nep-pbe New Economics Papers
on Public Economics
Issue of 2017‒10‒01
twelve papers chosen by
Thomas Andrén

  1. Optimal Income Taxation with Composition Effects By Jacquet, Laurence; Lehmann, Etienne
  2. "Does Voluntary Tax Compliance Increase After Granting Tax Amnesty?" By I Made Sudarma
  3. Broken Tax Breaks? Evidence from a Tax Credit Information Experiment with 1,000,000 Students By Bergman, Peter; Denning, Jeffrey T.; Manoli, Dayanand
  4. What Drives Pension Reform Measures in the OECD? Evidence based on a New Comprehensive Dataset and Theory By Beetsma, Roel; Romp, Ward E; van Maurik, Ron
  5. ProPelled: The Effects of Grants on Graduation, Earnings, and Welfare By Jeffrey T. Denning; Benjamin M. Marx; Lesley J. Turner
  6. Basic Income and a Public Job Offer: Complementary Policies to Reduce Poverty and Unemployment By FitzRoy, Felix; Jin, Jim
  7. Engineering Crises: Favoritism and Strategic Fiscal Indiscipline By Saint-Paul, Gilles; Ticchi, Davide; Vindigni, Andrea
  8. Who Really Benefits from Consumption Tax Cuts? Evidence from a Large VAT Reform in France. By Youssef Benzarti; Dorian Carloni
  9. What Goes Up May Not Come Down: Asymmetric Incidence of Value-Added Taxes By Youssef Benzarti; Dorian Carloni; Jarkko Harju; Tuomas Kosonen
  10. Longitudinal Determinants of End-of-Life Wealth Inequality By James M. Poterba; Steven F. Venti; David A. Wise
  11. Managing the UK National Debt 1694-2017 By Ellison, Martin; Scott, Andrew
  12. Ten Rules for Public Economic Policy By Yew-Kwang NG

  1. By: Jacquet, Laurence (Norwegian School of Economics); Lehmann, Etienne (CRED, Université Panthéon Assas Paris 2)
    Abstract: We study the optimal nonlinear income tax problem with multidimensional individual characteristics on which taxes cannot be conditioned. We obtain an optimal tax formula that generalizes the standard one by averaging, with specific weights, the sufficient statistics of individuals who earn the same income. Our first main contribution consists in showing that multidimensional heterogeneity brings a new source of endogeneity to the sufficient statistics that we call composition effects. We highlight that composition effects may substantially affect optimal marginal tax rates. Our results put the stress on the need for empirical studies on sufficient statistics for different demographic groups e.g., according to gender, age, ethnicity. As a second main contribution, we show the equivalence between the tax perturbation and mechanism design approaches which bridges the gap between both methods that have, so far, been used separately in the literature.
    Keywords: optimal taxation, multidimensional screening problems, tax perturbation, allocation perturbation, sufficient statistics
    JEL: H21
    Date: 2017–09
  2. By: I Made Sudarma (Brawijaya University, Indonesia Author-2-Name: I Nyoman Darmayasa Author-2-Workplace-Name: Bali State Polytechnic, Indonesia)
    Abstract: "Objective – The main objective of this study is to explore the meaning of voluntary tax compliance by a person after they are granted tax amnesty. Methodology/Technique – This research is qualitative research and uses a transcendental phenomenology method. Findings – The results show that tax compliance does not automatically increase after a grant of tax amnesty. The reason for this is the fact that taxpayers wish to avoid being tax audited. Tax amnesty is therefore not yet useful in build trust in the tax authority. Tax authorities need to convince the public that tax amnesty creates justice for all taxpayers. The power of the tax authority is useful to strengthen law enforcement measures. Furthermore, fundamental moral and ethical considerations based on internalization, spirituality and religion tend to improve taxpayers’ honesty. Novelty – The trust and power of a tax authority that is in line with taxpayers’ honesty is fundamental voluntary to tax compliance. The results of this research demonstrate the need for new tax policies to increase voluntary tax compliance."
    Keywords: Moral Ethics; Tax Amnesty; Transcendental Phenomenology; Trust; Voluntary Tax Compliance.
    JEL: H20 H21 M41
    Date: 2017–07–07
  3. By: Bergman, Peter (Columbia University); Denning, Jeffrey T. (Brigham Young University); Manoli, Dayanand (University of Texas at Austin)
    Abstract: There is increasing evidence that tax credits for college do not affect college enrollment. This may be because prospective students do not know about tax benefits for credits or because the design of tax credits is not conducive to affecting educational outcomes. We focus on changing the salience of tax benefits by providing information about tax benefits for college using a sample of over 1 million students or prospective students in Texas. We sent emails and letters to students that described tax benefits for college and tracked college outcomes. For all three of our samples – rising high school seniors, already enrolled students, and students who had previously applied to college but were not currently enrolled – information about tax benefits for college did not affect enrollment or reenrollment. We test whether effects vary according to information frames and found that no treatment arms changed student outcomes. We conclude that salience is not the primary reason that tax credits for college do not affect enrollment.
