nep-pbe New Economics Papers
on Public Economics
Issue of 2016‒11‒27
seventeen papers chosen by
Thomas Andrén

  1. Optimal fiscal policy in the presence of VAT evasion: the case of Bulgaria By Vasilev, Aleksandar
  2. Macroeconomics with endogenous markups and optimal taxation By Federico Etro
  3. Optimal Taxation with Risky Human Capital By Marek Kapicka; Julian Neira
  4. Taxing Vacant Apartments: Can fiscal policy reduce vacancy? By Mariona Segú; Benjamin Vignolles
  5. Bracket creeps: Bane or boon for the stability of numerical budget rules? By Altemeyer-Bartscher, Martin; Zeddies, Götz
  6. Taxation, infrastructure, and firm performance in developing countries By Lisa Chauvet; Marin Ferry
  7. Taxation and Privacy Protection on Internet Platforms * By Francis Bloch; Gabrielle Demange
  8. Is a Minimum Wage an Appropriate Instrument for Redistribution? By Aart Gerritsen; Bas Jacobs
  9. Fiscal policy, inequality and the poor in the developing world By Nora Lustig
  10. Temptation and the efficient taxation of education and labor By Bethencourt, Carlos; Kunze, Lars
  11. Experimental evidence on tax salience and tax incidence By Morone, Andrea; Nemore, Francesco; Nuzzo, Simone
  12. Taxation, Sorting and Redistribution: Theory and Evidence By Arash Nekoei; Ali Shourideh; Mikhail Golosov
  13. Recurrent explosive behaviour of debt-to-GDP ratio By Bystrov, Victor; Mackewicz, Michał
  14. Can Property Taxes Reduce House Price Volatility? Evidence from U.S. Regions By Tigran Poghosyan
  15. Banks' Equity Stakes and Lending : Evidence from a Tax Reform By Bastian von Beschwitz; Daniel Foos
  16. Taxation, social protection, and governance decentralization By Gil S. Epstein; Ira N. Gang
  17. How Does Pension Eligibility Affect Labor Supply in Couples? By Lalive, Rafael; Parrotta, Pierpaolo

  1. By: Vasilev, Aleksandar
    Abstract: This paper explores the effects of fiscal policy in an economy based on indirect taxes, and in the presence of VAT evasion channel. In addition, the government is taxing all income at the same rate. The focus of the paper to compare and contrast two regimes - the exogenous (observed) vs. optimal (Ramsey) policy case. The results are evaluated in light of consumption vs. income taxation debate, the issue of optimal provision of valuable public services, and the effect of fiscal policy on the size of VAT evasion. To this end, a Real-Business-Cycle model, calibrated to Bulgarian data (1999-2014), is augmented with a government sector. Bulgarian economy was chosen as a case study due to its dependence on consumption taxation as a source of tax revenue, and the prevalence of VAT evasion. The main findings from the computational experiments performed in the paper are: (i) The optimal steady-state income tax rate is zero; (ii) The benevolent Ramsey planner provides the optimal amount of the utility- enhanc- ing public services, which are now three times lower; (iii) The optimal steady-state consumption tax needed to finance the optimal level of government spending is twice lower, as compared to the exogenous policy case.
    Keywords: consumption tax,income tax,VAT evasion,general equilibrium,fiscal policy,Bulgaria
    JEL: D58 H26
    Date: 2016
  2. By: Federico Etro (Ca Foscari University of Venice, Department of Economics)
    Abstract: The neoclassical macroeconomic framework is extended to general preferences over a variety of goods supplied under monopolistic, Bertrand or Cournot competition to derive implications for business cycle, market inefficiencies and optimal corrective taxation. When markups are endogenously countercyclical the impact of shocks on consumption and labor supply is magnified through new intertemporal substitution mechanisms, and the optimal fiscal policy requires a countercyclical labor income subsidy and a capital income tax that is positive along the growth path and converging to zero in the long run. With an endogenous number of goods and strategic interactions, entry affects markups and the optimal fiscal policy requires also a tax on profits. We characterize the equilibrium dynamics and derive explicit tax rules for a variety of intratemporal preference aggregators including the quadratic, directly additive, indirectly additive and homothetic classes.
