nep-pbe New Economics Papers
on Public Economics
Issue of 2017‒06‒18
eighteen papers chosen by
Thomas Andrén

  1. What Drives Vertical Fiscal Interactions? Evidence from the 1980 Crude Oil Windfall Act By Fidel Perez-Sebastian; Ohad Raveh
  2. Decentralization and fiscal performance in Central and Eastern Europe By Makreshanska, Suzana; Petrevski, Goran
  3. Should pollution taxes be targeted at income redistribution? By Bas Jacobs; Frederick van der Ploeg
  4. Behavioral insights and business taxation: Evidence from two randomized controlled trials By Biddle, Nicholas; Fels, Katja; Sinning, Mathias
  5. Generalized Compensation Principle By Aleh Tsyvinski; Nicolas Werquin
  6. Household spending out of a tax rebate: Italian “€80 tax bonus” By Andrea Neri; Concetta Rondinelli; Filippo Scoccianti
  7. Capital Taxation and Investment: Matching 100 Years of Wealth Inequality Dynamics By Boehl, Gregor; Fischer, Thomas
  8. Under cover: detecting the existence of profit-shifting in China By Qian, Xuefeng; Tian, Bifei; Reed, W. Robert; Chen, Ziruo
  9. Tax evasion, intrinsic motivation, and the evolutionary effects of tax reforms By Fabio Lamantia; Mario Pezzino; Fabio Tramontana
  10. Fiscal Policy and Aggregate Demand in the U.S. Before, During and Following the Great Recession By David B. Cashin; Jamie Lenney; Byron F. Lutz; William B. Peterman
  11. The Heterogeneous Impact of Pension Income on Elderly Living Arrangements: Evidence from China’s New Rural Pension Scheme By Cheng, Lingguo; Liu, Hong; Zhang, Ye; Zhao, Zhong
  12. Federal Fiscal Transfers on Health: Implications of Fourteenth Finance Commission Recommendations at Subnational Level By Das, Nimai
  13. Social Security and Saving: An Update By Sita Slavov; Devon Gorry; Aspen Gorry; Frank N. Caliendo
  14. Government spending, GDP and exchange rate in Zero Lower Bound: measuring causality at multiple horizons By MAO TAKONGMO, Charles Olivier
  15. Two Tales of Two U.S. States: Regional Fiscal Austerity and Economic Performance By Rickman, Dan S.; Wang, Hongbo
  16. The Welfare Implications of Health Insurance By Sonia Jaffe; Anup Malani
  17. Should the Government Protect its Basic Research? By Cozzi, Guido; Galli, Silvia
  18. Introducing Risk Adjustment and Free Health Plan Choice in Employer-Based Health Insurance: Evidence from Germany By Adam Pilny; Ansgar Wübker; Nicolas R. Ziebarth

  1. By: Fidel Perez-Sebastian; Ohad Raveh
    Abstract: In economies with multi-level governments, why would a change in the scal rule of a gov-ernment in one level lead to a scal response by a government in a di¤erent level? Previous explanations focus on the standard common-pool problem. In this paper we study a new potential channel: complementarities between the public goods supplied by the two governments. First, we illustrate its potential key role in determining the sign of the vertical reaction through a standard model of horizontal tax competition with vertical scal interactions. Second, we propose a novel strategy for identifying it, by considering an empirical design that con nes the common-pool channel to speci c locations. We implement this design through a quasi-natural experiment: the 1980 U.S. Crude Oil Windfall Act, which increased federal tax collections from sale of crude oil, thereby a¤ecting the tax base of oil rich states speci cally. This latter feature enables attributing the vertical scal reactions of the remaining states to the complementarity channel. Following this strategy, via a di¤erence-in-di¤erences approach, we decompose the sources of the vertical scal reactions arising from this federal tax change and nd that those attributed to the novel channel: (i) point at complementarity between state and federal public goods; (ii) account for approximately 40% of the overall vertical scal response; (iii) are manifested primarily via corporate taxation.
