nep-pbe New Economics Papers
on Public Economics
Issue of 2016‒05‒28
seventeen papers chosen by
Thomas Andrén

  1. Should income inequality be praised? Multiple public goods provision, income distribution, and social welfare By Itaya, Jun-ichi; Mizushima, Atsue
  2. What determines the level of local business property taxes? By Merriman, David
  3. Demographics and tax competition in political economy By Tadashi Morita; Yasuhiro Sato; Kazuhiro Yamamoto
  4. Investment, Adverse Selection and Optimal Redistributive Taxation By Dosis, Anastasios
  5. Effective Marginal Tax Rates for Low- and Moderate-Income Workers in 2016 By Congressional Budget Office
  6. Cross-border flows operated through the EU budget: an overview By Pasquale D'Apice
  7. Tax Revenue Elasticities Corrected for Policy Changes in the EU By Gilles Mourre; Savina Princen
  8. "Demographics and Tax Competition in Political Economy" By Tadashi Morita; Yasuhiro Sato; Kazuhiro Yamamoto
  9. Taxing Wealth: Past, Present, Future - Workshop Proceedings By Caterina Astarita
  10. Inequality Reducing Properties of Progressive Income Tax Schedules: The Case of Endogenous Income By Oriol Carbonell-Nicolau; Humberto Llavador
  11. Heuristic Driven Agents in Tax Evasion: an Agent-based Approach By Luigi Mittone; Gian Paolo Jesi
  12. Measuring Tax Administration Effectiveness and its Impact on Tax Revenue By Arindam Das-Gupta; Gemma B. Estrada; Donghyun Park
  13. What Determines Top Income Shares? The Role of the Interactions between Financial Integration and Tax Policy By Thibault Darcillon
  14. Anti-poverty Income Transfers in the U.S.: A Framework for the Evaluation of Policy Reforms By Salvador Ortigueira; Nawid Siassi
  15. Monetary Union and Fiscal and Macroeconomic Governance By Marek Dabrowski
  16. Optimal time-consistent government debt maturity By Debortoli, Davide; Nunes, Ricardo; Yared, Pierre
  17. Inequality, Distributive Beliefs and Protests: A Recent Story from Latin America By Patricia Justino; Bruno Martorano

  1. By: Itaya, Jun-ichi; Mizushima, Atsue
    Abstract: We investigate how income inequality affects social welfare in a model of voluntary contributions to multiple pure public goods. Itaya, de Meza, and Myles (1997) show that the maximization of social welfare precludes income equality in a single pure public good model. In contrast, we show that the result of Itaya et al. may not be valid in a case of multiple voluntarily supplied public goods; specifically, we show that not only an income inequality-raising redistribution policy but also an income-equalizing one may raise social welfare. We also show that if altruistically motivated voluntary transfers are allowed, an inequality-raising redistribution policy is no longer effective and leaves social welfare unchanged.
    Keywords: Public goods, Inequality, Social welfare, Voluntary provision, Income distribution,
    Date: 2016–01–26
  2. By: Merriman, David (University of Illinois at Chicago)
    Abstract: Conventional economic theory intuitively holds that local business property taxes, which account for over one-third of the state and local taxes that firms pay, should be efficiently structured in order to recover the exact cost of providing public services to these firms. However, this conceptual thinking does not accord with observed geographic and over-time variation in business taxation. To better explain these discrepancies, the author develops an alternative theoretical model with heterogeneous firms, some of which are more profitable than others in certain locations. This model more precisely captures observed business tax revenues and its implications are empirically tested using a nationally-representative database of effective tax rates for commercial property and owner-occupied housing. The alternative model better reflects the political and policy tradeoffs that local government officials face between balancing the need for government revenue while maintaining an attractive profit-making environment for businesses and attracting firms that will supply jobs for their constituents.
    JEL: H25 H7 R38
    Date: 2016–01–01
  3. By: Tadashi Morita (Faculty of Economics, Kindai University,); Yasuhiro Sato (Faculty of Economics, University of Tokyo); Kazuhiro Yamamoto (Graduate School of Economics, Osaka University)
    Abstract: We examine possible impacts of demographics on outcomes of capital tax compe- tition in political economy. For this purpose, we develop an overlapping generations model wherein public good provision financed by capital tax is determined by majority voting. When a population is growing, younger people represent the majority, whereas when a population is decreasing, older people represent the majority. We show that the race to the bottom is likely to emerge in the population growing economy whereas the race to the top might emerge in the population decreasing economy.
