nep-pbe New Economics Papers
on Public Economics
Issue of 2015‒08‒25
twenty-two papers chosen by
Thomas Andrén

  1. Consumer Spending and Property Taxes By Surico, Paolo; Trezzi, Riccardo
  2. Impacts of Universal Health Coverage: A Micro-founded Macroeconomic Perspective By Huang, Xianguo; Yoshino, Naoyuki
  3. The End of the Flat Tax Experiment in Slovakia By Michal Horvath; Matus Senaj; Zuzana Siebertova; Norbert Svarda
  4. Improving public sector efficiency for more inclusive growth in Latvia By Caroline Klein; Robert W.R. Price
  5. Optimal asymmetric taxation in a two-sector model with population ageing By Fedotenkov, Igor
  6. Getting Poor to Work: Three Welfare Increasing Reforms for a Busy Germany By Robin Jessen; Davud Rostam-Afschar; Viktor Steiner
  7. The Texas Economic Model, Miracle or Mirage? A Spatial Hedonic Analysis By Wang, Hongbo
  8. Heterogeneous Aid Effects on Tax Revenues: Accounting for Government Stability in WAEMU Countries By Djedje Hermann Yohou; Michaël Goujon; Wautabouna Ouattara
  9. Back to fiscal consolidation in Europe and its dual tradeoff : now or later, through spending cuts or tax hikes ? By Christophe Blot; Jérôme Creel; Bruno Ducoudre; Xavier Timbeau
  10. A Model for Tax Evasion with Some Realistic Properties By Richard Vale
  11. When Should Public Debt Be Reduced? By Jonathan David Ostry; Atish R. Ghosh; Raphael A. Espinoza
  12. Agricultural Farm Income and competitiveness of the tax and insurance systems By Pawłowska-Tyszko, Joanna; Soliwoda, Michał
  13. Unemployment and Public Budget Impacts of the Auto Bailout By Robert Baumann; Andrea Thompson
  14. Joint Design of Emission Tax and Trading Systems By Bernard Caillaud; Gabrielle Demange
  15. The behaviour of US and UK public debt: further evidence based on time varying parameters By Süleyman Bolat; Aviral Kumar Tiwari; Mihai Mutascu
  16. How Income Mobility and Income Growth Explain Income Inequality Trends By Nicolas Herault
  17. Fiscal consolidation in times of crisis: is the sooner really the better? By Christophe Blot; Marion Cochard; Jérôme Creel; Bruno Ducoudre; Danielle Schweisguth; Xavier Timbeau
  18. Inequality and Labor Market Institutions By Florence Jaumotte; Carolina Osorio
  19. Wealth Effects on Consumption across the Wealth Distribution: Empirical Evidence By Luc Arrondel; Pierre Lamarche; Frédérique Savignac
  20. Pension Wealth and Maternal Employment: Evidence from a Reform of the German Child Care Pension Benefit By Andreas Thiemann
  21. Aggregating Elasticities: Intensive and Extensive Margins of Female Labour Supply By Orazio Attanasio, Peter Levell, Hamish Low, Virginia Sánchez-Marcos
  22. THE WELFARE COST OF INFLATION RISK UNDER IMPERFECT INSURANCE By Olivier Allais; Yann Algan; Edouard Challe; Xavier Ragot

  1. By: Surico, Paolo (London Business School); Trezzi, Riccardo (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: A major change of the property tax system in 2011 generated significant variation in the amount of housing taxes paid by Italian households. Using new questions added to the Survey on Household Income and Wealth (SHIW), we exploit this variation to provide an unprecedented analysis of the effects of property taxes on consumer spending. A tax on the main dwelling leads to large expenditure cuts among households with mortgage debt and low liquid wealth but generates only small revenues for the government. In contrast, higher tax rates on other residential properties reduce private savings and yield large tax revenues.
