nep-pbe New Economics Papers
on Public Economics
Issue of 2015‒09‒18
thirty papers chosen by
Thomas Andrén

  1. Taxation of Dividend Income and Economic Growth: The Case of Europe By Dackehag, Margareta; Hansson, Åsa
  2. Local Income Taxation and Intergovernmental Relationships in Denmark -Budget cooperation in the 1980s- By Shintaro Kurachi
  3. Optimal Income Taxation under Unemployment: A Sufficient Statistics Approach By Kavan Kucko; Johannes Schmieder; Etienne Lehmann; Kory Kroft
  4. Labour Supply in New Zealand and the 2010 Tax and Transfer Changes By John Creedy; Penny Mok
  5. Pareto Efficient Taxation with Learning by Doing By Marek Kapicka
  6. Tax loss carryforwards and corporate behavior By Masanori Orihara
  7. State Taxation and the Reallocation of Business Activity: Evidence from Establishment-Level Data By Xavier Giroud; Joshua Rauh
  8. The Effect of Moving to a Territorial Tax System on Profit Repatriation: Evidence from Japan By Makoto Hasegawa; Kozo Kiyota
  9. On the Optimal Provision of Social Insurance: Progressive Taxation versus Education Subsidies in General Equilibrium By Dirk Krueger; Alexander Ludwig
  10. Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data By Emmanuel Saez; Gabriel Zucman
  11. A common base answer to "Which country is most redistributive?" By Peter J. Lambert; Runa Nesbakken; Thor O. Thoresen
  12. Tax Evasion across Industries: Soft Credit Evidence from Greece By Nikolaos Artavanis; Adair Morse; Margarita Tsoutsoura
  13. Stock market listing and corporate tax aggressiveness: Evidence from legal reforms in squeeze out in Japan By Masanori Orihara
  14. Interacting effects of state cigarette taxes on smoking participation By Bishop, James
  15. A Practical Approach to Well-being Based Policy Development: What Do New Zealanders Want from Their Retirement Income Policies? By Joey Au; Andrew Coleman; Trudy Sullivan
  16. Crowding Out in Ricardian Economies By Andrew B. Abel
  17. The Effects of the Tax Deduction for Postsecondary Tuition: Implications for Structuring Tax-Based Aid By Caroline M. Hoxby; George B. Bulman
  18. Shale Public Finance: Local Government Revenues and Costs Associated with Oil and Gas Development By Richard G. Newell; Daniel Raimi
  19. Population Aging, Policy Reforms, and Lifetime Net Tax Rate in Japan: A Generational Accounting Approach By Manabu Shimasawa; Kazumasa Oguro; Minoru Masujima
  20. Side effects of nonlinear profit taxes in an evolutionary market entry model: abrupt changes, coexisting attractors and hysteresis problems By Schmitt, Noemi; Tuinstra, Jan; Westerhoff, Frank
  21. Growth, Unemployment, and Fiscal Policy: A Political Economy Analysis By Tetsuo Ono
  22. Determinants of Fiscal Distress in Italian Municipalities By W. D. Gregori; L. Marattin
  23. Fiscal policy analysis of highly indebted economies By Juan Equiza Goni
  24. Do Small Businesses Respond to an Increase in the Probability of a Tax Audit? Evidence from a Policy Reform in Italy By Alessandro Santoro
  25. The Economic and Environmental Effects of Taxing Air Pollutants and CO2: Lessons from a Study of the Czech Republic By Kiula, Olga; Markandya, Anil; Ščasný, Milan; Menkyna Tsuchimoto, Fusako
  26. Japanese Foreign Aid, Development Expenditures and Taxation in Thailand 1960-2012:Econometric Results from a Bounded Rationality Model of Fiscal Behavior By Khan, Haider A.; Dost, Ahmad Najim
  27. The Challenge of Measuring UK Wealth Inequality in the 2000s By Facundo Alvaredo; Anthony B. Atkinson; Salvatore Morelli
  28. The Financial Feasibility of Delaying Social Security: Evidence from Administrative Tax Data By Gopi Shah Goda; Shanthi Ramnath; John B. Shoven; Sita Nataraj Slavov
  29. Local Representation and Strategic Voting: Evidence from Electoral Boundary Reforms By Janne Tukiainen; Tuukka Saarimaa
  30. Regression Discontinuity Designs Based on Population Thresholds: Pitfalls and Solutions By Andrew C. Eggers; Ronny Freier; Veronica Grembi; Tommaso Nannicini

  1. By: Dackehag, Margareta (Lund University); Hansson, Åsa (Lund University)
    Abstract: More recently researchers have turned to analyze how the tax structure, rather than the overall tax level, affects economic performance. For instance, several papers have investigated how taxation on corporate and individual (labor) income influences growth. Taxation of dividend income may also influence growth via its impact on investments and firm behavior. Within the academic community there is conflicting views about the impact taxation of dividends has on firm behavior and, hence, on economic performance. According to the "traditional view", taxation of dividends is distortionary and increases the cost of equity. According to the "new view", taxation of dividends does not influence the marginal cost of capital and consequently has no impact on investment decisions. To our knowledge, this paper is the first study to explore how tax rates on dividends affect economic growth, by using panel data from 1990 till 2008 for 18 European countries. We find that taxation of dividend income negatively influences economic growth, a result that corroborates the old view of dividends taxation as distortionary and also has some policy implication for the European countries in question.
