nep-pbe New Economics Papers
on Public Economics
Issue of 2016‒06‒18
fourteen papers chosen by
Thomas Andrén

  1. Social Comparisons and Optimal Taxation in a Small Open Economy By Aronsson, Thomas; Johansson-Stenman, Olof; Sjögren, Tomas
  2. Unsticking the Flypaper Effect Using Distortionary Taxation By Carlos A. Vegh; Guillermo Vuletin
  3. The Structure of Government Spending and the Business Cycle By Grechyna, Daryna
  4. Top Incomes and Inequality in Australia: Reconciling Recent Estimates from Household Survey and Tax Return Data By Richard V. Burkhauser; Markus H. Hahn; Roger Wilkins
  5. Does trade liberalization trigger tax competition? Theory and evidence from OECD countries By Nelly Exbrayat
  6. Revisiting the relationship between welfare spending and income inequality in OECD countries By d'Agostino, Giorgio; Pieroni, Luca; Procidano, Isabella
  7. To Avoid or Not to Avoid Inheritance Taxes? That Is the Question for Parents: Empirical Evidence from Japan By Niimi, Yoko
  8. Does tax competition make mobile firms more footloose? By Ferrett, Ben; Hoefele, Andreas; Wooton, Ian
  9. House Prices and Immovable Property Taxes: Evidence from OECD Countries By Tommaso Oliviero; Agnese Sacchi; Annalisa Scognamiglio; Alberto Zazzaro
  10. The concept of tax gaps - Report on VAT Gap Estimations By Fiscalis Tax Gap Project Group
  11. How important is precautionary labor supply? By Jessen, Robin; Rostam-Afschar, Davud; Schmitz, Sebastian
  12. The Power to Tax in Sub-Saharan Africa: LTUs, VATs, and SARAs. By Christian EBEKE; M MANSOUR; Grégoire ROTA-GRAZIOSI
  13. Time-consistent unemployment insurance By Kankanamge, Sumudu; Weitzenblum, Thomas
  14. Do Welfare Dependent Neighbors Matter for Individual Welfare Dependency By Thomas K. Bauer; Rui Dang

  1. By: Aronsson, Thomas (Department of Economics); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, Göteborg University); Sjögren, Tomas (Department of Economics)
    Abstract: Almost all previous studies on optimal taxation and status consumption are based on closed model-economies. This paper analyzes how international capital mobility – which may constrain the use of capital income taxation – affects the optimal redistributive income tax policy in a small open economy when consumers care about their relative consumption. If the government can perfectly observe (and tax) returns on savings abroad, it is shown that the policy rules for marginal labor and capital income taxation derived for a closed economy largely carry over to the small open economy analyzed here. However, if these returns are unobserved by the government, the marginal tax policy rules will be very different from those pertaining to closed model-economies. In this case, capital income taxes on domestic savings will be completely ineffective, since such taxes would induce the consumers to move their savings abroad. The labor income tax must then indirectly also reflect the corrective purpose that the absent capital income tax would otherwise have had.
    Keywords: Optimal taxation; relative consumption; positional goods; capital mobility; small open economy
    JEL: D03 D60 D62 F21 H21 H23
    Date: 2016–05
  2. By: Carlos A. Vegh; Guillermo Vuletin
    Abstract: The flypaper effect is a widely-documented puzzle whereby the propensity of sub-national governmental units to spend out of unconditional transfers is higher than the propensity to spend out of private income. Building on previous insights in the literature that rationalize this puzzle using costly taxation, we develop a simple optimal fiscal policy model with distortionary taxation that generates two novel and testable implications: (i) there should be a positive association between the size of the flypaper effect and the level of the tax rate, and (ii) the flypaper effect should be larger the lower the elasticity of substitution between private and public spending and, in fact, should vanish for very high degrees of substitution. We show that these hypotheses hold for Argentinean provinces and Brazilian states.
    JEL: H21 H22 H41 H42 H62 H77
    Date: 2016–06
  3. By: Grechyna, Daryna
    Abstract: We explore the role of the composition of government spending for the cyclical properties of fiscal variables and for the volatility of the business cycles. In the U.S., the fraction of mandatory spending in total government outlays increased from around 0.40 to 0.60 during the last 50 years, while the share of total government outlays in national output stayed relatively constant during this period. We distinguish mandatory and discretionary public spending in a standard model of optimal fiscal policy and show that the composition of government spending is able to explain a fraction of the reduction in output volatility during the Great Moderation and an increase in the countercyclicality of fiscal policy in the U.S. This is another argument in support of the "rules-based" fiscal policy rather than fiscal discretion.
    Keywords: optimal fiscal policy, mandatory and discretionary public spending, volatility, business cycles.
