nep-pbe New Economics Papers
on Public Economics
Issue of 2015‒10‒25
seventeen papers chosen by
Thomas Andrén

  1. The Links between Economic Growth and Tax Revenue in Ghana: An Empirical Investigation By Njindan Iyke, Bernard; Takumah, Wisdom
  2. Fiscal Policy in Debt Constrained Economies By Amador, Manuel; Aguiar, Mark
  3. Interacting Effects of State Cigarette Taxes on Smoking Participation By James M. Bishop
  4. Migration State and Welfare State: Competition vs. Coordination in Economic Unions By Razin, Assaf; Sadka, Efraim
  5. Spillover Effects in a Federal Country with Vertical Tax Externalities By Lisa Grazzini; Alessandro Petretto
  6. Learning to Tax ?- Interjurisdictional Tax Competition under Incomplete Information By Johannes Becker; Ronald B. Davies
  7. Wealth-income ratios in a small, late-industrializing, welfare-state economy: Sweden, 1810–2014 By Waldenström, Daniel
  8. State and Local Sales Taxes and Business Activity in the United States By Saxon, Nicholas; Tosun, Mehmet S.; Yang, Jingjing
  9. On Redistributive Taxation under the Threat of High-Skill Emigration By Alan Krause
  10. Transfer Taxes and Household Mobility: Distortion on the Housing or Labor Market? By Christian A. L. Hilber; Teemu Lyytikäinen
  11. A Positive Theory of Tax Reform By Ethan Ilzetzki
  12. The Subversive Nature of Inequality: Subjective Inequality Perceptions and Attitudes to Social Inequality By Kuhn, Andreas
  13. MSME taxation in transition economies : country experience on the costs and benefits of introducing special tax regimes By Engelschalk,Michael; Loeprick,Jan
  14. Do increases in subsidized housing reduce the incidence of homelessness?: evidence from the low-income housing tax credit By Jackson, Osborne; Kawano, Laura
  15. Optimal inflation with corporate taxation and financial constraints By Daria Finocchiaro; Giovanni Lombardo; Caterina Mendicino; Philippe Weil
  16. Inflation and Income Inequality in Developed Economies By Pierre Monnin
  17. Challenges for European Welfare States By Börsch-Supan, Axel

  1. By: Njindan Iyke, Bernard; Takumah, Wisdom
    Abstract: This paper explores the causal influence of tax revenue on economic growth in Ghana. Our point of departure from the existing studies lies in the fact that we examine causality instead of the impact. The causality analysis performed in this paper builds on a multivariate setup, allowing for key control variables to intermediate the nexus between tax revenue and economic growth. Such a rich environment can overcome variable omission bias; thus allowing for efficient estimates of the test statistics of the Granger causality. In addition, we employed the Toda-Yamamoto test instead of the canonical Granger causality test to avoid pre-testing bias. Using a quarterly dataset which spans the period 1986Q1-2014Q4, we found strong evidence of unidirectional causal flow from tax revenue to economic growth in Ghana. This finding agrees with the existing finding that taxation can influence economic growth. The policy implication is quite clear. Ghana is a net borrower since the country regularly suffers from budget deficits. The policymaker can implement policies that enhance the tax scope in order to increase the revenue from taxation. For a country whose economy has a large share of black market activities, such a policy may be challenging to implement. Thus, such policies will require collective efforts from the policymaker and the players in the economy. To induce people to buy into these kinds of policies, the policymaker must first embrace accountability of the revenue raised from taxation. Productive government spending will appeal to the players of the Ghanaian economy whereas unproductive and unaccountable government spending will not.
    Keywords: Causality, Economic Growth, Tax Revenue, Ghana
    JEL: E6 H2
    Date: 2015–10–01
  2. By: Amador, Manuel (Federal Reserve Bank of Minneapolis); Aguiar, Mark (Princeton University)
    Abstract: We study optimal fiscal policy in a small open economy (SOE) with sovereign and private default risk and limited commitment to tax plans. The SOE's government uses linear taxation to fund exogenous expenditures and uses public debt to inter-temporally allocate tax distortions. We characterize a class of environments in which the tax on labor goes to zero in the long run, while the tax on capital income may be non-zero, reversing the standard prediction of the Ramsey tax literature. The zero labor tax is an optimal long run outcome if the economy is subject to sovereign debt constraints and the domestic households are impatient relative to the international interest rate. The front loading of tax distortions allows the economy to build a large (aggregate) debt position in the presence of limited commitment. We show that a similar result holds in a closed economy with imperfect inter-generational altruism, providing a link with the closed-economy literature that has explored disagreement between the government and its citizens regarding inter-temporal tradeoffs.
