nep-pbe New Economics Papers
on Public Economics
Issue of 2018‒02‒05
fifteen papers chosen by
Thomas Andrén

  1. Crime, Human Capital, and the Impact of Different Taxation By King Yoong Lim; Pengfei Jia; Ali Raza
  2. Retreat from mandatory pension funds in countries of the Eastern and Central Europe in result of financial and fiscal crisis: Causes, effects and recommendations for fiscal rules By Bielawska, Kamila; Chłoń-Domińczak, Agnieszka; Stańko, Dariusz
  3. International Tax Reforms with Flexible Prices By Assaf Razin; Efraim Sadka
  4. Exploring a negative income tax for South Africa: impacts on income inequality and poverty By Emma Helen Rasmussen
  5. Paying for the Ageing Crisis : Who, How and When? By Westerhout, Ed
  6. Fiscal devaluation and economic activity in the EU By Piotr Ciżkowicz; Bartosz Radzikowski; Andrzej Rzońca; Wiktor Wojciechowski
  7. Tax Expenditures and Sustainability. An Overview By Agustin Redonda
  8. Bureaucratic Competence and Procurement Outcomes By Francesco Decarolis; Leonardo M. Giuffrida; Elisabetta Iossa; Vincenzo Mollisi; Giancarlo Spagnolo
  9. Do Corporate Income Tax Rates Cuts Create Jobs? The European Experience By Antonio Estache; Brigitta Gersey
  10. Underground Activities and Labour Market Performance By Kolm, Ann-Sofie; Larsen, Birthe
  11. “How do unemployed workers behave prior to retirement? A multi-state multiple-spell approach” By Ewa Galecka-Burdziak; Marek Góra
  12. The quality of the estimators of the ETI By Aronsson, Thomas; Jenderny, Katharina
  13. Life expectancy and claiming behavior in a flexible pension system By Dennis Fredriksen; Christian N. Brinch; Ola L. Vestad
  14. Do School Spending Cuts Matter? Evidence from the Great Recession By C. Kirabo Jackson; Cora Wigger; Heyu Xiong
  15. Unemployment, neets and the social role of education in Europe By Csintalan, Csaba; Bădulescu, Alina

  1. By: King Yoong Lim; Pengfei Jia; Ali Raza
    Abstract: This paper presents a macroeconomic model with crime, human capital, and three taxation policies (consumption, labour, and capital income taxes). In an extension, we endogenize the probability of escaping punishment to depend on government expenditure on public security/police. The model is solved analytically and numerically to derive propositions, which are then verified empirically using cross-country data. Compared to the literature, we find a much higher threshold probability. Above the threshold, the equilibrium crime rate is positively related to the escape probability. In addition, above this threshold level, a rise in capital income tax or a decline in labour income tax would lead to a higher equilibrium crime rate, if the taxes are modelled using marginal tax rates. There also appears to be empirical supports where the equilibrium human capital level depends positively on consumption tax. Lastly, when the probability is endogenized, there also exists a threshold level for the spending on public security/police, above which consumption tax and capital income tax have positive e¤ects on the equilibrium level of human capital.
    Keywords: Apprehension risk, Crime, Human Capital, Police Spending, Taxation
    JEL: H20 H59 K42 O41
    Date: 2018
  2. By: Bielawska, Kamila; Chłoń-Domińczak, Agnieszka; Stańko, Dariusz
    Abstract: The aim of this book is to assess in various dimensions the causes and effects of the reduction of mandatory pension funds in selected countries of Central-Eastern Europe and to propose changes to existing fiscal rules so that they could respond to the challenge of population ageing impact on public finances. We review the changes made in 2008-2011 in the multi-pillar pension systems CEE region: Hungary, Poland, Lithuania, Latvia, Estonia, Bulgaria, Slovakia and Romania. All of these countries in the course of late 1990s and early 2000s introduced multi-pillar pension systems that replaced traditional PAYG ones. All countries are also EU member states and are subject to the European policy with regards to the coordination of economic government including public finance situation. However, as analysis reveals they have different social and economic contexts, relevant from the pension systems’ perspective. We make a comprehensive assessment of consequences of limiting the role of funded pillar in societies’ pension security of selected countries of Central and Eastern Europe from macro perspective (public finance) and micro perspective (pension levels of individuals), also combining the two approaches. This helped to determine the costs and benefits of current developments in the short and long term for various stakeholders. The book comprises of seven chapters. The first chapter presents the design and changes in the multi-pillar pension systems in the CEE countries in the light of their public finance situation and broader socio-economic context. Chapter 2 analyses how the pension fund markets functioned due to the pension changes introduced recently by the governments. Chapter 3 makes an assessment of the short-term effects of reduction of pension funds sectors on the public finance situation and the public pension system in each of the analysed countries. Chapter 4 analyses the impact of changes in pension system on the level of pension wealth of individuals. Chapter 5 provides an assessment of the long-term impact of changes in funded systems for the stability of public finances and pension systems. Chapter 6 presents the recommendations on how to strike the balance between fiscal tensions and the need to maintain the role of pension funds in developing sustainable and adequate pensions in the future. The last chapter summarises the findings of the project with regards to the formulated hypotheses. The authors gratefully acknowledge the financing of this project by the National Science Centre, the decision number DEC-2012/05/B/HS4/04206.
