nep-pbe New Economics Papers
on Public Economics
Issue of 2016‒01‒03
twenty papers chosen by
Thomas Andrén

  1. Regional State Capacity and the Optimal Degree of Fiscal Decentralization By Antonio A. Bellofatto; Martín Besfamille
  2. Economic Integration, Corporate Tax Incidence and Fiscal Compensation By Nelly Exbrayat; Benny Geys
  3. The Political Economy of Soda Taxation By Sriparna Ghosh; Joshua C. Hall
  4. Optimal Taxation with Behavioral Agents By Farhi, Emmanuel; Gabaix, Xavier
  5. The Political Economy of Growth, Inequality, the Size and Composition of Government Spending By Klaus Schmidt-Hebbel; José Carlos Tello
  6. ‘Hold that ghost’: using notches to identify manipulation of population-based grants By Dirk Foremny; Jordi Jofre-Monseny; Albert Solé-Ollé
  7. Social Health Insurance: A Quantitative Exploration By Juergen Jung; Chung Tran
  8. Fiscal sustainability of the German Laender: Time series evidence By Burret, Heiko T.; Feld, Lars P.; Köhler, Ekkehard A.
  9. Tax and Non-Tax Revenue of the Budget: What’S the Difference? By Dmitry L. Komyagin
  10. Kindergarten for All: Long-run Effects of a Universal Intervention By Drange, Nina; Havnes, Tarjei; Sandsør, Astrid M. J.
  11. National or political cake? By Jean-Francois Maystadt; Muhammad Kabir Salihu
  12. Tax Evasion Revised: Surprising Experimental Evidence on the Role of Principal Witness Regulations and Differences in Gender Attitudes By Luigi Mittone; Johannes Buckenmaier; Eugen Dimant
  13. Do Workplace Pensions Crowd Out Other Retirement Savings? Evidence from Canadian Tax Records By Messacar, Derek
  14. Instruction length and content: Effects on punishment behaviour in public goods games By Abhijit Ramalingam; Antonio J. Morales; James M. Walker
  15. Optimal Taxation Rule Reversal in the Presence of Gentle Polluters and Greedy Cleaners By Damien Sans
  16. Individual and Aggregate Constrained Efficient Intertemporal Wedges in Dynamic Mirrleesian Economies By Chen, Yunmin; Chien, YiLi; Yang, C.C.
  17. How does easing liquidity constraints affect aggregate employment? By Vicente Bermejo; Rodolfo G. Campos; José M. Abad
  18. Capitalization of capital gains taxes: (In)attention and turn-of-the-year returns By Eichfelder, Sebastian; Lau, Mona
  19. Disability Benefit Generosity and Labor Force Withdrawal By Mullen, Kathleen; Staubli, Stefan
  20. The impact of easy and early access to old-age benefits on exits from the labour market: a macro-micro analysis By Ewa Galecka-Burdziak; Marek Góra

  1. By: Antonio A. Bellofatto; Martín Besfamille
    Abstract: This paper studies the optimal degree of fiscal decentralization in a federation. In our environment, regional governments are characterized by two dimensions of state capacity; namely, administrative and fiscal. These gauge the ability to deliver public goods and to raise tax revenues, respectively. Two regimes are compared: partial and full decentralization. Under partial decentralization, regional governments have no tax powers and rely on central bailouts to refinance incomplete projects. Under full decentralization, regional governments refinance incomplete projects through capital taxes, in a context of tax competition. We provide a normative comparison between partial and full decentralization and show how the optimal degree of fiscal decentralization hinges on the relative magnitudes of each type of capacity. Specifically, for sufficiently low levels of fiscal capacity bailing out regional governments is optimal, regardless of the level of administrative ability. However, a combination of low levels of administrative capacity and high levels of fiscal capacity calls for fully decentralizing tax powers.
    JEL: D82 H77
    Date: 2015
  2. By: Nelly Exbrayat (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France, Université Jean Monnet, Saint-Etienne, F-42000, France); Benny Geys (Norwegian Business School BI, Nydalsveien 37, N-0442 Oslo, Norway ; Vrije Universiteit Brussel (VUB), Pleinlaan 2, B-1050 Brussels, Belgium)
    Abstract: Higher corporate taxes are often argued to depress wages (a tax incidence effect), while higher wages may require compensation via lower corporate tax rates (a fiscal compensation effect). Yet, existing empirical evidence ignores that i) both effects are likely to occur simultaneously (necessitating a joint estimation approach), and ii) capital mobility might play a critical moderating role for the strength of both effects. Using a panel dataset comprising 24 OECD countries over the period 1982-2007, we address both these deficiencies. This clearly illustrates the simultaneous existence of tax incidence and fiscal compensation effects. Moreover, capital mobility (and the ensuing relative bargaining power of economic agents) has a significant influence on both the prevalence and strength of these effects.
