nep-pbe New Economics Papers
on Public Economics
Issue of 2015‒11‒07
twenty papers chosen by
Thomas Andrén

  1. Political Economy of Debt and Growth By Marco Battaglini; Levon Barseghyan
  2. Fiscal Stimulus in Economic Unions: What Role for States? By Gerald Carlino; Robert P. Inman
  3. Economic integration and interdependence of tax policy By Holzmann, Carolin; von Schwerin, Axel
  4. The Return of Fiscal Activism and Distinguishing the Effects of Fiscal Policy Tools By İbrahim Ünalmış
  5. Tax competition’s role in economic development By Zakariya Chabani; Mona Hamed
  6. Quality costs and Corporate Taxation. Literature review. By Flamino Viola; Margarida Saraiva
  7. Fiscal policy and economic growth: Empirical evidence from the European Union. By Dimitrios Paparas; Christian Richter
  8. Diversity and Economic Growth in a Model with Progressive Taxation By Wang, Wei; Suen, Richard M. H.
  9. Business in the United States: Who Owns it and How Much Tax Do They Pay? By Michael Cooper; John McClelland; James Pearce; Richard Prisinzano; Joseph Sullivan; Danny Yagan; Owen Zidar; Eric Zwick
  10. Commodity taxation and regulatory competition By Simone Moriconi; Pierre M. Picard; Skerdilajda Zanaj
  11. A Positive Theory of Tax Reform By Ilzetzki, Ethan
  12. Behavioral Responses to Taxation: Cigarette Taxes and Food Stamp Take-Up By Kyle Rozema; Nicolas Ziebarth
  13. Optimal Unemployment Insurance and Cyclical Fluctuations By Williams, Noah; Li, Rui
  14. Income Inequality and Asset Prices under Redistributive Taxation By Lubos Pastor; Pietro Veronesi
  15. Collective Labour Supply, Taxes, and Intrahousehold Allocation: An Empirical Approach By Bloemen, Hans
  16. Explaining Changes in Tax Burdens in Latin America: Does Politics Trump Economics? By Mark Hallerberg; Carlos Scartascini
  17. Tax Harmonisation in the European Union / Armonización fiscal en la UE / Harmonització fiscal a la UE By Alejandro Esteller-Moré; Clemens Fuest; José M. Durán-Cabré
  18. Inequality, Public Wealth, and the Federal Shareholder By Corneo, Giacomo
  19. Does Eliminating the Earnings Test Increase the Incidence of Low Income Among Older Women? By Theodore Figinski; David Neumark
  20. Welfare Implications of India's Employment Guarantee Programme with a Wage Payment Delay By Basu, Parantap; Sen, Kunal

  1. By: Marco Battaglini; Levon Barseghyan
    Abstract: We present a theory of endogenous fiscal policy and growth. Fiscal policy — debt, income tax, spending on local public goods and public investment — is determined through legislative bargaining. Economic growth depends directly on public investment, private investment in human capital and, via learning-by-doing, labor supply. The model predicts that the economy converges to a balanced growth path in which consumption, private investment, public investment, public goods provision, public debt and productivity grow at the same constant rate. The transition to the balanced growth path is characterized by what we call the shrinking government effect: public debt grows faster than GDP, provisions of public goods and infrastructure grow slower than GDP and the tax rate declines. We use the model to study the impact of austerity programs which impose a ceiling on the amount of public debt a country can issue.
    JEL: D72 E6 E62 H6 H72
    Date: 2015–10
  2. By: Gerald Carlino; Robert P. Inman
    Abstract: The Great Recession and the subsequent passage of the American Recovery and Reinvestment Act returned fiscal policy, and particularly the importance of state and local governments, to the center stage of macroeconomic policy-making. This paper addresses three questions for the design of intergovernmental macroeconomic fiscal policies. First, are such policies necessary? Analysis of US state fiscal policies show state deficits (in particular from tax cuts) can stimulate state economies in the short-run, but that there are significant job spillovers to neighboring states. Second, to internalize these spillovers, what central government fiscal policies are most effective for stimulating income and job growth? Both federal tax cuts and transfers to households and firms and intergovernmental transfers to states for lower income assistance are effective, with one and two year multipliers greater than 2.0. Third, how are states, as politically independent agents, motivated to provide increased transfers to lower income households? The answer is matching (price subsidy) assistance for such spending. The intergovernmental aid is spent immediately by the states and supports assistance to those most likely to spend new transfers.
