nep-pbe New Economics Papers
on Public Economics
Issue of 2018‒03‒12
eighteen papers chosen by
Thomas Andrén

  1. Corruption, Taxation, and Tax Evasion By James Alm; Yongzheng Liu
  2. Optimal Taxes on Capital in the OLG Model with Uninsurable Idiosyncratic Income Risk By Krueger, Dirk; Ludwig, Alexander
  3. Debt Sustainability and Welfare along an Optimal Laffer Curve By Xiaoshan Chen; Campbell Leith; Matta Ricci
  4. Decentralization and intra-country transfers in the great recession: the case of EU. By Timothy J. Goodspeed
  5. Estimating the scale of profit shifting and tax revenue losses related to foreign direct investment By Petr Janský; Miroslav Palanský
  6. Should the Rich be Taxed More? The Fiscal Inequality Coefficient By John Hatgioannides; Marika Karanassou
  7. Uncertain Length of Life, Retirement Age, and Optimal Pension Design By Aronsson, Thomas; Blomquist, Sören
  8. Premature Deaths, Accidental Bequests and Fairness By Marc Fleurbaey; Marie-Louise Leroux; Pierre Pestieau; Grégory Ponthiere; Stéphane Zuber
  9. The Optimal Graduated Minimum Wage and Social Welfare By Danziger, Eliav; Danziger, Leif
  10. Tax and Corruption: A Global Perspective By Chris Evans; Richard Krever; James Alm
  11. What are the Costs of a New Tax Administration? The Case of a Personal Income Tax in Kuwait By James Alm
  12. Is there an optimal size for local governments? A spatial panel data model approach. By Miriam Hortas-Rico; Vicente Ríos
  13. The Efficient Combination of Taxes on Fuel and Vehicles By Geir H. M. Bjertnaes
  14. The ghost of institutions past: History as an obstacle to fighting tax evasion By Aaron Kamm; Christian Koch; Nikos Nikiforakis
  15. Fiscal decentralisation and the distributive incidence of the great recession. By Pablo Beramendi; Melissa Rogers
  16. Does the Earned Income Tax Credit Reduce Housing Instability? By Natasha Pilkauskas; Katherine Michelmore
  17. Fiscal stability during the great recesion: Putting decentralization design to the test. By Santiago Lago-Peñas; Jorge Martínez-Vázquez; Agnese Sacchi
  18. Welfare State and Taxation. The Critical Point of Freedom Between Gift and Corruption. By Silvestri, Paolo

  1. By: James Alm (Department of Economics, Tulane University); Yongzheng Liu (School of Finance, Renmin University of China)
    Abstract: In this paper, we examine the relationships between corruption, taxation, and tax evasion. We examine three specific questions. First, on a general level, what do simple empirical analyses suggest about some of the causes and the consequences of corruption? Second, on a more specific level, what do similar empirical analyses indicate about the relationship between corruption and taxation? Third, on an even more specific level, what is the relationship between corruption, taxation, and tax evasion? We conclude with a discussion of how this evidence can be used to control corruption, making use of a different if related body of work on tax evasion.
    Keywords: Corruption, tax evasion, behavioral economics, controlled field experiments, laboratory experiments
    JEL: H2 H26 D73
    Date: 2018–03
  2. By: Krueger, Dirk; Ludwig, Alexander
    Abstract: We characterize the optimal linear tax on capital in an Overlapping Generations model with two period lived households facing uninsurable idiosyncratic labor income risk. The Ramsey government internalizes the general equilibrium feedback of private precautionary saving. For logarithmic utility our full analytical solution of the Ramsey problem shows that the optimal aggregate saving rate is independent of income risk. The optimal time-invariant tax on capital is increasing in income risk. Its sign depends on the extent of risk and on the Pareto weight of future generations. If the Ramsey tax rate that maximizes steady state utility is positive, then implementing this tax rate permanently generates a Pareto-improving transition even if the initial equilibrium is dynamically efficient. We generalize our results to Epstein-Zin-Weil utility and show that the optimal steady state saving rate is increasing in income risk if and only if the intertemporal elasticity of substitution is smaller than 1.
