nep-pbe New Economics Papers
on Public Economics
Issue of 2015‒07‒18
sixteen papers chosen by
Thomas Andrén

  1. Designing Efficient College and Tax Policies By Findeisen, Sebastian; Sachs, Dominik
  2. Taxes and Executive Compensation: Evidence from Stock Options By Andrew Bird
  3. Effective Policy for Reducing Inequality? The Earned Income Tax Credit and the Distribution of Income By Hilary W. Hoynes; Ankur J. Patel
  4. Corporate Tax Policy and Industry Location with Fully Endogenous Productivity Growth By Colin Davis; Ken-ichi Hashimoto
  5. Life-Cycle Incidence of Family Policy Measures in Germany: Evidence from a Dynamic Microsimulation Model By Holger Bonin; Karsten Reuss; Holger Stichnoth
  6. The Optimal Use of Government Purchases for Macroeconomic Stabilization By Pascal Michaillat; Emmanuel Saez
  7. The Optimal Timing of Unemployment Benefits: Theory and Evidence from Sweden By Kolsrud, Jonas; Landais, Camille; Nilsson, Peter; Spinnewijn, Johannes
  8. Sustaining the economic expansion in New Zealand By Corinne Luu
  9. The Effects of the Earned Income Tax Credit on Children's Health, Quality of Home Environment, and Non-Cognitive Skills By Averett, Susan L.; Wang, Yang
  10. The Impact of Fiscal Decentralization: A Survey By Jorge Martinez-Vazquez; Santiago Lago-Peñas; Agnese Sacchis
  11. Migration and Social Insurance By Helmut CREMER; Catarina GOULÃO
  12. Means Testing versus Basic Income: The (Lack of) Political Support for a Universal Allowance By Cremer, Helmuth; Roeder, Kerstin
  13. Household Responses to Severe Health Shocks and the Design of Social Insurance By Itzik Fadlon; Torben Heien Nielsen
  14. Compliance with Endogenous Audit Probabilities By Kai A. Konrad; Tim Lohse; Salmai Qari
  15. Modelling the Joint Distribution of Income and Wealth By Jäntti, Markus; Sierminska, Eva; Van Kerm, Philippe
  16. Top Incomes in Canada: Evidence from the Census By Lemieux, Thomas; Riddell, W. Craig

  1. By: Findeisen, Sebastian; Sachs, Dominik
    Abstract: The total social benefits of college education exceed the private benefits because the government receives a share of the monetary returns in the form of income taxes. We study the policy implications of this fiscal externality in an optimal dynamic tax framework. Using a variational approach we derive a formula for the revenue effect of an increase in college education subsidies and for the excess burden of income taxation caused by the college margin. We also show how the optimal nonlinear income tax problem is altered by the college margin. Our modeling assumptions are strongly guided by the recent structural labor literature on college education. The model incorporates multidimensional heterogeneity, idiosyncratic risk and borrowing constraints. The model matches key empirical results on college enrollment patterns, returns to education and enrollment elasticities. Quantitatively, we find that a marginal increase in college subsidies in the US is at least 70 percent self-financing through the net-present value increase in future tax revenue. When targeting this increase to children in the lowest parental income tercile, it is even up to 165 percent self-financing. The excess burden of income taxation is only slightly altered by the college margin and therefore the optimal Mirrleesian income tax schedule is barely affected as well, in particular if subsidies are set at their optimal level.
    Keywords: Optimal Taxation , College Subsidies , College Enrollment , Tax Reforms
    JEL: H21 H23 I22 I24 I28
    Date: 2015
  2. By: Andrew Bird
    Abstract: Understanding the effects of taxes on executive compensation provides insight into the process determining this compensation and is a key input to top income tax rate policy. A recent tax reform in Canada, which greatly increased the effective tax rate on stock option compensation for a subset of firms, provides a natural experiment with which to address this question. Difference-in-differences estimates suggest that this tax increase resulted in an immediate reduction in both stock option grants and the fraction of total compensation made up of stock options with limited, if any, substitution towards other components of compensation.
