nep-pbe New Economics Papers
on Public Economics
Issue of 2016‒05‒08
twenty-two papers chosen by
Thomas Andrén

  1. The Fiscal Risk of Local Government Revenue in the People’s Republic of China By Fan, Ziying; Wan, Guanghua
  2. Discontent with taxes and the timing of taxation : experimental evidence By Vranceanu, Radu; Sutan, Angela; Dubart, Delphine
  3. The Distributional Effects of a Carbon Tax on Current and Future Generations By Fried, Stephie; Novan, Kevin; Peterman, William B.
  4. Effectiveness of early retirement disincentives: Individual welfare, distributional and fiscal implications By Bönke, Timm; Kemptner, Daniel; Lüthen, Holger
  5. Who Sold During the Crash of 2008-9? Evidence from Tax-Return Data on Daily Sales of Stock By Jeffrey Hoopes; Patrick Langetieg; Stefan Nagel; Daniel Reck; Joel Slemrod; Bryan Stuart
  6. State Aid to Local Governments: How Hawaii’s State Government Shares Transient Accommodation Tax Revenues With Its Local Governments By James Mak
  7. Balanced budget rules and fiscal outcomes: Evidence from historical constitutions By Asatryan, Zareh; Castellon, Cesar; Stratmann, Thomas
  8. Redistributive Politics and the Tyranny of the Middle Class By Floris T. Zoutman; Bas Jacobs; Egbert L. W. Jongen
  9. Growth of income and welfare in the U.S, 1979-2011 By John Komlos
  10. A Note on Home Bias and the Gain from Non-Preferential Taxation By Kaushal Kishore
  11. Disability Insurance Benefits and Labor Supply Choices: Evidence from a Discontinuity in Benefit Awards By Müller, Tobias; Boes, Stefan
  12. How Efficient are the Current U.S. Beer Taxes? By Vinish Shrestha
  13. How Migration Can Change Income Inequality? By Assaf Razin; Efraim Sadka
  14. Public bad conflicts: Cyclical Nash strategies and Stackelberg solutions By Halkos, George; Papageorgiou, George
  15. Disability Insurance Benefits and Labor Supply Decisions: Evidence from a Discontinuity in Benefit Awards By Müller, Tobias; Boes, Stefan
  16. "Flattening" the Tax Evasion: Evidence from the Post-Communist Natural Experiment By Filer, Randall K.; Hanousek, Jan; Lichard, Tomáš; Torosyan, Karine
  17. Fiscal Gaps and Financing of Southeast Asia’s Protected Areas: A Cross-Country Analysis By Gem B. Castillo; Somaly Chan; Li Wenjun; Li Yanbo; H. Luthfi Fatah; Sivannakone Malivarn; Kian Foh Lee; Alexander D. Anda, Jr; Prinyarat Laengcharoen; Pham Duc Chien; Benoit Laplante
  18. Economic opportunity and income mobility--remarks at the Association for Neighborhood and Housing Development Annual Community Development Conference, New York City By Dudley, William
  19. Environmental Taxes and Rural-Urban Migration - A Study from China By Jing Cao
  20. The Welfare Effects of Involuntary Part-time Work By Daniel Borowcyzk-Martins; Etienne Lalé
  21. Employment protection and unemployment benefits: On technology adoption and job creation in a matching model By Lommerud, Kjell Erik; Straume, Odd Rune; Vagstad, Steinar
  22. Premium Subsidies, the Mandate, and Medicaid Expansion: Coverage Effects of the Affordable Care Act By Molly Frean; Jonathan Gruber; Benjamin D. Sommers

  1. By: Fan, Ziying (Asian Development Bank Institute); Wan, Guanghua (Asian Development Bank Institute)
    Abstract: Since the Tax Sharing Reform in 1994, the local government revenue of the People’s Republic of China (PRC) has faced downward risk problems. This paper reviews the fiscal and taxation reforms in the central and local governments of the PRC and focuses on evaluating the effectiveness of fiscal transfers. We find that, to a certain extent, fiscal transfers significantly promote the construction of local infrastructure. Earmarked transfers had an effect, but lump-sum transfers did not. Results showed every 1% increase in earmarked transfers to be associated with a 5% increase in local spending on infrastructure. These fiscal transfers also increased the size of local government spending such that a 1% increase of fiscal transfer would increase the ratio of local fiscal spending to gross domestic product by 1%. The risk of the local fiscal revenue sources was also assessed, and results showed that land finance, local government bonds, and fiscal transfers from the central government are not sustainable in the long term. The local fiscal system in the PRC needs to focus on improving local taxes in the future, such as the property tax.