    Keywords: Economic growth; Taxation of corporate income; Taxation of personal income
    JEL: H21 H24 H25 O40
    Date: 2015–08–31
  2. By: Shintaro Kurachi (Graduate School of Economics, Keio University)
    Abstract: The aim of this article is to analyze the role of the tax authorities of local governments in intergovernmental negotiations. The Danish local income tax rate is set by each local government. However, the average tax rate is set as per the intergovernmental agreement. Since the 1980s, the local tax authorities and those that control central expenditure were in conflict with each other . This article focuses on the Extended Total Balance Principle (Det Udvidede Totalbalanceprincip) as it resolves this problem to an extent. This principle states that the central government is forbidden from assigning new tasks without providing the requisite funding and from carrying out the central economic policy without taking into consideration the effect of municipal tax revenues. During the process of agreement about this principle, local governments could insist on their own requirements because of their strong tax authority.
    Keywords: Local income taxation, Denmark, Intergovernmental relationships, Budget Cooperation, Tax authority
    JEL: H71 H72 H77
    Date: 2015–03
  3. By: Kavan Kucko (Boston University); Johannes Schmieder (Boston University); Etienne Lehmann (University Pantheon Assas Paris II); Kory Kroft (University of Toronto)
    Abstract: This paper is the first to derive an empirically implementable formula for the optimal income tax, in the presence of unemployment. This formula nests a broad variety of structures of the labor market, such as the standard competitive model with fixed or flexible wages and models with matching frictions. As such, we are able to show that several previously derived optimal tax formulas are nested by this formula. Our theoretical results show that several reduced-form parameters are welfare-relevant: the macro employment elasticity with respect to taxes and the micro and macro participation elasticities with respect to taxes. We estimate all three of these reduced-form parameters using policy variation in tax liabilities stemming from the U.S. tax and transfer system for over 20 years. Since our tax formula is stated in terms of ?sufficient statistics?, we numerically solve for the optimal tax schedule using our empirical estimates and discuss how the results compare to those in the literature. Finally we also provide estimates of how employment and participation elasticities vary over the business cycle that suggest ? together with our theoretical results ? that in recessions the optimal tax schedule looks more like a Negative Income Tax (NIT) and less like an Earned Income Tax Credit (EITC).
    Date: 2015
  4. By: John Creedy; Penny Mok (The Treasury)
    Abstract: This paper examines the simulated labour supply responses to the personal tax and transfer policy changes introduced in New Zealand in 2010, and the implications for revenue and income distribution. The main changes examined are the increase in the GST rate from 12.5 to 15 per cent, along with reductions in personal income tax rates and increases in the main benefit payments and assistance to families with children, to compensate for the rise in GST. The simulated labour supply responses were obtained using the Treasury’s behavioural microsimulation model, TaxWell-B. The 2009/10 Household Economic Survey (HES) was used. The combined effect of all policy changes is to increase average labour supply slightly for all demographic groups. Labour force participation of sole parents is simulated to increase by 0.86 percentage points. In considering separate components, the change in income tax rates is found to have the largest effect on labour supply. This is not surprising given that it affected a large proportion of the population while the changes to the benefit system and assistance to families with children apply only to certain groups. The reforms are found to be approximately distribution neutral, in terms of the Gini inequality measure of after-tax income per adult equivalent person.
    JEL: C25 J22
    Date: 2015–09
  5. By: Marek Kapicka (University of California Santa Barbara)
    Abstract: I provide a general framework for analyzing the Pareto efficient income taxation in a Mirrlees economy with human capital formation. I show that human capital formation effectively makes preferences nonseparable over labor supply, and derive a tax formula that holds in any Pareto efficient allocation. I compare it with the optimal tax formula in a Ramsey economy, and show that both formulas differ because the Ramsey planner does not take into account intertemporal changes in the earnings distribution. Both learning-by-doing and learning-or-doing models are special cases of the general framework. I compare their implications for the efficient tax structure and show that in both models the optimal marginal tax rates decrease with age, despite the fact that both models respond differently to any given tax change. In the learning-by-doing model the result is driven by a decreasing contemporaneous labor elasticity, while in the learning-or-doing model the result is driven by the fact that labor supply is initially a substitute for future labor supply because it crowds out schooling.
