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

  1. A More Precise Approach to Fiscal Consolidation and Sustainability By Afonso, Sérgio
  2. The growth trade-off between direct and indirect taxes in South Africa: Evidence from a STR model By Phiri, Andrew
  3. Analysis of dependence of tax behavior on macroeconomic factors: the case of OECD countries By Sokolovska, Olena; Sokolovskyi, Dmytro
  4. Stock Option Taxation and Venture Capital Activity: A Cross-Country Comparison By Henrekson, Magnus; Sanandaji, Tino
  5. The Elasticity of Taxable Income: Evidence from Changes in Municipal Income Tax Rates in Finland By Tuomas Matikka
  6. Capital Taxation under Political Constraints By Scheuer, Florian; Wolitzky, Alexander
  7. Wealth-income ratios in a small, late-industrializing, welfare-state economy: Sweden, 1810–2014 By Waldenström, Daniel
  8. Tax Structure and Corruption: Cross-Country Evidence By Yongzheng Liu; Haibo Feng
  9. Identifying Tax Implicit Equivalence Scales By Justin Van de Ven
  10. Social insurance with competitive insurance markets and risk misperception By Cremer, Helmuth; Roeder, Kerstin
  11. How Does Firm Heterogeneity Affect International Tax Policy? By Haufler, Andreas; Langenmayr, Dominika
  12. Bells in Space: The Spatial Dynamics of US Interpersonal and Interregional Income Inequality By Rey, Sergio
  13. Monopoly Capital and Capitalist Inequality: Marx after Piketty By Lambert, Thomas
  14. Inequality of income acquisition: The role of childhood circumstances By Hufe, Paul; Peichl, Andreas; Roemer, John; Ungerer, Martin
  15. Medicare Expenditures, Social Security Reform, and the Labor Force Participation of Older Americans By Yuanyuan Deng; Hugo Benítez-Silva
  16. Aging in Europe: Reforms, international diversification and behavioral reactions By Börsch-Supan, Axel; Härtl, Klaus; Ludwig, Alexander
  17. Do differences in international labor mobility lead to differences in the fiscal multiplier? A theoretical approach By Pfammatter, Andrea Corina
  18. Why truck distance taxes are contagious and drive fuel taxes to the bottom By Mandell, Svante; Proost, Stef
  19. Pre-trial procedure for settlement of disputes by results of tax inspections and the ways of its improvement By Zhirova, Galina
  20. Goods and Services Tax: The Introduction Process By Raghuram, G.; Deepa, K.S.
  21. Fiscal Policy and Financial Distress: A Balance Sheet Perspective By John FitzGerald; Philip Lane

  1. By: Afonso, Sérgio
    Abstract: This paper argues that austerity is not a good solution for fiscal consolidation and sustainability. Therefore, it is imperative to find a new approach. This paper presents a mechanism to improve both tax compliance and fiscal sustainability.
    Keywords: fiscal consolidation, fiscal sustainability, formalization
    JEL: H21 H26 H30 H61 H63
    Date: 2016–01–23
  2. By: Phiri, Andrew
    Abstract: The tax system forms the backbone to the functioning of the South African fiscal authorities and it is has been recently questioned whether alterations in the existing tax mix could promote economic growth. Using quarterly data from 1990:Q1 and 2015:Q2, this study investigated the effects of direct and indirect taxes on economic growth for South Africa using the recently developed smooth transition regression (STR) model. Our findings suggest an optimal tax of 10.27 percent on the indirect tax–growth ratio, of which below this rate indirect taxes are positively related with economic growth whereas direct taxes are negatively related with growth. Above the optimal tax rate, taxation bears no significant relationship with economic growth. We therefore suggest that policymakers place a greater burden on indirect taxes and yet ensure that the contribution of indirect taxes to economic growth does not exceed the threshold of 10.27 percent.
    Keywords: Direct taxes; Indirect taxes; optimal tax; VAT; Economic growth; South Africa; Smooth transition regression (STR) model.
