nep-pbe New Economics Papers
on Public Economics
Issue of 2016‒08‒21
twenty-one papers chosen by
Thomas Andrén

  1. Politicians, bureaucrats, and tax morale: What shapes tax compliance attitudes? By Gabriel Leonardo; Jorge Martinez-Vazquez
  2. Representation without taxation, taxation without consent: the legacy of Spanish colonialism in America By Alejandra Irigoin
  3. Budget-neutral labour tax wedge reductions: A simulation-based analysis for selected euro area countries By Attinasi, Maria-Grazia; Prammer, Doris; Stähler, Nikolai; Tasso, Martino; Van Parys, Stefan
  4. Does capital tax uncertainty delay irreversible risky investment? By Niemann, Rainer; Sureth, Caren
  5. Pareto Models, Top Incomes, and Recent Trends in UK Income Inequality By Jenkins, Stephen P.
  6. Taking the High Road? Compliance with Commuter Tax Allowances and the Role of Evasion Spillovers By Paetzold, Jörg; Winner, Hannes
  7. Fiscal Federalism, Taxation and Grants By Martín Gonzalez-Eiras; Dirk Niepelt
  8. VAT Evasion in Bulgaria: A General-Equilibrium Approach By Vasilev, Aleksandar
  9. The impact of pension system reform on projected old-age income: the case of Poland By Elena Jarocinska; Anna Ruzik-Sierdzinska
  10. An Aggregate Model for Policy Analysis with Demographic Change By McGrattan, Ellen R.; Prescott, Edward C.
  11. Fiscal Decentralization, Economic Freedom, and Political and Civil Liberties in the Americas By Antonio N. Bojanic
  12. Transfer pricing and customs valuation: key differences and mitigation of potential risks By Bulana, Oleksandra
  13. Pension programs around the world: Determinants of social pension By Alexandra Rudolph
  14. Pareto models, top incomes, and recent trends in UK income inequality By Jenkins, Stephen P.
  15. Volatile Top Income Shares in Switzerland? Reassessing the Evolution Between 1981 and 2010 By Foellmi, Reto; Martinez, Isabel Z.
  16. The supply of 'safe' assets and fiscal policy By Schuknecht, Ludger
  17. Inequality, Costly Redistribution and Welfare in an Open Economy By Pol Antràs; Alonso de Gortari; Oleg Itskhoki
  18. Unemployed but optimistic: optimal insurance design with biased beliefs By Johannes Spinnewijn
  19. Does labor supply modeling affect findings of transport policy analyses? By Hirte, Georg; Tscharaktschiew, Stefan
  20. Pay for Locally Monitored Performance? A Welfare Analysis for Teacher Attendance in Ugandan Primary Schools By Cilliers, Jacobus; Kasirye, Ibrahim; Leaver, Clare; Serneels, Pieter; Zeitlin, Andrew
  21. Poverty and Aging By Marchand, Joseph; Smeeding, Timothy

  1. By: Gabriel Leonardo (International Center for Public Policy. Andrew Young School of Policy Studies, Georgia State University); Jorge Martinez-Vazquez (International Center for Public Policy. Andrew Young School of Policy Studies, Georgia State University)
    Abstract: What actions do governments take that may affect individual trust? Although the literature on tax morale has reported a positive relationship between trust in government and tax morale, it is less known what is that government does to elicit trust among taxpayers. Which government organizations are most likely to produce those actions? This paper examines how governments elicit tax morale by testing the proposition that trust in government is built by the way citizens are treated when receiving their share of public goods and services from government institutions charged with the delivery of those goods and services, known as the output side (Rothstein, 2005). We use data from close to forty countries in the 2005-2007 wave of the World Values Survey (WVS) and after controlling for the level of political rights and civil liberties, we find that trust in administrative (output) government institutions positively influences tax morale, especially in the case of people living in democratic countries.