    Keywords: PRC fiscal risk; fiscal transfers; fiscal and tax reforms
    JEL: H54 H68 H71
    Date: 2016–04–22
  2. By: Vranceanu, Radu (Essec Business School, Economics Department); Sutan, Angela (University of Bourgogne Franche-Comté, ESC Dijon); Dubart, Delphine (Essec Business School)
    Abstract: This paper reports results from a linear sanction cost variant of the power-to-take game, with implications for tax policies. We compare a pay-as-you-earn (PAYE) system with an ex-post taxation system in which payroll taxes are collected at the end of the fiscal year. Dissatisfaction with taxation, as proxied by the sanction in the power-to-take game, is significantly higher in an ex-post taxation system compared with the PAYE system. However, in anticipation of the higher sanction, the "tax authority" will not apply lower taxes in the former system. Communication does not decrease dissatisfaction in a significant manner, and it is not used extensively by participants.
    Keywords: Power-to-take game; Experiments; Tax systems; Dissatisfaction with taxes
    JEL: C91 D01 H26
    Date: 2016–03–01
  3. By: Fried, Stephie; Novan, Kevin; Peterman, William B.
    Abstract: This paper examines the non-environmental welfare effects of introducing a revenue- neutral carbon tax policy. Using a life cycle model, we find that the welfare effects of the policy differ substantially for agents who are alive when the policy is enacted compared to those who are born into the new steady state with the carbon tax in place. Consistent with previous studies, we demonstrate that, for those born in the new steady state, the welfare costs are always lower when the carbon tax revenue is used to reduce an existing distortionary tax as opposed to being returned in the form of lump-sum payments. In contrast, during the transition, we find that rebating the revenue with a lump sum transfer is less costly than using the revenue to reduce the distortionary labor tax. Additionally, we find that the tax policy is substantially more regressive over the transition than in the steady state, regardless of what is done with the revenue. Overall, our results demonstrate that estimates of the non-environmental welfare costs of carbon tax policies that are based solely on the long-run, steady state outcomes may ultimately paint too rosy of a picture. Thus, when designing climate policies, policymakers must pay careful attention to not only the long-run outcomes, but also the transitional welfare costs and regressivity of the policy.
    Keywords: Carbon taxation ; overlapping generations
    JEL: E62 H21 H23
    Date: 2016–04–20
  4. By: Bönke, Timm; Kemptner, Daniel; Lüthen, Holger
    Abstract: In aging societies, information on how to reform pension systems is essential to policy makers. This study scrutinizes effects of early retirement disincentives on retirement behavior, individual welfare, pensions and public budget. We employ administrative pension data and a detailed model of the German tax and social security system to estimate a structural dynamic retirement model. We find that labor market participation and retirement behavior in general are strongly influenced by the level of disincentives. Further, disincentives come at the cost of increasing inequality and individual welfare losses. Still, net public returns are more than five times as high as monetarized individual welfare losses. Our estimates also suggest that similar levels of net public returns achieved by indiscriminating pension cuts are associated with individual welfare losses that are at least twice as high.
    Keywords: dynamic discrete choice,retirement,tax and pension system,pension reform
    JEL: C61 H55 J26
    Date: 2016
  5. By: Jeffrey Hoopes; Patrick Langetieg; Stefan Nagel; Daniel Reck; Joel Slemrod; Bryan Stuart
    Abstract: We examine individual stock sales from 2008 to 2009 using population tax return data. The share of sales by the top 0.1 percent of income recipients and other top income groups rose sharply following the Lehman Brothers bankruptcy and remained elevated throughout the financial crisis. Sales by top income and older age groups were relatively more responsive to increased stock market volatility. Volatility-driven sales were not concentrated in any one sector, but mutual fund sales responded more strongly to increased volatility than stock sales. Additional analysis suggests that gross sales in tax return data are informative about unobserved net sales.