    Date: 2015
  6. By: Masanori Orihara (Policy Research Institute, Ministry of Finance,Japan)
    Abstract: Tax losses are prevalent in the corporate sector of many countries. Firms with tax losses can deduct these losses from current or future taxable income. This deduction reduces corporate marginal tax rates and in turn can affect managerial incentives. Using industry-year level tax return data and accounting data, we show that tax loss carryforwards decrease leverage. We also show that tax loss carryforwards increase investments when the effective tax rates among the industry-year observations are considerably affected by tax loss carryforwards. Our findings suggest that the incentive effects of tax loss carryforwards on corporate behavior need to be considered in tax reforms in addition to other factors in public finance.
    Keywords: tax loss carryforward, leverage, investment
    JEL: G31 G32 H25
  7. By: Xavier Giroud; Joshua Rauh
    Abstract: In a sample of over 27 million establishments of U.S. firms with activities in more than one state, we estimate the impact of state business taxation on business activity. Only firms organized as subchapter C corporations are subject to the corporate tax code, whereas the income of partnerships, sole-proprietorships, and S corporations is passed through annually to the firm's owners and taxed at individual rates. For C corporations, both employment at existing establishments (intensive margin) and the number of establishments in the state (extensive margin) have corporate tax elasticities of -0.4. Pass-through entities, which serve as a control group for the corporate tax reforms, respond only to the personal tax code, with tax elasticities of -0.2 to -0.3. Around half of the effects are driven by reallocation of productive resources to other states where the treated firms have establishments. Capital shows similar patterns but is 36% less elastic than labor. A narrative approach confirms that the results are robust and strongest in the sample of tax changes that were implemented due to inherited budget deficits, long-run goals, or cross-state variation caused by Federal tax reforms.
    JEL: H25 H71 H73
    Date: 2015–09
  8. By: Makoto Hasegawa (National Graduate Institute for Policy Studies (GRIPS)); Kozo Kiyota (Keio Economic Observatory, Keio University)
    Abstract: In an increasingly globalized world, the design of international tax systems in terms of taxation on foreign corporate incomes has received much attention from policymakers and economists alike. In the past, Japanfs worldwide tax system taxed foreign source income upon repatriation. However, to stimulate dividend repatriations from Japanese-owned foreign affiliates, Japan introduced a foreign dividend exemption in 2009 that exempts dividends remitted by Japanese-owned foreign affiliates to their parent firms from home taxation. This paper examines the effect of this dividend exemption on profit repatriations by Japanese multinationals. We find that the response of Japanese-owned affiliates to the dividend exemption was heterogeneous. More particularly, foreign affiliates with a large stock of retained earnings were generally more responsive to the reform and significantly increased dividend payments to their parent firms in response to the enactment of the dividend exemption system. Dividend payments by these affiliates also became more sensitive to withholding tax rates on dividends levied by host countries under the new exemption system.
    Keywords: Local International taxation, Worldwide tax system, Territorial tax system, Profit repatriation, Dividend exemption
    JEL: H25 F23
    Date: 2015–07–15
  9. By: Dirk Krueger; Alexander Ludwig
    Abstract: In this paper we compute the optimal tax and education policy transition in an economy where progressive taxes provide social insurance against idiosyncratic wage risk, but distort the education decision of households. Optimally chosen tertiary education subsidies mitigate these distortions. We highlight the quantitative importance of general equilibrium feedback effects from policies to relative wages of skilled and unskilled workers: subsidizing higher education increases the share of workers with a college degree thereby reducing the college wage premium which has important redistributive benefits. We also argue that a full characterization of the transition path is crucial for policy evaluation. We find that optimal education policies are always characterized by generous tuition subsidies, but the optimal degree of income tax progressivity depends crucially on whether transitional costs of policies are explicitly taken into account and how strongly the college premium responds to policy changes in general equilibrium.
    JEL: E62 H21 H24
    Date: 2015–09
  10. By: Emmanuel Saez; Gabriel Zucman
    Abstract: This paper combines income tax returns with macroeconomic household balance sheets to estimate the distribution of wealth in the United States since 1913. We estimate wealth by capitalizing the incomes reported by individual taxpayers, accounting for assets that do not generate taxable income. We successfully test our capitalization method in three micro datasets where we can observe both income and wealth: the Survey of Consumer Finance, linked estate and income tax returns, and foundations' tax records. We find that wealth concentration was high in the beginning of the twentieth century, fell from 1929 to 1978, and has continuously increased since then. The top 0.1% wealth share has risen from 7%in 1978 to 22% in 2012, a level almost as high as in 1929. Top wealth-holders are younger today than in the 1960s and earn a higher fraction of the economy's labor income. The bottom 90% wealth share first increased up to the mid-1980s and then steadily declined. The increase in wealth inequality in recent decades is due to the upsurge of top incomes combined to an increase in saving rate inequality. We explain how our findings can be reconciled with Survey of Consumer Finances and estate tax data.
