nep-pbe New Economics Papers
on Public Economics
Issue of 2016‒12‒11
twenty-one papers chosen by
Thomas Andrén

  1. Estimating the Costs of International Corporate Tax Avoidance: The Case of the Czech Republic By Petr Jansky
  2. 'Aggregate Effects of Income and Consumption Tax Changes' By Anh D.M.Nguyen; Luisanna Onnis; Raffaele Rossi
  3. Uncertainty and the effectiveness of fiscal policy By Vladimir Arčabić; James Peery Cover
  4. Effects of Fiscal Policy in the DSGE-VAR Framework: The Case of the Czech Republic By Jan Babecky; Michal Franta; Jakub Rysanek
  5. Addressing Longevity Heterogeneity in Pension Scheme Design and Reform By Ayuso, Mercedes; Bravo, Jorge Miguel; Holzmann, Robert
  6. Accounting for Business Income in Measuring Top Income Shares: Integrated Accrual Approach Using Individual and Firm Data from Norway By Annette Alstadsæter; Martin Jacob; Wojciech Kopczuk; Kjetil Telle
  7. Welfare Effects of TTIP in a DSGE Model By Philipp Engler; Juha Tervala
  8. Can fiscal decentralisation curb fiscal imbalances? By Grażyna Bukowska; Joanna Siwińska-Gorzelak
  9. Heuristic Perceptions of the Income Tax: Evidence and Implications for Debiasing By Alex Rees-Jones; Dmitry Taubinsky
  10. The path of labor supply adjustment. Sources of lagged responses to tax-benefit reforms By Zhiyang Jia; Trine E. Vattø
  11. Audit publicity and tax compliance: a quasi-natural experiment By Pietro Battiston; Denvil Duncan; Simona Gamba; Alessandro Santoro
  12. The Macroeconomic Effects of Progressive Taxes and Welfare By Philipp Engler; Wolfgang Strehl
  13. The dynamic effect of public expenditure shocks in the United States By Susana Párraga Rodríguez
  14. Public Economics and Sustainable Developments Policy By Naveen Srinivasan; Vidya Mahambare; Francesco Perugini
  15. Identifying the Benefits from Home Ownership: A Swedish Experiment By Paolo Sodini; Stijn Van Nieuwerburgh; Roine Vestman; Ulf von Lilienfeld-Toal
  16. Employer Screening, Unemployment Stigma and Optimal Unemployment Insurance By Meier, Mario; Obermeier, Tim
  17. Social responsibility, human morality and public policy By Sanjit Dhami; Ali al-Nowaihi
  18. Income-Related Health Transfers Principles and Orderings of Joint Distributions of Income and Health By Mohamed Khaled; Paul Makdissi; Myra Yazbeck
  19. Optimal Taxation and R&D Policies By Akcigit, Ufuk; Hanley, Douglas; Stantcheva, Stefanie
  20. The Geography of Linguistic Diversity and the Provision of Public Goods By Joseph Gomes; Klaus Desmet; Ignacio Ortuño-Ortín
  21. Selection Effects and Heterogeneous Demand Responses to the Berkeley Soda Tax Vote By Debnam, Jakina

  1. By: Petr Jansky (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic)
    Abstract: International corporate tax avoidance by multinational enterprises likely lowers the Czech Republic's corporate income tax revenue, but it is not clear by how much. To clarify this I first review existing estimates of the costs of international corporate tax avoidance to government revenue worldwide. I then discuss research and revenue estimates relevant for the Czech Republic and develop a few new ones, albeit only illustrative. None of the existing research focused on the Czech Republic nor the five recent international studies I examine provide reliable estimates for the Czech Republic. The extrapolations from these studies result into a range from 6 to 57 billion CZK (4-38 % of current corporate income tax revenue) with a median of 15 billion CZK (10 %) in annual corporate income tax revenue loss. This scale is comparable with the responses of 35 Czech experts with a median of 20 billion CZK (13 %). I conclude with a discussion of these rough estimates as well as questions for further research and policy recommendations.
    Keywords: corporate income tax; international taxation; tax avoidance; BEPS; Czech Republic
    JEL: F23 H25 H26 O19
    Date: 2016–11
  2. By: Anh D.M.Nguyen; Luisanna Onnis; Raffaele Rossi
    Abstract: Do consumption and income tax changes a ect economic aggregates di erently? We answer this question by estimating structural VARs, where we proxy the latent tax shocks with a newly constructed narrative account of income and consumption tax liability changes in the United Kingdom. We find that income tax shocks have large short run effects on GDP, private consumption and investment. The implied income tax present-value multiplier is around 2.7. Consumption tax cuts expand marginally private consumption but their effects are modest and not statistically different from zero on GDP and investment. These results indicate that i) it is crucial to distinguish between direct and indirect taxation when studying the transmission mechanism of fiscal policy, and ii) consistent with conventional public finance theories, consumption taxes are less distortive than income taxes.