    Keywords: Monopolistic competition, variable markups, optimal taxation, business cycles
    JEL: E1 E2 E3
    Date: 2016
  3. By: Marek Kapicka; Julian Neira
    Abstract: We study optimal tax policies in a life-cycle economy with risky human capital and permanent ability differences. The optimal policies balance redistribution across agents, insurance against human capital shocks, and incentives to learn and work. In the optimum, i) if utility is separable in labor and learning effort, the inverse labor wedge follows a random walk, ii) if the utility is not separable then the “no distortion at the top” result does not apply, and iii) quantitatively, high-ability agents face very risky consumption while lowability agents are insured. The welfare gains from switching to an optimal tax system are large.
    Keywords: optimal taxation; income taxation; human capital;
    JEL: E6 H2
    Date: 2015–11
  4. By: Mariona Segú (RITM, Université Paris Sud, Paris Saclay); Benjamin Vignolles (Paris School of Economics)
    Abstract: In this paper, we focus on the empirical evaluation of a supply-sided fiscal policy: taxation of vacancy. We use the quasi-experimental setting of the implementation of a tax on vacancy in France in 1999 to identify the causal direct effect of the tax on the vacancy rate. Exploiting an exhaustive fiscal dataset, which contains information on every dwelling in France from 1995 to 2013, we implement a matching Difference-in-Difference approach. The results we obtain suggest that the tax was responsible of a 13% decrease on vacancy between 1997 and 2001. This impact is twice as big for high populated municipalities. Results are robust to the introduction of controls, sample reduction and choice of control group. Results also suggest that most of the vacant apartments moved to primary residences. In terms of policy implications, these results indicate that a municipal tax on vacancy can play a role in shaping the incentives of the owners in the housing market.
    JEL: R31 E62
    Date: 2016
  5. By: Altemeyer-Bartscher, Martin; Zeddies, Götz
    Abstract: As taxpayers typically pay relatively low attention to a small inflation-induced bracket creep of the income tax, policy-makers tend to postpone its correction into the future. However, the fiscal illusion fades away and political pressure for a tax relief arises since after some years, the cumulative increase of the average tax rate exceeds a critical threshold. Using Germany as an example, this paper shows that bracket creeps can provoke revenue cycles in public budgets hindering governments' compliance with the numerical budget rules. An indexation of the tax tariff, which provides an automatic correction of the bracket creep could prevent such fluctuations and thus provides a favorable framework for the debt rule.
    Keywords: progressive income taxes,bracket creep,political budget cycles,debt brake
    JEL: H24 H31 H63
    Date: 2016
  6. By: Lisa Chauvet; Marin Ferry
    Abstract: This paper investigates the relationship between taxation and firm performance in developing countries. Taking firm-level data from the World Bank Enterprise Surveys (WBES) and tax data from the Government Revenue Dataset (ICTD/UNU-WIDER), our results suggest that tax revenue benefits to firm growth in developing countries, especially in low-income countries and lower-middle income countries. These findings are robust to the inclusion of alternative covariates and specifications, and do not appear to be sample dependent. We also provide evidence that the positive effect of taxation on firm growth falls significantly when corruption is too pervasive, and when the origin of tax revenue origin reduces government accountability. Lastly, our paper finds that the positive effect of domestic revenue on firm performance could channel through the financing of public infrastructures vital to firms operating in lower-income countries. Keywords: taxation, firm growth, infrastructure, corruption
  7. By: Francis Bloch (PSE - Paris-Jourdan Sciences Economiques - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - École des Ponts ParisTech (ENPC) - CNRS - Centre National de la Recherche Scientifique); Gabrielle Demange (PSE - Paris-Jourdan Sciences Economiques - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - École des Ponts ParisTech (ENPC) - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper studies data collection by a monopolistic internet platform We show that the optimal strategy of the platform is either to cover the market or to choose the highest data exploitation level, excluding users with high privacy costs from the platform. For likely parameter values, the platform chooses an excessive level of data exploitation from the point of view of users. We study how different tax instruments can be used to reduce the level of data collection and analyze the effect of an opting-out option, letting users access the platform with no data collection. We show that a differentiated tax, taxing access revenues and data revenues at different rates is the most effective instrument and that the introduction of an opting-out option may harm users as it induces the platform to raise the level of data exploitation. JEL classification numbers: H23, L86, L50
    Keywords: Digital services,Privacy protection,Taxation,Opt-out option
    Date: 2016–10–13
  8. By: Aart Gerritsen (Max Planck Institute for Tax Law and Public Finance, Germany); Bas Jacobs (Erasmus University Rotterdam, The Netherlands)
    Abstract: We analyze the redistributional (dis)advantages of a minimum wage over income taxation in competitive labor markets, without imposing assumptions on the (in)efficiency of labor rationing. Compared to a distributionally equivalent tax change, a minimum-wage increase raises involuntary unemployment, but also raises skill formation as some individuals avoid unemployment. A minimum wage is an appropriate instrument for redistribution if and only if the public revenue gains from additional skill formation outweigh both the public revenue losses from additional unemployment and the utility losses of inefficient labor rationing. We show that this critically depends on how labor rationing is distributed among workers. A necessary condition for the desirability of a minimum-wage increase is that the public revenue gains from higher skill formation outweigh the revenue losses from higher unemployment. We write this condition in terms of measurable sufficient statistics. Our empirical analysis suggests that a minimum-wage increase is undesirable in nearly all OECD countries. A reduction in the minimum wage, along with tax adjustments that keep net incomes constant, would yield a Pareto improvement.
