nep-pbe New Economics Papers
on Public Economics
Issue of 2016‒02‒04
23 papers chosen by
Thomas Andrén

  1. Fiscal Austerity during Debt Crises By Arellano, Cristina; Bai, Yan
  2. Compliance, Informality and contributive pensions By Marie-Louise Leroux; Dario Maldonado; Pierre Pestieau
  3. The Inefficiencies of Existing Retirement Savings Incentives By Teresa Ghilarducci; Christian E. Weller
  4. The consequences of the value-added tax on inequality By Kaisa Alavuotunki,; Jukka Pirttilä2
  5. The Suitability of Tax Data to Study Trends in Inequality. A Theoretical and Empirical Review with Tax Data from Switzerland By Oliver Hümbelin; Rudolf Farys
  6. 401(k) Tax Policy Creates Inequality By Teresa Ghilarducci; Adam Hayes
  7. A Welfare Evaluation of the 1986 Tax Reform for Married Couples in the United States By Matteo PICCHIO; Giacomo VALLETTA
  8. How Well Do Subnational Borrowing Regulations Work? By Jorge Martinez-Vazquez; Violeta Vulovic
  9. Laying the Groundwork for More Efficient Retirement Savings By Teresa Ghilarducci; Christian E. Weller
  10. Optimal monetary and fiscal policy at the zero lower bound in a small open economy By Bhattarai, Saroj; Egorov, Konstantin
  11. Household heterogeneity, aggregation, and the distributional impacts of environmental taxes By Sebastian Rausch; Giacomo Schwarz
  12. The EU’s Fiscal Targets and Their Economic Impact in Finland By Keränen, Henri; Kuusi, Tero
  13. Tax-benefit microsimulation modelling in Tanzania By Vincent Leyaro; Elineema Kisanga; Gemma Wright; Helen Barnes; Michell Mpike
  14. Tax.benefit microsimulation: Feasibility study in Ethiopia By Andualem T. Mengistu; Kiflu G. Molla; Firew B.Woldeyes
  15. Racially Disparate Effects of Raising the Retirement Age By Teresa Ghilarducci; Kyle Moore
  16. Should a non-rival public good always be provided centrally? By GRAVEL, Nicolas; POITEVIN, Michel
  17. Optimal Taxation and Indeterminacy in the Uzawa-Lucas Model with Sector-specific Externalities By Barañano Mentxaka, Ilaski; San Martín Lizarralde, Marta
  18. The One-Percent across Two Centuries: A Replication of Thomas Piketty’s Data on the Distribution of Wealth for the United States By Richard C. Sutch
  19. The Effect of Unemployment Benefit Generosity on Unemployment Duration: Quasi-experimental Evidence from Slovenia By Primož Dolenc; Suzana Laporšek; Matija Vodopivec; Milan Vodopivec
  20. Retirement Readiness in New York City: Trends in Plan Sponsorship, Participation, and Income Security By Teresa Ghilarducci; Joelle Saad-Lessler; Kate Bahn
  21. Are U.S. Workers Ready for Retirement? Trends in Plan Sponsorship, Participation, and Preparedness By Teresa Ghilarducci; Joelle Saad-Lessler; Kate Bahn
  22. Does immigration crowd natives into or out of higher education? By Jackson, Osborne
  23. Are Washington Workers Ready for Retirement? By Teresa Ghilarducci; Joelle Saad-Lessler; Kate Bahn; Anthony Bonen

  1. By: Arellano, Cristina (Federal Reserve Bank of Minneapolis); Bai, Yan (University of Rochester)
    Abstract: This paper constructs a dynamic model in which fiscal restrictions interact with government borrowing and default. The government faces fiscal constraints; it cannot adjust tax rates or impose lump-sum taxes on the private sector, but it can adjust public consumption and foreign debt. When foreign debt is sufficiently high, however, the government can choose to default to increase domestic public and private consumption by freeing up the resources used to pay the debt. Two types of defaults arise in this environment: fiscal defaults and aggregate defaults. Fiscal defaults occur because of the government's inability to raise tax revenues. Aggregate defaults occur even if the government could raise tax revenues; debt is simply too high to be sustainable. In a quantitative exercise calibrated to Greece, we find that our model can predict the recent default, but that increasing taxes would not have prevented it. In fact, increasing taxes would have made the recession deeper because of the distortionary effects of taxation.