    Date: 2016
  3. By: Vladimir Arčabić (Faculty of Economics and Business, University of Zagreb); James Peery Cover (Department of Economics, Finance, & Legal Studies, University of Alabama)
    Abstract: During the Great Recession of 2007-2009 uncertainty in the United States reached historically high levels. This paper analyzes the effectiveness of fiscal policy under different uncertainty regimes in the U.S. High uncertainty is known to make economic agents postpone their decisions on consumption and investment (real-options channel), making economic policy less effective. We use several uncertainty measures in a threshold vector autoregressive model (TVAR) to endogenously estimate different uncertainty regimes. Then we analyze the effectiveness of different fiscal policy shocks in each uncertainty regime. We measure uncertainty using S&P 100 volatility index (VXO) and Baa corporate bond yield relative to yield on 10-year treasury constant maturity (Baa10ym). Our benchmark model consists of aggregate government spending, taxes, uncertainty, and GDP. In addition to the benchmark model, we estimate three extensions. First, we differentiate between government consumption, investment, and defense expenditures. Second, we check the robustness using two different measures of uncertainty – VXO and Baa10ym. Third, we compute impulse responses of GDP aggregates: consumption and investment. Nonlinear impulse response functions differentiate between positive and negative fiscal shocks, as well as between small and big fiscal shocks. Confidence intervals are obtained by bootstrapping in order to determine the statistical significance of impulse responses. This paper has five important findings. (1) We find that fiscal policy shocks have a much larger effect on the economy during periods of high uncertainty. (2) We also find that during periods of average or low uncertainty government spending shocks tend to crowd out private sector investment spending, but during periods of high uncertainty, after a one-year delay, government spending shocks “crowd-in” private sector investment expenditures. (3) We find large shocks typically do not have the same dollar for dollar effect on GDP as small shocks. That is, 2SD shocks tend to have only a 33-50% larger effect than 1SD shocks. (4) We find that expansionary tax shocks are not as powerful as contractionary tax shocks. And finally and perhaps most importantly (5) we find that government investment spending shocks are far more potent that government consumption and government defense spending shocks. This last result suggests that infrastructure investment expenditures are a much better way to stimulate the economy than other types of government spending.
    Keywords: uncertainty, fiscal policy, threshold, VAR model
    JEL: C32 D81 E62 H30
    Date: 2016–12–02
  4. By: Jan Babecky; Michal Franta; Jakub Rysanek
    Abstract: In this paper we explore the potential of the DSGE-VAR modelling approach for examining the effects of fiscal policy. The combination of the VAR and DSGE frameworks leads theoretically to more accurate estimates of impulse responses and consequently of fiscal multipliers. Moreover, the framework allows for discussion about the differences of the effects of fiscal shocks in DSGE and VAR models and to some extent discussion about misspecification in fiscal DSGE models. The DSGE-VAR model is estimated on Czech data covering the period from 1996 to 2011 at quarterly frequency. The government consumption multiplier attains a value close to 0.4 at the horizon of four years. The public investment multiplier is about 0.4 higher, which confirms findings in the literature. On the other hand, the DSGE model alone implies a similar government consumption multiplier but a much lower public investment multiplier, suggesting misspecification of the fiscal DSGE model.
    Keywords: DSGE-VAR model, fiscal multipliers, fiscal shocks, identification, model misspecification
    JEL: C11 E62 F41 H30
    Date: 2016–11
  5. By: Ayuso, Mercedes (University of Barcelona); Bravo, Jorge Miguel (Universidade Nova de Lisboa); Holzmann, Robert (University of New South Wales)
    Abstract: This paper demonstrates that the link between heterogeneity in longevity and lifetime income across countries is mostly high and often increasing; that it translates into an implicit tax/subsidy, with rates reaching 20 percent and higher in some countries; that such rates risk perverting redistributive objectives of pension schemes and distorting individual lifecycle labor supply and savings decisions; and that this in turn risks invalidating current reform approaches of a closer contribution-benefit link and life expectancy-indexed retirement age. All of this calls for mechanisms that neutralize or at least significantly reduce the effects of heterogeneity in longevity through changes in pension design. The paper suggests and explores a number of interventions in the accumulation, benefit determination, and disbursement stages. Among the explored approaches, a two-tier contribution structure seems promising, as a moderate social contribution rate that is already proportionally allocated to the average contribution base is able to broadly compensate for empirically established heterogeneity in the life expectancy/lifetime income relationship.
