nep-pbe New Economics Papers
on Public Economics
Issue of 2016‒09‒18
eighteen papers chosen by
Thomas Andrén

  1. The Earned Income Tax Credit: Targeting the Poor but Crowding Out Wealth By Froemel, M.; Gottlieb, C.
  2. Interconnection of Fiscal Policies on Sustainability of Public Debt By Atsumasa Kondo
  3. Tax Cuts, Tax Expenditures, and Comprehensive Tax Reform: Federal Income Tax Reform in the United States, 1961-1986 By Seiichiro Mozumi
  4. When Do We Start? Pension reform in aging Japan By KITAO Sagiri
  5. Multinational firms and tax havens By Gumpert, Anna; Hines Jr, James R; Schnitzer, Monika
  6. Healthcare Spending: The Role of Healthcare Institutions from an International Perspective By Titeca, Hannes
  7. What Determines Top Income Shares? The Role of the Interactions between Financial Integration and Tax Policy By Thibault Darcillon
  8. Welfare Implications of the Indian Employment Guarantee Programme with a Wage Payment Delay By Parantap Basu; Kunal Sen
  9. Wealth Inequality in Sweden: What Can We Learn from Capitalized Income Tax Data? By Lundberg, Jacob; Waldenström, Daniel
  10. On Income Inequality and Population Size By Sitthiyot, Thitithep; Holasut, Kanyarat
  11. Do expectations matter? Reassessing the effect of government spending on key macroeconomic variables in Germany By Gründler, Klaus; Sauerhammer, Sarah
  12. Financial Risk Protection from Social Health Insurance By Kayleigh Barnes; Arnab Mukherji; Patrick Mullen; Neeraj Sood
  13. Tax evasion, firm dynamics and growth By Emmanuele Bobbio
  14. Consumption Taxes and Divisibility of Labor under Incomplete Markets By Shuhei Takahashi; Tomoyuki Nakajima
  15. Welfare Analysis of the Allocation of Time During the Great Recession By Anil Alpman; François Gardes
  16. The Welfare Cost of Retirement Uncertainty By Frank N. Caliendo; Maria Casanova; Aspen Gorry; Sita Slavov
  17. Social Experiments in the Labor Market By Jesse Rothstein; Till von Wachter
  18. A unified approach to estimating demand and welfare By Stephen J. Redding; David E. Weinstein

  1. By: Froemel, M.; Gottlieb, C.
    Abstract: In this paper, we quantify the effects of the Earned Income Tax Credit (EITC) from a macroeconomic perspective. We use an incomplete markets model to analyze jointly the labor supply and saving responses to changes in tax credit generosity and their aggregate and distributional implications. In line with existing literature, our results show that the EITC is an effective policy instrument to raise labor force participation and provide insurance to working poor households. However, we show that the EITC also disincentivizes private savings for a large part of the population, except for the poorest transfer recipients. Furthermore, since unskilled labor supply reacts more strongly than skilled workers’ labor supply, wages for low skilled workers fall relative to high skilled workers. Whilst reducing post-tax earnings inequality, the EITC contributes to both a higher skill premium and wealth inequality. Finally, our welfare analysis suggests that EITC expansions are welfare improving for the majority of the population, both ex ante and when accounting for transitional dynamics.
    Date: 2016–09–05
  2. By: Atsumasa Kondo (Faculty of Economics, Shiga University)
    Abstract: This paper investigates the interconnection between certain fiscal policies in achieving a sustainable level of public debt. The fiscal policies that are investigated relate to the consumption tax rate, the income tax rate, and to public spending. The paper focuses on the critical level of public debt-to-GDP ratio, for which if the ratio exceeds this level at time 0, then it diverges to + ‡ as time passes. The paper theoretically examines how the critical level depends on the fiscal policies, and reveals some merits of consumption taxation. As the consumption tax rate increases, so income taxation and cutting public spending become more effective in sustaining public debt.
