nep-pbe New Economics Papers
on Public Economics
Issue of 2015‒08‒07
thirteen papers chosen by
Thomas Andrén

  1. Pareto Weights in Practice: Income Inequality and Tax Reform By Yongsung Chang; Sun-Bin Kim; Bo Hyun Chang
  2. Introducing an IP Licence Box in Switzerland: Quantifying the Effects By Marko Köthenbürger; Florian Chatagny; Michael Stimmelmayr
  3. A Variational Approach to the Analysis of Tax Systems By Nicolas Werquin; Aleh Tsyvinski; Mikhail Golosov
  4. The Welfare State and Migration:Coalition-formation dynamics By Assaf Razin
  5. Intergenerational Disagreement and Optimal Taxation of Parental Transfers By Hakki Yazici; Nicola Pavoni
  6. The impact of government size on economic growth: a threshold analysis By Stylianos Asimakopoulos; Yiannis Karavias
  7. The Impacts of Switching from a Volumetric Fuel Tax to a Mileage Tax By O'Rear, Eric G.; Sarica, Kemal; Tyner, Wallace E.
  8. Do Right to Work Laws Worsen Income Inequality? Evidence from the Last Five Decades By Munasib, Abdul; Jordan, Jeffrey L.; Mathur, Aparna; Roy, Devesh
  9. Welfare Rules, Incentives, and Family Structure By Robert A. Moffitt; Brian J. Phelan; Anne E. Winkler
  10. Is VAT on Agricultural Inputs Cost Effective? By Swaibu, Mbowa; Steven, Were Omamo; Joseph, Rusike
  11. Household Surveys in Crisis By Bruce D. Meyer; Wallace K.C. Mok; James X. Sullivan
  12. The effects of special economic zones on employment and investment: spatial panel modelling perspective By Piotr Ciżkowicz; Magda Ciżkowicz-Pękała; Piotr Pękała; Andrzej Rzońca
  13. Seniority Wages and the Role of Firms in Retirement By Frimmel, Wolfgang; Horvath, Gerard Thomas; Schnalzenberger, Mario; Winter-Ebmer, Rudolf

  1. By: Yongsung Chang (University of Rochester / Yonsei Univ.); Sun-Bin Kim (Yonsei University); Bo Hyun Chang (University of Rochester)
    Abstract: We develop a quantitative, heterogeneous-agents general equilibrium model that reproduces the income inequalities of 31 countries in the Organization for Economic Co-operation and Development. Using this model, we compute the optimal income tax rate for each country under the equal-weight utilitarian social welfare function. We simulate the voting outcome for the utilitarian optimal tax reform for each country. Finally, we uncover the Pareto weights in the social welfare functions of each country that justify the current redistribution policy.
    Date: 2015
  2. By: Marko Köthenbürger (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Florian Chatagny (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Michael Stimmelmayr (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: In response to the increasing international pressure on Switzerland to reform the ring-fenced elements in its tax system, the Swiss Government has put forward a comprehensive tax reform package. The proposal comprises, among other things, the introduction of a licence box, a substantial reduction in the cantonal profit tax rates and an allowance for excess corporate equity. We apply a computable general equilibrium model to quantify the economic effects of this reform. Our results reveal that the licence box, combined with the reduction in the cantonal profit tax, limits the outflow of the tax base of those companies that benefit from the current preferential tax treatment. The reduction in the cantonal profit tax and the fact that regularly taxed companies also benefit from the licence box render the reform package costly, such that the tax revenues will decline after the reform.
    Keywords: Tax Competition, Licence Box, Corporate Tax Reform, General Equilibrium Model
    JEL: H25 H32 C68
    Date: 2015–07
  3. By: Nicolas Werquin (Yale University); Aleh Tsyvinski (Yale University); Mikhail Golosov (Princeton University)
    Abstract: We develop a general method to study the effects of non-linear taxation in dynamic settings using variational arguments. We first derive general theoretical formulas that characterize the welfare effects of local tax reforms and, in particular, the optimal tax system, potentially restricted within certain classes (e.g., age-independent, linear, separable). These formulas are expressed in terms of intuitive parameters, such as the labor and capital income elasticities and the hazard rates of the income distributions. Second, we apply these formulas to various specific settings. In particular, we decompose the gains arising from each element of tax reform, starting from a simple baseline system, as the available tax instruments become more sophisticated. We further show that the design of tax systems obeys a common general principle, namely that more sophisticated tax instruments (e.g., age-dependent, non-linear, non-separable) allow the government to fine-tune the tax rates by targeting higher distortions to the segments of the population whose behavior responds relatively little to those taxes.