    Keywords: Sovereign default; Tax reforms; Debt crisis
    JEL: F30
    Date: 2016–01–26
  2. By: Marie-Louise Leroux; Dario Maldonado; Pierre Pestieau
    Abstract: We consider a political economy model in which agents have the possibility to hide part of their earnings in order to avoid taxation. Taxation is exclusively used to finance a pension system. If the pension system is implemented, agents in their old age receive a benefit which includes both a Bismarkian and a Beveridgian component. We show that in the absence of compliance costs, agents are indifferent to the tax rate level as in response, they can perfectly adapt their level of compliance. The public pension system is found to be at least partially contributory in order to increase compliance and thus to increase the tax base. When compliance costs are introduced, perfect substitutability between compliance and taxation breaks down. Depending on the relative returns from public pensions and private savings as well as on the elasticity of compliance to income, we obtain that the preferred tax rate should be increasing or decreasing in income. The majority voting tax rate is more likely to be positive when the median income is low and when the return from public pensions dominates that of private savings. The level of the Bismarkian pillar will now be chosen so as to account for increased political support, for increased direct redistribution toward the worst-off agent, and increased tax base.
    Keywords: Compliance costs, Majority Voting, Public Pensions, Tax Evasion
    JEL: H55 I13 D91
    Date: 2015
  3. By: Teresa Ghilarducci; Christian E. Weller (Schwartz Center for Economic Policy Analysis (SCEPA))
    Abstract: The growing retirement crisis results, in part, from inefficient savings incentives embedded in the U.S. tax code. In a joint issue brief with the Center for American Progress (CAP), CAP Senior Fellow Christian Weller and SCEPA Director Teresa Ghilarducci find that households that need the most help saving for retirement receive the least assistance from the multitude of savings incentives in the U.S. tax code, for three reasons. First, existing savings incentives can be incredibly complex. Second, savings incentives often benefit higher-income earners more than middle- and lower-income earners. Third, the public loses out on tax revenue that otherwise would have been collected. Tax reform is needed to simplify savings incentives and better target incentives.
    Keywords: Retirement, Social Security, Tax, Saving
    JEL: H55 J26 J32 D63 E21
    Date: 2015–10
  4. By: Kaisa Alavuotunki,; Jukka Pirttilä2
    Abstract: : The adoption of the value-added tax has arguably been one of the most important tax policy measures worldwide, but is also one of the most heatedly debated. While some argue that the VAT has served as a useful tool to boost government revenue, others claim that it is also a regressive tax, contributing to increased inequality within the developing world. Using newly released high-quality macro data, this paper offers updated estimates of the revenue impacts of the VAT and the first estimates on its consequences on inequality at the macro level. The results from instrumental variable estimations reveal that the revenue consequences of the VAT have not been positive, contrasting results from earlier work. VAT adoption has not led to increased inequality, suggesting that the move to the VAT has not undermined equitable development.
    Keywords: tax policy, value-added tax, inequality, developing countries
    Date: 2015
  5. By: Oliver Hümbelin; Rudolf Farys
    Abstract: In many countries results of inequality trends are ambiguous, because different methodological approaches blur the picture or because reliable data are not available. In this paper we assess whether tax data are suitable for inequality trend analysis. We do this by comparing tax data measurement concepts concerning income definition, statistical units and population coverage to theoretical ideal concepts. To get a sense of direction and magnitude of potential biases, we estimate the impact of tax data-related methodological options for inequality measures with Swiss tax data. Where possible and meaningful, we compare tax data results to corresponding results from surveys. While there are clear advantages of tax data like long-term availability and reliable population coverage in more recent years, there are also drawbacks that lead to an overestimation of inequality and hinder comparability over time. In sum, tax data are a source that should be used with care, but nonetheless seem to be indispensable for inequality analysis. As a substantive result for Switzerland, our tax data analysis raises doubts about the declining inequality trend reported by survey data for the last decades.