    Keywords: Fiscal policy; Sovereign debt; Limited commitment
    JEL: E62 F32 F34
    Date: 2015–10–16
  3. By: James M. Bishop (Oklahoma State University)
    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 micro data 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: I12 I18 H26 H73
    Date: 2015–10
  4. By: Razin, Assaf; Sadka, Efraim
    Abstract: We develop a model of an economic union with income redistribution, facing upward supplies of immigrants of various skills and wealth. We compare the policy competition equilibrium of the model to the coordination equilibrium. The model predicts that the completion equilibrium will be with a more generous welfare state (higher taxes) with more low skilled immigrants than the coordination equilibrium. The explanation is based on fiscal externalities due to income differences in the native born and immigrant populations. We argue that this type of a difference between the U.S. and the EU - the degree of coordination among the member states – contributes to our understanding of observed policy differences between these two otherwise similar unions: the generosity of the welfare state and the skill composition of migration.
    Keywords: Fiscal externality; Generosity of the welfare state; skill composition of immigration
    JEL: F2 H1
    Date: 2015–10
  5. By: Lisa Grazzini (Dipartimento di Scienze per l'Economia e l'Impresa); Alessandro Petretto (Dipartimento di Scienze per l'Economia e l'Impresa)
    Abstract: We analyse how spillover effects may affect the choice of a federal tax rate in a federal country with vertical tax externalities. Our main result shows under which conditions the federal tax rate with spillover effects is lower or higher than the federal tax rate without spillover effects. The effects of vertical tax externalities can be modified by the reaction of the federal government to the horizontal externality due to spillover effects.
    Keywords: Fiscal federalism, Median voter, Positive spillovers
    JEL: H71 H77 H41
    Date: 2015
  6. By: Johannes Becker; Ronald B. Davies
    Abstract: We present a multi-period model in which countries set source-based taxes without having precise information how their and their neighbours' tax rates affect the tax base. Countries can learn from past experience and from observing their neighbours' outcomes and/or tax policy choices. We consider the sequence of Markov perfect equilibria and show that the beliefs become more precise over time and, eventually, correct. The precision of beliefs in a given period increases in the number of observed countries. In equilibrium, tax rates are inefficiently low if the value of learning is positive and the pace of learning increases in the level of tax rates (because higher tax rates trigger larger tax base effects which helps learning); in the presence of fiscal externalities, tax rates are too homogeneous (because variance in tax policies enhances learning). If, due to fiscal externalities, the value of learning is negative, the opposite may be true. From the viewpoint of empirical measurement, the model generates time patterns that look as if countries react to each other even if there are no fiscal externalities. We conclude that the existing evidence may therefore be inconclusive with regard to the existence of tax competition.
    Keywords: Social learning; Policy diffusion; Tax competition
    JEL: H25 H32 H87
    Date: 2015–09
  7. By: Waldenström, Daniel
    Abstract: This paper uses new data on Swedish national wealth over a period of two hundred years to study whether the patterns in wealth-income ratios previously found by Piketty and Zucman (2014) for some very rich and large Western economies extend to smaller countries that were historically backward and developed a different set of political and economic institutions during the twentieth century. The findings point to both similarities and differences. In the pre-industrial era, Sweden had much lower wealth levels than the rest of Europe, and the main explanation is that the Swedes were too poor to save their income. Over the twentieth century, Swedish aggregate trends and levels are much more similar to those of the rest of Europe, but the structure of national wealth differs. In Sweden, government wealth grew much faster and became more important, not least through its relatively large public pension system. This suggests an explicit role of historical economic and political institutions for the long-run evolution of wealth-income ratios.