    JEL: G01 G11 G12
    Date: 2016–04
  6. By: James Mak (Professor Emeritus of Economics, University of Hawaii at Manoa; Fellow, University of Hawaii Economic Research Organization)
    Abstract: Many states in the U.S. give unrestricted financial support to their local governments. The reasons some state governments provide aid and others do not, and why a particular mode of revenue sharing is adopted remain unclear. This paper examines Hawaii’s recent effort at developing a model to allocate the state’s transient accommodation tax revenues between the State and the county governments. The paper documents the process and explains the rationale behind the model.
    Keywords: Intergovernmental revenue sharing; transient accommodation tax; hotel occupancy tax
    JEL: H7
    Date: 2016–05
  7. By: Asatryan, Zareh; Castellon, Cesar; Stratmann, Thomas
    Abstract: This paper studies the long-run fiscal consequences of balanced budget rules (BBR) that are enshrined in a country's constitution. Using historical data dating back to the 19th century and applying a difference-in-difference approach we find that the introduction of a constitutional-BBR reduces government debt-to-GDP and expenditure-to-GDP ratios, on average, by around 11 and 3 percentage points, respectively. We do not find evidence that BBRs affect tax revenues. Our analysis indicates that such rules reduce the probability of experiencing a debt crisis and that the effective enforcement of BBRs can be conditional on the quality of democratic institutions. In addition, we implement an instrumental variable approach by instrumenting the probability of having budget rules on de jure constraints on changing the constitution. This and other tests suggest that the relations we find are largely causal going from BBRs to fiscal outcomes.
    Keywords: economic effects of constitutions,fiscal rules,historical public finances,sovereign debt crises
    JEL: H50 H60 K10 N40
    Date: 2016
  8. By: Floris T. Zoutman (NHH Norwegian School of Economics, Norway); Bas Jacobs (Erasmus University Rotterdam, the Netherlands); Egbert L. W. Jongen (CPB Netherlands Bureau for Economic Policy Analysis, The Hague; and Leiden University, the Netherlands)
    Abstract: The Netherlands has a unique tradition in which all major Dutch political parties provide CPB Netherlands Bureau for Economic Policy Analysis with highly detailed proposals for the tax-benefit system in every national election. This information allows us to quantitatively measure the redistributive preferences of political parties. For each political party we calculate social welfare weights by income level using the inverse optimal-tax method. We find that all political parties roughly give a higher social welfare weight to the poor than to the rich. Furthermore, left-wing parties attach higher social welfare weights to the poor and lower social welfare weights to the rich than right-wing parties do. However, we also discover two anomalies. First, all political parties give a much higher social welfare weight to middle incomes than to the working and non-working poor. Second, all Dutch political parties attach a slightly negative social welfare weight to the rich by setting top rates beyond the revenue-maximizing 'Laffer' rate. Finally, we detect a strong political status quo, since social welfare weights of all political parties hardly deviate from the welfare weights that are implied by the pre-existing tax-benefit system. We argue that political-economy considerations are key in understanding the political status quo and why middle-income groups are able to lower their tax burdens at the expense of both the low- and high-income groups.