    JEL: C22 C51 H21 H30 O40
    Date: 2016–02–01
  3. By: Sokolovska, Olena; Sokolovskyi, Dmytro
    Abstract: The article deals with investigation of principles, factors and conditions of the government’s tax behavior, notably by means of changing the tax burden. We define da set of potential indicators of the economic efficiency, based on the GDP and normalized in various ways on the level of consumer prices in the country, on per capita data and on per hour worked. By using the statistical analysis techniques we found the statistical dependence between government’s behavior and each of the selected indicators. We argued that the factor of labour of productivity per capita has the biggest impact on the government’s tax decisions. Also we showed that the governments mostly act as satisfiers. The obtained results allow to understand the principles of governments’ decision-making, and, therefore, to forecast in some way their behavior in certain economic conditions. Moreover, it could help to understand the reasons why the “race to the bottom” situation appears. The present paper differs from previous studies both by the topic, studying the relations between government’s tax behavior and economic efficiency of their jurisdictions and by the approach to define this dependence, since the latest can be observed only when each variant of government’s tax reaction is analyzed separately.
    Keywords: economic efficiency; corporate tax burden; tax compliance; satisfying behavior; GDP; labour productivity
    JEL: C12 E22 H30 J38
    Date: 2015–09
  4. By: Henrekson, Magnus (Research Institute of Industrial Economics (IFN)); Sanandaji, Tino (Institute for Economic and Business History Research (EHFF), Stockholm School of Economics)
    Abstract: One response to uncertainty and transactions costs in VC-finance is to compensate founders (and other key personnel) with stock options under complex contracts. Entrepreneurs are granted stock options contingent on firm performance, vesting and other criteria. While most countries tax stock options as labor earnings, the United States allow them to be taxed at a low capital gains tax rate. The interaction of favorable tax treatment and inherent advantages has led to near universal use of stock options in American venture capital deals, while this remains less common in Europe. The effective tax treatment of stock options depends on tax practices and is not readily observed using statutory tax rates. We asked the local offices of the tax consultancy firm PwC to calculate the effective tax rate for a standardized entrepreneurial case in 22 countries, finding that countries with favorable tax treatment have more VC activity. One advantage of this tax policy is that it narrowly targets entrepreneurial startups without requiring broad tax cuts.
    Keywords: Business taxation; Corporate governance; Entrepreneurship; Innovation; Institutions; Tax policy; Venture capital
    JEL: H25 H30 K34 L26
    Date: 2016–01–11
  5. By: Tuomas Matikka
    Abstract: The elasticity of taxable income (ETI) is a key parameter in income tax analysis both in terms of efficiency and tax revenue. This paper uses Finnish panel data to analyze ETI. I use changes in flat municipal income tax rates as an instrument for overall changes in marginal tax rates. This instrument is not a function of individual income, which is the basis for an exogenous instrument. In general, instruments used in previous studies do not have this feature. My preferred estimate for the average ETI is 0.16. The preferred specification includes extensive regional and individual controlling. Earlier version of this paper was published in February 2014 ("Taxable income elasticity and the anatomy of behavioral response: Evidence from Finland" Government Institute for Economic Research (VATT) Working Papers 55).
    Keywords: elasticity of taxable income, income taxation
    JEL: J22 H24 H21
    Date: 2015–12–18
  6. By: Scheuer, Florian; Wolitzky, Alexander
    Abstract: This paper studies optimal dynamic tax policy under the threat of political reform. A policy will be reformed ex post if a large enough political coalition supports reform; thus, sustainable policies are those that will continue to attract enough political support in the future. We find that optimal marginal capital taxes are either progressive or U-shaped, so that savings are subsidized for the poor and/or the middle class but are taxed for the rich. U-shaped capital taxes always emerge when the salient reform threat consists of radically redistributing capital and individuals' political behavior is purely determined by economic motives.
    Keywords: Coalition Formation; Inequality; Tax Reforms; Wealth Taxation
    JEL: D3 D6 D9 E6 H2 P5
    Date: 2015–02
  7. By: Waldenström, Daniel (Department of Economics)
    Abstract: This paper uses new data on Swedish national wealth over a period of two hundred years to study whether the patterns in wealth-income ratios previously found by Piketty and Zucman (2014) for some very rich and large Western economies extend to smaller countries that were historically backward and developed a different set of political and economic institutions during the twentieth century. The findings point to both similarities and differences. In the pre-industrial era, Sweden had much lower wealth levels than the rest of Europe, and the main explanation is that the Swedes were too poor to save their income. Over the twentieth century, Swedish aggregate trends and levels are much more similar to those of the rest of Europe, but the structure of national wealth differs. In Sweden, govern-ment wealth grew much faster and became more important, not least through its relatively large public pension system. This suggests an explicit role of historical economic and political institutions for the long-run evolution of wealth-income ratios.