    Date: 2015
  4. By: Assaf Razin (tel aviv university)
    Abstract: We develop a dynamic political-economic theory of welfare state and immigration policies, featuring three distinct voting groups: skilled work- ers, unskilled workers, and old retirees. The essence of inter - and intra- generational redistribution of a typical welfare system is captured with a proportional tax on labor income to nance a transfer in a balanced- budget manner. We provide an analytical characterization of political- economic equilibrium policy rules consisting of the tax rate, the skill com- position of migrants, and the total number of migrants. When none of these groups enjoy a majority (50 percent of the voters or more), political coalitions will form. With overlapping generations and policy-determined influx of immigrants, the formation of the political coalitions changes over time. These future changes are taken into account when policies are shaped.
    Date: 2015
  5. By: Hakki Yazici (Sabanci University); Nicola Pavoni (Bocconi University)
    Abstract: We study optimal taxation of bequests and inter vivos transfers in a model where altruistic parents and their offspring disagree on intertemporal trade-offs. We show that laissez-faire equilibrium is Pareto inefficient, and whenever offspring are impatient from their parents' perspective, optimal policy involves a positive tax on parental transfers. Cautioned by the technical complications present in this class of models, our normative prescriptions do not rely on the assumption of differentiability of the agents’ policy functions.
    Date: 2015
  6. By: Stylianos Asimakopoulos; Yiannis Karavias
    Abstract: This paper examines the nature of the relationship between government size and economic growth and identifies the optimal level of government size through a novel and very general non-linear panel Generalized Method of Moments approach. Using a large panel dataset we uncover a statistically significant non-linear relationship via identifying the optimal threshold of government spending that maximizes growth. Furthermore, we show that the relationship between the two variables above and below that optimal level is statistically significant, even if we split our sample to developed and developing countries. Finally, we fi?nd an asymmetric impact of government size on economic growth in developed and developing countries around the estimated threshold.
    Keywords: government size, economic growth, dynamic threshold estimation JEL Classification: E62, C23, O11, O50
  7. By: O'Rear, Eric G.; Sarica, Kemal; Tyner, Wallace E.
    Abstract: I. Overview For close to a century fuel taxes have been used to finance the building, operations, and maintenance of the US transportation system. The contributions of tax revenues in real terms, however, have been consistently declining in the recent decade as average national tax rates have not budged since 1993 and failed to keep up with inflation – resulting in substantial losses in purchasing power. This coupled with the fact that average fuel economy levels for newer light-duty vehicles continues to improve given recent government legislation, fewer tax revenues can be recouped. Costs associated with constructing and maintaining transportation systems have increased over time, growing at faster rates than fuel tax revenues. The impacts of declining revenue streams on US highways have led to almost $130 billion in economic losses (in the form of increased vehicle repair and time costs). In order to correct the problem of eroding tax revenues groups such as the National Surface Transportation Infrastructure Finance Commission support the replacement of the current tax system with a tax on vehicle miles traveled (VMT) with hopes of encouraging less driving and creating more sustainable streams of revenue. Unlike a fuel tax, mileage charges directly target miles driven by consumers, which helps to lower fuel use and driving externality costs. One of the primary issues with the tax, however, is that it does not encourage the use of more fuel-efficient vehicles. So any reductions in emissions achieved by less driving could be displaced by the emissions of more heavily used, dirtier conventional automobiles. Our study compares a national VMT tax with the existing volumetric fuel tax system, observing the interaction between mileage charges and enacted policies such as the Renewable Fuels Standard (RFS) and the Corporate Average Fuel Economy (CAFE) Standard. II. Methodology The responsiveness of LDVs to a series of mileage taxes is observed using an elastic version of the US EPA MARKAL model. MARKAL is a bottom-up, demand-driven, partial equilibrium model that relies on linear optimization techniques to simultaneously minimize total system costs and maximize net total surplus. Exogenous end-use demands are satisfied using the most efficient and least-cost combination of technologies and primary resource usage rates chosen by the model. It operates on data supplied by the EPA National MARKAL database, which includes information on the five primary economic sectors. Existing fuel taxes are compared with three versions of a mileage-based tax. The first is a VMT charge ($/mile) set equivalent to the baseline national average gasoline tax ($0.49/gallon) and increases 1% annually. The second tax is tuned to achieve similar tax revenues as our series of baseline volumetric fuel taxes over time. The final VMT charge internalizes congestion, air pollution, oil dependency, and other driving-related externality costs. It is imperative that consideration for current environmental regulations and programs that either directly or indirectly impact the transportation sector is given to better understand differences in the ways mileage taxes interact with these policies. The