nep-pbe New Economics Papers
on Public Economics
Issue of 2017‒01‒01
nineteen papers chosen by
Thomas Andrén

  1. Comparing budget repair measures for a small open economy with growing debt By George Kudrna; Chung Tran
  2. Optimal Non-Welfarist Income Taxation for Inequality and Polarization Reduction By Vincenzo Prete; Alessandro Sommacal; Claudio Zoli
  3. The role of an EMU unemployment insurance scheme on income protection in case of unemployment By Jara Tamayo, Holguer Xavier; Sutherland, Holly; Tumino, Alberto
  4. Does Inequality Constrain the Power to Tax? Evidence from the OECD By Md. Rabiul Islam; Jakob Brochner Madsen; Hristos Doucouliagos
  5. Fiscal Consolidations and Their Effects on Income Inequality By Conrad Scheibe
  6. Income inequality and redistribution in the aftermath of the 2007-2007 crisis: the US case By Vanda Almeida
  7. Why Has Income Inequality in Germany Increased from 2002 to 2011? A Behavioral Microsimulation Decomposition By Robin Jessen
  8. Are Fuel Economy Standards Regressive? By Lucas W. Davis; Christopher R. Knittel
  9. Sustainability of the public debt and wealth inequality in a general equilibrium model By Noritaka Maebayashi; Kunihiko Konishi
  10. The German statutory pension scheme: Balance sheet, cross-sectional internal rates of return and implicit tax rates By Metzger, Christoph
  11. Analytic Foundations: Measuring the Redistributive Impact of Taxes and Transfers By Ali Enami; Nora Lustig; Rodrigo Aranda
  12. On the determinants of fiscal non-compliance: an empirical analysis of spain’s regions By Mar Delgado-Téllez; Víctor D. Lledó; Javier J. Pérez
  13. The Eurosystem Household Finance and Consumption Survey: a new underlying database for EUROMOD By Kuypers, Sarah; Figari, Francesco; Verbist, Gerlinde
  14. Welfare stigma in the lab: Evidence of social signaling By Friedrichsen, Jana; König, Tobias; Schmacker, Renke
  15. Hysteresis and Fiscal Policy By Philipp Engler; Juha Tervala
  16. A Structural Analysis of the Effects of the Great Recession on Retirement and Working Longer by Members of Two-Earner Households By Alan L. Gustman; Thomas L. Steinmeier; Nahid Tabatabai
  17. Household Economic Shocks Increase Retirement Wealth Inequality By Teresa Ghilarducci; Siavash Radpour; Bridget Fisher; Anthony Webb
  18. Effects of Increased Competition on Quality of Primary Care in Sweden By Dietrichson, Jens; Ellegård, Lina Maria; Kjellsson, Gustav
  19. The Impact of Taxes and Social Spending on Inequality and Poverty in El Salvador. By Margarita Beneke; Nora Lustig; Jose Andres Oliva

  1. By: George Kudrna; Chung Tran
    Abstract: In this study, we quantify the macroeconomic and welfare effects of alternative fiscal consolidation plans in the context of a small open economy. Using a computable overlapping generations model tailored to the Australian economy, we examine immediate and gradual eliminations of the existing fiscal deficit with (i) temporary income tax hikes, (ii) temporary consumption tax hikes and (iii) temporary transfer payment cuts. The simulation results indicate that all three examined fiscal measures result in favourable long-run macroeconomic and welfare outcomes, but have adverse consequences in the short run that are particularly severe under the immediate fiscal consolidation plan. Moreover, our results show that cutting transfer payments leads to the worst welfare outcome for all generations currently alive, and especially the poor. Increasing the consumption tax rate results in smaller welfare losses, but compared to raising income taxes, the current poor households pay much larger welfare costs. Overall, the welfare trade-offs between current and future generations, as well as between the rich and poor, highlight key political constraints and point to challenging policy choices for the wellbeing of future generations.