    Keywords: Tax Incidence, Fiscal Compensation, Corporate taxation, Wage bargaining, Capital mobility
    JEL: H22 H25 J21 J31 H32
    Date: 2015
  3. By: Sriparna Ghosh (West Virginia University, Department of Economics); Joshua C. Hall (West Virginia University, Department of Economics)
    Abstract: There has been an increase in the prevalence of obesity in the United States over the past several decades. The academic literature has highlighted numerous possible causes, including the consumption of soda and other sugar-sweetened beverages. Soda taxes have been suggested as a way of reducing the consumption of sugar-sweetened beverages and a number of U.S. states disfavor" sugar-sweetened beverages relative to food in their tax code. In this note we employ a political economy model to explain the adoption of these soda taxes." We find that more Democratic states and those with a higher rate of adult obesity are more likely to have soda taxes and states with more convenience stores per capita are less likely to have adopted a tax.
    Keywords: soda, sugar-sweetened beverages, political economy, median voter, special interests
    JEL: D72 H75
    Date: 2015–12
  4. By: Farhi, Emmanuel; Gabaix, Xavier
    Abstract: This paper develops a theory of optimal taxation with behavioral agents. We use a general behavioral framework that encompasses a wide range of behavioral biases such as misperceptions, internalities and mental accounting. We revisit the three pillars of optimal taxation: Ramsey (linear commodity taxation to raise revenues and redistribute), Pigou (linear commodity taxation to correct externalities) and Mirrlees (nonlinear income taxation). We show how the canonical optimal tax formulas are modified and lead to a rich set of novel economic insights. We also show how to incorporate nudges in the optimal taxation frameworks, and jointly characterize optimal taxes and nudges. We explore the Diamond-Mirrlees productive efficiency result and the Atkinson-Stiglitz uniform commodity taxation proposition, and find that they are more likely to fail with behavioral agents.
    Keywords: behavioural public finance; inattention; mistakes; nudges
    JEL: D03 H21
    Date: 2015–12
  5. By: Klaus Schmidt-Hebbel; José Carlos Tello
    Abstract: This paper develops a dynamic general-equilibrium political-economy model for the optimal size and composition of public spending. An analytical solution is derived from majority voting for three government spending categories: public consumption goods and transfers (valued by households), as well as productive government services (complementing private capital in an endogenous-growth technology). Inequality is reflected by a discrete distribution of infinitely-lived agents that differ by their initial capital holdings. In contrast to the previous literature that derives monotonic (typically negative) relations between inequality and growth in one-dimensional voting environments, this paper establishes conditions, in an environment of multi-dimensional voting, under which a non-monotonic, inverted U-shape relation between inequality and growth is obtained. This more general result – that inequality and growth could be negatively or positively related – could be consistent with the ambiguous or inconclusive results documented in the empirical literature on the inequality-growth nexus. The paper also shows that the political-economy equilibrium obtained under multi-dimensional voting for the initial period is time-consistent.
    JEL: D72 E62 H11 H31
    Date: 2014
  6. By: Dirk Foremny (University of Barcelona & IEB); Jordi Jofre-Monseny (University of Barcelona & IEB); Albert Solé-Ollé (University of Barcelona & IEB)
    Abstract: We study local government incentives to misreport the information required to implement a formula grant. We focus specifically on population, in theory the easiest variable for the grantor to verify. We analyze the Spanish case and show how a switch from the use of census to registered population data (the latter administered by the municipalities) led to a manipulation of the population numbers used by central government to allocate grants to municipalities. As a result, registers included a proportion of ‘ghost’ citizens, that is, people who presented no trace of actually residing in the municipality. We identify the effects of grants on population over-reporting taking profit of notches in the grant scheme (i.e., one based on weighted population with the weights increasing at specific population thresholds). We document an excess mass of municipalities to the right of the notch threshold and a density hole to the left of it. There are several indications that manipulation (rather than real population responses) is the mechanism at work.