    Keywords: income tax, wealth inequality,
    Date: 2015–08
  11. By: Peter J. Lambert; Runa Nesbakken; Thor O. Thoresen (Statistics Norway)
    Abstract: Which country is most redistributive? This question is often discussed in terms of comparisons of measures of redistribution when each country’s tax schedule is applied to its pre-tax income distribution. However, we believe that what most authors have in mind when referring to the “most redistributive country” is one in which the tax schedule is unanimously most redistributive across all pre-tax income distributions. A stronger identification of the most redistributive tax schedule therefore implies applying each tax schedule to all pre-tax income distributions and compare redistribution for all possible combinations. Given that this is practically complicated, we suggest applying the transplant-and-compare method of Dardanoni and Lambert (2002), which provides a tax progressivity ordering of schedules according to a common base. This paper shows how the transplant-and-compare approach can be utilized to approach an identification of the most redistributive country. The method and its implications are discussed by employing micro data from Luxembourg Income Studies, also contrasting results to those obtained using standard measures of redistribution.
    Keywords: Redistributive effect; Personal income tax; Cross-country comparison; Common base
    JEL: H11 H23
    Date: 2015–06
  12. By: Nikolaos Artavanis; Adair Morse; Margarita Tsoutsoura
    Abstract: We document that in semiformal economies, banks lend to tax-evading individuals based on the bank's assessment of the individual's true income. This observation leads to a novel approach to estimate tax evasion. We use microdata on household credit from a Greek bank, and replicate the bank underwriting model to infer the banks estimate of individuals' true income. We estimate that 43%-45% of self-employed income goes unreported and thus untaxed. For 2009, this implies 28.2 billion euros of unreported income, implying foregone tax revenues of over 11 billion euros or 30% of the deficit. Our method innovation allows for estimating the industry distribution of tax evasion in settings where uncovering the incidence of hidden cash transactions is difficult using other methods. Primary tax-evading industries are professional services — medicine, law, engineering, education, and media. We conclude with evidence that contemplates the importance of institutions, paper trail and political willpower for the persistence of tax evasion.
    JEL: G21 H26
    Date: 2015–09
  13. By: Masanori Orihara (Policy Research Institute, Ministry of Finance,Japan)
    Abstract: Recent literature argues that agency conflicts between shareholders and managers reduce corporate tax aggressiveness. Although stock market listing is a fundamental source of the agency costs, a dearth of widely available data prevents researchers from investigating how monitoring from stock markets affects tax aggressiveness. We use unique panel data that cover both publicly-traded (listed) companies and privately-held (unlisted) companies in Japan. To mitigate endogeneity concerns about the choice to list stocks on public equity markets, we use legal reforms in squeeze out as a quasi-natural experiment. We provide evidence that stock market listing decreases tax aggressiveness among companies whose ownership is concentrated. This result suggests that minority shareholdersf option to sell stocks in public markets reduces managersf incentives to be tax aggressive. Our findings link a function of capital markets with public finance by demonstrating that financial developments can contribute to the effective collection of tax revenues.
    Keywords: tax aggressiveness, stock market listing, ownership structure, squeeze out
    JEL: G30 G38 H25 H26
  14. By: Bishop, James
    Abstract: A state cigarette tax increase may deter some residents from smoking, but other residents may avoid the higher tax by purchasing cigarettes from another state. Using U.S. health survey microdata from 1999 to 2012, this paper measures how border-crossing opportunities affect the smoking deterrence achieved by a cigarette tax increase. I estimate by two-way fixed effects regression that a $1 state cigarette tax increase decreases the smoking rate by an additional 0.58 percentage points for each dollar of cigarette tax in the nearest lower-tax state. However, each successive $1 tax increase decreases the smoking rate by 0.38 fewer percentage points than the last. I show that the signs of these terms can be theoretically derived without parametric assumptions. I observe that, as both home and nearest lower taxes rose from 1999 to 2012, the mean effectiveness of a home state tax increase remained roughly constant over the period. My results imply that the lowest-tax states are those with the greatest power to reduce the national smoking rate.