    Keywords: Fiscal consolidation; marginal propensity to spend; mortgage debt; residential property taxes
    JEL: E21 E62 H31
    Date: 2015–07–27
  2. By: Huang, Xianguo (Asian Development Bank Institute); Yoshino, Naoyuki (Asian Development Bank Institute)
    Abstract: This paper studies the impact of tax-financed universal health coverage schemes on macroeconomic aspects of labor supply, asset holding, inequality, and welfare, while taking into account features common to developing economies, such as informal employment and tax avoidance, by constructing a dynamic stochastic general equilibrium model with heterogeneous agents. Agents have different education levels, employment statuses, and idiosyncratic shocks. Given three tax financing options, calibration results suggest that the financing options matter for outcomes both at the aggregate and disaggregate levels. Universal health coverage, financed by labor income tax revenue, could reduce inequality due to its large redistributive role. Social welfare cannot be improved when labor decisions are endogenous and distortions are higher than the redistributive gains for all tax financing options. In the absence of labor supply choice, mild welfare gains are found.
    Keywords: universal health coverage; DSGE model; idiosyncratic shocks; social welfare
    JEL: E24 E26 E62 H23 H51 J11
    Date: 2015–08–10
  3. By: Michal Horvath; Matus Senaj; Zuzana Siebertova; Norbert Svarda
    Abstract: The paper provides a quantitative assessment of the consequences of departing from a flat-tax system in the context of Slovakia. A behavioural microsimulation model of the labour supply is embedded into ageneral equilibrium framework with search and matching frictions. Some recently implemented marginal changes in the tax system leave aggregate labour market indicators as well as inequality measures virtually unaffected. We also examine hypothetical revenue-neutral reforms that would significantly increase the progressivity of the system through graduated marginal tax rates. We find that there are narrow limits to what policy makers could accomplish through such reforms in terms of employment and equality of income. Hence, an income tax reform should at best be seen as a complementary tool to other initiatives promoting such objectives. Moreover, we highlight an important trade-off: income tax reforms that promote employment may harm growth.
    Keywords: flat tax, microsimulation, general equilibrium, search and matching, labour supply elasticity
    JEL: E24 H24 H31 J22
    Date: 2015–08
  4. By: Caroline Klein; Robert W.R. Price
    Abstract: This working paper explores avenues to improve public sector efficiency in Latvia, a catching-up and ageing economy where spending needs are large. Ensuring that spending allocated to core services (e.g. education, healthcare) is adequate to achieve convergence of policy outcomes to OECD upper standards is challenging. Efficiency gains in the tax system could bring additional revenues. The tax base should be expanded by reducing informality, strengthening tax administration and increasing property and environmentally related taxes, which are low by international standards. To reduce unemployment and income inequality, the tax-benefit system should also be revised as it is now relatively regressive and the tax wedge on low-income earners is high. Enhancing analytical, monitoring and assessment capacities should help to rein in wasteful expenditure and improve the prioritisation of spending. The reform of human resource management, public procurement, and state-local relations is also needed to deliver higher-quality and more cost-efficient public services.<P>Améliorer l'efficience du secteur public pour une croissance plus inclusive en Lettonie<BR>Ce document de travail explore des pistes pour améliorer l’efficience du secteur public en Lettonie, une économie en rattrapage et vieillissante où les besoins de dépenses restent importants. L’enjeu va consister à assurer un niveau adéquat de dépenses consacrées aux services fondamentaux (éducation, santé) pour faire converger les résultats de l’action publique vers les normes les plus élevées de l’OCDE. Des gains d’efficience dans le système fiscal permettraient de collecter des recettes supplémentaires. On pourrait élargir la base d’imposition en réduisant l’activité informelle, en renforçant l’administration de l’impôt et en relevant les taxes immobilières et environnementales dont le niveau est faible par comparaison internationale. Pour abaisser le chômage et les inégalités de revenus, il faudrait aussi revoir le système de prélèvements et de prestations, car il est relativement régressif et le coin fiscal sur les personnes à faible revenu est important. Améliorer les capacités d’analyse, de contrôle et d’évaluation devrait contribuer à contenir les dépenses inutiles et à mieux hiérarchiser les priorités de dépenses. Une réforme de la gestion des ressources humaines, des marchés publics et les relations entre l’État et les collectivités locales s’impose également pour la fourniture de services publics de plus haute qualité et offrant un meilleur rapport coût-efficacité.