    Keywords: pension reforms, reversals, funded pensions, pension funds, CEE countries, mandatory pension funds, stability of public finances, stability of pension systems, public finance, performance evaluation
    JEL: E6 E62 G23 H53 H55 I38 J1
    Date: 2017
  3. By: Assaf Razin; Efraim Sadka
    Abstract: The growing spread of globalization creates a genuine need for international tax reforms. In this we establish the neutrality of border-tax adjustments of the income tax; the welfare dominance of residence-based over source-based income taxation, albeit at the cost of a larger trade deficit; and the ineffectiveness of non-transitory border taxes as a means for reducing the trade deficit.
    JEL: F0 G20 H2
    Date: 2018–01
  4. By: Emma Helen Rasmussen (Southern Africa Labour and Development Research Unit, School of Economics, University of Cape Town)
    Abstract: This paper explores the potential of a negative income tax to tackle South Africa's dual challenges of poverty and income inequality. Using a static, arithmetic microsimulation model with NIDS Wave 4 as the base dataset, we simulate a negative income tax in which recipients receive an income subsidy proportional to their income if it is below a set amount and a guaranteed subsidy if they have zero income. Two different sizes for the guaranteed subsidy are simulated, both pegged to recent poverty lines. The simulations show that the negative income tax significantly reduces both inequality and poverty levels, but that this necessarily comes at a high cost.
    Date: 2017
  5. By: Westerhout, Ed (Tilburg University, Center For Economic Research)
    Abstract: In many countries population ageing creates an implicit public debt. That is, if policies remain unchanged, the public debt will ultimately become unsustainable. This paper explores the optimal way to achieve debt sustainability. In particular, it asks when policy reforms should be made, how policies should be changed and which generations should make which contributions. As regards timing, we find that policy reform should anticipate future demographic change. As regards policy instruments, we find that optimal policy reform features changes in all available instruments. This implies less consumption of all types of goods; only pure public goods consumption may escape a reduction. The labour supply functions of the young and the old determine the allocation over policy instruments. In particular, the more elastic is the labour supply of the young, the smaller should be the increase in the tax rate on labour income; the more elastic is the labour supply of the old, the larger should be the reduction in transfers to the elderly. As regards generations, we find that the old share relatively little in the fiscal burden; future generations share more or less than the young, depending on future population size. In addition, we find that the change of the public debt is not a given, but a feature of optimal policies. In general,
    Keywords: population ageing; tax smoothing; public debt
    JEL: H21 H40 H60
    Date: 2018
  6. By: Piotr Ciżkowicz (Warsaw School of Economics); Bartosz Radzikowski (Center for Social and Economic Research); Andrzej Rzońca (Warsaw School of Economics); Wiktor Wojciechowski (Warsaw School of Economics)
    Abstract: In the aftermath of the global financial crisis, a fiscal devaluation (hereafter: FD), understood as a shift in taxation from labor to consumption, has been debated as a possible tool of restoring competitiveness in peripheral countries of the Euro area. We contribute to this debate. Based on a set of panel and spatial panel models for the EU 27 over the period 1995 – 2014, we find that FD increases value added in exports, improves net exports, accelerates GDP and employment growth, and decelerates labour costs growth. These effects are nonlinear: stronger in the members of the Euro area and weaker in countries with either more coordinated or more centralised wage bargaining process, or more generous unemployment benefits. Most importantly, FD turns out not to be a beggar thy neighbour policy, at least in the EU. In our sample ‘cooperative effect’ of unilateral FD, which is beneficial for neighbouring countries, dominates by far ‘competitive effect’, which goes at the expense of other countries’ competitiveness. Admittedly, FD implemented in one country can benefit other countries, provided that they are strongly integrated in global value chains. These findings are robust to changes in the estimation methods, the sample composition, the set of explanatory variables and the selection of a spatial weight matrix.
