nep-pbe New Economics Papers
on Public Economics
Issue of 2016‒01‒29
23 papers chosen by
Thomas Andrén

  1. Fiscal Decentralization and Decentralizing Tax Administration: Different Questions, Different Answers By Richard M. Bird
  2. Redistribution Through Charity, and Optimal Taxation when People are Concerned with Social Status By Thomas Aronsson; Olof Johansson-Stenman; Ronald Wendner
  3. The Poverty Implications of Alternative Tax Reforms: Some Countries Intuitive Results In an Application to Pakistan By Andrew Feltenstein; Carolina Mejia
  4. Representation without taxation, taxation without consent. The legacy of Spanish colonialism in America By Alejandra Irigoin
  5. Wealth Concentration, Income Distribution, and Alternatives for the USA By Lance Taylor; Ozlem Omer; Armon Rezai
  6. Taxation trends in the European Union: 2015 edition By European Commission
  7. A Proposal to Eliminate the Distortions Caused by Bailouts By Chari, V. V.; Kehoe, Patrick J.
  8. Heterogeneity in Returns to Wealth and the Measurement of Wealth Inequality By Andreas Fagereng; Luigi Guiso; Davide Malacrino; Luigi Pistaferri
  9. Corporate Flat Tax Reforms and Businesses' Location Choices. Evidence from Switzerland By Sergio Galletta; Agustin Redonda
  10. A Statistical Model of Inequality By Ricardo T. Fernholz
  11. Declining Wealth and Work among Male Veterans in the Health and Retirement Study By Alan Gustman; Thomas Steinmeier; Nahid Tabatabai
  12. Optimal Time-Consistent Monetary, Fiscal and Debt Maturity Policy By Eric M Leeper; Campbell Leith; Ding Liu
  13. How does a change in the excise tax on beer impact beer retail prices in South Africa? By Caitlan Russell and Corne van Walbeek
  14. Transforming Federal and State Retirement Tax Deductions By Teresa Ghilarducci; Ismael Cid-Martinez
  15. Social Insurance, Private Health Insurance and Individual Welfare By Kai Zhao
  16. Consumption taxes and taste heterogeneity By Stéphane Gauthier; Fanny Henriet
  17. Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach By Kory Kroft; Kavan Kucko; Etienne Lehmann; Johannes Schmieder
  18. Review of the pension provision across the European Union countries. By Serap Saritas
  19. How to Generate and Sustain the Highest Income Inequality in Latin America – the Case of Colombia 2000-2010 By Melanie Hultsch
  20. Country Size and Corporate Tax Rate : Rationale and Empirics By Az駑ar, C駘ine; Desbordes, Rodolphe; Wooton, Ian
  21. On households and unemployment insurance By Valladares-Esteban, Arnau; Choi, Sekyu
  22. Clustering European Welfare Systems through a Performance Index By Maria Alessandra Antonelli; Valeria De Bonis
  23. Distributional Effects of Social Security Reforms: the Case of France By Raquel Fonseca; Thepthida Sopraseuth

  1. By: Richard M. Bird (University of Toronto)
    Abstract: The case for decentralizing taxes does not imply that these taxes need to be administered locally. Nor is it is necessarily constrained by the weakness of local tax administration. Tax decentralization and the decentralization of tax administration are related but separable decisions. As discussed in this paper, different countries have at different times have reached different conclusions about the appropriate way to mix and match these issues. No country may have it quite right when taking all the relevant factors into consideration, at least when viewed from outside. However, decisions on such matters are not made outside but inside specific countries, few involved in such decisions are likely to attach the same weights to all factors, and usually no one has the full story in mind when decisions are made. As with many questions of institutional design, there is no one size fits all correct answer to either the question of the extent to which taxes should be decentralized or the question of whether such taxes should also be administered in a decentralized fashion. However, thinking through these two distinct questions separately can be a useful step towards achieving better outcomes.