    Keywords: sustainability of public debt, fiscal policies, consumption tax, income tax, public spending, balanced growth path
    JEL: E62 H6
    Date: 2016–09
  3. By: Seiichiro Mozumi (Faculty of Economics, Keio University)
    Abstract: In the United States since the 1930s, the Treasury Department and tax experts has attempted to accomplish a "one package" comprehensive tax reform program to create a simpler, fairer, and more equitable federal income tax system with sufficient ability to raise revenue. However, their attempts to accomplish the kind of tax reform have always failed except in 1986. This paper picks up three episodes of federal tax reform to demonstrate the Treasury's and tax experts' significant effort to accomplish a "one package" comprehensive tax reform, and the process in and for which they failed and succeeded: Federal tax reform of 1964, 1978, and 1986. In the meantime, through examining the three episodes, this paper explores how Congress had seriously considered the kind of comprehensive tax reform that the Treasury and tax experts proposed after World War II.
    Keywords: "one package" comprehensive tax reform, Stanley S. Surrey
    JEL: H2 N42
    Date: 2016–08–24
  4. By: KITAO Sagiri
    Abstract: Japan is going through rapid and significant demographic aging. Fertility rates have been below replacement level for four decades, and life expectancy has increased by 30 years since the 1950s. The pension reform of 2004 is expected to reduce the replacement rate, but there is much uncertainty as to when and whether the adjustment will be complete. The normal retirement age of 65 will be the lowest among major developed countries. This paper simulates pension reform to reduce the replacement rate by 20% and raise the retirement age by three years gradually over a 30-year period. We consider three scenarios that differ in timing to initiate reform and let the consolidation start in 2020, 2030, and 2040, respectively. A delay would suppress economic activities, lowering output by up to 4% and raising the tax burden by more than eight percentage points of total consumption. Delaying reform also implies a major tradeoff across generations and deteriorates the welfare of future generations by up to 3% in consumption equivalence.
    Date: 2016–07
  5. By: Gumpert, Anna; Hines Jr, James R; Schnitzer, Monika
    Abstract: Multinational firms with operations in high-tax countries can benefit the most from reallocating taxable income to tax havens, though this is sufficiently diffcult and costly that only 20.4 percent of German multinational firms have any tax haven affiliates. Among German manufacturing firms, a one percentage point higher foreign tax rate is associated with a 2.3 percent greater likelihood of owning a tax haven affiliate. This is consistent with tax avoidance incentives, and contrasts with earlier evidence for U.S. firms. The relationship is less strong for firms in service industries, possibly reflecting the difficulty of reallocating taxable service income.
    Keywords: multinational firms; tax havens
    JEL: F23 H87
    Date: 2016–09
  6. By: Titeca, Hannes
    Abstract: Healthcare systems differ greatly across the world, however, it appears that the extent of public insurance (publicly/government funded healthcare) is the only institutional characteristic that plays a significant role in accounting for the large disparities in total healthcare spending. Other factors, such as whether healthcare services are provided by the private or public sector, play much less of a role, highlighting the important distinction between how services are provided and how those services are funded. A regression analysis is conducted utilising an existing categorisation of the predominately high-income countries of the OECD in 2009. It is found that more public insurance and less private insurance is associated with significantly lower spending after controlling for differences in income through GDP and healthcare quality/outcomes through life expectancy. This result is robust to the inclusion of additional controls for lifestyle factors and the proportion of the population aged 65 and over, as well as the inclusion or exclusion of the US that could otherwise be seen as some kind of outlier. A typical country relying largely on private provision and insurance, such as the Netherlands, Germany or the US, could reduce total healthcare spending by around a third by moving to a system with extensive public insurance whilst retaining extensive private provision of services, a situation typical of some countries such as Austria, Greece and Japan.
    Keywords: healthcare systems; healthcare spending; healthcare expenditure; healthcare institutions; international comparison; regression analysis; private; public; health insurance; institutional differences; health care spending; health care institutions; health care expenditure
    JEL: D02 H51 I1 I11 I13 I18
    Date: 2016
  7. By: Thibault Darcillon (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This article aims at analyzing the role of the interactions between financial deregulation policies and changes in top tax marginal rates to explain the evolution in top income shares since the 1980s in most OECD countries. I argue that higher financial integration should have an increasing-effect on top income shares by resulting in lower marginal top tax rates. First, international financial integration has gradually contributed to increased tax competition by raising capital mobility. Second, financial integration also reflects higher bargaining power for top earners, pushing for a reduction in marginal top tax rates. Based on instrumental variables and simultaneous equations system regressions, I find strong evidence of my hypothesis: first, financial integration is negatively correlated with higher top marginal tax rates; second, this result seems to explain the negative relationship between marginal top tax rates and top income shares.