    Keywords: minimum wage; optimal redistribution; unemployment; skill formation
    JEL: D61 H21 J21 J24 J38
    Date: 2016–11–17
  9. By: Nora Lustig (Tulane University, U.S.A.)
    Abstract: Using comparable fiscal incidence analysis, this paper examines the impact of fiscal policy on inequality and poverty in twenty-five countries for around 2010. Success in fiscal redistribution is driven primarily by redistributive effort (share of social spending to GDP in each country) and the extent to which transfers/subsidies are targeted to the poor and direct taxes targeted to the rich. While fiscal policy always reduces inequality, this is not the case with poverty. Fiscal policy increases poverty in four countries using US\$1.25/day PPP poverty line, in 8 countries using US\$2.50/day line, and 15 countries using the US\$4/day line (over and above market income poverty). While spending on pre-school and primary school is pro-poor (i.e., the per capita transfer declines with income) in almost all countries, pro-poor secondary school spending is less prevalent, and tertiary education spending tends to be progressive only in relative terms (i.e., equalizing but not pro-poor). Health spending is always equalizing except for Jordan.
    Keywords: fiscal incidence, social spending, inequality, poverty, Developing Countries.
    JEL: H22 H5 D31 I3
    Date: 2016–10
  10. By: Bethencourt, Carlos; Kunze, Lars
    Abstract: This paper studies efficient tax policies in Ramsey’s tradition when consumers face temptation and self control problems in inter-temporal decision making. We embed the class of preferences developed by Gul and Pesendorfer into a simple two-period life-cycle model and show that education should be effectively subsidized if the elasticity of the earnings function is increasing in education and if temptation problems are sufficiently severe. By contrast, if temptation problems are not sufficiently severe, efficient education policy calls for taxing education. Moreover, efficient labor taxation calls for subsidizing qualified labor if the strength of temptation is sufficiently large.
    Keywords: temptation, self control, second-best efficient taxation, inverse elasticity rule, education policy
    JEL: D91 H21 I28 J24
    Date: 2016–11–18
  11. By: Morone, Andrea; Nemore, Francesco; Nuzzo, Simone
    Abstract: While a basic theoretical principle in public economics assumes that individuals'behaviour is fully- optimizer with respect to the introduction of a tax, an increasing body of research is presenting evidence that agents decision-making is often affected by non-negligible cognitive biases , which could be responsible for lower market performance as well as for deviations from s tandard theoretical predictions. This paper extends the latter strand of research focusing on two trend topics in public economics: tax salience and tax incidence. While the former refers to the prominence of the tax, the latter places emphasis on the statutory vs. factual division of tax payments. Is market performance affected by the salience of the tax? Is the incidence of a tax independent of which side of the market it is levied on (Liability-Side-Equivalence-Principle, LES)? We address these questions through a laboratory experiment in which one unit of a fictitious good is traded through a double-auction market ins titution. Bas ed on a panel data analys is , our contribution shows that a non-salient tax reduces both the allocational and informational efficiency o f the market with respect to the instance in which the tax is salient. Moreover, we show that the LES does not hold in practice.
    Keywords: Tax incidence,Tax salience,Liability Side Equivalence,Choice behaviour,Laboratory
    Date: 2016
  12. By: Arash Nekoei (IIES-Stockholm); Ali Shourideh (University of Pennsylavnia); Mikhail Golosov (Princeton University)
    Abstract: We develop a framework for optimal taxation when assignment of workers to firms is endogenous. In our model, workers are heterogeneous with respect to their productivity as well as their firm-specific cost of working. Firms have heterogeneous productivities and production exhibits complementarities between firm and worker productivity. Different workers assign to different firms and this assignment depends on the the distribution of workers characteristics. We show that the nature of the multi-dimensional heterogeneity of the workers implies that income taxes affect the way workers sort into jobs. As a result, taxes affect the allocation of workers among firms and thus aggregate productivity even when traditional notions of labor supply are fully inelastic. Our model allows us to define a notion of sorting elasticity with respect to taxes and technological changes. Furthermore, we can analyze optimal linear and non-linear taxes and provide formulas that relate optimal taxes to the sorting elasticity. Contrary to some results in the literature, technological change that changes firms' distribution of productivity does have an effect on marginal taxes through this sorting elasticity. Finally, we provide evidence on the magnitude of the sorting elasticity and its implications on optimal income taxes using employer-employee data.
