nep-pbe New Economics Papers
on Public Economics
Issue of 2016‒09‒11
twenty-two papers chosen by
Thomas Andrén

  1. Tax reforms and their varying impacts on private households in Germany ? Socio-economic modelling opportunities in a macro-econometric input-output model. By Dr. Thomas Drosdowski; Britta Stöver
  2. The Design of Fiscal Reform Packages; Insights from a Theoretical Endogenous Growth Model By Andrew Hodge
  3. R&D Tax Incentives: Evidence on design, incidence and impacts By Silvia Appelt; Chiara Criscuolo; Fernando Galindo-Rueda; Matej Bajgar
  4. Fiscal Multipliers and Institutions in Peru; Getting the Largest Bang for the Sol By Svetlana Vtyurina; Zulima Leal
  5. Optimal Taxation with Endogenous Return to Capital By Kristjánsson, Arnaldur Sölvi
  6. Fiscal Federalism, Taxation and Grants By Gonzalez-Eiras, Martin; Niepelt, Dirk
  7. Fiscal consolidation as a self-fulfilling prophecy on fiscal multipliers By Hubert Bukowski
  8. What Does Aid Do to Fiscal Policy? New Evidence By Jean-Louis Combes; Rasmané Ouedraogo; Sampawende J Tapsoba
  9. Optimal Debt Policy Under Asymmetric Risk By Julio Escolano; Vitor Gaspar
  10. Top Incomes and the Gender Divide By A.B. Atkinson; A. Casarico; S. Voitchovsky
  11. The Role of Fiscal Transfers in Smoothing Regional Shocks; Evidence from Existing Federations By Tigran Poghosyan; Abdelhak S Senhadji; Carlo Cottarelli
  12. Economic Development and Preferences for Redistribution By Hideaki Goto
  13. U.S. Corporate Income Tax Reform and its Spillovers By Kimberly Clausing; Edward Kleinbard; Thornton Matheson
  14. Fiscal Sustainability: Conceptual, Institutional, and Policy Issues By Marek Dabrowski
  16. Welfare effects of TTIP in a DSGE model By Engler, Philipp; Tervala, Juha
  17. Monetary and Fiscal Policy Design at the Zero Lower Bound - Evidence from the Lab By Hommes, C.H.; Massaro, D.; Salle, I.
  18. Taxation of Couples: a Mirrleesian Approach for Non-Unitary Households By Lucas de Lima; Carlos da Costa
  19. The Effects of the Early Retirement Age on Retirement Decisions By Weber, Andrea
  20. No Big Deal: The Impact of New York City’s Paid Sick Days Law on Employers By Eileen Appelbaum; Ruth Mikman
  21. On the Distribution of the Welfare Losses of Large Recessions By Kurt Mitman; Fabrizio Perri; Dirk Krueger
  22. Health insurance thresholds and policy implications: a Vietnamese medical survey in 2015 By Thu Trang Vuong; Ha Nguyen; Quan-Hoang Vuong

  1. By: Dr. Thomas Drosdowski (GWS - Institute of Economic Structures Research); Britta Stöver (GWS - Institute of Economic Structures Research)
    Abstract: Taxation of incomes generated by economic agents is a main pillar of redistributive social policies undertaken by the government in Germany. The apparent lack of sufficient adjustments of the tax schedule during the period 2005-2015 has led to higher average annual growth rates in taxes than in income. This development has triggered a public dispute about alleged bracket creep, i.e. inflationary-caused nominal income increase pushing taxable income into higher tax bracket, which apparently poses higher tax burden especially among households with small and medium incomes. The aim of this paper is an analysis of the effects of a permanent proportional income tax reduction on the total economy as well as on the income situation of different household types, against the background of repeated public demands for tax reliefs resulting from increased tax burdens in recent years. The taxation scenario is not calculated on a microeconomic level but uses a macro-econometric approach instead, in order to give a broad overview over a wide variety of effects. By combining the macro-econometric input-output model INFORGE with the socio-economic system DEMOS containing household-specific income and consumption information we can assess how a simple fiscal measure would affect the economy, different household types, and inequality. It can be shown that a tax reduction has a positive aggregate effect throughout the economy in all years of the tax reform. Working households with high incomes profit most from simple tax cuts. Non-working households, however, are faced with comparably smaller positive deviations in income, which exacerbates the projected distance between household incomes and contributes to further increasing inequality.