    Date: 2015–11
  2. By: Thomas Aronsson (Umea University); Olof Johansson-Stenman (University of Gothenburg); Ronald Wendner (University of Graz)
    Abstract: This paper deals with tax policy responses to charitable giving based on a model of optimal redistributive income taxation. The major contribution is the simultaneous treatment of (i) warm-glow and stigma effects of charitable donations; (ii) that the warm glow of giving and stigma of receiving charity may to some extent depend on relative comparisons; and (iii) that people are also concerned with their relative consumption more generally. Whether charity should be taxed or supported turns out to largely depend on the relative strengths of the warm glow of giving and the stigma of receiving charity, respectively, and on the positional externalities caused by charitable donations. In addition, imposing stigma on the mimicker (via a relaxation of the self-selection constraint) strengthens the case for subsidizing charity. We also consider a case where the government is unable to target the charitable giving through a direct tax instrument, and examine how the optimal marginal income tax structure is adjusted in response to charitable giving.
    Keywords: Conspicuous consumption; conspicuous charitable giving; optimal income taxation; warm glow; stigma
    JEL: D03 D62 H21 H23
    Date: 2016–01
  3. By: Andrew Feltenstein (International Center for Public Policy. Andrew Young School of Policy Studies, Georgia State University); Carolina Mejia (World Bank Author Name: David Newhouse; World Bank Author Workplace-Homepage: Author Name: Gohar Sedrakyan; International Center for Public Policy. Andrew Young School of Policy Studies, Georgia State University Author Workplace-Homepage:
    Abstract: This paper presents results from four simulations of the impact of potential tax reforms in Pakistan on poverty, shared prosperity, and inequality. The simulations are carried out in the context of a dynamic computational general equilibrium (CGE) model that incorporates endogenous evasion of the corporate income tax. The simulations are: a forward looking benchmark case, an increase in the corporate income tax from 35 to 45 percent, a rise in the General Sales Tax (GST) from 16 to 17 percent, and an increase in the tariff rate from 14 percent to 19 percent. The simulations link the CGE model to household survey data that is incorporated in a micro simulation model. This “top down” approach permits a disaggregated estimation of the poverty implications of alternative tax and tariff policies. The results indicate, counterintuitively, that the increase in the sales tax leads to milder average increases in poverty than an equal-yield corporate income tax, because the fall in capital investment resulting from the corporate tax increase lowers the marginal product of labor. The simulated tariff increase raises poverty slightly more than the sales tax increase and slightly less than the corporate tax increase. The difference in simulated poverty impacts is small, as the average headcount rate increases by half a percentage point more under the corporate income tax than the sales tax, confirming the limits of indirect taxation as a tool for redistributing income.
    Date: 2015–11
  4. By: Alejandra Irigoin
    Abstract: The essay examines Spain’s colonial legacy in the long run development of Spanish America. It surveys the fiscal and constitutional outcomes of independence and assesses the relative burden imposed by colonialism. Constitutional asymmetries between revenue collecting and spending agents constrained de facto governments’ power to tax. Inherent disparities embedded in colonial fiscal system worsened with vaguely defined representation for subjects and territories and troubled their aggregation into a modern representative polity. Governments with limited fiscal capacity failed to deliver public goods and to equitably distribute costs and benefits of independence. Growing indirect taxes, debt and money creation allowed them to transfer the fiscal burden to other constituents or future generations. Taxpayers realised the asymmetry between private contributions and public goods and hence favoured a low but regressive taxation. Comparisons with trajectories in the metropolis and the US are offered to qualify this legacy.
    Keywords: colonial legacy; institutions; long run development; Spanish America; Spain; fiscal; monetary; constitutional history
    JEL: F3 G3 E6
    Date: 2015–12
  5. By: Lance Taylor; Ozlem Omer; Armon Rezai (Schwartz Center for Economic Policy Analysis (SCEPA))
    Abstract: US household wealth concentration is not likely to decline in response to fiscal interventions alone. Creation of an independent public wealth fund could lead to greater equality. Similarly, once-off tax/transfer packages or wage increases will not reduce income inequality significantly; ongoing wage increases in excess of productivity growth would be needed. These results come from the accounting in a simulation model based on national income and financial data. The theory behind the model borrows from ideas that originated in Cambridge UK (especially from Luigi Pasinetti and Richard Goodwin).
