nep-pbe New Economics Papers
on Public Economics
Issue of 2017‒07‒09
fifteen papers chosen by
Thomas Andrén

  1. New Evidence on State Fiscal Multipliers: Implications for State Policies By Timothy J. Bartik
  2. Striking a balance: optimal tax policy with labor market duality By Gilbert Mbara; Joanna Tyrowicz; Ryszard Kokoszczynski
  3. Perception of Corruption and Public Support for Redistribution in Latin America By Esther Hauk; Monica Oviedo; Xavier Ramos
  4. Progressive taxation and (in)stability in an exogenous growth model with an informal sector By Aleksandar Vasilev
  5. Survey under-coverage of top incomes and estimation of inequality: what is the role of the UK’s SPI adjustment? By Burkhauser, Richard V.; Hérault, Nicolas; Jenkins, Stephen P.; Wilkins, Roger
  6. Fiscal Forward Guidance: A Case for Selective Transparency By Fujiwara, Ippei; Waki, Yuichiro
  7. Welfare effects of fiscal policy in reforming the pension system By Oliwia Komada; Krzysztof Makarski; Joanna Tyrowicz
  8. Taxes and the Location of Targets By Arulampalam, Wiji; Devereux, Michael; Liberini, Federica
  9. Taxes, Transfers, and Women’s Labor Supply in the United States By Melanie Guldi
  10. On Welfare Effects of Increasing Retirement Age By Krzysztof Makarski; Joanna Tyrowicz
  11. Pathways to Retirement through Self-Employment By Shanthi Ramnath; John B. Shoven; Sita Nataraj Slavov
  12. Rising Pension Age in Italy: Employment Response and Program Substitution. By Ardito, Chiara
  13. Permits or taxes? How to regulate Cournot Duopoly with polluting firms By Requate, Till
  14. The environmental tax and subsidy reform in Mexico By Johanna Arlinghaus; Kurt van Dender
  15. Incentives to innovate under emission taxes and tradeable permits By Requate, Till

  1. By: Timothy J. Bartik (W.E. Upjohn Institute for Employment Research)
    Abstract: When state and local governments engage in balanced budget changes in taxes and spending, what fiscal multiplier effects do such policies have on creating local jobs? Traditionally, the view has been that possible job-creation effects of such state and local "demand-side” policies are smaller, second-order effects. Such effects might be worthwhile to take into consideration when a state or local government balances its budget during a recession, but the effects were believed to be of modest magnitude, and not of major importance for more general state and local public policies. However, recent estimates of fiscal multiplier effects of state and local spending and tax policies suggest much larger demand-side effects of such policies on local jobs. These fiscal multiplier effects are large enough to suggest relatively low costs per job created of some tax and spending policy combinations, sufficient to alter the net benefits of many public policies. In particular, this recent research suggests that policies that use tax increases on the top 10 percent of the income distribution to finance either public spending expansions or tax relief for the bottom 90 percent of the income distribution may offer some job creation benefits that are large enough to alter state and local policy decisions. Furthermore, the cost per job created of state business tax incentive policies or business tax cuts may be significantly altered after taking into account the opportunity costs of financing such policies by cutting public spending or raising taxes on the bottom 90 percent.
    Keywords: job creation, fiscal multipliers, state and local taxation, state and local expenditures, local labor demand, income distribution, business tax incentives, state and local business taxes
    JEL: H71 H72 J23 R12
    Date: 2017–07
  2. By: Gilbert Mbara (University of Warsaw); Joanna Tyrowicz (Faculty of Economic Sciences, University of Warsaw; National Bank of Poland); Ryszard Kokoszczynski (Faculty of Economic Sciences, University of Warsaw; National Bank of Poland)
    Abstract: We develop a dynamic general equilibrium model in which firms may evade the employer contribution component of social security taxes by offering some workers secondary contracts. We calibrate the model to data from the United States and EU-14 countries and obtain estimates of the secondary labor market participation consistent with empirical evidence. We then investigate the optimal mix of the avoidable and unavoidable components of labor taxes and analyze the fiscal and macroeconomic effects of bringing the composition to the welfare optimum. We find that partial labor tax evasion makes tax revenues more elastic, but full tax compliance need not be a welfare enhancing policy mix. Relating to the highly cited work of Trabandt and Uhlig (2011), we extend their framework to analyze the phenomenon of non-standard employment. We distinguish between avoidable and unavoidable labor taxation -- the former may be evaded by firms if they formulate a contract with a worker as a non-standard employment contract and may be associated with employers' share in labor taxation. The latter is paid by worker--households. Our results enrich the intuition about the optimal mix of the two types of labor taxation. We show that in countries where the share of avoidable labor taxes is relatively low, substantial welfare gains can be achieved by changing the mix of the two types of labor taxes. The gains emanate from higher labor supply and consumption which accompanies modest increases in secondary employment. These gains are obtained without loss to aggregate fiscal revenue. In addition to these main results, we also show that plausible estimates of the levels of tax evasion, the efficiency of tax auditing and the shares of secondary employment can be obtained from aggregate tax revenue data.