    Keywords: public procurement, tax administration, fiscal policy, inequality, budgetary framework
    JEL: E62 H2 H5 H6 H7 H83
    Date: 2015–08
  5. By: Fedotenkov, Igor
    Abstract: This paper presents a simple condition for optimal asymmetric labour (capital) taxation/subsidization in a two-sector model with logarithmic utilities and Cobb-Douglas production functions, linked to demographic factors: fertility rate and longevity. The paper shows that depending on parameter values, it may be optimal to tax or subsidize labour in the sectors. If it is optimal to tax the investment-goods sector, a Pareto-improving tax reform is possible. Larger output elasticities of capital in the sectors reduce the possibilities of a Pareto-improving reform, while population ageing in terms of higher longevity enhances the possibilities of welfare improvement for all generations. Fertility rates do not affect optimal taxation.
    Keywords: Two sectors, factor mobility, asymmetric taxation, optimality, population ageing
    JEL: E62 H21 J10
    Date: 2015–07–09
  6. By: Robin Jessen; Davud Rostam-Afschar; Viktor Steiner
    Abstract: We study three budget-neutral reforms of the German tax and transfer system designed to improve work incentives for people with low incomes: a feasible flat tax reform that provides a basic income which is equal to the current level of the means tested unemployment benefit, and two alternative reforms that involve employment subsidies to stimulate participation and full-time work, respectively. We estimate labor supply reactions and welfare effects using a microsimulation model based on household data from the Socio-Economic Panel (SOEP) and a structural labor supply model. We find that all three reforms increase labor supply in the first decile of the income distribution. However, the flat tax scenario reduces overall labor supply by 4.9%, the reform scenario designed to increase participation reduces labor supply by 1%, while the reform that provides improved incentives to work full-time has negligible effects on overall labor supply. With equal welfare weights, aggregate welfare gains are realizable under all three reforms.
    Keywords: Flat Tax, Basic Income, Work Incentives, Poverty, Microsimulation
    JEL: H31 I38 J22 C25
    Date: 2015
  7. By: Wang, Hongbo
    Abstract: As a state without a personal income tax that has experienced strong employment and population growth in the past, Texas was held up as the economic policy model for Kansas and Oklahoma to follow in recently cutting their personal income tax rates. Using micro-level data, this paper examines whether Texas has benefitted from its mix of public policies by examining the geographic patterns of estimated quality-adjusted wages and housing costs across the U.S. The overall finding is an absence of significantly positive capitalized effects from the policies of Texas. The only significant capitalized policy effect found was lower quality of life in Texas nonmetropolitan areas relative to those in Oklahoma.
    Keywords: State income tax, Kansas, Oklahoma, Texas
    JEL: H30 R51 R58
    Date: 2015–07–31
  8. By: Djedje Hermann Yohou (CERDI - Centre d'études et de recherches sur le developpement international - CNRS - Université d'Auvergne - Clermont-Ferrand I); Michaël Goujon (CERDI - Centre d'études et de recherches sur le developpement international - CNRS - Université d'Auvergne - Clermont-Ferrand I); Wautabouna Ouattara (UAC - University of Abidjan Cocody - University of Abidjan Cocody)
    Abstract: We examine the heterogeneous effects due to government stability of foreign aid on tax revenues in the West African Economic and Monetary Union countries over the period 1986-2010. We show that the tax effects of aid are gradual and varying across countries according to the level of government stability. The Panel Smooth Threshold Regressions indicate that at low levels of government stability, aid negatively affects tax performances. At high levels, it encourages tax collection. Consequently, we provide estimates of individual time varying coefficients of aid effects. In general, the positive effects are marked since the mid of 1990 decade. However, decomposing aid into its forms of loans, technical and non-technical grants provides nuanced results.