    Keywords: taxation, scenario analysis, economic effects, inequality, private housholds
    JEL: E27 E62 E64 H2
    Date: 2016
  2. By: Andrew Hodge
    Abstract: This paper studies the impact on growth, welfare, and government debt of fiscal reform packages in a theoretical model drawing together three key features of the endogenous growth literature: (i) investment in technology (in the form of human capital) offsets diminishing marginal productivity of private capital, allowing for perpetual growth in output per capita; (ii) changes in investment behavior because of cuts to distortionary tax rates impact long-run growth; and (iii) public capital has a role influencing total factor productivity and growth. A quantitative simulation using reasonable parameter values suggests that modest capital and/or labor income tax cuts and public investment increases have significant positive effects on consumer welfare but small effects on per capita income growth, where fiscal costs are offset by reductions in unproductive government spending. Capital income tax cuts and public investment increases continue to boost welfare when offset by consumption tax rises (rather than spending cuts), although the welfare benefits of modest labor income tax cuts are outweighed by the costs of a compensating consumption tax increase.
    Keywords: Fiscal reforms;Fiscal policy;Public investment;Economic growth;Econometric models;Economic theory;Fiscal policy; Endogenous growth
    Date: 2016–07–22
  3. By: Silvia Appelt; Chiara Criscuolo; Fernando Galindo-Rueda; Matej Bajgar
    Abstract: This policy paper provides an overview of OECD work on measuring the extent and impact of public support for R&D through tax incentives. It discusses the policy rationale for tax incentives in the broader context of public support for business R&D, describing the main features of different modes of expenditure-based tax relief for R&D. It presents evidence on how much financial support is provided through tax incentives, how this has evolved in recent years and the variation in implied R&D tax subsidy rates across OECD countries and partner economies. The document also reviews empirical evidence on the impact of tax incentives, covering in detail different categories of impacts including potentially unintended effects. It further includes evidence on the use and impacts of income-based R&D tax incentives. The paper concludes with a synthesis of the main policy recommendations contained in key OECD policy documents and highlights future measurement and analytical work planned in this area.
    Date: 2016–09–10
  4. By: Svetlana Vtyurina; Zulima Leal
    Abstract: With the end of the commodity super cycle, Peru’s potential growth has declined, raising questions of what government policies could do to help boost growth, including over the medium-term. Our econometric analysis shows that public investment multipliers have a larger effect on growth than current spending or tax-related stimulus in the short and medium terms. Peru’s low debt and financial savings grants fiscal space for increasing investment spending, which could also entice and complement private investment, provided the former is efficient, fiscally sustainable and complemented by further reforms in public investment management and changes to the decentralization framework.
    Keywords: Fiscal policy;Peru;Public investment;Infrastructure;Fiscal stimulus and multipliers;Government expenditures;Fiscal sustainability;Peru, fiscal policy, fiscal sustainability, nonlinear models, multipliers, public investment management, decentralization.
    Date: 2016–07–22
  5. By: Kristjánsson, Arnaldur Sölvi (Dept. of Economics, University of Oslo)
    Abstract: This paper characterizes the optimal income and wealth tax schedules when rates of return are endogenous. Individuals exert investment effort in order to increase the return on their investments. Agents are heterogeneous along two dimensions: their investment ability and their labour market productivity. I show that when individuals can exert investment effort, the Atkinson-Stiglitz theorem that capital income should not be taxed does not hold. When the government observes wealth and capital income, it is optimal to tax capital income and subsidize wealth. When wealth is not observed, it is optimal to tax capital Income. The marginal tax rates on labour and capital income should not be equal, but they should be positively related to each other. The results extend to a model where individuals can hire investment advisors to increase the rate of return and also to a model with heterogeneous inheritance, in which case both capital Income and wealth should be taxed.