    JEL: E62 H77
    Date: 2015–10
  3. By: Holzmann, Carolin; von Schwerin, Axel
    Abstract: This paper provides empirical evidence for interdependence of jurisdictions' tax policies. We study tax policy interdependence between municipalities in the economically integrated European Metropolitan Area Frankfurt/Rhein-Main, that spreads across two German states, Hesse, and Rhineland-Palatinate. For empirical identification, we exploit two reforms in the Hessian local fiscal equalization scheme in the 1990s that induced quasi-experimental variation in Hessian metropolitan municipalities' business tax rates. In response to the Hessian metropolitan municipalities' tax rate increase, Rhineland-Palatine metropolitan municipalities increase their local business tax rates more moderately as compared to a matched control group of Rhineland-Palatine non-metropolitan municipalities. We argue that primarily tax competition considerations drive the results, as the average tax-rate differential between metropolitan municipalities in Rhineland-Palatinate and Hesse stays stable during the analysis period. We conclude that an arguably strong economic integration of municipalities seems a key determinant for the interdependence of their tax policies.
    Keywords: fiscal interdependence,tax mimicking,local business tax,tax competition,fiscal equalization schemes
    JEL: H20 H71 H77
    Date: 2015
  4. By: İbrahim Ünalmış (Central Bank of Turkey)
    Abstract: The recent crisis has led to massive fiscal stimulus packages around the world to boost the economic growth. These stimulus packages include government consumption and investment spending and transfers to households. However, effects of these different fiscal policy tools on macroeconomic variables can be considerably different. In this paper, we contribute to the literature by comparing the effects of temporary increases in government consumption good spending, government investment spending and government transfers to households in a new Keynesian dynamic stochastic general equilibrium (DSGE) framework. Different from the conventional new-Keynesian literature, our model features private and public capital stock which enables us to examine the effects of productive government investment spending increases. We calibrate the model for the US economy and show that the magnitude and persistency of the responses of macroeconomic variables differ significantly across different fiscal policy choices. We also show that governments willingness for building up high debt stocks significantly affects the outcomes of fiscal stimulus efforts.
    Keywords: na
    Date: 2015
  5. By: Zakariya Chabani (Istanbul University, Social Sciences Inst, Economics Faculty); Mona Hamed (Istanbul University, Social Sciences Inst, Economics Faculty)
    Abstract: Many theories of tax competition views that competition leads to inefficiently low tax rates and public expenditure levels. However, more recently other theories have been done in order to investigate the desirable effects of tax competition. Such as the benefices of raising total tax intake due to low corporate tax rates stimulating economic growth. Tax competition in Europe is a little bit different from international tax competition because we have to take in consideration the behavior of economic agents and public institutions in a specific geographic, political, economic and legal setting. This paper describes some approaches to extract the potential benefits of tax competition in order to develop European economy; we will see how tax competition handles inefficiencies in both the private sector and the public sector in Europe. We will also discuss how tax competition effects may represent important changes in the distribution of income.
    Keywords: Tax Competition, European Economy, Economy Development, Income Distribution
    Date: 2015
  6. By: Flamino Viola (University of Évora, PhD Student and CEFAGE, Portugal); Margarida Saraiva (University of Évora and BRU-UNIDE/ISCTE-IUL)
    Abstract: The literature on Total Quality Management (TQM) has never questioned whether there is any relationship between quality and taxation. This paper demonstrates that quality and taxation are two interdependent social realities that can and should be used together in the explanation of phenomena of an economic nature, and that there is a connection and interdependence between quality and taxation at the economic and business level. The relationship between quality and taxation at the corporate level occurs as a result of firms feeling the need to carry out more efficient management of resources. This efficient resource management requires that firms should have more precise and accurate information about all their costs including those associated with meeting their tax obligations (compliance costs). Quality is not alien to these issues: TQM and quality costs are strategies that can be applied to all activities undertaken by firms including their own tax practice. The PAF model, by allowing the reduction of compliance costs, is considered a useful and essential tool for business taxation.