    Abstract: Cet article cherche à analyser le rôle des interactions qui peuvent exister entre les politiques de dérégulation financière et les récentes modifications de politique fiscale pour expliquer l'évolution de la part du revenu national détenue par les hauts revenus depuis les années 1980 dans la plupart des pays de l'OCDE. Nous avançons l'argument selon lequel l'intégration financière aurait contribué à accroitre les inégalités dans le haut de la distribution des revenus en réduisant les taux de taxation auxquels sont les hauts revenus. Premièrement, l'intégration financière au niveau international a contribué progressivement à renforcer la concurrence fiscale en accentuant la mobilité du capital. Deuxièmement, l'intégration financière s'est également traduite par renforcer le pouvoir de négociation pour les hauts revenus, ceux-ci prônant un faible niveau de taxation sur leurs propres revenus. A l'aide d'un modèle à variables instrumentales et d'un modèle à équations simultanées, notre hypothèse principale semble vérifiée : d'une part, une plus forte intégration financière est corrélée à de plus faibles taux de taxation sur les hauts revenus ; d'autre part, ce résultat semble expliquer la relation négative entre le niveau des taxations des hauts revenus et la part du revenu national détenue par ces derniers.
    Keywords: Financial integration,top income shares,tax policy,Intégration financière,part des hauts revenus,politique fiscale
    Date: 2016–04
  8. By: Parantap Basu (Durham Business School); Kunal Sen (University of Manchester)
    Abstract: We examine the e¢ cacy of a popular anti-poverty programme namely, the National Rural Employment Guarantee Act (NREGA) of the Government of India. We argue that a chronic friction of wage payment delay in this áagship programme could adversely a§ect the welfare of the poor through two channels. First, it causes deferred consumption. Second, it turns labour into a credit good which makes the indebted household work harder to clear o§ his existing debt. The loss of welfare persists even when the worker has an outside employment option. If a programme of Önancial inclusion increases the indebtedness of the poor, a wage payment delay in the NREGA programme could escalate this welfare loss although the o¢ cial indicator of success (i.e. participation) may not reveal this friction.
    Keywords: NREGA, Employment Guarantee, Credit Good, Financial Inclusion.
    Date: 2015–02
  9. By: Lundberg, Jacob (Department of Economics); Waldenström, Daniel (Research Institute of Industrial Economics (IFN))
    Abstract: This paper presents new estimates of wealth inequality in Sweden during 2000–2012, linking wealth register data up to 2007 and individually capitalized wealth based on income and property tax registers for the period thereafter when a repeal of the wealth tax stopped the collection of individual wealth statistics. We find that wealth inequality increased after 2007 and that more unequal bank holdings and apartment ownership appear to be important drivers. We also evaluate the performance of the capitalization method by contrasting its estimates and their dispersion with observed stocks in register data up to 2007. The goodness-of-fit varies tremendously across assets and we conclude that although capitalized wealth estimates may well approximate overall inequality levels and trends, they are highly sensitive to assumptions and the quality of the underlying data sources.
    Keywords: Wealth distribution; Capitalization method; Investment income method; Gini co-efficient; Top wealth shares; Great Recession
    JEL: D31 H20 N32
    Date: 2016–08–31
  10. By: Sitthiyot, Thitithep; Holasut, Kanyarat
    Abstract: The pursuit of having an appropriate level of income inequality should be viewed as one of the biggest challenges facing academic scholars as well as policy makers. Unfortunately, research on this issue is currently lacking. This study is the first to introduce the theoretical concept of targeted level of income inequality for a given size of population. By employing the World Bank’s data on population size and Gini coefficient from sixty-nine countries in 2012, this study finds that the relationship between Gini coefficient and natural logarithm of population size is nonlinear in the form of a second degree polynomial function. The estimated results using regression analysis show that the majority of countries in the sample have Gini coefficients either too high or too low compared to their appropriate values. These findings could be used as a guideline for policy makers before designing and implementing public policies in order to achieve the targeted level of income inequality.