    Keywords: Tax Data, Inequality Trend, Income Distribution, Switzerland
    JEL: D31 H24
    Date: 2015–11–30
  6. By: Teresa Ghilarducci; Adam Hayes (Schwartz Center for Economic Policy Analysis (SCEPA))
    Abstract: Though well-intentioned, the current system of tax deferral for retirement contributions undermines public policy aimed at strengthening retirement security for all Americans. In fact, it has become a regressive policy that contributes to wealth inequality. This policy note illustrates how two employees who are identical savers and investors in every way except for income receive different rates of return due only to the effects of the tax code. Converting the current system of tax deductions for defined contribution retirement plans to a refundable tax credit would solve this problem and treat all retirement savers the same.
    Keywords: Retirement, 401(k), Tax, Inequality
    JEL: J26 H2 D63
    Date: 2015–02
  7. By: Matteo PICCHIO (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali); Giacomo VALLETTA (CORE - Universit‚ catholique de Louvain, Louvain-la-Neuve, Belgium)
    Keywords: Welfare measures, discrete model, labor supply, preference heterogeneity, tax reform
    JEL: D63 H31 J22
    Date: 2016–01
  8. By: Jorge Martinez-Vazquez (International Center for Public Policy. Andrew Young School of Policy Studies, Georgia State University); Violeta Vulovic (International Center for Public Policy. Andrew Young School of Policy Studies, Georgia State University)
    Abstract: There are many positive things associated with subnational borrowing, including additional funding or promoting intergenerational equity. But it may also endanger fiscal sustainability and macro stability due to moral hazard and soft budget constraints. Thus borrowing controls are justified and also common. In this paper we review the different types of ex-ante and ex-post regulations used the international experience based on a large panel of developed and developing countries. Effectiveness or borrowing regulations in this paper is defined relative to the ability to preserve primary balances at the general government and subnational levels. There is a wide variety of both ex-ante and ex-post sub-national borrowing regulations that countries implement. Each has both advantages and disadvantages, with different suitability countries’ circumstances. For example, depth of financial markets is important when choosing market-based regulations. The presence of subnational tax autonomy contributes to an increase in the general government primary balance, but not significantly for subnational primary balances. A history of subnational bailouts is associated with lower primary balances on average at all levels. The “golden rule” (borrowing is only for capital investment purposes) and limits on debt and borrowing appear effective at all levels of government. However, we find that none of the broad types of sub-national borrowing regulations seem to have a distinct significant direct effect on the narrow definition of fiscal sustainability at the subnational level.
    Keywords: Decentralization, Subnational Borrowing, Borrowing Rules and Regulations JEL classification: H70, H74, H63, H81
    Date: 2016–01
  9. By: Teresa Ghilarducci; Christian E. Weller (Schwartz Center for Economic Policy Analysis (SCEPA))
    Abstract: Better designed retirement savings incentives that target lower-income workers—for instance, those who do not work for an employer that offers retirement benefits—would make a real difference in workers’ retirement preparedness. In a joint issue brief with the Center for American Progress (CAP), CAP Senior Fellow Christian Weller and SCEPA Director Teresa Ghilarducci call for reforming the tax code to prioritize refundable tax credits over new tax deductions; emphasize progressive savings matches that offer relatively higher benefits to lower-income households; create savings incentives that are simple to use; and establish new savings options, such that gaining access to savings incentives depends less on employers offering retirement plans.
