nep-pbe New Economics Papers
on Public Economics
Issue of 2017‒10‒29
nineteen papers chosen by
Thomas Andrén

  1. The Laffer curve for high incomes By Lundberg, Jacob
  2. Human Capital, Public Debt, and Economic Growth: A Political Economy Analysis By Tetsuo Ono; Yuki Uchida
  3. Tax Refunds and Income Manipulation Evidence from the EITC By Buhlmann, Florian; Elsner, Benjamin; Peichl, Andreas
  4. Tax Overhaul Risks Making the US Tax and Transfer System (Even) More Regressive By Jacob Funk Kirkegaard
  5. Should Pollution Taxes be Targeted at Income Redistribution? By Bas Jacobs; Rick van der Ploeg
  6. Is Poland a welfare state? By Jakub Sawulski
  7. International Tax Evasion, State Purchases of Confidential Bank Data and Voluntary Disclosures By Bethmann, Dirk; Kvasnicka, Michael
  8. How to Use One Instrument to Identify Two Elasticities By Evelina Gavrilova; Floris Zoutman; Arnt Ove Hopland
  9. Leveraging Wage Subsidies to Facilitate Fair Wages and Increase Social Welfare By Tomer Blumkin; Haim Pinhas; Ro'i Zultan
  10. Economic and Political determinants of government expenditure in the state of Jammu and Kashmir (India): A multivariate co-integration analysis By Samir Ul Hassan; Biswhambhara Mishra
  11. Dirty money coming home: Capital flows into and out of tax havens By Miethe, Jakob; Menkhoff, Lukas
  12. Fairness and the unselfish demand for redistribution by taxpayers and welfare recipients By Sabatini, Fabio; Ventura, Marco; Yamamura, Eiji; Zamparelli, Luca
  13. Avoiding Taxes: Banks' Use of Internal Debt By Reiter, Franz
  14. Reported Preference vs. Revealed Preference: Evidence from the Propensity to Spend Tax Rebates By Jonathan A. Parker; Nicholas S. Souleles
  15. How do ideas shape national preferences? The Financial Transaction Tax in Ireland By Niamh Hardiman; Saliha Metinsoy
  16. Implausible Large Differences in the Sizes of Underground Economies in Highly Developed European Countries? A Comparison of Different Estimation Methods By Friedrich Schneider
  17. The Welfare and Distributional Effects of Fiscal Volatility: a Quantitative Evaluation By Bachmann, Rüdiger; Bai, Jinhui; Lee, Minjoon; Zhang, Fudong
  18. Cash-Flow Business Taxation Revisited: Bankruptcy, Risk Aversion and Asymmetric Information By Robin Boadway; Motohiro Sato; Jean-François Tremblay
  19. Discretionary fiscal policy in the Euro area: past, present, future By Francesco Caprioli; Marzia Romanelli; Pietro Tommasino

  1. By: Lundberg, Jacob (Department of Economics)
    Abstract: An expression for the Laffer curve for high incomes is derived, assuming a constant Pareto parameter and elasticity of taxable income. The peak of this Laffer curve is given by the well-known Saez (2001) expression. Microsimulations using Swedish population data show that the simulated curve matches the theoretically derived Laffer curve well, suggesting that the analytical expression is not too much of a simplification. Policy conclusions do not change much when income effects are taken into account. A country-level dataset of top effective marginal tax rates and Pareto parameters is assembled. This is used to draw Laffer curves for 27 OECD countries. Revenue-maximizing tax rates and degrees of self-financing for a small tax cut are also computed. The results indicate that degrees of self-financing range between 28 and 195 percent. Five countries have higher tax rates than the peak of the Laffer curve.
    Keywords: Laffer curve; income taxation; Pareto parameter; elasticity of taxable income
    JEL: H21 H24
    Date: 2017–08–31
  2. By: Tetsuo Ono (Graduate School of Economics, Osaka University); Yuki Uchida (Faculty of Economics, Seikei University)
    Abstract: This study considers the politics of public education policy in an overlapping- generations model with physical and human capital accumulation. In particular, this study examines how debt and tax financing differ in terms of growth and welfare across generations, as well as which fiscal stance voters support. The analysis shows that the growth rate in debt financing is lower than that in tax financing, and that debt financing creates a tradeoff between the present and future generations. The analysis also shows that debt financing attains slower economic growth than that realized by the choice of a social planner who cares about the welfare of all generations.
