nep-pbe New Economics Papers
on Public Economics
Issue of 2016‒11‒20
nineteen papers chosen by
Thomas Andrén

  1. Subjective Well-Being, Peer Comparisons and Optimal Income Taxation By David Ulph; Sean Slack
  2. Political competition and tax revenues in developing countries By Urbain T. Yogo1; Martine M; Ngo Njib
  3. More on the Optimal Taxation of Capital By Pedro Teles; Juan Nicolini
  4. Stimulative Effects of Temporary Corporate Tax Cuts By William GBOHOUI; Rui Castro
  5. Is the output growth rate in NIPA a welfare measure? By Licandro, Omar
  6. The Stimulative Effect of an Unconditional Block Grant on the Decentralized Provision of Care By Mark Kattenberg; Wouter Vermeulen
  7. Heterogeneity and Persistence in Returns to Wealth By Andreas Fagereng; Luigi Guiso; Davide Malacrino; Luigi Pistaferri
  8. A Quantitative Theory of Time-Consistent Unemployment Insurance By Pei, Yun; Xie, Zoe
  9. Global inequality: How large is the effect of top incomes? By Vanesa Jorda; Miguel Niño-Zarazúa
  10. Dynamic Tax Evasion with Habit Formation By Michele Bernasconi; Rosella Levaggi; Francesco Menoncin
  11. Elderly Care, Child Care, and Labor Supply in an Aging Japan By Ryuta Ray Kato
  12. Does postponing minimum retirement age improve healthy behaviours before retirement? Evidence from middle-aged Italian workers By Bertoni, Marco; Brunello, Giorgio; Mazzarella, Gianluca
  13. What Piketty said in Capital in the Twenty-first Century and how economists reacted By Riccardo De Bonis
  14. A Sales Tax Is Better at Promoting Healthy Diets than the Fat Tax and the Thin Subsidy By Kalamov, Zarko Y.
  15. Posner’s Wealth Maximization for Welfare Maximization: Separating Efficiency and Equality Considerations By Yew-Kwang Ng
  16. Optimal taxation with intermittent generation By Fadoua CHIBA
  17. The Bomb-Crater Effect of Tax Audits: Beyond Misperception of Chance By Luigi Mittone; Fabrizio Panebianco; Alessandro Santoro
  18. The political economy of immigration and population ageing By Dotti, Valerio
  19. From unemployment to self-employment: the role of entrepreneurship training By Marios Michaelides; Scott Davis

  1. By: David Ulph (University of St Andrews); Sean Slack (University of St. Andrews)
    Abstract: Empirical evidence suggests that an important determinant of subjective well-being is how an individual’s consumption compares with that of their immediate peers. We introduce peer comparisons into the standard optimal tax framework and demonstrate that the optimal linear tax expression is adjusted in three key ways, the latter two of which are novel to this paper and act to lower the tax rate. First, the dependence of well-being on peer income introduces an externality that distorts labour supply above that which individuals would choose were they to recognise the interplay between their own choices and the Nash equilibrium level of peer consumption. The optimal tax rate is adjusted upwards to (partially) correct this distortion. Second, if individual labour supply is a function of peer consumption, there are ‘Keeping up with the Joneses’ multiplier effects that raise the Nash compensated labour supply elasticity above the individual labour supply elasticity. This implies a lower tax rate on efficiency grounds. Third, Nash indirect well-being is decreasing in the wage rate for workers with wages close to the reservation wage. To the extent that this lowers the covariance between gross earnings and the net social marginal value of income, this will act to lower the optimal tax rate.
    Keywords: Optimal Taxation; Realtive consumption; Subjective Well-Being
    JEL: D63 H21 I31
    Date: 2016–08–15
  2. By: Urbain T. Yogo1; Martine M; Ngo Njib
    Abstract: Building on the literature of the political economy of taxation, this article explores the relationship between political competition and tax revenues using a sample of 89 developing countries from 1988 to 2010. Owing to the inertia of tax variables, we estimate a dynamic panel data model using the Blundell and Bond two-step System-GMM. The analysis led to the following results: political competition positively and significantly affects total tax revenues; however, this general pattern differs slightly across the type of taxes; and the net effect of political competition on tax revenues is negative for countries which have adopted fiscal rules.
