nep-pbe New Economics Papers
on Public Economics
Issue of 2016‒08‒28
twenty-two papers chosen by
Thomas Andrén

  1. The effects of size-based regulation on small firms: evidence from VAT threshold By Jarkko Harju; Tuomas Matikka; Timo Rauhanen
  2. Pareto models, top incomes, and recent trends in UK income inequality By Stephen P Jenkins
  3. "Income Distribution and Economic Development in Prewar Japan: Estimation and Analysis of the Prefecture-level Top Income Share" (in Japanese) By Tetsuji Okazaki
  4. Attention Variation and Welfare: Theory and Evidence from a Tax Salience Experiment By Dmitry Taubinsky; Alex Rees-Jones
  5. Who buffers income losses after job displacement? The role of alternative income sources, the family, and the state By Fackler, Daniel; Hank, Eva
  6. EU Tax Competition and Tax Avoidance: A Multiprincipal Perspective By Florence LACHET-TOUYA
  7. "Federalism, Fiscal Space, and Public Investment Spending: Do Fiscal Rules Impose Hard Budget Constraints?" By Pinaki Chakraborty
  8. Anti-Trade Agitation and Distribution-Neutral Tax Policy- An Elementary Framework By Marjit, Sugata
  9. Comparing the role of height between men and women in the marriage market By Shigeo Morita; Takuya Obara
  10. To Avoid or Not to Avoid Inheritance Taxes? That Is the Question for Parents: Empirical Evidence from Japan By Niimi, Yoko
  11. Actuarial neutrality and financial incentives for early retirement in the Austrian pension system By Kucsera, Dénes; Christl, Michael
  12. Fiscal Space under Demographic Shift By Christine Ma; Chung Tran
  13. The fiscal and macroeconomic effects of government wages and employment reform By Pérez, Javier J.; Aouriri, Marie; Campos, Maria M.; Celov, Dmitrij; Depalo, Domenico; Papapetrou, Evangelia; Pesliakaitė, Jurga; Ramos, Roberto; Rodríguez-Vives, Marta
  14. Tax Reforms, Redistribution and Population Aging : Evidence from Japan By Miyazaki, Takeshi; Kitamura, Yukinobu; Ohno, Taro
  15. Local Government Proliferation, Diversity, and Conflict By Samuel Bazzi; Matthew Gudgeon
  16. Optimal Fiscal Policy in a Model of Firm Entry and Financial Frictions By Dudley Cooke; Tatiana Damjanovic
  17. Gender and Redistribution: Experimental Evidence By Thomas Buser; Louis Putterman; Joël van der Weele
  18. Employment Effects of the ACA Medicaid Expansions By Pauline Leung; Alexandre Mas
  19. Pensions in transition in EU11 countries between 1990 and 2015 By Stefan Domonkos; Andras Simonovits
  20. The Impact of Taxes on the Extensive and Intensive Margins of FDI By Davies, Ronald B.; Siedschlag, Iulia; Studnicka, Zuzanna
  21. The Effects of the Early Retirement Age on Retirement Decisions By Manoli, Dayanand; Weber, Andrea
  22. Horizontal and Vertical Tax Interactions in a Common Agency Game By Florence LACHET-TOUYA

  1. By: Jarkko Harju; Tuomas Matikka; Timo Rauhanen
    Abstract: Various types of size-based regulations for firms are typical in most countries (tax schedules, accounting rules, health and safety standards etc.). However, there is only limited evidence of how owners of small firms respond to such rules, and what are the underlying mechanisms behind the observed behavior. We study these questions by examining the effects of the value-added tax (VAT) sales threshold using tax register data on the universe of Finnish firms and their owners. We find sizable bunching of firms in the sales distribution just below the VAT threshold. This implies that small firms actively avoid VAT liability. We utilize variation in both the VAT rate and reporting requirements to provide compelling evidence that the response is caused by the compliance costs of VAT reporting rather than the size of the tax rate. This shows that the costs related to reporting and understanding taxes induce greater distortions than pure tax incentives, especially among low-income entrepreneurs. In addition, we find no explicit evidence of avoidance or evasion, which suggests that firms respond by reducing their true output. Also, bunching behavior is very permanent, implying that the VAT threshold hinders the growth of small firms.
