nep-pbe New Economics Papers
on Public Economics
Issue of 2017‒06‒25
twenty papers chosen by
Thomas Andrén

  1. Healthcare tax credits: financial help to taxpayers or support to higher income and better educated patients? Evidence from Italy. By Elenka Brenna
  2. Culture, Compliance, and Confidentiality: Taxpayer Behavior in the United States and Italy By James Alm; Michele Bernasconi; Susan Laury; Daniel J. Lee; Sally Wallace
  3. Taxation and Investment in India By Alastair Thomas; Isabelle Joumard; Tibor Hanappi; Michelle Harding
  4. Optimal Taxation, Redistribution, and Environmental Externalities By Aronsson, Thomas; Sjögren, Tomas
  5. Taxing multinationals beyond borders: financial and locational responses to CFC rules By Sarah Clifford
  6. Innovation Dynamics and Fiscal Policy: Implications for Growth, Asset Prices, and Welfare By Michael Donadelli; Patrick Grüning
  7. Partial Privatization and Subsidization in a Mixed Duopoly: R&D versus Output Subsidies By Lee, Sang-Ho; Muminov, Timur; Tomaru, Yoshihiro
  8. Inequality and redistribution: taxes and transfers By International Policy Centre for Inclusive Growth; HelpAge International
  9. Fiscal Forward Guidance: A case for selective transparency By FUJIWARA Ippei; WAKI Yuichiro
  10. The Effect of Non-contributory Pensions on Saving in Mexico By Jorge Alonso; Catalina Amuedo-Dorantes; Laura Juárez
  11. Intergovernmental fiscal relations and sub-national finance By Mamedov Arseny; Arlashkin Igor; Barbashova Natalia
  12. Future trends in health care expenditure: A modelling framework for cross-country forecasts By Alberto Marino; David Morgan; Luca Lorenzoni; Chris James
  13. Pension Reform in Taiwan: the Path to Long-Run Sustainability By Yu-Hsiang Cheng; Hsuan-Chih (Luke) Lin; Atsuko Tanaka
  14. Child Care Subsidies, Quality, and Optimal Income Taxation By Bastani, Spencer; Blomquist, Sören; Micheletto, Luca
  15. Income, wealth and equal opportunities in Sweden By Jon Kristian Pareliussen; Christophe André; Hugo Bourrousse; Vincent Koen
  16. Too slow a change? Deep habits, consumption shifts and transitory tax By van den Bijgaart, I.M.
  17. Optimal Taxes Under Private Information: The Role of the Inflation Tax By Gomis-Porqueras, Pedro; Waller, Christopher J.
  18. Austerity Measures: Do they avert solvency crises? By Christos Shiamptanis
  19. What do external statistics tell us about undeclared assets held abroad and tax evasion? By Valeria Pellegrini; Alessandra Sanelli; Enrico Tosti
  20. The Effect of Public Debt on Growth in Multiple Regimes in the Presence of Long-Memory and Non-Stationary Debt Series By Irina Syssoyeva-Masson; João de Sousa Andrade

  1. By: Elenka Brenna (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore)
    Abstract: In several countries, taxpayers are given the option to detract from gross taxation a share of their out of pocket healthcare expenditure. This paper investigates the use of Healthcare Tax Credits (HTCs) in Italy through the analysis of a panel data which provides information on individual income tax from 2008 to 2014. The study focuses on the disparities emerging in the use of HTCs between Northern and Southern regions: per capita HTCs, either weighted for general population or for the number of claimants, are higher in the North than in the South of Italy. The existing differences in the average income between the two regional clusters may drive to inequalities in the out of pocket expenditure for healthcare services; however, the observed North-South gradient could also reveal possible disparities in the ability of using HTCs, mainly due to socioeconomic factors. A fixed effects OLS model is run to examine the impact of selected socioeconomic variables on regional per capita HTCs, with a particular focus on the role of education. Results corroborate the regressive imprinting of HTCs supported by literature and provide highlights on the role of education in explaining HTCs distribution among regions. Public money is reimbursed to regions where people are on average richer and better educated. More equitable objectives could be reached by allocating the same resources in the provision of services covered by NHS.