    Keywords: Wealth distribution, income distribution, Cambridge theory
    JEL: D31 D33 D58 B50
    Date: 2015–09
  6. By: European Commission
    Abstract: This report contains a detailed statistical and economic analysis of the tax systems of the Member States of the European Union, plus Iceland and Norway, which are Members of the European Economic Area. The data are presented within a unified statistical framework (the ESA95 harmonised system of national and regional accounts), which makes it possible to assess the heterogeneous national tax systems on a fully comparable basis.
    Keywords: European Union, taxation
    JEL: H23 H24 H25 H27 H71
    Date: 2015–12
  7. By: Chari, V. V. (University of Minnesota); Kehoe, Patrick J. (University of Minnesota)
    Abstract: We argue that bailouts create tax distortions, subsidy distortions and debt-size externalities. We show that an orderly resolution provision as in the Dodd-Frank Act addresses the tax and subsidy distortions but not the debt-size externalities. A regulatory system that imposes limits on the debt-equity ratio of firms and imposes a Pigouvian tax on their size eliminates the distortions and completely corrects the externalities.
    Date: 2016–01–05
  8. By: Andreas Fagereng (Statistics Norway); Luigi Guiso (EIEF); Davide Malacrino (Stanford University); Luigi Pistaferri (Stanford University and NBER)
    Abstract: Lacking a long time series on the assets of the very wealthy, Saez and Zucman (2015) use US tax records to obtain estimates of wealth holdings by capitalizing asset income from tax returns. They document marked upward trends in wealth concentration. We use data on tax returns and actual wealth holdings from tax records for the whole Norwegian population to test the robustness of the methodology. We document that measures of wealth based on the capitalization approach can lead to misleading conclusions about the level and the dynamics of wealth inequality if returns are heterogeneous and even moderately correlated with wealth.
    Date: 2016
  9. By: Sergio Galletta (IdEP, Economia, Universita' Svizzera italiana, Switzerland); Agustin Redonda (Council on Economic Policies (CEP), Switzerland)
    Abstract: Profit taxation affects corporate investment decisions through several channels. This paper focuses on the impact of corporate income flat tax reforms on businesses' location choices. Since 1990, Swiss states (cantons) have been switching from a graduated to a flat tax rate scheme on profits. The paper assesses the effects of such a reform on the number of establishments by computing a difference-in-differences estimation. Our results show a negative impact on the number of firms in a given jurisdiction. Interestingly, the effect is considerably larger for riskier firms, suggesting the presence of an insurance effect from progressive taxation for risk-averse entrepreneurs.
    Keywords: Corporate taxes, Business location, Flat-tax, Tax reform, Progressive taxation
    JEL: H25 H32 H71 R3
    Date: 2016–01–18
  10. By: Ricardo T. Fernholz
    Abstract: This paper develops a nonparametric statistical model of wealth distribution that imposes little structure on the fluctuations of household wealth. In this setting, we use new techniques to obtain a closed-form household-by-household characterization of the stable distribution of wealth and show that this distribution is shaped entirely by two factors - the reversion rates (a measure of cross-sectional mean reversion) and idiosyncratic volatilities of wealth across different ranked households. By estimating these factors, our model can exactly match the U.S. wealth distribution. This provides information about the current trajectory of inequality as well as estimates of the distributional effects of progressive capital taxes. We find evidence that the U.S. wealth distribution might be on a temporarily unstable trajectory, thus suggesting that further increases in top wealth shares are likely in the near future. For capital taxes, we find that a small tax levied on just 1% of households substantially reshapes the distribution of wealth and reduces inequality.