    Date: 2016–08
  2. By: Alejandra Irigoin
    Abstract: The essay examines Spain’s colonial legacy in the long-run development of Spanish America. It surveys the fiscal and constitutional outcomes of independence and assesses the relative burden imposed by colonialism. Constitutional asymmetries between revenue collecting and spending agents constrained de facto governments’ power to tax. Inherent disparities embedded in the colonial fiscal system worsened with vaguely defined representation for subjects and territories and vexed their aggregation into a modern representative polity. Governments with limited fiscal capacity failed to deliver public goods and to distribute the costs and benefits of independence equitably. Growing indirect taxes, debt and money creation allowed them to transfer the fiscal burden to other constituents or future generations. Taxpayers became aware of the asymmetry between private contributions and public goods and hence favoured a low but regressive taxation. Comparisons with trajectories in the metropolis and the United States are offered to qualify this legacy.
    Keywords: colonial legacy; institutions; long-run development; Spanish America; Spain; US
    JEL: N1 N16 N2 N20 N4 N40
    Date: 2016–06–13
  3. By: Attinasi, Maria-Grazia; Prammer, Doris; Stähler, Nikolai; Tasso, Martino; Van Parys, Stefan
    Abstract: Budget-neutral tax wedge reductions rank high in the policy agenda of several EMU member states. Using a New Keynesian DSGE model of a monetary union with a complex labour market structure and a comprehensive public sector, we evaluate the macroeconomic and welfare effects of reducing the firms' and workers' labour tax rates under alternative financing instruments. Overall, a tax wedge reduction is beneficial in terms of both welfare and output, as long as the financing measure does not harm private-sector productivity and/or the incentive for private capital investments over-proportionately. While financing the labour tax wedge reduction by an increase in consumption taxation yields most favourable output effects, financing it by a reduction in government spending is more beneficial in terms of welfare as the latter does not imply a policy-induced increase in private consumption costs. We also show that, when we assume that firms can adjust the ex- and intensive labour margin in response to policy changes, a reduction in the workers' and not the firms' burden is most beneficial.
    Keywords: Fiscal Policy,Tax Reforms,DSGE Modelling,Macroeconomics
    JEL: H2 J6 E32 E62
    Date: 2016
  4. By: Niemann, Rainer; Sureth, Caren
    Abstract: Tax uncertainty is often claimed to be harmful for investments. Capital taxes, such as property and wealth taxes, are particularly exposed to tax uncertainty. Capital tax uncertainty emerges from expected tax reforms, the unclear outcome of future tax audits, and simplified estimates of capital tax bases in investment models. Uncertain returns on investment as well as stochastic taxation contribute to overall uncertainty and may significantly affect investment decisions. Hitherto, it is unknown how capital tax uncertainty affects investment timing. However, it is well known that both uncertainty and capital tax may be harmful for investment and decelerate investment activities. We are the first to study the investment timing effects of stochastic capital taxes in a real options setting with risky investment opportunities. Our results indicate that even risk neutral investors are sensitive with respect to capital tax risk and may react in a surprising manner to a newly introduced stochastic capital tax. As an apparently paradoxical investment effect, we find that increased capital tax uncertainty can accelerate risky investment if such uncertainty is sufficiently low compared to cash .ow uncertainty. In contrast, high capital tax risk delays high-risk innovative investment projects. To reduce unintended consequences of uncertain tax policy, tax legislators and tax authorities should avoid high levels of capital tax uncertainty. Broadening the capital tax base or increasing the capital tax rate induces ambiguous timing effects. Furthermore, high-growth investments are likely to be postponed if they experience a capital tax cut. Since investment reactions upon tax reforms are well-known to affect income and wealth distribution, reliable estimations of the impact of taxes on economic decisions are necessary.