    JEL: E32 E62 H21 H41
    Date: 2016–03
  4. By: Richard V. Burkhauser (Department of Policy, Analysis and management, Cornell University; Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Markus H. Hahn (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Roger Wilkins (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)
    Abstract: We systematically compare differences in recent Australian income inequality estimates derived from tax records and survey data. We use customised tax tables provided by the Australian Taxation Office (ATO) to more precisely measure Australian top incomes as conceptualised in the international top incomes literature. We then document the inability of Household, Income and Labour Dynamics in Australia (HILDA) survey data, as well as the ATO 1% sample tax files, to replicate our top income share values. In contrast, accuracy is substantially improved using the ATO 2% sample introduced in 2011-12. Using HILDA data with enhanced income values from the 2% sample we better track top incomes. More importantly, we are able to use alternative income concepts and income-sharing units to provide more consistent cross-national comparisons than are currently found in the top incomes literature. Furthermore, we improve standard summary measure estimates of inequality found in the traditional survey-based Australian literature. Our findings show great potential value in linking tax records and survey data, but also show that this value is severely limited when using the 1% tax sample available for 2003-04 to 2010-11. Whereas the 2% sample substantially improves top incomes estimates, data without censored and perturbed income variables are needed and could be provided without unduly threatening tax filer confidentiality.
    Keywords: Inequality, summary income inequality measures, top income share measures, Australian tax records data, HILDA Survey data
    JEL: D31 C81
    Date: 2016–06
  5. By: Nelly Exbrayat (Université de Lyon, Lyon F- 69007, France; CNRS, GATE L-SE, Ecully, F- 69130, France; Université J. Monnet, Saint-Etienne, F- 42000, France)
    Abstract: This article aims at assessing the empirical relevance of New Economic Geography models of tax competition. We rely on a simple model to specify tax reactions functions, which we estimate with a panel covering (up to) 26 OECD countries over the period 1982 to 2006. We provide striking support for the two main predictions regarding the slope and the constant of the reaction function: national governments seem to adjust their corporate tax rate towards the level chosen in countries that are more populated, and they tend to set higher corporate tax rates when their country enjoys a high real market potential. Through the latter effect, trade integration exerts a positive influence on the level of corporate taxation. However, using a theoretically grounded index of bilateral trade integration, we also show that trade liberalization gives rise to significant tax interactions in the setting of effective average tax rates in the case of European countries, thus exerting a downward pressure on corporate tax rates.
    Keywords: Tax competition, new economic geography, panel data, trade integration, market potential
    JEL: H2 H3 C23 F12
    Date: 2016
  6. By: d'Agostino, Giorgio; Pieroni, Luca; Procidano, Isabella
    Abstract: The present paper estimates the effects of welfare interventions on income inequality. We propose a theoretical model showing that welfare policies follow the median voter constituency regardless of whether governments are center-left or center-right in the majority electoral system, whereas large differences exist between center-left and center- right coalitions in the proportional representation system. We exploit these differences in the mechanisms of welfare expenditure to estimate their elasticities on income inequality and find that a 1% increase in government spending reduces the Gini income index by half a percentage point. This result is robust under different compositions of expenditure, alternative imputation model specifications and falsification tests.
    Keywords: Welfare policies; Electoral rules; Income inequality; Instrumental variable approach; OECD countries
    JEL: C26 E62 H23 H53
    Date: 2016–06–15
  7. By: Niimi, Yoko
    Abstract: This paper examines the behavioral response of households to wealth transfer taxation using household survey data from Japan. The data reveal that relatively few households plan to reallocate the newly taxable amount of wealth to their own consumption or inter vivos transfers in response to the recent lowering of the basic deduction of the inheritance tax, largely because of a lack of concern about taxes. This may partly reflect the fact that bequest motives are relatively weak and/or that the majority of saving is for either retirement or precautionary purposes in Japan. However, our estimation results also suggest that parents with an altruistic motive for bequests are more likely to avoid an increase in their children’s tax bill by reallocating the newly taxable amount of wealth to inter vivos transfers. Parents with an exchange motive for bequests are also found to be responsive to changes in tax policy, but their reaction is heterogeneous: some of them reallocate the newly taxable amount of wealth to their own consumption while others reallocate it to inter vivos transfers.
    Keywords: bequests; inheritance tax; inter vivos transfers; Japan; precautionary saving
    JEL: D31 D64 H26 H31
    Date: 2016–06–02
  8. By: Ferrett, Ben; Hoefele, Andreas; Wooton, Ian
    Abstract: Existing analyses of fiscal competition for foreign direct investment (FDI) often assume a one-shot interaction between governments and the firm within a static environment where the firm makes a permanent location choice. We examine a two-period regional model where economic geography evolves, giving the firm an incentive to relocate between periods. Government competition for FDI leads the firm to make efficient location choices, with relocation "more likely" in the presence of international tax competition, because the winning country's bid absorbs some of the firm's relocation costs. With more time periods, tax competition induces firm relocation sooner than in its absence.