    Keywords: Income Inequality; Gini Coefficient; Population Size
    JEL: D31 D63 J19
    Date: 2016–09–12
  11. By: Gründler, Klaus; Sauerhammer, Sarah
    Abstract: This paper investigates the effects of government spending on key macroeconomic variables in Germany. It contributes to the ongoing debate on how to properly identify exogenous fiscal shocks in the data and on whether or not the government should intervene in the business cycle. Following Ramey (2011b), we include expectations held by consumers and firms into the standard VAR framework based on information from historical issues of the German political magazine Der Spiegel. The results suggest that government spending lowers gross domestic product, as it crowds out private consumption and investment. The findings also underscore the need to account for expectations, as failing to do so leads to significant misinterpretation of the effects of government spending. In fact, when neglecting anticipation effects, our results support the recent findings for Germany by pointing to a rather positive effect of government spending on GDP.
    Keywords: Fiscal Policy,Government Spending,Vector Autoregression Model,Expectations
    JEL: C32 D84 E32 E62 H31 H32
    Date: 2016
  12. By: Kayleigh Barnes; Arnab Mukherji; Patrick Mullen; Neeraj Sood
    Abstract: This paper estimates the impact of social health insurance on financial risk reduction by utilizing data from a natural experiment created by the phased roll out of a social health insurance program for the poor in India. We estimate the impact of insurance on the distribution of out-of-pocket costs, frequency and amount of money borrowed for health reasons, and the likelihood of incurring catastrophic health expenditures. We use a stylized expected utility model to compute the welfare effects associated with changes due to insurance in the distribution of out-of-pocket costs. We adjust the standard model to account for the unique conditions of a developing country by incorporating consumption floors, informal borrowing, and selling of assets. These adjustments allow us to estimate the value of financial risk reduction from both consumption smoothing and asset protection channels. Our results show that social insurance reduces out-of-pocket costs with larger effects in the higher quantiles of the out-of-pocket cost distribution. In addition, we find a reduction in the frequency and amount of money borrowed for health reasons. Finally, we find that the value of financial risk reduction outweighs the total per household cost of the social insurance program by two to five times.
    JEL: H0 H4 H51 I1 I13 I15 I3
    Date: 2016–09
  13. By: Emmanuele Bobbio (Banca d'Italia)
    Abstract: Italy's growth performance has been lacklustre in the last two decades. The economy has a low R&D intensity; firms are smaller and less likely to grow or exit than firms in other advanced countries; the shadow economy is large. I show how these features arise simultaneously in a Schumpeterian growth model with heterogeneous firms where the tax auditing probability increases with firm size. Tax evasion confers a cost advantage over competitors. In equilibrium, small firms invest less in innovation because growing entails a (shadow) cost of fiscal regularization. Unfair competition forces other firms to lower the mark-up they charge for their new products, reducing the incentive to innovate. Market selection is hampered, further lowering the aggregate growth rate along the extensive margin. I calibrate the model on Italian firm-level data for the period 1995-2006 and find that enforcing taxes would have increased the long-run growth rate from 0.9% to 1.1%. The market share of high type firms would have been 6 percentage points higher and average firm size 20% higher. Also, I find that lowering the tax burden can have a significant impact on growth when the shadow economy is large, while the effect is negligible when taxes are enforced.
    Keywords: growth, innovation, selection, firm dynamics, tax evasion, size dependent policies
    JEL: O30 O43 H26
    Date: 2016–09
  14. By: Shuhei Takahashi (Kyoto University); Tomoyuki Nakajima (Kyoto University)
    Abstract: We analyze lump-sum transfers financed through consumption taxes in a heterogeneous-agent model with uninsured idiosyncratic wage risk and endogenous labor supply. The model is calibrated to the U.S. economy. We find that consumption inequality and uncertainty decrease with transfers much more substantially under divisible than indivisible labor. Increasing transfers by raising the consumption tax rate from 5% to 35% decreases the consumption Gini by 0.04 under divisible labor, whereas it has almost no effect on the consumption Gini under indivisible labor. The divisibility of labor also affects the relationship among consumption-tax financed transfers, aggregate saving, and the wealth distribution.
