nep-pbe New Economics Papers
on Public Economics
Issue of 2017‒05‒14
eighteen papers chosen by
Thomas Andrén

  1. Public Investment, Taxation and Transfer of Technology By Kollias, Iraklis; Marjit, Sugata; Michelacakis, Nickolas
  2. Population Aging, Social Security and Fiscal Limits By Heer, Burkhard; Polito, Vito; Wickens, Michael R.
  3. The Effects of Tax Reforms to Address the Debt-Equity Bias on the Cost of Capital and on Effective Tax Rates By Centre for European Economic Research (ZEW)
  4. Does Delayed Retirement Affect Youth Employment? Evidence from Italian Local Labour Markets By Bertoni, Marco; Brunello, Giorgio
  5. Effects of Individual Resident Tax on the Consumption of Near-Retired Households in Japan By Toshiyuki Uemura; Yoshimi Adachi; Tomoki Kitamura
  6. Using Kinked Budget Sets to Estimate Extensive Margin Responses: Method and Evidence from the Social Security Earnings Test By Damon Jones; Alexander M. Gelber; Daniel W. Sacks; Jae Song
  7. The Khaldun-Laffer Curve Revisited: A Personal Income Tax-Based Analysis for Turkey By Şen, Hüseyin; Bulut-Çevik, Zeynep Burcu; Kaya, Ayşe
  8. Policy Effects of International Taxation on Firm Dynamics and Capital Structure By Spencer, Adam
  9. Budgetary stability and structural reforms in Spain By Rafael Doménech; José Manuel González Páramo
  10. The Impact of Tax Planning on Forward-Looking Effective Tax Rates By Centre for European Economic Research (ZEW)
  11. The Government Expenditure Structure and Economic growth By Simona V?eti?ková
  12. Income inequality and inequality of opportunity in Europe. Are they on the rise? By Ana Suarez Alvarez; Ana Jesus Lopez Menendez
  13. Fiscal Rules: Towards a New Paradigm for Fiscal Sustainability in Small States By Allan Wright; Kari Grenade; Ankie Scott-Joseph
  14. Incidence of value added taxation on inequality: Evidence from Sri Lanka By P Sivashankar; RMPS Rathnayake; Maneka Jayasinghe; Christine Smith
  15. A European Unemployment Benefits Scheme: Lessons from Canada By E. Wood, Donna
  16. Hiring subsidies for people with disabilities: Do they work? By Sergi Jiménez-Martín; Arnau Juanmarti Mestres; Judit Vall-Castello
  17. The Impact of Social Pensions on Intergenerational Relationships: Comparative Evidence from China By Chen, Xi; Eggleston, Karen; Sun, Ang
  18. Interactions between Financial Incentives and Health in the Early Retirement Decision By Pilar García-Goméz; Titus Galama; Eddy van Doorslaer; Ángel López-Nicholás

  1. By: Kollias, Iraklis; Marjit, Sugata; Michelacakis, Nickolas
    Abstract: A low wage developing economy (South) is interested in accessing and attracting superior technology from a high wage developed economy (North) with firms having heterogeneous quality of technology. To improve upon the initial market equilibrium, which shows that relatively inefficient technologies will move to the South, the host government invests in infrastructure financed through taxing the foreign firms. We discuss the problem of existence of such a tax-transfer mechanism within a balanced budget framework. We argue that such a policy can increase tax revenue as well as instigate the transfer of better quality technology. It turns out that this policy is more likely to be successful when the production concerns high value, high price products in low wage economies. Our results improve upon the conventional strategy of a tax break.
    Keywords: public investment, tax, high-low wage economy, technology transfer, model
    JEL: D42 H21 O33
    Date: 2017–04
  2. By: Heer, Burkhard; Polito, Vito; Wickens, Michael R.
    Abstract: We study the sustainability of pension systems using a life-cycle model with distortionary taxation that sets an upper limit to the real value of tax revenues. This limit implies an endogenous threshold dependency ratio, i.e. a point in the cross-section distribution of the population beyond which tax revenues can no longer sustain the planned level of transfers to retirees. We quantify the threshold using a computable life-cycle model calibrated on the United States and on 14 European countries which have dependency ratios among the highest in the world. We examine the effects on the threshold and welfare of a number of policies often advocated to improve the sustainability of pension systems. New tax data on dynamic Laffer effects are provided.
    Keywords: Dependency Ratio; Fiscal space; Laffer Effects; Pensions
    JEL: E62 H20
    Date: 2017–04
  3. By: Centre for European Economic Research (ZEW)
    Abstract: This study analysis current interest deduction limitation rules in the EU28 Member States and assesses the effect of interest deduction limitation rules on effective tax rates, provides insights on the effects of the fundamental tax reform options on current tax systems, considers a revenue-neutral implementation of the reforms and possible consequences for the level of investment in the EU28 Member States.