    Keywords: Economic history; Household portfolios; Institutions; National wealth; Pension wealth; Welfare state
    JEL: D30 E01 E02 N30
    Date: 2015–10
  8. By: Saxon, Nicholas (U.S. Census Bureau); Tosun, Mehmet S. (University of Nevada, Reno); Yang, Jingjing (University of Nevada, Reno)
    Abstract: There has been an increasing reliance on sales taxation in both the states and counties in the United States. In this paper, we are examining the relationship between state and local sales taxation and business activity in the U.S. by utilizing county-level data for the period 2002-2011. We have found significant negative association between the state and county combined sales tax rate and annual payroll of businesses particularly in the manufacturing sector. There is also evidence of spatial dependence particularly in the payroll response of businesses within the contiguous region. While we found no significant relationship with employment, there is also statistically significant negative association with retail establishments and small establishments with less than 10 employees. It is possible that businesses respond to a sales tax rate increase first, or more directly, by reducing payroll rather than employment. While the economic significance of these results, however, is not found to be overwhelmingly strong, policymakers should still pay attention particularly to how manufacturing businesses respond to sales tax rate tax changes in the form of changes in payroll, and the responses from the small retail establishments.
    Keywords: state and county sales tax, business activity, payroll, employment, number and size of establishments, United States
    JEL: H25 H71 H73 J21
    Date: 2015–10
  9. By: Alan Krause
    Abstract: The increasing international mobility of high-skill individuals is often seen as posing a threat to domestic social welfare, by limiting the ability of governments to tax these individuals and redistribute to the poor. In this note, we examine a simple dynamic nonlinear income tax model without commitment. In this setting, it is shown that the threat of emigration by high-skill individuals facilitates redistribution and increases social welfare in the short run, and has no effect on social welfare over the long run.
    Keywords: nonlinear taxation; migration; commitment.
    JEL: H21 H24 F22
    Date: 2015–10
  10. By: Christian A. L. Hilber; Teemu Lyytikäinen
    Abstract: We estimate the effect of the UK Stamp Duty Land Tax (SDLT) - a transfer tax on the purchase price of property or land - on different types of household mobility using micro data. Exploiting a discontinuity in the tax schedule, we isolate the impact of the tax from other determinants of mobility. We compare homeowners with self-assessed house values on either sides of a cut-off value where the tax rate jumps from 1 to 3 percent. We find that a higher SDLT has a strong negative impact on housing-related and short distance moves but does not adversely affect job-induced or long distance mobility. Overall, our results suggest that transfer taxes may mainly distort housing rather than labor markets.
    Keywords: Transfer taxes, stamp duty, transaction costs, homeownership, household mobility
    JEL: D23 H21 H27 J61 R21 R31 R38
    Date: 2015–10
  11. By: Ethan Ilzetzki (Department of Economics, London School of Economics; Centre for Macroeconomics (CFM))
    Abstract: The political impediments to reform and the forces allowing its success are studied in a model where the tax base and statutory rate are separate instruments of tax policy. The model predicts that big bang reforms - large changes in the tax code - may be easier to enact than marginal reforms. Preferences over the tax base face a tipping point where even the beneficiaries from tax exemptions support re-form. At such a "reform moment", tax reform is Pareto improving. Politically feasible tax reform occurs when fiscal needs are large, but may nonetheless involve reductions in marginal tax rates. There is strategic complementary in lobbying for tax exemptions, resulting in multiple equilibria. Evidence from tax-base changes in a panel of OECD countries supports a number of the main predictions.
    JEL: D72 D78 H26
    Date: 2015–10
  12. By: Kuhn, Andreas (Swiss Federal Institute for Vocational Education and Training)
    Abstract: This paper shows that higher levels of perceived wage inequality are associated with a weaker (stronger) belief into meritocratic (non-meritocratic) principles as being important in determining individual wages. This finding is robust to the use of an instrumental-variable estimation strategy which takes the potential issue of reverse causality into account, and it is further corroborated using various complementary measures of individuals' perception of the chances and risks associated with an unequal distribution of economic resources, such as their perception of the chances of upward mobility. I finally show that those individuals perceiving a high level of wage inequality also tend to be more supportive of redistributive policies and progressive taxation, and that they tend to favor the political left, suggesting a feedback effect of inequality perceptions into the political-economic sphere. Taken together, these findings suggest that high levels of perceived wage inequality have the potential to undermine the legitimacy of market outcomes.