  3. By: Hilary W. Hoynes; Ankur J. Patel
    Abstract: In this paper, we examine the effect of the EITC on the employment and income of single mothers with children. We provide the first comprehensive estimates of this central safety net policy on the full distribution of after-tax and transfer income. We use a quasi-experiment approach, using variation in generosity due to policy expansions across tax years and family sizes. Our results show that a policy-induced $1000 increase in the EITC leads to a 7.3 percentage point increase in employment and a 9.4 percentage point reduction in the share of families with after-tax and transfer income below 100% poverty. Event study estimates show no evidence of differential pre-trends, providing strong evidence in support of our research design. We find that the income increasing effects of the EITC are concentrated between 75% and 150% of income-to-poverty with little effect at the lowest income levels (50% poverty and below) and at levels of 250% of poverty and higher. By capturing the indirect effects of the credit on earnings, our results show that static calculations of the anti-poverty effects of the EITC (such as those released based on the Supplemental Poverty Measure, Short 2014) may be underestimated by as much as 50 percent.
    JEL: H2 I38 J2
    Date: 2015–07
  4. By: Colin Davis (The Institute for the Liberal Arts, Doshisha University); Ken-ichi Hashimoto (Graduate School of Economics, Kobe University)
    Abstract: This papers considers how national corporate tax policy affects productivity growth through adjustments in geographic patterns of industry in a two-country model of trade. With trade costs and imperfect knowledge spillovers between countries, production concentrates partially and innovation concentrates fully in the country with the lowest tax rate. When firms have weak (strong) monopoly power, a decrease in the tax rate of the low-tax-rate country depresses (accelerates) productivity growth. The paper also investigates the relationship between relative tax rates and the level of product variety, and analytically characterizes the effects of changes in tax policy on national welfare.
    Keywords: National Corporate Tax Policy, Fully Endogenous Productivity Growth, Monopoly Power, Industry Concentration
    JEL: F43 O30 O40 R12
    Date: 2015–07
  5. By: Holger Bonin; Karsten Reuss; Holger Stichnoth
    Abstract: This paper quantifies the life-cycle incidence of key family policy measures in Germany. The analysis is based on a novel dynamic microsimulation model that combines simulated family life-cycles for a base population from the 2009 wave of the German Socio-Economic Panel (SOEP) with a comprehensive tax-benefit model. The results indicate that households in Germany benefit considerably from family- and marriage-related transfers, yet also reveal substantial variation behindthe population average. Moreover, it is shown that some measures, such as income tax splitting, may make individuals in fact worse off, in financial terms, over the long course, as a result of negative labour supply incentives which are reinforced through detrimental effects on human capital accumulation.
    Keywords: Dynamic microsimulation, family policy, Germany
    JEL: C53 C54 J12 J13 J22
    Date: 2015
  6. By: Pascal Michaillat; Emmanuel Saez
    Abstract: This paper extends Samuelson's theory of optimal government purchases by considering the contribution of government purchases to macroeconomic stabilization. We consider a matching model in which unemployment can be too high or too low. We derive a sufficient-statistics formula for optimal government purchases. Our formula is the Samuelson formula plus a correction term proportional to the government-purchases multiplier and the gap between actual and efficient unemployment rate. Optimal government purchases are above the Samuelson level when the correction term is positive-for instance, when the multiplier is positive and unemployment is inefficiently high. Our formula indicates that US government purchases, which are mildly countercyclical, are optimal under a small multiplier of 0.03. If the multiplier is larger, US government purchases are not countercyclical enough. Our formula implies significant increases in government purchases during slumps. For instance, with a multiplier of 0.5 and other statistics calibrated to the US economy, when the unemployment rate rises from the US average of 5.9% to 9%, the optimal government purchases-output ratio increases from 16.6% to 19.8%. However, the optimal ratio increases less for multipliers above 0.5 because with higher multipliers, the unemployment gap can be filled with fewer government purchases. For instance, with a multiplier of 2, the optimal ratio only increases from 16.6% to 17.6%.
