nep-pbe New Economics Papers
on Public Economics
Issue of 2017‒02‒12
seventeen papers chosen by
Thomas Andrén

  1. Sectoral Composition of Government Spending, Distortionary Income Taxation, and Macroeconomic (In)stabilit By Jang-Ting Guo; Juin-Jen Chang; Jhy-Yuan Shieh; Wei-Neng Wang
  2. Beggar-Thy-Neighbour Tax Cuts: Mobility after a Local Income and Wealth Tax Reform in Switzerland By Martinez, Isabel Z.
  3. Inequality, Redistributive Policies and Multiplier Dynamics in an Agent-Based Model with Credit Rationing By Elisa Palagi; Mauro Napoletano; Andrea Roventini; Jean-Luc Gaffard
  4. Lone parents, time-limited in-work credits and the dynamics of work and welfare By Brewer, Mike; Cribb, Jonathan
  5. The deterrence effect of real-world operational tax audits By Gabriele, Mazzolini; Laura, Pagani; Alessandro, Santoro;
  6. Implications of a Sugar Tax in New Zealand: Incidence and Effectiveness By Alasdair Gardiner
  7. Tax Policy and Economic Growth: Does It Really Matter? By Donatella Baiardi; Paola Profeta; Riccardo Puglisi; Simona Scabrosetti
  8. How does petty corruption affect tax morale in sub-Saharan Africa? An empirical analysis By Björn Jahnke
  9. Should pensions be redistributive? The impact of Spanish reforms on the system’s sustainability and adequacy By Concepció Patxot; Meritxell Solé; Guadalupe Souto
  10. Does the political resource curse affect public finance? The vulnerability of tax revenue in resource-rich countries By Christian von Haldenwang; Maksym Ivanyna
  11. Fiscal Policy, Income Redistribution and Poverty Reduction in Low and Middle Income Countries By Nora Lustig
  12. National Care System in Uruguay: Who benefits and who pays? By Verónica Amarante; Maira Colacce; Victoria Tenenbaum
  13. Optimal social insurance and health inequality By Grossmann, Volker; Strulik, Holger
  14. The Ryan-Brady Cash Flow Tax: Disguised Protection, Exaggerated Revenue, and Increased Inequality By William R. Cline
  15. Healthcare Spending and Utilization in Public and Private Medicare By Vilsa Curto; Liran Einav; Amy Finkelstein; Jonathan D. Levin; Jay Bhattacharya
  16. A New Test of Ricardian Equivalence Using the Narrative Record on Tax Changes By Alfred Haug
  17. A Longitudinal Survey of Unemployment Insurance Recipients in Two Regions in California By Joanne Lee; Karen Needels; Walter Nicholson

  1. By: Jang-Ting Guo (Department of Economics, University of California Riverside); Juin-Jen Chang (Academia Sinica); Jhy-Yuan Shieh (Soochow University); Wei-Neng Wang (Academia Sinica)
    Abstract: This paper quantitatively examines the interrelations between sectoral composition of government spending and macroeconomic (in)stability in a two-sector real business cycle model with positive productive externalities in investment and distortionary income taxation through a stylized balanced-budget fiscal policy rule. We find that under endogenous public expenditures, the benchmark model always exhibits indeterminacy and sunspots provided the constant tax rate does not exceed a critical value. When the tax rate is raised to a higher level, a sufficiently high public-consumption share can destabilize the macroeconomy by generating belief-driven cyclical fluctuations. We also find that under the baseline parameterization with fixed government spending, the low-tax steady state is an indeterminate sink and the high-tax steady state is a saddle point, regardless of how public expenditures are divided between consumption and investment goods.
    Keywords: Government Spending; Distortionary Income Taxation; Equilibrium (In)determinacy.