    Keywords: Intergovernmental transfers, notches, bunching, enforcement
    JEL: H7 H26 D7
    Date: 2015
  7. By: Juergen Jung; Chung Tran
    Abstract: We quantify the welfare implications of three alternative approaches to providing social health insurance: (i) a mix of private and public health insurance (US-style), (ii) compulsory universal public health insurance (UPHI), and (iii) private health insurance for workers combined with government subsidies and price regulation. We use a Bewley-Grossman lifecycle model calibrated to match the lifecycle structure of earnings and health risks in the US. For all three systems we find that welfare gains triggered by a combination of improvements in risk sharing and wealth redistribution dominate welfare losses caused by tax distortions and ex-post moral hazard effects. Overall, the UPHI system outperforms the other two systems in terms of welfare gains if the coinsurance rate is properly designed. A switch from the US system to a well-designed UPHI system results in large welfare gains. However, such a radical reform faces political impediments due to opposing welfare effects across different income groups.
    Keywords: Health capital, lifecycle health risk, incomplete insurance markets, social insurance, optimal policy, dynamic general equilibrium with idiosyncratic shocks
    JEL: I13 D52 E62 H31
    Date: 2015–12
  8. By: Burret, Heiko T.; Feld, Lars P.; Köhler, Ekkehard A.
    Abstract: We analyze the sustainability of public finances in the 16 states (Laender) of the Federal Republic of Germany using an unprecedentedly comprehensive fiscal dataset covering the period from 1950 to 2011 for West German Laender and from 1991 to 2011 for East German Laender. As we apply unit root and stationarity tests not only on debt but also on expenditure and revenue and explore their long-run relation in cointegration analyses for each Land we extend the existing literature. The results provide evidence against strict fiscal sustainability in a majority of German Laender. A notable exception to this finding is Bavaria.
    Keywords: Fiscal Sustainability,Federalism,Unit Root,Cointegration,Public Debt
    JEL: H62 H77 H72
    Date: 2015
  9. By: Dmitry L. Komyagin (National Research University Higher School of Economics)
    Abstract: The article discusses the nature of non-tax public revenue. The author first offers his own universal definition of public revenue. This results in the discovery of a variety of theoretical and practical problems, which include decentralized revenue, non-uniformity of non-tax revenue, and a contradiction involved in grouping certain forms of revenue together. A proposal is offered to consider public revenue in its various phases, initially as a based in national wealth, then as mobilized in the form of budget revenue, redistributed for public needs, and then administered
    Keywords: public needs; public revenue; public expenses; Russian budget, budget revenue; tax revenue; non-tax revenue.
    JEL: K K
    Date: 2015
  10. By: Drange, Nina (Statistics Norway); Havnes, Tarjei (Dept. of Economics, University of Oslo); Sandsør, Astrid M. J. (Dept. of Economics, University of Oslo)
    Abstract: Theory and evidence point towards particularly positive effects of high-quality child care for disadvantaged children. At the same time, disadvantaged families often sort out of existing programs. To counter differences in learning outcomes between children from different socioeconomic backgrounds, governments are pushing for universal child care. However, it is unclear how effective programs with universal participation may be at addressing the needs of disadvantaged children. We provide evidence on the long-run effect on schooling of mandating kindergarten at age 5–6. Our identifying variation comes from a reform that lowered school starting-age from 7 to 6 in Norway in 1997. The new program was designed as a low intensity kindergarten program, similar to voluntary child care programs available before mandating. Our precise DD estimates reveal hardly any effect, both overall, across subsamples, and over the grading distribution. A battery of specification checks support our empirical strategy.
    Keywords: kindergarten; early childhood intervention; distributional effects; difference-in- differences; child care; child development
    JEL: H40 I28 J13
    Date: 2015–08–31
  11. By: Jean-Francois Maystadt; Muhammad Kabir Salihu
    Abstract: Analysing the effect of opportunistic fiscal transfers on the electoral fortune of incumbent politicians can be very difficult due to problems of endogeneity. In this paper, we use oil windfalls as an exogenous variation in the political discretion an incumbent government can exert in rule-based transfers. Exploiting within-state variation between 2007 and 2015 in Nigeria, an increase in VAT transfers induced by higher oil windfalls is found to improve the electoral fortune of an incumbent government. Our results question the role of rule-based transfers as an efficient institutional arrangement in resource-abundant countries.