    Keywords: Wealth-income ratios; National wealth; Household portfolios; Pension wealth; Welfare state; Institutions; Economic history
    JEL: D30 E01 E02 N30
    Date: 2015–10–07
  8. By: Yongzheng Liu (Renmin University of China); Haibo Feng (Jinan University)
    Abstract: The determinants of corruption have long been an important subject for research in the elds of economics and political science. The literature has identied a wide range of factors that cause corruption; however, little research has been done on how the design of government policy in uences corruption. We advance a new factor, the tax structure being measured as both tax mix and tax complexity, as another potential cause of corruption, and present strong supporting evidence by using a large sample of countries over the period 1995-2009. Our ndings indicate that: (1) countries relying more heavily on direct taxes tend to enjoy a lower level of corruption, as opposed to countries with higher reliance on indirect taxes; and (2) countries with more complex tax systems tend to have a higher level of corruption, as opposed to countries with less complex tax systems. These results are robust across alternative measures of corruption and tax structure, and alternative estimations with and without correcting the potential endogeneity issue of the tax structure variables.
    Keywords: Tax Structure; Direct versus Indirect Taxes; Tax Complexity; Corruption
    Date: 2014–06–28
  9. By: Justin Van de Ven
    Abstract: This paper describes a simple and tractable method for identifying equivalence scales that reflect the value judgements implicit in a tax-benefit system. The approach depends on two identifying assumptions and a functional description for transfer payments that can be estimated using common micro-data. We use this approach to evaluate tax implicit equivalence scales for the UK tax-transfer system that applied in April 2009. The estimated tax implicit scales vary positively with tax unit size and generally decrease with gross earnings, consistent with recent estimates calculated on consumption data. We conclude by discussing potential applications for the proposed tax implicit scales.
    Date: 2015–01
  10. By: Cremer, Helmuth; Roeder, Kerstin
    Abstract: This paper considers an economy where individuals differ in productivity and in risk. Rochet (1991) has shown that when private insurance markets offer full coverage at fair rates, social insurance is desirable if and only if risk and productivity are negatively correlated. This condition is usually shown to be satisfied for many health risks, but it appears to be violated for the old age dependency risk (mainly because longevity in turn is positively correlated with productivity). We examine the role of uniform and nonuniform social insurance to supplement a general income tax when neither public nor private insurers can observe individual risk and when it is positively correlated with wages. Consequently, a Rothschild and Stiglitz (1971) equilibrium emerges in the private insurance market and low-wage/low-risk individuals are not fully insured. We show that even when social insurance provided to the poor has a negative incentive effect, it also increases their otherwise insuficient insurance coverage. Social insurance to the rich produces exactly the opposite effects. Whichever of these effects dominates, some social insurance is always desirable. Finally, we introduce risk misperception which exacerbates the failure of private markets. The insurance term now reflects the combined failure brought about by adverse selection and misperception. Now the low-risk individuals are not only underinsured, but also pay a higher than fair rate. However, and rather surprisingly, it turns out that this does not necessarily strengthen the case for public insurance.
    Date: 2016–01
  11. By: Haufler, Andreas; Langenmayr, Dominika
    Keywords: Unternehmen; Internationale Unternehmensbesteuerung; Unternehmensbesteuerung; Steuerpolitik; International; Gewinnverlagerung; Multinationales Unternehmen; Steuertheorie; OECD-Staaten; EU-Staaten
    Date: 2015
  12. By: Rey, Sergio
    Abstract: Social and interregional inequality patterns across US states from 1929-2012 are analyzed using exploratory space-time methods. The results suggest complex spatial dynamics for both inequality series that were not captured by the stylized model of Alonso (1980). Interpersonal income inequalities of states displayed a U-shaped pattern ending the period at levels that exceeded the alarmingly high patterns that existed in the 1920s. Social inequality is characterized by greater mobility than that found for state per capita incomes. Spatial dependence is also distinct between the two series, with per capita incomes exhibiting strong global spatial autocorrelation, while state interpersonal income inequality does not. Local hot and cold spots are found for the per capita income series, while local spatial outliers are found for state interpersonal inequality. Mobility in both inequality series is found to be influenced by the local spatial context of a state.