    Keywords: Cost of quality; Taxation; Total Quality Management; Quality.
    JEL: H32
    Date: 2015
  7. By: Dimitrios Paparas (Harper Adams University, UK); Christian Richter (German University in Cairo, Egypt)
    Abstract: The role of Fiscal policy in the long run growth process has been crucial in macroeconomics since the appearance of endogenous growth models. Additionally, a significant debate among economists involves whether several types of spending or taxation enhance economic growth. The main objective of this paper is to highlight the relationship between fiscal policy and economic growth in the EU-15, and to make an attempt to determine which of the fiscal policy instruments enhance economic growth.  We deployed panel data techniques and included both sides of budget, spending and taxation, in our regressions and used the most recent dataset data for fiscal variables from Eurostat. We made a new classification of public expenditures into homogeneous groups in order to reduce the explanatory variables and increase the efficiency of our model and results since we have data for only 14 years. In our empirical analysis we included OLS, fixed effects models, random effects models and GMM estimators, the Arellano and Bond (1991) and the Arellano and Bover (1995) - Blundell and Bond (1998) estimators. On the first round of our regressions we find a negative impact of spending on human capital accumulation on economic growth. Our empirical results also indicate that an increase in government spending on infrastructure has a significant positive impact on the economic growth of a country. Additionally, in our regressions the variable government spending on property rights protections include spending on defence and spending on public order safety. Our empirical results from the first round of regressions imply a strongly negative relationship between t hese two variables. However, on the second round of our regressions we aggregate defence spending from spending on property right protection and we did not find any relationship between economic growth and defence spending. Moreover, we found a non-significant relationship between government spending on social protection and economic growth. On the second round of regressions, when we allow for non-linear growth effects we find a positive relationship with deficits and economic growth, which is in contrast with Ricardian Equivalence. We also included the employment growth and business investment in our model because labour and capital are very important factors of production in growth models. In our empirical results we do not find a significant impact of employment on economic growth, but when we allow for non-linear growth effects we find a strongly positive impact. However, we found that gross fixed capital formation of the private sector as a percentage of GDP in both rounds of our regressions, has no significant impact on economic growth. Finally, our empirical results do not support any evidence of a relationship between openness and economic growth.
    Keywords: Panel Data. Fiscal Policy. Taxation. Government Expenditures.
    JEL: C23 C33 E62 H2 H5
    Date: 2015
  8. By: Wang, Wei; Suen, Richard M. H.
    Abstract: Is a more heterogeneous population conducive or detrimental to capital accumulation and economic growth? This paper addresses this question using a dynamic general equilibrium model with ex ante heterogeneous consumers and progressive taxation. We show that the answer depends crucially on the shape of the marginal tax function. If this function is concave, then a more heterogeneous population will have a lower average marginal tax rate and a higher level of capital accumulation. The opposite is true when the marginal tax function is convex. These results are robust in a variety of models with either exogenous or endogenous economic growth.
    Keywords: Consumer Heterogeneity, Progressive Taxation, Economic Growth
    JEL: D31 E62
    Date: 2015–10–30
  9. By: Michael Cooper; John McClelland; James Pearce; Richard Prisinzano; Joseph Sullivan; Danny Yagan; Owen Zidar; Eric Zwick
    Abstract: “Pass-through” businesses like partnerships and S-corporations now generate over half of U.S. business income and account for much of the post-1980 rise in the top- 1% income share. We use administrative tax data from 2011 to identify pass-through business owners and estimate how much tax they pay. We present three findings. (1) Relative to traditional business income, pass-through business income is substantially more concentrated among high-earners. (2) Partnership ownership is opaque: 20% of the income goes to unclassifiable partners, and 15% of the income is earned in circularly owned partnerships. (3) The average federal income tax rate on U.S. pass- through business income is 19%|much lower than the average rate on traditional corporations. If pass-through activity had remained at 1980's low level, strong but straightforward assumptions imply that the 2011 average U.S. tax rate on total U.S. business income would have been 28% rather than 24%, and tax revenue would have been approximately $100 billion higher.