    Keywords: Health-related tax credits, regional disparities, healthcare access, personal income tax.
    JEL: I14 H31 H51
    Date: 2017–06
  2. By: James Alm (Tulane University); Michele Bernasconi (Department of Economics, Cà Foscari University Of Venice); Susan Laury (Georgia State University); Daniel J. Lee (Rice University); Sally Wallace (Georgia State University, African Tax Institute and the University of Pretoria RSA)
    Abstract: This paper analyzes the impact of confidentiality of taxpayer information on the level of compliance in two countries with very different levels of citizen trust in government – the United States and Italy. Using identical laboratory experiments conducted in the two countries, we analyze the impact on tax compliance of “Full Disclosure” (e.g., release of photos of tax evaders to all subjects, along with information on the extent of their noncompliance) and of “Full Confidentiality” (e.g., no public dissemination of photos or noncompliance). Our empirical analysis applies a two-stage strategy that separates the evasion decision into its extensive (e.g., “participation”) and intensive (e.g. “amount”) margins. We find strong support for the notion that public disclosure acts as an additional deterrent to tax evaders, and that the deterrent effect is concentrated in the first stage of the two-stage model (or whether to evade or not). We also find that the deterrent effect is similar in the U.S. and in Italy, despite what appear to be different social norms of compliance in the two countries.
    Keywords: H2, H3
    Date: 2016
  3. By: Alastair Thomas; Isabelle Joumard; Tibor Hanappi; Michelle Harding
    Abstract: Business taxation in India is characterised by high effective tax rates, a narrow tax base, and an uncertain tax environment for potential investors. However, India has now begun a process of significant business tax reform, including a staged reduction of the corporate income tax rate and removal of a range of business tax concessions. This paper sets the scene for these (and further) reforms by examining the taxation of business income in India with a particular focus on its impact on the investment climate. The paper calculates corporate effective tax rates to highlight the impact of the tax system on investment incentives, investigates the narrowness of the current tax base and the proposed base-broadening reforms, and examines the degree of investor certainty as to the tax rules and their application. This Working Paper relates to the 2017 OECD Economic Survey of India ( y-india.htm)
    Keywords: India, investment, taxation
    JEL: H2
    Date: 2017–06–23
  4. By: Aronsson, Thomas (Department of Economics, Umeå University); Sjögren, Tomas (Department of Economics, Umeå University)
    Abstract: This paper surveys research on optimal redistributive taxation in economies with environmental externalities. A major question is whether externality correction only motivates an adjustment of the tax policy rule for the externality-generating activity, or whether the marginal value of the externality directly enters the policy rules for other tax instruments as well. In a static benchmark model with an atmospheric consumption externality, where the government uses a mix of a nonlinear income tax and linear commodity taxes, we show that Sandmo’s (1975) additivity property applies. This means that externality correction leads to an additional term (measuring the marginal value of the externality) in the commodity tax formula for the externality generating good, while the policy rules for commodity taxation of clean goods and marginal income taxation take the same form as in the absence of any externality. We also extend this benchmark model to capture a number of scenarios (such as non-atmospheric externalities, border trade in the externality generating good, and competition between governments in a multi-country framework), where the additivity property no longer applies. We end by examining an intertemporal model of optimal taxation with a stock-externality, allowing us to integrate the study of optimal redistributive taxation with literature on environmental economics and policy based on dynamic models.
