nep-pbe New Economics Papers
on Public Economics
Issue of 2016‒04‒30
twelve papers chosen by
Thomas Andrén

  1. Fiscal Federalism and Tax Equalization: The potential for progressive local taxes By Debra Hevenstone; Ben Jann
  2. Property Tax and Property Values: Evidence from the 2012 Italian Tax Reform By Tommaso Oliviero; Annalisa Scognamiglio
  3. Incidence of Corporate Income Tax and Optimal Capital Structure: A dynamic analysis By DOI Takero
  4. U.S. capital gains and estate taxation: a status report and directions for a reform By Kopczuk, Wojciech
  5. A Choice Experiment on Taxes: Are Income and Consumption Taxes Equivalent? By Hirofumi Kurokawa; Tomoharu Mori; Fumio Ohtake
  6. Taxing Consumption in Canada: Rates, Revenues, and Redistribution By Richard Bird; Michael Smart; Jorge Martinez-Vazquez
  7. Distributional effects of taxes on car fuel, use, ownership and purchases By Eliasson, Jonas; Pyddoke, Roger; Swärdh, Jan-Erik
  8. The end of cheap talk about poverty reduction: the cost of closing the poverty gap while maintaining work incentives By Diego Collado; Bea Cantillon; Karel Van den Bosch; Tim Goedemé
  9. Are Preferential Tax Holidays Dynamic Inconsistent? By Kaushal Kishore
  10. Keeping Pigou on tracks: second-best carbon pricing and infrastructure provision By Siegmeier, Jan
  11. Impact of Public Investment on Economic Growth By Rabnawaz, Ambar; Jafar, Rana Muhammad Sohail
  12. Inter-generational thoughtfulness in a dynamic public good experiment By Spiller, Jörg; Bolle, Friedel

  1. By: Debra Hevenstone; Ben Jann
    Abstract: We construct an empirically informed computational model of fiscal federalism, testing whether horizontal or vertical equalization can solve the fiscal externality problem in an environment in which heterogeneous agents can move and vote. The model expands on the literature by considering the case of progressive local taxation. Although the consequences of progressive taxation under fiscal federalism are well understood, they have not been studied in a context with tax equalization, despite widespread implementation. The model also expands on the literature by comparing the standard median voter model with a realistic alternative voting mechanism. We find that fiscal federalism with progressive taxation naturally leads to segregation as well as inefficient and inequitable public goods provision while the alternative voting mechanism generates more efficient, though less equitable, public goods provision. Equalization policy, under both types of voting, is largely undermined by micro-actors' choices. For this reason, the model also does not find the anticipated effects of vertical equalization discouraging public goods spending among wealthy jurisdictions and horizontal encouraging it among poor jurisdictions. Finally, we identify two optimal scenarios, superior to both complete centralization and complete devolution. These scenarios are not only Pareto optimal, but also conform to a Rawlsian view of justice, offering the best possible outcome for the worst-off. Despite offering the best possible outcomes, both scenarios still entail significant economic segregation and inequitable public goods provision. Under the optimal scenarios agents shift the bulk of revenue collection to the federal government, with few jurisdictions maintaining a small local tax.
    Keywords: Fiscal Federalism, Equalization Grants, Computational Modeling, Tiebout Sorting, Theory of Justice, Multi-community model
    JEL: C63 D63 H21 H23 H3 H71
    Date: 2016–04–12
  2. By: Tommaso Oliviero (CSEF, Università di Napoli Federico II); Annalisa Scognamiglio (CSEF, Università di Napoli)
    Abstract: This paper estimates the impact of property taxes on property values. The unexpected introduction of a new fiscal regime on property taxes in 2012 adopted by the Italian government in December 2011 within the austerity plan to face the sovereign debt crisis ("Manovra Salva Italia") provides an ideal empirical setting. We exploit the cross-sectional variation in the tax rates set by each Italian municipality as the intensity of the treatment. We address the endogeneity problem by instrumenting the tax rate on primary residences with the timing of the elections. As showed by Alesina and Paradisi (2014) municipalities that did not have elections in 2013 set a tax rate about 0.1 percentage points higher than the others. Our results show that in those municipalities there has been a reduction in average property values about 6% higher the others. The effect is attributable to the relative higher property tax rate and provide evidence in favor of the capitalization hypothesis on property values.
    Keywords: Immovable property tax, Property values.
    JEL: H22 H31 R21
    Date: 2016–04–16
  3. By: DOI Takero
    Abstract: In this study, we analyze the incidence of corporate income tax using a dynamic general equilibrium model. The dynamic macroeconomic model enables us to analyze both the instantaneous and the intertemporal incidence of corporate income tax. We include capital structure (i.e., choices of equity, debt, and retained earnings) in the proposed model in order to implement investment. The model also includes a progressively increasing per unit agency cost on debt. We implement a simulation based on the dynamic model, and measure the incidence of corporate income tax on labor income, when the (effective) corporate income tax rate decreases from 34.62% to 29.74% in Japan. We find that the percentage of the incidence on labor income is about 20%-60%, in the short term (one year), and the percentage of the incidence on capital income is about 40%-80%. In the long term, about 90% of the incidence is on labor income. Thus, almost all of the incidence shifts to labor income in the long term. In contrast, in a neo-classical dynamic general equilibrium model, the entire incidence shifts to labor income in the long term. The difference between these results is caused by the inclusion of the agency cost on debt.