    Keywords: Intergovernmental transfers, ruled-based transfers, political manipulation, fiscal federalism, Nigeria
    JEL: H70 H77 P16
    Date: 2015
  12. By: Luigi Mittone; Johannes Buckenmaier; Eugen Dimant
    Abstract: This paper experimentally investigates indirect tax evasion that requires the cooperation of an intermediary. We explore the effectiveness of the introduction of a principal witness regulation as a means to facilitate tax compliance. Reactions show a significant drop in tax compliance that, surprisingly, is vastly different across gender with the effect being mainly driven by women. As a result, women decrease their tax compliance significantly reaching an even lower level than men who in turn do not react to the institutional change.
    Keywords: indirect tax evasion, gender difference, contextual sensitivity, reciprocity, principal witness regulation
    JEL: D03 D73 D81 H26
    Date: 2015
  13. By: Messacar, Derek
    Abstract: This paper investigates whether registered pension plans (RPPs) help households prepare financially for retirement or simply substitute for other forms of private saving. This issue is addressed using a panel of 1.8 million Canadian households, from 1991 to 2010, which appear in the Longitudinal Administrative Databank. The analysis controls for correlations in savings across accounts due to unobserved tastes for saving by exploiting the fact that employer contribution rates increase discontinuously on earnings above the average industrial wage, a unique feature of occupational pensions in Canada, the effect being estimated in a Regression Kink Design.
    Keywords: Income, pensions and wealth, Income, pensions, spending and wealth, Pension plans and funds and other retirement income programs, Seniors, Work and retirement
    Date: 2015–12–21
  14. By: Abhijit Ramalingam (University of East Anglia); Antonio J. Morales (Universidad de Malaga); James M. Walker (Indiana University)
    Abstract: Instruction length and content have been shown to affect comprehension levels and decision times of experimental subjects in public goods games. However, to date, there is no evidence of a significant impact on behaviour. We investigate the effects of instruction length and content on comprehension and behaviour in a more complicated setting – a public goods game with punishment. We find that longer instructions, that include examples that highlight the positive externality associated with public goods contributions, increase the comprehension levels of subjects, significantly lowering the time taken to answer the pre-experiment quiz and make decisions. Importantly, the differences in instructions are also associated with significant differences in behaviour. On average, groups that receive shorter instructions fail to use punishment effectively to raise contribution levels while those that receive longer instructions sustain higher contribution levels over time. In the former case, groups target low contributors less frequently than appears necessary to induce greater cooperation.
    Keywords: public goods, punishment, instruction length, decision times, contributions, punishment
    JEL: C72 C91 C92 H41
    Date: 2015–12–07
  15. By: Damien Sans (AMSE - Aix-Marseille School of Economics - EHESS - École des hautes études en sciences sociales - Centre national de la recherche scientifique (CNRS) - Ecole Centrale Marseille (ECM) - AMU - Aix-Marseille Université)
    Abstract: The literature on the micro-economics of the eco-industry often assumed interiority of pollutant net emissions. In a perfectly competitive final good market vertically integrated with an upstream monopoly supply this assumption implies that an optimal tax is always greater than its associated marginal social damage. In this short note we will relax this assumption and challenge that result. The market structure generates a unique threshold on the scale of the marginal social damage, whereby for any value above the threshold an optimal tax is strictly lower and net emissions are zero.
    Keywords: microeconomics,eco-industry,imperfect competition,optimal taxation
    Date: 2015–12
  16. By: Chen, Yunmin (Institute of Economics, Academia Sinica); Chien, YiLi (Federal Reserve Bank of St. Louis); Yang, C.C. (Institute of Economics, Academia Sinica)
    Abstract: Assuming a neoclassical production technology, this paper characterizes constrained efficient intertemporal wedges for the macro aggregate as well as the micro individual allocation of dynamic Mirrleesian economies. We first construct “Pareto-Negishi weights” from the multipliers on a sequence of temporary incentive constraints. For a fairly general stochastic process of idiosyncratic productivity shocks, we show that the evolution of the Pareto-Negishi weight associated with agents’ consumption is a nonnegative martingale. This powerful property enables us to deliver three contributions to the literature. First, we demonstrate that several celebrated constrained efficient intertemporal results of the individual allocation in the literature can be all attributed to originating from the nonnegative martingale property of consumption Pareto-Negishi weights. Second, we address optimal distortion for the aggregate allocation and establish that the constrained efficient intertemporal wedge for aggregate saving will be negative or positive, depending on whether the intertemporal elasticity of substitution is elastic or inelastic. This result is another application of the nonnegative martingale property. Third, we show how the nonnegative martingale property is modified in the presence of additional frictions and shed new light on incorporating different types of constraints documented in the literature.