    Keywords: Inverse optimal-tax method; revealed social preferences; political parties; optimal taxation; income redistribution
    JEL: C63 D63 H21
    Date: 2016–04–25
  9. By: John Komlos
    Abstract: We estimate growth rates of real incomes in the U.S. by quintiles using the Congressional Budget Office’s (CBO) post-tax, post-transfer data as basis for the period 1979-2011. We improve upon them by including only the present value of earnings that will accrue in retirement and excluding items included in the CBO income estimates such as “corporate taxes borne by labor” that do not increase either current purchasing power or utility. We estimate a high and a low growth rate using two price indexes, the CPI and the Personal Consumption Expenditure index. The major consistent findings include what in the colloquial is referred to as the “hollowing out” of the middle class. According to these estimates, the income of the middle class 2nd and 3rd quintiles increased at a rate of between 0.1% and 0.7% per annum, i.e., barely distinguishable from zero. Even that meager rate was achieved only through substantial transfer payments. In contrast, the income of the top 1% grew at an astronomical rate of between 3.4% and 3.9% per annum during the 32-year period, reaching an average annual value of $918,000, up from $281,000 in 1979 (in 2011 dollars). Hence, the post-tax, post-transfer income of the 1% relative to the 1st quintile increased from a factor of 21 in 1979 to a factor of 51 in 2011. However, income of no other group increased substantially relative to that of the lowest quintile. Oddly, the income of even those in the 96-99 percentiles increased only from a multiple of 8.1 to a multiple of 11.3. We next estimate growth in welfare assuming diminishing marginal utility of income. A logarithmic utility function yields a growth in welfare for the middle class of roughly 0.01% to 0.07% per annum, which is indistinguishable from zero. With interdependent utility functions only the welfare of the 5th quintile experienced meaningful growth while those of the first four quintiles tend to be either negligible or even negative.
    JEL: D30 D60 E0 I31 N12
    Date: 2016–04
  10. By: Kaushal Kishore (Department of Economics, University of Pretoria)
    Abstract: In a symmetric model of tax competition, we support the claim in Haupt and Peters (2005) that a non-preferential regime generates higher tax revenues compared to a preferential regime when investors have home bias. Further, we show that a complete ban on preferential taxation is desirable even when capital base is in?finitely elastic.
    Keywords: Tax competition, Nash Equilibrium, Non-preferential regime
    JEL: C72 F20 H26
    Date: 2016–04
  11. By: Müller, Tobias; Boes, Stefan
    Abstract: This paper explores the effects of disability insurance (DI) benefits on the labor market decision of existing DI beneficiaries using a fuzzy regression discontinuity (RD) design. We identify the effect of DI benefits on the decision of working full-time, part-time or staying out of the labor force by exploiting a discontinuity in the DI benefit award rate above the age of 55. Overall, our results suggest that the Swiss DI system creates substantial lock-in effects which heavily influence the labor supply decision of existing beneficiaries: the benefit receipt increases the probability of working part-time by about 41%-points, decreases the probability of working full-time by about 42%-points but has little or no effects on the probability of staying out of the labor force for the average beneficiary. Therefore, DI benefits induce a shift in the labor supply of existing beneficiaries in the sense that they reduce their work intensity from working full-time to part-time which adds a possible explanation for the low DI outflow observed all across the OECD.
    Keywords: Disability insurance benefits; Labor market participation; Fuzzy regression discontinuity design Endogenous switching models; Maximum simulated likelihood
    JEL: C35 C36 J22
    Date: 2016
  12. By: Vinish Shrestha (Department of Economics, Towson University)
    Abstract: This paper examines the status of current beer taxes in the U.S. by questioning how far away the present beer taxes are from the optimal taxes. Following the estimation of tax elasticity, I estimate the lifetime discounted costs that a heavy drinker levies on others through: 1) Years of life lost; 2) Social insurance system; 3) Drunk driving accidents; and 4) Forgone income taxes. The optimal level of beer tax ranges from 17.15 percent to 47.5 percent of the price per drink. Even the conservative estimates suggest that current beer taxes comprise only 16 percent of the external costs.
    Keywords: Externality, Beer Taxation, Efficiency.
    JEL: H21 H23 I10
    Date: 2016–04
  13. By: Assaf Razin; Efraim Sadka
    Abstract: Motivated by the unique experience of Israel of a supply-side shock of skilled migration, and the concurrent rise in disposable income inequality, this paper develops a model which can explain the mechanism through which a supply-side shock of skilled migration can reshape the political-economy balance and the redistributive policies. First, it depresses the incentives for unskilled migrants to flow in, though they are still free to do so. Second, tax-transfer system becomes less progressive. Nonetheless, the unskilled native-born may well become better-off, even though they lose their political clout.