    Keywords: Federalism, vertical fiscal reactions, common-pool problem, complimentarities, natural resources
    JEL: H77 H71 Q32
    Date: 2017
  2. By: Makreshanska, Suzana; Petrevski, Goran
    Abstract: The paper provides empirical evidence on the association between decentralization and fiscal performance of the general government on a panel of 11 former transition countries during 1996-2012, controlling for the effects of various demographic, institutional, and macroeconomic variables. Also, for robustness check we make a comparison with a panel of 18 industrialized European economies. The main findings from the empirical investigation suggest that decentralizing government activities in Central and Eastern Europe leads to an increase in the efficiency in the provision of public goods. Also, we show that not only the extent of fiscal decentralization, but the composition of local revenue, too, matters for fiscal discipline. In these regards, providing local governments with higher autonomy in financing their activities by relying more on their “own” tax revenues instead of intergovernmental grants seems to be conducive with fiscal discipline. In contrast to the sample consisting of the former transition economies, we cannot find evidence on the association between decentralization and fiscal discipline in the developed European countries.
    Keywords: Fiscal decentralization, Budget deficits, Central and Eastern Europe, Panel data models
    JEL: H50 H76 H77
    Date: 2016–03–25
  3. By: Bas Jacobs; Frederick van der Ploeg
    Abstract: This paper analyses optimal corrective taxation and optimal income redistribution. The Pigouvian pollution tax is higher if pollution damages disproportionally hurt the poor due to equity weighting of pollution damages. Moreover, optimal pollution taxes should be set below the Pigouvian tax if the poor spend a disproportionate fraction of their income on polluting goods if preferences for commodities are not of the Gorman (1961) polar form. However, optimal pollution taxes should follow the first-best rule for the Pigouvian corrective tax if preferences for commodities are of the Gorman polar form even if the government wants to redistribute income and the poor spend a disproportional part of their income on polluting goods. The often-used quasi-linear, CES and Stone-Geary utility functions all belong to the Gorman polar class. If pollution taxes are not optimized, Pareto-improving green tax reforms exist that move the pollution tax closer to the Pigouvian tax if preferences are Gorman polar. Simulations demonstrate that optimal corrective taxes should be Pigouvian if the demand for polluting goods is derived from a LES demand system, but optimal corrective taxes deviate from the Pigouvian taxes if demand for polluting goods demand is derived from a PIGLOG demand system.
    Keywords: redistributive taxation, corrective pollution taxation, Gorman polar form, Stone-Geary preferences, PIGLOG preferences, green tax reform
    JEL: H21 H23 Q54
    Date: 2017
  4. By: Biddle, Nicholas; Fels, Katja; Sinning, Mathias
    Abstract: This paper presents the findings of two Randomized Controlled Trials (RCTs) that were conducted in collaboration with the Australian Taxation Office (ATO). The first trial tests the effect of changes to letters (timing, social norms, color, and provision of information about charitable donations) on response rates of businesses, the timing of payments and the amount of tax debt payments. The second trial consists of two parts. The first part aims to raise awareness of the relevance of tax debt payment by changing internal guidelines used by field auditors. The second part focuses on studying the effect of changing the phone script used by desk auditors to offer assistance with payment arrangements and simplifying a follow-up letter. The findings of the first trial indicate that none of the treatments had a significant effect on any of the outcome measures considered. In contrast, the results of the second trial indicate that changing the phone script of desk auditors and simplifying the follow-up letter reduced the proportion of default assessments raised by the ATO significantly, suggesting that businesses are responsive to certain types of nudges.
