nep-pbe New Economics Papers
on Public Economics
Issue of 2015‒11‒15
twenty-one papers chosen by
Thomas Andrén

  1. The Optimum Quantity of Capital and Debt By Yikai Wang; Hans Holter; Marcus Hagedorn
  2. Do Payroll Taxes in the United States Create Bunching at Kink Points? By David Powell
  3. Inequality Reducing Properties of Progressive Income Tax Schedules: The Case of Endogenous Income By Oriol Carbonell-Nicolau; Humberto Llavador
  4. Fiscal policy and economic performance: A review of the theoretical and empirical literature By Halkos, George; Paizanos, Epameinondas
  5. Comparative Assessment of Various Proposals to Amend the Personal Income Tax By Manasan, Rosario G.
  6. Changing Social Preferences and Optimal Redistributive Taxation By Jang-Ting Guo; Alan Krause
  7. General Equilibrium Effects of Targeted Transfers: The case of EITC By Charles Gottlieb; Maren Froemel
  8. Individual Tax Rates and Regional Tax Revenues: A Cross-State Analysis By Hakan Yilmazkuday
  9. Are consumption taxes preferable to income taxes in preventing macroeconomic instability? By Stephen McKnight
  10. The Distribution of Household Income and Federal Taxes, 2011 By Congressional Budget Office
  11. Taxing Capital Income: Effective Marginal Tax Rates Under 2014 Law and Selected Policy Options By Congressional Budget Office
  12. The Sufficient Statistic Approach: Predicting the Top of the Laffer Curve By Badel, Alejandro; Huggett, Mark
  13. Bypassing progressive taxation: fraud and base erosion in the Spanish income tax (1970-2001) By Sara Torregrosa
  14. Temporary Assistance for Needy Families: Spending and Policy Options By Congressional Budget Office
  15. CBO’s 2014 Long-Term Projections for Social Security: Additional Information By Congressional Budget Office
  16. The Distribution of Household Income and Federal Taxes, 2010 By Congressional Budget Office
  17. Paying for the Welfare State in the European Periphery By Sebastian Dellepiane-Avellaneda; Niamh Hardiman
  18. Optimal time-consistent taxation with default By Karen Kopecky; Anastasios Karantounias
  19. Revisiting the role of public debt in economic growth: The case of OECD countries By Mencinger, Jernej; Verbic, Miroslav; Aristovnik, Aleksander
  20. Evaluating the Effectiveness of Public and Municipal Services: Social Criticism and Professional Expertise By Rogozin, Dmitriy M.; Shmerlina, Irina
  21. Comprehensive Wealth of Immigrants and Natives By David Love; Lucie Schmidt

  1. By: Yikai Wang (University of Oslo); Hans Holter (University of Oslo); Marcus Hagedorn (University of Oslo)
    Abstract: In this paper we consider an optimal taxation problem in an incomplete markets model to study the optimal quantity of capital and debt. The government commits itself ex-ante to a tax schedule and government debt. In contrast to most of the existing literature these instruments are chosen to to maximize agents' discounted present value of lifetime utility. Whereas the literature mainly focuses on characterizing the steady state which maximizes welfare, we characterize and compute the optimal policy along the full transition path. In particular our characterization takes into account that the optimal long-run policy depends on capital, debt and taxation during the transition path. We show theoretically that it is optimal to equalize the pre-tax return on capital and the rate of time preference in the long-run, i.e. the capital stock satisfies the modified golden-rule. Quantitatively we find that the tax on capital is around 3 percent in the long-run. Labor is taxed at a much higher rate where the precise number depends on the labor supply elasticity. For standard choices for this elasticity we find a labor tax rate of almost 40 percent to be optimal in the long-run. The reason for such a hight tax rate on labor income is that labor income is risky. Taxing this risky income and redistributing it back through lump-sum transfers improves ex-ante welfare in the long-run. Transfers and the optimal level of debt along the transition are chosen to equalize the amount of redistribution over time. Initially capital is taxed higher than in the long-run since it is inelastically supplied whereas labor is taxed less than in steady state.