    Date: 2016–01
  11. By: Alan Gustman (Dartmouth College); Thomas Steinmeier (Texas Tech University); Nahid Tabatabai (Dartmouth College)
    Abstract: The composition, wealth, and employment of male veterans and nonveterans are analyzed for four cohorts from the Health and Retirement Study, ages 51 to 56 in 1992, 1998, 2004, and 2010. Half of the two oldest cohorts served in the military. Only 16 percent of the youngest cohort, the only cohort subject to the all-volunteer military, served. One-fifth to one-third of the members of each cohort who served saw combat, mainly in Vietnam and in the Gulf War. Among those 51 to 56 in 1992, veterans were better educated, healthier, wealthier, and more likely to be working than nonveterans. By 2010, 51- to 56-year-old veterans had lost their educational advantage, were less healthy, less wealthy, and less likely to be working than nonveterans. After standardizing in multiple regressions for the influence of major observable characteristics, for the original 1992 HRS cohort, the wealth of veterans is no longer higher than the wealth of nonveterans. In contrast, the wealth of veterans from the youngest cohort, those 51 to 56 in 2010, remains about 10 to 13 percent below the wealth of nonveterans from that cohort. There also is a decline from older to younger cohorts of veterans compared to nonveterans in the probability of being not retired, of working more than 35 hours per week, and in the likelihood of holding a job for more than 10 years. Comparisons are made within the group of veterans by years of service, officer rank and other covariates.
    Date: 2015–09
  12. By: Eric M Leeper; Campbell Leith; Ding Liu
    Abstract: We develop a New Keynesian model with government bonds of mixed matu- rity and solve for optimal time-consistent policy using global solution techniques. This reveals several non-linearities absent from LQ analyses with one-period debt. Firstly, the steady-state balances an in ation and debt stabilization bias to gener- ate a small negative debt value with a slight undershooting of the in ation target. This falls far short of rst-best (`war chest') asset levels. Secondly, starting from debt levels consistent with currently observed debt to GDP ratios the optimal pol- icy will gradually reduce that debt, but the policy mix changes radically along the transition path. At high debt levels there is a reliance on a relaxation of monetary policy to reduce debt through an expanded tax base and reduced debt service costs, while tax rates are used to moderate the increases in in ation. However, as debt levels fall, the use of monetary policy in this way diminishes and the authority turns to scal policy to continue debt reduction. This endogenous switch in the policy mix occurs at higher debt levels, the longer the average debt maturity. Allowing the policymaker to optimally vary debt maturity in response to shocks and across varying levels of debt, we nd that variations in maturity are largely used to sup- port changes in the underlying time-consistent policy mix rather than the speed of scal correction. Finally, introducing a mild degree of policy maker myopia can re- produce steady-state debt to GDP ratios and in ation rates not dissimilar to those observed empirically, without changing any of the qualitative results presented in the paper.
    Keywords: New Keynesian Model; Government Debt; Monetary Policy; Fiscal Policy; Credibility; Time Consistency; Maturity Structure.
    JEL: E62 E63
    Date: 2016–01
  13. By: Caitlan Russell and Corne van Walbeek
    Abstract: This paper uses price data, collected by Statistics South Africa, to estimate the effect of a change in the excise tax on the retail price of beer. We find strong evidence that the excise tax on beer is overshifted to consumers. The pass-through coefficient is estimated at 4.83 (95% CI: 4.02; 5.64) for lager, and at 4.77 (95% CI: 4.04; 5.50) for all beer (which includes dark beer). This implies that for every R1/unit increase in the excise tax, the retail price increases by about R4.80/unit. Of the 23 brand-packaging combinations considered, the pass-through coefficients vary between 2.39 and 10.05 (median = 5.30). The majority of the price change in response to a tax change occurs immediately, and prices have fully adjusted two months after the excise tax increase becomes effective. Pass-through differs substantially across packaging types. The pass-through coefficient on 750ml bottles is substantially lower than that of 330 ml (or 340 ml) cans and 6 x 330 ml (or 6 x 340 ml) “six-packsâ€. The overshifting of the excise tax has positive implications for public health policy, since they increase the effectiveness of alcohol taxes as a tool to reduce the (excessive) consumption of beer.