    Keywords: Environmental externalities; optimal taxation; redistribution; income taxation; commodity taxation
    JEL: D60 D62 H21 H23 Q51
    Date: 2017–06–19
  5. By: Sarah Clifford (Department of Economics, University of Copenhagen)
    Abstract: Using a large panel dataset on worldwide operations of multinational firms, this paper studies one of the most advocated anti-tax-avoidance measures: Controlled Foreign Corporation rules. By including income of foreign low-tax subsidiaries in the domestic tax base, these rules create incentives for multinationals to move income away from low-tax environments. Exploiting variation around the tax threshold used to identify low-tax subsidiaries, we find that multinationals redirect profits into subsidiaries just above the threshold and place more new subsidiaries just above compared to just below the threshold. The resulting increase in global corporate tax revenue partly accrues to the rule-enforcing country.
    Keywords: CFC legislation; Multinational firms; Tax avoidance; Corporate taxation
    JEL: F23 H25 K34
    Date: 2017–02
  6. By: Michael Donadelli (Faculty of Economics and Business Administration and Research Center SAFE, Goethe University Frankfurt); Patrick Grüning (Bank of Lithuania & Faculty of Economics, Vilnius University)
    Abstract: We study the general equilibrium implications of different fiscal policies on macroeconomic quantities, asset prices, and welfare by utilizing two endogenous growth models. The expanding variety model features only homogeneous innovations by entrants. The Schumpeterian growth model features heterogeneous innovations: “incremental” innovations by incumbents and “radical” innovations by entrants. The government levies taxes on labor income and corporate profits and supplies subsidies to consumption, capital investment, and investments in research and development by entrants and, if applicable, incumbents. With these models at hand, we provide new insights on the interplay of innovation dynamics and fiscal policy.
    Keywords: Endogenous growth, Asset pricing, Government, Fiscal policy, Heterogeneous innovation
    JEL: E22 G12 H20 I30 O30
    Date: 2017–04–03
  7. By: Lee, Sang-Ho; Muminov, Timur; Tomaru, Yoshihiro
    Abstract: This study investigates R&D and output subsidies in a mixed duopoly with partial privatization. We show that an output subsidy is welfare-superior to an R&D subsidy policy, but the government has a higher incentive to privatize the public firm under the output subsidy than the R&D subsidy. However, when the government uses the policy mix of R&D and output subsidies together, it can achieve the first-best allocation, in which the degree of privatization does not influence output subsidies but influences R&D subsidies.
    Keywords: Mixed duopoly; Partial privatization; R&D subsidy; Output subsidy
    JEL: H2 L1 L3
    Date: 2017–06–19
  8. By: International Policy Centre for Inclusive Growth (IPC-IG); HelpAge International (IPC-IG)
    Abstract: "When it comes to income distribution, the most unequal region in the world is Latin America and the Caribbean?significantly more unequal than other developing regions, on average. Although it has experienced a significant decrease in the level of inequality over the past decade, recent data show a possible slowing down of this progress, associated with the waning economic boom of the last decades, combined with higher fiscal constraints and a rise in public debt. The webinar 'Inequality and Redistribution: Taxes and Transfers' explored and highlighted possible solutions for reducing inequality in the region, evaluating the effects of fiscal policies on income distribution". (...)
    Keywords: Inequality, redistribution, taxes, transfers
    Date: 2017–02
  9. By: FUJIWARA Ippei; WAKI Yuichiro
    Abstract: Should the fiscal authority use forward guidance to reduce future policy uncertainty perceived by private agents? Using dynamic stochastic general equilibrium models, we examine the welfare effects of announcing future fiscal policy shocks. Analytical as well as numerical experiments show that selective transparency is desirable—announcing future fiscal policy shocks that are distortionary can be detrimental to ex ante social welfare, whereas announcing non-distortionary shocks generally improves welfare. Sizable welfare gains are found with constructive ambiguity regarding the timing of a consumption tax increase in the fiscal consolidation scenario in Japan recommended by Hansen and Imrohoroglu (2016). However, being secretive about distortionary tax shocks is time inconsistent, and welfare loss from communication may be unavoidable without commitment.
