, Norwegian University of Science and Technology)
    Abstract: The tax system may have welfare costs associated with the regional allocation of resources. Nominal income taxation distorts incentives to the disadvantage of high-cost regions. The incentive problem can be addressed by real income taxation internalizing cost of living differences. Our contribution is to expand the handling of regional allocation by including amenities in a broader horizontal equitable taxation. Good amenities and high quality of life allow for lower wages in migration equilibrium and may distort the resource allocation to the disadvantage of low amenity regions. We use a large dataset of individual wages and housing prices to identify regional wage and price differences. The regional resource allocation is analyzed in a calibrated migration equilibrium model of a representative household capturing the basics of the Norwegian income tax system. Tax reform handling the two types of distortions has important and opposite quantitative effects for the resource allocation across regions when amenities and cost of living are positively correlated as in the Norwegian data.
    Keywords: Income taxation, regional taxation, cost of living, amenities
    JEL: H24 H77 J61 R23
    Date: 2015–03–06
  8. By: Stefanie Stantcheva
    Abstract: This paper derives optimal income tax and human capital policies in a dynamic life cycle model of labor supply and risky human capital formation. The wage is a function of both stochastic, persistent, and exogenous "ability'' and endogenous human capital. Human capital is acquired throughout life through monetary expenses. The government faces asymmetric information regarding the initial ability of agents and the lifetime evolution of ability, as well as the labor supply. The optimal subsidy on human capital expenses is determined by three considerations: counterbalancing distortions to human capital investment from the taxation of wage and capital income, encouraging labor supply, and providing insurance against adverse draws from the productivity distribution. When the wage elasticity with respect to ability is increasing in human capital, the optimal subsidy involves less than full deductibility of human capital expenses on the tax base, and falls with age. I consider two ways to implement the optimum: income contingent loans, and a tax scheme that allows for a deferred deductibility of human capital expenses. Numerical results are presented that suggest that full dynamic risk-adjusted deductibility of expenses might be close to optimal, and that simple linear age-dependent policies can achieve most of the welfare gain from the second best.
    JEL: H21 H23 I21 I22 I24
    Date: 2015–05
  9. By: Soldatos, Gerasimos
    Abstract: This paper demonstrates theoretically that a profit tax does not affect the distribution of the firm’s operations between the official and the underground economy. Or, if the firm was initially operating only officially, direct taxation of its business would not be a reason to go underground. Indirect taxation in the form of a sales tax does influence an already existing mix of official and underground activities, favoring the latter. And, it does constitute a reason to “go underground” for an otherwise fully official business. This is a thesis robust to market structure changes and to introducing tax evasion in the usual sense, provided the underground demand is inelastic. The tax authority can still collect the planned tax revenue through a combination of a cash-flow tax with indirect taxation, under only consumer-surplus loss by the underground customer.
    Keywords: Inelastic underground demand, Business-tax shift, Tax policy
    JEL: D21 E26 H26
    Date: 2014
  10. By: Ryoji Ohdoi (Department of Social Engineering, Tokyo Institute of Technology); Koichi Futagami (Graduate School of Economics, Osaka University); Takeo Hori (College of Economics, Aoyama Gakuin University)
    Abstract: In this paper, we propose a neoclassical growth model with non-unitary discount- ing, where an individual discounts her future utilities from consumption and leisure differently. Because this non-unitary discounting induces the individual's preference reversals, we regard one individual as being composed of different selves. Then we derive the closed-form solution of the recursive competitive equilibrium in which her different selves behave in a time-consistent way in all periods. With regard to welfare analysis, we obtain the following three main results. First, the selves in any period strictly prefer the planning allocation to the laissez-faire allocation if they are given the same value of a state variable in both situations. Second, the selves in the long run can prefer the latter to the former allocation if we focus on the overall equilibrium paths in both situations. Third, a time-consistent tax policy designed by a benevolent government replicates the planning allocation.