    Keywords: Fiscal Deficit, Public Debt, Fiscal Consolidation, Welfare, Dynamic General Equilibrium, Small Open Economy
    JEL: C68 E21 E63 H31 H60 J26
    Date: 2016–12
  2. By: Vincenzo Prete (Department of Economics (University of Verona)); Alessandro Sommacal (Department of Economics (University of Verona)); Claudio Zoli (Department of Economics (University of Verona))
    Abstract: We adopt a non-welfarist approach to investigate the effect of different redistributive objectives on the shape of the optimal tax schedule. We consider inequality and income polarization reduction objectives and we identify socially desirable three brackets piecewise linear tax systems that allow to collect a given revenue. The optimal tax problem is formalized as the maximization of families of rank-dependent social evaluation function defined over net incomes. These functions allow to incorporate within the same social evaluation model concerns for inequality and for polarization reduction. Both with fixed and variable labour supply the optimal tax schemes substantially differ as the focus moves from the reduction of inequality to the one of polarization. In the case of inequality concerns the optimal tax system is mainly convex exhibiting increasing marginal tax rates unless when labour supply elasticities are higher. While in case of polarization concerns the optimal tax scheme is not-convex with reduced marginal tax rate for the upper income bracket.
    Keywords: Non welfarism, Rank-dependent social evaluation function, Optimal Taxation, Inequality, Polarization.
    JEL: D31 D63 H21
    Date: 2016–12
  3. By: Jara Tamayo, Holguer Xavier; Sutherland, Holly; Tumino, Alberto
    Abstract: The aim of this paper is to explore the potential of an EMU unemployment insurance scheme (EMU-UI) to improve the income protection available to individuals and their families in case of unemployment. Our analysis uses an illustrative EMU-UI scheme, which has a common design across member states and can therefore be considered as a benchmark with respect to which gaps in national unemployment insurance schemes are assessed. We make use of EUROMOD, the EU-wide tax-benefit microsimulation model, to simulate entitlement to the national and EMU-UI and calculate their effect on household disposable income for all individuals currently in work and those with the highest unemployment risk, in case they would become unemployed. Our results show that the EMU-UI has the potential to reduce current gaps in coverage where these are sizeable due to stringent eligibility conditions, to increase generosity where current unemployment benefits are low relative to earnings and to extend duration where this is shorter than twelve months. The illustrative EMU-UI would reduce the risk of poverty for the potentially new unemployed and would have a positive effect on household income stabilization. The extent of these effects varies in size across EMU member states for two main reasons: differences in the design of national unemployment insurance schemes and differences in labor force characteristics across member states.
    Date: 2016–12–19
  4. By: Md. Rabiul Islam; Jakob Brochner Madsen; Hristos Doucouliagos
    Abstract: We investigate the consequences of income inequality on the income tax-to-GDP ratio for 21 OECD countries over a long time period spanning 1870 to 2011. We use several identification strategies, including using unionization as a new IV for inequality. In contrast to predictions from median voter models, we find that rising inequality significantly depresses the income tax ratio. This finding is robust to alternative measures of inequality, treatment for endogeneity, and model specification. The tax ratio increases with the degree of democracy and openness and decreases with urbanization. Inequality also reduces the indirect tax ratio and alters the tax structure.
    Keywords: Tax ratio; inequality; fiscal policy; OECD
    JEL: H2 E25
    Date: 2016–11
  5. By: Conrad Scheibe
    Abstract: This paper investigates the effects of fiscal consolidations on income inequality. Although fiscal consolidations have become a popular policy instrument and research topic, their effects on income inequality are relatively unexplored. We thus econometrically analyse the evolution of Gini coefficients during and after austerity measures. The paper relies on panel data techniques using a sample of 17 high-income countries during the period of 1978 – 2009. We find that a consolidation (measured by a deliberate improvement of the primary budget balance) significantly increases income inequality. More specifically, an improvement of the primary budget balance by about one percent of GDP is associated with an increase in market income inequality of 0.6% and a smaller increase in net income inequality the following year. In addition, this paper explores the discretionary effect of different consolidation compositions. To do so, we differentiate between consolidations that are either exclusively undertaken through spending cuts, tax increases or a combination of both. Thereby, we show that tax-only consolidations tend to be equality-friendly but also rather small in size while the opposite is true for spending-only and mixed consolidations. These findings point to a more pronounced trade-off between different consolidation policy goals than is currently believed.
    Keywords: Fiscal consolidation, Fiscal Adjustment, Austerity, Income inequality, Cross-country analysis, Panel data technique
    Date: 2016
  6. By: Vanda Almeida
    Abstract: This paper provides a detailed empirical assessment of the evolution of income inequality and the redistributive effects of the tax and transfer system following the 2007-2008 crisis. It focuses on the US case, drawing on data from the Current Population Survey for the period 2007-2012. Contrary to most existing studies, it uses of a wide range of inequality indicators and looks in detail at several sections of the income distribution, allowing for a clearer picture of the heterogeneous consequences of the crisis. Furthermore, it analyses the contribution of different types of taxes and transfers, beyond the overall cushioning effect of the system, which allows for a more refined assessment of its effectiveness. Results show that although the crisis implied income losses across the whole income distribution, the burden was disproportionately born by low to middle income groups. Income losses experienced by richer households were relatively modest and transitory, while those experienced by poorer households were not only strong but also highly persistent. The redistributive system had a crucial role in taming the increase in income inequality in the immediate aftermath of the crisis, and during the GR years, particularly cash transfers. After 2010, however, its effect became weaker and income inequality experienced a new surge. The findings of this paper contribute to a better understanding of the distributional consequences of aggregate crises and the role of tax and transfer policies in stabilising the income distribution in a crisis aftermath.