    Keywords: corporate taxation, effective tax rates, dept-bias, tax reforms
    JEL: H21 H26 E43
    Date: 2016–10
  4. By: Bertoni, Marco (University of Padova); Brunello, Giorgio (University of Padova)
    Abstract: Pension reforms that raise minimum retirement age increase the pool of senior individuals aged 50+ who are not eligible to retire from the labour market. Using data from Italian provinces and regions and an instrumental variable strategy, we estimate the effects of local changes in the supply of workers aged between 50 and minimum retirement age on youth, prime age and senior employment. Results based on provincial data from 2004 to 2015, a period characterized by declining real GDP, indicate that adding one thousand additional senior individuals to the local labour supply reduces employment in the age group 16-34 by 189 units. Estimates based on longer regional data covering the period 1996 to 2015, that includes also a period of growing real GDP, show smaller negative effects for young workers, suggesting that the employment costs of pension reforms may be lower when the economy is growing.
    Keywords: pension reforms, lump of labour, youth employment, local labour markets
    JEL: J26 H55 J21 J14 J11
    Date: 2017–04
  5. By: Toshiyuki Uemura (School of Economics, Kwansei Gakuin University); Yoshimi Adachi (Department of Economics, Konan University); Tomoki Kitamura (Finance Research Group, NLI-Research Institute)
    Abstract: We empirically investigate whether the Japanese individual resident tax causes a reduction in the consumption of near-retired households. In contrast to the income tax, the individual resident tax is levied on income from the previous year, and we found it has a negative effect on the consumption of three types of near-retired households: those who maintain regular employment, who move from regular to irregular employment, and who move from employment (regular, irregular, or self) to unemployment. Particularly, for the second type, the individual resident tax caused a larger reduction in household consumption
    Keywords: Individual resident tax, Consumption, Retirement, Life-Cycle model, Panel data
    JEL: D12 D91 E21 H24 H31
    Date: 2017–05
  6. By: Damon Jones (University of Chicago); Alexander M. Gelber (University of California, Berkeley); Daniel W. Sacks (Indiana University); Jae Song
    Abstract: We develop a method for estimating the effect of a kinked budget set on workers' employment decisions, and we use it to estimate the impact of the Social Security Old-Age and Survivors Insurance (OASI) Annual Earnings Test (AET). The AET reduces OASI claimants' current OASI benefits in proportion to their earnings in excess of an exempt amount. Using a Regression Kink Design and Social Security Administration data, we document that the discontinuous change in the benefit reduction rate at the exempt amount causes a corresponding change in the employment rate. We develop conditions in a general setting under which we can use such patterns to estimate the elasticity of the employment rate with respect to the effective average net-of-tax rate. Our resulting elasticity point estimate for the AET is at least 0.49, suggesting that the AET reduces employment by more than one percentage point in the group we study.
    Keywords: social security, elasticity of employment rate, Annual Earnings Test
    JEL: H24 H31 H55 J14 J22
    Date: 2017–05
  7. By: Şen, Hüseyin; Bulut-Çevik, Zeynep Burcu; Kaya, Ayşe
    Abstract: The objective of this paper is to revisit as well as empirically examine an old but still discussed postulate, the Khaldun-Laffer curve, on the basis of personal income tax by making use annual time-series data for Turkey for the period 1970-2015. The findings of the paper confirm the validity of the Khaldun-Laffer curve hypothesis. In addition, we infer that the optimal tax rate that maximizes the tax revenue generated from personal income taxation in Turkey is 15.03 percent. This rate is well-below than the current rate which we estimate as 15.37 percent, implying that Turkey’s current tax rate for personal income tax takes place in the prohibitive range of the Khaldun-Laffer curve. These findings suggest that the current tax rate should be lowered and to its optimal level to collect more tax revenue. Getting down the current rate to its revenue-maximizing rate not only would it enable the Turkish authorities to collect more revenues with a relatively lower rate, but also would allow them to minimize the substitution effects of personal income tax while maximizing the income revenues from it.
    Keywords: Tax Policy, Khaldun-Laffer Curve, Laffer Curve, Optimal Tax Rate, Personal Income Tax, Turkey
    JEL: E62 H2 H20
    Date: 2017–04–10
  8. By: Spencer, Adam
    Abstract: I develop and calibrate an industry equilibrium model with heterogeneous multinational firms to study the impact of a potential policy change from the current U.S. worldwide taxation system to a territorial system on firm investment, capital structure, payout policy and tax revenues. Firms in the model make both intensive and extensive margin decisions in terms of overseas investment. They optimally choose dividend payments to shareholders, holdings of riskless debt securities and earnings repatriations from the subsidiary to the parent in each period. To estimate the impact of the policy change, I solve the model under both worldwide and territorial systems and compare the stationary equilibria. The results show that the policy change causes both domestic and overseas production by U.S. firms to rise. In addition, firms borrow more and pay larger dividends to shareholders. These effects on firm variables are coupled with a rise in U.S. Government tax collections.