    Keywords: Value-added tax, compliance costs, small firms, entrepreneurs, bunching
    JEL: H32 L11 D22 H25
    Date: 2016–06–14
  2. By: Stephen P Jenkins
    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
  3. By: Tetsuji Okazaki (Faculty of Economics, University of Tokyo)
    Abstract: This paper provides a new estimation of the income distribution in prewar Japan. Using the income tax statistics and the Pareto interpolation, the top 0.1% income share is estimated at the prefecture-level, for 1890, 1925 and 1935. Based on the estimated data, we examine the relationship between economic development and income inequality, as well as the implication of income inequality on the public security. Positive correlation is found between per capita income and income inequality for 1925 and 1935. Also, it was found that income inequality was associated with poor public security.
    Date: 2016–08
  4. By: Dmitry Taubinsky; Alex Rees-Jones
    Abstract: This paper shows that accounting for variation in mistakes can be crucial for welfare analysis. Focusing on consumer underreaction to not-fully-salient sales taxes, we show theoretically that the efficiency costs of taxation are amplified by 1) individual differences in underreaction and 2) the degree to which attention is increasing with the size of the tax rate. To empirically assess the importance of these issues, we implement an online shopping experiment in which 2,998 consumers--matching the U.S. adult population on key demographics--purchase common household products, facing tax rates that vary in size and salience. We find that: 1) there are significant individual differences in underreaction to taxes. Accounting for this heterogeneity increases the efficiency cost of taxation estimates by at least 200%, as compared to estimates generated from a representative agent model. 2) Tripling existing sales tax rates roughly doubles consumers' attention to taxes. Our results provide new insights into the mechanisms and determinants of boundedly rational processing of not-fully-salient incentives, and our general approach provides a framework for robust behavioral welfare analysis.
    JEL: C9 D0 H0
    Date: 2016–08
  5. By: Fackler, Daniel; Hank, Eva
    Abstract: Using survey data from the German Socio-Economic Panel (SOEP), this paper analyses to what extent alternative income sources, reactions within the household context, and redistribution by the state attenuate earnings losses after job displacement. Applying propensity score matching and fixed effects estimations, we find high individual earnings losses after job displacement and only limited convergence. Income from selfemployment slightly reduces the earnings gap and severance payments buffer losses in the short run. On the household level, we find substantial and rather persistent losses in per capita labour income. We do not find that increased labour supply by other household members contributes to the compensation of the income losses. Most importantly, our results show that redistribution within the tax and transfer system substantially mitigates income losses of displaced workers both in the short and the long run whereas other channels contribute only little.
    Keywords: job displacement,plant closure,household income,SOEP
    JEL: D10 I38 J63 J65
    Date: 2016
  6. By: Florence LACHET-TOUYA
    Keywords: Vertical and horizontal tax externalities; Information asymmetry; Tax competition; EU taxation; Governments' objective function
    JEL: D72 D82 H23 H30 H32 H71 H77
    Date: 2016–08
  7. By: Pinaki Chakraborty
    Abstract: The primary objective of rule-based fiscal legislation at the subnational level in India is to achieve debt sustainability by placing a ceiling on borrowing and the use of borrowed resources for public capital investment by phasing out deficits in the budget revenue account. This paper examines whether the application of fiscal rules has contributed to an increase in fiscal space for public capital investment spending in major Indian states. Our analysis shows that, controlling for other factors, there is a negative relationship between fiscal rules and public capital investment spending at the state level under the rule-based fiscal regime.
    Keywords: Fiscal Deficit; Revenue Deficit; Fiscal Rule
    JEL: H00 H6
    Date: 2016–08
  8. By: Marjit, Sugata
    Abstract: The recent Brexit episode is being interpreted in some quarters as an anti-globalisation backlash. Free trade does not promise gains for all without a proper compensating mechanism that allows winners to bribe the losers. Also standard prediction of trade theory does point towards increasing wage inequality for the relatively skill abundant developed world. Theoretical discussion on compensating mechanism that addresses inequality is rare in trade literature. In a simple HOS model we consider tax policies that keep the pre-trade degree of inequality unchanged between skilled and unskilled workers. We discuss the problem of existence of such an inequality-neutral tax rate that generates a positive increment in the after tax skilled wage. Existence of such a mechanism is contingent on the initial degree of inequality and is independent of whether the tax is progressive or proportional.