    Keywords: Non-unitary discounting; Time-inconsistency; Intrapersonal game; Markov- perfect equilibrium; Time-consistent tax policy
    JEL: E21 H21 O41
    Date: 2015–05
  11. By: Jeffrey Grogger
    Abstract: To combat a growing obesity problem, Mexico imposed a nationwide tax on drinks with added sugar, popularly referred to as a “soda tax,” effective January 2014. I analyze data on taxed and untaxed products collected as part of Mexico’s Consumer Price Index program to estimate how prices responded to the tax. Prices of regular sodas jumped by more than the amount of the tax in the month that the tax took effect. The prices of other taxed drinks also rose, though by a smaller amount. Diet soda prices rose as well, suggesting that consumers may have substituted toward diet sodas after regular sodas became taxable. The prices of bottled water, pure (untaxed) juices, and milk were largely unchanged. A companion analysis of untaxed comparison products showed no general price increases around the time that the soda tax was imposed.
    JEL: H2 I1
    Date: 2015–05
  12. By: Bandyopadhyay, Subhayu (Federal Reserve Bank of St. Louis); Pinto, Santiago M. (Federal Reserve Bank of Richmond)
    Abstract: Reflecting recent enforcement policy activism of US states, this paper examines federal-state overlap of illegal immigration policy in a spatial context. Keeping the US-Mexico context in mind, we assume that labor from a source nation enters a host nation through bordering states. Once in the host, illegal immigrants may stay in the state of entry or move to another state. The host nation's federal government and/or the state governments choose border and internal enforcement policies, and also provide local goods. As a benchmark, we define the completely centralized solution as the case where the federal government chooses all the policies, while the state governments are passive. At higher levels of decentralization (i.e., as states take more responsibility in deciding some of the policies), the overlap of federal and state policies is associated with both vertical and horizontal externalities. Among other results, we find that if inter-state mobility is costless, internal enforcement is overprovided, and border enforcement and local goods are under-provided under decentralization, leading to relatively high levels of illegal immigration. While inter-state migration costs moderate such overprovision/under-provision, extreme levels of inter-state immobility may lead to too little illegal immigration, and an overprovision of local goods.
    Keywords: illegal immigration, vertical and horizontal externalities, border and internal enforcement, publicly provided local goods
    JEL: F2 H4 H7
    Date: 2015–05
  13. By: Ryu-ichiro Murota; Yoshiyasu Ono
    Abstract: We develop a Keynesian cross analysis with a dynamic optimization setting that explains long-run stagnation caused by aggregate demand deficiency. We show that an increase in government purchases boosts GDP through a multiplier process, but the implication is quite different from the conventional Keynesian one. It works not through an increase in disposable income but through moderation of deflation. Thus, countries that have lapsed into long-run stagnation should expand government spending that directly creates employment in order to reduce the deflationary gap.
    Date: 2015–05
  14. By: Stephen P Jenkins
    Abstract: This paper describes the UK income distribution and how it has evolved over the last 50 years. It also includes some comparisons with the income distributions of other rich countries. Multiple perspectives on the distribution are provided: there is evidence about real income levels and inequality, and the prevalence of affluence and of poverty.
    Keywords: Inequality, poverty, affluence, income distribution, United Kingdom
    JEL: D31 I32
    Date: 2015–02
  15. By: Shehsinski, Eytan; de Menil, Georges; Murtin, Fabrice
    Abstract: We argue that a rational-economic model of how societies choose their paygo tax rate can explain the cross section variance of these rates in large, developed OECD economies. Using a two-period OLG framework, we suggest that paygo tax rates are determined by a representative agent and a benevolent government jointly maximizing the expected life-time utility of the representative agent. In order to calculate these expected utilities, we construct probability distributions of life-time labor and capital income by simulating annual models of real wages and the return to capital estimated from data on real GDP and the real return to capital from the end of World War II to 2002. The joint distribution of the error terms is bootstrapped from the estmated errors of the annual equations. Expectations are taken over these distributions. The model predicts that each country chooses the paygo tax rate which maximizes the expected life-time utility of its representative agent. Risk aversion, described by a CRRA utility function, is assumed uniform across countries, such that the variance of the predicted rates is due exclusively to cross-country differences in the objective characteristics of the dynamics of wages and the return to capital in each country. These predicted rates are shown to explain 85% of the variance of observed effective-paygo rates. The calculations show that it is cross-country differences in the level and variability of the return to capital which are the most important source of this variance. We use the model to simulate a hypothetical world in which all countries share a unique, global capital market, and show that this scenario leads to a radical convergence of paygo rates. In a further exercise, we add an estimate of the probability of global crises like that of 2008 to the national distributions computed from post-War data, and examine the potential effect on paygo rates of these previously neglected, low probability events.
