nep-pbe New Economics Papers
on Public Economics
Issue of 2017‒03‒26
ten papers chosen by
Thomas Andrén

  1. When Do Discretionary Changes in Government Spending or Taxes Have Larger Effects? By Steven M. Fazzari; James Morley; Irina B. Panovska
  2. Public debt, corruption and tax evasion: Nash and Stackelberg equilibria By Halkos, George; Papageorgiou, George
  3. Public Investment, Time to Build, and the Zero Lower Bound By Hafedh Bouakez; Michel Guillard; Jordan Roulleau-Pasdeloup
  4. How Has the Shift to 401(k) Plans Affected Retirement Income? By Alicia H. Munnell; Wenliang Hou; Anthony Webb; Yinji Li
  5. Welfare benefit reforms and employment By Marta Aloi; Teresa Lloyd-Braga; Manuel Leite-Monteiro
  6. Does the Strength of Incentives Matter for Elected Officials? A Look at Tax Collectors By Sutirtha Bagchi
  7. Exchange rate implications of Border Tax Adjustment neutrality By Buiter, Willem H.
  8. Anatomy of Income Inequality in the United States: 1979{2013 By Aboozar Hadavand
  9. The true art of the tax deal: Evidence on aid flows and bilateral double tax agreements By Julia Braun; Martin Zagler
  10. Tax Revenue Capacity and Tax Effort of Kerala: Analysis during Pre- and Post- Period of Accelerated Economic Growth By K Pushpangadan; Sthanu R Nair

  1. By: Steven M. Fazzari (Washington University in St. Louis); James Morley (University of New South Wales); Irina B. Panovska (Lehigh University)
    Abstract: We investigate when discretionary increases and decreases in government spending or taxes have larger effects using a nonlinear vector autoregressive model with fiscal shocks identified via sign restrictions. We confirm previous empirical findings of state dependence in the relationship between fiscal policy and aggregate output, with the nonlinearity related to a broad measure of economic slack that displays strong asymmetry across the business cycle. This state dependence has important implications for the timing of stimulus or austerity measures. We find that tax cuts and spending increases have similarly large stimulative effects in periods of excessive slack, but are much less effective, especially in the case of spending increases, when the economy is close to or above potential. In terms of austerity measures designed to reduce the debt-to-GDP ratio, we find that tax increases and spending cuts are most contractionary and largely self defeating in periods of excessive slack, while only spending cuts lead to any significant reduction in the debt-to-GDP ratio when the economy is close to or above potential. The effectiveness of discretionary spending, including its state dependence, appears to be due almost entirely to the response of aggregate consumption, while the responses of both consumption and investment to discretionary taxes are state dependent, but investment appears to play the larger role in terms of their effectiveness.
    Keywords: Government spending; austerity measures; nonlinear dynamics; Bayesian; sign restrictions; vector autoregression
    JEL: E32 E62 C32
    Date: 2017–02
  2. By: Halkos, George; Papageorgiou, George
    Abstract: Public debt accumulation results to disutility with the problem addressed as whether time path of the public debt is sustainable. In this study the infinite time differential game modeling is used as appropriate tool for the economic analysis that follows. The dynamic game is simple and assumes that the starting point of the public debt model is the well known accounting identity interrelating public debt, interest rate and real government surplus exclusive of interest payments on public debt. In the setting, we consider as stock the public debt and the stress of the regulator is to raise nation’s primary surplus. Any surplus increase is not only dependent on government measures, but is also dependent on the known “culture of corruption” and on tax evasion. Thus the process of surpluses’ augmentation should be a function of these two factors. Nash and Stackelberg differential game approaches are used to explore strategic interactions. In the Nash equilibrium establishment of cyclical strategies during the game between the group of people involved in illegal activities of corruption and tax evasion in one hand and the government in the other, requires that the discount rate of the group of people involved in illegal actions must be greater than government’s discount rate. That is the group of corrupt officials and evaders must be more impatient than government. In the case of hierarchical setting analytical expressions of the strategies and the steady state value of public debt stock are provided. Furthermore a number of propositions are stated.