    JEL: E32 E62 H21 H41
    Date: 2015–07
  7. By: Kolsrud, Jonas (Uppsala University); Landais, Camille (London School of Economics); Nilsson, Peter (IIES, Stockholm University); Spinnewijn, Johannes (London School of Economics)
    Abstract: This paper provides a simple, yet general framework to analyze the optimal time profile of benefits during the unemployment spell. We derive simple sufficient-statistics formulae capturing the insurance value and incentive costs of unemployment benefits paid at different times during the unemployment spell. Our general approach allows to revisit and evaluate in a transparent way the separate arguments for inclining or declining profiles put forward in the theoretical literature. We then estimate our sufficient statistics using administrative data on unemployment, income and wealth in Sweden. First, we exploit duration-dependent kinks in the replacement rate and find that the moral hazard cost of benefits is larger when paid earlier in the spell. Second, we find that the drop in consumption determining the insurance value of benefits is large from the start of the spell, but further increases throughout the spell. On average, savings and credit play a limited role in smoothing consumption. Our evidence therefore indicates that the recent change from a flat to a declining benefit profile in Sweden has decreased welfare. In fact, the local welfare gains push towards an increasing rather than decreasing benefit profile over the spell.
    Keywords: unemployment, dynamic policy, sufficient statistics, consumption smoothing
    JEL: H20 J64
    Date: 2015–07
  8. By: Corinne Luu
    Abstract: The NZ economy has performed well over the past few years, having achieved relatively strong GDP and employment growth. However, some constraints to sustaining this momentum beyond the short term are emerging in the fields of skills, housing and urban infrastructure. Skills shortages have risen most in construction trades and management occupations. Housing shortages are most severe in Auckland, reflecting supply constraints in the face of population increases. As a result, prices are rising, reducing affordability. Urban infrastructure, particularly for road transportation, is also strained. In this respect, policy has a role to play in expanding economic capacity by reducing supply-side constraints and fostering productivity growth. At times New Zealand’s fiscal policy has been expansionary during upturns. Ensuring that permanent spending or tax cuts are implemented in a sustainable manner would encourage the strong fiscal position that New Zealand needs to meet potentially large macroeconomic shocks and long-run ageing-related costs. This Working Paper relates to the 2015 OECD Economic Review of New Zealand (<P>Pérenniser la croissance en Nouvelle-Zélande<BR>L’économie néo-zélandaise a enregistré de bons résultats durant ces dernières années, et le PIB tout comme l’emploi ont bénéficié de taux de croissance relativement élevés. Toutefois, cette dynamique pourrait être contrariée à moyen terme par plusieurs difficultés émergentes en matière de compétences, de logement et d’infrastructures urbaines. Les pénuries de compétences affectent principalement les métiers de la construction et les fonctions d’encadrement. Le déficit de logements est avant tout marqué à Auckland, en raison des contraintes pesant sur l’offre de logements et de l’accroissement démographique. Les prix sont donc tirés à la hausse tandis que les possibilités d’accéder au logement diminuent. Les infrastructures, notamment les réseaux routiers, présentent également des insuffisances. À cet égard, les politiques publiques peuvent contribuer à accroître les capacités économiques, en réduisant les contraintes sur le versant de l’offre, et en favorisant les gains de productivité. Par le passé, la Nouvelle-Zélande a suivi une politique budgétaire expansionniste durant certaines phases de reprise économique. Il convient de s’assurer de la viabilité financière à long terme de toute mesure entraînant des dépenses budgétaires ou fiscales permanentes, afin que la Nouvelle-Zélande se trouve dans une situation budgétaire solide lui permettant de faire face à d’éventuels chocs macroéconomiques d’importance et d’assumer, à plus long terme, les coûts liés au vieillissement de sa population. Ce Document de travail se rapporte à l’Étude économique de l’OCDE de la Nouvelle-Zélande 2015 ( conomique-nouvelle-zelande.htm).