    Date: 2016–03
  4. By: Kopczuk, Wojciech
    Abstract: Recent changes in the U.S. estate taxation significantly reduced its reach and revenue, although the tax continues to contribute to progressivity of the overall tax system and is likely to play a role in influencing the long term concentration of wealth. I discuss recent changes, empirical evidence and theory applying to this form of taxation. I then discuss directions for a reform of the tax. The interaction between estate taxation and other components of the tax system is most important in the context of capital gains, with step up in basis partially compensating for high marginal rates while at the same time creating very strong deferral incentives. Modifying this interaction is long overdue and experience from the temporary repeal of the tax in 2010 is helpful in understanding challenges. I discuss options for modifying this interaction, including implications both for estate tax design and for the great majority of taxpayers who are not subject to the estate tax. Eliminating the step-up in basis would allow for increasing the efficiency of the tax system, while the additional revenue could be used to either mitigate the consequences for the affected taxpayers by reducing the estate tax burden or increasing the overall progressivity. I note that any exemption for capital gains at death does retain deferral incentives for individuals with unrealized capital gains smaller than the exemption and suggest that a lifetime exemption would have better incentive properties. I also note that the treatment of spousal transfers under any capital gains at death approach is critical for the revenue implications.
    Keywords: capital gains tax; Estate tax
    JEL: H20 H30
    Date: 2016–03
  5. By: Hirofumi Kurokawa; Tomoharu Mori; Fumio Ohtake
    Abstract: We test the equivalence of income and consumption taxes through a choice experiment. Under a given set of income and consumption parameters, subjects were asked to choose among an income tax of 20%, a consumption tax of 25% (which is an equivalent tax burden), a consumption tax of 22%, and a consumption tax of 20%. Our results showed that subjects prefer income tax to consumption tax when the nominal consumption tax rate is higher than the nominal income tax rate. However, subjects tend to prefer consumption tax to income tax when the nominal tax rates are identical. Our result, that subjects prefer income tax to consumption tax despite a higher tax burden, implies the consumption tax miscalculation bias. The consumption tax miscalculation bias is one where subjects miscalculate the amount of consumption tax as if it is declared by tax inclusive, as in the case of income tax, despite consumption tax being tax exclusive. If the income tax burden is equivalent to the consumption tax burden, subjects prefer income tax. This result implies that income and consumption taxes are not equivalent due to the consumption tax miscalculation bias.
    Date: 2016–03
  6. By: Richard Bird (University of Toronto, Department of Economics); Michael Smart (University of Toronto, Department of Economics); Jorge Martinez-Vazquez
    Abstract: The introduction of the VAT in Canada, initially in the form of the federal GST in 1991, did not signify a major change in the tax mix even after most provincial sales taxes also became VATs. Canadians do not pay much if any more in taxes on their consumption than they did 25 years ago. Although the GST and its provincial companions are not perfect, the evidence is that they create fewer barriers to investment and growth than the taxes they replaced so that Canadians appear as a whole to be better off than they were before setting off down the road to VAT. Nonetheless, perhaps in part because the VAT in Canada unlike in other countries is generally quoted separately (like retail sales taxes in the US) and hence highly visible, it continues to be politically unpopular and considered undesirably regressive. The major contribution of this paper is to examine in some detail and with some new evidence the incidence of Canada’s sales and excise taxes, a question that has received surprisingly little analysis. Because the share of total consumption taxes coming from sales rather than excise taxes has increased, these taxes are now less regressive than they were before the move to VAT, regardless of how incidence is measured. More importantly, there are solid arguments for using consumption than income as a basis for evaluating the progressivity of consumption taxes, and on this measure the GST and its companion taxes appear to be mildly progressive. However because the remaining excises are quite regressive even on this basis, on the whole the sales and excise system remains mildly regressive.
    Keywords: sales tax, excise tax, value-added tax, incidence, progressivity
    Date: 2016–03
  7. By: Eliasson, Jonas (KTH); Pyddoke, Roger (VTI); Swärdh, Jan-Erik (VTI)
    Abstract: We analyse distributional effects of four car-related tax instruments: an increase of the fuel tax, a new kilometre tax, an increased CO2-differentiated vehicle ownership tax, and a CO2-differentiated purchase tax on new cars. Distributional effects are analysed with respect to income, lifecycle category and several spatial dimensions. All the analysed taxes are progressive over most of the income distribution, but just barely regressive if the absolutely highest and lowest incomes are included. However, the variation within income groups is substantial; the fraction of the population who suffer substantial welfare losses relative to income is much higher in lower income groups. The two most important geographical distinctions are between rural and urban areas (including even small towns), and between central cities and satellites/suburbs; these spatial dimensions matter much more for distributional effects than for example whether an area is remote or sparsely populated.
