nep-pbe New Economics Papers
on Public Economics
Issue of 2016‒07‒30
24 papers chosen by
Thomas Andrén

  1. Optimal Taxation when People Do Not Maximize Well-Being By Aart Gerritsen
  2. Labour Force Participation Elasticities: the Case of Slovakia By Matus Senaj; Zuzana Siebertova; Norbert Svarda; Jana Valachyova
  3. Productivity, Taxation and Evasion: A Quantitative Exploration of the Determinants of the Informal Economy By Di Nola, Alessandro; Kocharkov, Georgi; Vasilev, Aleksandar
  4. Direct Taxation in Romania: an Empirical Analysis By Cristian PANA
  5. Estimating the distributional impact of the Greek crisis (2009-2014) By Chrysa Leventi; Manos Matsaganis
  6. Optimal Nonlinear Taxation: The Dual Approach By Aart Gerritsen
  7. Cross-subsidization in employer-based health insurance and the effects of tax subsidy reform By Pashchenko, Svetlana; Porapakkarm, Ponpoje
  8. State Level Income Inequality and Individual Self-Reported Health Status: Evidence from the United States By Loree, Jacob
  9. Equity and Efficiency in Rationed Labor Markets By Aart Gerritsen
  10. The paradox of land reform, inequality and local development in Colombia By Jean-Paul Faguet; Fábio Sanches; Marta-Juanita Villaveces
  11. Optimal Unemployment Insurance and International Risk Sharing By Moyen, Stephane; Stähler, Nikolai; Winkler, Fabian
  12. Making public finances more growth and equity-friendly in the euro area By Álvaro Pina
  13. On the measurement of investment types: Heterogeneity in corporate tax elasticities By Jungmann, Hendrik; Loretz, Simon
  14. On the Heterogeneity in Longevity among Socioeconomic Groups: Scope, Trends, and Implications for Earnings-Related Pension Schemes By Ayuso, Mercedes; Bravo, Jorge Miguel; Holzmann, Robert
  15. Progressive taxation and (in)stability in an endogenous growth model with human capital accumulation By Aleksandar Vasilev
  16. Fiscal Rules and Sovereign Default By Laura Alfaro
  17. Fiscal Sustainability in Japan By Shiro Armstrong and Tatsuyoshi Okimoto
  18. Fiscal Consolidation Under Imperfect Credibility By Lemoine, Matthieu; Lindé, Jesper
  19. Do Parents Tax Their Children? Teenage Labour Supply and Financial Support By Holford, Angus J.
  20. Do parents tax their children? Teenage labour supply and financial support By Holford, Angus
  21. Fiscal Policy with Limited-Time Commitment By Alex Clymo; Andrea Lanteri
  22. The Marriage Market, Labor Supply and Education Choice By Pierre-Andre Chiappori; Monica Costa Dias; Costas Meghir
  23. Entrepreneurship and Income Distribution Dynamics: Why Are Top Income Earners Unaffected by Business Cycles? By Noh-Sun Kwark; Eunseong Ma
  24. Shifting the tax burden from labor to property: The case of Germany By Paetzold, Jörg; Tiefenbacher, Markus

  1. By: Aart Gerritsen
    Abstract: I derive the optimal nonlinear income tax when individuals do not necessarily maximize their own well-being. This generates a corrective argument for taxation: optimal marginal taxes are higher (lower) if individuals work too much (too little) from a well-being point of view. I allow for multidimensional heterogeneity and derive the optimal tax schedule in terms of measurable sufficient statistics. One of these statistics measures the degree to which individuals fail to optimize their labor supply. I empirically estimate this by using British life satisfaction data as a measure of well-being. I ï¬ nd that low-income workers tend to work ‘too little’ and high-income workers ‘too much,’ providing a motive for lower marginal tax rates at the bottom and higher marginal tax rates at the top of the income distribution.