    Keywords: inequality perceptions, attitudes to social inequality, support of redistribution, legitimacy of market outcomes, beliefs about the causes of economic success, political preferences
    JEL: D31 D63 J31
    Date: 2015–10
  13. By: Engelschalk,Michael; Loeprick,Jan
    Abstract: The paper analyzes the design of simplified small business tax regimes in Eastern Europe and Central Asia and the impact of such regimes on small business tax compliance. Although many approaches for tax simplification exist, a general trend in the region is to offer small businesses the option to be taxed based on their turnover instead of net income. The study finds that many of the regimes in place are overly simplistic and neither take into account fairness considerations nor do they facilitate business growth and migration into the standard tax regime. Although revenue generation is not a main objective of such regimes, low revenue performance and the risk of system abuse by larger businesses should be issues of concern. More attention should therefore be devoted to improving the design of simplified regimes and monitoring their application. This will require in particular a more profound analysis of the economic situation and the tax compliance challenges in the small business segment and increased efforts to improve the quality of bookkeeping.
    Keywords: E-Business,Tax Law,Debt Markets,Emerging Markets,Taxation&Subsidies
    Date: 2015–10–19
  14. By: Jackson, Osborne (Federal Reserve Bank of Boston); Kawano, Laura (Federal Reserve Bank of Boston)
    Abstract: The provision of affordable housing for low-income families is often cited by policymakers and advocacy groups as a necessity for ending homelessness. The U.S. government spends a considerable amount on housing programs for the nation's poor, and the use of federal housing programs to mitigate homelessness has attracted increasing interest following the recent financial downturn and housing market crisis. While important for housing policy, however, the question of whether subsidized housing is effective for combating homelessness remains unresolved. In this paper, the authors examine the impact of subsidized housing on homelessness using the Low-Income Housing Tax Credit (LIHTC), the largest place-based housing program in the United States.
    Keywords: low-income housing; tax credits; homelessness; regression discontinuity
    JEL: H20 H31 I32 R21 R31
    Date: 2015–05–01
  15. By: Daria Finocchiaro; Giovanni Lombardo; Caterina Mendicino; Philippe Weil
    Abstract: This paper revisits the equilibrium and welfare effects of long-run inflation in the presence of distortionary taxes and financial constraints. Expected inflation interacts with corporate taxation through the deductibility of i) capital expenditures at historical value and ii) interest payments on debt. Through the first channel, inflation increases firms' taxable profits and further distorts their investment decisions. Through the second, expected inflation affects the effective real interest rate, relaxes firms' financial constraints and stimulates investment. We show that, in the presence of collateralized debt, the second effect dominates. Therefore, in contrast to earlier literature, we find that when the tax code creates an advantage of debt financing, a positive rate of long-run inflation is beneficial in terms of welfare as it mitigates the financial distortion and spurs capital accumulation.
    Keywords: optimal monetary policy, Friedman rule, credit frictions, tax benefits of debt
    Date: 2015–10
  16. By: Pierre Monnin (Council on Economic Policies)
    Abstract: This paper explores the empirical link between income inequality and inflation in ten OECD countries over the period 1971 to 2010. In addition to inflation, we include six control variables in our analysis: economic development level, business cycles, unemployment, unionization, openness to international trade and skill-biased technological change. We estimate the empirical link between all seven variables and income inequality with a balanced panel. We find a U-shaped link between long-run inflation and income inequality. Low inflation rates are associated with higher income inequality. As inflation goes up, inequality decreases, reaches a minimum with an inflation rate of about 13%, and then starts rising again. The precise mechanisms that lead more inflation to correlate with a decrease in income inequality until a certain threshold are unclear yet, and warrant further research.
    Date: 2014–05
  17. By: Börsch-Supan, Axel (Munich Center for the Economics of Aging (MEA))
    Abstract: In the absence of social security reform, current pension entitlements of an aging population exceed future fiscal capacity. However, structural labor market reforms facilitate the transition to sustainable schemes in which a sizeable part of the current generosity of European welfare states can be maintained. In fact, many European states have already taken important steps in this direction. In the end insufficient productive capacities to support the welfare state pose smaller challenges to reform than do time inconsistencies built into the political process of redesigning pension plans.
    Date: 2015–08–01

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