nep-pbe New Economics Papers
on Public Economics
Issue of 2017‒01‒29
twenty-two papers chosen by
Thomas Andrén

  1. The Effects of Collecting Income Taxes on Social Security Benefits By Jones, John Bailey; Li, Yue
  2. Why is the Long-Run Tax on Capital Income Zero? Explaining the Chamley-Judd Result By Bas Jacobs; Alexandra Victoria Rusu
  3. Does postponing minimum retirement age improve healthy behaviours before retirement? Evidence from middle-aged Italian workers? By Bertoni, Marco; Brunello, Giorgio; Mazzarella, Gianluca
  4. More Tax Sources for Canada’s Largest Cities: Why, What, and How? By Harry Kitchen and Enid Slack
  5. Forecasting UK Income Tax By Zara Ghodsi; Allan Webster
  6. A survey of the UK population on public policy By Richard S.J. Tol; Peter Dolton
  7. Ideology and Public Policies: A Quasi-Experimental Test of the Hypothesis that Left-Wing Governments Spend More By Benoît LE MAUX; Kristýna DOSTÁLOVÁ; Fabio PADOVANO
  8. Resource Discovery and the Politics of Fiscal Decentralization By Sambit Bhattacharyya; Louis Conradie; Rabah Arezki
  9. Bargaining power and the incidence of income taxes on high earners in Canada By Stephen Gordon
  10. Distributional and revenue effects of a tax shift from labor to property By Paetzold, Jorg; Tiefenbacher, Markus
  11. The political economy of fiscal supervision and budget deficits: Evidence from Germany By Roesel, Felix
  12. Fiscal and other rules in EU economic governance: helpful, largely irrelevant or unenforceable? By Iain Begg
  13. Tenure in Office and Public Procurement By Decio Coviello; Stefano Gagliarducci
  14. Did the Land Transfer Tax Reduce Housing Sales in Toronto? By Murtaza Haider, Amar Anwar, and Cynthia Holmes
  15. Quality of government and subjective poverty in Europe By Massimo Baldini; Vito Peragine; Luca Silvestri
  16. Can Tax Increment Financing Support Transportation Infrastructure Investment? By Murtaza Haider and Liam Donaldson
  17. How do wage earners respond to a large kink? Evidence on earnings and deduction behavior from Austria By Paetzold, Jörg
  18. Inequality, fiscal policy, and business cycle anomalies in emerging markets By Amanda Michaud; Jacek Rothert
  19. Trends in the German Income Distribution: 2005/06 to 2010/11 By Martin Biewen; Martin Ungerer; Max Löffler
  20. Border Tax Adjustments: Assessing Risks and Rewards By Gary Clyde Hufbauer; Zhiyao (Lucy) Lu
  21. Habit formation and the Pareto-efficient provision of public goods By Aronsson, Thomas; Schöb, Ronnie
  22. A New Approach to Free Entry Markets in Mixed Oligopolies: Welfare Implications By Lee, Sang-Ho; Matsumura, Toshihiro; Sato, Susumu

  1. By: Jones, John Bailey (Federal Reserve Bank of Richmond); Li, Yue (University at Albany)
    Abstract: Since 1983, Social Security benefits have been subject to income taxation, a provision that can significantly increase the marginal income tax rate for older individuals. To assess the impact of this tax, we construct and calibrate a detailed life-cycle model of labor supply, saving, and Social Security claiming. We find that in a long-run stationary environment, replacing the taxation of Social Security benefits with a revenue-equivalent increase in the payroll tax would significantly increase labor supply, consumption and welfare. From an ex-ante perspective an even more desirable reform would be to make the portion of benefits subject to income taxes completely independent of other income.