    Keywords: Crisis, Gini, Income, Inequality, Income tax, Low income, Personal Income Distribution, Redistribution, Safety net, Transfers
    Date: 2016–12
  7. By: Robin Jessen
    Abstract: I propose a method to decompose changes in income inequality into the contributions of policy changes, wage rate changes, and population changes while considering labor supply reactions. Using data from the Socio-Economic Panel (SOEP), I apply this method to decompose the increase in income inequality in Germany from 2002 to 2011, a period that saw tax reductions and a controversial overhaul of the transfer system. The simulations show that tax and transfer reforms have had an inequality reducing effect as measured by the Mean Log Deviation and the Gini coefficient. For the Gini, these effects are offset by labor supply reactions. In contrast, policy changes explain part of the increase in the ratio between the 90th and the 50th income percentile. Changes in wage rates have led to a decrease in income inequality. Thus, the increase in inequality was mainly due to changes in the population.
    Keywords: Inequality, Decomposition, Labor Supply, Microsimulation, Policy Reform
    JEL: D31 I38 J31
    Date: 2016
  8. By: Lucas W. Davis; Christopher R. Knittel
    Abstract: Despite widespread agreement that a carbon tax would be more efficient, many countries use fuel economy standards to reduce transportation-related carbon dioxide emissions. We pair a simple model of the automakers' profit maximization problem with unusually-rich nationally representative data on vehicle registrations to estimate the distributional impact of U.S. fuel economy standards. The key insight from the model is that fuel economy standards impose a constraint on automakers which creates an implicit subsidy for fuel-efficient vehicles and an implicit tax for fuel-inefficient vehicles. Moreover, when these obligations are tradable, permit prices make it possible to quantify the exact magnitude of these implicit subsidies and taxes. We use the model to determine which U.S. vehicles are most subsidized and taxed, and we compare the pattern of ownership of these vehicles between high- and low-income census tracts. Finally, we compare these distributional impacts with existing estimates in the literature on the distributional impact of a carbon tax.
    JEL: H22 L5 L91 Q48
    Date: 2016–12
  9. By: Noritaka Maebayashi (Faculty of Economics and Business Administration, The University of Kitakyushu); Kunihiko Konishi (Institute of Economic Research, Kyoto University)
    Abstract: This study investigates the correlation between sustainability of the public debt and wealth inequality in an endogenous growth model with heterogeneous agents. We show that the threshold for the sustainability of public debt can be related to not only relative size of public debt but also wealth inequality. In addition, this study examines the effects of budget deficit and redistributive policies on the sustainability of the public debt and wealth inequality. We show that an increase in the deficit ratio or the redistributive tax makes the public debt less sustainable. If the economy falls into the unsustainable region as a result of the policy change, both public debt and wealth inequality continue to increase.
    Keywords: Fiscal sustainability, Public debt, Wealth inequality, Redistributive policy, Endogenous growth
    JEL: H62 H63
    Date: 2016–12
  10. By: Metzger, Christoph
    Abstract: We present a framework for accounting of the German statutory pension scheme and estimate a balance sheet for the years 2005 until 2012. Extending and applying the methodology proposed by Settergren and Mikula (2005), we estimate the cross-sectional internal rates of return of the German pension scheme over this period. We are able to show that the cross-sectional internal rate of return is mainly financed by increasing contributions and by changing the liabilities not backed by assets. Additionally, our results reveal that from an expenditure perspective, the major part of the internal rate of return is resulting from changing longevity rather than indexation of pension entitlements. Finally, we prove that from a cross-sectional perspective the implicit tax of a pension scheme can mainly be interpreted as an “implicit wealth tax” on pension wealth and subsequently present empirical estimates for these cross-sectional implicit tax rates.