    Keywords: fiscal policy, infrastructure, immigration, housing prices, saving, urban planning, labour market, fiscal councils
    JEL: E21 G28 H54 H6 J2 J61 R31 R4 R52
    Date: 2015–07–09
  9. By: Averett, Susan L. (Lafayette College); Wang, Yang (Lafayette College)
    Abstract: In 1993, the benefit levels of the Earned Income Tax Credit (EITC) were changed significantly based on the number of children in the household. Employing a difference-in-differences plus mother fixed-effects framework, we find better mother-rated health for children of unmarried black mothers and married white and Hispanic mothers, lower accident rates for children of married white and Hispanic mothers, and improved home environment quality for children of unmarried white and Hispanic mothers. Our results provide new evidence of the effects of the 1993 EITC expansion and therefore have important policy implications.
    Keywords: EITC, child health, home environment, non-cognitive skills
    JEL: I12 I38 J13
    Date: 2015–07
  10. By: Jorge Martinez-Vazquez (International Center for Public Policy. Andrew Young School of Policy Studies, Georgia State University); Santiago Lago-Peñas (GEN, IEB, and University of Vigo); Agnese Sacchis (Universitas Mercatorum (Italy) and GEN)
    Abstract: In this paper we offer a comprehensive and updated review of the impact of fiscal decentralization on the economy, society and politics. We start with the examination of two crucial and yet unsolved issues in the literature on decentralization: its proper measurement and the potential endogeneity of fiscal decentralization with many of the variables of interest we are trying to investigate. Then we discuss the main findings in the existing literature on the effects of decentralization on a relevant list of socio-economic variables. The impact of fiscal decentralization reforms on political institutions is also considered. Complete answers to the many questions on the impact of fiscal decentralization are not likely to be certain but overall there are reasons to be optimistic about the overall positive impact of the decentralized systems that have been introduced all over the world in the past several decades. The survey offered in this paper by necessity has to be selective but it presents a balanced view of what is known and what is not yet known opening room for further research and practice on fiscal decentralization.
    Date: 2015–06–15
  11. By: Helmut CREMER (Toulouse School of Economics, GREMAQ, IDEI and Insitut Universitaire de France); Catarina GOULÃO (Toulouse School of Economics, GREMAQ, INRA)
    Abstract: Mobility across countries is often suspected to affect the coexistence of different social insurance systems. A wide variety of social protection systems exist within the EU. Some are of Beveridgean inspiration (with universal and more or less flat benefits), while others are mainly Bismarckian (with benefits related to past contributions). Concerns about the sustainability of the most generous and redistributive (Beveridgean) insurance systems are often based on the assumption of (near) perfect and costless mobility. In reality, labor mobility remains limited. Such low levels of migration rates could, mistakenly, lead to the conclusion that migration would currently not be affecting the redistributive social insurance systems. We address this issue in a two-country setting, where mobility is costly and where individuals differ in mobility cost (attachment to their native country). A Bismarckian insurance system is not affected by migration while a Beveridgean one is. Our results suggest that the race-to-the-bottom affecting tax rates may be more important under Beveridge-Beveridge competition than under Beveridge-Bismarck competition. Finally, we study the strategic choice of the type of social protection. We show that Bismarckian governments may find it beneficial to adopt a Beveridgean insurance system.
    Keywords: Social Insucrance, Tax Competition, Mobility, Economic integration
    JEL: H23 H70
    Date: 2014–03–01
  12. By: Cremer, Helmuth (Toulouse School of Economics); Roeder, Kerstin (University of Augsburg)
    Abstract: This paper studies the political economy of a basic income (BI) versus a means tested welfare scheme. We show in a very simple setting that if society votes on the type of system, its generosity as well as the "severity" of means testing (if any), a BI system could only emerge in the political equilibrium under very strong and empirically implausible conditions. Instead, the political process leads to a means tested system. The necessity to draw political support does affect the design of the system, but it only implies that means testing becomes less severe so that benefits are extended also to the middle classes. However, a fully universal system is rejected by a majority.
