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

  1. Estimating top income shares without tax return data: Mexico since the 1990s By Raymundo M. Campos-Vazquez; Emmanuel Chavez; Gerardo Esquivel
  2. Districts’ co-financing of the central government By Jussila Hammes , Johanna; Mandell , Svante
  3. Comparing The Incidence Of Taxes And Social Spending In Brazil And The United States By Sean Higgins; Nora Lustig; Whitney Ruble; Timothy Smeeding
  4. Effectiveness of fiscal incentives for R&D: quasi-experimental evidence By Irem Guceri; Li Liu
  5. The Effect of Local Taxes on Firm Performance: Evidence from Geo-referenced Data By Federico Belotti; Edoardo Di Porto; Gianluca Santoni
  6. Corporate tax minimization and stock price reactions By Blaufus, Kay; Möhlmann, Axel; Schwäbe, Alexander
  7. Estimating taxable income responses using Danish tax reforms By Henrik Jacobsen Kleven; Esben Anton Schultz
  8. Female labour supply, human capital and welfare reform By Richard Blundell; Monica Costa Dias; Costas Meghir; Jonathan Shaw
  9. Wealth distribution and taxation in EU Members By Anna Iara
  10. Rethinking the political economy of decentralization: how elections and parties shape the provision of local public goods. By Raúl A. Ponce-Rodríguez; Charles R. Hankla; Jorge Martinez-Vazquez; Eunice Heredia-Ortiz
  11. A Review of critical issues on tax design and tax administration in a global economy and developing countries. By Mattéo Godin; Jean Hindriks
  13. How to Make The Fiscal policies Greener in China?——Based on The Perspective of Environmental Macroeconomics By Lu, Hongyou; Xu, Wenli; Xu, Kun
  14. Public debt and fiscal risks in the European Union By Marko Primorac; Anto Bajo
  15. Implications of Fiscal Policy for Housing Tenure Decisions By Anastasia Girshina
  16. Resource Discovery and the Politics of Fiscal Decentralization By Sambit Bhattacharyya; Louis Conradie; Rabah Arezki
  17. Government Old-Age Support and Labor Supply: Evidence from the Old Age Assistance Program By Daniel K. Fetter; Lee M. Lockwood
  18. Welfare analysis of rationing in health care provision By Laura Levaggi; Rosella Levaggi
  19. A simple theory of exploding household debts By Kim, Minseong
  20. Does Postponing Minimum Retirement Age Improve Healthy Behaviours Before Retirement? Evidence from Middle-Aged Italian Workers By Bertoni, Marco; Brunello, Giorgio; Mazzarella, Gianluca
  21. Effects of fiscal consolidation on exports in Ukraine By Vdovychenko, Artem; Zubrytskyi, Artur

  1. By: Raymundo M. Campos-Vazquez (El Colegio de Mexico); Emmanuel Chavez (Paris School of Economics); Gerardo Esquivel (UNAM and El Colegio de México)
    Abstract: This study estimates the income of individuals in the top part of the income distribution in Mexico since 1992. Mexico is the only OECD country that does not publicly report income from fiscal sources. To circumvent this problem we use income information from household surveys but adjust the misrepresentation of top earners using national accounts data. We then estimate incomes of the very rich using interpolations based on a Pareto distribution. Once we correct for the misrepresentation of top earners in the survey, we find that the income share of the top decile has increased in the last two decades. Our findings contradict the conclusion that is usually obtained solely from household survey information. We also find that the income share of top 1 percent earners in Mexico is close to 25 percent, placing Mexico as one of the countries where the rich take the largest share of total income. Moreover, we find that inequality among the rich in Mexico is larger than in most countries where information is available.
    Keywords: top income, rich, inequality, Pareto, Mexico
    JEL: D31 D63 E01 I30 O54
  2. By: Jussila Hammes , Johanna (VTI); Mandell , Svante (VTI and KTH)
    Abstract: We study two districts’ voluntary co-financing of a centrally provided public good. Income taxes are collected both by the two local governments and by the central government. We compare outcomes with a surplus-maximizing level of public good provision. We show that co-financing per se does not influence the amount of public good provided. Co-financing and lobbying are substitutes, so that increased co-financing lowers the marginal amount of lobbying by a district. The production of the public good is closer to the surplus-maximizing level with co-financing and lobbying than with only lobbying. Including spillovers into the model, the provision of the public good can fall below the surplus-maximizing level if co-financing exceeds some threshold value. In order to understand the Swedish government’s claim that co-financing increases funds available for public good provision, we must assume that the central government’s ability to tax its citizens is limited. In this case, co-financing can raise the amount of the public good provided compared with pure central government provision.