    Keywords: Optimal taxation; capital taxation; endogenous return to capital
    JEL: G11 H21 H24
    Date: 2016–04–28
  6. By: Gonzalez-Eiras, Martin; Niepelt, Dirk
    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.
    Keywords: Fiscal Federalism; Grants; Markov equilibrium; Politico-economic equilibrium; Public Goods
    JEL: D72 E62 H41 H77
    Date: 2016–08
  7. By: Hubert Bukowski
    Abstract: Fiscal policy may affect the size of the fiscal multiplier or lengthen the elevated multipliers period. This notion at first seems controversial, however it is only an outcome of combining two strands of already available literature together. The first strand touches the effects of fiscal policy on economic situation, the second one suggests economic situation affects fiscal multiplier. Having those two premises implies that fiscal policy could indirectly influence the fiscal multiplier size or the length of the elevated multiplier period. This possibility is fitted into a simple model of liquidity trap with hysteresis effects. One of the main outcomes of the model is that, when the government expectations on the size of the fiscal multiplier influence fiscal actions - as it is possibly the case - those expectations may become selffulfilling prophecies.
    Keywords: fiscal multiplier, self-fulfilling prophecy, fiscal consolidation timing
    JEL: E62 H5
    Date: 2015
  8. By: Jean-Louis Combes; Rasmané Ouedraogo; Sampawende J Tapsoba
    Abstract: Foreign aid is a sizable source of government financing for several developing countries and its allocation matters for the conduct of fiscal policy. This paper revisits fiscal effects of shifts in aid dependency in 59 developing countries from 1960 to 2010. It identifies structural shifts in aid dependency: upward shifts (structural increases in aid inflows) and downward shifts (structural decreases in aid inflows). These shifts are treated as shocks in aid dependency and treatment effect methods are used to assess the fiscal effects of aid. It finds that shifts in aid dependency are frequent and have significant fiscal effects. In addition to traditional evidence of tax displacement and “aid illusion,†we show that upward shifts and downward shifts in aid dependency have asymmetric effects on the fiscal accounts. Large aid inflows undermine tax capacity and public investment while large reductions in aid inflows tend to keep recipients’ tax and expenditure ratios unchanged. Moreover, the tax displacement effects tend to be temporary while the impact on expenditure items are persistent. Finally, we find that the undesirable fiscal effects of aid are more pronounced in countries with low governance scores and low absorptive capacity, as well as those with IMF-supported programs.
    Keywords: Foreign aid;Fiscal policy;Developing countries;Aid flows;Aid and growth;Econometric models;Time series;Foreign aid, Fiscal policy, Tax displacement, Fungibility, Aid illusion.
    Date: 2016–06–09
  9. By: Julio Escolano; Vitor Gaspar
    Abstract: In the paper we show that, most of the time, smooth reduction in the debt ratio is optimal for tax-smoothing purposes when fiscal risks are asymmetric, with large debt-augmenting shocks more likely than commensurate debt reducing shocks. Asymmetric risks are a feature of 200 years of data for the U.S. and the U.K.: rare but recurrent large surges of the debt-to-GDP ratio, followed by very gradual but persistent declines over long periods. More informal evidence from many other countries suggests that asymmetry is a general feature of fiscal shocks. The gradual smooth reduction in the public debt to GDP ratio is not a response to past developments. Instead it is optimal given recurrent fiscal risks and the empirical characteristics of fiscal shocks. The behavior of the debt-to-GDP ratio in the U.K. and the U.S. seems roughly compatible with the prescriptions of the tax-smoothing model.
    Keywords: Debt strategy;Fiscal risk;Public debt;Debt service ratios;Debt reduction;Government Debt, Optimal Debt Policies, Fiscal Risks, Fiscal Shocks.