    Keywords: Retirement, Social Security, Tax, Saving
    JEL: H55 J26 J32 D63 E21
    Date: 2015–11
  10. By: Bhattarai, Saroj (University of Texas at Austin); Egorov, Konstantin (Pennsylvania State University)
    Abstract: We investigate open economy dimensions of optimal monetary and fiscal policy at the zero lower bound (ZLB) in a small open economy model. At positive interest rates, the trade elasticity has negligible effects on optimal policy. In contrast, at the ZLB, the trade elasticity plays a key role in optimal policy prescriptions. The way in which the trade elasticity shapes policy depends on the government's ability to commit. Under discretion, the increase in government spending at the ZLB depends critically on the trade elasticity. Under commitment, the difference between future and current policies, both for domestic inflation and government spending, is smaller when the trade elasticity is higher.
    JEL: E31 E52 E58 E61 E62 E63 F41
    Date: 2016–01–01
  11. By: Sebastian Rausch (ETH Zurich, Switzerland); Giacomo Schwarz (ETH Zurich, Switzerland)
    Abstract: This paper examines how the general equilibrium incidence of an environmental tax depends on the effect of different incomes and preferences of heterogeneous households on aggregate outcomes. We develop a Harberger-type model with general forms of preferences and substitution between capital, labor, and pollution in production that captures the impact of household heterogeneity and interactions with production characteristics on the general equilibrium. We theoretically show that failing to incorporate household heterogeneity can qualitatively aect incidence. We quantitatively illustrate that this aggregation bias can be important for assessing the incidence of a carbon tax, mainly by aecting the returns to factors of production. Our findings are robust to a number of extensions including alternative revenue recycling schemes, preexisting taxes, non-separable utility in pollution, labor-leisure choice, and multiple commodities.
    JEL: H23 Q52
    Date: 2016–01
  12. By: Keränen, Henri; Kuusi, Tero
    Abstract: In this paper, we quantify time-varying fiscal multipliers using Finnish economic data and address questions about the design of the fiscal adjustment currently needed to comply with the EU's fiscal targets. We find that the necessary adjustment is likely to be larger than what is proposed in the current fiscal plans. The consolidation measures slow the economic recovery, and their cumulative multiplier effect on economic activity is close to 1 in the period 2016-2019. Despite the large fiscal multipliers, we do not find significant benefits in delaying the fiscal consolidation in terms of the present value of the GDP, at least given the current economic forecasts. Our results suggest that the emphasis of the government's fiscal plans on net revenue measures (defined as gross revenues minus transfers) seems to be well-placed.
    Date: 2016–01–26
  13. By: Vincent Leyaro; Elineema Kisanga; Gemma Wright; Helen Barnes; Michell Mpike
    Abstract: This paper presents the findings from a feasibility study on the potential for developing a static tax-benefit microsimulation model for Tanzania. The paper provides an account of the current tax-benefit system in Tanzania and introduces the survey dataset which could function as the underpinning data for the model. The paper concludes with an assessment of the feasibility of producing such a model for Tanzania with reference to personal income tax, indirect taxes, and contributory and non-contributory benefits. Keywords: tax, benefits, microsimulation, Tanzania
    Keywords: tax, benefits, microsimulation, Tanzania
    Date: 2015
  14. By: Andualem T. Mengistu; Kiflu G. Molla; Firew B.Woldeyes
    Abstract: The purpose of this study is to assess the feasibility of building a microsimulation model of the Ethiopian tax and benefits system. We first provide a detailed description of the tax and benefits system of the country. This includes qualifying criteria, tax brackets, and exemptions. We then describe household survey datasets available in the country and examine the nature of these datasets in terms of representativeness, completeness, and panel data structure. Finally, we provide assessments for whether each tax and benefits system can be microsimulated given the rules and the nature of the data available.
    Keywords: tax, benefits, microsimulations, revenue, Ethiopia
    Date: 2015
  15. By: Teresa Ghilarducci; Kyle Moore (Schwartz Center for Economic Policy Analysis (SCEPA))
    Abstract: Advocates for raising the retirement age to 70 and beyond argue that since the "average" American is living longer, lifetime benefits are actually increasing. However, black seniors die sooner and are sick for a longer period of time than white seniors. This means that any policy to cut Social Security benefits by raising the normal retirement age will have a disparate and negative impact on Blacks. This study examines the size and growth of racial gaps in mortality and morbidity, and shows that while some groups have experienced lifetime benefit increases, others have not.