    Keywords: Distributional effects; Equity effects; Fuel tax; Car ownership tax
    JEL: D63 H23 R48
    Date: 2016–04–15
  8. By: Diego Collado; Bea Cantillon; Karel Van den Bosch; Tim Goedemé
    Abstract: How can poverty reduction be improved and at what cost? Available evidence suggests that social investment strategies and employment policies are important but not sufficient. In order to reduce the number of people below the relative at-risk-of-poverty threshold of the EU, countries must develop not only effective employment policies but also ensure adequate social protection. This implies increasing social transfers for working and non-working households, while protecting work incentives. In this paper we show that this is not a cheap option. We calculate the hypothetical cost of closing the poverty gap while maintaining the existing average labour market participation incentives at the bottom of the income distribution in three of the most developed welfares states of the EU, namely Belgium, Denmark and the United Kingdom. Results show that this would require around two times the budget needed to just lift all disposable household incomes to the poverty threshold. The cost would obviously be lower in countries with smaller poverty gaps and with weaker participation incentives. The results suggest that anti-poverty strategies also have to look at the drivers of rising income inequalities, at the most appropriate magnitude of work incentives and at downward pressures on low wages.
    Keywords: poverty gap, tax-benefit system, minimum income, in-work benefit, work incentives, redistribution
    JEL: H23 H24 H53 I32 I38
    Date: 2016–04
  9. By: Kaushal Kishore (Department of Economics, University of Pretoria)
    Abstract: In a two-period dynamic model, where a single country is trying to attract large investors endowed with capital with varying rate of returns, we show that the result of Kishore and Roy (2014), that a country has incentives to commit to a non-preferential regime to circumvent dynamic inconsistency problem does not hold. Tax revenue of the government may be higher under a preferential regime compared to a non-preferential regime.
    Keywords: Tax Competition, Non-preferential regime, Dynamic Inconsistency, Rational Expectations
    JEL: F21 H21 H25 H87
    Date: 2016–04
  10. By: Siegmeier, Jan
    Abstract: Long-lived public infrastructure (for example roads) complements private goods (cars) and may perpetuate carbon-intensive demand patterns and technologies far into the future. Thus, climate policy must combine `direct' instruments such as carbon taxation with public investment shifts (from roads towards rails or bicycle paths). This is particularly important and complex because infrastructure supply changes slowly and carbon taxation may be politically constrained: This paper shows that if carbon taxation is non-optimal, infrastructure provision should be used to actively change private behavior. Nevertheless, if one instrument is restricted, the other may also have to be less ambitious: Intuitively, if clean infrastructure provision is non-optimal, polluting should also be penalized less (and vice versa), unless welfare gains from environmental quality are large. More precisely, for two public goods complementing private goods in utility, general second-best policy conditions are derived and applied to a specific utility function. Constrained public spending composition leaves the (Pigouvian) tax rule unchanged, but constrained taxation implies that the environmental externality enters the condition for public spending composition. Nevertheless, the second-best level of either policy instrument is below its first-best when `dirty' consumption is sufficiently important in utility.
    Keywords: infrastructure, public spending, carbon price, environmental tax, second-best, transport
    JEL: H23 H41 H54 R48
    Date: 2015–12–31
  11. By: Rabnawaz, Ambar; Jafar, Rana Muhammad Sohail
    Abstract: The study examines the relationship between Gross domestic product and public investment. Time series data for empirical investigation covers the period 1980-2009. The data has collected from Pakistan bureau of Statistics, State bank of Pakistan (SBP) and Stockholm International Peace Research Institute (SIPRI). Empirical results show, there is a positive relationship between GDP and public investment in short run. The increase in GDP causes a rapid increase in public investment. Granger causality test apply to check the causality. Results of test show that bi-causal relationship exists between GDP and public investment. Causality runs from GDP to public investment and similarly, from public investment to GDP.
    Keywords: Public investment, economic growth, GDP
    JEL: H3
    Date: 2015
  12. By: Spiller, Jörg; Bolle, Friedel
    Abstract: In a laboratory experiment we investigate inter-generational concerns and myopia in a dynamic Public Good game. Groups of four played a 15-period game where they could either invest in a green sector or in a more profitable brown sector that builds a pollution stock. We find that subjects are more cooperative when their final pollution stock will be inherited by another group in a later session. Furthermore, we observe that defection from a negotiated common plan is higher when subjects are in a loss frame, negotiated plans are more ambitious. We analyze our results in reference to several social preference theories and find that Linear Altruism is most supported in such a dynamic environment.
    Keywords: Dynamic,Environmental Economics,Experimental Economics,Inter-Generation,Public Good
    JEL: H41 C91
    Date: 2016

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