    Date: 2015–04–01
  9. By: Christophe Blot (OFCE - OFCE - Sciences Po); Jérôme Creel (OFCE - OFCE - Sciences Po); Bruno Ducoudre (OFCE - OFCE - Sciences Po); Xavier Timbeau (OFCE - OFCE - Sciences Po)
    Abstract: The European consolidation process has raised a few questions. The most frequent one has been how large are the costs of consolidation and has the Eurozone fiscal stance improved or achieved debt sustainability? Second, do these costs and sustainability depend on the composition (tax vs. spending) of the consolidation process? Third, do risk premia matter? Fourth, which of the two following strategies, backloading vs. frontloading, is superior to the other? The aim of the paper is to shed light on these questions using a multi-country reduced-form model. It considers explicitly that the Eurozone member states are facing a dual trade-off, first between labor market outcomes of consolidation and public debt dynamics and, second, between reducing public expenditures and increasing taxes. The main conclusion is that a tax-based backloaded consolidation is superior to all other strategies, be they spending-based or frontloaded, or both. Introducing risk premia endogenously does not alter the conclusion.
    Date: 2015–03
  10. By: Richard Vale
    Abstract: We present a discrete-time dynamic model of income tax evasion. The model is solved exactly in the case of a single taxpayer and shown to have some realistic properties, including avoiding the Yitzhaki paradox. The extension to an agent-based model with a network of taxpayers is also investigated.
    Date: 2015–08
  11. By: Jonathan David Ostry; Atish R. Ghosh; Raphael A. Espinoza
    Abstract: What considerations should guide public debt policy going forward? Should debt be reduced to achieve normative anchors (such as 60 percent of GDP), should it be increased further to finance a big public investment push, or should the existing debt be serviced forever? We argue that, for countries with ample fiscal space (little risk of encountering a fiscal crisis), raising distortive taxes merely to bring the debt down is a treatment cure that is worse than the disease. High public debt of course is costly, but it is a sunk cost only made worse by efforts to pay down the debt through distortionary taxation. Living with the debt is the welfare-maximizing policy. In decisions vis-à-vis the big push for public investment, golden-rule considerations remain salient, with due account taken of the additional servicing costs (and associated distortive taxation) from the resulting buildup of public debt.
    Keywords: Economic growth;Public investment;Public debt;debt, investment, financial crisis, Forecasts of Budgets, Deficits, and Debt,
    Date: 2015–06–02
  12. By: Pawłowska-Tyszko, Joanna; Soliwoda, Michał
    Abstract: The aim of this study was to analyse the conditions and principles of functioning of the insurance system and the taxation on agriculture with regard to their impact on increasing efficiency and improving the competitiveness of the agricultural sector in order to make appropriate changes to these systems.
    Keywords: insurance system, tax, taxation, competitiveness, agricultural sector, Agricultural and Food Policy, Financial Economics, International Development,
    Date: 2014
  13. By: Robert Baumann (Department of Economics, College of the Holy Cross); Andrea Thompson (Department of Economics, College of the Holy Cross)
    Abstract: We estimate the impact of the 2009 financial rescue of two large American automobile companies (General Motors and Chrysler) on unemployment in Michigan. We conservatively estimate that the auto bailout saved about 7,700 workers from unemployment each month over a period of four-and-a-half years. This translates to a public savings of between $1.3 and $1.6 billion via lower transfer payments and higher tax revenues.
    Keywords: bailout, public finance, unemployment, automobile industry
    JEL: H12 H50 E24 J65
    Date: 2015–08
  14. By: Bernard Caillaud (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics, PSE - Paris-Jourdan Sciences Economiques - CNRS - Institut national de la recherche agronomique (INRA) - EHESS - École des hautes études en sciences sociales - ENS Paris - École normale supérieure - Paris - École des Ponts ParisTech (ENPC)); Gabrielle Demange (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics, PSE - Paris-Jourdan Sciences Economiques - CNRS - Institut national de la recherche agronomique (INRA) - EHESS - École des hautes études en sciences sociales - ENS Paris - École normale supérieure - Paris - École des Ponts ParisTech (ENPC))
    Abstract: This paper analyzes the joint design of fiscal and cap-and-trade instruments in climate policies under uncertainty. Whether the optimal mechanism is a mixed policy (with some firms subject to a tax and others to a cap-and-trade) or a uniform one (with all firms subject to the same instrument) depends on parameters reflecting preferences, production, and, most importantly, the stochastic structure of the shocks affecting the economy. This framework is then used to address the issue of the non-cooperative design of ETS in various areas worldwide and to characterize the resulting inefficiency and excess in emission. We provide a strong Pareto argument in favor of merging ETS of different regions in the world.