    Keywords: Economic growth, Human capital, Public debt, Political equilib- rium
    JEL: D70 E24 H63
    Date: 2016–01
  3. By: Buhlmann, Florian (ZEW Mannheim); Elsner, Benjamin (IZA); Peichl, Andreas (Ifo Institute for Economic Research)
    Abstract: Welfare programs are important for reducing poverty but create incentives for recipients to maximize their income by either reducing labor supply or manipulating taxable income. In this paper, we quantify the extent of such behavioral responses for the Earned Income Tax Credit (EITC) in the US. We exploit that US states can set top-up rates, which means that, at a given point in time, workers with the same income receive different tax refunds in different states. Using event studies as well as a border pair design, we document that a raise in the state-EITC leads to more bunching of self-employed tax filers at the first kink point of the tax schedule. While we document a strong relationship up until the Great Recession in 2007, we find no effect thereafter. These findings point to important behavioral responses to what is the largest welfare program in the US.
    Keywords: EITC, tax refunds, income manipulation
    JEL: H20 H24
    Date: 2017–09
  4. By: Jacob Funk Kirkegaard (Peterson Institute for International Economics)
    Abstract: US policymakers should be particularly concerned about the effects of any new tax legislation on the incomes of individuals and businesses because of rising income inequality in the United States and the relatively limited US social safety net financed with government taxes. The evidence gathered in this Policy Brief shows that among the world’s high-income countries, the United States has the least redistributive government tax and transfer system, mainly because it chooses to redistribute relatively less through direct tax collection and government transfers to low-income American families. Therefore, any proposed revenue generation measures involving federal value-added taxes or general sales taxes, unless supplemented with increases in government transfers or designed to be less regressive, will only worsen income inequality in 21st century America.
    Date: 2017–10
  5. By: Bas Jacobs; Rick van der Ploeg
    Abstract: This paper analyses optimal corrective taxation and optimal income redistribution. Under general utility functions, 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. However, if preferences for commodities are of the Gorman (1961) polar form, optimal pollution taxes should follow the first-best rule for the Pigouvian corrective tax 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 preferences are Gorman polar, and if pollution taxes are not optimized, Pareto-improving green tax reforms exist that move the pollution tax closer to the Pigouvian tax. Simulations demonstrate that optimal corrective taxes should be Pigouvian if the demand for polluting goods is derived from a LES demand system, but 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
  6. By: Jakub Sawulski
    Abstract: We determine whether Poland is a welfare state by looking at social expenditures as a share of GDP, taking into account that the share tends to increase with the level of income. By this criterion Poland is a welfare state. The share of social expenditure in GDP is high in Poland compared to countries with similar income levels, although still lower than in the majority of wealthier EU Member States. The structure of social expenditure in Poland is marked by high pension expenditure. Education spending is close to the EU average. Low public health expenditure, on the other hand, diverges from EU standards. Following the introduction of the Family 500+ Programme, Poland has become one of the top EU spenders on family policy. The main challenge for social policy is to improve the quality of health care and limit the negative impact of certain types of social expenditure on labour force participation.
    Keywords: welfare state, public expenditure, social expenditure
    JEL: H50 H53 H55
    Date: 2017–10
  7. By: Bethmann, Dirk; Kvasnicka, Michael
    Abstract: State purchases of bank data on suspected tax evaders from international tax havens constitute a potential tool to combat international tax evasion. Using self-compiled data for North-Rhine Westphalia on the timing and content of such data acquisitions from whistleblowers and on monthly voluntary disclosures of international tax evasion involving Swiss banks, we show that purchases of data by tax authorities on potential tax evaders have a positive and sizeable effect on voluntary disclosures.
    JEL: H26
    Date: 2017
  8. By: Evelina Gavrilova; Floris Zoutman; Arnt Ove Hopland
    Abstract: We show that an insight from taxation theory allows identification of both the supply and demand elasticities with only one instrument. Ramsey (1928) and subsequent models of taxation assume that a tax levied on the demand side only affects demand through the price after taxation. Econometrically, we show that this assumption functions as an additional exclusion restriction. Under the Ramsey Exclusion Restriction (RER) a tax reform can serve to simultaneously identify elasticities of supply and demand. We develop a TSLS estimator for both elasticities, a test to assess instrument strength and a test for the RER. Our result extends to a supply-demand system with J goods, and a setting with supply-side or non-linear taxes. Further, we show that key results in the sufficient statistics literature rely on the RER. One example is Harberger’s formula for the excess burden of a tax. We apply our method to the Norwegian labor market.