    Keywords: tax competition, majority voter, fiscal externality, political externality
    JEL: H20 J11
    Date: 2016–05
  4. By: Dosis, Anastasios (Essec Business School, Economics Department)
    Abstract: I study a credit market with adverse selection as a signalling game. I show that in the least-costly separating equilibrium, entrepreneurs of high-quality projects may over-or under-invest compared to the social optimum to signal their type. I then examine a simple budget-balanced tax-subsidy scheme applied by the government. At a first sight, the tax-subsidy scheme seems to benefit entrepreneurs of low-quality projects and harm entrepreneurs of high-quality projects because the former are cross-subsidised by the latter. Nonetheless, this result does not necessarily hold if entrepreneurs can pledge the subsidy as collateral. In that case, taxes can improve social welfare by either decreasing or increasing aggregate investment depending on whether entrepreneurs of high-quality projects over-or under-invest in equilibrium. Keywords : Adverse selection investment taxes welfare
    Keywords: Adverse selection; investment; taxes; welfare;
    JEL: D04 D60 D82 D86 H25 H82
    Date: 2016–02–17
  5. By: Congressional Budget Office
    Abstract: In 2016, low- and moderate-income workers will face an effective marginal tax rate of 31 percent, on average. Federal individual income and payroll taxes will be the main contributors.
    JEL: H20 H24 I38
    Date: 2015–11–19
  6. By: Pasquale D'Apice
    Abstract: The budget of the European Union (EU) amounts to around 1% of Gross Domestic Product (GDP) of the EU. Although financed by national contributions, only a part of expenditure flows across Member States. According to our estimates, yearly cross-border flows operated through the EU budget amount to a quarter of a percentage point of the EU’s GDP. To provide a benchmark, ‘cross-border’ flows between US States are calculated using the same method. These are much larger in normal times and incomparably larger in deep recessions. They amounted to 1.5% of US GDP on average between 1980 and 2005, and increased to 9% over 2009 and 2010. Importantly, the post-crisis increase (2009-10) of net inflows was financed entirely by borrowing at the federal level. During normal times (1980-2005), instead, it was the size and structure of the federal budget to determine the magnitude of cross-border flows. These happen automatically and almost invisibly through the federal tax and spending system. They are not subject to intense interstate negotiations but predominantly stem from a direct fiscal relationship between the citizen – regardless of its residence – and the federal layer of government. While keeping in mind the limitations of such comparisons, the evidence gathered in this paper suggests that – contrary to popular perception - cross-border flows operated through the EU budget are overall fairly small in both absolute and relative terms. Notions such as 'fairness' and 'juste retour' often used in the context of past intense EU budgetary negotiations could therefore benefit from being framed in a broader, arguably more relevant, perspective.
    JEL: E63 H70
    Date: 2015–12
  7. By: Gilles Mourre; Savina Princen
    Abstract: This paper investigates how tax revenue elasticities develop with respect to their tax base and analyses the specific impact of the business cycle. The main novelty of the paper is to use revenue data net of discretionary tax measures. The latter come from a new database, filled by Member States and managed by the European Commission (DG ECFIN). Based on an EU country panel for the period 2001-13, we estimate short-term and long-term revenue elasticities for consumption taxes, social security contributions, personal income taxes and corporate income taxes, using a wide range of specifications. The estimated revenue-to-base elasticities are broadly in line with the results found in previous research, although the robustness of the estimates varies across tax categories. Then, we add different indicators of the business cycle to test its specific influence on the short-term dynamics of revenue-to-base elasticities. This confirms the existence of a specific impact of the business cycle on short-term revenue elasticities – beyond the direct effect on the tax base – for all revenue categories, except for consumption taxes. Corporate income taxes appear to be the most cyclically-dependent tax category, followed by personal income taxes, for which estimation results turn out particularly robust.
    JEL: E32 H2 H3 H6
    Date: 2015–11
  8. By: Tadashi Morita (Faculty of Economics, Kindai University); Yasuhiro Sato (Faculty of Economics, The University of Tokyo); Kazuhiro Yamamoto (Graduate School of Economics, Osaka University)
    Abstract: We examine possible impacts of demographics on outcomes of capital tax competition in political economy. For this purpose, we develop an overlapping generations model wherein public good provision financed by capital tax is determined by majority voting. When a population is growing, younger people represent the majority, whereas when a population is decreasing, older people represent the majority. We show that the race to the bottom is likely to emerge in the population growing economy whereas the race to the top might emerge in the population decreasing economy.
  9. By: Caterina Astarita
    Abstract: In times of fiscal consolidation and strong macroeconomic adjustment needs in some EU Member States, the debate on wealth taxation gained momentum, both in the academic and in the policy debate. In this context, the aim of the workshop, held by DG ECFIN on 13 November 2014, was to discuss theoretical and policy issues associated with wealth taxation, including the broad principles and the concrete design challenges of an optimal wealth tax. Different types of wealth taxation have been scrutinised including transmission taxes, housing taxes and the taxation of financial assets. The challenges they may raise have been discussed also with respect to recent experience in particular Member States. The workshop was organised in two sessions: "Taxation of wealth: state of play and rationale" and "Taxing wealth: specific instruments and challenges". The proceedings offer a detailed summary of the most recent research related to various aspects of wealth taxation and carried out by academics and international organisations' representatives.