    Keywords: Optimal taxation, corrective taxation, subjective well-being
    JEL: H21 I31 D63
    Date: 2015–06
  2. By: Matus Senaj (Council for Budget Responsibility); Zuzana Siebertova (Council for Budget Responsibility); Norbert Svarda (Council for Budget Responsibility); Jana Valachyova (Council for Budget Responsibility)
    Abstract: This paper provides a microeconometric analysis of extensive margin labour force participation elasticities in Slovakia. Using a fully parametric framework, a probability model for participation in labour force is estimated. Our results show that low-skilled and females are the groups that are particularly responsive to changes in income taxes and transfers. We perform a microsimulation of two counterfactual scenarios of abolition of the flat tax regime and we demonstrate that abolishing flat-tax regime may differ in the impact on labour participation decisions. We find out that recent departure from flat tax system in Slovakia reduces the average probability of being economically active only negligible at the extensive margin. More significant average effect is found in the hypothetical scenario with similar fiscal revenue impact, simulating a departure from flat-tax system by reintroducing five tax brackets. Finally, we show that the impact on selected subgroups of population is different.
    Keywords: Labour force participation elasticity, Extensive margin, Micro-simulation, Flat-tax
    JEL: H31 H53 I38 J21
    Date: 2016–06
  3. By: Di Nola, Alessandro; Kocharkov, Georgi; Vasilev, Aleksandar
    Abstract: This paper evaluates the relative importance of labor productivity vs. income taxes and social security contributions for tax compliance in an economy with a large degree of informality. To this end, we build a bargaining model in which matched employer-employee pairs of heterogeneous productive capacities make decisions on output sharing and the degree of tax evasion. The quantitative model takes as inputs the income tax structure and the estimated aggregate productivity series. The estimation strategy recovers the bargaining parameters and the cost function of tax evasion in the model by matching the empirical series for the size of the informal sector (2000-2014). The results from the performed computational experiments point out that the most important factor is labor productivity, followed by the corporate tax. Income tax progressivity in Bulgaria is found not to be quantitatively relevant for tax evasion.
    Keywords: informal economy,tax evasion
    JEL: H24 H25
    Date: 2016
  4. By: Cristian PANA (Faculty of Economics, Ecological University of Bucharest)
    Abstract: There is a widespread agreement that fiscal policy can positively or negatively influence growth. Thus, taxes on income and profits in particular are those that can have the greatest effect, while consumption and property taxes have the lowest negative effects on growth. In the context of the financial and economic crisis, the EU Member States have adopted various measures in order to counter-balance the negative effects. Based on these considerations, the paper is analysing the evolution of overall tax rate and in particular of direct taxes in Romania in the European Union context.
    Keywords: fiscal policy, taxation, direct taxes, tax rate
    JEL: E62 H21 H24 H25
    Date: 2015–11
  5. By: Chrysa Leventi; Manos Matsaganis
    Abstract: Estimating the impact of the crisis on income distribution requires up-to-date information. Due to the complexity of income surveys such as EU-SILC, income data usually become available with considerable delay. In this context, micro-simulation models are an appropriate and widely used alternative to bridge the gap in official data, allowing for an early evaluation of the distributional impact of changes in tax-benefit policies and in the wider economy. This paper analyses the effects of the Greek crisis on inequality and poverty in 2009-2014 using the micro-simulation model EUROMOD. Specifically, the paper updates earlier OECD estimates of distributional effects of the crisis in 2009-2012, and provides new estimates for 2013-2014, a period for which survey data are not yet publicly available. The results indicate that inequality, as measured by most indicators, rose in 2010-2013 as the recession deepened and unemployment rose, and fell back in 2014 as the economy stabilised. Relative poverty seems to have increased in 2012, after remaining broadly unchanged in the previous two years; in 2013 it appears to have stabilised, while in 2014 it fell back to only slightly above its level in 2010 (13.8% vs.13.2% respectively). This pattern is more pronounced when poverty is measured against an “anchored” benchmark: the proportion of population whose income fell below a poverty line anchored in pre-crisis terms increased steadily and steeply, until 2014 when it finally stabilised at 27.4% (from 13.2% in 2010). Not all population groups were affected evenly by recent developments: the