    Date: 2017–06
  10. By: Jorge Alonso; Catalina Amuedo-Dorantes; Laura Juárez
    Abstract: This paper examines the effects of non-contributory pension programs at the federal and state levels on Mexican households' saving patterns using micro data from the Mexican Income and Expenditure Survey. The federal program by itself appears to reduce the saving rate of households whose oldest member is either 18 to 54 or 65 to 69. State programs by themselves have no significant effects on household saving rates in the smallest localities, but in larger localities they may reduce the saving of households with members in their sixties. The combination of both types of programs generally does not have statistically significant effects on households' aggregate saving, probably because each program seems to affect different population strata. No significant effects are found for households whose oldest member is age-eligible (70 and older). Within specific investment categories, evidence is found of increases in human capital and in durable and financial goods for some age groups. Finally, the paper provides evidence on household-level labor supply responses.
    Keywords: Pensions Systems, Household Saving Rate, Labor supply, Housing, Human Capital Investment, Financial Assets, Household Income, Pension funds, Social Insurance, household saving rate, pensions systems
    JEL: H55 O12 J26 D14
    Date: 2016–10
  11. By: Mamedov Arseny (Gaidar Institute for Economic Policy); Arlashkin Igor (Gaidar Institute for Economic Policy); Barbashova Natalia (Gaidar Institute for Economic Policy)
    Abstract: The revenue and expenditure structure of Russia’s consolidated budget reflects main trends in the relationship between various public administration levels. Fig. 20 presents data reflecting the percentage of tax revenues and expenditure of subjects of the Russian Federation in total tax revenues and expenditure of Russia’s budget system (the consolidated budget of the Russian Federation and of public off-budget funds).
    Keywords: Russian economy, intergovernmental relations
    JEL: H77
    Date: 2017
  12. By: Alberto Marino (OECD); David Morgan (OECD); Luca Lorenzoni (OECD); Chris James (OECD)
    Abstract: Across the OECD, healthcare spending has typically outpaced economic growth in recent decades. While such spending has improved health outcomes, there are concerns about the financial sustainability of this upward trend, particularly as healthcare systems are predominantly funded from public resources in most OECD countries. To better explore this financial sustainability challenge, many countries and international institutions have developed forecasting models to project growth in future healthcare expenditure. Despite methodological differences between forecasting approaches, a common set of healthcare spending drivers can be identified. Demographic factors, rising incomes, technological progress, productivity in the healthcare sector compared to the general economy (Baumol’s cost disease) and associated healthcare policies have all been shown to be key determinants of healthcare spending.
    JEL: C53 H51 I18 J11
    Date: 2017–06–22
  13. By: Yu-Hsiang Cheng (Public Utilities Section, Department of Public Works, Keelung City Government); Hsuan-Chih (Luke) Lin (Institute of Economics, Academia Sinica, Taipei, Taiwan); Atsuko Tanaka (Department of Economics, University of Calgary)
    Abstract: This paper quantifies the fiscal costs of different pension reforms in Taiwan that achieve long-run sustainability. We build a general equilibrium life-cycle model with endogenous labor supply in both intensive and extensive margins, consumption, saving, and benefit claiming. Several options to make pensions sustainable under current demographic changes are presented; increase income tax by 5.4 percent, increase the consumption tax by 6.2 percent, increase the pension tax by 9 percent, or reduce the pension benefits by 23.5 percent. Furthermore, we evaluate the changes in macroeconomic indicators as well as labor market outcomes under different reforms. Last, we highlight the importance of the general equilibrium effects that can account for endogenously saving and labor supply, as partial equilibrium analysis usually underestimates negative effects.