    Keywords: Intertemporal wedges; Nonnegative martingale; Inverse Euler equation; Immiseration
    JEL: D82 E21 H21
    Date: 2015–12–21
  17. By: Vicente Bermejo; Rodolfo G. Campos; José M. Abad
    Abstract: We measure the impact of removing liquidity constraints on aggregate employment by focusing on a sudden and unexpected large liquidity injection to Spanish firms in early 2012, when the Spanish central government paid all invoices of firms to regional and municipal governments that were in arrears. We identify the effect on employment from the cross-sectional variation in the size of the liquidity injection received by Spanish municipalities. Our preliminary finding sindicate that labor market responses can be detected both in the municipality where the liquidity injection occurs and in the municipality where firms are headquartered. We find evidence that the effect on unemployment is stronger where the liquidity injection originates whereas the effect on employment is stronger where the firms are located.
    Keywords: Liquidity injection , Financial constraints , Employment , Unemployment , Spain
    JEL: J64 H11
    Date: 2015–07
  18. By: Eichfelder, Sebastian; Lau, Mona
    Abstract: We argue that the tax capitalization effect is a function of the attention of market participants. Market reactions can therefore be driven not only by the announcement dates of tax events but also by factors influencing the dissemination of tax information, such as deadlines and media reports. Analyzing the introduction date of the earlier-announced German capital gains tax reform of 2009 by triple-difference estimation, we find evidence of a delayed market reaction long after the announcement date. Within the last two (five) trading days before the deadline, we observe a sharp increase in abnormal trading volumes of 151.7% (104.0%). The aggregate abnormal return of the German capital market in the last five trading days in 2008 was 10.6%. Furthermore, we find a significant and positive correlation between trading volumes and measures for awareness of the upcoming tax reform (Google searches and media reports).
    Keywords: capital gains tax,asset pricing,tax awareness,tax arbitrageM,turn-of-the-year effect,market efficiency
    JEL: G02 G12 H24 M41
    Date: 2015
  19. By: Mullen, Kathleen (RAND); Staubli, Stefan (University of Calgary)
    Abstract: A key component for estimating the optimal size and structure of disability insurance (DI) programs is the elasticity of DI claiming with respect to benefit generosity. Yet, in many countries, including the United States, all workers face identical benefit schedules, which are a function of one's labor market history, making it difficult to separate the effect of the benefit level from the effect of unobserved preferences for work on individuals' claiming decisions. To circumvent this problem, we exploit exogenous variation in DI benefits in Austria arising from several reforms to its DI and old age pension system in the 1990s and 2000s. We use comprehensive administrative social security records data on the universe of Austrian workers to compute benefit levels under six different regimes, allowing us to identify and precisely estimate the elasticity of DI claiming with respect to benefit generosity. We find that, over this time period, a one percent increase in potential DI benefits was associated with a 1.2 percent increase in DI claiming.
    Keywords: disability insurance, benefit generosity, labor force withdrawal, claiming elasticity
    JEL: H55 J14 J22
    Date: 2015–12
  20. By: Ewa Galecka-Burdziak (Warsaw School of Economics); Marek Góra (Warsaw School of Economics)
    Abstract: We analyse whether easy and early access to old-age benefits tempts workers to become inactive. We examine the impact of old-age benefits in the light of the discouraged worker effect in Poland, a country severely experiencing the problem of population ageing. We identify cyclical properties in activity and discouraged worker rates, and estimate a set of logistic regressions to identify the determinants of exits from the labour market. In the macro analysis, the added worker effect prevails over the discouraged worker effect. The discouraged worker effect arises with a delay of a few quarters. This process is asymmetric; in duration for females and in size for males. Females often permanently leave the market, and males more likely leave the market in downturns than re-enter in expansions. In a micro perspective, if the old-age benefit becomes the main source of income for the worker within a 1-year interval, the worker is 8 to 20 times more likely to leave the workforce compared to those who receive unemployment benefits or social welfare benefits. Thus, our findings are in favour of a higher retirement age, understood as the age when workers become eligible for the old-age benefits.
    Date: 2015–12

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