rise of poverty in 2010-2013 especially affected the unemployed, the self-employed, the young, the middle-aged, families living in Athens, families paying rent or mortgage rather than outright owning their dwelling; on the contrary, relative poverty actually fell among groups traditionally seen as ‘poor’, such as farmers and the elderly – although in the latter case the relative improvement in terms of income may have been offset by difficulties in access to health care. The paper also assesses first-round effects of austerity policies on the income distribution given changes in the wider economy, i.e. abstracting from second-round effects associated with the deflationary impact of austerity on output. In this sense, early austerity policies per se appear to have had a small positive distributional impact, partly offsetting the increases in inequality and poverty due to the recession. As fiscal consolidation intensified in 2012, tax and benefit policies appear to have exacerbated the adverse distributional effects of the recession, causing poverty and inequality to rise further. From 2013, austerity policies seem to have had a more equalizing effect, especially at the bottom of the distribution and in terms of its distance from the top. This working paper relates to the 2016 OECD Economic Survey of Greece ( Estimer les effets de la crise grecque sur la distribution des revenus (2009-2014) La présente étude s’appuie sur des modèles de microsimulation afin d’actualiser les estimations réalisées par l'OCDE quant aux effets de la crise sur les inégalités et la pauvreté en Grèce en 2009-2012, et en produire de nouvelles pour 2013-2014. À l’aune de la plupart des indicateurs utilisés pour les mesurer, les inégalités se sont creusées en 2010-2013 parallèlement à l’aggravation de la récession et à la montée du chômage, pour reculer ensuite en 2014 à la faveur de la stabilisation de l’économie. Le taux de pauvreté relative semble avoir augmenté en 2012, après être resté globalement inchangé au cours des deux années précédentes. Il s’est ensuite stabilisé en 2013 pour retomber, en 2014, en deçà du niveau de 2012. Cette tendance est encore plus marquée lorsque la pauvreté est mesurée par rapport à un seuil « ancré ». Toutes les populations n’ont pas été touchées dans les mêmes proportions par l’aggravation de la pauvreté relative : la montée de la pauvreté en 2010-2013 a particulièrement touché les chômeurs, les travailleurs indépendants, les jeunes, les personnes d’âge moyen, les ménages résidant à Athènes, et les ménages qui paient un loyer ou remboursent un prêt immobilier. À l’inverse, la pauvreté relative a en fait reculé parmi les populations traditionnellement considérées comme « pauvres », comme les exploitants agricoles et les personnes âgées – même si, pour ces dernières, l’amélioration relative des revenus pourrait avoir été compensée par des difficultés d’accès aux services de santé. Il semble que les politiques d’austérité en elles-mêmes (hors effets de l’assainissement budgétaire sur la production) ont eu un modeste impact sur les inégalités et la pauvreté relative dans un premier temps, atténuant en partie les effets de la récession. Avec l’intensification de l’effort d’assainissement des finances publiques en 2012, les politiques fiscales et sociales semblent avoir favorisé une hausse de la pauvreté et des inégalités. Depuis 2013, les mesures d’austérité semblent avoir contribué à réduire les inégalités, surtout au bas de l’échelle de distribution des revenus et en termes d’écart entre le bas et le haut de la distribution. La part de la population dont le revenu est tombé sous le seuil de la pauvreté ancrée avant la crise a augmenté avec chaque cycle de mesures d’austérité, et la hausse régulière du chômage n’a fait qu’amplifier le mouvement, jusqu’en 2014 lorsqu’elle a fini par se stabiliser. Ce Document de travail se rapporte à l’Étude économique de l’OCDE de la Grèce 2016 ( ique-grece.htm).
    Keywords: taxation, poverty, labour market, inequality, distributional impact, impact distributif, marché du travail, inégalité, pauvreté, imposition
    JEL: D31 D63 E62 H22 I32 I38
    Date: 2016–07–26
  6. By: Aart Gerritsen
    Abstract: The usual method of solving for an optimal nonlinear tax schedule is that of the primal approach – ï¬ rst solving for the optimal allocation, and subsequently determining which tax system decentralizes this allocation. While this method is mathematically rigorous, it lacks intuitive appeal. I propose a different method based on the dual approach – directly solving for the optimal tax system – which is equally rigorous, while being much closer in spirit to actual tax policy. I show that this approach can easily incorporate preference heterogeneity, as well as individual behavior that is not fully consistent with utility maximization. Over and above solving for the optimum, the dual approach allows one to obtain new insights into the welfare effects of small nonlinear tax reforms outside the optimum.