    Keywords: Cigarette Taxes; Smoking; Tax Avoidance; Border-crossing
    JEL: H26 H73 I12 I18
    Date: 2015–09–13
  15. By: Joey Au; Andrew Coleman; Trudy Sullivan (The Treasury)
    Abstract: This paper investigates the practicality of using a sophisticated multi-criteria analysis technique to estimate the preferences of a representative sample of the public to inform policy advice. Our application concerns retirement income policy and we use a multicriteria decision-making survey to (i) investigate the relative importance of seven aspects of retirement income policies to a sample of 1,066 New Zealanders, (ii) document the diversity of policy preferences in a statistically rigorous manner, and (iii) evaluate the way people rank three different retirement income policies from an individual well-being perspective. The results of the paper suggest that multi-criteria surveys as a tool have considerable potential to help policymakers develop and identify policies that are aligned with the way people want to live. In terms of retirement income policies, we find that (i) there is widespread opposition to means-testing, (ii) a majority of respondents would choose an increase in current taxes if this could prevent even larger tax increases on future generations, and (iii) there are strongly divergent preferences over the appropriate eligibility age for New Zealand Superannuation. Overall, a policy combination that raises the age of eligibility for New Zealand Superannuation and reduces future tax increases is opposed by many and preferred by few. However, a policy that more aggressively prefunds New Zealand Superannuation by immediately raising taxes is supported by a majority of people of all ages and income groups.
    JEL: H55 I31 I39 J26
    Date: 2015–09
  16. By: Andrew B. Abel
    Abstract: The crowding-out coefficient is the ratio of the reduction in privately-issued bonds to the increase in government bonds that are issued to finance a tax cut. If (1) Ricardian equivalence holds, and (2) households do not simultaneously borrow risklessly and have positive gross positions in other riskless assets, the crowding-out coefficient equals the fraction of the aggregate tax cut that accrues to households that borrow. In the conventional case in which all households receive equal tax cuts, the crowding-out coefficient equals the fraction of households that borrow. In the United States, about 75% of households borrow, so the crowding-out coefficient is predicted to be 0.75, which differs from econometric estimates that are around 0.5. I explore extensions of the model, such as a departure from Ricardian Equivalence or the introduction of cross-sectional variation in taxes, that might account for this difference.
    JEL: E62 G11 H6
    Date: 2015–09
  17. By: Caroline M. Hoxby; George B. Bulman
    Abstract: The federal tax deduction for tuition potentially increases investments in postsecondary education at minimal administrative cost. We assess whether it actually does this using regression discontinuity methods on the income cutoffs that govern eligibility for the deduction. Although many eligible households take nearly the maximum deduction allowed, we find no evidence that it affects attending college (at all), attending full- versus part-time, attending four- versus two-year college, the resources experienced in college, the amount paid for college, or student loans. Our analysis suggests that the deduction's inefficacy may be due to issues of salience, timing, and the method of receipt. We argue that the deduction might increase college-going if it were modified in simple ways that would not increase costs but would make it more likely to relax liquidity constraints and be perceived as a price change (which they is) as opposed to an income change. We outline how such modifications could be tested. This study has independent applied econometrics interest because households who would be just above a cut-off manage their incomes so that they fall slightly below it. This income management generates bias due to reverse causality, and we explore how to choose "doughnut-holes" that avoid bias without undue loss of statistical power.
    JEL: C21 H2 H24 H26 I22 I23
    Date: 2015–09
  18. By: Richard G. Newell; Daniel Raimi
    Abstract: Oil and gas development associated with shale resources has increased substantially in the United States, with important implications for local governments. These governments tend to experience increased revenue from a variety of sources, such as severance taxes distributed by the state government, local property taxes and sales taxes, direct payments from oil and gas companies, and in-kind contributions from those companies. Local governments also tend to face increased demand for services such as road repairs due to heavy truck traffic and from population growth associated with the oil and gas sector. This paper describes the major oil- and gas related revenues and service demands (i.e., costs) that county and municipal governments have experienced in Arkansas, Colorado, Louisiana, Montana, North Dakota, Pennsylvania, Texas, and Wyoming. Based on extensive interviews with officials in the most heavily affected parts of these states, along with analysis of financial data, it appears that most county and municipal governments have experienced net financial benefits, though some in western North Dakota and eastern Montana appear to have experienced net negative fiscal impacts. Some municipalities in rural Colorado and Wyoming also struggled to manage fiscal impacts during recent oil and gas booms, though these challenges faded as drilling activity slowed.
    JEL: H25 H71 H72 H76 Q32 Q33 Q41 Q43 Q48
    Date: 2015–09
  19. By: Manabu Shimasawa (Senior Researcher National Institute for Research Advancement); Kazumasa Oguro (Associate Professor Faculty of Economics, Hosei University); Minoru Masujima (Director for Macroeconomic Analysis Cabinet Office, Government of Japan)
    Abstract: We employed the Generational Accounting model in estimating the generation-specific lifetime (both past and the future) benefits/burdens and income and evaluating their values as of 2010, thus estimating the lifetime net burden ratio (= lifetime net burden/lifetime income). As a result, the following points were elucidated: 1) Among the current living generations, the lifetime net burden ratio of the 0-year-old generation is about 25 percentage points higher than that of the current 90-year-old generation; 2) The lifetime net burden ratio of the future generations is about 31 percentage points higher than that of the 0-year-old generation; 3) The net burden of the current generations would have to be increased in order to narrow the generational gap between the current generations and the future generations, which would inevitably lead to an expansion of the intragenerational gap of the current generations; and 4) In order to prevent conflict of interest between the current generations, in particular the younger generations and future generations, and at the same time, narrow the intergenerational gap, it is desirable to increase the income of the current generations, in particular that of the younger generations, by achieving a high economic growth rate and implementing macroeconomic policy management that would inhibit increase in the risk premium included in the interest rate.