    Keywords: Budget constraint; Co-financing; Fiscal federalism; Lobbying; Political economy; Rent-seeking; Spillovers
    JEL: H20 H40 H70
    Date: 2016–04–15
  3. By: Sean Higgins (Tulane University); Nora Lustig (Tulane University); Whitney Ruble (Tulane University); Timothy Smeeding (University of Wisconsin at Madison)
    Abstract: We perform the first comprehensive fiscal incidence analyses in Brazil and the US, including direct cash and food transfers, targeted housing and heating subsidies, public spending on education and health, and personal income, payroll, corporate income, property, and expenditure taxes. In both countries, primary spending is close to 40 percent of GDP. The US achieves higher redistribution through direct taxes and transfers, primarily due to underutilization of the personal income tax in Brazil and the fact that Brazil’s highly progressive cash and food transfer programs are small while larger transfer programs are less progressive. However, when health and non-tertiary education spending are added to income using the government cost approach, the two countries achieve similar levels of redistribution. This result may be a reflection of better-off households in Brazil opting out of public services due to quality concerns rather than a result of government effort to make spending more equitable.
    Keywords: inequality, fiscal policy, taxation, social spending
    JEL: D31 H22 I38
  4. By: Irem Guceri (Oxford University Centre for Business Taxation); Li Liu (Oxford University Centre for Business Taxation)
    Abstract: With growing academic and policy interest in R&D tax incentives, the question about their effectiveness has become ever more relevant. In the absence of an exogenous policy reform, the simultaneous determination of companies' tax positions and their R&D spending causes an identification problem in evaluating tax incentives. To overcome this problem, we exploit a UK policy reform and use the population of corporation tax records that provide precise information on the amount of firm-level R&D expenditure. Using difference-in-differences and other panel regression approaches, we find a positive and significant impact of tax incentives on R&D spending, and an implied user cost elasticity estimate of around -2.3. This translates to more than a pound in additional private R&D for each pound foregone in corporation tax revenue.
    Keywords: Tax incentives; corporation tax returns; quasi-experiment
    JEL: H2 O3
    Date: 2015
  5. By: Federico Belotti (CEIS,University of Rome "Tor Vergata"); Edoardo Di Porto (University of Naples Federico II, CSEF and UCFS Uppsala University); Gianluca Santoni (CEPII)
    Abstract: This paper investigates the impact of business property taxation on firms' performance using a panel of italian manufacturing firms. To account for endogeneity in local taxation, we exploit a pairwise spatial differenced generalized method of moments estimator. As well as providing robust inference, we also improve on existing work by exploiting the exogenous variation in local taxes generated by the political alignment of each local government with the central one. We find that property taxation exerts a negative impact on firms' employment, capital and sales to such an extent as to significantly affect total factor productivity.
    Keywords: Local taxation, endogeneity, spatial differencing, two-way clustering.
    JEL: H22 H71 R38
    Date: 2016–04–13
  6. By: Blaufus, Kay; Möhlmann, Axel; Schwäbe, Alexander
    Abstract: Tax minimization strategies may lead to significant tax savings, which could, in turn, increase firm value. However, such strategies are also associated with significant costs, such as expected penalties and planning, agency, and reputation costs. The overall impact of firms' tax minimization strategies on firm value is, therefore, unclear. To investigate whether corporate tax minimization increases firm value, we analyze the stock price reaction to news concerning corporate tax avoidance or evasion. Our hand-collected dataset includes 139 tax news items regarding listed German firms over the period from 2003 to 2014. In contrast to previous research, we explicitly distinguish between news about legal tax minimization (tax avoidance) and illegal tax minimization (tax evasion). We show that stock market responses differ significantly between news items concerning legal and illegal activities. While we find negative abnormal returns for tax evasion news, we find positive abnormal returns for tax avoidance news. Our results do not indicate any reputation effect of legal tax minimization. Conversely, the positive market reaction to tax avoidance news is associated with firms that face high reputation risk.
    Keywords: tax avoidance,tax evasion,tax aggressiveness,tax risk,market reaction,event study
    JEL: G14 G30 H25 H26
    Date: 2016
  7. By: Henrik Jacobsen Kleven; Esben Anton Schultz
    Abstract: This paper estimates taxable income responses using a series of Danish tax reforms and population-wide administrative data since 1980. The tax variation and data in Denmark makes it possible to overcome the biases from nontax changes in inequality and mean reversion that plague the existing literature. We provide compelling graphical evidence of taxable income responses, arguably representing the first nonparametrically identified evidence of taxable income elasticities using tax reforms. We also present panel regression evidence that is extremely robust to specification, unlike previous results which have been very sensitive.