    Keywords: Optimal taxation, dual approach, preference heterogeneity, individual misoptimization, tax reforms
    JEL: H21 H23 H24
    Date: 2016–01
  7. By: Pashchenko, Svetlana; Porapakkarm, Ponpoje
    Abstract: A major source of insurance coverage for non-elderly adults in the US is the employer-based health insurance market. Every participant in this market receives a tax subsidy because premiums are excluded from taxable income. However, people have different incentives to participate in the employer-based pool - since premiums are independent of individual risk, high-risk individuals receive implicit cross-subsidies from low-risk individuals. In this paper, we explore several ways to reform the tax subsidy by taking this implicit cross- subsidization into account. Using a general equilibrium heterogeneous agents model, we find that even though the complete elimination of the tax subsidy leads to the unraveling of the employer-based pool, there is still room for substantial savings by targeting the tax subsidy. More specifically, the same level of risk-sharing in the employer-based market can be achieved at one- third of the current costs if i) the tax subsidy is targeted only towards low- risk individuals who have weak incentives to participate in the pool, and ii) employer-based insurance premiums become age-adjusted. To improve the welfare outcome of this reform, the modified tax subsidy should also be targeted to low-income individuals.
    Keywords: health insurance, tax subsidies, tax deductions, general equilibrium, life-cycle, health reform
    JEL: D52 D91 E2 E21 E65 H20 I10
    Date: 2013–05–08
  8. By: Loree, Jacob
    Abstract: The relative income hypothesis theorizes an individual’s income, relative to the income of their peers, adversely affects their health. There is empirical evidence to support the relative income hypothesis, showing a negative statistical relationship between income inequality and health. The literature is unsettled on the relevant level of geography to measure income inequality, as well as other control variables in the estimation. This paper contributes to this literature by asking how state level income inequality affects the probability of an individual having excellent self-reported health. The relative income hypothesis is tested using individual level data from the Current Population Survey in the United States, and is supplemented with state level income inequality and healthcare spending data from 1996-2009. A logit model with clustered standard errors is employed, with marginal effects reported. Results suggest no statistically significant effects within the full sample. However, if the analysis is restricted to the five most or least equal states, there is a statistically significant relationship between income inequality and health. The most equal states exhibit a positive (but small) relationship between inequality and health, while the least equal exhibit a negative (but small) relationship. While a statistically significant association is found for these samples, the point estimates are not economically significant. The results are robust to the specific income inequality measure, lag structure of income inequality, and time period of analysis. The results do not support the relative income hypothesis. The implication is the effect of income inequality on health may be overstated
    Keywords: Gini Coefficient, Health Inequality, Income Inequality, Self-reported Health
    JEL: D63 I12 I14
    Date: 2015–08
  9. By: Aart Gerritsen
    Abstract: The social welfare implications of income tax policy are shown to critically depend on whether or not labor markets are rationed – i.e., on the existence of involuntary unemployment. With rationed labor markets, raising taxes on the employed and transfers towards the unemployed might improve both equity and efficiency. It improves equity by redistributing income from the employed to the unemployed; it improves efficiency as it encourages people with a small utility surplus of employment to exit the labor market, leaving their jobs for people with a higher utility surplus. I derive conditions under which this result continues to hold when only part of the labor market is rationed. I also show that conventional tax incidence results break down in rationed labor markets.
    Keywords: Involuntary unemployment, inefficient rationing, optimal taxation
    JEL: H21 J21 E24
    Date: 2016–03
  10. By: Jean-Paul Faguet; Fábio Sanches; Marta-Juanita Villaveces
    Abstract: Over two centuries, Colombia transferred vast quantities of land, equivalent to the entire UK landmass, mainly to landless and poor peasants. And yet Colombia retains one of the highest concentrations of land ownership in the world. Why? We show that the effects of land reform on inequality and economic and human development were heterogeneous. On average, rural properties grew larger, land inequality and dispersion fell, and development increased across Colombia’s 1100+ municipalities between 1961-2010. But pre-existing inequality counteracts these effects, resulting in smaller rural properties, greater dispersion, and lower levels of development. How? Land reform increased public investment in agriculture, raising consumption of public and private goods. But land concentration again counters these effects. Elites seem to have distorted local decision-making to benefit themselves. We conclude that land reform’s second-order effects, on the distribution of local power, are more important than its first-order effects on the distribution of land.