    JEL: D31 D33 E25 E62 H2 H22 H25 M2
    Date: 2015–10
  10. By: Simone Moriconi (Universita Cattolica del Sacro Cuore & University of Luxembourg, CREA); Pierre M. Picard (University of Luxembourg, CREA & Université Catholique de Louvain, CORE); Skerdilajda Zanaj (University of Luxembourg, CREA)
    Abstract: This paper studies competition in commodity taxation and product market regulation between trading partners. To explain the strategic interaction between governments and regulators, we present a two-country general equilibrium model in which destination-based commodity taxes finance public goods and product market regulation affects the number of firms in the market. We provide empirical evidence based on data for 21 OECD countries over the 1990-2008 period. Our results suggest that commodity taxation and product market regulation are interdependent policies. We confirm the absence of strategic interaction in commodity taxation between governments. Finally, we show that domestic regulation has a negative effect on domestic commodity taxation and that product market regulation is a strategic complement policy.
    Keywords: Regulation, commodity tax, strategic interactions
    JEL: F0 H1 H7 H87 L5
    Date: 2015
  11. By: Ilzetzki, Ethan
    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 reform. 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: 2015–11
  12. By: Kyle Rozema; Nicolas Ziebarth
    Abstract: This paper investigates a previously unexplored behavioral response to taxation: whether smokers compensate for higher cigarette taxes by enrolling in food stamps. First, we show theoretically that increases in cigarette taxes can induce food stamp take-up of non-enrolled, eligible smoking households. Then, we study the theoretical predictions empirically by exploiting between and within-household variation in food stamp enrollment from the Current Population Survey, as well as data from the Consumer Expenditure Survey. The empirical evidence strongly supports the model predictions. Higher cigarette taxes increase the probability that low-income smoking households take-up food stamps.
    Keywords: cigarette taxes, food stamp take-up, tax pass-through rate, unintended consequences
    JEL: L66 H21 H23 H26 H71 I18
    Date: 2015–10
  13. By: Williams, Noah (University of Wisconsin–Madison); Li, Rui (University of Massachusetts–Boston)
    Abstract: The authors study the design of optimal unemployment insurance in an environment with moral hazard and cyclical fluctuations. The optimal unemployment insurance contract balances the insurance motive to provide consumption for the unemployed with the provision of incentives to search for a job. This balance is affected by aggregate conditions, as recessions are characterized by reductions in job finding rates. We show how benefits should vary with aggregate conditions in an optimal contract. In a special case of the model, the optimal contract can be solved in closed form. We show how this contract can be implemented in a rather simple way by allowing unemployed workers to borrow and save in a bond (whose return depends on the state of the economy), providing flow payments that are constant over an unemployment spell but vary with the aggregate state, and giving additional lump-sum payments (or charges) upon finding a job or when the aggregate state switches. We then consider a calibrated version of the model and study the quantitative impact of changing from the current unemployment system to the optimal one. In a recession, the optimal system reduces unemployment rates by roughly 2.5 percentage points and shortens the duration of unemployment by about 50 percent.
    Keywords: optimal contract; unemployment benefits; lump-sum payments; welfare; unemployment durations
    JEL: E32
    Date: 2015–08–01
  14. By: Lubos Pastor; Pietro Veronesi
    Abstract: We develop a simple general equilibrium model with heterogeneous agents, incomplete financial markets, and redistributive taxation. Agents differ in both skill and risk aversion. In equilibrium, agents become entrepreneurs if their skill is sufficiently high or risk aversion sufficiently low. Under heavier taxation, entrepreneurs are more skilled and less risk-averse, on average. Through these selection effects, the tax rate is positively related to aggregate productivity and negatively related to the expected stock market return. Both income inequality and the level of stock prices initially increase but eventually decrease with the tax rate. Investment risk, stock market participation, and skill heterogeneity all contribute to inequality. Cross-country empirical evidence largely supports the model's predictions.
    JEL: E24 G1 H2 J24 J31 J38
    Date: 2015–10
  15. By: Bloemen, Hans (VU University Amsterdam)
    Abstract: Most empirical studies of the impact of labour income taxation on the labour supply behaviour of households use a unitary modelling approach. In this paper we empirically analyze income taxation and the choice of working hours by combining the collective approach for household behaviour and the discrete hours choice framework with fixed costs of work. We identify the sharing rule parameters with data on working hours of both the husband and the wife within a couple. Parameter estimates are used to evaluate various model outcomes, like the wage elasticities of labour supply and the impacts of wage changes on the intrahousehold allocation of income. We also simulate the consequences of a policy change in the tax system. We find that the collective model has different empirical outcomes of income sharing than a restricted model that imposes income pooling. In particular, a specification with income pooling fails to capture asymmetries in the income sharing across spouses. These differences in outcomes have consequences for the evaluation of policy changes in the tax system and shed light on the effectiveness of certain policies.