    Keywords: level of tax revenues, political competition, volatility of tax revenues pages
    Date: 2016
  3. By: Pedro Teles (Banco de Portugal, Universidade Catolica); Juan Nicolini (Federal Reserve Bank of Minneapolis)
    Abstract: Should capital income taxes be zero in the long run, as argued by Chamley (1986) and Judd (1985)? Or should instead capital be heavily taxed as suggested by Straub and Werning (2015)? We revisit the Ramsey literature on the optimal taxation of capital and make again the case for a low, possibly zero, tax on capital income.
    Date: 2016
  4. By: William GBOHOUI; Rui Castro (Western University)
    Abstract: Policymakers often rely on temporary corporate tax cuts in order to provide incentives for business investment in recession times. A common motivation is that such policies help relax financing frictions, which might bind more during recessions. Our aim is to assess whether this mechanism is effective at raising aggregate investment and output. We consider an industry equilibrium model where some firms are financially constrained, and therefore have high marginal propensities to invest. By increasing current cash flows, corporate tax cuts are effective at stimulating investment. We quantify by how much aggregate investment and output increase, and describe the effects in the cross-section of firms. We find that, on impact, a temporary reduction in corporate taxation increases aggregate investment by 26 cents per dollar of tax stimulus, and aggregate output by 3.5 cents. The cumulative effect multipliers yield increases of investment and output of 4.6 and 7.2 cents, respectively. A major factor preventing larger effects is that this policy tends to significantly crowd out investment among the larger, unconstrained firms.
    Date: 2016
  5. By: Licandro, Omar
    Abstract: National Income and Product Accounts (NIPA) measure real output growth by means of a Fisher ideal chain index. Bridging modern macroeconomics and the economic theory of index numbers, this paper shows that output growth as measured by NIPA is welfare based. In a dynamic general equilibrium model with general recursive preferences and technology, welfare depends on present and future consumption. Indeed, the associated Bellman equation provides a representation of preferences in the domain of current consumption and current investment. Applying standard index number theory to this representation of preferences shows that the Fisher-Shell true quantity index is equal to the Divisia index, in turn well approximated by the Fisher ideal index used in NIPA.
    Keywords: Embodied technical change; Fisher-Shell index; Growth measurement; NIPA; Quantity indexes
    JEL: C43 D91 O41 O47
    Date: 2016–11
  6. By: Mark Kattenberg; Wouter Vermeulen
    Abstract: Understanding the impact of central government grants on decentralized health care provision is of crucial importance for the design of grant systems, yet empirical evidence on the prevalence of flypaper effects in this domain is rare. We study the decentralization of home care in the Netherlands and exploit the gradual introduction of formula-based equalization to identify the effect of exogenous changes in an unconditional block grant on local expenditure and utilization. Although spending the money on other items is explicitly allowed, a one euro increase in central government grants raises local expenditure by twenty to fifty cents. Adjustments occur through the number of hours as well as through substitution between basic and more advanced types of assistance. These findings suggest that conditioning of grants is not required for the central government to retain a moderate degree of control over the decentralized provision of care.
    Keywords: intergovernmental transfers, flypaper effect, decentralization of health care
    JEL: H42 H51 H71 H75
    Date: 2016–11
  7. By: Andreas Fagereng (Statistics Norway); Luigi Guiso (EIEF and CEPR); Davide Malacrino (Stanford University); Luigi Pistaferri (Stanford University and NBER)
    Abstract: We provide a systematic analysis of the properties of individual returns to wealth using twenty years of population data from Norway’s administrative tax records. We document a number of novel results. First, in a given cross-section, individuals earn markedly different returns on their assets, with a difference of 500 basis points between the 10th and the 90th percentile. Second, heterogeneity in returns does not arise merely from differences in the allocation of wealth between safe and risky assets: returns are heterogeneous even within asset classes. Third, returns are positively correlated with wealth. Fourth, returns have an individual permanent component that accounts for 60% of the explained variation. Fifth, for wealth below the 95th percentile, the individual permanent component accounts for the bulk of the correlation between returns and wealth; the correlation at the top reflects both compensation for risk and the correlation of wealth with the individual permanent component. Finally, the permanent component of the return to wealth is also (mildly) correlated across generations. We discuss the implications of these findings for several strands of the wealth inequality debate.