    Keywords: Social Security; Labor Supply; Taxation
    JEL: E21 H24 H55 I38
    Date: 2017–01–12
  2. By: Bas Jacobs (Erasmus School of Economics, Tinbergen Institute, CESifo); Alexandra Victoria Rusu (Erasmus School of Economics, The Netherlands)
    Abstract: Why is it optimal not to tax capital income in the long-run in Chamley (1986) and Judd (1985)? This paper demonstrates that the answer follows standard intuitions from the commodity tax literature. In the steady state, Engel curves for consumption are linear in labour earnings, irrespective of the utility function adopted. Thus, in the steady state, consumption demands in each period become equally complementary to leisure over time. This renders taxes on capital income redundant, since they cannot alleviate distortions from taxing labour income. The argument that taxes on capital income should be zero because distortions explode in finite time is relevant only if restrictions are imposed on the utility function. We show how these restrictions imply that consumption demands in each period are equally complementary to leisure over time. We also demonstrate that the optimal tax on capital income is zero irrespective of whether the gross interest rate is endogenous. This contradicts arguments that the entire burden of capital income taxes is shifted to labour through general equilibrium effects on the interest rate.
    Keywords: taxation of capital income; zero capital income tax; Corlett-Hague motive; Chamley-Judd result
    JEL: H2
    Date: 2017–01–23
  3. By: Bertoni, Marco (university of padova); Brunello, Giorgio (university of padova); Mazzarella, Gianluca (university of padova)
    Abstract: By increasing the residual working horizon of employed individuals, pension reforms that raise minimum retirement age are likely to affect the returns to investments in health-promoting behaviours before retirement, with consequences for individual health. Using the exogenous variation in minimum retirement age induced by a sequence of Italian pension reforms during the 1990s and 2000s, we show that Italian males aged 40 to 49 reacted to the longer time to retirement by raising regular exercise and by reducing smoking and regular alcohol consumption. Dietary habits were also affected, with positive consequences on obesity and self-reported satisfaction with health.
    JEL: H55 I12 J26
    Date: 2016
  4. By: Harry Kitchen and Enid Slack (University of Toronto)
    Abstract: Canadian cities have long called for access to more tax revenues. This paper argues that additional taxes are appropriate for major cities, describes the advantages and disadvantages of potential new taxes, and estimates the revenue from a city income tax, a city sales tax, and a city fuel tax for eight Canadian cities – Vancouver, Calgary, Edmonton, Winnipeg, Toronto, Ottawa, Montréal, and Halifax. The authors find that the property tax is a good tax, but cities would benefit from a mix of taxes. In particular, user fees are an important source of revenue and can alter economic behaviour. Taxes on income, sales, vehicle registration, fuel, and hotel stays are also an effective way to diversify local taxes. Of the available options, a personal income tax and a municipal sales tax are likely to generate the largest revenues. Although setting up their own tax systems would grant cities the greatest fiscal autonomy, doing so would be costly. It would be more cost-effective for cities to piggyback new taxes onto provincial taxes, with the province collecting the revenue and remitting it to cities. To promote local accountability, however, it is essential that local governments set their own tax rates. In this way, taxes levied would be linked to services consumed.
    Keywords: municipal finance, local taxes, fiscal autonomy
    JEL: H71 H77
    Date: 2016–10
  5. By: Zara Ghodsi (Statistical Research Centre, Bournemouth University); Allan Webster (Statistical Research Centre, Bournemouth University)
    Abstract: The literature on forecasting tax revenues focuses on the need for a body of competing forecasts independent of government, to limit potential political bias. The Office for Budget Responsibility does provide detailed independent forecasts for the UK but there are limited alternatives. The literature on appropriate techniques for forecasting detailed tax revenues is under-developed. In many countries tax revenue forecasts are embedded in a more extensive macro-economic forecasting model. These models lack sufficient precision for revenue forecasting revenues for several specific taxes. Such models are too involved to support a body of competing independent forecasts. In consequence there is an established need for single equation revenue forecasts for specific taxes to complement the macro-economic approach. This study considers the use of a number of (mainly) time series forecasting techniques. We find Recurrent Singular Spectrum Analysis (RSSA) to perform the best of the techniques considered.
    Keywords: United Kingdom; Income Tax; Forecasting; Singular Spectrum Analysis; ARIMA; Exponential Smoothing; Neural Networks
    Date: 2017–01
  6. By: Richard S.J. Tol (Department of Economics, University of Sussex,UK, Institute for Environmental Studies and Department of Spatial Economic,UK, Vrije Universiteit, Amsterdam, The Netherlands Tinbergen Institute, Amsterdam, The Netherlands); Peter Dolton (Department of Economics, University of Sussex,UK,Centre for Economic Performance, London School of Economics,UK,CESifo, Munich, Germany,IZA, Bonn, Germany)
    Abstract: An online survey of over 12,000 UK residents was conducted with the aim of understanding: elements of public policy, preferences and knowledge of public expenditure, the provision of public goods, and the intergenerational allocation of resources. Questions were asked about demographics, wealth and income attitudes, time preferences, risk preferences, social value orientation, subjective personal assessments of life expectancy, perceptions of government spending, and public policies on health, education, pensions and climate change. This paper presents a simple description of the summary statistics from the survey. It does not, as yet, provides substantive analysis of the data.
