nep-pbe New Economics Papers
on Public Economics
Issue of 2015‒11‒21
fifteen papers chosen by
Thomas Andrén

  1. A Positive Theory of Economic Growth and the Distribution of Income By Allan H. Meltzer; Scott F. Richard
  2. Inequality Reducing Properties of Progressive Income Tax Schedules: The Case of Endogenous Income By Oriol Carbonell-Nicolau; Humberto Llavador
  3. Effects of Increases in Value Added Tax: A Dynamic CGE Approach By Jean Luc Erero
  4. The Sufficient Statistic Approach: Predicting the Top of the Laffer Curve By Mark Huggett; Alejandro Badel
  5. Taxation under Oligopoly in a General Equilibrium Setting By Collie, David R.
  6. Commodity Taxation and Regulatory Competition By Simone Moriconi; Pierre M. Picard; Skerdilajda Zanaj
  7. Wealth accumulation and aggregate demand stagnation in a two class economy with applications to the United States By Rishabh Kumar
  8. Intrinsic and extrinsic effects on behavioral tax biases in risky investment decisions By Fochmann, Martin; Hemmerich, Kristina; Kiesewetter, Dirk
  9. Educate or Adjudicate? Socio-Economic Heterogeneity and Welfare By Bilin Neyapti
  10. Voluntary Disclosure Programs for Tax Evaders By Heiner Schmittdiel
  11. Taxation, credit constraints and the informal economy By Julia Passabom Araujo; Mauro Rodrigues
  12. Tax, Regulation and Economic Growth: A Case Study of the UK By Minford, Lucy
  13. The local government of Tuscany. A review of 2013 By Patrizia Lattarulo
  14. Paid Parental Leave: Lessons from OECD Countries and Selected U.S. States By Willem Adema; Chris Clarke; Valérie Frey
  15. The effectiveness of public subsidies for private innovations: An experimental approach By Brüggemann, Julia

  1. By: Allan H. Meltzer; Scott F. Richard
    Abstract: This paper is a positive theory of the distribution of income and the growth rate of the economy. It builds on our earlier work, Meltzer and Richard (1981), on the size of government. How does the distribution of income change as an economy grows? To answer this question we build a model of a labor economy in which consumers have diverse productivity. The government imposes a linear income tax which funds equal per capita redistribution. The tax rate is set in a sequence of single issue election in which the median productivity individual is decisive. Economic growth is the result of using a learning by doing technology, so higher taxes discourage labor causing the growth rate of the economy to fall. The distribution of productivity can widen due to an exogenous increase in technological specialization. This causes voters to raise the equilibrium tax rate and reduce growth. The distribution of pre-tax income widens. We calibrate the model using data from the U.S., U.K. and France. The results of the calibration show that the model is consistent with the facts about changes in income distribution over time in developed countries.
    Date: 2015–04
  2. By: Oriol Carbonell-Nicolau (Rutgers University); Humberto Llavador (Universitat Pompeu Fabra and Barcelona GSE)
    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: 2015–11–16
  3. By: Jean Luc Erero
    Abstract: This paper analyses the effects of increases in value added tax (VAT) through a dynamic computable general equilibrium model. The database of the model encompasses a social accounting matrix (SAM) for the year 2010. All the important South African taxes are included in the SAM and the household sectors are disaggregated according to income deciles, with the top decile being further split into five groups. Five different simulations are performed, ranging from 1% increase in the VAT to 5% over the period 2012 to 2018. Our findings show that the percentage increase in VAT would not affect lower income households negatively if the higher government revenue flowed to the lower income households. For example, the 1% increase in the VAT rate impacts on the investment through the price of capital. The change in investment means that any adjustment in capital stock will affect the production and demand for labour that might impact on the standard of living of all income groups. The GDP increases slightly by 0.02173% in 2013 and reports a positive change for the period between 2013 and 2018. This shows that in the short run the GDP depends on other variables such as investment and consumption, which likewise are positively affected by this shock.