    Keywords: convergence, inequality, spatial distribution dynamics
    JEL: C23 R11 R12
    Date: 2015–07–15
  13. By: Lambert, Thomas
    Abstract: This paper proposes that one major explanation of growing inequality in the United States (US) is through the use of the concept of economic surplus. The economic surplus is a neo-Marxian term which combines the traditional Marxian tenet of surplus value with other ways that surplus value can be invested in a mature, advanced capitalist economy. A rising economic surplus that is not absorbed through growing consumer spending, luxury spending or government spending results in stagnant wages and growing inequality via higher levels of underemployment and greater monopoly and monopsony power among a decreasing number of huge, powerful corporations. Therefore, the politics surrounding the growth of inequality in the US has to be understood first by understanding over accumulation of the economic surplus by those at the top of the US capitalist class. This research note gives estimates of the rising economic surplus over the last several decades in the US as well as how these correlate with the level of inequality. The growth of the economic surplus gives rise and form to the politics of inequality and austerity. As time goes by, the politics of inequality and austerity in the US will be manifested by greater corporate influence in the political system, greater political polarization, less government effectiveness, and more debates about welfare spending, corporate taxation, taxes on upper income households, and taxes on wealth.
    Keywords: alienation, economics, fascism, inequality, monopoly capital, occupy movement, political science, socialism, tea party
    JEL: B51 B59
    Date: 2016–01
  14. By: Hufe, Paul; Peichl, Andreas; Roemer, John; Ungerer, Martin
    Abstract: Many studies have estimated the effect of circumstances on income acquisition. Perhaps surprisingly, the fraction of inequality attributable to circumstances is usually quite small - in the advanced democracies, on the order of 20%. One reason for this is the lack of data on circumstance variables in empirical research. Here, we argue that all behaviors and accomplishments of children should be considered the consequence of circumstances: That is, an individual should not be considered to be responsible for her choices before an age of consent is reached. Using two data sets that contain data on childhood accomplishments, other environmental circumstances, and the income as an adult, we compute that the fraction of income inequality due to circumstances in the US is over 45%, and in the UK it is over 31%.
    Keywords: Equality of Opportunity,Earnings Inequality,Lower bounds,Early childhood achievements
    JEL: D63 D3
    Date: 2015
  15. By: Yuanyuan Deng (Stony Brook University); Hugo Benítez-Silva (Stony Brook University)
    Abstract: The changes to the Social Security Old Age benefits system introduced in the last decade, which will continue later this decade, have impacted individuals' labor supply and retirement decisions, and therefore their health insurance coverage. This paper provides an empirical analysis of the effects of the changes in the OA system, resulting from the 1983 Amendments, on Medicare costs. Using data from the Medicare Current Beneficiary Survey (MCBS), we empirically analyze the Medicare expenditures of individuals around retirement age as a function of their health insurance coverage and labor market attachment. Our results show a significant effect of employment measures as well as insurance coverage types, suggesting a sizable effect of employment and insurance on Medicare expenditures as well as on total health expenditures and on out-of-pocket health expenditures. Our findings allow us to compute the total savings to the Medicare system resulting from individuals' working while receiving health insurance coverage at older ages, and we estimate savings of 2.89 billion dollars a year, as well as another 333.67 million per year resulting from the delayed in enrollment into the Medicare system, given that some individuals do not enrolled in Medicare when first available, and this is more common among those who work and have insurance coverage. These results suggest that any future reform to the social insurance system will have to account for the effect on Medicare costs of policies that likely lead to increases in employment and employer provided health insurance coverage among populations eligible for Medicare.
    Date: 2015–09
  16. By: Börsch-Supan, Axel; Härtl, Klaus; Ludwig, Alexander (Munich Center for the Economics of Aging (MEA))
    Abstract: The extent of demographic changes in Europe and Asia is much more drastic than in the US. This paper studies the effects of population aging on the interactions between economic growth and living standards in Europe with labor market and pension reform, behavioral adaptations, and international capital flows. Our analysis is based on an overlapping generations model with behavioral reactions to reform which is extended to the multi-country situation typical for Europe. While the negative effects of population aging on growth in Europe can in principle be compensated by reforms and economic adaptation mechanisms, they may be partially offset by behavioral reactions.