    Date: 2016–08–26
  10. By: A.B. Atkinson (Nuffield College, Oxford; London School of Economics; and INET at the Oxford Martin School); A. Casarico (Università Bocconi; CESifo; and Dondena Centre for Research on Social Dynamics and Public Policy); S. Voitchovsky (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne; and Graduate Institute of International and Development Studies, Geneva)
    Abstract: In the recent research on top incomes, there has been little discussion of gender. How many of the top 1 and 10 per cent are women? A great deal is known about gender differentials in earnings, but how far does this carry over to the distribution of total incomes, bringing selfemployment and capital income into the picture? We investigate the gender divide at the top of the income distribution using tax record data for a sample of eight countries with individual taxation. We show that women are under-represented at the top of the distribution. They account for between a fifth and a third of those in the top 10 per cent. Higher up the income distribution, the proportion is lower, with women constituting between 14 and 22 per cent of the top 1 per cent. The presence of women in the top income groups has generally increased over time, but the rise becomes smaller at the very top. As a result, the gradient with income has become more marked: the under-representation of women today increases more sharply. Examination of the shape of the income distribution by fitting a Pareto distribution shows that at the end of the period women disappear faster than men as one moves up the income scale in all countries. In this sense, there appears to be something of a “glass ceiling” for women. In the case of Canada, Denmark, Norway and New Zealand, there appears to have been a reversal over time, with the slope of the upper tail having been steeper for women in the past. In seeking to explain this, we highlight the role of income composition, where we show that there have been significant changes over time, underlining the fact that it is not sufficient to look only at earned income.
    Keywords: Top income groups, gender, income composition
    JEL: D31 J16
    Date: 2016–09
  11. By: Tigran Poghosyan; Abdelhak S Senhadji; Carlo Cottarelli
    Abstract: We assess the extent to which fiscal transfers smooth regional shocks in three large federations: the U.S., Canada, and Australia. We find that fiscal transfers offset 4-11 percent of idiosyncratic shocks (risk-sharing) and 13-24 percent of permanent shocks (redistribution). This fiscal insurance largely operates through automatic stabilizers embedded in a central budget primarily through federal taxes and transfers to individuals, rather than transfers from the central government to state budgets. These results have implications for the design of fiscal risk-sharing mechanisms in the euro area.
    Keywords: Fiscal stabilization;United States;Canada;Australia;Fiscal risk;Regional shocks;Stabilization measures;Fiscal policy;public debt cycles, credit cycles, asset price cycles, duration analysis
    Date: 2016–07–21
  12. By: Hideaki Goto (International University of University)
    Abstract: This study empirically analyzes whether people's preferences for redistribution change as their countries develop. The results show that after controlling for income inequality, political orientation, and demographic and institutional factors, among others, people in more developed countries are more in favor of redistribution. This implies that concern for, or a social norm of caring about, the poor grows as a country becomes richer.
    Keywords: Redistribution, GDP per capita, Social preferences, Social norms
    JEL: D31 D63 H20
    Date: 2016–08
  13. By: Kimberly Clausing; Edward Kleinbard; Thornton Matheson
    Abstract: This paper examines the main distortions of the U.S. corporate income tax (CIT), focusing on its international aspects, and proposes a set of reforms to alleviate them. A bold reform to replace the CIT with a corporate-level rent tax could induce efficiency-enhancing reform of the international tax system. Since fundamental reform is politically difficult, this paper also proposes an incremental reform that would reduce tax expenditures, reduce the CIT rate to 25-28 percent, and impose a minimum rent tax on foreign earnings. Finally, this paper analyzes empirically the likely impact of the incremental on corporate revenues outside the U.S.: Though a U.S. rate cut would likely lower revenues elsewhere, implementation of a strong minimum tax could more than offset that effect for most countries with effective tax rates above 15 percent.
