nep-pbe New Economics Papers
on Public Economics
Issue of 2016‒12‒04
twelve papers chosen by
Thomas Andrén

  1. Problematic response margins in the estimation of the elasticity of taxable income By Kristoffer Berg; Thor O. Thoresen
  2. The Effect of State Taxes on the Geographical Location of Top Earners: Evidence from Star Scientists By daniel wilson; enrico moretti
  3. Two "Little Treasure Games" driven by Unconditional Regret By Leslie J. Reinhorn
  4. Housing and Macroeconomics: Evidence from Property Tax Shocks By Thomas GRJEBINE; Francois Geerolf
  5. Accounting for Business Income in Measuring Top Income Shares: Integrated Accrual Approach Using Individual and Firm Data from Norway By Alstadsaeter, Annette; Jacob, Martin; Kopczuk, Wojciech; Telle, Kjetil
  6. Public expenditure on education in the time of population aging- Which educational stages does the elderly support? By Miki Miyaki; Masaki Kimura
  7. The Distributional Impact of Structural Reforms By Orsetta Causa; Mikkel Hermansen; Nicolas Ruiz
  8. Short Run Effects of Fiscal Policy on GDP and Employment: Swedish Evidence By Hjelm, Göran; Stockhammar, Pär
  9. The Flypaper Effect in Germany: An East-West Comparison By Korzhenevych, Artem; Langer, Sebastian
  10. Republicans, Democrats and Budget Deficits: Fiscal Dynamics in Political Perspective By Pereira, Jaime; Tavares, José
  11. Demonetisation: Impact on the Economy. By Tax Research Team
  12. Nonpoint source pollution: An experimental investigation of the Average Pigouvian Tax By Hamet Sarr; Mohamed Bchir; Francois Cochard; Anne Rozan

  1. By: Kristoffer Berg; Thor O. Thoresen (Statistics Norway)
    Abstract: The elasticity of taxable income (ETI) is known to represent a summary measure of tax efficiency costs, which means that further information about the behavioral components of the ETI is not required for its use in tax policy design. However, as there are response margins that may cause biases in the estimation of the elasticity, we advise against neglecting information about the composition of the behavior seized by the ETI. When using responses of the Norwegian self-employed to the tax reform of 2006 for illustration, we discuss how four different responses relate to the overall ETI, given characteristics of the reform. Effects on working hours, on tax evasion, and from shifts in organizational form and across tax bases are discussed in terms of to what extent they represent sources to estimation bias, or enter into the ETI in a decompositional way. We provide empirical illustrations of the effects of each of these margins, and we show that the estimated ETI is biased downward because of organizational shifts.
    Keywords: elasticity of taxable income; self-employed; tax evasion; organizational shift
    JEL: H24 H26 H31 J2
    Date: 2016–11
  2. By: daniel wilson (Federal Reserve Bank); enrico moretti
    Abstract: We quantify how sensitive is migration by star scientist to changes in personal and business tax differentials across states. We uncover large, stable, and precisely estimated effects of personal and corporate taxes on star scientists’ migration patterns. The long run elasticity of mobility relative to taxes is 1.8 for personal income taxes, 1.9 for state corporate income tax and -1.7 for the investment tax credit. While there are many other factors that drive when innovative individual and innovative companies decide to locate, there are enough firms and workers on the margin that state taxes matter
    Date: 2016
  3. By: Leslie J. Reinhorn (Durham Business School)
    Abstract: This paper addresses conflicting results regarding the optimal taxation of capital income. Judd (1985) proves that in steady state there should be no taxation of capital income. Lansing (1999) studies a logarithmic example of one of Judd’s models and finds that the optimal steady state tax on capital income is not always zero. it is positive in some specifications, negative in some others. There appears to be a contradiction. However, I show that Lansing derives his result by relaxing the hypotheses of Judd’s theorem -- with less restrictive hypotheses, a wider range of outcomes is possible. This raises the question of whether yet more outcomes are possible with yet weaker hypotheses. I find that the answer is no: the only possible interior steady states for the model are essentially Judd’s zero capital tax and Lansing’s unitary elasticity of marginal utility.
    Keywords: Dynamic optimal taxation
    JEL: H2
    Date: 2016–11
  4. By: Thomas GRJEBINE (Cepii); Francois Geerolf (University of California, Los Angeles)
    Abstract: We use variations in property taxes in a panel of more than 20 countries, and over 40 years, to investigate one source of joint determination between house prices and output, employment, consumer spending, investment and the trade balance. We use a narrative approach to identify changes in property taxes that are automatic or politically motivated, and thus exogenous to the business cycle. We also use the easiness with which property tax increases can be passed on to renters depending on landlord-tenants regulations across countries as a source of overidentification. In preliminary results, we find large non-ricardian effects. Property tax increases are highly contractionary and the economic effect is large, with a multiplier strictly higher than one. Regressions of housing on macroeconomic aggregates, plagued by the omission of the joint effect of property taxes, would suggest a marginal propensity to consume out of housing wealth of about 9 cents, and a marginal propensity to invest out of housing collateral of 6 cents. These results are in line with various micro or macroeconomic studies. We try to discuss these results through the lens of macroeconomic theory.