    Keywords: Survey, United Kingdom, discount rate, risk aversion, social value orientation, health, education, pensions, climate change, public policy
    JEL: D10 D64 D70 D80 I18 I28 J32 H51 H52 H55 Q54
    Date: 2016–02
  7. By: Benoît LE MAUX (University of Rennes 1, CREM-CNRS, Condorcet Center for Political Economy, France); Kristýna DOSTÁLOVÁ (University of Rennes 1, CREM-CNRS, France); Fabio PADOVANO (University of Rennes 1, CREM-CNRS, Condorcet Center for Political Economy, France)
    Abstract: In the literature it is often argued that governments on the left tend to raise tax rates and public spending more than their right-wing counterparts. We demonstrate that this result must be interpreted with caution. Not only it may reveal partisan effects, due to the direct impact of parties’ ideology on public spending, but also a selection bias, since the distribution of voters’ preferences determines the ideology of the government in office. The present research overcomes this problem of observational equivalence by applying two identification strategies, namely re-gression discontinuity design and propensity score matching. Using data from the French local public sector, we show that governments facing the same economic situation do not spend more when they are left-wing, particularly in the case of social expenditures. This result rules out the partisan-politicians hypothesis and lends support to demand driven policy selection processes.
    Keywords: Public services, Party ideology, Redistribution, Partisan effects, Selection bias
    JEL: H72 H40 D72
    Date: 2017–01
  8. By: Sambit Bhattacharyya (Department of Economics, University of Sussex); Louis Conradie (Department of Economics, University of Sussex); Rabah Arezki (Research Department, IMF)
    Abstract: If the central government is a revenue maximizing Leviathan then resource discovery and democratization should have a discernible impact on the degree of fiscal decentralization. We systematically explore this effect by exploiting exogenous variation in giant oil and mineral discoveries and permanent democratization. Using a global dataset of 77 countries over the period 1970 to 2012 we find that resource discovery has very little effect on revenue decentralization but induces expenditure centralization. Oil discovery appears to be the main driver of centralization and not minerals. Resource discovery leads to centralization in locations which have not experienced permanent democratization. Tax and intergovernmental transfers respond most to resource discovery shocks and democratization whereas own source revenue, property tax, educational expenditure, and health expenditure do not seem to be affected. Higher resource rent leads to more centralization and the effect is moderated by democratization.
    Keywords: Resource discovery; Resource rent; Democratization; Fiscal decentralization
    JEL: H41 H70 O11
    Date: 2016–03
  9. By: Stephen Gordon
    Abstract: This study explores the ‘brain drain’ explanation for the concentration of incomes in Canada during the past thirty years, namely, that high-skilled Canadians have made use of the high salaries on offer in the United States to extract higher salaries at home. If this is the case, then for a given level of US salaries, the threat to accept outside offers should be more credible when the Canadian dollar is depreciating against the US dollar, and weaker when the Canadian dollar is appreciating. The data are broadly consistent with this claim: income concentration worsened during the depreciations of the 1980s and 1990s, and eased when the Canadian dollar began to appreciate in value. The paper develops a simple two-parameter model based on the propositions that high earners in Canada can use US salaries to bargain for higher salaries, and that Canadian high earners can shelter part of their income from personal income taxes. It also offers some preliminary evidence about the parameter values consistent with available data. The results suggest that higher top marginal personal income tax rates may actually accentuate top-end after-tax income inequality. If high earners are able to use their bargaining power to extract pay increases to offset higher tax rates, the the burden of increased taxes will be pushed down to those lower down in the income distribution, leaving the after-tax income distribution more unequal than it was before.