    Date: 2015
  2. By: David Powell (RAND)
    Abstract: Much of the literature on labor supply responsiveness to taxes studies the effects of payroll and income taxes together, usually using income tax changes to identify effects. There is less research on how individuals respond to payroll taxes specifically. Given the salience of the payroll tax relative to other income taxes, it is possible that taxpayers respond differentially than income tax elasticities may suggest. Using data from the Social Security Administration, I exploit two recent short-term changes in payroll taxes to study whether labor earnings responded. The Making Work Pay Tax Credit reduced the payroll tax by 6.2 percentage points up to $6,451 ($12,903 for couples) of earnings in 2009 and 2010. I test for bunching at this kink. In 2011, payroll taxes were reduced by 2 percentage points, changing the incentives to bunch at the taxable earnings maximum. While many papers on bunching must make assumptions on the distribution of earnings in the absence of taxes, an advantage of studying changes in payroll taxes is that it is possible to observe the distribution in different years under different tax regimes. I find evidence of bunching induced by the payroll tax changes. I estimate a tax elasticity of labor earnings of 0.08 at the taxable earnings maximum, suggests that policy proposals to raise or eliminate the payroll tax cap should consider labor supply behavioral responses to this policy. I also estimate larger responsiveness to the Making Work Pay Tax Credit.
    Date: 2015–09
  3. By: Oriol Carbonell-Nicolau; Humberto Llavador
    Abstract: The case for progressive income taxation is often based on the classic result of Jakobsson (1976) and Fellman (1976), according to which progressive and only progressive income taxes—in the sense of increasing average tax rates on income—ensure a reduction in income inequality. This result has been criticized on the ground that it ignores the possible disincentive effect of taxation on work effort, and the resolution of this critique has been a long-standing problem in public finance. This paper provides a normative rationale for progressivity that takes into account the effect of an income tax on labor supply. It shows that a tax schedule is inequality reducing only if it is progressive—in the sense of increasing marginal tax rates on income, and identifies a necessary and sufficient condition on primitives under which progressive and only progressive taxes are inequality reducing.
    Keywords: Progressive Taxation, Income inequality, incentive effects of taxation
    JEL: D63 D71
    Date: 2015–10
  4. By: Halkos, George; Paizanos, Epameinondas
    Abstract: The economic implications of government expenditure have been shown to be significant and broad. In particular, government spending has been shown to enhance long-run economic growth by increasing the level of human capital and Research and Development (R&D) expenditure, and by improving public infrastructure. On the other hand, there is evidence that a greater size of government spending may be less efficient and therefore not necessarily associated with a better provision of public goods and higher levels of economic growth. Moreover, it is likely that the size of government expenditure and its composition are associated with key aspects of the quality of growth, such as income inequality and environmental sustainability. This paper presents a review of the theoretical and empirical literature on the relationship between fiscal policy and economic activity, both in terms of long-run economic growth and short-term output fluctuations. In general, empirical evidence on these relationships is not robust and remains inconclusive.
    Keywords: Fiscal policy; Economic growth; Government Expenditure; Taxation.
    JEL: E62 H2 H5 O44 O47 Q01 Q56
    Date: 2015–11
  5. By: Manasan, Rosario G.
    Abstract: Proposals to reform the personal income tax has gained prominence in recent months. To date, personal income tax reform is part and parcel of the platform of a number of the candidates in the 2016 presidential elections. This paper aims to evaluate the various proposals in both houses of Congress to amend the existing personal income legislation. Proposals to amend the personal income tax schedule appear to be well-justified from the perspective of (i) the need to eliminate the bracket creep and (ii) easing the tax burden on Filipino personal income taxpayers relative to their ASEAN neighbors. In terms of the progressivity of the personal income tax, all of the proposals to amend the personal income tax are progressive. However, two of the proposals, SB 2149 and HB 4829, are less progressive than the existing rate structure. In terms of revenue yield, all of the proposals are estimated to have a negative impact on government revenue. The projected revenue loss from proposals to restructure the personal income tax is best seen in the context of the government`s overall revenue and tax effort. Fiscal prudence dictates that new revenue measures be found to compensate for the projected revenue loss that will arise as a result of the implementation of any one of the various proposals to restructure the personal income tax. Thus, the questions that beg to be asked is: What new revenue measure or combination of measures will allow government to recover the revenue loss from the new personal income tax structure? Possibilities include increasing the VAT rate, excise tax on petroleum products, and road user`s tax.