    Keywords: value added tax, computable general equilibrium model, South Africa
    JEL: C68 E62 H21
    Date: 2015
  4. By: Mark Huggett (Georgetown University); Alejandro Badel (St. Louis Fed)
    Abstract: We provide a formula that relates the tax rate at the top of the Laffer curve to three elasticities. The formula applies to static models and to steady states of dynamic models. We also explore whether existing methods for estimating elasticities, common in the elasticity of taxable income literature, accurately estimate the theoretically-relevant elasticity. Existing methods work poorly in models with endogenous human capital accumulation but better in models with exogenous human capital.
    Date: 2015
  5. By: Collie, David R. (Cardiff Business School)
    Abstract: Taxation under oligopoly is analysed in a general equilibrium setting where the firms are large relative to the size of the economy and maximise the utility of their shareholders. It turns out that the model is an aggregative game, which simplifies the comparative statics for the effects of taxation. This novel analysis of taxation leads to a number of counterintuitive results that challenge conventional wisdom in microeconomics. A lump-sum tax may increase the price of the oligopolistic good and decrease welfare whereas a profits tax may decrease the price of the oligopolistic good and increase welfare. An ad valorem tax may decrease the price of the oligopolistic good and increase welfare. Furthermore, in line with conventional wisdom, total tax revenue is always higher with an ad valorem tax than with a specific tax that leads to the same price for the oligopolistic good.
    Keywords: Oligopoly; General Equilibrium; Aggregative Games; Ad Valorem Taxes; Specific Taxes; Profits Taxes; Lump-Sum Taxes
    JEL: C72 D21 D43 D51 H22 H25 L13 L21
    Date: 2015–10
  6. By: Simone Moriconi (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Pierre M. Picard; Skerdilajda Zanaj
    Abstract: TThis paper studies competition in commodity taxation and product market regula- tion between trading partner countries. We present a two-country general equilibrium model in which destination-based commodity taxes finance public goods, and prod- uct market regulation affects both the number of firms in the market and product diversity. We provide empirical evidence based on data for 21 OECD countries over the 1990-2008 period. Our results suggest that commodity taxation and product mar- ket regulation are interdependent policies. Theoretically and empirically we find an absence of strategic interaction in commodity taxation between governments. Further- more, we show that domestic regulation has a negative effect on domestic commodity taxation. Finally, we demonstrate theoretically and show empirically that product market regulation is a strategic complementary policy.
    Keywords: Regulation, commodity tax, strategic interactions.
    JEL: F0 H1 H7 H87 L5
    Date: 2015–11
  7. By: Rishabh Kumar (Department of Economics, New School for Social Research)
    Abstract: I develop a structuralist model of long run growth and distribution with capitalists and workers. Wealth distribution oers a resolution to prot-led vs wage-led regimes. At a stable steady state, wealth must be shared by each class and the consumption of workers becomes a key determinant of capacity utilization. The paradox of thrift be- comes a paradox of wealth. Capitalists' tendency to over-accumulate has negative consequences for their own steady state wealth, through the mechanisms of demand driven economic growth. As an applica- tion, it is predicted that observed levels of wealth inequality can cost the US economy approximately $500 billion of annual output in cur- rent terms. The model oers support for public policies looking to equalize the distribution of wealth and income whilst also improving macroeconomic stability and performance.
    Keywords: Wealth distribution, Economic Growth, Paradox of thrift
    JEL: D3 E21 O4
    Date: 2015–11
  8. By: Fochmann, Martin; Hemmerich, Kristina; Kiesewetter, Dirk
    Abstract: In a variety of recent papers, it is shown that individuals do not take taxes correctly into account, which results in distorted or unexpected investment behavior. We shed further light on the discussion of such behavioral tax perception biases by analyzing intrinsic and extrinsic effects on decision behavior. We study two dimensions: (1) the influence of emotions and cognition (individual dimension, intrinsic effects) and (2) the influence of available tax information by varying tax complexity and salience (tax system dimension, extrinsic effects). In our laboratory experiment, we construct the payoff structure such that the subjects are confronted with exactly the same choices in net terms in a situation with or without a capital gains tax. This design allows us to identify pure tax perception biases. We show that both dimensions are able to explain tax perception biases. In particular, we find evidence that perceived risk (cognition) is lower and consequently willingness to take risk is higher with a capital gains tax (with full loss offset provision) than without taxation. Furthermore, this positive effect on risky investment is higher in a situation with a rather low level of tax information in which tax complexity is high and tax salience is low. In addition, we are able to provide evidence that the use of decision heuristics can explain the observed tax bias differences between our information treatments. In particular, we find a negative relationship between the information level and the use of heuristics.