    Date: 2016
  10. By: Paetzold, Jorg; Tiefenbacher, Markus
    Abstract: Contrary to frequent recommendations of the public finance literature and international institutions, a persistently high tax wedge on labor is observed in Europe. Simultaneously, the scope for shifting taxes to more growth-friendly revenue sources appears underused. This motivates our simulation of a tax shift from labor to property for Germany, a country where property tax revenues are particularly low and the tax wedge on labor income is among the highest in industrialized countries. We simulate a reform where property is no longer taxed by its (often) outdated cadastral value but by its market value, using the additional revenue to reduce social insurance contributions (SIC). To make such a simulation possible, we match property-related information with the input data of the tax-benefit microsimulation model EUROMOD. We find a considerable increase in property tax revenues, allowing to reduce the implicit tax rate on labor from 37.2% to 36.5%. Distributive effects tend to be modest, and depend critically on the design of the SIC reduction. Overall, our results suggest that more households would gain than lose from the tax shift, with gainers mostly situated in the middle of the income distribution.
    Date: 2016–12–30
  11. By: Roesel, Felix
    Abstract: In many federal countries, local governments run large deficits, even when fiscal supervision by state authorities is tight. I investigate to which extent party alignment of governments and fiscal supervisors influences budget deficits. The dataset includes 427 German local governments for the period 2000-2004. I exploit a period after a far-reaching institutional reform that entirely re-distributed political powers on both the government level and the fiscal supervisor level. Results do not show that party alignments of governments and supervisors (co-partisanship) drive short-term deficits. Instead, I find that the ideology of partisan governments and supervisors matters: left-wing local governments run higher deficits than their right-wing counterparts; left-wing supervisors tolerate higher deficits than right-wing supervisors. These findings imply that political independence for fiscal supervisors is recommended.
    Keywords: Local government,Budget deficits,Fiscal supervision,Partisan cycle
    JEL: H62 H74 H77
    Date: 2017
  12. By: Iain Begg
    Abstract: EU Member States, particularly in the euro area, have been pushed to adopt more extensive and intrusive fiscal rules, but,what is the evidence that the rules are succeeding?. The EU level Stability and Growth Pact (SGP) has been – and remains – the most visible rule-book, but it has been complemented by a profusion of national rules and by new provisions on other sources of macroeconomic imbalance. Much of the analysis of rules has concentrated on their technical merits, but tends to neglect the political economy of compliance. This paper examines the latter looking at compliance with fiscal rules at EU and Member State levels, and at the rules-based mechanisms for curbing other macroeconomic imbalances. It concludes that politically driven implementation and enforcement shortcomings have been given too little attention, putting at risk the integrity and effectiveness of the rules.
    Keywords: Fiscal rules; European economic governance; Macroeconomic imbalances; Political economy of compliance; Fiscal councils in Europe
    JEL: E61 F42 H11 H61 H77 H81
    Date: 2017
  13. By: Decio Coviello; Stefano Gagliarducci
    Abstract: We study the impact of politicians' tenure in office on the outcomes of public procurement. To this purpose, we match a data set on the politics of Italian municipal governments to a data set on the procurement auctions they administered. In order to identify a causal relation, we apply two different identification strategies. First, we compare elections where the incumbent mayor barely won another term, with elections where the incumbent mayor barely lost and a new mayor took over. Second, we cross-validate these estimates using a unique quasi-experiment determined by the introduction of a two-term limit on the mayoral office in March 1993. This reform granted one potential extra term to mayors appointed before the reform. The main result is that an increase in the mayor's tenure is associated with ``worse' outcomes: fewer bidders per auction, a higher cost of procurement, a higher probability that the winner is local and that the same firm is awarded repeated auctions. Taken together, our estimates are informative of the possibility that time in office progressively leads to collusion between government officials and a few favored local bidders. Other interpretations receive less support in the data.