    Keywords: property tax,capital tax,investment decisions,real options,timing flexibility,uncertainty
    JEL: H25 H21
    Date: 2016
  5. By: Jenkins, Stephen P. (London School of Economics)
    Abstract: I determine UK income inequality levels and trends by combining inequality estimates from tax return data (for the 'rich') and household survey data (for the 'non-rich'), taking advantage of the better coverage of top incomes in tax return data (which I demonstrate) and creating income variables in the survey data with the same definitions as in the tax data to enhance comparability. For top income recipients, I estimate inequality and mean income by fitting Pareto models to the tax data, examining specification issues in depth, notably whether to use Pareto I or Pareto II (generalised Pareto) models, and the choice of income threshold above which the Pareto models apply. The preferred specification is a Pareto II model with a threshold set at the 99th or 95th percentile (depending on year). Conclusions about aggregate UK inequality trends since the mid-1990s are robust to the way in which tax data are employed. The Gini coefficient for gross individual income rose by around 7% or 8% between 1996/97 and 2007/08, with most of the increase occurring after 2003/04. The corresponding estimate based wholly on the survey data is around –5%.
    Keywords: inequality, top incomes, Pareto distribution, generalized Pareto distribution, survey under-coverage, HBAI, SPI
    JEL: C46 C81 D31
    Date: 2016–08
  6. By: Paetzold, Jörg (University of Salzburg); Winner, Hannes (University of Salzburg)
    Abstract: This paper provides evidence of evasion in the context of a widely used commuter tax allowance, and explores evasion spillovers as a determinant of the individual compliance decision. For this purpose, we exploit discontinuities in the commuter allowance scheme and employ a research design resting on a large panel of individual tax returns. We find that around 30 percent of all allowance claims are overstated and, consistent with deliberate tax evasion, we observe sharp reactions of taxpayers to thresholds where the allowance discretely jumps to a higher amount. Further, we use variation in job changes to uncover spillover effects from the work environment on the individual compliance decision. These effects appear to be asymmetric: Job changers moving to companies with a higher fraction of cheaters increase their cheating. In contrast, movers to companies with a lower fraction of cheaters tend not to alter their reporting behavior. We provide suggestive evidence that the spillover has more to do with an information environment, but can ultimately not reject other behavioral explanations such as asymmetric persistence of norms.
    Keywords: Tax Evasion; Self-Reporting; Tax Deductions; Spillover Effects
    JEL: D83 H24 H26
    Date: 2016–08–04
  7. By: Martín Gonzalez-Eiras (University of Copenhagen); Dirk Niepelt (Study Center Gerzensee, University of Bern)
    Abstract: We propose a theory of tax centralization and inter governmental grants in politico-economic equilibrium. The cost of taxation differs across levels of government because voters internalize general equilibrium effects at the central but not at the local level. This renders the degree of tax centralization and the tax burden determinate even if none of the traditional, expenditure-related motives for centralization considered in the fiscal federalism literature is present. If central and local spending are complements and the trade-off between the cost of taxation and the benefit of spending is perceived differently across levels of government, inter governmental grants become relevant. Calibrated to U.S. data, our model helps to explain the introduction of federal grants at the time of the New Deal, and their increase up to the turn of the twenty-first century. Grants are predicted to increase to approximately 5.5% of GDP by 2060.
    Date: 2016–08
  8. By: Vasilev, Aleksandar
    Abstract: This paper utilizes an otherwise standard micro-founded general-equilibrium setup, which is augmented with a revenue-extraction mechanism to assess the magnitude of VAT evasion. The model is calibrated to Bulgaria after the introduction of the currency board (1999-2014), as one of the very few countries in Europe with a non-differentiated consumption tax rate, and an economy where VAT revenue makes almost half of total government tax revenue. A computational experiment performed within this setup estimates that on average, the size of evaded VAT is a bit more than one-fourth of output, an estimate which is in line with the figures provided in both Philip (2014) and the European Commission (2014). In addition, model-based simulations suggest that increases in spending on law and order could generate substantial welfare gains by decreasing VAT evasion.