    Keywords: Idiosyncratic Risk; Overlapping Generations; precautionary saving; Taxation of Capital
    JEL: E21 H21 H31
    Date: 2018–02
  3. By: Xiaoshan Chen; Campbell Leith; Matta Ricci
    Abstract: A recent literature on sovereign debt sustainability (see Trabandt and Uhlig (2011) and Mendoza et al. (2014)) has produced Laffer curve calculations for Eurozone countries. These calculations have been car- ried out mainly in a quasi-static fashion by considering policy experi- ments where individual tax rates are permanently set at a new value while keeping all others constant. However, such fiscal policy design disregards complementarities among tax instruments as well as the po- tential for altering tax rates during the transition to the steady-state in a manner which exploits expectations. Our paper addresses this issue by considering policy experiments where fiscal policy is set op- timally and fiscal instruments are jointly varied along the transition to steady-state. Through the Ramsey problem we map the maximum amount of tax revenues a government can further raise to the welfare costs of the associated tax distortions. We label this relation as the ‘optimal Laffer curve’. We show that tax revenue and welfare gains relative to the policy experiments examined by the previous literature are dramatic.
    Keywords: Laffer Curve, Optimal Policy, Fiscal Sustainability, Fis- cal Limit, Fiscal Consolidations
    JEL: E62 H30 H60
    Date: 2018–01
  4. By: Timothy J. Goodspeed
    Abstract: The classic arguments of Musgrave (1959) and Oates (1972) are that the redistribution and stabilization functions should be assigned to the federal level of government. The argument is that redistribution is difficult to achieve at lower levels because the public good nature of redistribution and the mobility of individuals and firms. Likewise, stabilization is difficult to achieve because fiscal stimulus of lower levels of government is likely to be underused due to spillover effects and a limited ability to service debt obligations. These arguments suggest that under-provision of redistributive spending should accompany greater decentralization. They also suggest that subnational policies aimed at macroeconomic stabilization are likely to be less effective than national ones, an important issue in an economic crisis. In this paper I examine data on intra-country social protection transfers in the EU before and after the crisis. The results support the classic federalism assignment. For both reasons of redistribution and stabilization, social protection expenditures are best assigned to the central level of government. Regression results indicate that greater decentralization lowers social protection expenditures and a greater vertical fiscal imbalance and greater subnational deficits result in more spending on things other than social protection.
    Keywords: decentralization, transfers, social protection, federalism.
    JEL: H74 H77
    Date: 2018–02
  5. By: Petr Janský; Miroslav Palanský
    Abstract: Governments’ revenues are lower when multinational enterprises avoid paying corporate income tax by shifting their profits to tax havens. In this paper, we ask which countries’ tax revenues are affected most by this tax avoidance and how much. To estimate the scale of profit shifting, we start by observing that the higher the share of foreign direct investment from tax havens, the lower the reported rate of return on this investment. Like the 2015 World Investment Report of the United Nations Conference on Trade and Development, we assume that the reported rate of return is lower due to profit shifting. Unlike the report, however, we provide illustrative country-level estimates of profit shifting related to foreign direct investment which enables us to study the distributional impact of international corporate tax abuse. We find that, on average, higher-income countries lose the least and lower-income countries lose the most corporate tax revenue relative to their GDP. On the basis of these estimates, we conclude that profit shifting thus deepens the existing income inequalities and the differences in government revenues between countries. Furthermore, we compare our results with three other recent studies that use different methodologies to derive country-level estimates of tax revenue losses that can be related to profit shifting. In the first comparison of its kind we find that every study identifies differences across income groups, but the nature of these differences varies across the four studies.