    Keywords: tenure in office, procurement auctions, public works, term limit
    JEL: D44 D72 D73 H57 H70
    Date: 2017–01
  14. By: Murtaza Haider, Amar Anwar, and Cynthia Holmes (Ryerson University and Cape Breton University)
    Abstract: The City of Toronto implemented a land transfer tax on real estate transactions in February 2008. We explore the impact of the tax on housing sales in the City of Toronto and the rest of the Greater Toronto Area (GTA). Previous research has shown that housing sales declined in Toronto once the City imposed the land transfer tax. This study, however, concludes that the negative impact of the tax on housing sales was statistically insignificant. Our approach differs from earlier studies in three ways. First, we highlight other influences on housing sales, in particular, the impact of the Great Recession, which overlapped with the imposition of the land transfer tax in Toronto, and the tightening of mortgage regulations in Canada that prevented lenders from issuing subprime mortgages. Second, we analyze the sale of both freehold and condominium properties in the GTA; previous research restricted analysis to freehold properties. Third, we take a regional perspective by contrasting any decline in housing sales in Toronto against an increase in sales in the suburban municipalities.
    Keywords: land transfer tax, housing sales, housing market, consumer behavior, Toronto, Greater Toronto Area
    JEL: H76 H31 R31
    Date: 2016–07
  15. By: Massimo Baldini; Vito Peragine; Luca Silvestri
    Abstract: We study the effect of quality of government on subjective poverty across European countries and regions, taking advantage of recently released data on the quality of public institutions at the regional level, and of information on household subjective poverty. In the analysis we try to separate the effects of quantity and quality of public services on perceived well-being, controlling for the size of the local government and for the receipt of in-kind services by each household of the sample. Results suggest that good governance significantly reduces the probability of being subjectively poor, both over the whole population and also among households that are poor in terms of monetary income. We then estimate the greater cost that a family has to bear in order to achieve a given level of welfare, if it lives in a region with inefficient public institutions. Our measure of this inefficiency cost is around 6% of disposable income.
    Keywords: Quality of government, subjective poverty, minimum income, European regions, poverty line
    JEL: I32 H1 H7
    Date: 2017–01
  16. By: Murtaza Haider and Liam Donaldson (Ryerson University)
    Abstract: This report reviews alternative sources of revenue to support new infrastructure and other development projects for which municipal funds are not readily available. We review two such instruments: Tax Increment Financing (TIF) and Land Value Capture (LVC). We found more frequent use of TIF than LVC. TIF has largely been used to fund small-scale projects, often not exceeding one or two hundred million dollars in capital costs. We could find only two TIF implementations that aimed to generate over a billion dollars in TIF revenue, and those projects fell short of meeting the revenue targets. The evidence for TIF efficacy is mixed and depends, to some extent, on the type of methods used in the analysis. Some studies found the TIF districts reported higher rates of development and greater real estate price appreciation than comparable non-TIF districts. Other studies reached different conclusions. Three key elements were repeatedly found to contribute to TIF success. (1) Mixed land use developments often met their intended TIF objectives. (2) The timing of TIF implementation mattered; TIFs initiated during recessions met with limited success. (3) Smaller TIFs were more successful in meeting revenue targets than larger ones. We simulate a 30-year TIF implementation along the Sheppard East corridor in Toronto, the route for the Sheppard subway line that started operations in 2002, and offer insights for local and higher tiers of government interested in implementing TIF. Our analysis of the Sheppard East corridor found that the net present value of the simulated TIF revenue covered only a small portion of the capital costs of extending the subway line.
    Keywords: tax increment financing, land value capture, value capture, infrastructure
    JEL: H27 H76 R42
    Date: 2016–04
  17. By: Paetzold, Jörg (University of Salzburg)
    Abstract: This paper contributes to recent literature emphasizing the importance to identify the different channels along which taxable income responses occur. Using bunching techniques and exploiting a large first kink point where marginal tax rates increase by as much as 38 percentage points, we recover modest gross wage earnings responses of Austrian employees. Next, we show that when accounting for deduction behavior, the additional mass of wage earners at the kink increases by around 50%. We find direct evidence for wage earners targeting the kink with their deduction claiming. Finally, we use a novel estimation strategy to show evidence that the probability of claiming a deduction depends on its (net-of-tax) cash value, and we provide a new estimate for the deduction elasticity. In sum, our results suggest that distinguishing between earnings and deduction responses matters even for taxpayers with only limited possibilities to shelter taxable income.