    Keywords: VAT evasion,general equilibrium,Bulgaria
    JEL: D58 E26 H26 K42
    Date: 2016
  9. By: Elena Jarocinska; Anna Ruzik-Sierdzinska
    Abstract: This paper analyses the distributional effects of the Polish old-age pension reform introduced in 1999. Following a benchmark Mincer earnings equation, and using a newly developed microsimulation model we project future pension benefits for males born in years 1969–1979. We find that inequality of predicted first pension benefits measured by the Gini coefficient increases from 0.119 to 0.165 for cohorts of men retiring between 2036 and 2046. The observed increased inequality of pension benefits is due to the decreasing share of initial capital that is based on a more generous DB formula in the total accumulated pension capital. At the same time, inequality in replacements rates decreases due to a stronger link between contributions paid through the entire working life and pension benefits.
    Keywords: pension benefits, inequality, replacement rates, microsimulation
    JEL: H55 J26
    Date: 2016–04
  10. By: McGrattan, Ellen R. (Federal Reserve Bank of Minneapolis); Prescott, Edward C. (Federal Reserve Bank of Minneapolis)
    Abstract: Many countries are facing challenging fiscal financing issues as their populations age and the number of workers per retiree falls. Policymakers need transparent and robust analyses of alternative policies to deal with demographic changes. In this paper, we propose a simple framework that can easily be matched to aggregate data from the national accounts. We demonstrate the usefulness of our framework by comparing quantitative results for our aggregate model with those of a related model that includes within-age-cohort heterogeneity through productivity differences. When we assess proposals to switch from the current tax and transfer system in the United States to a mandatory saving-for-retirement system with no payroll taxation, we find that the aggregate predictions for the two models are close.
    Keywords: Taxation; Retirement; Social Security; Medicare
    JEL: E13 H55 I13
    Date: 2016–08–11
  11. By: Antonio N. Bojanic (Department of Economics, Tulane University)
    Abstract: This paper analyzes the impact of fiscal decentralization on economic freedom and political and civil liberties in the Americas. Regarding the latter and with the full sample of countries, the findings suggest that decentralization initially worsens but eventually improves political and civil liberties, underlining the importance of fiscal decentralization as a driver for achieving basic liberties. When Canada and the US are excluded, the evidence shows that decentralization may eventually be a detriment for political and civil liberties. With respect to the impact of fiscal decentralization on economic freedom, decentralization first hinders but eventually increases freedom when all countries are included, emphasizing the point that a decentralization regime takes time to develop and function properly. When Canada and the US are excluded, decentralization initially increases but ultimately hampers freedom, demonstrating that if the decentralization regime does not address important matters like fiscal discipline, wealth inequality, and political accountability, economic freedom – like political and civil liberties – will also deteriorate.
    Keywords: Fiscal decentralization, economic freedom, political and civil liberties.
    JEL: E62 H70 O23 P52
    Date: 2016–08
  12. By: Bulana, Oleksandra
    Abstract: Tax issues pertaining to cross-border trade in goods between related parties (i.e., companies from the same group) represent a major challenge for many national tax and customs administrations. One of the biggest concerns is how to determine the fair market price for such operations. The methodology for determining the tax base depends on the type of tax concerned - i.e., transfer pricing methods for corporate income tax and customs valuation methods for indirect taxes. The two approaches have considerable differences, that may result in negative implications for the fiscal authorities (tax evasion) and taxpayers (disputes with the fiscal authorities, overpaid tax). The article highlights the main differences between the methods of transfer pricing and customs valuation. The author analyzes the recent Ukrainian legal changes pertaining to control over transfer pricing. The author describes potential risks for taxpayers and the areas that require settlement by the customs authorities in relation with the new transfer pricing regulations in Ukraine. The main achievement of this research is development of recommendations for harmonization of transfer pricing and customs valuation in Ukraine, inter alia considering international best practices.