    Date: 2016
  13. By: Bystrov, Victor; Mackewicz, Michał
    Abstract: In this paper the recurrent explosive behaviour of debt-to-GDP ratio is tested in three countries with a long fiscal record: Sweden, the UK and the US. The testing is based on the method developed by Phillips et al. (2015) which is new in this context. The method allows us to avoid the size distortion problem of the traditional tests of fiscal sustainability and makes it possible to examine potential unsustainability as a transitory rather than permanent phenomenon. It has been demonstrated that in the economies analyzed, long periods of fiscal sustainability were interrupted by relatively short periods when the debt-to-GDP ratio had explosive dynamics.
    Keywords: Public debt, Sustainability, Unit root tests, Explosiveness
    JEL: C12 C22 E62 H63
    Date: 2016–11
  14. By: Tigran Poghosyan
    Abstract: We use a novel dataset on effective property tax rates in U.S. states and metropolitan statistical areas (MSAs) over the 2005–2014 period to analyze the relationship between property tax rates and house price volatility. We find that property tax rates have a negative impact on house price volatility. The impact is causal, with increases in property tax rates leading to a reduction in house price volatility. The results are robust to different measures of house price volatility, estimation methodologies, and additional controls for housing demand and supply. The outcomes of the analysis have important policy implications and suggest that property taxation could be used as an important tool to dampen house price volatility.
    Date: 2016–11–10
  15. By: Bastian von Beschwitz; Daniel Foos
    Abstract: Several papers find a positive association between a bank's equity stake in a borrowing firm and lending to that firm. While such a positive cross-sectional correlation may be due to equity stakes benefiting lending, it may also be driven by endogeneity. To distinguish the two, we study a German tax reform that permitted banks to sell their equity stakes tax-free. After the reform, many banks sold their equity stakes, but did not reduce lending to the firms. Thus, our findings suggest that the prior evidence cannot be interpreted causally and that banks’ equity stakes are immaterial for their lending.
    Keywords: Relationship banking ; Ownership ; Monitoring
    JEL: G21 G32
    Date: 2016–10
  16. By: Gil S. Epstein; Ira N. Gang
    Abstract: Governments do not have perfect information regarding constituent priorities and needs. This lack of knowledge opens the door for groups to lobby in order to affect the government’s taxation levels. We examine the political economy of decentralized revenue-raising authority in light of social protection expenditures by constructing a theoretical model of hierarchical contests and comparing the implications of centralized with decentralized governance. Increasing information available to the government may generate additional expenditures by interest groups trying to affect government taxation decisions. We show the potential existence of a poverty trap as a result of decentralization in taxation decisions.
    Keywords: governance, decentralization, economic-models-of-political-processes, contests, rent-seeking, intergovernmental-relation Number: UNU-WIDER Research Paper wp2016-101
  17. By: Lalive, Rafael (University of Lausanne); Parrotta, Pierpaolo (ICN Business School)
    Abstract: Many OECD countries are reforming their pension systems. We investigate how pension eligibility affects labor supply in couples. Inspired by a theoretical framework, we measure how the sharp change in the pension eligibility of both partners affects labor force participation. We find that both partners leave the labor force as they become eligible for a pension. The effect of their own pension eligibility is 12 percentage points for women and 28 percentage points for men. Women also reduce their labor force participation by 2 to 3 percentage points as their partner reaches pension eligibility. For men, the effect of their partner's eligibility is smaller and not significantly different from zero. For women and men with low education, the effect of their own eligibility is strong. Regardless of education level, the partner eligibility effect is strong in homogamous couples. Studying joint labor supply, we find that pension eligibility reduces labor supply in couples by 44 percentage points, approximately 4 percentage points more than in a model that ignores partner eligibility effects.
    Keywords: couple labor supply, pension eligibility, full retirement age, household decisions
    JEL: J26 J14 C40 D10
    Date: 2016–11

This nep-pbe issue is ©2016 by Thomas Andrén. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.