    Keywords: tax reform, instrumental variable, supply and demand elasticities, tax incidence, payroll taxation
    JEL: C36 H22 H31 H32 J22 J23
    Date: 2017
  9. By: Tomer Blumkin; Haim Pinhas; Ro'i Zultan
    Abstract: Wage subsidies can be provided directly to the worker, as in the federal Earned Income Tax Credit (EITC) program. They can also be provided indirectly by subsidizing the employer; by reducing the cost of labor, employers are induced to offer higher wages. The standard literature stipulates that the identity of the entity that is statutorily entitled for the subsidy bears no implications for the economic incidence. We propose and test a mechanism by which indirect subsidies can lead to higher social welfare. A substantial empirical literature establishes that workers reciprocate gifts in the form of higher wages with the gift of exerting higher effort. Thus, if a wage subsidy is implemented by indirectly subsidizing employers, employers face a lower cost of labor and increase their wages, leading workers to reciprocate with higher effort and productivity than achieved by providing the equivalent direct subsidy. A controlled laboratory experiment supports our behavioral hypotheses and confirms the behavioral and welfare implications
    Keywords: wage subsidies, welfare, gift exchange, tax incidence
    JEL: C92 H21 H22 H53 J33
    Date: 2017
  10. By: Samir Ul Hassan; Biswhambhara Mishra
    Abstract: The study examine the long and short run determinants of marked expansion of government expenditure in the state of Jammu and Kashmir. Using annual time series data for the period 1984-2013 and broader data pertaining to economic and political dimension, the paper seeks to identify the significant variables from each dimension that determines the growth of government expenditure in the state. Further, an attempt is made to examine whether the short run economic and political dimensions play any significant role in correcting the disequilibrium in government expenditure over the long run. Using multivariate co-integration technique followed by VECM and OLS model, we find that that absolute level of Government expenditure is largely determined by economic and political environment in the state. From the point of view of economic dimension, the study reveals that NSDP, tax revenue and grants from center are positively significant in determining government expenditure both in long as well as short run, while rate of unemployment and Gross fiscal deficit are found to be negative but significant determinants of government expenditure both in long and short run. An analysis of political dimension exhibits that Majoritarian government leads to lesser government expenditure than coalition government or governorâs rule. Law and order found to be negative but significant determinant of government expenditure while as election cycle is insignificant. Finally, the study reveals that the speed of adjustment of economic variables is significant and any disequilibrium in government expenditure is being restored by economic variables within the period of 2 years.
    JEL: H3 B23 D74 H5
    Date: 2017–10–20
  11. By: Miethe, Jakob; Menkhoff, Lukas
    Abstract: We use recently released bilateral locational banking statistics of the BIS to show the full circle of international tax evasion via tax havens. White-washed money from tax havens is withdrawn from banks in non-havens if an information treaty is signed. This complements the stylized fact of such a reaction on outbound flows into tax havens. We find different time lags and other plausible structures in these reactions and a puzzling decline of the effect of treaties on capital flows over time.
    JEL: G21 H26
    Date: 2017
  12. By: Sabatini, Fabio; Ventura, Marco; Yamamura, Eiji; Zamparelli, Luca
    Abstract: We illustrate how the desire to live in a fair society that rewards individual effort and hard work triggers an unselfish though rational demand for redistribution. This leads the well off to prefer higher taxes and the poor to reject extreme progressivity. We then provide evidence of these behaviors using a nationally representative survey from Italy. Our empirical analysis confirms that a stronger aversion to unfair distributive outcomes is associated with a higher support for redistribution by individuals with high income and to a lower demand for redistribution by those with low income.
    Keywords: fairness, income distribution, inequalities, taxation, Welfare, redistribution, free-riding, civic capital, social capital
    JEL: D63 H10 H50 H53 Z1
    Date: 2017–10–19
  13. By: Reiter, Franz
    Abstract: This paper investigates how banks use internal debt to shift profits to lower taxed affiliates. Using regulatory data on German multinational banks I find that banks employ the debt shifting channel more aggressively than non-banks do. This becomes even clearer when I correct for conduit entities in internal debt financing: A ten percentage points higher corporate tax rate increases the internal net leverage by 5.63 percentage points, corresponding to an 18% increase at the mean.
    JEL: H25 G21 F21
    Date: 2017
  14. By: Jonathan A. Parker; Nicholas S. Souleles
    Abstract: We evaluate the consistency of two methods for estimating the effect of an economic policy: i) surveying people to report the change in their behavior caused by the policy, ii) inferring this change using (reported) actual behavior and differences in treatment across people. Both methods have been widely used to measure propensities to spend. Using Federal stimulus payments disbursed quasi-randomly over time in 2008, we find greater revealed-preference estimates of spending by households reporting greater spending and the two methods produce similar estimates of average spending. But, counterfactually, reported-preferences estimates are not higher for households with lower liquidity.