    JEL: F22 H0 J0
    Date: 2016–04
  14. By: Halkos, George; Papageorgiou, George
    Abstract: The first purpose of this paper is to study the dynamics of a general socially undesirable public evil and the possibility of cyclical Nash strategies in equilibrium. As a second result of the paper we found the analytical solutions of the hierarchical (Stackelberg) game for the public bad accumulation model. In both cases we use the differential game modeling, as the appropriate tool for the economic analysis that follows. The control setting is not the usual one, which assumes an accumulated stock of a public bad (e.g. pollutants, wastes or even tax evasion), but we claim that the disadvantage which is responsible for the unwished public evil accumulation is the use of the available inputs and equipment. Therefore, this could be a crucial assumption which possibly prevents the irreversibility of the public bad accumulation. As a continuation, we set as stock the available resources (inputs plus equipment) and the stress of the regulator is to reduce these resources. In the first case of Nash equilibrium, we find that the establishment of cyclical strategies, during the game between the agents in charge and the regulator, requires that the agents’ discount rate must be greater than the government’s discount rate, i.e., the agents in charge must be more impatient than the government (acting as the regulator). In the second case of the hierarchical setting, we provide the analytical expressions of the strategies as well as the steady state value of the resources’ stock. We use the notion of a public bad as the opposite meaning to the public good.
    Keywords: Public bad; cyclical policies; Nash equilibrium; Stackelberg equilibrium.
    JEL: C61 C62 D43 H21 Q50 Q58
    Date: 2016–04–11
  15. By: Müller, Tobias; Boes, Stefan
    Abstract: This paper explores the effects of disability insurance (DI) benefits on the labor market decision of existing DI beneficiaries using data from the Swiss Household Panel. We use a fuzzy regression discontinuity (RD) design to identify the effect of DI benefits on the decision of working full-time, part-time or staying out of the labor force by exploiting a discontinuity in the DI benefit award rate. Overall, our results suggest that the Swiss DI system creates substantial lock-in effects which heavily influence the working decision of existing beneficiaries: the benefit receipt increases the probability of working part-time by about 41%-points, decreases the probability of working full-time by about 42%-points but has little or no effects on the probability of staying out of the labor force for the average beneficiary. Therefore, DI benefits induce a shift in the labor supply of existing beneficiaries in the sense that they reduce their work intensity from working full-time to part-time adding a possible explanation for the low DI outflow across the OECD.
    Keywords: Disability insurance benefits, Fuzzy regression discontinuity design, Labor market participation, Endogenous switching models, Maximum simulated likelihood
    JEL: C35 J20
    Date: 2016
  16. By: Filer, Randall K.; Hanousek, Jan; Lichard, Tomáš; Torosyan, Karine
    Abstract: We analyze the response of tax evasion to the introduction of a flat tax in several transition economies. Using a novel estimator based on household level data, we show that in most of the studied countries there was no discernible effect on the measured size of unreported income following flat tax reform. This may imply that decreases in marginal tax rate may frequently have been accompanied by parallel deterioration in attitudes towards public services and these countries' government in general as the only countries that show a response to the flat tax reform appear to be those where satisfaction with government services increased. Additionally, our results show a pro-cyclicality of the size of the shadow economy that is in line with previous research.
    Keywords: consumption-income gap; Flat tax; tax evasion; tax reform; underreporting
    JEL: C34 H26
    Date: 2016–04
  17. By: Gem B. Castillo (Resource and Environmental Economics Foundation of the Philippines, Inc. (REAP)); Somaly Chan (Department of Nature Conservation & Protection, Ministry of Environment Cambodia); Li Wenjun (Department of Environmental Management, College of Environmental Sciences and Engineering, Peking University); Li Yanbo (Visayas State University); H. Luthfi Fatah (Lambung Mangkurat University); Sivannakone Malivarn (Water Resources and Environment Administration); Kian Foh Lee (WWF-Malaysia (Peninsular Malaysia Office-HQ)); Alexander D. Anda, Jr (Resources, Environment And Economic Center For Studies (REECS)); Prinyarat Laengcharoen (Thailand Development Research Institute); Pham Duc Chien (Forest Science Institute of Vietnam (FSIV)); Benoit Laplante (EEPSEA)
    Keywords: Fiscal Gaps,Protected Areas, Southeast Asia
    Date: 2016–03
  18. By: Dudley, William (Federal Reserve Bank of New York)
    Abstract: Remarks at the Association for Neighborhood and Housing Development Annual Community Development Conference, New York City.