    Keywords: basic income, means testing, political support
    JEL: D3 D7 H2 H5
    Date: 2015–07
  13. By: Itzik Fadlon; Torben Heien Nielsen
    Abstract: This paper studies how households respond to severe health shocks and the insurance role of spousal labor supply. In the empirical part of the paper, we provide new evidence on individuals' labor supply responses to spousal health and mortality shocks. Analyzing administrative data on over 500,000 Danish households in which a spouse dies, we find that survivors immediately increase their labor supply and that this effect is entirely driven by those who experience significant income losses due to the shock. Notably, widows – who experience large income losses when their husbands die – increase their labor force participation by more than 11%, while widowers – who are significantly more financially stable – decrease their labor supply. In contrast, studying over 70,000 households in which a spouse experiences a severe health shock but survives – for whom income losses are well-insured in our setting – we find no economically significant spousal labor supply responses, suggesting adequate insurance coverage for morbidity (vs. mortality) shocks. In the theoretical part of the paper, we develop a method for welfare analysis of social insurance using only spousal labor supply responses. In particular, we show that the labor supply responses of spouses fully identify the welfare gains from insuring households against health and mortality shocks. Our findings imply large welfare gains from transfers to survivors and identify efficient ways for targeting government transfers.
    JEL: H0 I1 J1 J2
    Date: 2015–07
  14. By: Kai A. Konrad; Tim Lohse; Salmai Qari
    Abstract: This paper studies the effect of endogenous audit probabilities on reporting behavior in a face-to-face compliance situation such as at customs. In an experimental setting in which underreporting has a higher expected payoff than truthful reporting we find an increase in compliance of about 80% if subjects have reason to believe that their behavior towards an officer influences their endogenous audit probability. Higher compliance is driven by considerations about how own appearance and performance affect their audit probability, rather than by social and psychological effects of face-to-face contact.
    Keywords: Compliance, audit probability, tax evasion, face value, customs
    JEL: H26 H31 C91 K42
    Date: 2015
  15. By: Jäntti, Markus (SOFI, Stockholm University); Sierminska, Eva (LISER (CEPS/INSTEAD)); Van Kerm, Philippe (LISER (CEPS/INSTEAD))
    Abstract: This paper considers a parametric model for the joint distribution of income and wealth. The model is used to analyze income and wealth inequality in five OECD countries using comparable household-level survey data. We focus on the dependence parameter between the two variables and study whether accounting for wealth and income jointly reveals a different pattern of social inequality than the traditional 'income only' approach. We find that cross-country variations in the dependence parameter effectively accounts only for a small fraction of cross-country differences in a bivariate measure of inequality. The index appears primarily driven by differences in inequality in the wealth distribution.
    Keywords: income, wealth, inequality, copula, multivariate Gini
    JEL: C1 D31 J10
    Date: 2015–07
  16. By: Lemieux, Thomas; Riddell, W. Craig
    Abstract: This paper looks at the evolution of incomes at the top of the distribution in Canada. Master files of the Canadian Census are used to study the composition of top income earners between 1981 and 2011. Our main finding is that, as in the United States, executives and individuals working in the financial and business services sectors are the two most important groups driving the growth in top incomes in Canada. A finding more specific to Canada is that the oil and gas sector has also played an important role in income growth at the top, especially in more recent years. Another arguably Canadian-specific finding is that holders of medical degrees have lost ground compared to other top income earners. Finally, despite the IT revolution, scientists, engineers and even computer scientists do not account for much of the growth in top incomes in Canada.
    Keywords: income inequality, top incomes, labour’s share, executive compensation, rent extraction
    JEL: D31 D33 G30 H24
    Date: 2015–07–07

This nep-pbe issue is ©2015 by Thomas Andrén. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.