    JEL: E32 E62 O41
    Date: 2017–02
  2. By: Martinez, Isabel Z.
    Abstract: Tax competition raises the question to which extent taxpayers respond to differences in income tax rates by migrating to low-tax areas. This paper analyzes a large, two-step tax reform in the canton of Obwalden in central Switzerland in 2006 and 2008. The canton first introduced a regressive income tax scheme with the explicit purpose of attracting affluent taxpayers, followed by a change to a flat rate tax, thereby lowering taxes for all taxpayers. Using individual tax data from the cantonal tax administration, I apply a 2SLS approach to estimate how responsive migration was to the tax reduction. I estimate an elasticity of the stock of rich taxpayers in the canton with respect to the average net-of-tax rate of 2.4 in the first two years after the reform, increasing to 3.5 over the five post-reform years. The corresponding elsticities of the inflow of rich taxpayers are even larger. These estimates are larger than what the few studies on tax induced mobility elasticity have found so far. I can further rule out that these results are due to an exogenous positive income shock to top incomes. DiD estimations comparing the share of rich taxpayers and net income per taxpayer in Obwalden to two neighboring cantons confirm that the reform was successful in increasing the canton's tax base. The large elasticities can be explained by two aspects. First, by the sizable pool of intentionally treated and the prevailing residence-based taxation, as opposed to source-based taxation. Through relocating to Obwalden, any Swiss and European citizen could take advantage of this tax scheme. Second, by the initially low share of rich taxpayers in Obwalden and the small size of the canton.
    JEL: H71 H24 H31
    Date: 2016
  3. By: Elisa Palagi; Mauro Napoletano; Andrea Roventini; Jean-Luc Gaffard
    Abstract: We build an agent-based model populated by households with heterogenous and time-varying financial conditions in order to study how different inequality shocks affect income dynamics and the effects of different types of fiscal policy responses. We show that inequality shocks generate persistent falls in aggregate income by increasing the fraction of credit-constrained households and by lowering aggregate consumption. Furthermore, we experiment with different types of fiscal policies to counter the effects of inequality-generated recessions, namely deficit-spending direct government consumption and redistributive subsidies financed by different types of taxes. We find that subsidies are in general associated with higher fiscal multipliers than direct government expenditure, as they appear to be better suited to sustain consumption of lower income households after the shock. In addition, we show that the effectiveness of redistributive subsidies increases if they are financed by taxing financial incomes or savings. Downloads
    Keywords: income inequality, scal multipliers, redistributive policies, credit-rationing, agent-based models
    Date: 2017–06–02
  4. By: Brewer, Mike; Cribb, Jonathan
    Abstract: Time-limited in-work credits are cheaper, and more targeted, than conventional in-work credits, but are thought to have small to zero long-term impacts. We study two time-limited in-work credits in- troduced in the mid-2000s in the UK and find they reduced welfare participation and increased employment. Both policies increased job retention once recipients were in work and boosted employment even after the payments were stopped. Conditioning on hours of work was important. Paying a credit to those working 16+ hours a week only increased part-time work, while conditioning on full-time work reduced part-time work and increased full-time work.
    Date: 2017–01–27
  5. By: Gabriele, Mazzolini; Laura, Pagani; Alessandro, Santoro;
    Abstract: We use a large administrative tax-returns panel dataset merged with tax audit database to estimate the effect of real-world operational tax audits on subsequent tax behavior. Our identification strategy and the institutional setting that we consider enable us to address potential endogeneity related to non-random selection of taxpayers to be audited. We find a positive and lasting effect of audits on subsequent reported income. However, in line with theoretical predictions, taxpayers do not increase tax compliance when the tax authority does not assess a positive additional income. Our results are robust to a variety of specifications and samples.
    Keywords: Tax Compliance, Administrative Panel Data, Tax Audits
    JEL: H26 C23 C55
    Date: 2017–02–03
  6. By: Alasdair Gardiner (Ministry of Business, Innovation and Employment)
    Abstract: This paper has two aims. First, it surveys some of the literature on the likely effectiveness of sugar taxes as a policy instrument for reducing morbidity and mortality associated with obesity. There is a wide range of estimates among the literature of the price elasticity of demand for sugary products. A plurality of studies found that groups most at risk from obesity have greater price sensitivity. Studies also found there is a risk of consumers substituting unhealthy but non-taxed products for taxed products, negating any potential health improvements from a tax. The paper's second aim is to build on the literature review by analysing the possible incidence of a sugar tax in New Zealand, based on New Zealand household expenditure data. The empirical analysis presented is consistent with international evidence that a sugar tax would be regressive at the general population level.
    Keywords: Sugar sweetened beverages; tax progressivity
    JEL: H2 H3
    Date: 2016–12
  7. By: Donatella Baiardi (Università di Parma); Paola Profeta (Università Bocconi); Riccardo Puglisi (Università di Pavia); Simona Scabrosetti (Università di Pavia)
    Abstract: We challenge the "OECD view" (Arnold et al. 2011) according to which a shift from direct to indirect taxation is associated with higher long-run economic growth. We study the relationships between per capita GDP, overall tax revenue and tax composition (in particular direct vs. indirect taxation). We can replicate the findings in Arnold et al. when focusing on the same sample of countries and time period, but not when adopting more cautious estimates of the standard errors. The results are not robust to adding countries and/or extending the time period under consideration. They also differ in the short- and long-run.