    Keywords: Philippines, personal income tax, tax reform, value added tax (VAT), excise tax
    Date: 2015
  6. By: Jang-Ting Guo (Department of Economics, University of California Riverside); Alan Krause (University of York)
    Abstract: We examine a dynamic model of optimal nonlinear taxation of labor income and savings, in which there are two political parties: left-wing and right-wing. The parties differ only in their redistributive preferences, with the left-wing party having a stronger preference for redistribution. Our analysis explicitly considers the possibility that society's preference for redistribution may change, as reflected in its future voting behavior. The incumbent government respects the possibility that society's preference may change, and sets taxes to maximize expected social welfare. Our main result is that an incumbent left-wing (resp. right-wing) government will implement a regressive (resp. progressive) savings tax policy. The incumbent government implements this policy not out of self interest, but to accommodate the redistributive goals of the opposing party.
    Keywords: Nonlinear Taxation, Redistribution, Normative Taxation.
    JEL: H21 H24
    Date: 2015–11
  7. By: Charles Gottlieb (University of Cambridge); Maren Froemel (University of Cambridge)
    Abstract: Transfers have recently become the most important fiscal policy tool of the U.S. Government. Moreover, within the transfer category, refundable tax credits have reached the same magnitude as unemployment insurance, yet little research documents the macroeconomic implications of tax credits. The existing literature on the effect of tax credits, abstract from behavioral responses to policy changes and are silent on potential general equilibrium effects. This paper fills this gap by addressing these two shortcomings of the existing literature, by modeling the Earned Income Tax Credits (EITC) in an infinite horizon economy with exogenously incomplete asset markets and heterogeneous agents. In particular, we assess the welfare effects of the EITC and analyze how effective targeted transfers are in alleviating distortions arising from incomplete financial markets, and contribute to the debate on labor supply responses to EITC. We also conduct two policy exercises. First, we evaluate the impact of a more generous targeted transfer program on welfare and aggregate outcomes, and thereby uncover the distributional properties of this fiscal policy tool. Secondly, we assess whether targeted transfers are a better policy tool than lump sum transfers and show that targeted transfers are indeed welfare enhancing as they achieve more redistribution at lower tax rates, but that they lead to a less efficient production at the aggregate level.
    Date: 2015
  8. By: Hakan Yilmazkuday (Department of Economics, Florida International University)
    Abstract: This paper analyzes the effects of state-level personal tax rates on state tax revenue and individual welfare. The policy analysis based on a general equilibrium model suggests that tax revenues would benefit from higher wage-income, sales or property taxes, while any increase in dividend-income tax would result in a reduction of revenues. It is also shown that individuals would suffer from an increase in state-level wage-income tax, dividend-tax or sales tax, while they would benefit from an increase in property taxes. The heterogeneity across states is determined by a TaxIndex, a weighted average of initial taxes at the state level.
    Keywords: Regional Taxes, State Tax Revenue, Individual Welfare
    JEL: H24 H71 R13 R51
    Date: 2015–11
  9. By: Stephen McKnight (El Colegio de México)
    Abstract: This paper examines the local determinacy implications of using consumption taxes and in- come taxes to finance a balanced budget fiscal policy for a variety of popular monetary policy rules. It is shown using a New Keynesian framework that the severity of the indeterminacy problem that arises under each tax system depends not only on the specification of the interest- rate feedback rule, but also on the magnitude of the steady state tax rate, the steady state government debt-output ratio, and the degree of price stickiness. However, significant differ- ences in the determinacy criteria across the two tax systems are found to exist. The robustness of the results are assessed by extending the baseline model to include capital accumulation and the taxation of bond interest income. From a policy perspective, our results suggest that future shifts towards indirect taxation could have non-trivial implications for the setting of monetary policy under balanced-budget rules, in particular the ability of the Taylor principle to achieve determinacy.
    Keywords: equilibrium determinacy; distortionary taxation; income taxes; consumption taxes; Taylor principle; balanced-budget rules.
    JEL: E32 E52 E62 E63
    Date: 2015–09
  10. By: Congressional Budget Office
    Abstract: Because higher-income households receive a much greater share of the nation’s before-tax income and pay higher average federal tax rates on that income, they pay much more in federal taxes than lower-income households do. In 2011, households in the top quintile received 52 percent of before-tax income and paid 69 percent of federal taxes; households in the bottom quintile received 5 percent of before tax-income and paid 1 percent of federal taxes.
    JEL: H20 H24 H50 J30
    Date: 2014–11–12
  11. By: Congressional Budget Office
    Abstract: An effective marginal tax rate (ETR) measures an investor’s tax burden on returns from an investment. CBO estimates that the ETR, on average, for all capital income is 18 percent. ETRs on returns from investment vary by sector, ranging from 29 percent for businesses to virtually zero for owner-occupied housing. In this report, CBO estimates ETRs under current law and eight policy options for taxing capital income.