    Keywords: land reform; inequality; development; latifundia; poverty; Colombia
    JEL: H27 N16 Q15
    Date: 2016–07
  11. By: Moyen, Stephane; Stähler, Nikolai; Winkler, Fabian
    Abstract: We discuss how cross-country unemployment insurance can be used to improve international risk sharing. We use a two-country business cycle model with incomplete financial markets and frictional labor markets where the unemployment insurance scheme operates across both countries. Cross-country insurance through the unemployment insurance system can be achieved without affecting unemployment outcomes. The Ramsey-optimal policy however prescribes a more countercyclical replacement rate when international risk sharing concerns enter the unemployment insurance trade-off. We calibrate our model to Eurozone data and find that optimal stabilizing transfers through the unemployment insurance system are sizable and mainly stabilize consumption in the periphery countries, while optimal replacement rates are countercyclical overall. Moreover, we find that debt-financed national policies are a poor substitute for fiscal transfers.
    Keywords: Fiscal Union ; International Business Cycles ; International Risk Sharing ; Unemployment Insurance
    JEL: E32 E62 H21 J64
    Date: 2016–07
  12. By: Álvaro Pina
    Abstract: Across the euro area, the ability of public finances to support equitable growth has tended to deteriorate. Concerns about high and rising public debt, together with market pressure in some cases, led to sharp fiscal consolidation in 2011-13, against the backdrop of a weak economic situation at the time, which is considered to have made the recession deeper and longer. Consolidation has slowed down afterwards, but countries with fiscal space have made limited use of the leeway allowed under EU fiscal rules to support euro area aggregate demand. The expenditure composition has generally become less growth-friendly, with large cuts in public investment. On the revenue side, already high taxes on labour have tended to increase further. Structural reforms with direct positive implications for the composition or efficiency of public finances have stalled. While most policy levers to improve public finances remain at the country level, European and national policies can be mutually reinforcing in fiscal governance and public investment. To achieve a euro area fiscal stance that fosters the recovery, countries with fiscal space under the Stability and Growth Pact rules should use budgetary support to raise growth, and existing incentives and flexibility should be taken advantage of to pursue reforms of tax and spending policies. At the national level, it is essential to further upgrade budgetary frameworks, including through the adoption of expenditure rules and regular performance of spending reviews. To promote capital formation and make it more effective, EU budget resources for investment should be deployed in a way to crowd in national public funds and private financing, and foster greater investment productivity. At the national level, better coordination of investment across levels of government and upgraded administrative capacity would increase investment efficiency. This Working Paper relates to the 2016 OECD Economic Survey of the euro area ( Rendre les finances publiques plus favorables à la croissance et à l'équité dans la zone euro Dans la zone euro, la capacité des finances publiques à soutenir la croissance équitable s’est globalement détériorée. Face aux inquiétudes suscitées par le niveau élevé et croissant de l’endettement public, et parfois sous la pression exercée par les marchés, les autorités des pays ont procédé à un effort d’assainissement budgétaire massif en 2011-13 dans un contexte de conjoncture économique défavorable, ce qui est généralement considéré comme ayant contribué à intensifier et à prolonger la récession. Le processus d’assainissement s’est ensuite ralenti, mais les pays disposant d’une marge de manoeuvre budgétaire ont peu utilisé la souplesse autorisée par les règles budgétaires de l’UE pour stimuler la demande globale dans la zone euro. De manière générale, la composition des dépenses est devenue moins favorable à la croissance du fait de coupes drastiques dans les investissements publics. Sur le plan des recettes, la fiscalité du travail, déjà élevée, s’est encore alourdie. Les réformes structurelles qui peuvent avoir des retombées positives directes sur la composition ou l’efficience des finances publiques ont marqué le pas. Si la plupart des leviers d’action permettant d’améliorer les finances publiques restent situés au niveau des pays, les politiques européennes et nationales peuvent se renforcer mutuellement dans les domaines de la gouvernance budgétaire et de l’investissement public. Pour faire en sorte que l’orientation budgétaire de l’ensemble de la zone euro contribue à alimenter la reprise, les pays qui disposent d’une marge de manoeuvre budgétaire au sens des règles du Pacte de stabilité et de croissance devraient recourir à l’appui budgétaire pour stimuler la croissance, et il faudra mettre à profit les dispositifs d’incitation existants et la