    Keywords: Multinational corporations, Firm dynamics, Capital structure, Corporate taxation, Repatriation tax
    JEL: F23 G32 H25 L11
    Date: 2017–05–06
  9. By: Rafael Doménech; José Manuel González Páramo
    Abstract: We analyse the fiscal policy lessons from the recent recession in the Spanish economy and the options for the future. Our results indicate that budget balance and public debt trends showed clear signs of unsustainability between 2009 and 2011, with few alternatives available other than reducing the fiscal deficit.
    Keywords: Economic Analysis , Spain , Working Paper
    JEL: E62 H62 H63
    Date: 2017–05
  10. By: Centre for European Economic Research (ZEW)
    Abstract: This study provides a general insight into the effect of different profit shifting strategies on effective tax rates for cross-border investments between the 28 EU member states and the US. In particular, this study enhances the baseline findings of ongoing research conducted by ZEW on behalf of the European Commission. Specifically, this report presents the cost of capital (CoC) and the effective average tax rates (EATR) for cross-border investments between the 28 EU member states and the US distinguishing between scenarios that involve seven different tax planning strategies.
    Keywords: corporate taxation, effective tax rates, cross-border investment, profit shifting, tax planning
    JEL: H21 H26 E43
    Date: 2016–10
  11. By: Simona V?eti?ková (University of Economics, Faculty of Economics, Department of Economics, Prague)
    Abstract: This article examines the effect of the government expenditure structure on the economic growth. The objective is to determine which components of public expenditures are growth enhancing and which growth retarding. The theoretical model is set into the endogenous growth framework and describes the growth mechanism of productive and unproductive government expenditures. The growth impact of public spending composition is analysed for 18 European countries from 1996 to 2012. The empirical part is based on the panel data analysis. The empirical findings suggest that reallocating public resources towards education and health can promote growth. On the contrary higher expenditures on social spending and defence are likely to be growth-retarding.
    Keywords: Government expenditure, Economic growth, Endogenous growth theory
    JEL: E62 H10 H50
    Date: 2017–04
  12. By: Ana Suarez Alvarez (University of Oviedo, Spain); Ana Jesus Lopez Menendez (University of Oviedo, Spain)
    Abstract: The aim of this paper is to shed some light on the behaviour of income inequality and Inequality of Opportunity over time for 26 European countries. The analysis is carried out using microdata collected by the European Union Statistics on Income and Living Conditions (EU-SILC), which incorporate a wide variety of personal harmonised variables, allowing comparability between countries. The availability of this database for years 2004 and 2010 is particularly relevant to assess changes over time in the main inequality indices and the contribution of circumstances to inequality of opportunity. Furthermore, a bootstrap estimation is performed with the aim of testing if the differences between both years are statistically significant.
    Date: 2017–04
  13. By: Allan Wright; Kari Grenade; Ankie Scott-Joseph
    Abstract: This study contends that Caribbean countries cannot adequately surmount their fiscal and debt challenges in the absence of binding rules that are geared toward entrenching fiscal discipline, curbing fiscal procyclicality, and improving budget transparency and credibility. Distilling global lessons and taking due cognizance of Caribbean countries' idiosyncrasies, the paper explores key technical, operational and institutional issues in the design, implementation, and monitoring of fiscal rules that might be relevant for Caribbean countries that currently do not have legislated rules. Results from simulations carried out to determine welfare effects and the extent of volatility of key macroeconomic variables under various fiscal rules scenarios suggest that of the different types of simulated fiscal rules, expenditure rules perform best in terms of reducing macroeconomic volatility, and in that regard, appear to be the most welfare-enhancing. This is believed to be the first study to carry out such a simulation exercise for Caribbean countries. The findings of the study evince useful insights for policymakers on how to improve the design and conduct of fiscal policy for better fiscal and, by extension, development outcomes.