    Keywords: Pension Reform, Long-Run Sustainability, Intensive and Extensive Margins JEL Classification: E2, E6, H5, J2
    Date: 2017–06
  14. By: Bastani, Spencer (Department of Economics and Statistics, Linnaeus University); Blomquist, Sören (Department of Economics); Micheletto, Luca (Department of Law, University of Milan)
    Abstract: In this paper we examine the desirability of subsidizing child care expenditures in a model where parents can choose both the quantity and the quality of child care services they purchase in the market. Our vehicle of analysis is a Mirrleesian optimal tax framework where child care services not only enable parents to work, but also contribute to children’s formation of human capital. In addition, there are externalities related to the parents’ choice of child care arrangements for their o spring. Using a quantitative simulation model calibrated to the US economy, we evaluate the relative merits of some the most common forms of child care subsidies (tax deductions, tax credits, and opting-out public provision schemes) in terms of their e ectiveness in alleviating the distortions associated with income taxation and increasing the quality of child care chosen by parents.
    Keywords: optimal income taxation; child care subsidies; tax deductibility; tax credit; public provision of private goods
    JEL: H21 H41
    Date: 2017–06–15
  15. By: Jon Kristian Pareliussen; Christophe André; Hugo Bourrousse; Vincent Koen
    Abstract: Sweden is an egalitarian society in international comparison, and has managed to combine equity with economic efficiency. Rapidly rising inequality and relative poverty from a historical low in the 1980s partly stem from ageing, changing family structures and migration. Living standards increased for all groups, but social benefits rose less than earned income. Incomes of newly-arrived immigrants and single mothers trailed the median. Bottlenecks in the migrant settlement process are costly to migrants and society, and high entry wages further slow integration. Spatial segregation leads to school segregation and potentially reduced social mobility for the least endowed, and rental regulations reduce the scope for settling where job opportunities are the best. Fast-growing capital incomes, likely linked to increasing wealth concentration and income shifting, increased inequality. Low intergenerational income mobility in the very top of the income distribution is a concern. Social benefits should be uprated more systematically and regressive housing-related taxation reformed to strengthen redistribution. Migrant settlement and integration need to be better coordinated and adapted to individual starting points. The number of wage subsidies and their administrative complexity should be reduced to ease labour market entry. Dysfunctional rental regulations should be reformed to increase mobility and limit spatial segregation. This working paper relates to the 2017 OECD Economic Survey of Sweden ( y-sweden.htm).
    Keywords: housing, Income, inequality, migration, redistribution, rent control, skills, wealth
    JEL: D31 F22 H23 H55
    Date: 2017–06–23
  16. By: van den Bijgaart, I.M. (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: This paper studies shifts in the consumption bundle when consumption is subject to habit formation, and consumers do not internalize this habit formation process. Habits are goodspecific, or ’deep’, and cause persistence in good-specific consumption. In addition, at the aggregate level, habits act as benchmark against which consumption is evaluated. I establish that a rapid transition is optimal if the persistence effect is relatively strong, and determine the path of taxes or subsidies that implements this transition, both when goods are produced competitively and when they are produced by monopolists. To explore the quantitative implications of the model I consider the introduction of a 10 percent charge on a subset of goods. I find that consumption adjusts inefficiently fast; implementing first-best adjustment requires a transitory discount of up to 60 percent of the cost increase.
    Keywords: habit formation; projection bias; consumption shifts; optimal taxation
    JEL: D11 D62 H21 H23
    Date: 2017–06
  17. By: Gomis-Porqueras, Pedro (Deakin University); Waller, Christopher J. (Federal Reserve Bank of St. Louis)
    Abstract: We consider an overlapping generation framework with search and private information to study optimal taxation. Agents sequentially trade in markets that are characterized by different frictions and trading protocols. In frictional decentralized markets, agents receive shocks that determine if they are going to be consumers or producers. Shocks are private information. Mechanism design is used to solve for the constrained optimal allocation. We then study whether a government can replicate the constrained optimal allocation with an array of policy instruments including fiat money. We show that if the government has a full set of non-linear taxes, then lump-sum taxes and inflation are irrelevant for the allocation. However, if the government is constrained to use linear taxes, then using the inflation tax is optimal even if lump-sum taxes are available.