    Keywords: tax compliance,business taxation,behavioral insights,nudging
    JEL: C93 H25 H26
    Date: 2017
  5. By: Aleh Tsyvinski; Nicolas Werquin
    Abstract: We generalize the classic concept of compensating variation and the welfare compensation principle to a general equilibrium environment with distortionary taxes. We show that the problem of designing a tax reform that compensates the welfare gains and losses induced by an economic disruption can be formalized as a solution to a system of differential-algebraic equations (DAEs). We derive its solution in a closed form and therefore provide a complete analytical characterization of the welfare-compensating tax reform in general equilibrium. The partial equilibrium compensation consists of adjusting the average tax rate to exactly cancel out the initial wage disruption. We show that in general equilibrium, the compensating tax reform features three primary modifications to this benchmark. First, defining the relevant wage disruption that needs to be compensated requires accounting for the endogenous wage adjustments induced by the initial shock. The other two effects arise because the marginal tax rates, in general equilibrium, impact wages, and hence individual utility. The “progressivity” effect requires adjustments to the tax code that counteract the welfare effects implied by the decreasing marginal product of each skill's labor. This leads to exponentially decreasing or increasing taxes on incomes below those of the disrupted agents. The “compensation of compensation” effect requires adjustments that counteract the welfare effects implied by the complementarities between skills in production. This leads to an inductive procedure to implement compounding rounds of iterative compensation. While we provide a closed form expression for this effect in the general model, in the special case of a CES production function it reduces to a remarkably simple uniform shift of the marginal tax rates. Finally, we derive a closed form formula for the fiscal surplus of the wage disruption and the compensating tax reform, generalizing the traditional Kaldor-Hicks criterion.
    JEL: H20 H21
    Date: 2017–06
  6. By: Andrea Neri (Bank of Italy); Concetta Rondinelli (Bank of Italy); Filippo Scoccianti (Bank of Italy)
    Abstract: We estimate the consumption response of Italian households to the “€80 tax bonus” introduced in 2014, using the panel component on the Survey of Household Income and Wealth. We find that households that received the tax rebate increased their monthly consumption of food and means of transportation by about €20 and €30, respectively, about 50-60 per cent of the total bonus. There was a larger increase for households with low liquid wealth or low income. Our estimates are quite robust to different model specifications and are broadly in line with the evidence available from similar tax rebates in other countries but, due to the small sample size, are not always statistically significant. To understand the mechanism behind our results we then simulate an overlapping generations model of household consumption: the marginal propensity to consume generated by the structural model is in line with our empirical estimates.
    Keywords: fiscal stimulus, marginal propensity to consume, consumer behaviour
    JEL: D12 E21
    Date: 2017–06
  7. By: Boehl, Gregor (IFMS, Goethe University Frankfurt, Germany.); Fischer, Thomas (Department of Economics, Lund University)
    Abstract: Using a parsimonious, analytically tractable dynamic model, we are able to explain up to 100 years of the available data on the dynamics of top-wealth shares for several countries. We build a micro-founded model of heterogeneous agents in which - in addition to stochastic returns on investment - individuals disagree marginally on their expectations of future returns and thus hold different asset positions. We show that, given a positive tax on capital gains, the distribution converges to a double Pareto distribution for which the degree of wealth inequality decreases with the tax rate. Closed-form solutions confirm that without government intervention there is infinite inequality. Moreover, transition dynamics are shown to increase with the tax rate. We discuss the model's ability to match the measured wealth inequality for the US, the UK, Sweden, and France, both in levels and transitions. The heterogeneous development in the different countries and across time can be traced back to different tax regimes.
    Keywords: Wealth inequality; capital taxation; stochastic simulation; heterogeneity
    JEL: C63 D31 G11 H23
    Date: 2017–06–07
  8. By: Qian, Xuefeng; Tian, Bifei; Reed, W. Robert; Chen, Ziruo
    Abstract: This paper investigates profit-shifting behaviour among a large sample of multinational corporations (MNCs) in China. While profit-shifting behaviour is difficult to observe directly, it can be inferred from the behaviour of firms. That is the approach taken by Egger, Merlo, and Wamser (Unobserved tax avoidance and the tax elasticity of FDI 2014, henceforth EM&W) in their seminal analysis of tax elasticity of German MNCs. They developed a two-component mixture model that categorized MNCs into tax "avoiders" and "non-avoiders" based upon the estimated elasticities of investment to taxes. The authors of this paper apply their approach to their sample of MNCs in China. Like EM&W they find evidence of two distinct groups of MNCs. One group is responsive to changes in taxes, reducing investment when taxes increase. The other group is unresponsive to taxes, so that investment is not significantly associated with changes in tax rates. The authors show that the characteristics of these groups closely match the "avoiders" and "non-avoiders" of EM&W's sample. Even so, their estimated tax elasticities are much smaller than EM&W. This suggests that the extent of profit-shifting was relatively small during China's period of preferential tax treatment for foreign investors.