souplesse prévue par les règles en vigueur pour poursuivre la réforme des politiques fiscales et de dépenses. Au niveau national, il est essentiel de poursuivre l’amélioration des cadres budgétaires, y compris en adoptant des règles de dépenses et en procédant à des examens réguliers des dépenses. Pour promouvoir la formation de capital et rendre celui-ci plus efficace, les ressources budgétaires de l’UE disponibles pour l’investissement devraient être déployées de façon à créer un effet d’attraction sur les fonds publics et les financements privés nationaux et à rendre l’investissement plus productif. À l’échelon national, des investissements mieux coordonnés entre les différents niveaux d’administration et des capacités administratives renforcées conféreraient aux investissements une efficience accrue. Ce Document de travail se rapporte à l’Étude économique de l’OCDE de la Zone euro 2016 ( conomique-union-europeenne-et-zone-euro. htm)
    Keywords: stability and growth pact, euro area, public investment, fiscal councils, fiscal consolidation, assainissement budgétaire, organismes budgétaires indépendants, zone Euro, pacte de stabilité et de croissance, investissement public
    JEL: E62 F45 H20 H50 H54 H61
    Date: 2016–07–26
  13. By: Jungmann, Hendrik (University of Salzburg); Loretz, Simon (Institute for Advanced Studies, Vienna)
    Abstract: This paper highlights the importance of different investment motives and to what extend they affect the responsiveness to corporate taxation. In particular, we discuss how to classify investment as non-related, horizontal, vertical and complex types using a combination of both firm-specific (ownership) information and sector-specific information from input-output tables. Hereby, we point out to what extend the resulting classification depends on assumptions made by the researcher. Following this, we examine the effects of host-country corporate taxation on the volume of investment within related firms (i.e., the intensive margin). We are able to quantitatively replicate the average result in the empirical literature with an overall tax semi-elasticity of approximately -1.5. Taking into account firm-heterogeneity we find that non-related investments react stronger to corporate taxation whereas horizontal investments are less responsive, though, significant negative tax semi-elasticities turn out for the subset of manufacturing industries where horizontal investment is much more prevalent. As the strict categorical classification still yields ambiguous results for both vertical and complex investments we extend the methodology by defining shares of investment and make the point that, by and large, stronger business motives reduce the tax responsiveness of investment.
    Keywords: Corporate Taxation; Investment Strategy; Panel Econometrics
    JEL: C23 F23 H25 L25
    Date: 2016–04–15
  14. By: Ayuso, Mercedes (University of Barcelona); Bravo, Jorge Miguel (Universidade Nova de Lisboa); Holzmann, Robert (University of New South Wales)
    Abstract: Heterogeneity in longevity between socioeconomic groups is increasingly documented for developed economies and is reviewed in the paper. Heterogeneity in life expectancy disaggregated by main socioeconomic characteristics – such as age, gender, race, health, education, profession, income, and wealth – is sizable and has not declined in recent decades. The prospects for future decline are not strong, either; perhaps even to the contrary. As heterogeneity is closely linked to income or earnings (i.e., the contribution base of earnings‐related social programs such as pensions) and as heterogeneity is empirically sizable, the result is major implicit taxes for some groups – particularly the less educated and low earners –and major subsidies for other groups – particularly highly educated individuals and high‐income earners. The implications for pension reform and scheme design are substantial as taxes/subsidies counteract the envisaged effects of (i) a closer contribution‐benefit link, (ii) a later formal retirement age to address population aging, and (iii) more individual funding and private annuities to compensate for reduced public generosity.
    Keywords: implicit tax, lifetime income, gender, life expectancy, implicit subsidy
    JEL: D9 G22 H55 J13 J14 J16
    Date: 2016–07
  15. By: Aleksandar Vasilev
    Abstract: We show that in an endogenous growth model with human accumulation calibrated to Bulgarian data under the progressive taxation regime (1993-2007), the artificial economy exhibits equilibrium indeterminacy. These results are in line with the recent findings in Chen and Guo (2015) in the context of an AK endogenous growth model. Also, the findings are in contrast to Guo and Lansing (1988) who argue that progressive taxation works as an automatic stabilizer. Progressive taxation in our setup leads to equilibrium indeterminacy. This indeterminacy result could explain, at least partially, why the economic performance under the progressive taxation regime in Bulgaria was not impressive.
    Keywords: Progressive Income Taxation; Endogenous growth; Human capital; Equilibrium (In)determinacy.