    Keywords: Corporate income taxes;United States;Tax reforms;Positive spillovers;International taxation;Tax systems;Corporate income tax, tax reform, international taxation
    Date: 2016–07–05
  14. By: Marek Dabrowski
    Abstract: The chronic nature of sovereign debt crises has resulted in the growing interest of analysts in finding both their real causes and the mechanisms of cross-country transmission - the so-called contagion effect. In this paper, we will try to answer the frequently asked question: what is the “safe” level of public debt (i.e. what level helps to avoid the risk of sovereign default)? Simultaneously, we will address various conceptual, institutional, and statistical dilemmas related to the definition and measurement of public debt.
    Keywords: public debt, fiscal deficit, fiscal policy, public finance management, general government, fiscal rules
    JEL: E62 H62 H63 H81
    Date: 2016
  15. By: Jo Thori Lind (University of Oslo); Daniel Chen (Toulouse School of Economics)
    Abstract: Religious groups with greater within-group charitable giving are more against the welfare state and more socially conservative. We propose and test a model where religious provision of social insurance explains why fiscal and social conservatism align and where church-state separation is key. We present new evidence that the alignment disappears with a state church and it reverses for members of a state church. The model further suggests a novel explanation for religious movements and why church-state separation arose in the U.S. but not in many European countries. Elites increase church-state separation to create a constituency for lower taxes, if religious voters exceed non-religious voters. Otherwise, elites prefer less church-state separation in order to curb the secular left. Multiple steady states arise where some countries sustain high church-state separation, high religiosity, and low welfare state, and vice versa. We document a causal link between church-state separation and fiscal and social conservatism using a time-series of U.S. Supreme Court decisions and instrumental variables estimates using random variation in U.S. Circuit Court decisions on church-state separation. The causal link is corroborated through differences-in-differences-in-differences analyses at the individual-level using a panel of Scandinavian voters followed before and after Sweden’s separation of church and state.
    Date: 2016
  16. By: Engler, Philipp; Tervala, Juha
    Abstract: Several studies have analyzed the trade and output effects of the Transatlantic Trade and Investment Partnership (TTIP) between the United States and the European Union, but our paper is the first attempt to study its welfare effects. We measure the welfare effect of TTIP as the percentage of initial consumption that households would be willing to pay for TTIP in order to remain as well off with TTIP as without it. The discounted present value of the welfare gain of TTIP, which leads to the elimination of tariffs and cuts in non-tariff measures by 25%, is in the range of 1% to 4% of initial consumption, depending on the parameterization. The welfare gain increases in the elasticity of substitution between domestic and foreign goods. The bulk of the welfare gain is caused by cuts in non-tariff measures.
    Keywords: tariffs,TTIP,trade agreement,trade liberalization
    JEL: F13 F41 E60
    Date: 2016
  17. By: Hommes, C.H. (University of Amsterdam); Massaro, D. (University of Amsterdam); Salle, I. (University of Amsterdam)
    Abstract: The global economic crisis of 2007-8 pushed many advanced economies into a liquidity trap, a macroeconomic scenario characterised by nominal rates at the zero lower bound (ZLB), low inflation and output below trend. We design an experiment to generate empirical evidence on the effectiveness of policies aimed at managing expectations against liquidity traps in a controlled laboratory environment where expectations are elicited directly from human subjects. Our results suggest that monetary policy alone is not sufficient to insulate the economy from the risk of falling into a liquidity trap, even if it preventively cuts the interest rate when inflation threatens to fall below a certain threshold. However, such policy augmented with a fiscal switching rule succeeds in avoiding and escaping liquidity trap episodes. We also measure larger-than-unity fiscal multipliers when monetary policy is constrained by the ZLB. Experimental results in different treatments are well explained by adaptive learning.