    Keywords: Tax Perception,Behavioral Taxation,Risk Taking Behavior,Tax Complexity,Tax Salience,Affect and Cognition,Experimental Economics
    JEL: C91 D14 H24
    Date: 2015
  9. By: Bilin Neyapti (Bilkent University)
    Abstract: This paper presents a model to explore the welfare effects of the government’s choice over two types of public goods provision: domestic regulatory and security spending (adjudication) versus education. Output is a function of physical and social capital, both of which can be heterogeneous across the regions. Local social capital is exposed to spillover effects of other regions. Education spending increases social capital, whereas adjudication spending increases total factor productivity. The solution in an OLG framework indicates that the welfare maximizing ratio of education spending is negatively related with the past levels of social capital stock and the degree of social cohesion, but positively related with the current levels of aggregate income and the tax rate. Simulations of the model’s temporal solution reveal the short-run and long-run difference, reversing the positive effects of the tax rate and the income level, which is a crucial point. Income and cultural homogeneity are associated positively with the level of aggregate income and social cohesion whereas the relationship between income distribution and social cohesion is non-linear in the short-run.
    Keywords: Economic Development; Income Equality; Public Spending; Social Capital; Social Cohesion.
    JEL: E02 E6 H11 H52 I24 I25 I31 Z18
    Date: 2015–11
  10. By: Heiner Schmittdiel (Erasmus University Rotterdam, the Netherlands)
    Abstract: In this paper, we develop a model that can explain why governments may want to choose to offer a voluntary disclosure program that allows people who withheld taxes to turn themselves in without punishment. We find that such a leniency rule not only increases government revenue when it comes as a surprise, but even when taxpayers anticipate it.
    Keywords: Tax compliance; voluntary disclosure; guilt
    JEL: H26 K34 K40
    Date: 2015–11–17
  11. By: Julia Passabom Araujo; Mauro Rodrigues
    Abstract: This paper extends Evans and Jovanovic (1989)’s entrepreneurship model to incorporate the informal sector. Specifically, entrepreneurs can operate either in the formal sector – in which they have limited access to credit markets, but have to pay taxes – or in the informal sector – in which they can avoid paying taxes, but have no access to credit markets. In addition, technology in the informal sector is both less productive and more labor intensive than that in the formal sector. We calibrate the model to the Brazilian economy, and evaluate the impact of credit frictions and taxation on occupational choices, aggregate output and inequality. Removing all distortions can improve aggregate efficiency considerably, largely because this induces entrepreneurs to switch to the formal sector, where technology is superior. Most of this effect comes from removing credit market frictions, but taxes on formal businesses are also important. The elimination of distortions can also reduce inequality, but this comes from credit constraints and labor income taxation. Reducing taxes on formal businesses actually increases inequality in the model.
    Keywords: Informal sector; credit frictions; taxation; entrepreneurship
    JEL: E26 L26 O17
    Date: 2015–11–10
  12. By: Minford, Lucy
    Abstract: This paper investigates whether government policy had a causal impact on UK output and productivity growth between 1970 and 2009. An open economy DSGE model of the UK is set up, with productivity growth determined by the tax and regulatory environment in which firms start up and operate. The agent’s optimality conditions imply a reduced form linear relationship between policy and short-run productivity growth. Identification is assured for the DSGE model by the rational expectations restrictions; therefore the direction of causality is unambiguously from policy to productivity. The model is estimated and tested by Indirect Inference, a simulation-based method with good power against general misspecification. The results of this study offer robust empirical evidence that temporary changes in policies underpinning the business environment can have long-lasting effects on UK economic growth.