    JEL: F38 H2 H26 H30 H31 H32 H71 H87
    Date: 2015–07
  10. By: Oriol Carbonell-Nicolau (Rutgers University); Humberto Llavador (Universitat Pompeu Fabra)
    Abstract: The case for progressive income taxation is often based on the classic result of Jakobsson (1976) and Fellman (1976), according to which progressive and only progressive income taxes—in the sense of increasing average tax rates on income—ensure a reduction in income inequality. This result has been criticized on the ground that it ignores the possible disincentive effect of taxation on work effort, and the resolution of this critique has been a long-standing problem in public finance. This paper provides a normative rationale for progressivity that takes into account the effect of an income tax on labor supply. It shows that a tax schedule is inequality reducing only if it is progressive—in the sense of in- creasing marginal tax rates on income, and identifies a necessary and sufficient condition on primitives under which progressive and only progressive taxes are inequality reducing.
    Keywords: progressive taxation, income inequality, incentive effects of taxation
    JEL: D63 D71
    Date: 2016–05–18
  11. By: Luigi Mittone; Gian Paolo Jesi
    Abstract: The Allingham and Sandmo model is an adaptation of the standard expected utility maximization framework where the taxpayer is defined as a representative agent who is coping with a risky choice. The main limit of this model regards the assumption of perfect rationality from the agent’s side and the impossibility to study at the macro level a situation where many heterogeneous agents interact together. The aim of this work is to try to overcome, at least partially, some of the neoclassical standard approaches in this field. More precisely, we present a very simplified, agent- based, fiscal system with heterogeneous tax payers, interacting within a public good game framework. Heterogeneity has been introduced in our model by designing the agents like simple heuristics. The environment has been designed by a voluntary supply public good context reinforced through tax audits and fines. Looking for more realism, we also allowed agents to mutate their heuristics and we introduced two cross sectional types of agents: the “employees" and the “self-employees" allowing our agents to switch from one type to the other and vice-versa. Finally, the system is dynamic over time, since new agents can join over time to mimic the idea of having a growing population over time. We obtained a complex adaptive system (CAS) with heterogeneous agents, dynamically evolving, able to describe the adaptation of agent’s behaviour either concerning evading decision and the preferred kind of heuristic.
    Date: 2016
  12. By: Arindam Das-Gupta (Goa Institute of Management, Goa, India); Gemma B. Estrada (Asian Development Bank, Manila, Philippines); Donghyun Park (Asian Development Bank, Manila, Philippines)
    Abstract: We propose a method for constructing a tax administration measure of effectiveness or TAME, and describe its desirable properties. We then empirically construct a TAME using data from external audits of VAT administrations of Indian state governments. We then use the TAME to quantitatively assess the impact of tax administration effectiveness on tax revenues. The impact is found to be both statistically significant and large. We then identify causes of tax administration effectiveness in the poorly performing states. We then suggest guidelines for constructing our TAMEs for other jurisdictions and time periods.
    Keywords: tax administration, tax revenues, value-added tax
    JEL: H21 H25
    Date: 2016–01
  13. By: Thibault Darcillon (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This article aims at analyzing the role of the interactions between financial deregulation policies and changes in top tax marginal rates to explain the evolution in top income shares since the 1980s in most OECD countries. I argue that higher financial integration should have an increasing-effect on top income shares by resulting in lower marginal top tax rates. First, international financial integration has gradually contributed to increased tax competition by raising capital mobility. Second, financial integration also reflects higher bargaining power for top earners, pushing for a reduction in marginal top tax rates. Based on instrumental variables and simultaneous equations system regressions, I find strong evidence of my hypothesis: first, financial integration is negatively correlated with higher top marginal tax rates; second, this result seems to explain the negative relationship between marginal top tax rates and top income shares.
    Abstract: Cet article cherche à analyser le rôle des interactions qui peuvent exister entre les politiques de dérégulation financière et les récentes modifications de politique fiscale pour expliquer l'évolution de la part du revenu national détenue par les hauts revenus depuis les années 1980 dans la plupart des pays de l'OCDE. Nous avançons l'argument selon lequel l'intégration financière aurait contribué à accroitre les inégalités dans le haut de la distribution des revenus en réduisant les taux de taxation auxquels sont les hauts revenus. Premièrement, l'intégration financière au niveau international a contribué progressivement à renforcer la concurrence fiscale en accentuant la mobilité du capital. Deuxièmement, l'intégration financière s'est également traduite par renforcer le pouvoir de négociation pour les hauts revenus, ceux-ci prônant un faible niveau de taxation sur leurs propres revenus. A l'aide d'un modèle à variables instrumentales et d'un modèle à équations simultanées, notre hypothèse principale semble vérifiée : d'une part, une plus forte intégration financière est corrélée à de plus faibles taux de taxation sur les hauts revenus ; d'autre part, ce résultat semble expliquer la relation négative entre le niveau des taxations des hauts revenus et la part du revenu national détenue par ces derniers.