    Keywords: dynamic fiscal competition; efficiency; FDI; geographical change
    JEL: F23 H25 R38
    Date: 2016–06
  9. By: Tommaso Oliviero (CSEF, Università di Napoli Federico II); Agnese Sacchi (Universitas Mercatorum (Italy) and GEN (Spain).); Annalisa Scognamiglio (CSEF, Università di Napoli); Alberto Zazzaro (University of Naples Federico II (Italy), Polytechnic University of Marche (Italy), MoFiR (Italy) and CSEF (Italy).)
    Abstract: In this paper we study the impact of changes in immovable property taxation on the growth rate of house prices by analyzing a panel of 34 OECD countries over the period 1970-2014. We show that there is a negative relationship, robust to the inclusion of other cyclical determinants of house prices, country and year fixed effects. Furthermore, we do not find evidence of a stabilizing role of immovable property taxes on the variability of house prices: boom-bust cycles in housing markets are, in fact, not correlated with the levels of such a tax.
    Keywords: House prices, Immovable property tax.
    JEL: E62 H20 R21 R31
    Date: 2016–06–10
  10. By: Fiscalis Tax Gap Project Group
    Abstract: Effective collection of taxes is a cornerstone of a fair taxation system. Taxes that remain unpaid cause revenue loss in the budget of Member States and may lead to an excessive burden on the honest taxpayers who correctly fulfil their tax obligations. Furthermore, effective collection of taxes is essential for level playing field and avoids economic distortions. Tackling the issue of unpaid taxes is therefore a collective responsibility which starts with understanding the scale and the scope of the issue. Tax gap estimations are rough indicators of revenue loss. In the past decades several methods have been developed by national (tax) administrations and international institutions to estimate revenue loss. In order to pool knowledge and share experience in existing tax gap estimations, the Tax Gap Project Group (TGPG) was established under the Fiscalis 2020 Program. The TGPG consisted of national experts of 15 Member States and its work was coordinated by the European Commission.
    Keywords: European Union, VAt gap, tax gap, Member states, VAT, tax revenue
    Date: 2016–03
  11. By: Jessen, Robin; Rostam-Afschar, Davud; Schmitz, Sebastian
    Abstract: We quantify the importance of precautionary labor supply using data from the German Socio- Economic Panel (SOEP) for 2001-2012. We estimate dynamic labor supply equations augmented with a measure of wage risk. Our results show that married men choose about 2.5% of their hours of work or one week per year on average to shield against unpredictable wage shocks. This implies that about 26% of precautionary savings are due to precautionary labor supply. If self-employed faced the same wage risk as the median civil servant, their hours of work would reduce by 4%.
    Keywords: wage risk,labor supply,precautionary saving,life cycle,dynamic panel data
    JEL: D91 J22 C23
    Date: 2016
  12. By: Christian EBEKE; M MANSOUR; Grégoire ROTA-GRAZIOSI (Centre d'Etudes et de Recherches sur le Développement International(CERDI))
    Abstract: In the context of achieving the new Sustainable Development Goals, revenue mobilization is a high priority in developing countries and in Sub-Saharan Africa, where governments’ ability to tax remains limited. Using a unique revenue dataset spanning the period 1980-2010, we analyze three important tax reforms: the Large Taxpayers Unit (LTU), the Value Added Tax (VAT), and the Semi-Autonomous Revenue Agency (SARA). We propose an ex-post impact assessment of these tax reforms in SSA countries based on propensity-score matching methodology (PSM) and synthetic control method (SCM). VAT and SARA are found to have an unambiguously large and positive effect on non-resource taxes, while the impact of LTU is insignificant—LTU seems however an important precondition for the adoption of the first two reforms. We conclude also that VAT and SARA display some synergy, and their positive effects strengthen several years after their adoption.
    Keywords: Tax reforms, Africa, Revenue mobilization, Causality.
    JEL: C1 O55 O23 H2
    Date: 2016–06
  13. By: Kankanamge, Sumudu; Weitzenblum, Thomas
    Abstract: This paper examines the optimal time-consistent unemployment insurance policy in a search economy with incomplete markets. In a context of repeated choice without a commitment device, we show that the optimal replacement rate depends on how frequently in time the policy can be revised. The exact relation is dependent on the political process: if the utilitarian welfare criterion is used, the optimal rate is higher the shorter the choice periodicity. Self-insurance reduces the need for the public scheme but mostly because the policy cannot be changed often enough. The comparison with an economy where a commitment device is assumed shows that the commitment rate is close to time-consistent rates with very long choice periodicities.
    JEL: C63 E61 J65
    Date: 2016–05
  14. By: Thomas K. Bauer; Rui Dang
    Abstract: This paper investigates neighborhood peer effects on individual welfare using a combined IV and control function approach. The empirical analysis is based on panel data for the years 2007-2010 constructed by enriching the geo-referenced version of the German Socio-Economic Panel (SOEP) with aggregated zip code level-information. The results suggest that individual welfare use is positively correlated with neighborhood social benefit recipient rates, i.e. an increase in the share of neighborhood peers on social benefit by 1 percentage point raises the individual probability of welfare use by 0.97 percentage points.
    Date: 2016

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