    Keywords: Generational Accounting, falling birthrates and aging population, fiscal sustainability, government debt
    JEL: H61 E62 B41
  20. By: Schmitt, Noemi; Tuinstra, Jan; Westerhoff, Frank
    Abstract: In order to demonstrate that nonlinear tax systems may have surprising and potentially undesirable side effects, we develop an evolutionary market entry model in which firms decide on the basis of past profit opportunities whether or not to enter a competitive market. Our main focus is on the case of a proportional tax on positive profits. Such a piecewise-linear tax scheme induces a kink in the profit functions of firms' strategies, and may lead to abrupt changes in a market's dynamics, coexisting attractors and hysteresis problems. Since these phenomena can also be observed in more general models, a proper understanding of their basic mechanism may be helpful to explain the intricate behavior of many economic systems.
    Keywords: market entry model,replicator dynamics,evolutionary fitness,nonlinear profit taxes,stability analysis,policy implications
    JEL: D84 E30 H20
    Date: 2015
  21. By: Tetsuo Ono (Graduate School of Economics, Osaka University)
    Abstract: This study presents an overlapping-generations model featuring capital accumu- lation, collective wage-bargaining, and probabilistic voting over fiscal policy. We characterize a Markov-perfect political equilibrium of the voting game within and across generations and show the following results. First, greater bargaining power of unions lowers the growth rate of capital and creates a positive correlation between unemployment and public debt. Second, greater political power of the old lowers the growth rate and shifts government expenditure from the unemployed to the old. Third, when the government finances its spending by issuing public debt, an introduction of a balanced-budget requirement increases the growth rate but may benefit the old at the expense of the unemployed.
    Keywords: Economic Growth; Fiscal Policy; Government Debt; Unemployment; Voting
    JEL: E24 E62 H60
    Date: 2014–08
  22. By: W. D. Gregori; L. Marattin
    Abstract: Fiscal distress of local governments and municipalities is a non-negligible component of the public finance turmoil after the Great Recession. In this paper we consider a dataset of Italian municipalities over the period 2000-2012 and look for the main budget determinants of local default. According to our results the default probability is positively affected by the share of loan repayment over total spending. This result is robust to alternative model specifications as well as inclusion of fixed effects, time dummies and macroeconomic control variables.
    JEL: H72 H74
    Date: 2015–09
  23. By: Juan Equiza Goni
    Abstract: The financial crisis of 2007-2009 led to a large increase in the government debt of all advanced economies. In the United States, the debt burden reached levels not seen since the Second World War. In Europe, high fiscal stress evolved into a sovereign debt crisis. My thesis focuses on debt dynamics in advanced economies and the design of policies that can stabilize their fiscal burden. In the first chapter, I provide new evidence and theory on US debt dynamics and their relation with long-term growth forecasts. In the second chapter, I document a novel dataset on the maturity structure of sovereign debt of Euro Area (EA) countries and study the effect of the maturity composition on debt dynamics. Finally, in the third chapter, I analyze empirically the role of debt management in stabilizing the fiscal burden of countries in the EA.<p><p>Chapter 1: Sovereign Debt in the US and Growth Expectations<p><p>This chapter studies the effect of changes in expectations of long-term GDP growth on US government debt and deficits. Long-term growth expectations are an essential determinant of expected future revenue growth and fiscal solvency. I present evidence that US government debt and deficits are positively correlated with long-term GDP (and revenue) growth forecasts from the Congressional Budget Office between 1984 and 2012. This is robust to controlling for current growth and to using à-la-Kalman estimated forecasts for a longer time span. This stylized fact is novel in the macroeconomics literature and I develop a new model of government behavior that explains it.<p>My model features endogenous (forward-looking) purchasing behavior for the government. This distinguishes my model from standard macro theories that assume exogenous government purchases, or ad-hoc backward looking policy rules for government purchases. It builds on the recent ‘long-run risks’ literature by assuming shocks to the trend growth rate of total factor productivity. The model matches the observed positive correlation between fiscal deficits and the trend growth rate, based on the government’s desire to smooth public consumption over periods of higher (or lower) long-run productivity growth. <p><p>Chapter 2: Government Debt Maturity and Debt Dynamics in EA Countries<p><p>This chapter presents a new comprehensive database on sovereign debt stocks and yields, at all maturities, for six EA countries: Belgium, Finland, France, Germany, Italy and Spain between 1991 and 2013. I constructed this database by combining information from different sources (treasuries, national central banks and statistical offices), on a security-by-security basis. A recent literature has shown the importance of debt maturity management in the US - e.g. Hall and Sargent (2011) - however, due to lack of data, this key issue remained unstudied for the EA. Thus, I use my database to study the effect of debt maturity management on the evolution of government debt in EA countries. <p>My main finding is that debt maturity also had an important effect in debt dynamics of the EA. The debt maturity structure affects debt dynamics because longer maturity shields the government budget from changes in interest rates. In general, interest rates in the EA have fallen since 1991 while treasuries in the region extended debt maturity. Thus, an increasing number of long-term bondholders experienced large capital gains. Counterfactual simulations show the impact of a different maturity structure on the evolution of debt and suggest that extending debt maturity in 2014 and 2015 would result in lower debt ratios by 2022. I also estimate the debt-to-GDP erosion induced by higher current and future inflation and find that inflation would lower the fiscal burden in EA countries much more than in the US.<p><p>Chapter 3: Quantifying the Role of Debt Management for Fiscal Self-Insurance in the EA<p><p>The last chapter provides evidence of debt management being an effective tool for protecting the government budget from fiscal spending shocks in the EA. In particular, I document that sovereign bonds of EA countries had a significantly lower real return in response to government spending shocks between 1991 and 2013. Importantly, longer bond maturity generally implied a larger drop in returns. This is in line with theories claiming that long-term debt provides fiscal self-insurance. However, my finding suggests that medium-term debt is more effective in hedging against spending shocks. <p>I identify government spending shocks in a Structural VAR model estimated with both aggregated quarterly fiscal data for the EA and stacked data from individual countries. I also use a simple FAVAR model to distinguish between common and idiosyncratic (country-specific) shocks and document that the former risk was hedged more effectively. The introduction of the Euro reduced the absorption of idiosyncratic shocks (relative to common shocks) by bond returns. However, the European debt crisis brought the degree of fiscal self-insurance against country-specific shocks back to pre-Euro levels. Finally, debt maturity seems to play a minor role in the absorption of country-specific shocks by the return on sovereign bonds. <p>
    Keywords: Debts, Public; Finance, Public; Fiscal policy; Inflation (Finance); Dettes publiques; Finances publiques; Politique fiscale; Inflation; sovereign debt / dette souveraine; inflation / l'inflation; debt maturity / échéance de la dette
    Date: 2015–06–18
  24. By: Alessandro Santoro
    Abstract: This paper uses a panel of administrative data concerning 71,000 Italian small businesses observed in tax years 2005-2008. The aim of the paper is to evaluate the impact of a reform of audit rules implemented in 2006. The reform repealed a special audit exemption previously granted to businesses which adopted a stringent accounting standard. It is shown that the reform increased the level of economic activity, as measured by the value of inventory, for the generality of businesses involved. However, an increase in profits and turnover was reported only by the subset of businesses which were more likely to perceive it as an increase in the probability of an audit. This result is in line with the predictions of the Allingham-Sandmo model and it casts some doubts on the possibility to reduce evasion by limiting the opportunities of manipulating accounting books.
    Keywords: Tax Evasion by Small Businesses, Audit Probabil- ity, Accounting Standard
    JEL: H25 H26 H32
    Date: 2015–09
  25. By: Kiula, Olga; Markandya, Anil; Ščasný, Milan; Menkyna Tsuchimoto, Fusako
    Abstract: This paper analyzes the impacts of local emissions charges as well as a tax on CO2 for a small open economy. We do this to see the separate and collective impacts of these taxes so as to understand the effects of a system of environmental taxes that reflects something close to the full internalization of external effects in the case of air emissions. The analysis was carried out using a static CGE model, with unemployment, bottom-up abatement technologies and with sector- and fuel-specific emission coefficients. The model imposes environmental charges on several pollutants, as a result of which emissions can fall through three channels: reduced output of the polluting good, substitution between production factors, and increased end-of-pipe abatement activity. Such CGE modeling of both local and global pollutants, with a wide range of abatement options is one of the first of its kind. The analysis shows that a full internalization of air pollution externalities can result in modest overall welfare gains and the combination of local pollution taxes and CO2 taxes should be feasible. There are, however, differences in terms of employment and output impacts, depending on what combination of taxes are applied, which sectors are covered and how fiscal revenues are redistributed.