    Date: 2016
  8. By: Pei, Yun (State University of New York at Buffalo); Xie, Zoe (Federal Reserve Bank of Atlanta)
    Abstract: During recessions, the U.S. government substantially increases the duration of unemployment insurance (UI) benefits through multiple extensions. This paper seeks to understand the incentives driving these increases. Because of the trade-off between insurance and job search incentives, the classic time-inconsistency problem arises. This paper endogenizes a time-consistent UI policy in a stochastic equilibrium search model, where a government without commitment to future policies chooses the UI benefit level and expected duration each period. A longer benefit duration increases unemployed workers’ consumption but reduces job search, leading to higher future unemployment. Quantitatively, the model rationalizes most of the variations in benefit duration during the Great Recession. We use the framework to evaluate the effects of the 2009–13 benefit extensions on unemployment and welfare.
    Keywords: time-consistent policy; unemployment insurance; labor market; business cycle
    JEL: E61 H21 J64 J65
    Date: 2016–11–01
  9. By: Vanesa Jorda; Miguel Niño-Zarazúa
    Abstract: In this paper, we estimate the recent evolution of global interpersonal inequality and examine the effect of omitted top incomes on the level and direction of global inequality. We propose a methodology to estimate the truncation point of household surveys by combining information on income shares from household surveys and top income shares from tax data. The methodology relies on a flexible parametric functional form that models the income distribution for each country-year point under different assumptions on the omitted information at the right tail of the distribution. Goodness-of-fit results show a robust performance of our model, supporting the reliability of our estimates. Overall, we find that the undersampling of the richest individuals in household surveys generate a downward bias in global inequality estimates that ranges between 15 per cent and 42 per cent, depending on the period of analysis, and the assumed level of truncation of the income distribution.
    Keywords: inequality, top incomes, income distribution, truncated Lorenz curves
    Date: 2016
  10. By: Michele Bernasconi; Rosella Levaggi; Francesco Menoncin
    Abstract: Although tax evasion and auditing are dynamic processes, they have been approached in a dynamic framework only recently. We argue that the decision to avoid taxes is dynamically embedded with consumption decisions, which in turn are driven by consumption habits. The model is cast in a dynamic context with an infinite horizon. Our paper makes several contributions to the existing literature on tax evasion: 1) habit formation has a dampening effect on tax evasion; 2) as the representative consumer grows older, the gap between habit and consumption decreases and his tax evasion decreases; 3) the effect of an increase in tax evasion depends on the ration of habit to capital, i.e. the presence of the Yitzhaki (1974) paradox depends on such a ratio; 4) we show that in the long run the ratio increases while the relationship between evasion and the tax rate changes from being positive to being negative; 5) the model has policy implications: other things being equal, it is better to induce people to reduce their level of tax evasion with controls rather than fines.
    Keywords: dynamic tax evasion, habit
    JEL: H26 H30
    Date: 2016
  11. By: Ryuta Ray Kato (International University of Japan)
    Abstract: This paper numerically examines the impact of the financial and time cost of child care as well as elderly care on economic growth and welfare in an aging Japan within a dynamic general equilibrium framework of multi-period overlapping generations with endogenized labor supply. Simulation results indicate that the replacement rate of the public pension scheme becomes below 50 percent from year 2039, even if the currently accumulated public pension funds are used up for paying pension benefits by year 2115. Financial burdens for the first group (age 65 and over) and for the second group (age 40 - 64) in the public long-term care insurance in year 2060 become more than double and more than five times as much as the level of year 2010 in an aging Japan, respectively. While increased child benefits stimulate savings and thus they improve welfare, the impact of elimination of the time cost of child care and elderly care is quite mixed, depending on the gender and job contract types of workers within the household. When the time cost of elderly care spent by all workers irrespective of gender and job contract types is eliminated, many generations enjoy welfare gain, but when the time cost of child care by all workers is eliminated, then almost all generations, except for relatively elder generations, reversely suffer from welfare loss. When a starting age to contribute to the long-term care insurance becomes earlier from the current age of 40 to age 35, welfare of all generations improves.