    Keywords: Laffer curve, tax evasion, labor market duality
    JEL: H26 H3 E13 E26 J81
    Date: 2017
  3. By: Esther Hauk; Monica Oviedo; Xavier Ramos
    Abstract: This paper studies the relationship between people's beliefs about the quality of their institutions, as measured by corruption perceptions, and preferences for redistribution in Latin America. Our empirical study is guided by a theoretical model which introduces taxes into Foellmi and Oechslin's (2007) general equilibrium model of non-collusive corruption. In this model perceived corruption influences people's preferences for redistribution through two channels. On the one hand it undermines trust in government, which reduces people's support for redistribution. On the other hand, more corruption decreases own wealth relative to average wealth of below-average-wealth individuals leading to a higher demand for redistribution. Thus, the effect of perceived corruption on redistribution cannot be signed a priori. Our novel empirical findings for Latin America suggest that perceiving corruption in the public sector increases people's support for redistribution. Although the positive channel dominates in the data, we also find evidence for the negative channel from corruption to demand for redistribution via reduced trust.
    Keywords: preference for redistribution, perception of corruption, political trust, bribery, Latin America
    JEL: D31 D63 H1 H2 P16
    Date: 2017–06
  4. By: Aleksandar Vasilev
    Abstract: We show that in an exogenous growth model with informal economy calibrated to Bulgarian data under the progressive taxation regime (1993-2007), the economy exhibits equilibrium indeterminacy due to the presence of an unofficial production. These results are in line with the findings in Benhabib and Farmer (1994, 1996) and Farmer (1999). Also, the findings in this paper are in contrast to Guo and Lansing (1988) who argue that progressive taxation works as an automatic stabilizer. Un- der the flat tax regime (2008-14), the economy calibrated to Bulgarian data displays saddle-path stability. The decrease in the average effective tax rate addresses the indeterminacy issue and eliminates the ”sink” dynamics.
    Keywords: Progressive taxation; Informal Sector; Equilibrium (In)determinacy.
    JEL: H22 J46 D51 D91 O41
    Date: 2017–06–07
  5. By: Burkhauser, Richard V.; Hérault, Nicolas; Jenkins, Stephen P.; Wilkins, Roger
    Abstract: Survey under-coverage of top incomes leads to bias in survey-based estimates of overall income inequality. Using income tax record data in combination with survey data is a potential approach to address the problem; we consider here the UK’s pioneering ‘SPI adjustment’ method that implements this idea. Since 1992, the principal income distribution series (reported annually in Households Below Average Income) has been based on household survey data in which the incomes of a small number of ‘very rich’ individuals are adjusted using information from ‘very rich’ individuals in personal income tax return data. We explain what the procedure involves, reveal the extent to which it addresses survey under-coverage of top incomes, and show how it affects estimates of overall income inequality. More generally, we assess whether the SPI adjustment is fit for purpose and consider whether variants of it could be employed by other countries.
    Date: 2017–06–22
  6. By: Fujiwara, Ippei (Keio University); Waki, Yuichiro (University of Queensland)
    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 nondistortionary 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.
    JEL: D82 E30 E62 H20
    Date: 2017–06–01
  7. By: Oliwia Komada (Group for Research in Applied Economics (GRAPE)); Krzysztof Makarski (Group for Research in Applied Economics (GRAPE); Warsaw School of Economics; Narodowy Bank Polski); Joanna Tyrowicz (Group for Research in Applied Economics (GRAPE); University of Warsaw)
    Abstract: Most reforms of the pension systems imply substantial redistributions between cohorts and within cohort. Fiscal policy, which accompanies these changes may counteract or reinforce this redistribution. Moreover, the literature has argued that the insurance motive implicit in some pension systems plays a major role in determining the welfare effects of the reform: reforms otherwise improving welfare become detrimental to welfare once insurance motive is internalized. We show that this result is not universal, i.e. there exists a variety of fiscal closures which yield welfare gains and political support for a pension system reform. In an OLG model with uncertainty we analyze two sets of fiscal adjustments: fiscally neutral adjustments in the pension system (via contribution rate or replacement rate) and balancing pension system by a combination of taxes and/or public debt. We find that fiscally neutral pension system reforms are more likely to yield welfare gains. Many adjustments obtain sufficient political support despite yielding aggregate welfare losses and vice versa. Furthermore, we point to fiscal closures which attenuate and reinforce the relevance of the insurance motive in determining the welfare effects.