    JEL: D31 H24 H31 J22
    Date: 2014–11
  8. By: Richard Blundell (Institute for Fiscal Studies and IFS and UCL); Monica Costa Dias (Institute for Fiscal Studies and Institute for Fiscal Studies); Costas Meghir (Institute for Fiscal Studies and Yale University); Jonathan Shaw (Institute for Fiscal Studies and Institute for Fiscal Studies)
    Abstract: We estimate a dynamic model of employment, human capital accumulation - including education, and savings for women in the UK, exploiting tax and benefit reforms, and use it to analyze the effects of welfare policy. We find substantial elasticities for labor supply and particularly for lone mothers. Returns to experience, which are important in determining the longer-term effects of policy, increase with education, but experience mainly accumulates when in full-time employment. Tax credits are welfare improving in the UK and increase lone-mother labor supply, but the employment effects do not extend beyond the period of eligibility. Marginal increases in tax credits improve welfare more than equally costly increases in income support or tax cuts.
    Date: 2016–02
  9. By: Anna Iara (European Commission)
    Abstract: After a short overview of the distribution of private wealth and asset-based taxation in EU Members, this paper provides a range of economic arguments to make the case for assetbased taxation. Thereafter, aspects of design and implementation of specific asset-based taxes, notably housing, net wealth, and gifts and inheritances, are discussed from a distributional perspective. Finally, the possible role of the EU level of policy making in the adoption of such tax instruments is addressed
    Keywords: wealth distribution, wealth taxation, capital income taxation, household data
    JEL: D31 H23 H24
    Date: 2015–12
  10. By: Raúl A. Ponce-Rodríguez; Charles R. Hankla; Jorge Martinez-Vazquez; Eunice Heredia-Ortiz
    Abstract: As more and more of the world’s states devolve power and resources to sub-national governments, decentralization has emerged as one of the most important global trends of the new century. Yet there is still no consensus concerning the benefits of decentralization and how to design institutions that can realize these benefits. In this paper, we investigate the political conditions under which the decentralization of authority will improve the delivery of public goods. Building off Oates’ “decentralization theorem” to include inter-jurisdictional spillovers, we develop a new theory suggesting that the interaction of democratic decentralization (the popular election of sub-national governments) and party centralization (the power of national party leaders over sub-national office-seekers) will produce the best service delivery outcomes. To test this argument empirically, we develop a new dataset of sub-national political institutions. Our analyses, which examine educational and health service delivery in 135 countries across 30 years, provide support for our theoretical expectations.
    Keywords: decentralization
    JEL: H70 H71 H72 H73 H74 H77
    Date: 2016–04
  11. By: Mattéo Godin (CRED, University of Namur); Jean Hindriks (CORE, Université Catholique de Louvain)
    Abstract: The mobilization of domestic tax resource has become a key issue for developing countries. In this report, we provide some facts and figures on the levels and structures of taxation around the world with special attention to Low Income Countries, (LICs). We use the new ICTD database covering 203 countries with 40 tax items over the period 1980-2010. We discuss some principles of tax design in a global economy that are relevant for LICs. We also review some critical issues on corruption and compliance to see how they relate to growth and tax evasion. We then provide a benchmark framework to assess the overall performance of the government tax collection. We use the tax effort index that measures the gap between the potential tax and the actual tax. The novelty of this tax effort index is twofold. First it takes into account spatial variables to capture the geographic dependence. Second it breaks down the tax effort analysis into different tax items to capture the possible tax shift. We conclude with a full ranking of tax effort for all countries and some suggestions of tax reform for a subset of countries that are targeted by the Belgian Development Cooperation.
    Keywords: Corporate taxation, efficient tax administration, tax enforcement, source-based and destination based taxation, origin and destination principles
    JEL: C72 H23 H70
    Date: 2015–06
  12. By: D'Souza, Errol
    Abstract: The literature on tax evasion assumes that taxpayers wish to evade their taxes entirely and the only reason they do not do so is that there is some non-zero probability of being caught by the government. Also, it is assumed that government uses the taxes and fines from caught evaders on goods that it consumes which produce no utility to taxpayer-citizens. In a developing country, however, we argue that taxpayers use tax evasion to compensate for imperfect financial markets as well as government expenditure patterns that do not benefit them. We demonstrate that imperfect financial markets result in situations where when individuals find the chance of earning high returns from investments, it causes them to overcome their aversion to risk and participate in actuarially unfair tax evasion gambles. Also, tax evasion increases when either public goods are underprovided, or the government is sufficiently predatory , or the government directs policies at groups that the taxpayer is not a member of. In such a situation tax evasion is viewed by the taxpayer as a means of shifting the allocation of his income in favor of investments and away from government expenditure policies that give little benefit to him.