    Keywords: economic growth, taxation, tax mix, OECD countries
    JEL: E62 H20 P50
  8. By: Björn Jahnke
    Abstract: Revenues from taxation gain importance to finance economic development in sub-Saharan Africa. Extortion of bribes by public officials can provide one obstacle for tax compliance. This paper uses micro-level data from the Afrobarometer to analyse how petty corruption erodes tax morale. A mediation analysis shows that petty corruption directly reduces tax morale but also diminishes trust in the tax department and hence indirectly affects tax morale. The effect on tax morale is more severe in countries and regions where fewer people are affected by petty corruption and becomes insignificant if extortion of bribes is particularly prevalent.
    Keywords: corruption, tax morale, economic development, mediation analysis, regional disaggregation
    Date: 2017
  9. By: Concepció Patxot; Meritxell Solé; Guadalupe Souto
    Abstract: Concerns about the consequences of demographic ageing on the sustainability of the pension system has led to the adoption of reforms reducing pension expenditure. However, the impact of these reforms on pension adequacy is now coming under increasing scrutiny. Taking recent Spanish reforms as an example, this paper analyses the extent to which fostering pension sustainability threatens pension adequacy, with a particular focus on inter- and intragenerational equity. Using an extension of the DyPeS microsimulation model, results show that the introduction of mechanisms linking retirement pensions to the evolution of the social security budget balance has strong and negative effects on adequacy and on income redistribution. Unexpected effects of the Bismarckian reforms on income redistribution are also observed. The outcomes reported for the Spanish pension system highlight the need to reconsider the convenience of using the pension system as an income redistribution device.
    Date: 2017–02
  10. By: Christian von Haldenwang; Maksym Ivanyna
    Abstract: This paper explores the extent to which government revenue is affected by external shocks, and whether these effects are different for resource-rich as compared with non-resource-rich countries. We are particularly interested in the fate of poorer countries, as we assume they will find it more difficult to implement the policies needed to offset the effect of shocks. Based on data from the International Centre for Taxation and Development Government Revenue Dataset for 1980–2010, we measure the elasticity of tax revenue with respect to terms-of-trade shocks. We find that revenue in resource-rich countries is more vulnerable to such shocks. Interestingly, it is above all the richer countries that appear to be adversely affected. Also, resource-rich countries became less vulnerable in the 2000s as compared with previous decades. When we look at the poorer resource-rich countries, we find that a country’s general institutional characteristics may not always reflect the quality of its management of natural resources.
    Keywords: taxes, natural resources, terms-of-trade shocks, developing countries, government revenue, volatility
    Date: 2017
  11. By: Nora Lustig (Department of Economics, Tulane University)
    Abstract: Current policy discussion focuses primarily on the power of fiscal policy to reduce inequality. Yet, comparable fiscal incidence analysis for twenty-eight low and middle income countries reveals that, although fiscal systems are always equalizing, that is not always true for poverty. In Ethiopia, Tanzania, Ghana, Nicaragua, and Guatemala the extreme poverty headcount ratio is higher after taxes and transfers (excluding in-kind transfers) than before. In addition, to varying degrees, in all countries a portion of the poor are net payers into the fiscal system and are thus impoverished by the fiscal system. Consumption taxes are the main culprits of fiscally-induced impoverishment. Net direct taxes are always equalizing and indirect taxes net of subsidies are equalizing in nineteen countries of the twenty-eight. While spending on pre-school and primary school is pro-poor (i.e., the per capita transfer declines with income) in almost all countries, pro-poor secondary school spending is less prevalent, and tertiary education spending tends to be progressive only in relative terms (i.e., equalizing but not pro-poor). Health spending is always equalizing but not always pro-poor. More unequal countries devote more resources to redistributive spending and appear to redistribute more. The latter, however, is not a robust result across specifications.
    Keywords: fiscal incidence, social spending, inequality, poverty, developing countries
    JEL: H22 H5 D31 I3
    Date: 2017–01
  12. By: Verónica Amarante; Maira Colacce; Victoria Tenenbaum
    Abstract: In this paper, we analyse two specific policies that make up the National Care System, a social policy being implemented in Uruguay. Through the calibration of a static tax benefit model, we estimate the distributive impact of the expansion of childcare services and home-based care for dependent elderly, both financed through a progressive direct tax on income. We discuss the importance of identifying who benefits from these services, and show that, in the Uruguayan case, the redistributive impact is very limited. Even if the benefits are significant for individual households, the overall impact is weak because the number of beneficiaries is small.