    Date: 2016
  5. By: Alstadsaeter, Annette; Jacob, Martin; Kopczuk, Wojciech; Telle, Kjetil
    Abstract: Business income is important in the upper tail of the personal income distribution, but the extent to which it is captured by measures of personal income varies substantially across tax regimes. Using linked individual and firm data from Norway, we are able to attribute business income to personal owners as it accrues rather than when it is realized. This adjustment leads to an increase in top income shares, and the size of this effect varies dramatically depending on the tax regime in place. After a tax reform in 2005 that created strong incentives to retain earnings within businesses, the increase was massive: accounting for earnings retained in the corporate sector leads to more than doubling of the share of income of top 0.1[%] in some years. Furthermore, adjusting for retained earnings stabilizes the composition of the top income group before and after the reform. We also show that the response is driven by majority owners in closely held firms and facilitated through indirect ownership. As the result, traditional measures of top income shares become misleadingly low (even when accounting for capital gains). We speculate on the implications of our findings for levels and trends in top income shares observed in other countries. In particular, we note that the major tax reforms of the 1980s in the United States correspond to a shift toward business income being passed through to personal owners, and argue that top income shares constructed using income tax statistics before 1987 are likely to be significantly understated relative to those afterwards.
    Keywords: business income; individual income; inequality; top income shares
    JEL: D31 H24 H25
    Date: 2016–11
  6. By: Miki Miyaki (Rikkyo University, College of Business); Masaki Kimura (Bank of Japan, Financial Markets Department)
    Abstract: This paper examines the elderly fs preference on public educational expenditures by each stage of education, i.e., from preschool to higher education. Utilizing a dynamic panel estimation method with Japanese prefectural data in the 1975-2012 period (38 years), we found that before 1990s the elderly tended to support public spending on almost every educational stage, especially on higher stages such as high school and university education. After 2000s, however, their preference was not to support government spending on earlier stages such as kindergarten and primary education. As the share of the elderly in eligible voters is becoming higher with the progress of population aging, their preference on government expenditures is gaining more influence on political decision. These results provide a foundation to discuss the allocation of public expenditure among educational stages under the circumstances of serious budget constraints.
    Keywords: population aging, public expenditure on education, educational stages, dynamic panel
    JEL: H52 H75 I28
    Date: 2016–11
  7. By: Orsetta Causa; Mikkel Hermansen; Nicolas Ruiz
    Abstract: In a majority of OECD countries, GDP growth over the past three decades has been associated with growing income disparities. To shed some lights on the potential sources of trade-offs between growth and equity, this paper investigates the long-run impact of structural reforms on household incomes across the distribution, hence on income inequality. The paper builds on a macro-micro approach by combining recent macro-level estimates of the impact of structural reforms on macroeconomic growth with micro-level estimates of the impact of structural reforms on household incomes across the income distribution. It considers the sources of macroeconomic growth, by decomposing growth in GDP per capita into growth in labour utilisation and labour productivity. This allows for shedding light on the mechanisms through which growth and its drivers, including policy drivers, benefit household incomes at different points of the income distribution. Most structural reforms are found to have little impact on income inequality when the latter is assessed through measures that emphasise the middle class. By contrast, a higher number of structural reforms, in particular social protection reforms, are found to have an impact on income inequality and thus may raise tradeoffs and synergies between growth equity objectives when inequality is assessed through measures that emphasise relatively more incomes among the poor. This corresponds to higher degrees of inequality aversion. L'impact distributionnel des politiques structurelles Dans la majorité des pays de l'OCDE la croissance du PIB au cours des trois dernières décennies a été associée à des disparités croissantes de revenus. Afin de comprendre le lien entre ces deux phénomènes, cet article étudie l'impact de long terme des réformes structurelles sur la distribution des revenus. Le cadre empirique proposé est une approche macro-micro, combinant des estimations récentes au niveau macro de l'impact des réformes structurelles sur la croissance macroéconomique, avec des estimations au niveau micro de l'impact des réformes structurelles sur les revenus des ménages le long de la distribution. Les sources de la croissance sont aussi décomposées, entre travail et productivité, afin d’illustrer par quels mécanismes la croissance et les politiques structurelles bénéficient aux ménages. La plupart des réformes structurelles se trouvent avoir peu d'impact sur les inégalités de revenu lorsque le focus est sur la classe moyenne. En revanche, un nombre plus élevé de réformes structurelles, en particulier les réformes de la protection sociale, se trouvent avoir un impact significatif lorsque le focus est sur les segments les plus pauvres de la distribution.