    Keywords: MNCs,profit shifting,tax elasticity of investment,finite mixture model,China
    JEL: F23 H32
    Date: 2017
  9. By: Fabio Lamantia; Mario Pezzino; Fabio Tramontana
    Date: 2017
  10. By: David B. Cashin; Jamie Lenney; Byron F. Lutz; William B. Peterman
    Abstract: We examine the effect of federal and subnational fiscal policy on aggregate demand in the U.S. by introducing the fiscal effect (FE) measure. FE can be decomposed into three components. Discretionary FE quantifies the effect of discretionary or legislated policy changes on aggregate demand. Cyclical FE captures the effect of the automatic stabilizers--changes in government taxes and spending arising from the business cycle. Residual FE measures the effect of all changes in government revenues and outlays which cannot be categorized as either discretionary or cyclical; for example, it captures the effect of the secular increase in entitlement program spending due to the aging of the population. We use FE to examine the contribution of fiscal policy to growth in real GDP over the course of the Great Recession and current expansion. We compare this contribution to the contributions to growth in aggregate demand made by fiscal policy over past business cycles. In doing so, we highlight that the relatively strong support of government policy to GDP growth during the Great Recession was followed by a historically weak contribution over the course of the current expansion.
    Keywords: Fiscal policy ; Great Recession ; Multipliers ; Public debt and national budget ; Public economics ; Taxation ; Automatic stabilizers
    Date: 2017–06
  11. By: Cheng, Lingguo; Liu, Hong; Zhang, Ye; Zhao, Zhong
    Abstract: This paper investigates the impact of pension income on living arrangements of the elderly. Taking advantage of a unique opportunity due to the recent establishment and expansion of the New Rural Pension Scheme in China, we explicitly address the endogeneity of pension status and pension income through a fixed-effect model with instrumental variable approach by exploiting exogenous time variation in the program implementation at county level. We find an overall positive effect of pension income on independent living as well as considerable heterogeneity. The positive income effects of the NRPS are concentrated among the elderly with adult children living nearby, of higher socio-economic status, and with better health at baseline; for other groups, the effects are insignificant. We also find that more generous programs exhibit larger effects. Our results highlight that living arrangement is multidimensional in rural China.
    Keywords: pension income,living arrangements,heterogeneity,China
    JEL: J12 H55 I38
    Date: 2017
  12. By: Das, Nimai
    Abstract: This article is based on a study of Public Expenditure Review of Health Spending in Selected States of India as part of research project Strengthening Ecosystem for Sustainable and Inclusive Health Financing in India (SESSIHFI). It is observed that the growth of tied fund to health in real term is much lower than the untied one during 14th FC period irrespective of category of states as EAG and Non-EAG. In search of the root of such shrinkage in tied component, it observed that there is a negative growth of central tied transfer to health between 13th to 14th FCs in both EAG and Non-EAG states. A very comprehensive level of analysis using Demand for Grant of several state-budgets since 2010-11 to till date shows that while the growth of tied fund directly devoted to communicable diseases is affirmative (excepting Chhattisgarh), a serous negative growth of expenditure on non-communicable diseases is observed for most of the EAG states and a few Non-EAG states during 14th FC period.
    Keywords: Intergovernmental transfers, public health, subnational states, federal policy
    JEL: H51 H75 H77 I18
    Date: 2016–12–15
  13. By: Sita Slavov; Devon Gorry; Aspen Gorry; Frank N. Caliendo
    Abstract: Typical neoclassical life-cycle models predict that Social Security has a large and negative effect on private savings. We review this theoretical literature by constructing a model where individuals face uninsurable longevity risk and differ by wage earnings, while Social Security provides benefits as a life annuity with higher replacement rates for the poor. We use the model to generate numerical examples that confirm the standard result. Using several benefit and tax changes from the 1970s and 1980s as natural experiments, we investigate the empirical relationship between Social Security and private savings and find little to support the strong predictions from the theoretical model. We explore possible reasons for the divergence between theoretical predictions and empirical findings.