    Keywords: defined contribution scheme, two-tier contribution structure, proxied life expectancy, tax/subsidy structure
    JEL: D9 G22 H55 J13 J14 J16
    Date: 2016–11
  6. By: Annette Alstadsæter; Martin Jacob; Wojciech Kopczuk; Kjetil Telle
    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.
    JEL: D31 H24 H25
    Date: 2016–12
  7. By: Philipp Engler; Juha Tervala
    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
  8. By: Grażyna Bukowska (Faculty of Economic Sciences, University of Warsaw); Joanna Siwińska-Gorzelak (Faculty of Economic Sciences, University of Warsaw)
    Abstract: The aim of this paper is to study the impact of fiscal decentralisation on fiscal discipline. We use annual data for more than 2400 Polish municipalities, over the years 2002-2014. We introduce the distinction between “de facto” and “de jure” fiscal decentralisation, what is the first novelty of this study. The second novelty is that we control for the characteristics of the political scene and include interactions of decentralisation and political variables. We show that higher decentralisation is associated with higher fiscal discipline and that this result is robust for all our decentralisation measures. We also show that the impact of decentralisation is different, depending on the characteristics of the local political scene. Therefore, its overall effect on fiscal balance is not necessarily straightforward.
    Keywords: deficit, fiscal decentralization, political competition
    JEL: D72 H72 H77
    Date: 2016
  9. By: Alex Rees-Jones; Dmitry Taubinsky
    Abstract: Using responses from an incentivized tax forecasting task, we estimate the prevalence of previously discussed heuristics for simplifying tax forecasts (Liebman and Zeckhauser, 2004). We find strong evidence for “ironing” (linearizing the tax schedule using one's average tax rate), no evidence for “spotlighting” (linearizing the tax schedule using one's marginal tax rate), and we identify the qualitative features of the remaining misperceptions that are not captured by existing models. We then embed these misperceptions in a standard model of income taxation and study a social planner’s decision to "nudge" taxpayers. We find that a social planner would not choose to correct the misperceptions that we estimate because they are helpful in achieving redistributive goals.
    JEL: D03 D04 D1 H0 K34
    Date: 2016–12
  10. By: Zhiyang Jia; Trine E. Vattø (Statistics Norway)
    Abstract: The standard static labor supply model ignores that it takes time for individuals to adjust to a taxbenefit reform. A labor supply decision model is developed that allows for lagged responses in terms of state dependence, stemming from preferences, labor market constraints and adjustment costs. The parameters of the model are estimated using panel data on working hours for Norwegian females. We find evidence of all three sources of state dependence, with adjustment costs as the most dominant component. When using the model to simulate the path of adjustment to a general tax cut, we find that state dependence brings down responses to only one third of the estimated full effect in the first year. The females reach the proximity of the full effect after about seven years.
    Keywords: labor supply; path of adjustment; state dependence; adjustment costs; discrete choice model; tax-benefit microsimulation
    JEL: C35 C51 H24 H31 J22
    Date: 2016–12
  11. By: Pietro Battiston; Denvil Duncan; Simona Gamba; Alessandro Santoro
    Abstract: We use confidential data on Value Added Tax payments at the sector level, in two large Italian cities, to estimate the effect of audits publicity on tax compliance of local sellers. By employing a Difference-in-Differences identification strategy, we find that such publicity has a positive effect on fiscal declarations made shortly after. The results suggest that increasing awareness on future audits via the media can be an important instrument in the hands of tax authorities.
    Keywords: Tax evasion, Quasi-natural experiment, Audit publicity
    Date: 2016–07–12
  12. By: Philipp Engler; Wolfgang Strehl
    Abstract: We analyze the positive and normative effects of a progressive tax on wages in a nonlinear New Keynesian DSGE model in the presence of demand and technology shocks. The non-linearity allows us to disentangle the effects of the progressive tax on the volatility and the level of macroeconomic variables, for both intertemporally optimizing (“Ricardian") and non-Ricardian (“rule-of-thumb") households. We find that the interaction of the two household types is of crucial importance. When only Ricardian households are considered, progressive taxes increase welfare (compared to at taxes) in the presence of technology shocks. Aggregate welfare falls, however, when rule-of-thumb households are added to the analysis. The progressive tax increases the welfare of the latter household by lowering its consumption volatility, but this is overcompensated for by the destabilization of Ricardian household consumption. Under demand shocks, progressive taxes reduce the welfare of both household types, with the welfare of rule-of-thumb households falling despite a decline in their consumption volatility. The reason is a lower average consumption level which is related to the changed curvature of the marginal cost function.