    Keywords: Trade Model, Wage inequality, Compensation mechanism, Tax policy.
    JEL: D63 F11 H20 H23 J31
    Date: 2016–08
  9. By: Shigeo Morita (Graduate School of Economics, Osaka University); Takuya Obara (Graduate School of Economics, Hitotsubashi University)
    Abstract: In this study, we investigate optimal nonlinear labor and capital income tax- ation and subsidies for contribution goods in a dynamic setting. We show that when individuals can contribute to a public good|even if additive and separa- ble preference between consumption and labor supply is assumed and individuals differ only in earning ability|marginal capital income tax rate for low-income earners is not zero, indicating that the Atkinson{Stiglitz theorem does not hold. In particular, heterogeneous tastes for private consumptions endogenously occur. In addition, we derive a formula for optimal tax treatment of a public good, which is expressed in terms of the Pigouvian effect and the effect on an incentive com- patibility constraint.
    Keywords: Capital income tax, Private donations, Tax treatment
    JEL: H21 H23
    Date: 2016–08
  10. 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, bequests, inheritance tax, inter vivos transfers, Japan, precautionary saving, D31, D64, H26, H31
    Date: 2016–06
  11. By: Kucsera, Dénes; Christl, Michael
    Abstract: This paper studies actuarial neutrality in the Austrian pension system. It is often argued that actuarial neutrality constitutes an incentive for people to retire. We show that there are almost no financial incentives within the Austrian pension corridor, when we use the traditional definition of actuarial neutrality. Taking taxation into account, our results suggest that financial incentives for early retirement stem mainly from the Austrian tax system and not from the pension system itself.
    Keywords: actuarial neutrality,early retirement,pension system,retirement
    JEL: J26 H55
    Date: 2016
  12. By: Christine Ma; Chung Tran
    Abstract: In this paper we quantitatively explore implications of ageing demographic structure for government revenue raising capacity through lens of fiscal space. We base our analysis on dynamic general equilibrium, overlapping generations model calibrated to data from Japan and USA.We first map out fundamental-based fiscal limit using the Laffer curve approach, and then compute fiscal space in terms of budgetary room between the current revenue and the maximum revenue defined by the peak of Laffer curves. We demonstrate that the evolution of underlying demographic structures plays an important role in shaping a country’s fiscal limit and fiscal space. There will be significant contractions in fiscal space in Japan and USA when the two countries enter their late stage of demographic transition in 2040. In particular, the results from the model calibrated to Japan indicates that an increase in old-age dependency ratio to over 70 percent can reduce Japan’s fiscal space by 36 percent. When factoring in the increased fiscal cost of existing commitments to the age pension program, the net fiscal space for Japan turns negative.
    Keywords: Population Ageing, Laffer Curve, Fiscal Limit, Sustainability, Heterogeneity, Dynamic General Equilibrium.