    JEL: E32 E62 O41
    Date: 2016–07–18
  16. By: Laura Alfaro (Harvard Business School)
    Abstract: We provide a quantitative analysis of fiscal rules in a standard model of sovereign debt accumulation and default, modified to incorporate quasi-hyperbolic preferences. Due to the aggregation of citizens’ preferences or to political economy reasons, government preferences are present biased, and results in over accumulation of debt. In a quantitative exercise calibrated to Brazil, we obtain that the welfare gains of the optimal fiscal policy are economically substantial, and that the optimal rule does not entail a countercyclical fiscal policy. We also analyze the cases of a simple debt rule limiting the maximum amount of debt and compare it to that of a simple deficit rule, which limits the maximum amount of deficit per period. Whereas the deficit rule does not perform well, the debt rule results in welfare gains virtually equal to the optimal rule.
    Date: 2016
  17. By: Shiro Armstrong and Tatsuyoshi Okimoto
    Abstract: Japanese government debt is at unprecedented levels with a gross debt to gross domestic product ratio of over 230 per cent and a net debt to gross domestic product ratio of 150 per cent. There are three big challenges to fiscal sustainability: the huge amount of government bonds outstanding; continued budget deficits; and the growing age-related spending. The debt is sustainable as long as the market as a whole believes it is. The path to fiscal consolidation requires increasing the tax rate, reducing spending, broadening the tax base and growing the economy out of trouble. The longer the delay before moving to a more sustainable consolidation path, the larger the risks and closer Japan moves towards a financial crisis. The policy goal is to keep government debt sustainable, not to repay it all. Just as Japan has done since the burst of the asset bubble in the early 1990s, there is every likelihood that the Japanese economy will muddle through.
    Keywords: intergenerational, fiscal policy, Japan, tax policy, Japanese government bonds
    Date: 2016–07–01
  18. By: Lemoine, Matthieu; Lindé, Jesper
    Abstract: This paper examines the effects of expenditure-based fiscal consolidation when credibility as to whether the cuts will be long-lasting is imperfect. We contrast the impact limited credibility has when the consolidating country has the means to tailor monetary policy to its own needs, with the impact when the country is a small member of a currency union with a negligible effect on interest rates and on nominal exchange rates of the currency union. We find two key results. First, in the case of an independent monetary policy, the adverse impact of limited credibility is relatively small, and consolidation can be expected to reduce government debt at a relatively low output cost given that monetary policy provides more accommodation than it would under perfect credibility. Second, the lack of monetary accommodation under currency union membership implies that the output cost may be significantly larger, and that progress in reducing government debt in the short and medium term may be limited under imperfect credibility.
    Keywords: Currency Union.; DSGE model; Front-Loaded vs. Gradual Consolidation; Monetary and Fiscal Policy; Sticky Prices and Wages
    JEL: E32 F41
    Date: 2016–07
  19. By: Holford, Angus J. (University of Essex)
    Abstract: This paper models child employment and parental pocket money decisions as a non-cooperative game. Assuming that the child human capital is a household public good and that the relationship between child human capital and employment is concave, we compare the welfare obtained under different decision-making mechanisms and test the predictions of the model for a cohort of English teenagers in compulsory education. Our results support a situation in which parents 'tax' their children's earnings, withdrawing financial support as the child increases his working hours. This strategy forces the child to internalise the social cost of his activities.
    Keywords: intra-household transfers, pocket money, child labour supply, noncooperative game, human capital
    JEL: C52 C72 D13 J22
    Date: 2016–07
  20. By: Holford, Angus
    Abstract: This paper models child employment and parental pocket money decisions as a non- cooperative game. Assuming that the child human capital is a household public good and that the relationship between child human capital and employment is concave, we compare the welfare obtained under different decision-making mechanisms and test the predictions of the model for a cohort of English teenagers in compulsory education. Our results support a situation in which parents ‘tax’ their children’s earnings, withdrawing financial support as the child increases his working hours. This strategy forces the child to internalise the social cost of his activities.