    Keywords: labour supply, household behaviour and family economics, intrahousehold allocation, taxation, model construction and estimation
    JEL: J22 D1 D13 H24 C51
    Date: 2015–10
  16. By: Mark Hallerberg; Carlos Scartascini
    Abstract: This paper examines whether elections, which are generally held on fixed dates, and banking crises explain the timing of tax reforms and the allocation of the additional tax burden. Using an original fine-grained dataset of tax reforms, the paper finds support for the role of these two sources of variation. In particular, the probability of reform is higher during banking crises. During electoral periods, increasing taxes becomes highly unlikely, even if the government is facing financing problems. Interestingly, politics seem to trump economics: banking crises do not affect the probability of having a reform during electoral times. Moreover, the presence of an IMF program affects the tax instruments chosen: countries with a program increase the value-added tax, while those without raise the personal income tax. Finally, the ideology of the president does not explain who bears the additional tax burden.
    Keywords: Public Administration & Policy Making, Taxation, Financial Crises & Economic Stabilization, Fiscal Policy, Elections, Taxation, Banking crises, Elections, Political economy, Fiscal reform, Ideology, Policymaking
    Date: 2015–09
  17. By: Alejandro Esteller-Moré (Universitat de Barcelona & IEB); Clemens Fuest (Centre for European Economic Research (ZEW) / University of Mannheim); José M. Durán-Cabré (Universitat de Barcelona & IEB)
    Date: 2015
  18. By: Corneo, Giacomo
    Abstract: Current trends in the distribution of wealth trigger a social divide and threaten democracy. I propose to counter this evolution by enhancing the role of public capital as a redistribution and empowerment device. The governance of public capital requires two novel institutions: a socially responsible Sovereign Wealth Fund and a Federal Shareholder. This paper offers an account of their design and sources of financing.
    Keywords: public ownership; redistribution
    JEL: H0 H5
    Date: 2015–11
  19. By: Theodore Figinski; David Neumark
    Abstract: Reductions in the implicit taxation of Social Security benefits from reducing or eliminating the Retirement Earnings Test (RET) are an appealing – and in many cases successful – means of encouraging labor supply of older individuals receiving benefits. The downside, however, is that the same policy reforms can encourage earlier claiming of Social Security benefits, which permanently lowers benefits paid in the future. Depending on the magnitude of the effects on earnings and how households or individuals adjust their consumption and savings decisions, the net effect can be lower incomes at much older ages well beyond when people have retired. We explore the consequences of the 2000 reforms eliminating the RET from the Full Retirement Age to age 69 for the longer-run evolution of income, focusing in particular on the incidence of low income among older women, who are more likely to have become dependent mainly on income from their Social Security benefits. We find that the elimination of the RET increased the likelihood of having low incomes among women in their mid-70s and older – ages at which the lower benefits, in the long run, from claiming earlier outweigh possibly higher income in the period when women or their husbands increased their labor supply.
    JEL: H2 J14 J22
    Date: 2015–10
  20. By: Basu, Parantap (University of Durham); Sen, Kunal (University of Manchester)
    Abstract: We examine the efficacy of a popular anti-poverty programme, namely the National Rural Employment Guarantee Act (NREGA) of the Government of India. We argue that a chronic friction of wage payment delay in this flagship programme could adversely affect the welfare of the poor through two channels. First, it causes deferred consumption. Second, it turns labour into a credit good which makes an indebted household work harder to clear off his existing debt. The loss of welfare persists even when the worker has an outside employment option. If a programme of financial inclusion increases the indebtedness of the poor, a wage payment delay in the NREGA programme could escalate this welfare loss although the official indicator of success (i.e., participation) may not reveal this friction.
    Keywords: NREGA, employment guarantee, credit good, financial inclusion
    JEL: H53 O11 J43
    Date: 2015–10

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