    Keywords: Financial integration,top income shares,tax policy,Intégration financière,part des hauts revenus,politique fiscale
    Date: 2016–04
  14. By: Salvador Ortigueira (Department of Economics, University of Miami); Nawid Siassi (Department of Economics, University of Konstanz, Universit¨atsstrasse)
    Abstract: We develop a dynamic model of labor supply, consumption, savings and marriage decisions to study the behavioral responses of low-income workers to anti-poverty income transfers in the U.S. The model is calibrated to match moments from a sample of non-college-educated workers with children drawn from the 2014 Annual Social and Economic Supplement. The categorical, asset and income eligibility criteria of the transfer programs, along with the income and payroll taxes, yield complex budget constraints and introduce a web of interactions whose effects we identify and measure. We examine the workers' behavioral responses across the model's equilibrium distribution over living arrangements, labor productivities, wealth and number of children. Then we use the model to assess the effects of three recent proposals to reform the U.S. tax-transfer system, including the "21st Century Worker Tax Cut Act" and the "Tax Reform Act of 2014". A core objective of these proposals is the mitigation of the disincentives introduced by the Earned Income Tax Credit to married mothers' labor market participation.
    Keywords: Anti-poverty income transfers, household decisions, cohabitation and marriage Publication Status: Under Review
    JEL: E21 H24 H31 J12
    Date: 2016–04–29
  15. By: Marek Dabrowski
    Abstract: This paper analyses three questions related to the EU/EMU integration infrastructure: (i) interrelation between monetary and fiscal integration; (ii) interrelation between monetary integration and closer coordination of macroeconomic policies and (iii) fiscal discipline vs. fiscal solidarity. On the first issue, we suggest that rationale of further fiscal and political integration should be guided by the costbenefit analysis based on the theory of fiscal federalism rather than OCA theory. On the second issue, we express conceptual and practical doubts regarding the way in which the Macroeconomic Imbalance Procedure has been designed and operated. On the third issue, we believe returning to the market discipline (based on credible danger of sovereign default) supplemented by clear and consistently enforced fiscal rules will have a key importance for long-term sustainability of a monetary union in Europe and avoiding dysfunctional fiscal federalism.
    JEL: F32 F33 F42 F45 H62 H63 H77 H81
    Date: 2015–09
  16. By: Debortoli, Davide (Universitat Pompeu Fabra); Nunes, Ricardo (Federal Reserve Bank of Boston); Yared, Pierre (Columbia University)
    Abstract: The current literature on a government's optimal debt maturity structure contends that by purchasing short-term assets and selling long-term debt, it is possible to fully insulate the economy against fiscal shocks. The required short and long positions are large relative to GDP and constant. The market value of debt adjusts automatically and the constant debt positions and fluctuating bond prices insulate against potential shocks. However, achieving the goal of averting future shocks depends on the government perfectly committing to the future fiscal policy, for without this sustained commitment, the large debt positions required to insure against future spending shocks are extremely expensive to service; moreover, the government faces a tradeoff between using the debt maturity structure to service its debt obligations and using it to protect against economic shocks. As the authors point out, in practice a government chooses tax, spending, and debt levels sequentially in each period, taking into account its outstanding debt portfolio and anticipating the behavior of future governments. The paper develops an alternative model of optimal debt maturity that solves the problem of a government's lack of commitment.
    Keywords: public debt; optimal taxation; fiscal policy
    JEL: E62 H21 H63
    Date: 2016–05–17
  17. By: Patricia Justino; Bruno Martorano
    Abstract: This paper analyses the role of perceptions of inequality and distributive beliefs in motivating people to engage in protests. The paper focuses on the case of Latin America, where an interesting paradox has been observed: despite considerable reductions in inequality, most countries in Latin America have experienced increases in protests and civil unrest in the last decade. In order to understand this paradox, we analyse the relationship between inequality and protests in recent years in Latin America, using micro-level data on individual participation in protests in 2010, 2012 and 2014. The results show that civil protests are driven by distributive beliefs and not by levels of inequality because individual judgments and reactions are based on own perceptions of inequality that may or may not match absolute levels of inequality. The results also point to the important role of government policy in affecting perceptions of inequality and ensuring social and political stability.
    Keywords: Perception of inequality, inequality, distributive beliefs, protests, Latin America
    Date: 2015

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