    Date: 2018
  6. By: John Hatgioannides (Cass Business School); Marika Karanassou (Queen Mary University of London)
    Abstract: This paper holistically addresses the effective (relative) income tax contribution of a given income (or, wealth) group. The widely acclaimed standard in public policy is the absolute benefaction of a given income group in filling up the fiscal coffers. Instead, we focus on the ratio of the average income taxrate of an income group divided by the percentage of national income (or wealth) appropriated by the same income group. In turn, we develop the Fiscal Inequality Coefficient which compares the effective percentage income tax payments of pairs of income (or wealth) groups. Using data for the US, we concentrate on pairs such as the Bottom 90% versus Top 10%, Bottom 99% versus Top 1% and Bottom 99.9% versus Top 0.1%. We conclude that policy makers with a strong social conscience should re-evaluate the progressivity of the income tax system and make the richest echelons of the income and wealth distributions pay a fairer and higher tax.
    Keywords: Fiscal policy; progressive income taxation; inequality; effective income tax rate; fiscal inequality coefficient
    JEL: H23 H30 E64
    Date: 2017–09–15
  7. By: Aronsson, Thomas (Department of Economics, Umeå University); Blomquist, Sören (Department of Economics, Uppsala University)
    Abstract: In this paper, we consider how the hours of work and retirement age ought to respond to a change in the uncertainty of the length of life. In a first best framework, where a benevolent government exercises perfect control over the individuals’ labor supply and retirement-decisions, the results show that a decrease in the standard deviation of life-length leads to an increase in the optimal retirement age and a decrease in the hours of work per period spent working. This result is robust, and is also derived in models of decentralized decision-making where individuals decide on their own consumption, labor supply, and retirement age, and where the government attempts to affect their behavior and welfare through redistribution and pension policy.
    Keywords: uncertain lifetime; retirement; work hours pension policy
    JEL: D61 D80 H21 H55
    Date: 2018–03–02
  8. By: Marc Fleurbaey; Marie-Louise Leroux; Pierre Pestieau; Grégory Ponthiere; Stéphane Zuber
    Abstract: While little agreement exists regarding the taxation of bequests in general, there is a widely held view that accidental bequests should be subject to a confiscatory tax. We propose to reexamine the optimal taxation of accidental bequests in an economy where individuals care about what they leave to their offspring in case of premature death. We show that, whereas the conventional 100 % tax view holds under the standard utilitarian social welfare criterion, it does not hold under the ex post egalitarian criterion, which assigns a strong weight to the welfare of unlucky short-lived individuals. From an egalitarian perspective, it is optimal not to tax, but to subsidize accidental bequests. We examine the robustness of those results in a dynamic OLG model of wealth accumulation, and show that, whereas the sign of the optimal tax on accidental bequests depends on the form of the joy of giving motive, it remains true that the 100 % tax view does not hold under the ex post egalitarian criterion.
    Keywords: mortality, accidental bequests, optimal taxation, egalitarianism, OLG models
    JEL: D63 D64 D91 H31 J10
    Date: 2017
  9. By: Danziger, Eliav; Danziger, Leif
    Abstract: This paper analyzes the effects of introducing a graduated minimum wage in a model with optimal income taxation in which a government seeks to maximize social welfare. It shows that the optimal graduated minimum wage increases social welfare by increasing the low productivity workers’ consumption and bringing it closer to the first-best. The paper also describes how the graduated minimum wage in a social welfare optimum depends on important economy characteristics such as the government’s revenue needs, the social-welfare weight of low-productivity workers, and the numbers and productivities of the different types of workers.
    Keywords: Graduated minimum wage,optimal income taxation,social welfare
    JEL: D60 H21 J30
    Date: 2018
  10. By: Chris Evans (UNSW Sydney and University of Pretoria;); Richard Krever (University of Western Australia); James Alm (Department of Economics, Tulane University)
    Abstract: This paper summarizes the discussion and the lessons at two recent conferences on corruption.