    Keywords: childcare, elderly care, redistribution, microsimulation
    Date: 2017
  13. By: Grossmann, Volker; Strulik, Holger
    Abstract: This paper integrates into public economics a biologically founded, stochastic process of individual ageing. The novel approach enables us to quantitatively characterize the optimal joint design of health and retirement policy behind the veil of ignorance for today and in response to future medical progress. Calibrating our model to Germany, we find that future progress in medical technology calls for a potentially drastic increase in health spending that typically should be accompanied by a lower pension savings rate and a higher retirement age. Interestingly, medical progress and higher health spending are in conflict with the goal to reduce health inequality.
    Keywords: ageing,health expenditure,health inequality,social security system,retirement age
    JEL: H50 I10 C60
    Date: 2017
  14. By: William R. Cline (Peterson Institute for International Economics)
    Abstract: The proposal by Speaker of the House Paul Ryan and House Ways and Means Committee Chairman Kevin Brady to replace the corporate profits tax with a 20 percent tax on cash flow with no deductibility for imports but complete deduction of exports is misguided for several reasons. First, it is protectionist, because it imposes the tax on the entirety of import value but only on the corporate profit component of domestic production, violating the concept of “like treatment” between imports and domestic goods. Second, a nonprotectionist version would involve a much lower rate and far lower revenues and, in principle, would have to vary sharply across sectors. Third, the tax would punish sectors particularly dependent on imports, especially the retail sector, automobiles, and oil refining. Fourth, the tax would be regressive, by shifting the burden to consumers and away from the holders of corporate shares with respect to the traded part of production and consumption. Fifth, the tax is unlikely to induce a fully compensating rise in the dollar against other currencies such that imports would be no more costly (and exports no more profitable) than before. Because of its protective structure, the proposal is likely to run afoul of rules against protection at the World Trade Organization, of which the United States is a signatory. Nevertheless, because the Ryan-Brady proposal continues to be a priority of Republicans in Congress, and in view of the Trump administration’s mixed signals on the proposal, it is important for the public to understand its elements and the dangers they pose.
    Date: 2017–01
  15. By: Vilsa Curto; Liran Einav; Amy Finkelstein; Jonathan D. Levin; Jay Bhattacharya
    Abstract: We compare healthcare spending in public and private Medicare using newly available claims data from Medicare Advantage (MA) insurers. MA insurer revenues are 30 percent higher than their healthcare spending. Healthcare spending is 25 percent lower for MA enrollees than for enrollees in traditional Medicare (TM) in the same county with the same risk score. Spending differences between MA and TM are similar across sub-populations of enrollees and sub-categories of care, with similar reductions for "high value" and "low value" care. Spending differences primarily reflect differences in healthcare utilization; spending per encounter and hospital payments per admission are very similar in MA and TM. Geographic variation in MA spending is about 20 percent higher than in TM, but geographic variation in hospital prices is about 20 percent lower. We present evidence consistent with MA plans encouraging substitution to less expensive care, such as primary rather than specialist care, and outpatient rather than inpatient surgery, and with employing various types of utilization management. Some of the overall spending differences between MA and TM may be driven by selection on unobservables, and we report a range of estimates of this selection effect using mortality outcomes to proxy for selection.
    JEL: H11 H42 H51 I11 I13
    Date: 2017–01
  16. By: Alfred Haug (University of Otago)
    Abstract: This paper empirically tests the Ricardian equivalence hypothesis with a narrative measure of tax shocks. The present value, at the time of legislation, for tax increases motivated solely by concerns for improving the scal health of the government is used for the tests. These tax news represent a switch from debt to tax nancing that should have no eects on the economy if Ricardian equivalence holds as a good approximation. Such a tax increase seems to have positive eects on real GDP in the post-1980:IV period. However, this is due to scal anticipation as many of the tax increases are implemented with substantial delays and distortionary taxes increase economic activity before taxes go up, which is caused by intertemporal substitution. Therefore, Ricardian equivalence is rejected.
    Keywords: Ricardian equivalence hypothesis; narrative record; exogenous tax changes; government budget decits.
    JEL: E62 C51
    Date: 2016–07
  17. By: Joanne Lee; Karen Needels; Walter Nicholson
    Abstract: This study used longitudinal survey data to investigate how unemployment insurance recipients in California changed their job search strategies and ways of coping with financial hardships during a six- to nine-month period after they started receiving benefits.
    Keywords: unemployment, insurance, California, benefits, longitudinal, survey
    JEL: J

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