    Keywords: Retirement, Social Security, Race, Inequality
    JEL: H55 J26 J32 D63 E21
    Date: 2015–06
  16. By: GRAVEL, Nicolas; POITEVIN, Michel
    Abstract: This paper discusses the problem of optimal design of a jurisdiction structure from the view point of a utilitarian social planner when individuals with identical utility functions for a non-rival public good and private consumption have private information about their contributive capacities. It shows that the superiority of a centralized provision of a non-rival public good over a federal one does not always hold. Specifically, when differences in individuals’ contributive capacities are large, it is better to provide the public good in several distinct jurisdictions rather than to pool these jurisdictions into a single one. In the specific situation where individuals have logarithmic utilities, the paper provides a complete characterization of the optimal jurisdiction structure in the two-type case.
    Keywords: Federalism; Jurisdictions; Asymmetric information; Equalization; Second best; Public goods, City mergers
    JEL: D6 H2 H7
    Date: 2015
  17. By: Barañano Mentxaka, Ilaski; San Martín Lizarralde, Marta
    Keywords: endogenous, growth, externalities, optimal, policy, indeterminacy
    JEL: H21 E62
    Date: 2015–12
  18. By: Richard C. Sutch (Department of Economics, University of California Riverside)
    Abstract: This exercise reproduces and assesses the historical time-series on the top shares of the wealth distribution for the United States presented by Thomas Piketty in Capital in the Twenty-First Century. Piketty’s best-selling book has gained as much attention for its extensive presentation of detailed historical statistics on inequality as for its bold and provocative predictions about the continuing rise in inequality in the twenty-first century. Those predictions were derived and justified by reference to the historical data, so it is helpful to assess the robustness of the historical evidence presented. Here I examine only Piketty’s U.S. data for the period 1810 to 2010 for the top ten percent and the top one percent of the wealth distribution. I conclude that Piketty’s data for the wealth share of the top ten percent for the period 1870-1970 are unreliable. The values he reported are manufactured from the observations for the top one percent inflated by a constant 36 percentage points. Piketty’s data for the top one percent of the distribution for the nineteenth century (1810-1910) are also unreliable. They are based on a single mid-century observation that provides no guidance about the antebellum trend and only very tenuous information about trends in inequality during the Gilded Age. The values Piketty reported for the twentieth-century (1910-2010) are based on more solid ground, but have the disadvantage of muting the marked rise of inequality during the Roaring Twenties and the decline associated with the Great Depression. The reversal of the decline in inequality during the 1960s and 1970s and subsequent sharp rise in the 1980s is hidden by a fifteen-year straight-line interpolation. This neglect of the shorter-run changes is unfortunate because it makes it difficult to discern the impact of policy changes (income and estate tax rates) and shifts in the structure and performance of the economy (depression, inflation, executive compensation) on changes in wealth inequality.
    Date: 2016–01
  19. By: Primož Dolenc; Suzana Laporšek; Matija Vodopivec; Milan Vodopivec
    Abstract: The paper analyses the effects of a 2011 increase in the unemployment benefit replacement rate on the job-finding rate of Slovenian benefit recipients. Using registry data on the universe of Slovenian unemployment benefit recipients, we exploit legislative changes that selectively increased the replacement rates for certain groups of workers while leaving them unchanged for others. Applying this quasi-experimental approach, we find that increasing the replacement rate significantly decreases the hazard rate of the transition from unemployment to employment, with an implied elasticity of the hazard rate with respect to benefit replacement rate being 0.7 to 0.9. The results also show that increase of the unemployment benefit replacement rate does not affect the job-finding probability of jobseekers whose reason for unemployment is employer exit, and that the effects of the increase of replacement rate are present only upon exit to employment and not to inactivity.