current Renewable Fuels Standard is modeled alongside President Obama’s recent increases in CAFE standards which require that average fuel economy reach 54.5 miles per gallon by 2025 for LDVs. Plug-in hybrid-electric vehicles (PHEV) purchased after 2010 are eligible for a tax credit worth up to $7,500 based on the battery capacity. For simplicity, we assume that the $7,500 credit is applicable to all PHEVs and is deducted from annual investment costs for each type of plug-in hybrid vehicle III. Results Our first series of results in which we compare current fuel taxes to VMT tax rates set according to baseline fuel economy levels (Case 1), suggest that mileage charges begin to generate more revenue after complete implementation of newer CAFÉ standards in year 2025. Consumers respond to higher CAFE standards by driving more energy-efficient vehicles like PHEVs. These vehicles escape paying fuel taxes either partially or completely by using electricity instead of gasoline – thereby resulting in fewer fuel tax revenues. Under mileage taxes they face similar taxes as conventional vehicles and will now have a greater contribution to tax revenues. Case 2 directly contrasts fuel taxes and revenue-neutral mileage taxes. We discover that the revenue-neutral taxes fail to achieve any additional reductions in VMT. And the LDV fleet will experience an average loss in energy-efficiency as the tax structure switches from fuel to mileage taxes. CAFE increases and PHEV credits modeled help ensure that minimum fleet average efficiency will be achieved. However, VMT taxes prevent efficiency levels from improving much beyond this point partly due to their discouraging of the use of plug-in hybrid vehicles. Market responses to VMT taxes urge the substitution of the heavier gasoline-ethanol blend E85 (15% gasoline/85% ethanol) to one comprised of only 10% ethanol (E10). The implications of lower ethanol demands on the RFS are significant, as cellulosic ethanol is no longer used to meet fuel demands. However, there is a ramp up in the production of cheaper thermochemical fuels in order to satisfy RFS biofuel requirements. Similar to Case 2, internalizing driving externalities within VMT rates (Case 3) produce far greater reductions in miles driven, fuel use, and transportation sector emissions than fuel taxes internalizing similar externality costs. The switch from E85 to E10 occurs as well but at a much larger magnitude given higher VMT tax rates. IV. Conclusion Our work removes some of the ambiguity surrounding VMT taxes by confirming that mileage taxes have the ability to produce more revenues at both the state and federal levels at the expense of the overall LDV fleet becoming less fuel-efficient; and depending on their level of stringency, they can produce rather noticeable reductions in miles driven, total energy use, and greenhouse gas emissions. There exists potential for economic losses which continue to deepen as VMT tax rates increase. In other words, the higher VMT tax rates become, the more harmful they will be to US economic performance. Switching tax schemes showcased the possibility of spurring variations in the types of “green” fuels consumed. Mileage taxes have proven that they could potentially jumpstart the production of thermochemical gasoline and diesel replacing cellulosic ethanol as a part of the cellulosic biofuel requirement identified under the national RFS.
    Keywords: gasoline taxes, mileage taxes, MARKAL, Resource /Energy Economics and Policy,
    Date: 2015
  8. By: Munasib, Abdul; Jordan, Jeffrey L.; Mathur, Aparna; Roy, Devesh
    Abstract: There is an ongoing debate about whether changes in labor regulations such as Right to Work (RTW) laws are contributing to the rising trend of income inequality in the U.S. We adopt Synthetic Control Method (SCM) for comparative case study to examine the impact of a state’s adoption of RTW law on its income inequality. We use a wide range of inequality measures for Idaho, Louisiana, Oklahoma and Texas, states that enacted RTW between the 1960s and the 2000s. We find that RTW did not impact income inequality in these states. This result is underpinned by additional finding of a lack of impact of RTW on unionization and investment.
    Keywords: Right to Work, Synthetic Control, unionization, inequality, Consumer/Household Economics, Labor and Human Capital, Political Economy, Public Economics, J01, J08, J23, J38, J39, J51, L59,
    Date: 2015
  9. By: Robert A. Moffitt (Department of Economics, Johns Hopkins University); Brian J. Phelan (Department of Economics, DePaul University); Anne E. Winkler (Department of Economics, University of Missouri-St. Louis)
    Abstract: In this study we provide a new examination of the incentive effects of welfare rules on family structure. Focusing on the AFDC and TANF programs, we first emphasize that the literature, by and large, has assumed that the rules of those programs make a key distinction between married women and cohabiting women, but this is not a correct interpretation. In fact, it is the biological relationship between the children and any male in the household that primarily determines how the family is treated. In an empirical analysis conducted over the period 1996 to 2004 that correctly matches family structure outcomes to welfare rules, we find significant effects of several welfare policies on family structure, both work-related policies and family-oriented policies, effects that are stronger than in most past work. Many of our significant effects show that these rules led to a decrease in single motherhood and an increase in biological partnering. For all of our results, our findings indicate that the impact of welfare rules crucially hinges on the biological relationship of the male partner to the children in the household.