    Keywords: accounting of pension schemes,balance sheet,internal rate of return,implicit tax,fiscal sustainability
    JEL: E01 H55 H83 H87
    Date: 2016
  11. By: Ali Enami (Tulane University and CEQ Institute.); Nora Lustig (Stone Center for Latin American Studies, Department of Economics, Tulane University.); Rodrigo Aranda (Tulane University and CEQ Institute.)
    Abstract: This paper provides a theoretical foundation for analyzing the redistributive effect of taxes and transfers for the case in which the ranking of individuals by pre-fiscal income remains unchanged. We show that in a world with more than a single fiscal instrument, the simple rule that progressive taxes or transfers are always equalizing not necessarily holds, and offer alternative rules that survive a theoretical scrutiny. In particular, we show that the sign of the marginal contribution unambiguously predicts whether a tax or a transfer is equalizing or not.
    Date: 2016–11
  12. By: Mar Delgado-Téllez (Banco de España); Víctor D. Lledó (International Monetary Fund); Javier J. Pérez (Banco de España)
    Abstract: This paper proposes an empirical framework that distinguishes between voluntary and involuntary compliance with fiscal deficit targets on the basis of economic, institutional and political factors. The framework is applied to Spain’s Autonomous Communities (regions) over the period 2002-2015. Fiscal non-compliance among Spain’s regions has proven persistent. It increases with the size of growth forecasting errors and the extent to which fiscal targets are tightened, factors not fully under the control of regional governments. Non-compliance also tends to increase during election years, when vertical fiscal imbalances become accentuated, and market financing costs subside. Strong fiscal rules have not shown any significant impact on containing fiscal noncompliance. Reducing fiscal non-compliance in multi-level governance systems such as Spain’s requires a comprehensive assessment of inter-governmental fiscal arrangements that looks beyond rules-based frameworks by ensuring enforcement procedures are politically credible.
    Keywords: fiscal compliance, rules, fiscal federalism, soft budget constraints
    JEL: H61 H68 H72 H77
    Date: 2016–12
  13. By: Kuypers, Sarah; Figari, Francesco; Verbist, Gerlinde
    Abstract: We explore the prospects for using the Eurosystem Household Finance and Consumption Survey (HFCS) dataset as an underlying micro-database for the EU taxbenefit model, EUROMOD. This will allow expanding the policy domains currently covered in EUROMOD with dimensions like wealth taxation, incentives for wealth accumulation and asset tests determining benefit eligibility. As the HFCS only contains gross income amounts which are not suitable for distributive analysis, the purpose of this paper is to derive net incomes by simulating the gross-to-net transition with EUROMOD taking into account all important details of the social security and personal income tax system. In order to identify the issues and illustrate their importance a trial database for Belgium and Italy is constructed.
    Date: 2016–12–19
  14. By: Friedrichsen, Jana; König, Tobias; Schmacker, Renke
    Abstract: A puzzle of the modern welfare state is that a large fraction of social benefits is not taken up. Using a laboratory experiment, we present evidence that stigmatization through public exposure causally reduces the take-up of a redistributive transfer by 30 percentage points. We build a theoretical model that interprets welfare stigma as unfavorable inferences about the claimant's type. Our design exogenously varies the informativeness of the takeup decision by varying whether transfer eligibility is based on ability or luck. We find that subjects avoid the inference both of being low-skilled and of being willing to live off others. Contrary to conventional wisdom, stigma may thus also contribute to low take-up if eligibility is not linked to economic performance.
    Keywords: stigma,signaling,redistribution,non take-up,welfare program
    JEL: D03 H31 I38 C91
    Date: 2016
  15. By: Philipp Engler; Juha Tervala
    Abstract: Empirical studies support the hysteresis hypothesis that recessions have a permanent effect on the level of output. We analyze the implications of hysteresis for fiscal policy in a DSGE model. We assume a simple learning-by-doing mechanism where demand-driven changes in employment can affect the level of productivity permanently, leading to hysteresis in output. We show that the fiscal output multiplier is much larger in the presence of hysteresis and that the welfare multiplier of fiscal policy - the consumption equivalent change in welfare for one dollar change in public spending - is positive (negative) in the presence (absence) of hysteresis. The main bene.t of accommodative fiscal policy in the presence of hysteresis is to diminish the damage of a recession to the long-term level of productivity and, thus, output.