  13. By: Lu, Hongyou; Xu, Wenli; Xu, Kun
    Abstract: From the perspective of environmental macroeconomics, in addition to environmental equilibrium effected by environmental policies, the fiscal policy have an impact on the environment equilibrium. On this basis, this paper constructs a RBC model with environmental equilibrium, that contains different financing mode of government environmental expenditure, within which incorporating fiscal spending shocks, labor income tax rate shock, capital income tax rate shock and environmental tax shock. Utilizing the historically macroeconomic data during 1978 to 2014, this paper estimate the long-run steady-state of macroeconomic and environmental variables, then simulate short-run fluctuation of these macro-variables. The results show that:(1) government environmental expenditure being arranged in the general budget, taxing emission achieve the "double dividend" that output increase by 0.13%, and the stock of carbon dioxide fall by 1.1%; (2) changes of environmental tax rates is one important source of volatility in the stock of carbon dioxide, volatility contribution rate of 87%; (3) changes in fiscal policy have a significant impact on short-term fluctuations of carbon dioxide, and the environmental effects of direction caused by expansionary fiscal policy depend on the fiscal policy type. Based on the above conclusions, this paper suggests the introduction of environmental taxes as quickly as possible, government environmental expenditure take the general tax financing mode, and a combination of modest increase in fiscal expenditure, reducing labor income tax rate and inceasing capital income tax rate in order to promote green development during "Thirteen Five Plan" period.
    Keywords: environmental tax; finacing mode; fiscal policies; business cycle
    JEL: E62 H23 H3 Q5
    Date: 2016–03–23
  14. By: Marko Primorac (University of Zagreb, Faculty of Economics and Business); Anto Bajo (Institute of Public Finance)
    Abstract: At the beginning of 2015, the Statistical Office of the European Commission – Eurostat – for the first time released data on contingent liabilities and non-performing loans of European Union (EU) member states. Contingent liabilities include guarantees, liabilities related to public-private partnerships and liabilities of public corporations that are controlled by the state, but excluded from the statistical coverage of general government. The scale of the contingent liabilities of member states reveals a completely new image of their indebtedness and exposure to fiscal risks, and also raises the issue of the need to redefine the Maastricht fiscal criteria. It is obvious that member states – under pressure from budgetary restrictions (in line with the Maastricht criteria) – are creating liabilities that certainly affect the growth of public debt. At the same time these liabilities were only until recently beyond the reach of Eurostat.
    Keywords: public debt, contingent liabilities, fiscal risks, EU
    JEL: H63
  15. By: Anastasia Girshina (Department of Economics, University Of Venice Cà Foscari)
    Abstract: Many of the world's wealthy countries provide fiscal incentives to homeowners. Yet, the impact of such tax breaks on housing tenure decision is unclear. Using difference-in-differences approach, this study estimates the effect of mortgage interest deduction on homeownership in the United States. The identification relies on the large changes in income tax rates and standard deduction. The largest of these changes increased income tax rate by as much as 23,9% and decreased standard deduction by 7,2% between 2002 and 2004. The baseline estimates suggest that increase in income tax rate in a state that allows mortgage interest deduction is associated to 3 percentage points increase in homeownership relative to states that didn't change their fiscal policy and to 5 percentage points -relative to states that do not allow mortgage interest deduction but had a comparable increase in tax rates. The results are robust to a range of alternative specifications.
    Keywords: fiscal policy, tenure choice, mortgage interest deduction, income tax, homeownership
    JEL: E62 G11 H24 H31 K34
    Date: 2016
  16. By: Sambit Bhattacharyya; Louis Conradie; Rabah Arezki
    Abstract: If the central government is a revenue maximizing Leviathan then resource discovery and democratization should have a discernible impact on the degree of fiscal decentralization. We systematically explore this effect by exploiting exogenous variation in giant oil and mineral discoveries and permanent democratization. Using a global dataset of 77 countries over the period 1970 to 2012 we find that resource discovery has very little effect on revenue decentralization but induces expenditure centralization. Oil discovery appears to be the main driver of centralization and not minerals. Resource discovery leads to centralization in locations which have not experienced permanent democratization. Tax and intergovernmental transfers respond most to resource discovery shocks and democratization whereas own source revenue, property tax, educational expenditure, and health expenditure do not seem to be affected. Higher resource rent leads to more centralization and the effect is moderated by democratization.