    Keywords: bunching; elasticity of wage earnings and deductions; tax expenditures; deduction behavior; administrative data
    JEL: H21 H24 J22
    Date: 2017–01–18
  18. By: Amanda Michaud; Jacek Rothert
    Abstract: Government expenditures are procyclical in emerging markets and countercyclical in developed economies. We show this pattern is driven by differences in social transfers: transfers are more countercyclical and make up a larger portion of spending in developed economies. We use a small open economy model to study how much these differences in fiscal policies can account for differences in business cycle characteristics of emerging economies, particularly excess volatility of private consumption. We find that ignoring disparate fiscal policy results in an overestimation of the persistence of technology shocks in emerging markets relative to developed by 52%. We study how this conclusion depends on differences in the extent and sources of inequality across countries.
    Keywords: fiscal policy, emerging markets, trasnfers, inequality
    JEL: E21 E32 E62 F41
    Date: 2016
  19. By: Martin Biewen; Martin Ungerer; Max Löffler
    Abstract: We analyze the potential influence of a number of factors on the distribution of equivalized net incomes in Germany over the period 2005/2006 to 2010/11. While income inequality considerably increased in the years before 2005/2006, this trendwas stopped after 2005/2006. Among many other factors, we consider the role of the employment boom and the development of inequality in wage incomes after 2005/2006. Our results suggest that, despite further increases in wage inequality, inequality in equivalized net incomes did not increase further after 2005/2006 because increased within-year employment opportunities compensated otherwise rising inequality in annual labour incomes. On the other hand, income inequality did not fall in a more marked way after 2005/2006 because also the middle and the upper part of the distribution benefitted from the employment boom. Other factors, such as changing household structures, population aging and changes in the tax and transfer system had no important effects on the distribution. Finally, we find little evidence that the distribution of equivalized net incomes was affected in any important way by the financial crisis and the subsequent great recession.
    Keywords: income inequality, poverty
    JEL: C14 D31 I30
    Date: 2016
  20. By: Gary Clyde Hufbauer (Peterson Institute for International Economics); Zhiyao (Lucy) Lu (Peterson Institute for International Economics)
    Abstract: Border tax adjustments—achieved by denying business deductions for imported goods and services and excluding exports of goods and services from the tax base—will be hotly debated as a key feature of the cash flow tax proposed in the Blueprint of House Speaker Paul Ryan and Ways and Means Committee Chair Kevin Brady. This Policy Brief examines border tax adjustments from the perspective of their compatibility with World Trade Organization (WTO) rules, their possible impact on the dollar exchange rate, and the resulting effects on tax incidence brought by exchange rate movements. The authors conclude that not only are dogmatic assertions on the WTO compatibility of BTAs unwarranted but also are confident predictions of the induced exchange rate impact. The Trump administration and Congress will need to evaluate BTAs from different angles, realizing that decisions taken will carry the US economy into uncertain terrain.
    Date: 2017–01
  21. By: Aronsson, Thomas; Schöb, Ronnie
    Abstract: This paper examines the implications of habit formation in private and public consumption for the Pareto-efficient provision of public goods, based on a two-period model with nonlinear taxation. If the public good supply is time-invariant, the presence of habit formation generally alters the standard rules for public good provision. In contrast, if the public good is a flow-variable such that the government directly decides on the level of the public good in each period, habit formation leads to a modification of the first best Samuelson condition only if the degrees of habituation differ for private and public consumption. Since habit formation affects the incentives to relax the self-selection constraint through public good provision, however, habituation alters the second-best analogue to the Samuelson condition also when the degrees of habituation in private and public consumption coincide.
    Keywords: public good provision,Samuelson condition,habit formation,optimal taxation
    JEL: D60 H21 H41
    Date: 2017
  22. By: Lee, Sang-Ho; Matsumura, Toshihiro; Sato, Susumu
    Abstract: This study formulates a new model of mixed oligopolies in free entry markets. A state-owned public enterprise is established before the game, private enterprises enter the market, and then the government chooses the degree of privatization of the public enterprise (Entry-then-Privatization Model). We find that under general demand and cost functions, the timing of privatization does not affect consumer surplus or the output of each private firm, while it does affect the equilibrium degree of privatization, number of entering firms, and output of the public firm. The equilibrium degree of privatization is too high (low) for both domestic and world welfare if private firms are domestic (foreign).
    Keywords: timing of privatization, commitment, state-owned public enterprises; foreign competition
    JEL: H42 L13
    Date: 2017–01

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