    Keywords: Public debt; Tax evasion; Dynamic games; Nash equilibrium; Stackelberg equilibrium
    JEL: C72 H26 H62 H63
    Date: 2017–03
  3. By: Hafedh Bouakez (Department of Applied Economics and CIRPEE, HEC Montréal); Michel Guillard (EPEE, Université d’Evry Val d’Essonne); Jordan Roulleau-Pasdeloup (DEEP, HEC Lausanne)
    Abstract: We study the effectiveness of public investment in stimulating an economy stuck in a liquidity trap. We do so in the context of a tractable new-Keynesian economy in which a fraction of government spending increases the stock of public capital subject to a time-to-build constraint. Public investment projects typically entail significant time-to-build delays, which often span several years from approval to completion. We show that this feature implies that the spending multiplier associated with public investment can be substantially large — nearly twice as large as the multiplier associated with public consumption — in a liquidity trap. Intuitively, when the time to build is sufficiently long, and to the extent that public capital raises the marginal productivity of private inputs, the resulting disinflationary effect will occur after the economy has escaped from the liquidity trap. At the same time, the increase in households’ expected wealth amplifies aggregate demand while the economy is still in the liquidity trap. Using a mediumscale model extended to allow for the accumulation of public capital, we quantify the multiplier associated with the spending component of the 2009’s ARRA, which allocated roughly 40% of the authorized funds to public investment. We find a peak multiplier of 2.31. Our results also indicate that failing to account for the composition of the stimulus by overlooking its investment component would lead one to underestimate the spending multiplier by about 50%.
    Keywords: Public spending, Public investment, Time to build, Multiplier, Zero lower bound
    JEL: E4 E52 E62 H54
    Date: 2016
  4. By: Alicia H. Munnell; Wenliang Hou; Anthony Webb; Yinji Li
    Abstract: Employer-sponsored retirement plans have shifted dramatically in recent decades from defined benefit (DB) to defined contribution (DC) plans. Although theoretical calculations show that participants in 401(k) and other DC plans who stay the course can accumulate substantial account balances, many studies have documented how such plans often fall short. This shortfall reflects a failure of workers to participate, inadequate contribution rates, leakages, poor investment choices, and subpar market returns. On the other hand, while DB plans provide generous benefits for workers who spend most of their career with a single employer, the pensions of job-hoppers are eroded by inflation and those who separate prior to vesting receive nothing. Therefore, the net effect of the shift from DB to DC plans on retirement wealth and income is unclear. This brief, adapted from a recent paper, uses the Health and Retirement Study (HRS) to document the amount and distribution of retirement wealth, the amount of retirement income it produces, and the pattern of replacement rates for households ages 51-56 in 1992, 1998, 2004, and 2010. The discussion proceeds as follows. The first section describes the data and presents trends in retirement plan coverage. The second section explores whether workers in 2010, when DC plans dominated, had more or less retirement wealth in employer plans than their counterparts in 1992, when DB plans dominated. It also reports how that wealth was distributed by education. The third section shifts the focus from wealth to income. It shows the impact of moving from DB plans, where annuities are actuarially fair, to DC plans, where annuities must be purchased on the open market; and it examines the pattern of replacement rates over time. The final section concludes with four observations. First, retirement wealth has been relatively steady or declining, depending on whether the starting year is 1992 or 1998. Second, DC wealth is more concentrated in the top quartile of education than DB wealth, and this concentration will become more evident in the aggregate wealth measure as the shift from DB to DC plans evolves. Third, the shift from DB to DC has reduced the amount of retirement income per dollar of wealth because DC participants have to pay more for annuities, and annuity rates fell as interest rates dropped. Fourth, even with later retirement ages, steady retirement income combined with rising wages has produced declining replacement rates. Thus, retirement income from employer plans has been contracting.
    Date: 2017–03
  5. By: Marta Aloi; Teresa Lloyd-Braga; Manuel Leite-Monteiro
    Abstract: We consider an economy characterised by involuntary unemployment among low skilled workers, and investigate the implications for employment and income of welfare schemes often advocated as less distortionary. We show that reducing unemployment benefits in favour of income subsidies (social benefits) reduces employment in general equilibrium and also the income of low skilled workers, for not too high distortions in the labour market. Furthermore, it leads to a higher tax burden and a welfare deterioration. To support employment, we suggest that systems grounded in contribution-based unemployment insurance schemes are to be preferred and strengthened.
    Keywords: Unemployment benefits, social benefits, taxes, unions, employment
    Date: 2017
  6. By: Sutirtha Bagchi (Department of Economics, Villanova School of Business, Villanova University)
    Abstract: In Pennsylvania local property taxes are collected by elected officials, known as tax collectors, whose compensation varies widely in both structure and level across municipalities. This paper analyses the existence of a pay-performance relationship for these officials. Using data on the percentage of real estate taxes that are actually collected at the municipal level, the paper finds that as the compensation tax collectors receive goes up, they collect more in taxes. This relationship is however true only for collectors who are compensated on a commission basis and not for collectors compensated on the basis of a flat salary. The paper also finds no relationship between the share of votes received by the tax collector and the percentage of property taxes collected during the previous term. This observation may account for the lack of a positive relationship between pay and performance for collectors compensated on the basis of a salary.