    Keywords: Resource discovery; Resource rent; Democratization; Fiscal decentralization
    JEL: H41 H70 O11
    Date: 2016
  17. By: Daniel K. Fetter; Lee M. Lockwood
    Abstract: Many major government programs transfer resources to older people and implicitly or explicitly tax their labor. In this paper, we shed new light on the labor supply effects of such programs by investigating the Old Age Assistance Program (OAA), a means-tested and state-administered pension program created by the Social Security Act of 1935. Using newly available Census data on the entire US population in 1940, we exploit the large differences in OAA programs across states to estimate the labor supply effects of OAA. Our estimates imply that OAA reduced the labor force participation rate among men aged 65-74 by 5.7 percentage points, nearly half of its 1930-40 decline. Estimating a structural model of labor supply, we find that the welfare costs to recipients of the high tax rates implicit in OAA's earnings test were quite small. Predictions based on our reduced-form estimates and our estimated model both suggest that Social Security could account for at least half of the large decline in late-life work from 1940 to 1960.
    JEL: H53 H55 I38 J26 N32 N42
    Date: 2016–03
  18. By: Laura Levaggi; Rosella Levaggi
    Abstract: We study the welfare properties of direct restrictions based on cost-effectiveness and indirect methods represented by waiting lists in a public health care system. Health care is supplied for free by the public health sector, but patients can choose to address their demand elsewhere by stipulating a private health care insurance policy to avoid restrictions. Our model shows that if the individual response to treatment is independent of income and cannot be observed by the patient, the choice of opting out simply depends on income and the redistributive effects of both instruments are quite similar. In general, restrictions may only improve welfare of relatively rich individuals, usually those that opt out of the public health care system. Form a policy point of view, our model casts serious doubts upon the use of these instruments for redistributive purposes.
    Keywords: Waiting lists, Explicit restrictions, Welfare analysis, Redistribution
    JEL: I11 I18 H51
  19. By: Kim, Minseong
    Abstract: In this paper, I explore how a household budget constraint allows one to construct a simple theory of exploding household debts. The conclusion reached in this paper is that in case the household started off being indebted, maintaining balanced budget all the time is a very dangerous choice. For analysis, government is assumed to be non-existent.
    Keywords: household debt, budget constraint
    JEL: D11 E13 E21 E62 H61 H62 H63
    Date: 2016–04–16
  20. By: Bertoni, Marco (University of Padova); Brunello, Giorgio (University of Padova); Mazzarella, Gianluca (University of Padova)
    Abstract: By increasing the residual working horizon of employed individuals, pension reforms that raise minimum retirement age are likely to affect the returns to investments in health-promoting behaviours before retirement, with consequences for individual health. Using the exogenous variation in minimum retirement age induced by a sequence of Italian pension reforms during the 1990s and 2000s, we show that Italian males aged 40 to 49 reacted to the longer time to retirement by raising regular exercise and by reducing smoking and regular alcohol consumption. Dietary habits were also affected, with positive consequences on obesity and self-reported satisfaction with health.
    Keywords: retirement, working horizon, healthy behaviours, pension reforms
    JEL: H55 I12 J26
    Date: 2016–03
  21. By: Vdovychenko, Artem; Zubrytskyi, Artur
    Abstract: The question of Ukraine's economic recovery after several years of rapid decline is closely connected to the reform of its fiscal policy. Because Ukraine is a country with a small, open economy, exports may be one of the drivers of economic recovery. Monetary policy over the past decades had, for various reasons, a limited impact on the dynamics of exports, while today, a long period of unsustainable fiscal policy forces the government to carry out fiscal consolidation. Adding together all these facts, we can state the importance of studying the influence of fiscal balance parameters on the exports of Ukraine. Using the gravity model, we conclude that fiscal consolidation has a positive effect on Ukraine's exports with a lag of several years. We also find that the effect of fiscal consolidation on exports is mainly due to the correction of the exchange rate. The stimulating effect of fiscal consolidation takes place on an intensive margin of exports; exposing serious structural problems in the Ukrainian economy.
    Keywords: structural budget balance, exports, gravity model, fixed effects, random effects, fiscal consolidation, monetary policy, and exchange rate.
    JEL: F10 H32 H62
    Date: 2016–01

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