    Date: 2016
  15. By: Anil Alpman (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); François Gardes (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics)
    Abstract: Using a generalization of the time allocation model to estimate the opportunity cost of time, we explore the intratemporal substitutions between goods and time and the variations of individuals' full expenditures and welfares during the Great Recession. Our findings provide empirical evidence about the importance the home production over the business cycles and show that the reallocation of time absorbed approximately a third of the Great Recession's negative welfare impact.
    Abstract: En utilisant une généralisation du modèle de l'allocation du temps pour estimer le coût d'opportunité du temps, nous analysons la substitution entre temps et biens, et les variations du revenu-complet et du bien-être des individus durant la Grande Récession. Nos résultats montrent que la production domestique absorbe un tiers de l'effet négatif sur bien-être de la Grande Récession.
    Keywords: Home Production,Time Allocation,Welfare,Great Recession,Production domestiques,Allocation du temps,Richesse
    Date: 2016–03
  16. By: Frank N. Caliendo; Maria Casanova; Aspen Gorry; Sita Slavov
    Abstract: Uncertainty about the timing of retirement is a major financial risk with implications for decision making and welfare over the life cycle. Our conservative estimates of the standard deviation of the difference between retirement expectations and actual retirement dates range from 4.28 to 6.92 years. This uncertainty implies large fluctuations in total wage income. We find that individuals would give up 2.6%-5.7% of total lifetime consumption to fully insure this risk and 1.9%-4.0% of lifetime consumption simply to know their actual retirement date at age 23. Uncertainty about the date of retirement helps to explain consumption spending near retirement and precautionary saving behavior. While social insurance programs could be designed to hedge this risk, current programs in the U.S. (OASI and SSDI) provide very little timing insurance.
    JEL: C61 E21 H55 J26
    Date: 2016–09
  17. By: Jesse Rothstein; Till von Wachter
    Abstract: Large-scale social experiments were pioneered in labor economics, and are the basis for much of what we know about topics ranging from the effect of job training to incentives for job search to labor supply responses to taxation. Random assignment has provided a powerful solution to selection problems that bedevil non-experimental research. Nevertheless, many important questions about these topics require going beyond random assignment. This applies to questions pertaining to both internal and external validity, and includes effects on endogenously observed outcomes, such as wages and hours; spillover effects; site effects; heterogeneity in treatment effects; multiple and hidden treatments; and the mechanisms producing treatment effects. In this Chapter, we review the value and limitations of randomized social experiments in the labor market, with an emphasis on these design issues and approaches to addressing them. These approaches expand the range of questions that can be answered using experiments by combining experimental variation with econometric or theoretical assumptions. We also discuss efforts to build the means of answering these types of questions into the ex ante design of experiments. Our discussion yields an overview of the expanding toolkit available to experimental researchers.
    JEL: H53 I38 J22 J24 J31 J65
    Date: 2016–09
  18. By: Stephen J. Redding; David E. Weinstein
    Abstract: The measurement of price changes, economic welfare, and demand parameters is currently based on three disjoint approaches: macroeconomic models derived from time-invariant utility functions, microeconomic estimation based on time-varying utility (demand) systems, and actual price and real output data constructed using formulas that differ from either approach. The inconsistencies are so deep that the same assumptions that form the foundation of demand-system estimation can be used to prove that standard price indexes are incorrect, and the assumptions underlying standard exact and superlative price indexes invalidate demand-system estimation. In other words, we show that extant micro and macro welfare estimates are biased and inconsistent with each other as well as the data. We develop a unified approach to demand and price measurement that exactly rationalizes observed micro data on prices and expenditure shares while permitting exact aggregation and meaningful macro comparisons of welfare over time. We show that all standard price indexes are special cases of our approach for particular values of the elasticity of substitution, constant preferences for each good, and a constant set of goods. In contrast to these standard index numbers, our approach allows us to compute changes in the cost of living that take into account both changes in the preferences for individual goods and the entry and exit of goods over time. Using barcode data for the U.S. consumer goods industry, we show that allowing for the entry and exit of products, changing preferences for individual goods, and a value for the elasticity of substitution estimated from the data yields substantially different conclusions for changes in the cost of living from standard index numbers.
    Keywords: elasticity of substitution; price index; consumer valuation bias; new goods; welfare
    JEL: D11 D12 E01 E31
    Date: 2016–08

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