    JEL: B40 C42 D14 E21 E62 H31
    Date: 2017–10
  15. By: Niamh Hardiman (UCD School of Politics and International Relations, and UCD Geary Institute for Public Policy); Saliha Metinsoy (UCD School of Politics and International Relations, and UCD Geary Institute for Public Policy)
    Abstract: European countries have been required to formulate a national preference in relation to the EU Financial Transaction Tax. The two leading approaches to explaining how the financial sector makes its views felt in the political process – the structural power of the financial services sector based on potential disinvestment, and its instrumental power arising from direct political lobbying – fall short of providing a comprehensive account. The missing link is how and why policy-makers might be willing to adopt the priorities of key sectors of the financial services industry. We outline how two levels of ideational power might be at work in shaping outcomes, using Ireland as a case study. We argue firstly that background systems of shared knowledge that are institutionalized in policy networks generated broad ideational convergence between the financial sector and policymakers over the priorities of industrial policy in general. Secondly, and against that backdrop, debate over specific policy choices can leave room for a wider range of disagreement and indeed political and ideational contestation. Irish policymakers proved responsive to industry interests in the case of the FTT, but not for the reasons normally given. This work seeks to link literatures in two fields of inquiry. It poses questions for liberal intergovernmentalism in suggesting that the translation of structurally grounded material interests into national policy preferences is far from automatic, and argues that this is mediated by ideational considerations that are often under-estimated. It also contributes to our understanding of how constructivist explanations of policy outcomes work in practice, through a detailed case study of how material and ideational interests interact.
    JEL: F02 F15 F23 F55 H25 H70 P16
    Date: 2017–10–17
  16. By: Friedrich Schneider
    Abstract: In this paper, first, the MIMIC estimation method is described and criticized and due to a double counting problem a correction is suggested. Second, the measurement methods used for National Accounts Statistics – the discrepancy method and two new micro survey methods – are described and a third, a micro method, using a combination of company manager surveys and their knowledge to calibrate the size of the shadow economy in firms, is presented, too. Third, a detailed comparison of the four micro estimation methods with the MIMIC and the corrected MIMIC method are presented. One major result is that the corrected MIMIC method, especially, comes quite close to various types of lately developed micro survey methods.
    Keywords: MIMIC estimation methods, macro and adjusted, micro survey method asking company managers, micro survey method using households’ data, using the consumption-income-gap, comparison of results of size of shadow economy of European countries, shadow economies
    JEL: E26 E01 H26 H32 K42 P24 O17
    Date: 2017
  17. By: Bachmann, Rüdiger; Bai, Jinhui; Lee, Minjoon; Zhang, Fudong
    Abstract: This study explores the welfare and distributional effects of fiscal volatility using a neoclassical stochastic growth model with incomplete markets. In our model, households face uninsurable idiosyncratic risks in their labor income and discount factor processes, and we allow aggregate uncertainty to arise from both productivity and government purchases shocks. We calibrate our model to key features of the U.S. economy, before eliminating government purchases shocks. We then evaluate the distributional consequences of the elimination of fiscal volatility and find that, in our baseline case, welfare gains increase with private wealth holdings.
    Keywords: Distributional Effects; fiscal volatility; labor income risk; transition path; Wealth Inequality; Welfare costs
    JEL: E30 E32 E60 E62 H30
    Date: 2017–10
  18. By: Robin Boadway (Queen's University, ON, Canada); Motohiro Sato (Hitotsubashi University, Japan); Jean-François Tremblay (University of Ottawa, ON, Canada)
    Abstract: It is well-known that cash-flow business taxes with full loss-offset, and their present-value equivalents, are neutral with respect to firms’ investment decisions when firms are risk-neutral and there are no distortions. We study the effects of cash-flow business taxation when there is bankruptcy risk, when firms are risk-averse, and when financial intermediaries face asymmetric information problems in financing heterogeneous firms. In these circumstances, investment decisions are distorted, with investment being less than in the full-information case. Cash-flow taxation corrects the distortion by inducing more investment in rent-generating projects and increasing social welfare. An ACE tax is equivalent to a cash-flow tax but is easier to implement under asymmetric information.
    Keywords: cash-flow tax, risk-averse firms, asymmetric information
    JEL: H21 H25
    Date: 2017
  19. By: Francesco Caprioli (Bank of Italy); Marzia Romanelli (Bank of Italy); Pietro Tommasino (Bank of Italy)
    Abstract: The depth and the length of the recent crisis prompted a more positive re-assessment of a countercyclical fiscal stance, especially in the euro area. Against this background, we look at discretionary fiscal policy in the euro area from three different perspectives. First, we provide evidence that the discretionary fiscal policy in euro-area countries has been mostly a-cyclical even if our estimates suggest that using it counter-cyclically could have been useful, particularly during the crisis. Second, focusing on the short-run – i.e. taking as given the economic and institutional constraints that currently make a significant fiscal expansion quite unrealistic in Europe – we discuss some budget-neutral proposals aimed at fostering economic growth. Finally, taking a more forward-looking perspective, we discuss the issue of the appropriate fiscal stance for the euro area as a whole, and argue that the advantages of having a coordinated approach (e.g. through a centralized fiscal capacity) can be substantial.
    Keywords: discretionary fiscal policy; automatic stabilizers; European Monetary Union
    JEL: E62 H87
    Date: 2017–10

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