    Keywords: Progressive Taxation, Rule-of-thumb Households, Monetary Policy
    JEL: E2 E3 E52 E62
    Date: 2016
  13. By: Susana Párraga Rodríguez (University College London)
    Abstract: This paper estimates the dynamic aggregate effect of exogenous shocks to two key components of public expenditure in the United States: government income transfers and government spending. The identifi cation strategy positions the structural shocks to public expenditures in an SVAR framework with exogenous measures of public expenditure changes. Transfers shocks are based on a new narrative variable of legislated increases in U.S. social security benefi ts. I demonstrate that shocks to different types of public expenditure do not have the same macroeconomic impact. The estimated government spending multiplier is between 0 and 1, while increases in transfers generate a multiplier effect above 1.
    Keywords: government expenditures, transfer payments, social security
    JEL: E2 E62 H55 H56 I38
    Date: 2016–12
  14. By: Naveen Srinivasan (Madras School of Economics); Vidya Mahambare (Madras School of Economics); Francesco Perugini (Department of Economics, Society, and Politics, University of Urbino, Italy)
    Abstract: This paper examines the concept of monetary policy credibility from both the theoretical and practical viewpoints. It also discusses the advantages of high credibility and explains measures that can be taken to enhance it. The article reviews a number of studies that have examined the credibility of monetary policy making over the past decade. Our main conclusion is that credibility is an elusive thing. The only way to be sure of acquiring it is to earn it by deeds. The existing theoretical literature would benefit a great deal by taking this into consideration.
    Keywords: Monetary Policy, Credibility, InstitutionsClassification-JEL: E31, E52, E58
    Date: 2015–06
  15. By: Paolo Sodini; Stijn Van Nieuwerburgh; Roine Vestman; Ulf von Lilienfeld-Toal
    Abstract: This paper studies the economic benefits of home ownership. Exploiting a quasi-experiment surrounding privatization decisions of municipally-owned apartment buildings, we obtain random variation in home ownership for otherwise similar buildings with similar tenants. We link the tenants to their tax records to obtain information on demographics, income, mobility patterns, housing wealth, financial wealth, and debt. These data allow us to construct high-quality measures of consumption expenditures. Home ownership causes households to move up the housing ladder, work harder, and save more. Consumption increases out of housing wealth are concentrated among the home owners who sell subsequent to privatization and among those who receive negative income shocks, evidencing a collateral effect.
    JEL: D12 D31 E21 G11 H31 J22 R21 R23 R51
    Date: 2016–12
  16. By: Meier, Mario; Obermeier, Tim
    Abstract: This paper studies how firms’ screening behavior and crowding out among applicants affect the optimal design of unemployment policies. In our model, firms face a pool of applicants and observe unemployment duration and a signal about productivity. Firms screen the applicants with the highest expected productivity first. The probability of being hired declines with duration due to declining beliefs about productivity and competition by other job seekers. We estimate the model using German administrative employment records and information on job search behavior, vacancies and applications. The model matches the observed decline in search effort and job finding rates and the implied decline of callback rates is in line with recent evidence from audit studies. Optimal policy takes into account that unemployment benefits can affect hiring probabilities by making unemployment duration more or less informative and by changing the applications-per-vacancy ratio due to search effort or vacancy responses. The equilibrium elasticity of unemployment duration to benefits can be larger or smaller than the standard micro elasticity. Our findings suggest that benefit levels should be more generous, especially after the first year of unemployment. We also find that extended benefits do not increase the duration of unemployment as much as suggested by a model without employer screening.
    Keywords: Unemployment,Optimal Unemployment Insurance,Job Search,Employer Screening
    JEL: H20 J64 J65 J7
    Date: 2016
  17. By: Sanjit Dhami; Ali al-Nowaihi
    Abstract: The evidence shows that in many important economic domains, many people are either predisposed to engage in ‘socially responsible actions’ and/or required by regulations to do so. Examples include pollution abatement activity, behavior in a commons, and contributions to charity. We propose a general framework of analysis for modelling such actions and the role of public policy in encouraging these actions in an equilibrium setting. Multiple equilibria are endemic in these situations. We show that it is possible to conduct interesting and meaningful analysis in the presence of multiple equilibria. We examine the role of optimal public policy such as subsidies, taxes and direct government grants in engineering moves from less to more desirable equilibria. We highlight a new role for leadership contributions in facilitating moves between multiple equilibria. We also conduct a welfare analysis of the optimal mix between private and public actions.