    JEL: J64 J65
    Date: 2016–01–20
  20. By: Teresa Ghilarducci; Joelle Saad-Lessler; Kate Bahn (Schwartz Center for Economic Policy Analysis (SCEPA))
    Abstract: This report, conducted at the request of New York City Comptroller Scott Stringer, reveals a 17% drop (from 49% to 41%) between 2001 and 2011 in the percentage of New York City workers participating in a retirement plan at work. Only 12% of New Yorkers had a defined benefit (DB) plan. The DB plan guarantees a pension, whereas defined contribution (DC) plans such as 401(k)s and IRAs do not. As a result, those with DB plans maintained an average income replacement rate of 90% versus those with DC plans who had an average replacement rate of 48%. The consequences of declining employer-sponsored plans and low replacement rates threaten workers' standard of living in retirement and could increase poverty levels among the city's older residents.
    Keywords: Retirement, Social Security, New York City
    JEL: J26 H55 E21
    Date: 2014–04
  21. By: Teresa Ghilarducci; Joelle Saad-Lessler; Kate Bahn (Schwartz Center for Economic Policy Analysis (SCEPA))
    Abstract: Employer-sponsored retirement plans provide the best vehicle for retirement savings because they provide a practical and efficient way for workers to save consistently. However, this report finds that almost half of Americans who were working in 2011 were not offered a retirement account at work. In addition, 68% of the U.S. working age population (25-64) did not participate in an employer-sponsored retirement plan because their employer did not offer one, they elected not to participate or were not working. This report also finds the amounts saved through employer-sponsored defined contribution (DC) retirement plans are only slightly better off than those without a retirement plan. Except for those workers with defined benefit (DB) plans, most middle class U.S. workers will not have adequate retirement income. The poverty projections highlighted in this report reveal that 33% of future retirees will be either poor or near-poor when they retire. Additionally, 55% of retirees will be forced to rely solely on their Social Security income. A previous version of this report was published in the Journal of Pension Benefits.
    Keywords: Retirement, 401(k), Pensions
    JEL: H55 J26 J32 D63
    Date: 2015–03
  22. By: Jackson, Osborne (Federal Reserve Bank of Boston)
    Abstract: Over the past several decades, the United States has experienced some of its largest immigrant inflows since the Great Depression. This higher level of immigration has generated significant debate on the effects of such inflows on receiving markets and natives. Education market studies have found that inflows of immigrant students can displace some natives from enrollment. Meanwhile, labor market studies have primarily examined the impact of immigrant labor inflows on the wages of similarly and dissimilarly skilled natives, with mixed results. The lack of consensus in the wage studies has spurred a growing line of research on whether natives respond endogenously to immigrant worker inflows. Yet, it remains unexplored whether native responses in the higher education market also contribute to the absorption of immigrants into the labor market and the effects on equilibrium in both markets. In a unified framework of the education and labor markets this paper addresses whether skill level via college enrollment is another margin on which natives endogenously adjust to immigrant inflows of students and labor. This study differs from previous research by separately identifying native human capital accumulation responses to both immigrant labor and student inflows at the college margin, where such responses may be strongest due to the high school-college wage gap. The analysis also contributes to our understanding of how local markets respond to immigrant inflows.
    JEL: H75 J22 J23 J24 J61
    Date: 2015–10–01
  23. By: Teresa Ghilarducci; Joelle Saad-Lessler; Kate Bahn; Anthony Bonen (Schwartz Center for Economic Policy Analysis (SCEPA))
    Abstract: In addition to Social Security, Washington workers depend on the accessibility and affordability of employer-sponsored retirement plans to support them in retirement. This report reveals that Washington employers are offering fewer retirement plans to their employees today. The overall decline in plan sponsorship, coupled with the shift from DB to DC plans, represents a real threat to workers' retirement security. Left unchanged, Washington's residents will face increasing downward mobility in retirement.
    Keywords: Retirement, Social Security, Washington
    JEL: J26 H55 E21
    Date: 2014–04

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