    Keywords: Excise Tax, Beer, South Africa
    Date: 2016
  14. By: Teresa Ghilarducci; Ismael Cid-Martinez (Schwartz Center for Economic Policy Analysis (SCEPA))
    Abstract: Published in the Marquette Benefits and Social Welfare Law Review, this paper discusses how the United States' system of voluntary, tax-favored retirement accounts has failed to produce adequate retirement savings. It recommends switching the ineffective and regressive system of tax deductions for contributions to qualified retirement accounts to providing every American with a tax credit. This revenue-neutral policy change would provide an equitable and effective means of ensuring that all working Americans have retirement savings.
    Keywords: Retirement, 401(k), Tax, Deductions
    JEL: H55 J26 J32 D63 E21
    Date: 2015–06
  15. By: Kai Zhao (University of Connecticut)
    Abstract: This paper studies the impact of social insurance on private insurance and individualwelfare in a dynamic general equilibrium model with uncertain medical expenses and individual health insurance choices. I find that social insurance (modeled as a combination of the minimum consumption floor and the Medicaid program) crowds out private health insurance coverage, and this crowd-out is important for understanding the welfare consequences of social insurance. When the crowding out effect on private insurance is taken into account, the welfare gain from social insurance becomes substantially smaller and under some certain conditions it becomes a welfare loss. The intuition for these results is that the crowding out effect partially offsets the insurance benefits provided by social insurance. The findings of the paper suggest that it is important to consider the endogenous responses on private insurance choices when examining any social insurance policy reform. They also imply that the existence of social insurance programs may be one reason why some Americans do not buy any health insurance.
    Keywords: Saving, Uncertain Medical Expenses, Health Insurance, Means Testing
    JEL: E20 E60 H30 I13
    Date: 2016–01
  16. By: Stéphane Gauthier (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics); Fanny Henriet (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics)
    Abstract: We study optimal commodity taxes in the presence of non-linear income taxes when agents differ in skills and tastes for consumption. We show that commodity taxes are partly determined by a many-person Ramsey rule when there is taste heterogeneity within income classes. The usual role of consumption taxes in relaxing incentive constraints explains the remaining part of these taxes when there is taste heterogeneity between income classes. We quantify the importance of these two components on Canadian microdata using a new method to identify empirically the binding incentive constraints. Incentives matter but tax exemptions are mostly justified by Ramsey considerations.
    Keywords: taste heterogeneity, commodity taxes, income taxation, empirical tests for asymmetric information, social weights
    Date: 2016–01–07
  17. By: Kory Kroft; Kavan Kucko; Etienne Lehmann; Johannes Schmieder
    Date: 2015
  18. By: Serap Saritas (School of Oritental and African Studies, University of London)
    Abstract: This paper targets providing a detailed review of different modes of pension provision in both public and private sectors in EU countries and the recent transformations through which pension systems have been. Moreover, it is also aimed to address issues related to household’s income levels and poverty alleviation, particularly in the aftermath of the crisis. After outlining the general characteristics of the pension systems, their transformation is explained with reference to financialisation. In this regard, it is argued that pension provision in the EU countries have been heavily financialised in the last two decades which raised critical issues for the future retirees as well as the current ones. More privatised and individualised pension systems as a result of the increase in the financial component of pension schemes and entitlements are riskier. Furthermore, as pension benefits are a main income source for most old people, the replacement of solidarity within the pension provision by individual and financial interests raises crucial issues for the EU member states.