    Keywords: Child Care, Child Benefits, Elderly Care, Long-Term Care Insurance, Public Pension, Female Labor Supply, Aging, Economic Growth, Simulation, CGE Model
    JEL: C68 H51 E62 H55 J16
    Date: 2016–11
  12. By: Bertoni, Marco (university of padova); Brunello, Giorgio (university of padova); Mazzarella, Gianluca (university of padova)
    Abstract: By increasing the residual working horizon of employed individuals, pension reforms that raise minimum retirement age are likely to affect the returns to investments in healthpromoting behaviours before retirement, with consequences for individual health. Using the exogenous variation in minimum retirement age induced by a sequence of Italian pension reforms during the 1990s and 2000s, we show that Italian males aged 40 to 49 reacted to the longer time to retirement by raising regular exercise and by reducing smoking and regular alcohol consumption. Dietary habits were also affected, with positive consequences on obesity and self-reported satisfaction with health.
    Keywords: retirement, working horizon, healthy behaviours, pension reforms
    JEL: H55 I12 J26
    Date: 2016
  13. By: Riccardo De Bonis (Bank of Italy, Directorate General for Economics, Statistics and Research)
    Abstract: This work rehearses the main themes of Piketty.s book and summarizes the debate it triggered. The paper dwells on the rise in the ratio of household wealth to GDP in the rich countries since the 1980s and the role played by the build-up of saving and variations in house and financial asset prices; on the various justifications put forward for the increasing income and wealth inequality that has accompanied the rise in the wealth/income ratio, especially in the US and Britain; on the relationship between the rate of return on capital and the economic growth rate; on the ties between rising income inequality and the financial crisis of 2007-08; on the feasibility of Piketty.s proposals for higher taxation of top incomes and a progressive global tax on net household wealth; and on the progress that has been made in the US and Europe in exchanging information on citizens. income and foreign assets.
    Keywords: ratio household wealth/GDP; distribution of income and wealth; taxation; welfare State
    JEL: C80 D14 D31 D91 E62 H26
    Date: 2016–11
  14. By: Kalamov, Zarko Y.
    Abstract: Rising prevalence of obesity among adults and children is a major policy issue in many countries. Two widely discussed instruments to address obesity are a tax on unhealthy foods (fat tax) and a subsidy on healthy foods (thin subsidy). We compare these two policies to a sales tax on all food products, taking into account the different opportunity costs in terms of time for healthy and unhealthy meals. We show that the policy which reduces obesity under the most general conditions is the sales tax without the fat tax and the thin subsidy. Moreover, this policy is the only one which unambiguously stimulates healthy consumption.
    Keywords: fat tax,thin subsidy,sales tax,obesity
    JEL: D11 I12 I18 H31 H51
    Date: 2016
  15. By: Yew-Kwang Ng (Division of Economics, Nanyang Technological University, 14 Nanyang Drive, Singapore 637332.)
    Abstract: Posner’s proposal for wealth maximization in judiciary decisions has not been widely accepted, but the influence of the economic analysis of law it propelled has increased tremendously. In the face of criticism, Posner himself has retreated into a pragmatism with wealth maximization not the only principle used. This leads to a lack of both moral justification and consistency. This paper argues that, if not used as the ultimate objective, but as an instrument for welfare maximization, wealth maximization is much more acceptable, if it is also supplemented by appropriate redistribution in the general equality policy. This is especially so as efficiency supremacy in specific issues including the judiciary (close to wealth maximization) would then make every income group better off. This is so despite the presence of disincentive effects in general redistribution. The separation of the judiciary and the legislative may then also be justified.
    Keywords: Wealth maximization; efficiency; welfare; utilitarianism; judiciary.