    JEL: J11 J21 D13 E27 H55 F16 F21
    Date: 2014–05–15
  17. By: Pfammatter, Andrea Corina
    Abstract: A real business cycle economy with endogenous labor supply and heterogeneous households is modeled. I allow for different degrees of labor migration to assess potential differences in the effects of changes in government consumption on aggregate economic activity. I argue that a relatively elastic labor migration with respect to economic activity may have a positive effect on the effectiveness of fiscal policy because labor migration may influence labor market adjustments after a positive government consumption shock. The findings suggest that there is a positive relationship between labor migration elasticity and the size of the fiscal multiplier. However, whether the relationship is economically meaningful is uncertain and requires further research.
    Keywords: Fiscal multiplier, fiscal policy, RBC model, international labor migration
    JEL: F22 F44 H3 J61
    Date: 2015–09–28
  18. By: Mandell, Svante (Department of Real Estate and Construction Management, Royal Institute of Technology); Proost, Stef (Center for Economic Studies, KULeuven)
    Abstract: This paper analyzes how countries with international and local truck traffic decide to switch from a simple fuel tax system to a dual system of fuel and kilometer taxes. We show what drives a country to switch and how this affects the level of fuel taxes and the incentives for the other countries to also adopt the dual system. The model is partially able to explain the gradual extension of kilometer charging for trucks in Europe. The model also shows that, in the absence of diesel cars, the gradual introduction of kilometer charges will make fuel taxation for trucks virtually disappear and will lead to a system where truck use is (1) taxed mainly based on distance, but (2) is taxed too heavily. When the fuel tax must in addition serve as an externality tax for diesel cars, the introduction of distance charges for trucks will give rise to diesel taxes that are lower than the external cost of diesel cars. For trucks, this leads to a sum of diesel taxes and distance charges that are higher than the external cost of trucks.
    Keywords: Diesel taxes; fuel taxes; kilometer charges; tax competition; pricing of trucks
    JEL: H23 H73 L91 R48
    Date: 2015–04–01
  19. By: Zhirova, Galina (Russian Presidential Academy of National Economy and Public Administration)
    Abstract: The article considers the pre-trial procedure for settlement of disputes, analyzes the conflicts between the tax authorities and taxpayers. In the review of decisions on complaints, the results of which were substantiated the arguments of taxpayers, noted that the main reasons for satisfaction of tax disputes are the wrong application of norms of tax legislation, lack of evidence, violations by the tax authority established by the Tax code of the Russian Federation procedures for the collection of taxes, procedure for consideration of tax inspection materials and established procedures governing the timing of tax control measures and the processing of their results. It also justifies the proposals on the introduction of a mediation procedure and settlement agreements as an alternative method of resolving the conflicts.
    Keywords: tax disputes, tax inspections, pre-trial settlement of disputes, the institute of mediation, the settlement agreement
    Date: 2015
  20. By: Raghuram, G.; Deepa, K.S.
    Abstract: This paper focuses on the process of introducing the Goods and Services Tax (GST), bringing out the perspectives of different stakeholders and the contentious issues. The GST was expected to subsume a variety of taxes and simplify the indirect tax regime. The Empowered Committee (EC) was mandated in 2007, to bring about consensus among the States to move towards GST. The important stakeholders in the process were the Government of India (GoI), individual States, industry and the committees commissioned by the GoI or EC. However, the EC faced challenges since there were issues of control between the Centre and States, perceived loss of revenue by some States, extent of uniformity across various commodities and their tax rates, input credit mechanism and dispute settlement. The deadline for the introduction of GST kept getting postponed due to the slow resolution of the challenging issues. Finally, it was tabled in the Parliament as the 122nd Constitutional Amendment Bill (CAB) in December 2014.
  21. By: John FitzGerald (Department of Economics, Trinity College Dublin); Philip Lane (Department of Economics, Trinity College Dublin)
    Abstract: Governments actively manage the public balance sheet during episodes of financial distress. Under these circumstances, the stock of gross public debt is not a sufficient statistic for fiscal sustainability. In this paper, we examine the roles of financial asset acquisition, liquidity management, debt management and the central bank balance sheet in determining the fiscal health of a government. We argue that a strategy of “under-promising and over-delivering” is essential in restoring market access.
    Keywords: Government balance sheet, public debt, management of debt
    JEL: H63 E58
    Date: 2016–02

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