    Keywords: dual objective; dual mandate; American Dream; equal opportunity; upward mobility; Raj Chetty; intergenerational mobility; residential segregation; school quality; school vouchers; residential mobility
    Date: 2016–04–11
  19. By: Jing Cao (Harvard China Project, Harvard University Center for the Environment and School of Economics and Management Tsinghua University, Beijing)
    Abstract: This study investigates the potential impact of two environmental tax regimes on the movement of rural people to China's cities. The study models the impact of a fuel tax and an output tax on the country's economy to get a full picture of how they would affect people's livelihoods and welfare, and how this would, in turn, affect rural-urban migration. The study sheds light on the implications of future environmental taxes and how they would affect urbanization and "rural-urban" migration in China. The study finds that both proposed taxes would discourage the flow of migrants from China's countryside to its cities. This would therefore exacerbate the current distortions in the country's labour market, where there is a surplus of rural labour. A comparison of the impact of the two taxes shows the fuel tax to be more efficient in terms of reducing pollution emissions and their associated environmental and health impacts. It also produces less distortion in the rural-urban migration process than the output tax. The study therefore recommends that this would be the preferable policy.
    Keywords: environmental taxation, rural-urban, China
    Date: 2016–04
  20. By: Daniel Borowcyzk-Martins; Etienne Lalé
    Abstract: We extend a standard incomplete-market model featuring unemployment risk by allowing for an additional risk of involuntary part-time employment. A calibration of the model consistent with U.S. institutions and labor market dynamics shows that involuntary part-time work entails lower welfare losses relative to unemployment. This finding relies critically on the premium enjoyed by part-time workers in returning to full-time work.
    Keywords: Involuntary part-time work, Unemployment, Welfare
    JEL: E21 E32 J21
    Date: 2016–04–13
  21. By: Lommerud, Kjell Erik; Straume, Odd Rune; Vagstad, Steinar
    Abstract: We analyse the effects of different labour market policies - employment protection, unemployment benefts and payroll taxes - on job creation and technology choices in a model where firms are randomly matched with workers of different productivity and wages are determined by ex-post bargaining. The model is characterised by two intertwined sources of inefficiency, namely a matching externality and a hold-up externality associated with workers' bargaining strength. Results depend on the relative importance of the two externalities and on worker risk aversion. "Flexicurity", meaning low employment protection and generous unemployment insurance, can be optimal if the hold-up problem is relatively important and workers greatly value income security.
    Keywords: Technology adoption; job creation; employment protection; unemployment in-
    JEL: H21 J38 J65 O31
    Date: 2016–03
  22. By: Molly Frean; Jonathan Gruber; Benjamin D. Sommers
    Abstract: Using a combination of subsidized premiums for Marketplace coverage, an individual mandate, and expanded Medicaid eligibility, the Affordable Care Act (ACA) has significantly increased insurance coverage rates. We assessed the relative contributions to insurance changes of these different ACA provisions in the law’s first full year, using rating-area level premium data for all 50 states and microdata from the 2012-2014 American Community Survey. We employ a difference-in-difference-in-difference estimation strategy that relies on variation across income groups, areas, and years to causally identify the role of the ACA policy levers. We have four key findings. First, insurance coverage was only moderately responsive to price subsidies, but the subsidies were still large enough to raise coverage by almost one percent of the population; the coverage gains were larger in states that operated their own health insurance exchanges (as opposed to using the federal exchange). Second, the exemptions and tax penalty structure of the individual mandate had little impact on coverage decisions. Third, the law increased Medicaid coverage both among newly eligible populations and those who were previously eligible for Medicaid (the “woodwork” effect), with the latter driven predominantly by states that expanded their programs prior to 2014. Finally, there was no “crowdout” effect of expanded Medicaid on private insurance. Overall, we conclude that exchange premium subsidies produced roughly 40% of the ACA’s 2014 coverage gains, and Medicaid the other 60%, of which 2/3 occurred among previously-eligible individuals.
    JEL: H2 I13
    Date: 2016–04

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