    Keywords: Corruption; taxation; tax compliance
    JEL: H2 H26 D73
    Date: 2018–03
  11. By: James Alm (Department of Economics, Tulane University)
    Abstract: This paper assesses the viability of introducing a new personal income tax (PIT), focusing on the administrative costs of new tax. I first present a methodology for calculating the one-time start-up costs and the ongoing administrative costs of a new PIT. I then apply this methodology to the specific case of Kuwait. I estimate that the first-year total administrative costs of a new PIT tax administration in Kuwait range from Kuwaiti dinars (KWD) 46.8 million to KWD 90.9 million (or from USD 154.4 million to USD 300.0 million), depending on how the construction costs are financed. However, after the initial construction costs are incurred, I find that the annual total administrative costs of a PIT fall significantly to about KWD 50 million (or about USD 164 million), regardless of specific financing methods, and then rise at an annual rate of less than 6 percent per year to reach KWD 82.0 million (or USD 270.6 million) by year 2020, driven mainly by labor force growth. I also estimate that the likely revenues of a new PIT far exceed these administrative costs, even if the PIT is imposed at low rates.
    Keywords: Public administration, tax administration, administrative costs.
    JEL: H2 H5 H83
    Date: 2018–03
  12. By: Miriam Hortas-Rico; Vicente Ríos
    Abstract: The paper presents a framework for determining the optimal size of local jurisdictions. To that aim, we first develop a theoretical model of cost eficiency that takes into account spatial interactions and spillover effects among neighbouring jurisdictions. The model solution leads to a Spatial Durbin panel data specification of local spending as a non-linear function of population size. The model is tested using local data over the 2003-2011 period for two aggregate (total and current) and four disaggregate measures of spending. The empirical findings suggest a U-shaped relationship between population size and the costs of providing public services that varies depending on (i) the public service provided and (ii) the geographical heterogeneity of the territory.
    Keywords: Optimal Government Size, Spatial Panels, Spanish Municipalities.
    JEL: H11 H72 H77 R12
    Date: 2018–02
  13. By: Geir H. M. Bjertnaes
    Abstract: A tax on fuel combined with tax-exemptions or subsidies for purchase of fuel-efficient vehicles is implemented in many countries to reduce greenhouse gas emissions and other negative externalities from road traffic. This study, however, shows that a tax on fuel should be combined with heavier taxation of fuel-efficient vehicles to curb externalities from road traffic. The tax on fuel is implemented to curb externalities linked to both consumption of fuel and road use. The heavier tax on fuel-efficient vehicles prevents that motorists avoid the road user charge on fuel by purchasing fuel-efficient vehicles.
    Keywords: transportation, optimal taxation, environmental taxation, global warming
    JEL: H20 H21 H23 Q58 R48
    Date: 2017
  14. By: Aaron Kamm; Christian Koch; Nikos Nikiforakis (Division of Social Science)
    Abstract: If taxpayers believe past rates of compliance are indicative of the future, traditional measures for combating tax evasion can be compromised. We present evidence from a novel laboratory experiment with strategic complementarities showing that a history of low compliance can render a major institutional reform ineffective at reducing tax evasion. The experimental treatments manipulate the history of tax compliance by varying the percentage of tax revenue embezzled by a ‘politician’ – our measure of ‘institutional quality’. We show that tax compliance is substantially higher in good-quality than bad-quality institutions when there is no history of tax evasion. When a bad-quality institution is replaced with a good-quality one, however, tax compliance remains low, as if the institutional change had not occurred. The reason is that the institutional change leaves expectations about future compliance largely unaffected. A history of high-quality institutions, on the other hand, shields tax compliance only partly from institutional deterioration. We discuss reasons for this, policy implications of our findings and evidence that a society-wide poll can assist in overcoming the ‘ghost of institutions past’.
    Date: 2017–10
  15. By: Pablo Beramendi; Melissa Rogers
    Abstract: We argue that fiscal decentralisation is one important explanation for variation in distributive outcomes following the Great Recession. Using a difference in differences approach, we examine how fiscal decentralisation mediated the link between spatial distribution, redistributive effort, and interpersonal inequality in 21 OECD cases in the years following the Great Recession. We find that fiscally decentralised nations saw increased interpersonal inequality and lower redistribution, but lower inter-regional inequality. We attribute these results to the weaker redistributive mechanisms in fiscally decentralized nations, which increased interpersonal inequality while preserving market-driven productivity declines in high productivity areas that temporary increased regional convergence.