    Date: 2015–02
  15. By: Süleyman Bolat (Aksaray University - Aksaray University); Aviral Kumar Tiwari (IFHE University); Mihai Mutascu (University of Orleans - LEO)
    Abstract: The paper investigates whether US and UK have followed sustainable debt policies during the period 1970-2012, by exploring the reaction of the primary surplus as percentage of GDP to variations in the debt to GDP ratio, as a powerful test. The main results reveal that the coefficient for UK is negative and significant, while for the US, we are unable to find a clear-cut evidence of the sustainability of public debt as the coefficient is also negative, but insignificant. In the case of the UK, the outputs reveal that government did not raise the primary surplus as the government debt increased rather reduced it and this reduction has been significant. On the other hand, the significance of the reaction coefficient demonstrates that the reaction of the primary surplus to increases in public debt varies over time. All these evidences allow us to appreciate that the fiscal policy in the UK is not sustainable in the sense of satisfying of intertemporal budgetary constrain.
    Date: 2014
  16. By: Nicolas Herault (Melbourne Institute of Applied Economic and Social Research, University of Melbourne)
    Abstract: Jenkins and Van Kerm (2006) show how income inequality trends can be explained by income mobility and the equalising effect of panel-income changes. This paper extends their framework to show explicitly how the distributional effect of panel-income changes depends on the respective size and distribution of income gains and losses. An application to US data illustrates the contribution of the approach. One of the new insights of the application to US data for the 1970/2009 period is that most of the equalising effect of income growth occurs through income gains rather than income losses even in times of recession. The analysis also reveals some interesting trends regarding income mobility and the business cycle. Classification-D31, D63
    Keywords: Income inequality, income mobility, income growth
    Date: 2015–08
  17. By: Christophe Blot (OFCE - OFCE - Sciences Po); Marion Cochard (OFCE - OFCE - Sciences Po); Jérôme Creel (OFCE - OFCE - Sciences Po); Bruno Ducoudre (OFCE - OFCE - Sciences Po); Danielle Schweisguth (OFCE - OFCE - Sciences Po); Xavier Timbeau (OFCE - OFCE - Sciences Po)
    Abstract: Recent evidence has renewed views on the size of fiscal multipliers. It is notably emphasized that fiscal multipliers are higher in times of crisis. Starting from this literature, we develop a simple and tractable model to deal with the fiscal strategy led by euro area countries. Constrained by fiscal rules and by speculative attacks in financial markets, euro area members have adopted restrictive fiscal policies despite strong negative output gaps. Based on the model, we present simulations to determine the path of public debt given the current expected consolidation. Our simulations suggest that despite strong austerity measures, not all countries would be able to reach the 60% debt-to-GDP. If fiscal multipliers vary along the business cycle, this would give a strong case for delaying austerity. This alternative scenario is considered. Our results show not only that delaying austerity would improve growth perspectives and would not be incompatible with public debt converging to 60% of GDP.
    Date: 2014–04
  18. By: Florence Jaumotte; Carolina Osorio
    Abstract: The SDN examines the role of labor market institutions in the rise of income inequality in advanced economies, alongside other determinants. The evidence strongly indicates that de-unionization is associated with rising top earners’ income shares and less redistribution, while eroding minimum wages are related to increases in overall income inequality. The results, however, also suggest that a lack of representativeness of unions may be associated with higher inequality. These findings do not necessarily constitute a blanket recommendation for higher unionization and minimum wages, as country-specific circumstances and potential trade-offs with other policy objectives need to be considered. Addressing inequality also requires a multipronged approach, which should include taxation reform and curbing excesses associated with financial deregulation.