    Keywords: fiscal devaluation, fiscal policy, tax structure, economic growth, labor market institutions, panel data models, spatial panel data models
    JEL: C30 C33 E62 E63 E65 H30 H60 J32 J51
    Date: 2017
  7. By: Agustin Redonda (Council on Economic Policies)
    Abstract: Fiscal policy has significant effects on a broad sustainability agenda covering long-term economic, social and environmental goals. However, whereas a myriad of actors scrutinize taxation as well as direct government spending with regard to their impact on sustainability, a key feature of fiscal policy has only partially hit the radar screens in the sustainability debate: Tax Expenditures. Tax expenditures (TEs) are benefits granted through preferential tax treatment that lower government revenue from the beneficiary taxpayer. Research on the links between these schemes and sustainability is scarce, and mostly focused on a single TE or a group of TEs pursuing the same policy goals, the effects of TEs on a single dimension of sustainability, as well as on a specific country, region or trade bloc. Against this background, the goal of this discussion note is threefold: i) to introduce the reader to the concept and overall significance of TEs; ii) to outline an analytical framework to evaluate the impact of a selected group of TEs on sustainability and; iii) to provide an overview on specific TEs, including TEs in both developing and developed economies, and to assess their alignment with a broad sustainability agenda, as well as their effectiveness and efficiency.
    Date: 2016–11
  8. By: Francesco Decarolis; Leonardo M. Giuffrida; Elisabetta Iossa; Vincenzo Mollisi; Giancarlo Spagnolo
    Abstract: To what extent does a more competent public workforce contribute to better economic outcomes? We analyze this question in the context of the US federal procurement by combining data on office-level competencies, federal workforce characteristics, and procurement performance. Using an instrumental variable strategy, we find that the effects of competence heterogeneity across bureaus are quantitatively important: if all federal bureaus were to obtain NASA's high level of competence (corresponding to the top 10 percent of competence), delays in contract execution would decline by 7.2 million days and price renegotiations would drop by $13.5 billion over the 2010-2015 period analyzed. Cooperation within the office appears to be a key driver of the findings.
    JEL: H11 H57 J45
    Date: 2018–01
  9. By: Antonio Estache; Brigitta Gersey
    Abstract: The paper assesses the impact of changes in the effective corporate tax rate on the unemployment rate in Europe between 1999 and 2014. The results suggest, for this sample, that a 1% decrease in the effective tax rate was associated with a 0.34% increase in the unemployment rate on average. This means that, in the region, lower corporate income taxes were linked to the replacement of labor by capital. This this substitution effect has been stronger than the output effect conservative administrations tend to focus on in their motivation for the rates cut. The substitution may be needed to achieved longer run growth payoffs, but these results suggest that transition cost are likely to be paid by workers and these should be addressed jointly with the corporate tax cut decisions.
    Keywords: corporate taxation, unemployment rate, fixed effects, EU panel data
    Date: 2018–01
  10. By: Kolm, Ann-Sofie (Stockholm University); Larsen, Birthe (Department of Economics, Copenhagen Business School)
    Abstract: We build a general equilibrium model in terms of a search and matching model with an informal sector. We consider the impact of the traditional policy instruments considered in the tax evasion literature, such as changes in the tax- and punishment system as well as changes in the employment protection legislation and concealment costs, on labour market outcomes. To this end, we set-up a model which allows workers to allocate their search for formal and informal sector jobs optimally. We calibrate and simulate the model to fit the North and the South of Europe, where the share of informal sector workers is equal to three percent in the North and more than 4 times as high in the South. We consider the impact of concealment costs, as there are large differences in terms of tax administration procedures between the South and the North, in terms of that Northern countries make more extensively use of third-party reporting. We also examine whether stricter employment protection legislation in Southern Europe may explain the observed fact.