    JEL: D14 H31 H55
    Date: 2017–06
  14. By: MAO TAKONGMO, Charles Olivier
    Abstract: This paper assesses the causality between government spending and gross domestic product in the United States at multiple horizons. We compare the Granger causality for normal periods (1959Q1 to 2006 Q4) with the causality for the ZLB period (2007Q1 to 2015Q4). We show that the Granger causality measures between government spending and GDP are very high and persistent in the ZLB period, but only if the exchange rate is not taken into account. When the exchange rate is taken into account, the Granger causality between government spending and GDP becomes very small and non-persistent.
    Keywords: Zero Lower Bound; Causality Measures
    JEL: C01 C3 C32 E6 E62
    Date: 2016–07–01
  15. By: Rickman, Dan S.; Wang, Hongbo
    Abstract: The recent fiscal austerity experiments undertaken in the states of Kansas and Wisconsin have generated considerable policy interest. Using a variety of identification approaches within a difference-in-differences framework and examining a wide range of economic indicators, this paper assesses whether the experiments have spurred growth in the states as promised by the governors and legislatures which enacted them into law. The overall conclusion from the paper is that the fiscal experiments did not spur growth, and if anything, harmed state economic performance. Among the identification approaches used, the Synthetic Control Method (Abadie and Gardeazabal 2003; Abadie et al., 2010) is demonstrated to provide the most compelling evidence.
    Keywords: Fiscal austerity; State taxes; Synthetic Control Method
    JEL: H71 R12 R23
    Date: 2017–03–19
  16. By: Sonia Jaffe (Becker Friedman Institute For Research in Economics); Anup Malani (University of Chicago)
    Abstract: We analyze the financial value of insurance when individuals have access to credit markets. Loans allow consumers to smooth shocks across time, decreasing the value of the smoothing (across states of the world) provided by insurance. We derive a simple formula for the incremental value of insurance and show how it depends on individual characteristics and the features of available loans. Our central contribution is to derive formulas for aggregate welfare that can be taken to data from typical studies of health insurance. We provide both exact formulas that can be taken to data on the distribution of medical expenditures and income and an approximate formula for aggregate data on medical expenditure. Using the Medical Expenditure Panel Survey we illustrate how the incremental value of insurance is decreasing with access to loans. For consumers in the sickest decile, access to a five-year loan decreases the incremental value of insurance by $338 (6%) on average and $3,433 (36%) for the poorest consumers. We also find that our approximate formula is a reasonable proxy for the exact one in our data.
    Keywords: health insurance, credit access
    JEL: I10 I13 I00 H53
    Date: 2017–06
  17. By: Cozzi, Guido; Galli, Silvia
    Abstract: Basic research is mainly performed publicly. Yet in the US public research findings were not patentable until 1980, and in other countries are not yet patentable. Patentability renders public research more directed, with less potential waste, but it also restricts private applied research. This paper shows, by means of a multi-stage Schumpeterian growth model, that in the long run the first effect is bound to dominate.
    Keywords: R&D and Growth; Sequential Innovation; Public R&D; Patent Laws; Bayh-Dole Act.
    JEL: H4 O3
    Date: 2017–06
  18. By: Adam Pilny; Ansgar Wübker; Nicolas R. Ziebarth
    Abstract: To equalize differences in health plan premiums due to differences in risk pools, the German legislature introduced a simple Risk Adjustment Scheme (RAS) based on age, gender and disability status in 1994. In addition, effective 1996, consumers gained the freedom to choose among hundreds of existing health plans, across employers and state-borders. This paper (a) estimates RAS pass-through rates on premiums, financial reserves, and expenditures and assesses the overall RAS impact on market price dispersion. Moreover, it (b) characterizes health plan switchers and investigates their annual and cumulative switching rates over time. Our main findings are based on representative enrollee panel data linked to administrative RAS and health plan data. We show that sickness funds with bad risk pools and high pre-RAS premiums lowered their total premiums by 42 cents per additional euro allocated by the RAS. Consequently, post-RAS, health plan prices converged but not fully. Because switchers are more likely to be white collar, young and healthy, the new consumer choice resulted in more risk segregation and the amount of money redistributed by the RAS increased over time.
    Keywords: employer-based health insurance, free health plan choice, risk adjustment, health plan switching, adverse selection, German sickness funds, SOEP
    JEL: D12 H51 I11 I13 I18
    Date: 2017

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