    Keywords: transfer pricing, customs valuation, import of goods.
    JEL: H25
    Date: 2015–03
  13. By: Alexandra Rudolph (German Development Institute (DIE))
    Abstract: Old-age poverty is to become one of the most pressing issues in the coming decades given the demographic trends forecasted. Particularly in developing countries this could be an obstacle to inclusive and sustainable growth as well as the fight against all forms of poverty (SDG 1), through shocks on consumption and production patterns within countries. Investigating social, non-contributory pension systems highlights their potential for countries to implement one of the main instrument to fight old-age poverty. A new comprehensive global data set of 185 countries over the 1960-2012 period on the provision of social pension across the world allows the author to examine trends in social pension provision in the last five decades and study internal and external political economy drivers of implementation. Grouped event history data allows the control of duration dependence on the probability of social pension adoption in the multivariate setting. Results show that internal (national) demand drivers are more important than external (international) peer pressure while the composition of the political system and of governments seem to be major factors influencing the provision of social pension mainly in developing countries. Since only 50 percent of countries provide against old-age poverty countries may use the window-of-opportunity of the 2030 Agenda to reach “nationally appropriate social protection systems” (SDG 1.3; UN, 2015).
    Keywords: public pension; social pension; demographic change; old-age poverty; political economy; panel data
    JEL: H55 J14 I38
    Date: 2016–08–11
  14. By: Jenkins, Stephen P.
    Date: 2016–08–04
  15. By: Foellmi, Reto; Martinez, Isabel Z.
    Abstract: In the last 20 years, the share of top incomes in Switzerland has risen, while exhibiting large variations. Switzerland is similar to European countries for the top 1% but closer to the U.S. for higher top income groups. With the synthetic control method we close a time gap in the tax data, exploiting the fact that Swiss cantons changed their tax system at different points in time. Using social security data which cover all top labor incomes, we document the growing importance of labor compared to capital incomes among the top income earners in Switzerland.
    Keywords: Income Inequality, Synthetic Control Method, Pareto Interpolation, Labor Income, Wealth Inequality, Tax Data
    JEL: D31 H24 C81 N33
    Date: 2016–07
  16. By: Schuknecht, Ludger
    Abstract: This study looks at the interrelationship between fiscal policy and safe assets as there is surprisingly little analysis about this beyond fleeting references. The study argues that from a certain point more public debt will not "buy" more safety: countries face a kind of "safe-assets Laffer curve" with a maximum amount of safe assets at some level of indebtedness. The position and "stability" of this curve depend on a number of national and international factors, including the international risk appetite and, as a more recent factor, QE policies by central banks. The study also finds evidence of declining safe assets as reflected in government debt ratings.
    Keywords: fiscal policy,public debt,safe assets,financial markets
    JEL: E62 G10
    Date: 2016
  17. By: Pol Antràs; Alonso de Gortari; Oleg Itskhoki
    Date: 2016–01
  18. By: Johannes Spinnewijn
    Abstract: This paper analyzes how biased beliefs about employment prospects affect the optimal design of unemployment insurance. Empirically, I find that the unemployed greatly overestimate how quickly they will find work. As a consequence, they would search too little for work, save too little for unemployment and deplete their savings too rapidly when unemployed. I analyze the use of the "sufficient-statistics" formula to characterize the optimal unemployment policy when beliefs are biased and revisit the desirability of providing liquidity to the unemployed. I also find that the optimal unemployment policy may involve increasing benefits during the unemployment spell.