    Keywords: tax benefits for college
    JEL: I22 I23 H2
    Date: 2017–09
  4. By: Beetsma, Roel; Romp, Ward E; van Maurik, Ron
    Abstract: Using a narrative approach we construct a unique dataset of pension reform measures for a broad sample of OECD countries over the period since 1970 and explore the determinants of those reforms based on information available at the time of legislation. We distinguish three potential reform regimes: expansion of pension arrangements through increased coverage, eligibility or higher benefits; contraction aimed at enhancing financial and fiscal sustainability or stimulating work incentives; and a regime that combines expansionary and contractionary reform measures occurring in the same year. Over time the expansionary regime has become less prevalent. The incidence of the other two regimes has increased over time. None of the three regimes are affected by current or projected future demographic changes. This finding is remarkable, as we would a priori expect reform measures to be closely linked to long-run financial sustainability considerations. By contrast, business cycle indicators play a substantially larger role. A worsening of the business cycle enhances the likelihood of the contractionary and combination regimes, and reduces that of the expansionary regime during the second part of the sample period. We present a simple theoretical model with an adjustment cost of changing the pension arrangement that can account for the responsiveness to the business cycle and the non-responsiveness to demographic forecasts.
    Keywords: business cycle indicators; contraction; expansion; narrative identification; old-age dependency ratio; pension reform measures
    JEL: H55 H62 J11 J26
    Date: 2017–09
  5. By: Jeffrey T. Denning; Benjamin M. Marx; Lesley J. Turner
    Abstract: We estimate the effect of grant aid on poor college students' attainment and earnings using student-level administrative data from four-year public colleges in Texas. To identify these effects, we exploit a discontinuity in grant generosity as a function of family income. Eligibility for the maximum Pell Grant significantly increases degree receipt and earnings beginning four years after entry. Within ten years, imputed taxes on eligible students' earnings gains fully recoup total government expenditures generated by initial eligibility. To clarify how these estimates relate to social welfare, we develop a general theoretical model and derive sufficient statistics for the welfare implications of changes in the price of college. Whether additional grant aid increases welfare depends on (1) net externalities from recipients' behavioral responses and (2) a direct effect of mitigating credit constraints or other frictions that inflate students' in-school marginal utility. Calibrating our model using nationally representative consumption data suggests that increasing grant aid for the average college student by $1 could generate negative externalities as high as $0.50 and still improve welfare. Applying our welfare formula and estimated direct effects to our setting and others suggests considerable welfare gains from grants that target low-income students.
    JEL: D14 D61 H21 H52 I22
    Date: 2017–09
  6. By: FitzRoy, Felix (University of St. Andrews); Jin, Jim (University of St. Andrews)
    Abstract: Unconditional basic income, or a job guarantee by government as employer-of-last-resort, are usually discussed as alternative policies, though the first does not provide the benefits of an earned income and a good job to the growing numbers in precarious- or under-employment, while the second fails to assist those who would prefer to remain in self-employment or particular occupations if their incomes were higher, rather than to work under a JG. Furthermore a JG cannot support those who are unwilling to work. We argue here that the only cost-effective policy for comprehensive welfare is a combination of a modest basic income with job offer by local authorities below the minimum wage.
    Keywords: basic income, job guarantee, poverty, unemployment
    JEL: H53
    Date: 2017–09
  7. By: Saint-Paul, Gilles; Ticchi, Davide; Vindigni, Andrea
    Abstract: If people understand that some macroeconomic policies are unsustainable, why would they vote for them in the first place? We develop a political economy theory of the endogenous emergence of fiscal crises, based on the idea that the adjustment mechanism to a crisis favors some social groups, that may be induced ex-ante to vote in favor of policies that are more likely to lead to a crisis. People are entitled to a certain level of a publicly provided good, which may be rationed in times of crises. After voting on that level, society votes on the extend to which it will be financed by debt. Under bad enough macro shocks, a crisis arises: taxes are set at their maximum but despite that some agents do not get their entitlement. Some social groups do better in this rationing process than others. We show that public debt -- which makes crises more likely -- is higher, as is the probability of a crisis, the greater the level of favoritism. If the favored group is important enough to be pivotal when society votes on the entitlement level, favoritism also leads to greater public expenditure. We show that the favored group may strategically favor a weaker state in order to make crises more frequent. Finally, the decisive voter when choosing expenditure may be different from the one when voting on debt. In such a case, constitutional limits on debt may raise the utility of all the poor, relative to the equilibrium outcome absent such limits.