    Keywords: Fiscal policy, hysteresis, learning by doing, welfare
    JEL: E62 F41 F44
    Date: 2016
  16. By: Alan L. Gustman; Thomas L. Steinmeier; Nahid Tabatabai
    Abstract: This paper uses data from the Health and Retirement Study to estimate a structural model of household retirement and saving. It applies that model to analyze the effects of the Great Recession on the work and retirement of older couples who were both employed full-time at the beginning of the recession. We analyze the effects of job loss, changes in wealth and changes in expectations. The largest overall effects of the Great Recession are observed for 2009 and 2010. In 2009, an additional 2.5 percent of all 55 to 59 year old husbands were not working full-time as result of the Great Recession, amounting to a reduction of 3.2 percent in full-time work. In 2010, 2.8 percent of 55 to 59 year old husbands were not working full-time as a result of the Great Recession, amounting to a 3.8 percent reduction in full-time work. For wives the reductions in full-time work due to the Great Recession were 1.7 percent and 2.2 percent of those who initially held a job, or reductions of full-time work of 2.3 and 3.0 percent respectively. For those 60 to 64, the reductions were 1.2 percent of men and 0.9 percent of women. Having been laid off in the last three years reduces full-time work by 30 percent. There also are lingering effects of layoff on the probability of working longer. Having been laid off three or more years in the past reduces full-time employment in the current year by about 12 percent. This reflects the reduced work incentives for full-time work arising from lower earnings due to the loss of job tenure with a layoff as well as the additional earnings penalty from a layoff. The effect on own work of a spouse having been laid off is much smaller. The reason is that, as found in the estimation of our structural model, having one spouse not working increases the value of leisure for the other. In contrast, when one member of the household loses their job, the value of consumption increases relative to leisure. For recent layoffs, these effects are roughly offsetting. All told, the effects of the Great Recession on retirement seem relatively modest. These findings are consistent with our earlier descriptive analyses.
    JEL: C61 D31 D91 E21 E24 E32 H55 I3 J11 J14 J16 J32 J63 J64 J82
    Date: 2016–12
  17. By: Teresa Ghilarducci; Siavash Radpour; Bridget Fisher; Anthony Webb (Schwartz Center for Economic Policy Analysis (SCEPA))
    Abstract: Economic shocks, such as job-loss, have a particularly adverse effect on the retirement savings of workers in low-income households, exacerbating retirement savings inequality. Low income households are more likely than moderate- and upper-income households to experience economic shocks. Workers in low-income households are also more likely to withdraw from their retirement account after a shock. This study shows that these shocks have significant effects on the finances of low-income households, causing up to a third of all withdrawals, and possibly more.
    Keywords: Retirement, 401(k), GRA, Social Security
    JEL: H55 J26 J32 D63 E21
    Date: 2016–04
  18. By: Dietrichson, Jens (The Danish National Centre for Social Research (SFI)); Ellegård, Lina Maria (Department of Economics, Lund University); Kjellsson, Gustav (Department of Economics, University of Gothenburg)
    Abstract: In the last decades, many health systems have implemented policies to make care providers engage in quality competition. But care quality is a multi-dimensional concept, and competition may have different impacts on different dimensions of quality. The empirical evidence on competition and care quality is scarce, in particular regarding primary care. This paper adds evidence from recent reforms of Swedish primary care that affected competition in municipal markets differently depending on the pre- reform market structure. Using a difference-in-differences strategy, we demonstrate that the reforms led to substantially more entry of private care providers in municipalities where there were many patients per provider before the reforms. The effects on primary care quality in these municipalities are modest: we find small improvements in subjective measures of overall care quality, but no significant effects on the rate of avoidable hospitalizations or patients’ satisfaction with access to care. We find no indications of quality reductions.
    Keywords: Competition; Patient choice; Primary health care; Quality
    JEL: D04 H75 I11 I18
    Date: 2016–12–14
  19. By: Margarita Beneke (FUSADES, El Salvador); Nora Lustig (Stone Center for Latin American Studies, Department of Economics, Tulane University.); Jose Andres Oliva (FUSADES, El Salvador)
    Abstract: We conducted a fiscal impact study to estimate the effect of taxes, social spending, and subsidies on inequality and poverty in El Salvador, using the methodology of the Commitment to Equity project. Taxes are progressive, but given their volume, their impact is limited. Direct transfers are concentrated on poor households, but their budget is small so their effect is limited; a significant portion of the subsidies goes to households in the upper income deciles, so although their budget is greater, their impact is low. The component that has the greatest effect on inequality is spending on education and health. Therefore, the impact of fiscal policy is limited and low when compared with other countries with a similar level of per capita income. There is room for improvement using current resources.
    Keywords: fiscal incidence, poverty, inequality, El Salvador
    JEL: D31 H22 I14
    Date: 2016–11

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