    Keywords: Pay-as-you-go, Savings, Risk Aversion, OLG, National Capital Markets
    JEL: H0
    Date: 2014
  16. By: Alberto Cavaliere; Mario Maggi; Francesca Stroffolini
    Abstract: We analyze rehabilitation investments in a regulated water industry with perfectly inelastic demand. We compare alternative organizational solutions for local provision (municipalization, corporatization and privatization), though subject to a common regulatory mechanism. We can then assess the effects of incentive regulation in public firms and find that even benvolent politicians always stick to the price-cap, in order to save on distortionary taxation. However, incentives to invest result to be excessive only in private firms, as the cost of capital is accounted differently by public and private undertakings. We also provide a theory of mixed firms, based on strategic interaction between politicians and managers, which contributes to endogenously explain partial privatization and minority participation by private stockholders. In this last case incentives to invest appear to be driven just by governance and ownership reasons.
    Keywords: price-cap regulation, mixed firms, partial privatization, water networks, inelastic demand, natural monopoly
    JEL: H42 L32
    Date: 2015
  17. By: Nicolas Carnot; Phil Evans; Serena Fatica; Gilles Mourre
    Abstract: The recent crisis has shown how economic shocks can lead to considerable and persistent cyclical divergences in the euro area. Successful monetary unions have generally been backed by fiscal arrangements providing income insurance against shocks. This paper reviews the potential issues, the underlying trade-offs and the necessary theoretical conditions to make an income insurance scheme workable, and provides an empirical application for the euro area. It also discusses ‘good’ design features, arguing that such schemes should focus on large shocks and exert a moderating effect during boom times, as well as provide cushioning against adverse shocks.
    JEL: E61 E62 F36 F42 H77
    Date: 2015–03
  18. By: Marcin Bielecki (Faculty of Economic Sciences, University of Warsaw); Joanna Tyrowicz (Faculty of Economic Sciences, University of Warsaw; National Bank of Poland); Krzysztof Makarski (National Bank of Poland; Warsaw School of Economics); Marcin Waniek (University of Warsaw)
    Abstract: While the inequalities of endowments are widely recognized as areas of policy intervention, the dispersion in preferences may also imply inequalities of outcomes. In this paper, we analyze the inequalities in an OLG model with obligatory pension systems. We model both policy relevant pension systems (a defined benefit system -- DB -- and a transition from a DB to a defined contribution system, DC). We introduce within cohort heterogeneity of endowments (individual productivities) and heterogeneity of preferences (preference for leisure and time preference). We introduce two policy instruments, which are widely used: a contribution cap and a minimum pension. In theory these instruments affect both the incentives to work and the incentives to save for the retirement with different strength and via different channels, but the actual effect attributable to these policy instruments cannot be judged in an environment with a single representative agent. We show four main results. First, longevity increases aggregate consumption inequalities substantially in both pension systems, whereas the effect of a pension system reform works to reinforce the consumption inequalities and reduce the wealth inequalities. Second, the contribution cap has negligible effect on inequalities, but the role for minimum pension benefit guarantee is more pronounced. Third, the reduction in inequalities due to minimum pension benefit guarantee is achieved with virtually no effect on capital accumulation. Finally, the minimum pension benefit guarantee addresses mostly the inequalities which stem from differentiated endowments and not those that stem from differentiated preferences.
    Keywords: inequality, longevity, defined contribution, defined benefit, Gini
    JEL: C68 E17 E21 J11 J26 H55 D63
    Date: 2015
  19. By: Eileen Herden; Anne Power; Bert Provan
    Abstract: In 2013, members of HAILO commissioned the London School of Economics and Political Science (LSE) to conduct an 18 month longitudinal study looking at how the government's welfare reform programme will influence tenants' work opportunities throughout the South West region. Recent welfare reforms are intended to encourage benefitdependent households to become more self-reliant, find and hold down work and take up training opportunities. HAILO has commissioned this research to look at whether the government's policies are delivering the expected outcomes, and what we as affordable landlords can do to support our residents. The research will provide HAILO members with independent and respected empirical evidence of what's working and what is not. This will enable HAILO to demonstrate to Government the adjustments needed in order to ensure that reforms truly lead to fulfilling employment for those who can work, while providing a fairer system for those who can't.
    Date: 2014–03

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