    Keywords: growth, inequality, structural policies
    Date: 2016–11–25
  8. By: Hjelm, Göran (National Institute of Economic Research); Stockhammar, Pär (National Institute of Economic Research)
    Abstract: Since the financial crisis, there has been a surge in theoretical and empirical studies on the macroeconomic effects of fiscal policy. Moreover, the protracted state of low demand since 2008 together with constrained monetary policy have put emphasis on non-linear effects of fiscal policy. In this paper, we use a newly published quarterly Swedish data set on fiscal variables and estimate the effects on GDP and employment for the period 1980q1–2015q3. We examine the linear and non-linear short run effects of shocks to government consumption, investments, transfers to households, indirect taxes on consumption goods and direct taxes on household income. We find that fiscal policy generally has Keynesian effects although often insignificant. The multipliers are on average greater when estimated during the period of flexible exchange rate, 1993q1–2015q3. Shocks to government investments were found to have the greatest effect on both GDP and employment. Looking at non-linear effects it was interestingly found that all three fiscal spending variables have rather substantial positive effects on employment in slumps while the employment effects of shocks to taxes are small indeed. However, the non-linear results are sensitive both to the instrument used and the definition of “slump”.
    Date: 2016–11–23
  9. By: Korzhenevych, Artem; Langer, Sebastian
    Abstract: We investigate the effect of general-purpose transfers on different expenditure categories and tax rates in the municipalities of Saxony (eastern Germany) and North Rhine-Westphalia (western Germany). Findings from the panel data analysis suggest the existence of the "flypaper effect" - municipalities use transfers to increase expenditures but do not reduce taxes. For most expenditure subcategories the estimated coefficients are alike, suggesting similarity of spending priorities in the two federal states despite the differences in the transfer dependency. Targeted support of eastern municipalities could potentially explain few identified differences in the spending behavior.
    Keywords: Flypaper Effect,Local Government Expenditure,Transfers to Municipalities,Local Taxation
    JEL: H21 H70 H71 H72 H77
    Date: 2016
  10. By: Pereira, Jaime; Tavares, José
    Abstract: We use an asymmetric cointegration framework to explore politically motivated fiscal asymmetries in the US, from Eisenhower to Obama. We analyze fiscal dynamics in response to deficits as an asymmetric process, sensitive to partisan and electoral motivations, characterizing the response of Republican and Democratic administrations to budget disequilibria. In a novel approach to empirical fiscal policy, we incorporate narrative data in our partisan framework, in order to to distinguish between responses to automatic and discretionary fiscal changes. We conclude that partisanship is a key factor in the fiscal response to budget disequlibria, with Democrats and Republicans exhibiting distinct corrective behavior. On the other hand, the timing of elections does not seem to be a key determinant of the fiscal response to unsustainable budget deviations.
    Keywords: Asymmetric cointegration approach; Democrats; Fiscal Dynamics; Republicans
    JEL: H30 H62 H68
    Date: 2016–11
  11. By: Tax Research Team (National Institute of Public Finance and Policy)
    Abstract: The argument posited in favour of demonetisation is that the cash that would be extinguished would be black money and hence, should be rightfully extinguished to set right the perverse incentive structure in the economy. While the facts are not available to anybody, it would be foolhardy to argue that this is the only possibility. Therefore, it is imperative to evaluate the short run and medium-term impacts that such a shock is expected to have on the economy. Further, the impact of such a move would vary depending on the extent to which the government decides to remonetise. This paper elucidates the impact of such a move on the availability of credit, spending, level of activity and government finances.
    Keywords: demonetization ; cashless transactions ; credit ; tax evasion
    JEL: H25 H27
    Date: 2016–11
  12. By: Hamet Sarr (UMR GESTE - Gestion Territoriale de l'Eau et de l'environnement - Irstea - ENGEES, Université de Strasbourg); Mohamed Bchir (UMR GESTE - Gestion Territoriale de l'Eau et de l'environnement - Irstea - ENGEES, Université de Strasbourg); Francois Cochard (CRESE - Centre de REcherches sur les Stratégies Economiques - UFC - UFC - Université de Franche-Comté, UBFC - Université Bourgogne Franche-Comté); Anne Rozan (UMR GESTE - Gestion Territoriale de l'Eau et de l'environnement - Irstea - ENGEES, Université de Strasbourg)
    Abstract: The “Average Pigouvian Tax” (APT) was proposed by Suter et al. (2008) to reduce the financial burden of the standard ambient tax. This instrument consists in a standard ambient tax divided by the number of firms, which requires polluters to cooperate in order to achieve the social optimum. To enable polluters to cooperate, communication is allowed. We introduce different types of communication: cheap talk, exogenous costly communication (communication is imposed), and endogenous costly communication (conducted on a voluntary basis after a vote). Our experiment confirms that the instrument induces polluters to reduce their emissions under cheap talk. However, we find that group emissions are less reduced when communication is costly. This result still holds even when we endogenize communication by introducing a voting phase.
    Keywords: nonpoint source pollution, ambient tax, social dilemma, cooperation, cheap talk, costly communication, vote
    Date: 2016–05–01

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.