    Keywords: family structure, welfare, incentive effects.
    JEL: I38 J1
    Date: 2015–06
  10. By: Swaibu, Mbowa; Steven, Were Omamo; Joseph, Rusike
    Abstract: This policy brief summarizes the results of preliminary analysis to quantify the potential farm-level and aggregate impacts of the proposed imposition of 18% value added tax (VAT) on key agricultural inputs in Uganda. Results reveal that the potential costs of the proposed imposition of VAT on agricultural inputs appear to far outweigh the potential benefits. The impact of VAT imposition on maize seed and fertilizer is estimated to contribute total tax revenues of $10.29 million compared to estimated total losses to maize farmers of $20.93 million. This implies a benefit-cost ratio (BCR) of 0.49. This ratio of benefits to costs is well below acceptable levels; and if other commodities, inputs, and other impact channels (e.g., the “output price effect”)were considered, the BCR could be even much lower. In conclusion, the proposed measure undermines basic agricultural and broader economic growth and development objectives; and the ratio of benefits to costs renders the proposed measure unjustifiable based on economic arguments. Therefore, the proposed measure should be reconsidered; and alternative sources of revenue sought.
    Keywords: Agribusiness, Agricultural Finance, Farm Management, International Relations/Trade, Land Economics/Use, Marketing,
    Date: 2014–08
  11. By: Bruce D. Meyer; Wallace K.C. Mok; James X. Sullivan
    Abstract: Household surveys, one of the main innovations in social science research of the last century, are threatened by declining accuracy due to reduced cooperation of respondents. While many indicators of survey quality have steadily declined in recent decades, the literature has largely emphasized rising nonresponse rates rather than other potentially more important dimensions to the problem. We divide the problem into rising rates of nonresponse, imputation, and measurement error, documenting the rise in each of these threats to survey quality over the past three decades. A fundamental problem in assessing biases due to these problems in surveys is the lack of a benchmark or measure of truth, leading us to focus on the accuracy of the reporting of government transfers. We provide evidence from aggregate measures of transfer reporting as well as linked microdata. We discuss the relative importance of misreporting of program receipt and conditional amounts of benefits received, as well as some of the conjectured reasons for declining cooperation and survey errors. We end by discussing ways to reduce the impact of the problem including the increased use of administrative data and the possibilities for combining administrative and survey data.
    JEL: C42 C81 D31 H53 H55 I32 I38
    Date: 2015–07
  12. By: Piotr Ciżkowicz; Magda Ciżkowicz-Pękała; Piotr Pękała; Andrzej Rzońca
    Abstract: We estimate the set of panel and spatial panel data models of employment and investments for 379 Polish counties over the period 2003-2012. We take advantage of a unique firm-level dataset for Polish Special Economic Zones (SSEs), which includes about 30,000 observations. We find that SSEs have substantial positive effects on employment: jobs in a given SSE create jobs outside the SSE in hosting county and even more jobs in neighbouring counties. Effect of SSEs on investments is weaker, but still positive. Investments in a given SSE neither crowd out nor crowd in investments outside the SSE. Thereby, they add one to one to capital stock in hosting county. Our findings are robust to changes in estimation methods, sample composition, set of explanatory variables and selection of spatial weight matrix.
    Keywords: special economic zones, regional economic development, economic policy tools, panel data models, spatial panel data models
    JEL: H25 H32 R3 C21
    Date: 2015
  13. By: Frimmel, Wolfgang; Horvath, Gerard Thomas; Schnalzenberger, Mario; Winter-Ebmer, Rudolf
    Abstract: In general, retirement is seen as a pure labor supply phenomenon, but firms can have strong incentives to send expensive older workers into retirement. Based on the seniority wage model developed by Lazear (1979), we discuss steep seniority wage profiles as incentives for firms to dismiss older workers before retirement. Conditional on individual retirement incentives, e.g., social security wealth or health status, the steepness of the wage profile will have different incentives for workers as compared to firms when it comes to the retirement date. Using an instrumental variable approach to account for selection of workers in our firms and for reverse causality, we find that firms with higher labor costs for older workers are associated with lower job exit age.
    Keywords: firm incentives; retirement; seniority wages
    JEL: H55 J14 J26 J31
    Date: 2015–07

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