    JEL: E62 H20 H60 J11
    Date: 2016–08
  13. By: Pérez, Javier J.; Aouriri, Marie; Campos, Maria M.; Celov, Dmitrij; Depalo, Domenico; Papapetrou, Evangelia; Pesliakaitė, Jurga; Ramos, Roberto; Rodríguez-Vives, Marta
    Abstract: This paper examines the overall macroeconomic impact arising from reform in government wages and employment, at times of fiscal consolidation. Reform of these two components of the government wage bill appeared necessary for containing the deterioration of the public finances in several EU countries, as a consequence of the financial crisis. Such reforms entailed in some instances, but not always, the implementation of cost-cutting measures affecting the government wage bill, as part of broader consolidation packages that typically hinged more heavily on other fiscal instruments, like public investment. While such measures have adverse short-term macroeconomic effects, public wage bill restraining policy changes present the idiosyncrasy that they can yield medium- to longer-term benefits due to possible competitiveness and efficiency gains through their impact on labour market dynamics. This paper provides some evidence of such medium- to long-run effects, based on a wealth of micro and macro data in the euro area and the EU. It concludes that appropriately designed government wage bill moderation could indeed produce positive dividends to the economy, which depend on certain country-specific conditions. These gains can be reinforced by relevant fiscal-structural reforms. JEL Classification: H50, E62, J45
    Keywords: fiscal consolidation, fiscal policies, labour market, public employment, public wages
    Date: 2016–08
  14. By: Miyazaki, Takeshi; Kitamura, Yukinobu; Ohno, Taro
    Abstract: In the 1980s, income tax rates decreased and income tax deduction thresholds changed through income tax reforms in the OECD countries. Likewise, in Japan in the 1980s and 1990s, income tax rates decreased and the income tax deduction threshold increased. Recently, it has been pointed out that inequality and redistribution vary over different age groups. This study attempts to explore how different the redistributive effects of the income tax reforms in Japan are among various age groups, using Japanese household microdata for the period 1984–2009. The following results are obtained. First, the overall redistributive effect was greatest for the elderly group, followed by the middle-age group, and then the young group for the period 1984–2009. Furthermore, this trend increased steadily over time. Second, the difference in the total redistributive effect between the young and elderly increased owing to a large reduction in the base effect for the young. Third, the redistributive effect of income tax for the older elderly group is smaller than that for the younger elderly group. The consequences from Japan’s experience could provide insightful suggestions for redistribution policies in other countries, most of which will face an aging society in the future.
    Keywords: Base effect, personal income tax, population aging, rate effect, redistribution
    JEL: D31 H2 H24
    Date: 2016–08
  15. By: Samuel Bazzi (Boston University & BREAD); Matthew Gudgeon (Boston University)
    Abstract: The creation of new local governments is a key feature of decentralization in developing countries. This process often causes substantial changes in contestable public resources and the local diversity of the electorate. We exploit the plausibly exogenous timing of new district creation in Indonesia to iden- tify the implications of these changes for violent conflict. Using new geospatial data on violence, we show that allowing for redistricting along group lines can reduce conflict. However, these reductions are undone and even reversed if the newly defined electorates are ethnically polarized, particularly in areas that receive an entirely new seat of government. We identify several mechanisms highlighting the violent contestation of political control.
    Keywords: Conflict, Polarization, Ethnic Diversity, Decentralization
    JEL: D72 D74 H41 H77 O13 Q34
    Date: 2016–03
  16. By: Dudley Cooke (Department of Economics, University of Exeter); Tatiana Damjanovic (Department of Economics, Durham University)
    Abstract: This paper develops a general equilibrium model of firm entry and financial frictions. Movements in the volatility of firm-level shocks and aggregate productivity generate procyclical entry and a countercyclical firm default rate. We derive analytical results for optimal fiscal policy and show that the government faces two trade-offs. The first arises from a profit destruction and a consumer surplus effect when firm entry is endogenous. The second arises because financial frictions reduce firm entry and default is costly. We also study the optimal mix of taxes on labor-income and firm profits in a quantitative version of the model. We find that a countercyclical labor-income tax is always part of the optimal fiscal policy, whereas the cyclicality of the profit tax is sensitive to the source of aggregate fl uctuations.
    Keywords: Firm Entry, Financial Frictions, Optimal Fiscal Policy.
    JEL: E31 E52 F41
    Date: 2016
  17. By: Thomas Buser (University of Amsterdam, The Netherlands); Louis Putterman (Brown University, United States); Joël van der Weele (University of Amsterdam, The Netherlands)
    Abstract: Gender differences in voting patterns and political attitudes towards redistribution are well-documented. The experimental gender literature suggests several plausible behavioral explanations behind these differences, relating to gender differences in confidence concerning future relative income position, risk aversion, and social preferences. We use data from lab experiments on preferences for redistribution conducted in the U.S. and several European countries to disentangle these potential mechanisms. We find that when choosing to redistribute income as a disinterested observer, women choose higher tax rates than men when initial income depends on performance in a task but not when it is randomly allocated. In a veil of ignorance condition with uncertainty about the income position of the decision maker, this effect is even stronger, leading to a 10ppt gender difference in average chosen tax rates in the performance conditions. We find that this gender difference is mainly due to men being more (over)confident about their task performance and the resulting income position, with gender differences in risk aversion and social preferences playing a minor role.