    Date: 2016–07–01
  21. By: Alex Clymo (University of Amsterdam, the Netherlands); Andrea Lanteri (Duke University, United States)
    Abstract: We consider models where the Ramsey-optimal fiscal policy under Full Commitment (FC) is time-inconsistent and define a new notion of optimal policy, Limited-Time Commitment (LTC). Successive one-period lived governments can commit to future plans over a finite horizon. We provide a sufficient condition on the mapping from finite policy sequences to allocations, such that LTC and FC lead to the same outcomes. We then show that this condition is verified in several existing models, allowing FC Ramsey plans to be supported with a finite commitment horizon (often a single period). We relate the required degree of commitment to the economic environment: in economies without capital, the minimum degree of commitment required is given by the government debt maturity; in economies with capital and government balanced-budget constraints, the required commitment is given by the horizon over which the budget has to be balanced. Finally, we solve numerically for the LTC equilibrium of an economy where the equivalence result fails and show that a single year of commitment to capital taxes provides substantial welfare gains relative to the No-Commitment time-consistent policy.
    Keywords: Optimal fiscal policy; time-inconsistency; limited commitment
    JEL: E61 E62 H21 H63
    Date: 2016–07–26
  22. By: Pierre-Andre Chiappori (Dept. of Economics, Columbia University); Monica Costa Dias (Institute for Fiscal Studies); Costas Meghir (Cowles Foundation, Yale University)
    Abstract: We develop an equilibrium lifecycle model of education, marriage and labor supply and consumption in a transferable utility context. Individuals start by choosing their investmentsin education anticipating returns in the marriage market and the labor market. They then match based on the economic value of marriage and on preferences. Equilibrium in the marriage market determines intrahousehold allocation of resources. Following marriage households (married or single) save, supply labor and consume private and public commodities under uncertainty. Marriage thus has the dual role of providing public goods and offering risk sharing. The model is estimated using the British HPS.
    Keywords: Marriage market, Human capital, Labor supply, Life cycle models, Intrahousehold allocations, Collective model, Education choice, Returns to education
    JEL: J12 J16 J22 J24 H31 I24 I26
    Date: 2015–03
  23. By: Noh-Sun Kwark (Department of Economics, Sogang University, Seoul); Eunseong Ma (Department of Economics, Texas A&M University, College Station)
    Abstract: Business cycles affect income shares of low- and high-income groups in the U.S. econ- omy. Income shares of the bottom three income quintiles are procyclical; while those of the other quintiles are countercyclical. However, the very top ?ve percent income group is unaffected by the business cycle. This study attempts to explain the cyclical behavior of the income distribution over the business cycle, focusing on the top ?ve percent in- come earners?share, by incorporating an entrepreneurial choice to a heterogeneous agent model with indivisible labor. Two main results emerge. First, the model economy success- fully reproduces the acyclical behavior of the income share of the top ?ve percent income earners. Economic expansions allow top income earners to have more entrepreneurial op- portunities, which o¢´set a decline in the income share of the top income earners from the workers?side. Second, the model economy replicates reasonably well the income transition matrices over occupational choices obtained from the U.S. data, which documents that entrepreneurial activities are shown to be related to upward movement to higher income groups.
    Keywords: Income distribution dynamics, Heterogeneity, Entrepreneurs
    Date: 2016–04
  24. By: Paetzold, Jörg (University of Salzburg); Tiefenbacher, Markus (University of Salzburg)
    Abstract: Contrary to frequent recommendations of the public finance literature and international institutions, a persistently high tax wedge on labor is observed in Europe. At the same time, the scope for shifting taxes from labor to more growth-friendly revenue sources appears underused in many European countries. This motivates our simulation of a revenue-neutral property tax reform for Germany, a country in which tax receipts from land are particularly low. More precisely, we assess by how much social insurance contributions (SIC) can be reduced when Germany switches from its current property tax scheme based on outdated cadastral values to one based on market property values. In order to make such a simulation possible, we match property related information with the input dataset of EUROMOD, the tax-benefit simulation model for the EU. Our results suggest that the implicit tax rate on labor could be reduced from currently 37,2% to 36,5%. Furthermore, we simulate different scenarios of the SIC reduction. Redistributive effects of these different scenarios tend to be modest and depend crucially on the design of the SIC reduction.
    Keywords: Statistical Matching; Labor Tax; Property Tax; EUROMOD
    JEL: C15 C83 D31 H12 R28
    Date: 2016–07–22

This nep-pbe issue is ©2016 by Thomas Andrén. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.