    Keywords: Pensions, European Union, Financialisation, Crisis
    JEL: H55 I38 J26 L33 G01
    Date: 2014–01–30
  19. By: Melanie Hultsch
    Abstract: The main purpose of this paper was to identify the economic factors keeping income inequality high in Colombia, with a focus on the decade between 2000 and 2010. To this end, three determinants were analysed; two of them contributing primarily to income inequality (land concentration and functional income distribution) and one contributing secondarily (the fiscal system). Since income inequality is a measure of the degree of disparity or the gap between high and low income households in a country, the previous factors were evaluated from the perspective of how they affected the highest and lowest quintiles in the income distribution. The results of the analysis revealed that current income inequality is strongly rooted in land inequality, as it has perpetuated poverty, affected human capital accumulation and has led to an increased proportion of people in poverty and extreme poverty conditions. The functional income distribution shows a very unbalanced distribution among profit and wage shares in favour of profits, thus impacting the highest income quintile. The analysis also shows that fiscal policies led to a slight reduction of the Gini coefficient in the last decade with public expenditure benefiting the highest income quintile in Colombia. Together, the three elements discussed in this paper are determining factors when explaining the pattern of income inequality in Colombia in the last decade.
    Date: 2014–02
  20. By: Az駑ar, C駘ine; Desbordes, Rodolphe; Wooton, Ian
    Abstract: This paper investigates whether the differences in corporate tax rates set by countries can be explained, in part, by the size of national home markets. We set up a simple model in which multinational firms within an industry choose where to invest, given the levels of corporation tax rates in each location. This model yields predictions with respect to the influences of the relative size of countries on the differences in corporate tax rates that should arise in equilibrium. We then test these predictions using data from 27 European Union member-states for the period 1981-2005. Consistent with our model, we find that large countries set higher corporate tax rates than their smaller competitors for FDI. Our rationale for the existence of this effect, the market access, withstands the test of alternative explanations.
    Keywords: country size, corporate tax rate, foreign direct investment, tax competitio
    JEL: E62 F23 H25
  21. By: Valladares-Esteban, Arnau; Choi, Sekyu
    Date: 2016–01–18
  22. By: Maria Alessandra Antonelli; Valeria De Bonis (Università Sapienza di Roma - Dipartimento di Studi Giuridici, Filosofici ed Economici)
    Abstract: We construct a composite performance indicator to assess the relative performance of welfare policies in the EU countries. We show that the variability of performances cannot be explained only by the amount of resources devoted to social policies, but also by the composition of social expenditure: countries with higher shares of redistributive public expenditure obtain better results in the social sector. This result confirms the association between the type of welfare system, according to the traditional four-way classification, and the performance level. However, considering a more complete set of indicators of the structure of the welfare systems, we find that European countries cannot be grouped according to the traditional classification. Considering expenditure-side indicators and financing-side indicators together, three groups form: one comprising the UK and Iceland, one the Nordic countries and the Netherlands, one the continental (and southern) countries and Ireland.
    Keywords: welfare systems; European integration; cluster analysis.
    JEL: H11 H53 I3
    Date: 2016–01
  23. By: Raquel Fonseca; Thepthida Sopraseuth
    Abstract: This paper uses a calibrated dynamic life-cycle model to quantify the long-run distributional impact of two opposite Social Security reforms: modifying the parameters of a defined benefit (DB) plan (such as in France with Ayrault’s reform) or switching to a notional defined contribution (NDC) plan (such as in Italy). Both reforms yield an inequal distribution of welfare losses. Low-skilled workers are the main losers of the reforms. This is so for different reasons in each reform. In the case of Ayrault’s reform, low-skilled individuals delay retirement by 2 years, up to age 62. In switching to a NDC scheme, low-skilled workers’pensions fall substantially. In NDC schemes, inequalities along the working-life are directly translated into inequalities in pension levels. The switch from a DB plan to the Italian reform yields substantial welfare losses, pensions drastically fall, and individuals save more. Since low-skilled workers do not save as much as middle or high-skilled workers, the switch to NDC schemes leads to a more unequal society in terms of asset distribution.
    Keywords: Pension reforms, life-cycle heterogeneous-agent model, distributional effects
    JEL: E24 H31 H55 J26
    Date: 2015

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