    Keywords: Social responsibility; multiple equilibria; optimal mix of public and pri- vate social responsibility; subsidies and direct grants; environmental economics, problem of the commons, charitable giving.
    JEL: D6 H2 H4
  18. By: Mohamed Khaled (School of Economics, The University of Queensland); Paul Makdissi (School of Economics, The University of Queensland); Myra Yazbeck (School of Economics, The University of Queensland)
    Abstract: The objective of this article is to provide the analyst with the necessary tools that allow for a robust ordering of joint distributions of health and income. We contribute to the literature on the measurement and inference of socioeconomic health inequality in three distinct but complementary ways. First, we provide a formalization of the socioeconomic health inequality-specific ethical principle introduced by Erreygers Clark and van Ourti, (2012). Second, we propose new graphical tools and dominance tests for the identification of robust orderings of joint distributions of income and health associated with this new ethical principle. Finally, based on both pro-poor and pro-extreme ranks ethical principles we address a very important aspect of dominance literature: the inference. To illustrate the empirical relevance of the proposed approach, we compare joint distributions of income and a health-related behaviour in the United States in 1997 and 2014.
    Keywords: Health concentration curves, health range curves, socioeconomic health inequality, dominance, inference
    JEL: D63 I10
    Date: 2016–11–28
  19. By: Akcigit, Ufuk; Hanley, Douglas; Stantcheva, Stefanie
    Abstract: We study the optimal design of R&D policies and corporate taxation when the outputs of innovation are not appropriable in the absence of intellectual property rights policies and there are non-internalized technology spillovers across firms. Firms are heterogeneous in their research productivity, i.e., in the efficiency with which they convert a given set of R&D inputs into successful innovations. There is asymmetric information about firm productivity and about its stochastic evolution over time that prevents the first best solution to the technology spillover. The problem is thus posed as one of dynamic mechanism design with externalities. We characterize the optimal constrained efficient allocations over firms' life cycles and for firms of different productivities. We show that the constrained efficient allocations can be implemented either by a patent system plus a price subsidy for the monopolists' products, together with a parsimonious R&D subsidy function or, equivalently, by a prize mechanism. We estimate our model using firm-level data matched to patent data and quantify the optimal policies. Simpler innovation policies, such as linear R&D subsidies and linear profit taxes, lead to large revenue losses relative to the optimal mechanism.
    Keywords: Corporate taxation; innovation; patents; R&D; Subsidies; Tax credits
    JEL: H21 H23 H25 H32 O31 O32 O33 O38
    Date: 2016–12
  20. By: Joseph Gomes; Klaus Desmet; Ignacio Ortuño-Ortín
    Abstract: This paper theoretically analyzes and empirically investigates the importance of local interaction between individuals of different linguistic groups for the provision of public goods at the national level. Depending on whether local interaction mitigates or reinforces antagonism towards other groups, the micro-founded theory we develop predicts that a country's provision of public goods (i) decreases in its overall linguistic fractionalization, and (ii) either increases or decreases in how much individuals locally learn about other groups. After constructing a 5 km by 5 km geographic dataset on language use for 223 countries, we compute measures of overall fractionalization and local learning, and investigate their relation to public good provision at the country level. While overall fractionalization worsens outcomes, we find a positive causal relation between local learning and public goods. Local mixing therefore mitigates the negative impact of a country's overall linguistic fractionalization. An IV strategy shows that this result is not driven by the possible endogenous spatial distribution of language speakers within countries.
    JEL: H4 H5 J15 D7 D74
    Date: 2016–11
  21. By: Debnam, Jakina
    Abstract: Early evidence from household-level surveys suggests that the one-cent-per-ounce tax on sugarsweetened beverages which took effect March 1, 2015 in Berkeley, California decreased consumption of sugar-sweetened-beverages by 21%2. Even if these findings are robust, the welfare implications of expanding the Berkeley soda tax policy at a national level are complicated by selection effects inherent in the populations of both voters and consumers. Based on their demographic composition, the soda preferences of voters who supported the Berkeley referendum likely differ from the preferences of high-soda-consuming households, and from the preferences of the average-soda consuming household in the United States. Further, we find consumption responses related to the tax interact nontrivially with consumer heterogeneity. Some of these responses directly counter the public policy goals of a soda tax: first, highconsuming households are less price sensitive, and therefore less responsive to price changes following a tax; and, second, “reactance” among high-consuming populations led to increases in soda consumption immediately following the passage of the tax, partially mitigating reductions in soda consumption.
    Keywords: Demand and Price Analysis, Public Economics,
    Date: 2016–11

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