    JEL: H25
    Date: 2014–12–18
  12. By: Badel, Alejandro (Federal Reserve Bank of St. Louis); Huggett, Mark (Georgetown University)
    Abstract: We provide a formula for the tax rate at the top of the Laffer curve as a function of three elasticities. Our formula applies to static models and to steady states of dynamic models. One of the elasticities that enters our formula has been estimated in the elasticity of taxable income literature. We apply standard empirical methods from this literature to data produced by reforming the tax system in a model economy. We find that these standard methods underestimate the relevant elasticity in models with endogenous human capital accumulation.
    Keywords: Sufficient Statistic; Laffer Curve; Marginal Tax Rate; Elasticity
    JEL: D91 E21 H2 J24
    Date: 2015–11–10
  13. By: Sara Torregrosa (Universitat de Barcelona)
    Abstract: In this paper I estimate under-assessment of incomes in the Personal Income Tax during the years following its introduction in Spain. The methodology combines an analysis of discrepancy with National Accounts and an econometric exercise, which follows and slightly modifies the Feldman and Slemrod (2007) procedure, based on the relation of reported charitable donations with the composition of income in tax micro-data. Both calculations show that concealment of income differed substantially across sources and levels, with better compliance at the bottom of the distribution of taxpayers. Because of this, fraud made the tax less progressive than it was on paper. Compliance improved over the next decades, but the overall levels were still far from those attained in developed countries, because of lack of administrative capacity or political will to enforce the new regulation. In this way, general, comprehensive income taxation was hardly a reality 20 years after its introduction.
    Keywords: Tax evasion, base erosion, under-reporting, progressivity, personal income tax
    JEL: H23 H24 H26 N44
    Date: 2015
  14. By: Congressional Budget Office
    Abstract: Temporary Assistance for Needy Families (TANF) is a federal program administered by states that provides cash assistance, work support, and other services to some low-income families. This report examines spending on TANF, how TANF compares to other federal programs for low-income families, and the effects of TANF on employment. CBO also analyzes policy options that would change the program’s federal funding and requirements for states regarding employment and nonfederal funding.
    JEL: H53 I30 I38
    Date: 2015–01–21
  15. By: Congressional Budget Office
    Abstract: This report presents additional information about CBO’s long-term projections of revenues and outlays for Social Security and provides information on Social Security benefits and payroll taxes for people born in different years and at different earnings levels. CBO has made a number of changes in the presentation and methodology of its distributional estimates since last year’s report. Lifetime Social Security benefit-to-tax ratios are higher this year as a result of those changes.
    JEL: H55 H60 H68 J26
    Date: 2014–12–18
  16. By: Congressional Budget Office
    Abstract: Higher-income households pay much more in federal taxes than do their lower-income counterparts: They have a much greater share of the nation’s before-tax income, and they pay a much larger proportion of that income in taxes. Households in the top quintile (including the top percentile) paid 68.8 percent of all federal taxes, households in the middle quintile paid 9.1 percent, and those in the bottom quintile paid 0.4 percent.
    Date: 2013–12–04
  17. By: Sebastian Dellepiane-Avellaneda (School of Government and Public Policy, University of Strathclyde, Glasgow); Niamh Hardiman (School of Politics and International Relations and Geary Institute for Public Policy, University College Dublin)
    Abstract: This exploratory paper outlines an approach to the evolution of the tax state in four countries: Ireland, Spain, Portugal, and Greece. It is motivated by our interest in a cluster of countries that are all too often excluded from comparative studies in political economy. Both the volume and the composition of tax revenues in these four countries display somewhat different patterns from those of the wealthier European countries. Their systematic exclusion may distort comparative generalizations in important ways. We focus here on three analytical themes that merit further exploration. Each of them helps us challenge the conventional understanding of the dynamics of tax policy. The first is that of timing. These four countries were late welfare developers, which meant that the demands placed on the tax capacity of the state is at variance with trends elsewhere, with implications for the constraints and opportunities available to their governments. The second concerns the specific domestic political economy mechanisms involved in these countries’ tax choices, which can be opened out using perspectives drawn from fiscal sociology. The third theme concerns the international political economy, and suggests that the economic and financial vulnerability of countries on the ‘periphery’ may influence many aspects of their policy choices, including the size of their tax state and the composition of their revenues. This preliminary version of our work focuses on the experiences of Spain and Ireland; further work on Portugal and Greece will follow.