    Keywords: pension system reform, fiscal policy, welfare effects
    JEL: C68 D72 E62 H55 J26
    Date: 2017
  8. By: Arulampalam, Wiji (Department of Economics, University og Warwick); Devereux, Michael (Centre for Business Taxation, University of Oxford); Liberini, Federica (Economic Institute, ETH Zürich)
    Abstract: We use firm-level data to investigate the impact of taxes on the international location of targets in M&A allowing for heterogeneous responses by companies. The statutory tax rate in the target country is found to have a negative impact on the probability of an acquisition in that country. In addition, the estimated size of the effect is found to depend on whether (i) acquirer is a domestic or a multinational enterprise; (ii) the acquisition is domestic or cross-border; and (iii) the acquirer's country has a worldwide or territorial tax system
    Keywords: Multinational enterprises; cross-border expansion; target choice; corporation income tax; mixed logit
    JEL: C25 G34 H25 H32
    Date: 2017–02–28
  9. By: Melanie Guldi (University of Central Florida, Orlando, FL)
    Abstract: The U.S. tax and transfer system generates revenue and provides safety net programs that move millions out of poverty. Since women are more likely to live in poverty, they are more likely to qualify for means-tested transfers. The structure of taxation in the U.S. often penalizes secondary earners, who are usually women. These programs alter work incentives and consequently may affect labor supply decisions. In this chapter, we examine the empirical evidence on the effects of taxes and transfers on the labor supply of women in the U.S. We show that much has changed since 1990, with the biggest shift being a change from cash transfers via welfare to refundable tax credits to workers. Overall, the evidence we review shows women have higher labor force participation and are less responsive to changes in after-tax wages than they were before 1990, but the labor supply effects vary substantially by program considered.
    Keywords: taxes; transfer programs; women’s labor supply; Earned Income Tax Credit; Temporary Assistance for Needy Families; Medicaid
    Date: 2017–05
  10. By: Krzysztof Makarski (Group for Research in Applied Economics (GRAPE); Warsaw School of Economics; Narodowy Bank Polski); Joanna Tyrowicz (Group for Research in Applied Economics (GRAPE); University of Warsaw)
    Abstract: We develop an OLG model with realistic assumptions about longevity to analyze the welfare effects of raising the retirement age. We look at a scenario where an economy has a pay-as-you-go defined benefit scheme and compare it to a scenario with defined contribution schemes (funded or notional). We show that initially in both types of pension system schemes majority of the welfare effects come from adjustment in taxes and/or prices. After the transition period, welfare effects are predominantly generated by the preference for smoothing inherent in many widely used models. We also show that although incentives differ between defined benefit and defined contribution systems, the welfare effects are of comparable magnitude under both schemes. We provide an explanation for this counter-intuitive result.
    Keywords: longevity, PAYG, retirement age, pension system reform, welfare
    JEL: C68 E21 J11 H55
    Date: 2017
  11. By: Shanthi Ramnath; John B. Shoven; Sita Nataraj Slavov
    Abstract: We examine the role of self-employment in retirement transitions using a panel of administrative tax data. We find that the hazard of self-employment increases at popular retirement ages associated with Social Security eligibility, particularly for those with greater retirement wealth. Late-career transitions to self-employment are associated with a larger drop in income than similar mid-career transitions. Data from the Health and Retirement Study suggest that hours worked also fall upon switching to self-employment. These results suggest that self-employment at older ages may serve as a “bridge job,” allowing workers to gradually reduce hours and earnings along the pathway to retirement.
    JEL: H55 J26 J29
    Date: 2017–06
  12. By: Ardito, Chiara (University of Turin)
    Abstract: This paper investigates the impact of the 1992 Italian Pension Reform tightening minimum pension age for men on several labour market outcomes. In particular, both its intended (on retirement and employment) and unintended effects (on other components of social welfare) are considered. The empirical analysis is based on a large administrative database and it exploits the quasi-natural experiment offered by the gradual phase in of the reform. Results show that the reduced pension benefit claiming induced by the reform did not lead to a one-to-one increase in employment, inasmuch we find evidence of social support substitution. Workers facing stricter eligibility conditions demanded more disability and unemployment benefits and yet, the probability of inactivity increased the most. Sensitivity checks show that the results are very robust and that they are not driven by an extension of the receipt time of people already receiving alternative welfare benefits before the reform. The size of the effects vary across socioeconomic groups and individuals with poorer health, in manual occupations and with lower earnings resulted the most constrained by the new pension rules, experiencing the highest increase in employment and substitution between retirement and other social. security programs.
    Date: 2017–06
  13. By: Requate, Till (Center for Mathematical Economics, Bielefeld University)
    Date: 2017–04–04
  14. By: Johanna Arlinghaus (OECD); Kurt van Dender (OECD)
    Abstract: In a bold policy effort, Mexico recently moved away from subsidies to transport fuels, increased tax rates on these fuels and introduced a carbon tax. This paper analyses these reforms using a broad set of criteria that consider the main practical dimensions of environmental policy design: environmental effectiveness, equity and distributional impacts, broader tax system impacts, macroeconomic effects, compliance and administration, policy process and consistency. The reforms significantly improve the extent to which the external costs of energy use are reflected in prices and increase government revenues, but, as price deregulation progresses further, more attention may need to be devoted to analysing and addressing the policies’ distributive effects. The analysis also highlights that ease of administration and collection are an important and desirable property of carbon taxes, especially in emerging market contexts.
    Keywords: carbon pricing, distributional effects, energy taxation, fossil-fuel subsidies, tax reform
    JEL: H23 Q48 Q52
    Date: 2017–07–05
  15. By: Requate, Till (Center for Mathematical Economics, Bielefeld University)
    Date: 2017–04–04

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