    Keywords: Minimum wage;Inequality, top income shares, unions, labor market, union density, labor, unemployment, Equity, Justice, and Other Normative Criteria and Measurement, Aggregate Factor Income Distribution, General,
    Date: 2015–07–17
  19. By: Luc Arrondel (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics, PSE - Paris-Jourdan Sciences Economiques - CNRS - Institut national de la recherche agronomique (INRA) - EHESS - École des hautes études en sciences sociales - ENS Paris - École normale supérieure - Paris - École des Ponts ParisTech (ENPC)); Pierre Lamarche (BCE - Banque Centrale Européenne - BCE); Frédérique Savignac (Banque de france - Banque de France)
    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 tends to be higher compared with the effect of housing assets, except 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.
    Date: 2015–06
  20. By: Andreas Thiemann
    Abstract: This paper uses administrative data to investigate how a change in pension wealth affects a mother’s employment decision after child birth. I exploit the extension of the child care pension benefit in 1992 as a natural experiment in a regression discontinuity design to estimate short- and medium-run employment effects. In comparison to most family benefits, the child care pension benefit is accumulated upon child birth but only becomes effective on the verge of retirement. Hence, the employment response depends on how a mother discounts future pension benefits. The results suggest that the change in pension wealth does not affect maternal employment, which is not in line with a forward looking rational behavior. Therefore, the child care pension benefit increases maternal old-age income without causing negative employment reactions.
    Keywords: Natural experiment, female labor supply, pension benefit
    JEL: J13 H55 D19
    Date: 2015
  21. By: Orazio Attanasio, Peter Levell, Hamish Low, Virginia Sánchez-Marcos
    Abstract: There is a renewed interest in the size of labour supply elasticities and the discrepancy between micro and macro estimates. Recent contributions have stressed the distinction between changes in labour supply at the extensive and the intensive margin. In this paper, we stress the importance of individual heterogeneity and aggregation problems. At the intensive margins, simple specications that seem to fit the data give rise to non linear expressions that do not aggregate in a simple fashion. At the extensive margin, aggregate changes in participation are likely to depend on the cross sectional distribution of state variables when a shock hits and, therefore, are likely to be history dependent. We tackle these aggregation issues directly by specifying a life cycle model to explain female labour supply in the US and estimate its various components. We estimate the parameters of different component of the model. Our results indicate that (i) at the intensive margin, Marshallian and Hicksian elasticities are very heterogeneous and, on average, relatively large; (ii) Frisch elasticities are, as implied by the theory, even larger; (iii) aggregate labour supply elasticities seem to vary over the business cycle, being larger during recessions.
    Keywords: labour supply elasticities, heterogeneity, aggregation, non-separability
    JEL: J22 D91
    Date: 2015–06–15
  22. By: Olivier Allais (Laboratoire de recherche sur la Consommation - Institut national de la recherche agronomique); Yann Algan (ECON - Département d'économie - Sciences Po); Edouard Challe (CEREG - Centre d'études et de recherches sur l'espace germanophone - Université Paris III - Sorbonne nouvelle); Xavier Ragot (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics, PSE - Paris-Jourdan Sciences Economiques - CNRS - Institut national de la recherche agronomique (INRA) - EHESS - École des hautes études en sciences sociales - ENS Paris - École normale supérieure - Paris - École des Ponts ParisTech (ENPC))
    Abstract: What are the costs of inflation fluctuations and who bears those costs? In this paper, we investigate this question by means of a quantitative incomplete-market, heterogenous-agent model wherein households hold real and nominal assets and are subject to both idiosyncratic labor income shocks and aggregate inflation risk. A key feature of our analysis is a nonhomothetic specication for households' preferences towards money and consumption goods. Unlike traditional specications, ours allows the model to reproduce the broad features of the distribution of monetary assets (in addition to being consistent with the distribution of nonmonetary assets). Inflation risk is found to generate significant welfare losses for most households, i.e., between 1 and 1.5 percent of permanent consumption. The loss is small or even negative for households at the very top of the productivity and/or wealth distribution.
    Date: 2015–05–27

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