    Keywords: politics of taxation, European periphery, economic sociology, fiscal sociology, Spain, Ireland
    JEL: E62 H20 Z13 Z18
    Date: 2015–11–04
  18. By: Karen Kopecky (Federal Reserve Bank of Atlanta); Anastasios Karantounias (Federal Reserve Bank of Atlanta)
    Abstract: We study optimal time-consistent distortionary taxation when the repayment of government debt is not enforceable. The government taxes labor income or issues non-contingent debt in order to finance an exogenous stream of stochastic government expenditures. The government can repudiate its debt subject to some default costs. Our setup blends elements of time-consistent fiscal policy and the sovereign default literature.
    Date: 2015
  19. By: Mencinger, Jernej; Verbic, Miroslav; Aristovnik, Aleksander
    Abstract: The paper empirically explores the factor of public debt which considerably changes the transmission mechanism of fiscal policy effects to economic activity in the short term. We examined and evaluate the direct effect of higher indebtedness in the public sector on economic growth for a panel dataset of overall 36 countries (25 EU member states and 11 OECD countries). Our examination will shed light on the current debt problem by identifying a possible non-linear relationship between the level of public debt and economic growth, with an explicit focus to determine the threshold values for our sample of countries. Our sample is divided into subgroups distinguishing between so-called developed, covering the period 1980–2010, and emerging economies, covering the period 1995–2010. Extending our previous research we are particularly interested in the existence of a non-linear impact of government debt on the behaviour of GDP growth. In order to account for the impact of the level of the debt-to-GDP ratio on the real growth rate of GDP, we employ a panel estimation on a generalized economic growth model augmented with a debt variable, while also considering some methodological issues like the problems of heterogeneity and endogeneity. The results confirm the general theoretical assumption that at low levels of public debt the impact on growth is positive, whereas beyond a certain debt turning point a negative effect on growth prevails. Further, we calculated that the debt-to-GDP turning point, where the positive effect of accumulated public debt inverts into a negative effect, is roughly between 90% and 94% for developed economies. Yet for emerging countries the debt-to-GDP turning point is lower, namely between 44% and 45%. Therefore, we can confirm our hypothesis that the threshold value for emerging is lower than for the developed in our sample.
    Keywords: fiscal policy; public debt; economic growth; panel analysis; turning points; EU
    JEL: C23 H63
    Date: 2015
  20. By: Rogozin, Dmitriy M. (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Shmerlina, Irina (Russian Presidential Academy of National Economy and Public Administration (RANEPA))
    Abstract: The work is dedicated to the identification and analysis of problems and contradictions in the task of improving the social impact of the activities of government bodies and state/local government agencies both in theoretical and methodological terms and from the perspective of the practical implementation of legal innovations.
    Keywords: Russian economy, public services, municipal services, public goods
    JEL: H41 H43 H44
    Date: 2014
  21. By: David Love (Williams College); Lucie Schmidt (Williams College)
    Abstract: The 1965 Immigration and Nationality Act had a profound impact on the demographic and skill composition of immigrants arriving in the U.S. A large literature has investigated the relative earnings of immigrants and natives, but much less is known about relative wealth accumulation and the preparation of immigrants for retirement. This paper compares the retirement preparation of older immigrants to that of native-born households using an annualized comprehensive measure of available resources. We find that immigrants have less wealth overall, but that they appear to be drawing down resources at a slower rate. We attempt to make sense of the trends in annualized wealth with the help of a lifecycle framework that incorporates uncertain longevity, bequests, risk in retirement resources, as well as endogenous housing wealth. Simulations from the model indicate that it is difficult to match the observed patterns in annualized wealth without the combination of both an explicit bequest motive and an explicit treatment of housing choice. These patterns mask a good deal of heterogeneity, however, in terms of socioeconomic and demographic characteristics. Some of the largest differences within immigrants occur along the margins of race and ethnicity, as well as the number of years since arrival. The evidence suggests that the typical immigrant is relatively well situated in retirement, but that more recent immigrants have low levels of total resources and are likely to have difficulty maintaining adequate levels of spending in retirement.
    Date: 2015–09

This nep-pbe issue is ©2015 by Thomas Andrén. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.