    Keywords: Tax Collectors; Politician Salary; Productivity; Pay for Performance
    JEL: H70 J45 J33 D72 M52
    Date: 2017–03
  7. By: Buiter, Willem H.
    Abstract: This paper investigates the implications for the nominal exchange rate of a Border Tax Adjustment (BTA) when there is BTA neutrality. A border tax adjustment is a change from an origin-based system of taxation, that taxes exports but exempts imports to a destination-based system that taxes imports but exempts exports. Both indirect taxes (e.g. a VAT) and direct taxes (e.g. a cash-flow corporate profit tax) can be subject to a BTA. In the US, a BTA for the corporate profit tax is under discussion. There is BTA neutrality when the real equilibrium, including measures of profitability and competitiveness, of an open economy is unchanged when it moves from an origin-based to a destination-based tax. The conventional wisdom on the exchange rate implications of a neutral BTA is that the currency of the country implementing the BTA will strengthen (appreciate) by a percentage equal to the VAT or CPT tax rate. The main insight of this note is that this 'appreciation presumption' is not robust, even when all conditions for full BTA neutrality are satisfied. Indeed, plausible alternative assumptions about constancy (or stickiness) of nominal prices support a weakening (depreciation) of the currency by the same percentage as the tax rate. On the basis on the very patchy available empirical information, it is not possible to take a view with any degree of confidence on the implications of a BTA for the nominal exchange rate, even if full BTA neutrality prevailed. Whether BTA neutrality itself is a feature of the real world is also a disputed empirical issue. Therefore, buyer (or seller) beware.
    Keywords: border tax adjustment,neutrality,equivalence,exchange rate appreciation,nominal price and wage rigidities
    JEL: E31 E62 F11 F13 F41 H25 H87
    Date: 2017
  8. By: Aboozar Hadavand
    Abstract: This paper provides a novel analysis of the trend in income inequality in the United States between 1979{2013. There are two ways in which this paper contributes to the literature. First, I analyze how much of the existing inequality in the U.S. is due to the demographic changes that happened over this period. Using microdata from Luxembourg Income Study and after decomposing inequality into within- and between-age group components, I find that the within-group share of overall inequality in the U.S. is high and steady compared to other developed countries. I also find that about 17 percent of the rise in inequality in this period is due to the between-group component (life-cycle effects). Second, I provide a regression analysis to explain cross-group variations in inequality during the period. I estimate that most of the rise in inequality has happened among middle-aged men while inequality among women, especially among married women has, in fact, decreased. This more granular analysis of inequality can help us investigate the causes of inequality, which would be impossible if we only look at a single inequality statistic.
    Keywords: Inequality Decomposition, Within-Group Inequality, Income Distribution
    JEL: D31 J11 D63
    Date: 2017–03
  9. By: Julia Braun (Centre for European Economic Research (ZEW)); Martin Zagler (Department of Economics, Vienna University of Economics and Business)
    Abstract: Out of a total of 2,976 double tax agreements (DTAs), some 60% are signed between a developing and a developed economy. As DTAs shift taxing rights from capital importing to capital exporting countries, the prior would incur a loss. We demonstrate in a theoretical model that in a deal one country does not trump the other, but that the deal must be mutually beneficial. In the case of an asymmetric DTA, this requires compensation from the capital exporting country to the capital importing country. We provide empirical evidence that such compensation is indeed paid, for instance in the form of bilateral official development assistance, which increases on average by six million US$ in the year of the signature of a DTA.
    Keywords: developing countries, foreign aid, double taxation agreements
    JEL: K33 F53 H25 H87 D82
    Date: 2017–03
  10. By: K Pushpangadan (Rajiv Gandhi Institute for Development Studies, Thiruvananthapuram); Sthanu R Nair (Indian Institute of Management Kozhikode)
    Abstract: To meet several of her developmental requirements Kerala requires sufficient tax revenue mobilisation. This paper is an attempt to empirically estimate the effort taken by Kerala in mobilising tax revenues in relation to its taxable capacity during two different phases of the state’s economic growth trajectory: 1970-71 to 1999-00 and 2000-01 to 2012-13. Whereas the first period has experienced stagnant to moderate economic growth, the second period saw rapid economic progress. The findings of the paper reveal that though Kerala was able to improve the tax effort with respect to land revenue, motor vehicle tax and passengers and goods tax, state excise duty and own tax revenue during the period of accelerated economic growth in the case sales tax, which contributes the lion’s share of the tax revenue, the state’s tax effort lowered significantly. Also, the state has earned lowest ranking based on the tax effort for many taxes when compared to other comparable states. On the whole, the findings of the study calls for policy measures aimed at improving Kerala’s tax effort on par with higher ranked states.
    Date: 2016–03

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