    Keywords: Entitlements; favoritism; Fiscal Crises; inequality; political economy; public debt; State Capacity.
    JEL: E62 F34 H12 H6 O11 P16
    Date: 2017–09
  8. By: Youssef Benzarti; Dorian Carloni
    Abstract: In this paper we evaluate the incidence of a large cut in value-added taxes (VAT) for French sit-down restaurants. In contrast to previous studies that focus on prices only, we estimate its effect on four groups: workers, firm owners, consumers and suppliers of material goods. Using a difference-in-differences strategy on firm-level data we find that: (1) the effect on consumers was limited, (2) employees and sellers of material goods shared 25 and 16 percent of the total benefit, and (3) the reform mostly benefited owners of sit-down restaurants, who pocketed 41 percent of the tax cut.
    JEL: H20 H22 H23
    Date: 2017–09
  9. By: Youssef Benzarti; Dorian Carloni; Jarkko Harju; Tuomas Kosonen
    Abstract: This paper shows that prices respond more to increases than to decreases in Value-Added Taxes (VATs). First, using all VAT reforms from 1996 to 2015 across all European countries we show that prices respond 3 to 4 times more to VAT increases than decreases. Second, using a plausibly exogenous VAT reform, we show that the asymmetry persists over several years. Third, we document several empirical features of this asymmetry that are inconsistent with the standard incidence model. We provide evidence consistent with firm behavior driving the asymmetry.
    JEL: H20 H22 H23
    Date: 2017–09
  10. By: James M. Poterba; Steven F. Venti; David A. Wise
    Abstract: This paper examines inequality in end-of-life wealth and the factors that contribute to individuals reaching this life stage with few financial resources. It analyzes repeated cross-sections of the Health and Retirement Study, as well as a small longitudinal sample of individuals observed both at age 65 and shortly before death. Most of those who die with little wealth had little wealth at retirement. There is strong persistence over time in the bottom tail of the wealth distribution, but the probability of having low wealth increases slowly with age after age 65. Those with low lifetime earnings are much more likely to report low wealth at retirement, and to die with little wealth, than their higher-earning contemporaries. The onset of a major medical condition and the loss of a spouse increase in the probability of falling into the low wealth category at advanced ages, although these factors appear to contribute to wealth decline for only a small fraction of those who had modest wealth at age 65 but low wealth at the time of death.
    JEL: E21 H55 J14
    Date: 2017–09
  11. By: Ellison, Martin; Scott, Andrew
    Abstract: We construct a new monthly dataset for UK government debt over the period 1694 to 2017 based on price and quantity data for each individual bond issued. This enables us to examine long run fiscal sustainability using the theoretically relevant variable of the market value of debt, and investigate the historical importance of debt management. We find the general implications of the tax smoothing literature are replicated in our data, especially around financing wars, although we find major shifts over time in how fiscal sustainability is achieved. Before the 20th century, governments continued to pay bond holders a high rate of return and achieved sustainability through running fiscal surpluses but since then governments have relied on low growth adjusted real interest rates. The optimal debt management literature tends to favour the use of long bonds but we find the government would have been better off over the 20th century issuing short bonds. The contrast with the literature occurs because of an upward sloping yield curve and long bonds rarely providing fiscal insurance. This is particularly true during periods of financial crises when falling interest rates lead to sharp rises in the price of long bonds, making them an expensive form of finance. We examine the robustness of our conclusions to liquidity effects, rollover risks, buyback operations and leverage. In general, these do suggest a greater role for long bonds but do not overturn an issuance strategy based mainly on short term bonds.
    Keywords: Debt Management; Fiscal Deficits; Fiscal policy; Government Debt; inflation; Maturity; Yield Curve
    JEL: E43 E62 H63
    Date: 2017–09
  12. By: Yew-Kwang NG (Division of Economics, Nanyang Technological University, 14 Nanyang Drive, Singapore 637332.)
    Abstract: This paper discusses ten simple rules for the formulation of public economic policies efficiently, using both old wisdom and recent results. The ten rules are: Using the Invisible Hand; Provision of Essential Public Goods; Reducing Excessive Inequalities Efficiently; Adopt Free Trade and Eliminate Administrative and Collusive Monopolies; Provide Useful Information and Regulation; Raise Taxes Efficiently; Mitigate against Excessive Market Fluctuations; Undertake Public Projects Efficiently; Soft Paternalism; Happiness-Oriented Objectives. Justifications and qualifications are discussed.
    Keywords: Economic policy; ten rules; ten commandments; efficiency; public economics
    Date: 2017–03

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