    Date: 2015
  18. By: Lucas de Lima (Fundacao Getulio Vargas); Carlos da Costa (Fundação Getulio Vargas)
    Abstract: Can we still rely on the taxation and revelation principles to study optimal taxation if households do not behave as single agents as precribed by the unitary model? To address this question we take a collective view of households, for which choices are outcomes of Nash bargains. The mechanism plays the dual role of inducing the allocations given that spouses make joint decisions and determining through threat points the objective functions optimized by spouses. We show that the revelation principle applies, provided that one uses the appropriate defintion of a type. The same is not true for the taxation principle, which typically fails in this environment. Our findings should prove useful to other group decison problems such as group borrowing and cartel behavior for firms with economies of scope.
    Date: 2016
  19. By: Weber, Andrea
    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: early retirement age; pension reform; regression kink design
    JEL: H55 J22 J26
    Date: 2016–09
  20. By: Eileen Appelbaum; Ruth Mikman
    Abstract: In June 2013, New York City became the seventh — and the largest — U.S. jurisdiction to provide workers with paid sick days, with the passage of the Earned Sick Time Act, which took effect in April 2014. Under this law, covered workers employed in New York City private-sector companies and non-profit organizations with five or more employees accrue job-protected paid sick leave at a rate of one hour for every 30 hours worked. Employees of companies with one to four workers are entitled to unpaid sick leave. The law covers about 3.9 million workers employed in the City, 1.4 million of whom did not have access to paid sick days prior to its passage. When it was first proposed, critics of the paid sick time law argued that it would lead to a loss of jobs in the City and impose a major cost burden on employers, especially small businesses. They also predicted that such a law would invite widespread abuse by employees. However, as this report shows, these fears have proven unfounded. By their own account, the vast majority of employers were able to adjust quite easily to the new law, and for most the cost impact was minimal to nonexistent. Indeed, a year and a half after the law took effect, 86 percent of the employers we surveyed expressed support for the paid sick days law.
    JEL: I I1 H J J8 J83 J88 J3 J33 J38
    Date: 2016–09
  21. By: Kurt Mitman (Stockholm University); Fabrizio Perri (Federal Reserve Bank of Minneapolis); Dirk Krueger (University of Pennsylvania)
    Abstract: How big are the welfare losses from severe economic downturns, such as the Great Recession the U.S. experienced in recent years? How are those losses dis- tributed across the population? In this paper we answer these questions using a canonical business-cycle model featuring household income and wealth hetero- geneity that matches micro data from the Panel Study of Income Dynamics (PSID). We document how these losses are distributed across households and how they are affected by social insurance policies. We find the welfare cost of losing one’s job in a Great Recession ranges from 2% of lifetime consumption for the wealthiest households to 5% for low wealth households. The cost increases to approximately 8% for low wealth households if unemployment insurance benefits are cut from 50% to 10%. The fact that welfare losses fall with wealth, and that in our model (as in the data) a large fraction of households has very low wealth, implies that the impact of a severe recession, once aggregated across all households, is very significant (2.2% of lifetime consumption).
    Date: 2016
  22. By: Thu Trang Vuong; Ha Nguyen; Quan-Hoang Vuong
    Abstract: In this research, we use a survey dataset from 900 Vietnamese patients, of which 605 have health insurance, to establish empirical relations between medical expenditures, actual insurance coverage rate, residency status, socioeconomic status of patients and their perceived dis/satisfaction toward the health insurance services/values. The results show that actual insurance coverage and medical expenditures contribute to higher probabilities of satisfaction, but with coverage rate having much higher influence. In addition, threshold insurance coverage and expenditures are estimated, showing that perceptions are immensely heterogeneous regarding values of benefits, following which the poor and non-resident patients being those most efficient for the healthcare system to target and demonstrate positive policy changes. This group's threshold coverage is only 63.4%, a little above the current mean 58%. Finally, as the universal insurance and full coverage is impossible, Vietnamese health insurance policy should switch to support the most vulnerable, with more flexible health insurance and financing options as the current system has proved too rigid to be of value to the poor.
    Keywords: health insurance; threshold; medical expenditures; healthcare policy; Vietnam
    JEL: I18 I10
    Date: 2016–09–01

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