    JEL: K0 H0
    Date: 2016–11
  16. By: Fadoua CHIBA
    Abstract: The paper analyses the development of the intermittent technologies to produce electricity, facing the competition of the incumbent sector, using conventional technologies. In our analysis of the interaction between these two sectors, we consider the environmental damage caused by the electricity production from fossil fuel. This allowed us to represent the social cost of electricity production. We show that it is socially favorable to keep some conventional capacities in reserve. We then investigate the efficiency of environmental taxes in the internalization of the environmental damage. The paper shows that there is not a rate tax capable of implementing the first-best equilibrium. Effectively, this requires a variable tax rate, which seems unrealistic in practice. We also determine the constrained second-best equilibrium and the tax rate that decentralizes it. Interestingly, we find that the interaction between a retail price and tax, both constant and the intermittency of renewable energy, yield to two phenomena that, on average, promote the investment in intermittent capacities.
    Keywords: Electricity, Intermittency, Tax, Renewable Energy, Pollution.
    JEL: D24 D61 Q41 Q42 Q48
    Date: 2016
  17. By: Luigi Mittone; Fabrizio Panebianco; Alessandro Santoro
    Abstract: In this paper, we run a laboratory experiment where the information set is relatively rich, and, in particular, it includes audits on other taxpayers. At the same time, the implementation of the Bayesian updating process for the subjective probability to be audited is fairly simple. By doing so, we are able to elicit a range of consistent but heterogeneous probability beliefs and to distinguish between Bayesian and non-Bayesian subjects. We obtain two major results concerning Bayesian subjects. First, they exhibit strong and robust short-run BoCE. Second, they are seemingly not affected by audits on other taxpayers in their compliance decision. These results are robust to different definitions of Bayesianity and to different specifications. They confl ict with the evidence that Bayesian agents do perceive correctly the chance to be audited. In turn, this suggests that existing explanations of the BoCE are not entirely satisfactory and that alternative theories, possibly based on the Duality approach, are needed. KEYWORDS: Bomb-crater effect, Bayesian Updating, Behavioral Duality. JEL CODES: C91,D81,H26
    Date: 2016
  18. By: Dotti, Valerio
    Abstract: I investigate the effects of population ageing on immigration policies. Voters' attitude towards immigrants depends on how the net gains from immigration are divided up in the society by the fiscal policy. In the theoretical literature this aspect is treated as exogenous to the political process because of technical constraints. This generates inconsistent predictions about the policy outcome. I adopt a new equilibrium concept for voting models to analyse the endogenous relationship between immigration and fiscal policies and solve this apparent inconsistency. I show that the elderly and the poor have a common interest in limiting immigration and in increasing public spending. This exacerbates the effects of population ageing on public finances and results in a high tax burden on working age individuals and further worsens the age profile of the population. Moreover, I show that if the share of elderly population is suffciently large, then a society is unambiguously harmed by the tightening in the immigration policy caused by the demographic change. The implications of the model are consistent with the patterns observed in UK attitudinal data and in line with the findings of the empirical literature about migration.
    Keywords: Immigration , Ageing , Policy , Voting
    JEL: D72 C71 J61 H55
    Date: 2016
  19. By: Marios Michaelides; Scott Davis
    Abstract: This paper uses data from the Growing America Through Entrepreneurship (GATE) program to assess the effectiveness of providing self-employment training to unemployed workers during a period of moderate unemployment and during the Great Recession. Results show that self-employment training can significantly improve the short-term self-employment and overall employment rates of unemployed workers, with effects on self-employment persisting for long periods after program entry. Although it appears unlikely that self-employment training may improve self-employment earnings, there is evidence that some participants may achieve higher salary and total earnings when the labor market is relatively strong. Based on these findings, we conclude that self-employment training can potentially be an effective short-term reemployment strategy, regardless of the overall economic conditions, but it is unlikely to help unemployed workers improve their long-term employment and earnings outcomes.
    Keywords: Great Recession; Self-employment; Small business; Training; Unemployment; Program evaluation.
    JEL: J6 H4
    Date: 2016–11

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