    Keywords: CGE modelling; Internalisation of external costs; Ancillary benefits; Carbon taxation; Air pollution charging
    JEL: D58 D62 H22 H23 Q52
    Date: 2014–09–21
  26. By: Khan, Haider A.; Dost, Ahmad Najim
    Abstract: How does Japanese aid influence the allocation of government expenditures and the raising of government revenues? Using a non-linear model with an asymmetric loss function the case of Japanese aid to Thailand is examined at the macroeconomic level with a large time-series data set for 1960-2012. It turns out that Japanese aid led to proportionately more development expenditures than did other aid. It also might have been positively related to an increased effort by the Thai government to raise taxes. Economic explanations based on a set of bounded rationality model are advanced. Econometric and institutional explanations are also offered. The three sets of explanations can be seen as overlapping and complementary in this case.
    Keywords: Japanese aid, Non-linear Models, Development Expenditures, Non-Development Expenditures, Bounded Rationality, Asymmetric Loss, Thai Policy Makers.
    JEL: F35 H30 O23
    Date: 2015–09–10
  27. By: Facundo Alvaredo (Paris School of Economics, INET at the Oxford Martin School, and Conicet); Anthony B. Atkinson (Nuffield College, London School of Economics, and INET at the Oxford Martin School); Salvatore Morelli (CSEF, University of Naples and Institute for Economic Modelling at the INET Oxford)
    Abstract: The concentration of personal wealth is now receiving a great deal of attention – after having been neglected for many years. One reason is the growing recognition that, in seeking explanations for rising income inequality, we need to look not only at wages and earned income but also at income from capital, particularly at the top of the distribution. In this paper, we use evidence from existing data sources to attempt to answer three questions: (i) what is the share of total personal wealth that is owned by the top 1 per cent, or the top 0.1 per cent? (ii) is wealth much more unequally distributed than income? (iii) is the concentration of wealth at the top increasing over time? The main conclusion of the paper is that the evidence about the UK concentration of wealth post-2000 is seriously incomplete and significant investment is necessary if we are to provide satisfactory answers to the three questions.
    JEL: D3 H2
    Date: 2015–09–04
  28. By: Gopi Shah Goda; Shanthi Ramnath; John B. Shoven; Sita Nataraj Slavov
    Abstract: Despite the large and growing returns to deferring Social Security benefits, most individuals claim Social Security before the full retirement age, currently age 66. In this paper, we use a panel of administrative tax data on likely primary earners to explore some potential hypotheses of why individuals fail to delay claiming Social Security, including liquidity constraints and private information regarding one’s expected future lifetime. We find that approximately 31-34% of beneficiaries who claim prior to the full retirement age have assets in Individual Retirement Accounts (IRAs) that would fund at least 2 additional years of Social Security benefits, and 24-26% could fund at least 4 years of Social Security deferral with IRA assets alone. Our analysis suggests that these percentages would be considerably higher if other assets were taken into account. We find evidence that those who claim prior to the full retirement age have higher subjective and actual mortality rates than those who claim later, suggesting that private information about expected future lifetimes may influence claiming behavior.
    JEL: D14 H31 H55
    Date: 2015–09
  29. By: Janne Tukiainen; Tuukka Saarimaa
    Abstract: We analyze whether voters value local political representation by exploiting municipal mergers, which increase the number of candidates available to voters and intensify political competition. In the Finnish open-list proportional representation system, voters rank the candidates within parties, and thus, concentrating votes to local candidates increases the extent of local representation. Using a difference-in-differences strategy, we find that the vote distributions become more concentrated in municipalities less likely to gain local representation after the mergers. Moreover, the effect is much larger in municipalities where the benefits of local representation to voters are large. The latter result disentangles voters? responses from the responses of other political actors. The results are important also for designing local government mergers, which are an important policy tool in many countries. They highlight that concerns over deteriorating local democracy due to mergers have merit, because voters have preferences for local representation. At the same time, the vote concentration patterns we find alleviate these concerns.
    Keywords: Electoral boundary reform, difference-in-differences, local representation, municipality mergers, strategic voting.
    JEL: C23 D72 C21 H73 H77
    Date: 2015–09–11
  30. By: Andrew C. Eggers; Ronny Freier; Veronica Grembi; Tommaso Nannicini
    Abstract: In many countries, important features of municipal government (such as the electoral system, mayors' salaries, and the number of councillors) depend on whether the municipality is above or below arbitrary population thresholds. Several papers have used a regression discontinuity design (RDD) to measure the effects of these threshold-based policies on political and economic outcomes. Using evidence from France, Germany, and Italy, we highlight two common pitfalls that arise in exploiting population-based policies (confounded treatment and sorting) and we provide guidance for detecting and addressing these pitfalls. Even when these problems are present, population-threshold RDD may be the best available research design for studying the effects of certain policies and political institutions.
    Keywords: regression discontinuity design; causal inference; sorting; population thresholds, institutional design
    JEL: H10 H19 H70 H77
    Date: 2015

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