    Keywords: Fiscal rules, Public debt, Public Financial Management, Fiscal deficit, fiscal deficit, public debt, fiscal policy, fiscal sustainability
    JEL: H60 E62
    Date: 2017–02
  14. By: P Sivashankar; RMPS Rathnayake; Maneka Jayasinghe; Christine Smith
    Keywords: Inequality, Value Added Tax, Tax incidence, Kakwani index, Gini coefficient
    JEL: H24 H22 H31 D31 C18
    Date: 2017–04
  15. By: E. Wood, Donna
    Abstract: In many federal political systems, responsibility for unemployment has a multi-tiered architecture, with competence for key elements such as unemployment insurance, social assistance, and the public employment service, dispersed across different orders of government. This CEPS Working Document tells the story of the long transformation of unemployment insurance into a federal responsibility in Canada, and seeks to identify lessons from Canada’s experience that might help Europeans consider the potential of an EU-wide unemployment benefits scheme. Most European scholars look to the United States for transferable ideas; this author argues that Canada is a more salient comparator, given that it has similar institutional features to the EU, and has successfully managed a pan-Canadian unemployment insurance benefits scheme for over 75 years. Lessons for the EU from Canada include the place of a centrally managed unemployment insurance programme in a monetary union, and insights with respect to stabilisation, labour mobility, redistribution, social solidarity, legitimacy, and institutional moral hazard.
    Date: 2017–01
  16. By: Sergi Jiménez-Martín; Arnau Juanmarti Mestres; Judit Vall-Castello
    Abstract: This article evaluates the effectiveness of hiring subsidies targeted to people with disabilities. By exploiting the timing of implementation among the different Spanish regions of a subsidy scheme implemented in Spain during the period 1990-2014, we employ a differencesin- differences approach to estimate the impact of the scheme on the probability of DI beneficiaries of transiting to employment and on the propensity of individuals of entering the DI program. Our results show that the introduction of the subsidy scheme is in general ineffective at incentivizing transitions to employment, and in some cases it is associated with an increased propensity of transiting to DI. Furthermore, we show that an employment protection component incorporated to the subsidy scheme, consisting in the obligation for the employer to maintain the subsidized worker in employment, is associated with less transitions to permanent employment, more transitions to temporary employment and more transitions to DI, suggesting that these type of employment protection measures can have undesired effects for people with disabilities.
    Keywords: disability, employment subsidies, labor market transitions, disability insurance, differences-in-differences
    JEL: H24 H55 J08 J14
    Date: 2017–05
  17. By: Chen, Xi (Yale University); Eggleston, Karen (Stanford University); Sun, Ang (Central University of Finance and Economics)
    Abstract: China launched a new rural pension scheme (hereafter NRPS) for rural residents in 2009, now covering almost all counties with over 400 million people enrolled. This implementation of the largest social pension program in the world offers a unique setting for studying the economics of intergenerational relationships during development, given the rapidity of China's population aging, traditions of filial piety and co-residence, decreasing number of children, and dearth of formal social security, at a relatively low income level. We draw on rich household surveys from two provinces at distinct development stages – impoverished Guizhou and relatively well-off Shandong – to better understand heterogeneity in the impact of pension benefits. Employing a fuzzy regression discontinuity design, we find that around the pension eligibility age cut-off, the NRPS significantly reduces intergenerational co-residence, especially between elderly parents and their adults sons; promotes pensioners' healthcare service consumption; and weakens (but does not supplant) nonpecuniary and pecuniary transfers across three generations. These effects are much larger in less developed Guizhou province.
    Keywords: social pensions, intergenerational relationships, regional comparisons, coresidence, old-age care, service consumption, transfers
    JEL: H55 I18 J14 R28
    Date: 2017–04
  18. By: Pilar García-Goméz (Erasmus University); Titus Galama (University of Southern California); Eddy van Doorslaer (Erasmus University); Ángel López-Nicholás (Universidad Politécnica de Cartagena)
    Abstract: We present a theory of the relation between health and retirement that generates testable predictions regarding the interaction of health, wealth and financial incentives in retirement decisions. The theory predicts (i) that wealthier individuals (compared to poorer individuals) are more likely to retire for health reasons (affordability proposition), and (ii) that health problems make older workers more responsive to nancial incentives encouraging retirement (reinforcement proposition). We test these predictions using administrative data on older employees in the Dutch healthcare sector for whom we link adverse health events, proxied by unanticipated hospitalizations, to information on retirement decisions and actual incentives from administrative records of the pension funds. Exploiting unexpected health shocks and quasi-exogenous variation in nancial incentives for retirement due to reforms, we account for the endogeneity of health and nancial incentives. Making use of the actual individual pension rights diminishes downward bias in estimates of the effect of pension incentives. We find support for our affordability and reinforcement propositions. Both propositions require the bene ts function to be convex, as in our data. Our theory and empirical findings highlight the importance of assessing nancial incentives for their potential reinforcement of health shocks and point to the possibility that di erences in responses to nancial incentives and health shocks across countries may relate to whether the benefit function is concave or convex.
    Keywords: pensions, Health, retirement, disability, health investment, lifecycle model, health capital, optimal control
    JEL: C33 D91 H55 I10 I12 J00 J24 J26 J45
    Date: 2017–05

This nep-pbe issue is ©2017 by Thomas Andrén. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.