    Keywords: Fiscal decentralisation, Inter-regional inequality, Interpersonal inequality, Redistribution.
    JEL: H71 H72 H77 I38
    Date: 2018–02
  16. By: Natasha Pilkauskas (University of Michigan); Katherine Michelmore (Syracuse University)
    Abstract: Housing instability (inability to pay rent, frequent moves, doubling up, eviction, or homelessness) is common among low-income households and is linked with a host of negative outcomes for families and children. As rents have risen and wages have not kept pace, housing affordability has declined over the last 15 years, increasing rates of housing instability. In this study, we examine whether the Earned Income Tax Credit (EITC), a key US social welfare policy and one of the largest cash transfer programs in the US, reduces housing instability. Using longitudinal data from the Fragile Families and Child Wellbeing Study and the Survey of Income and Program Participation, we employ a simulated instruments strategy to examine whether policy-induced expansions in the EITC reduce housing instability. Results suggest that a $1,000 increase in the EITC reduces doubling up (living with other non-nuclear family adults) 3 to 5 percentage points. We find some suggestive evidence that the EITC decreases the average number of moves per year (0.05 moves). While our results suggest that the EITC does decrease certain, less severe forms of housing instability, we find no evidence that the EITC decreases more extreme (and rarer) forms of housing instability: eviction or homelessness.
    JEL: H24 I21 R21 R31
    Date: 2017–08
  17. By: Santiago Lago-Peñas; Jorge Martínez-Vázquez; Agnese Sacchi
    Abstract: There is a longstanding debate in the economics literature on whether fiscally decentralized countries are inherently more fiscally unstable. The Great Recession provides a fertile testing ground for analyzing how the degree of decentralization does actually affect countries’ ability to implement fiscal stabilization policies in response to macroeconomic shocks. We provide an empirical analysis aiming at disentangling the roles played by decentralization design itself and several recently introduced budgetary institutions such as subnational borrowing rules and fiscal responsibility laws on country’s fiscal stability. We use OECD countries’ data since 1995, which includes both a boom period of worldwide economic growth and the Great Recession. Our main finding is that well-designed decentralized systems are not destabilizing. But, in addition, sub-national fiscal and borrowing rules should be at work to improve the overall fiscal stability performance of decentralized countries.
    Keywords: sub-national governments, political decentralization, fiscal stability, public deficit.
    JEL: H70 H72 H77
    Date: 2018–02
  18. By: Silvestri, Paolo (University of Turin)
    Abstract: Can taxation and the redistribution of wealth through the welfare state be conceived as a modern system of circulation of the gift? But once such a gift is institutionalized, regulated and sanctioned through legal mechanisms, does it not risk being perverted or corrupted, and/or not leaving room for genuinely altruistic motives? In this paper I will develop two interrelated arguments. 1) The way these problems are posed as well as the standard answers to them are: a) subject to fallacies: the dichotomy fallacy and the fallacy of composition; b) too reductive and simplistic: we should at least try to clarify what kind of ‘gift’ or ‘corruption’ we are thinking about, and who or what the ‘giver’, the ‘corrupter’, the ‘receiver’ and/or the ‘corrupted’ party are. 2) The answers to these problems cannot be found by merely following a theoretical approach, nor can they be merely based on empirical evidence; instead, they need to take into account the forever troublesome, ambiguous and unpredictable matter of human freedom. To explain the standard answers to the abovementioned questions as well as their implications I will first re-examine two opposing positions assumed here as paradigmatic examples of other similar positions: on the one hand, Titmuss’ work and the never-ending debate about it; on the other, Godbout’s position, in-so-far as it shows how Titmuss’ arguments can easily be turned upside down. I will then introduce and reinterpret Einaudi’s “critical point” theory as a more complex and richer anthropological explanation of the problems and answers considered herein.
    Date: 2018–02

This nep-pbe issue is ©2018 by Thomas Andrén. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.