    Keywords: gender; redistribution; overconfidence; risk attitudes; voting; taxation
    JEL: C91 J16 H24 D31
    Date: 2016–08–23
  18. By: Pauline Leung; Alexandre Mas
    Abstract: We examine whether the recent expansions in Medicaid from the Affordable Care Act reduced “employment lock” among childless adults who were previously ineligible for public coverage. We compare employment in states that chose to expand Medicaid versus those that chose not to expand, before and after implementation. We find that although the expansion increased Medicaid coverage by 3.0 percentage points among childless adults, there was no significant impact on employment.
    JEL: H0 J0 J18
    Date: 2016–08
  19. By: Stefan Domonkos (Institute of Economic Research, Slovak Academy of Sciences); Andras Simonovits (Institute of Economics - Centre for Economic and Regional Studies, Hungarian Academy of Sciences also Mathematical Institute of Budapest University of Technology, Budapest)
    Keywords: post-socialist countries, pension reform, political sustainability, economic sustainability, pension adequacy, pension privatisation
    JEL: H11 H55
    Date: 2016–07
  20. By: Davies, Ronald B.; Siedschlag, Iulia; Studnicka, Zuzanna
    Abstract: The design of optimal tax policy, especially with respect to attracting FDI, hinges on whether taxes affect multinational firms at the extensive or the intensive margins. Nevertheless, the literature has not yet explored the simultaneous impact of taxation on FDI on these two margins. Using firm-level cross-border investments into Europe during 2004-2013, we do so with a Heckman two-step estimator, an approach which also allows us to endogenize the number of investments and include home country and parent firm characteristics. We find that taxes affect both margins, particularly for firms that invest only once, with 92 percent of tax-induced changes in aggregate inbound FDI driven by movements at the extensive margin. In addition, we find significant effects of both home country and parent firm characteristics, pointing towards the granularity of investment decisions.
    Date: 2016–07
  21. By: Manoli, Dayanand (University of Texas at Austin); Weber, Andrea (Vienna University of Economics and Business)
    Abstract: We present quasi-experimental evidence on the effects of increasing the Early Retirement Age (ERA) on older workers' retirement decisions. The analysis is based on social security reforms in Austria in 2000 and 2004, and administrative data allows us to distinguish between pension claims and job exits. Using a Regression Kink Design, we estimate that, within a birth cohort, a 1.0 year increase in the ERA leads to a 0.4 year increase in the average job exiting age and a 0.5 year increase in the average pension claiming age. When the ERA increases, many older workers remain in their jobs longer.
    Keywords: retirement, early retirement age, pension reform, life cycle labor supply, regression kink design
    JEL: H55 J21 J22 J26
    Date: 2016–08
  22. By: Florence LACHET-TOUYA
    Abstract: The decisions made by one government affect the tax revenue that can be collected by the decisionmakers belonging to the same tier of government or by stacked jurisdictions : externalities arise, the existence and the magnitude of which are closely related to the nature of the tax, to the mobility of the base and to the distribution of tax competence among decisionmakers. Indeed, when same authorities belonging to a same level of government derive their receipts from a mobile tax base, a competition mechanism takes place among them that triggers externalities. Likewise, when different layers of decision-makers exert their taxing power upon a common base, the choices made by one tier affect the receipts that the other governments can collect. As a by-product, this paper proposes a model where both horizontal and vertical interactions are tackled, ?first successively then simultaneously. Uncertainty concerning the base, that is, the amount of capital likely to be invested, is introduced and a generalization of taxation schemes is provided. The analysis shows that horizontal and vertical externalities point towards opposite directions : while horizontal competition leads to ine¢ ciently low rates, the common pool problem arising from the stacking of decisionmakers taxing a same base gives rise to a phenomenon of over-taxation. Besides, the combination of both externalities yields to an intermediary tax rate : the outcome is brought closer to the social optimum.
    Keywords: Vertical and horizontal tax externalities; Informational asymmetry; Tax competition; Common Agency; Nonlinear taxes
    JEL: D72 D82 H23 H30 H32 H71 H77
    Date: 2016–08

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