    Keywords: biased belief; unemployment; optimal insurance; moral hazard
    JEL: D83 G22 H30
    Date: 2015–02
  19. By: Hirte, Georg; Tscharaktschiew, Stefan
    Abstract: The transport and urban economics literature applies different labor supply approaches when studying economic or planning instruments. Some studies assume that working hours are endogenous while the number of workdays is given, whereas others model only decisions on workdays. Unfortunately, empirical evidence does hardly exist on account of missing data. Against this background, we provide an assessment of whether general effects of transport policies are robust against the modeling of leisure demand and labor supply. We introduce different labor supply approaches into a spatial general equilibrium model and discuss how they affect the welfare implication of congestion policies. We, then, perform simulations and find that in many cases the choice of labor supply modeling not only affects the magnitude of the policy impact but also its direction. While planning instruments are suggested to be quite robust to different labor supply approaches, the way of modeling labor supply may crucially affect the overall welfare implications of economic instruments such as congestion tolls. Based on these findings it becomes clear which labor supply approach is the most appropriate given specific conditions. Our study also emphasizes the need for better micro labor market data that also feature days of sickness, overtime work used to reduce workdays, the actual number of leave days, part-time work, days with telecommuting etc.
    Keywords: Public Economics,Tax Efficiency,Time Allocation,Labor Supply,Pigouvian,Tax,Environmental Economics,Urban Economics,Spatial Economics,Regional Welfare,Land-Use,Zoning,CGE,Spatial Economics,Spatial Modeling,Transportation
    JEL: H2 H3 J22 Q5 R1 R4 R5
    Date: 2015
  20. By: Cilliers, Jacobus (Georgetown University); Kasirye, Ibrahim (Economic Policy Research Centre); Leaver, Clare (University of Oxford); Serneels, Pieter (University of East Anglia); Zeitlin, Andrew (Georgetown University)
    Abstract: Public sector organizations often rely on reports by local monitors that are costly to verify and that serve twin objectives: to incentivize agent performance, and to provide information for planning purposes. Received wisdom has it that pay for locally monitored performance (P4LMP) will result in collusion and undermine both objectives. But simple Coasian logic suggests the reverse: P4LMP puts transferable money on the table and may enable interested parties to bargain to a more efficient outcome. This paper develops a theoretical model that shows why, and for which parameters, the welfare-enhancing Coasian scenario exists. Focusing on education, we model how the preferences of a teacher (agent) and head-teacher (local monitor) affect actual and reported teacher attendance, and how these equilibrium outcomes depend on the financial stakes attached to reports. To capture the value of information, we also consider the welfare of a bureaucracy that makes a costly policy mistake when holding the wrong belief about teacher performance. We test the model and estimate the predicted effects using data from a field experiment in Ugandan primary schools, randomly varying whether head teachers' reports of teacher attendance are tied to bonus payments or not. Consistent with Coasian logic, P4LMP increased actual and reported teacher attendance (by 9 and 15 percentage points respectively) and reduced policy mistakes (by 7 percentage points) relative to unincentivized local monitoring. We use these experimental impacts to undertake a detailed cost-benefit analysis and conclude, even under conservative assumptions, that welfare improved when paying for locally monitored performance.
    Keywords: public sector, monitoring, performance pay
    JEL: D61 H52 I25 I26
    Date: 2016–08
  21. By: Marchand, Joseph (University of Alberta, Department of Economics); Smeeding, Timothy (University of Wisconsin-Madison, Robert M. La Follette School of Public Affairs)
    Abstract: This chapter explores the relationship between poverty and aging, in terms of its measurement and trends, as well as its alleviation, with particular attention on the most vulnerable individuals at each end of the age distribution. The measurement addresses both the definition of poverty and its aggregation over various age groups. The trends highlight a significant reduction in poverty among the elderly and a gradual increase in poverty among children and working age individuals, both in the United States and across the greater developed world, over the past fifty years. The alleviation of poverty is attributed to the labor market and to social expenditure and its associated policies, which have been especially effective for the elderly. A summary of key contributions and a discussion follow that set forth an agenda for further research and policy.
    Keywords: aging; children; distribution; elderly; income support; labor market; poverty; public policy; social expenditure
    JEL: D30 D60 H50 I30 J10 J20 J30
    Date: 2016–08–16

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