    Keywords: Inflation; Monetary Policy; Fiscal Policy
    JEL: E52 E62 H21
    Date: 2017–05–31
  18. By: Christos Shiamptanis (Wilfrid Laurier University)
    Abstract: Many countries are adopting austerity measures, whereby governments aggressively raise taxes, with the hope to dispel future solvency crisis. This paper investigates the implications of austerity on the likelihood of solvency crisis. We derive the maximum level of debt consistent with solvency, labelled as the effective fiscal limit on debt, and we show that its position depends on austerity. We find that countries like Italy that undergo strict austerity could lower their effective fiscal limit and induce a solvency crisis in the near future.
    Keywords: Austerity, Solvency Crisis, Fiscal Policy, Fiscal Limit, Default
    JEL: C63 E62 E63 F34 H63
    Date: 2017–06–19
  19. By: Valeria Pellegrini (Banca d'Italia); Alessandra Sanelli (Banca d'Italia); Enrico Tosti (Banca d'Italia)
    Abstract: The analysis of international investment position and balance of payments statistics suggests that foreign assets held abroad are greatly underestimated. This paper has three main goals. First, it examines the role played by tax havens in tax evasion. Second, it estimates unreported capital to range globally between $6 trillion and $7 trillion at end-2013, on the basis of mirror statistics on portfolio securities and on cross-border deposits of non-banks. Third, it estimates the portion of tax evasion connected to the underreporting of foreign assets to range between $20 trillion and $42 billion a year over the period 2001-2013 for capital income tax, and between $2.1 trillion and $2.8 trillion at end-2013 for personal income tax. The estimate for personal income tax is based on the assumption that the entire stock of unreported capital outstanding at end-2013 was made up of income that had escaped income tax. Finally, the paper gives a critical assessment of the strengths and weaknesses of the recent policy responses to international tax evasion.
    Keywords: tax evasion, tax haven, international investment, foreign investment, multinational firm, offshore, foreign assets, under-reporting
    JEL: H26 F21 F23 G15
    Date: 2016–11
  20. By: Irina Syssoyeva-Masson (Department of Finance and Economics, University of Savoy Mont Blanc, France; Association CEMAFI International); João de Sousa Andrade (CeBER and Faculty of Economics of the University of Coimbra)
    Abstract: The study of the relationship between public debt and economic growth came again to the spotlight with the financial crisis (2007-2008) and with the sovereign debt crisis that followed in Europe. This literature aims to shed light about the sign, magnitude, mechanisms and threshold regimes relating debt to growth and to make policy recommendations with important consequences in terms of government’s policies. We empirically investigate this relationship for a group of 60 countries for a long-time period (the shorter one from 1970 to 2012) using the historical public debt database (HPDD) built by the International Monetary Fund (IMF) and we defend that the empirical strategy underlying most of the studies on this topic should be revised. We claim that: a) the study of the long-memory property of the public debt GDP ratio and stationarity (using the last generation tests) has to be performed as a first step of the empirical analysis, what has been done using 87 countries; b) In the presence of a non-stationary public debt GDP ratio cointegration analysis was used to estimate the relationship between the public debt GDP ratio and output; c) under the no rejection of the null of no cointegration, the above mentioned relationship was studied between the public debt GDP ratio first difference and GDP growth rate using threshold models and searching for thresholds using a wide variety of variables. The main conclusions of this study are that the debt series have a long memory and should not be analyzed in a short-term framework; additionally, the non-stationarity of the debt series does not allow researchers to apply stationary econometrics methods to model its behavior. This finding implies that the relationship between economic growth and national debt that has been characterizing the literature on the subject, has disputable econometric foundations. We thus recommend our empirical strategy to overcome the above-mentioned drawbacks of the existent empirical literature. Finally, it should be mentioned that the relationship between the public debt GDP ratio first difference and GDP growth rate is always negative despite the different threshold regimes identified.
    Keywords: Public Debt, Growth, Long Memory, Stationary, Co-integration and Thresholds.
    JEL: C24 C51 E62 H6 O11
    Date: 2017–06

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