    Keywords: informal economy; tax policy; tax evasion; Northern Europe; Southern Europe;
    JEL: E24 E26 H26
    Date: 2018–01–29
  11. By: Ewa Galecka-Burdziak (Warsaw School of Economics); Marek Góra (Warsaw School of Economics and IZA Bonn)
    Abstract: We examine the behaviour of unemployed older workers up to five years prior to the point at which they can transition out of unemployment because they become eligible to receive pension benefits. We use a unique dataset covering the unemployment histories (longitudinal data) of individuals born between 1940 and 1965 who were registered with any of the public employment offices in Poland. Thus, we study a whole population of individuals who experienced this type of transition over the time period 1996-2015. We examine the transition from unemployment to retirement as a multi-year process. We analyse multiple unemployment spells, identify transition pathways, and look for patterns in these transitions. Moreover, we estimate a conditional risk set model (a stratified Cox model). Our research proves that being close to the point at which they are eligible to receive pension benefits leads individuals ‘wait’ to fulfil these eligibility criteria.
    Date: 2018–01
  12. By: Aronsson, Thomas (Department of Economics, Umeå University); Jenderny, Katharina (Department of Economics, Umeå University)
    Abstract: Measuring the elasticity of taxable income (ETI) is central for tax policy design. Yet, there are few arguments which support or infirm that current methods are leading to measurement of the ETI that can be trusted. Our first purpose in this paper is to use simulation methods to assess the bias and precision of the prevalent methods used in the literature (bunching methods and IV estimation). Thereby, we aim at (i) explaining the huge differences in empirical results, and (ii) providing arguments in favor of or against using these methods. Our second purpose is to suggest using indirect inference to improve the quality of the measurement. We show that using more of the information available in the data, estimators based on indirect inference principles produce more precise estimates of the ETI than any of the most commonly used methods.
    Keywords: Elasticity of Taxable Income; Income Tax; Indirect Inference; IV estimation; Bunching; Monte Carlo simulations
    JEL: D60 H24 H31
    Date: 2017–12–21
  13. By: Dennis Fredriksen (Statistics Norway); Christian N. Brinch; Ola L. Vestad
    Abstract: We study the relationship between early claiming of pensions and incentives in the highly flexible Norwegian public pension system, measuring incentives to claim based on an estimated model for expected longevity. Despite a strong correlation between incentives and claiming decisions, the additional costs to public budgets arising from this selection turn out to be modest. Based on analyses exploiting only variation in expected pensions generated by variation in parental longevities and only claiming of pensions not in conjunction with retirement, we conclude that part of the selection is active: Some individuals claim pensions early because they gain from doing so.
    Keywords: social security; pension benefits; retirement; annuity
    JEL: H55 J14 J26
    Date: 2017–05
  14. By: C. Kirabo Jackson; Cora Wigger; Heyu Xiong
    Abstract: Audits of public school budgets routinely find evidence of waste. Also, recent evidence finds that when school budgets are strained, public schools can employ cost-saving measures with no ill-effect on students. We theorize that if budget cuts induce schools to eliminate wasteful spending, the effects of spending cuts may be small (and even zero). To explore this empirically, we examine how student performance responded to school spending cuts induced by the Great Recession. We link nationally representative test score and survey data to school spending data and isolate variation in recessionary spending cuts that were unrelated to changes in economic conditions. Consistent with the theory, districts that faced large revenue cuts disproportionately reduced spending on non-core operations. However, they still reduced core operational spending to some extent. A 10 percent school spending cut reduced test scores by about 7.8 percent of a standard deviation. Moreover, a 10 percent spending reduction during all four high-school years was associated with 2.6 percentage points lower graduation rates. While our estimates are smaller than some in the literature, spending cuts do matter.
    JEL: H0 H61 I2 I20 J0
    Date: 2018–01
  15. By: Csintalan, Csaba; Bădulescu, Alina
    Abstract: Education is maybe the most important engine for economic and social development and cultural empowerment, and also the most beneficial investment that a government cand make. In this paper we present a short overview on the socio-educational situation of the young people in Europe. If we refer to the social situation, the role of education becomes an undeniable one, regarding the support of the learners from a socio-economic point of view. Starting from the premise that education represents the society’s health, the education must be considered as the most important factor regarding the situation of the unemployed people from different age groups. Knowing that the higher the level of education of individuals, the more appropriate and probable are the individuals’ commitments during work. This leads to the hypothesis of a socio-economic climate, beneficial growth and further economic development. Moreover, we investigate several employment indicators, such as the unemployment rate at the European level, from the age groups of 15-24, on the period 2013-2015. We particularly investigate data in the base of some indicators, part of the training process in countries such as Poland, Estonia, Hungary and Bulgaria.
    Keywords: education, public expenditure, unemployment, NEET
    JEL: H52 I21 J21 P51
    Date: 2017–05–26

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