    JEL: E6 O11 O47 O5 O38
    Date: 2015–11
  13. By: Patrizia Lattarulo (Istituto Regionale per la Programmazionae Economica della Toscana)
    Abstract: Because of the instability of the present economic phase and the undecidedness of politics in facing it, it is difficult to attentively track the continual evolution of public financial regulations and procedures. However, the progression of the crisis – on the one hand – and the bundle of regulations – on the other – are increasingly changing the modus operandi of the public actor and his relationships with firms, families and territories. The long-run effect of too strict measures (such as the Internal Stability Pact or the block of turnover), accompanied, from time to time, by exceptional interventions (like the abolition of the Municipal property tax on first homes, or the payment of public administration debts) only increased the distance between citizenship and administration, sharpening the conflict between a growing demand for services and an unbearable fiscal burden. Presently, the country has still no comprehensive framework of reforms, while its public administration system is deprived of financial and human resources and brought into the disrepute – often out of simplist evaluations – of public opinion. This report is composed of short monographs on cross-sections of public administration and offers a concise reading of the changes afoot in the different areas of public interventions. The figures for Tuscany, a region traditionally having a good supply of services and presenting a virtuous integration of the public and the private spheres, provide many cues for thinking about the processes of sectoral reform that have been started and never completed, as well as the impacts of public actions on territories and the corresponding replies of administrations.
    Keywords: local government, public services, local taxes
    JEL: H71 H76
    Date: 2014
  14. By: Willem Adema; Chris Clarke; Valérie Frey
    Abstract: The United States is at a crossroads in its policies towards the family and gender equality. Currently America provides basic support for children, fathers, and mothers in the form of unpaid parental leave, child-related tax breaks, and limited public childcare. Alternatively, the United States’ OECD peers empower families through paid parental leave and comprehensive investments in infants and children. The potential gains from strengthening these policies are enormous. Paid parental leave and subsidised childcare help get and keep more women in the workforce, contribute to economic growth, offer cognitive and health benefits to children, and extend choice for parents in finding their preferred work-life strategy. Indeed, the United States has been falling behind the rest of the OECD in many social and economic indicators by not adequately investing in children, fathers and mothers.<BR>Les États-Unis se trouvent à la croisée des chemins dans le domaine des politiques familiales et de promotion de l’égalité hommes-femmes. À l’heure actuelle, les enfants américains et leurs parents ne bénéficient que d’une aide minimum, qui comprend un congé parental non rémunéré, des allégements fiscaux liés aux enfants et une offre restreinte de services publics d’accueil des jeunes enfants. A contrario, les pairs des États-Unis au sein de l'OCDE offrent aux parents et aux familles la possibilité de prendre un congé parental rémunéré et investissent massivement dans les politiques de l’enfance. Des politiques plus généreuses dans ces domaines pourraient générer des bénéfices considérables. Le congé parental rémunéré et les services subventionnés de garde d’enfants contribuent à augmenter le nombre de femmes qui rejoignent le marché du travail ou qui y restent, participent à la croissance économique, ont des effets bénéfiques sur les compétences cognitives et la santé des enfants, et offrent aux parents un éventail de choix plus large afin de concilier au mieux vie professionnelle et vie privée. Les États-Unis accusent en effet du retard par rapport aux autres pays de l'OCDE à l’aune de nombreux indicateurs sociaux et économiques, car ils n’ont pas suffisamment investi dans le bien-être des enfants et des parents.
    Keywords: employment, United States, OECD countries, children, parental leave, Women, work
    JEL: H53 I38 J13 J21
    Date: 2015–11–19
  15. By: Brüggemann, Julia
    Abstract: The effects of public subsidies in supporting private innovative activity is subject to longstanding political and scientific debates. Since the empirical findings remain largely inconclusive, this study adds to this debate with counterfactual evidence from a laboratory experiment. In a creative real effort task simulating the innovation process, two distinct means of allocating subsidies are compared to a benchmark treatment without subsidies to identify their effects in fostering innovativeness. Furthermore, subjects' cooperative behavior in relation to subsidies is investigated. Overall, subsidies lead to a substantial crowding-out of private investment. While the individual revenues increase due to the subsidy, the innovative activity fails to increase and less sophisticated innovations are realized. Consequently, subsidies have no positive and even negative effects on overall welfare, depending on the subsidy specifics. However, subsidies do not influence cooperative behavior. These findings imply that the additional costs of subsidies for innovations might not be warranted by gains from additional innovations and increased welfare.
    Keywords: creativity,innovation policy,laboratory experiment,real effort task,subsidies
    JEL: C91 H25 O31
    Date: 2015

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