nep-pbe New Economics Papers
on Public Economics
Issue of 2018‒09‒24
twenty-one papers chosen by
Thomas Andrén

  1. Taxes and Economic Growth in OECD Countries: A Meta-Analysis By Nazila Alinaghi; W. Robert Reed
  2. Taxation and Innovation in the 20th Century By Ufuk Akcigit; John Grigsby; Tom Nicholas; Stefanie Stantcheva
  3. Immigrant Voters, Taxation and the Size of the Welfare State By Chevalier, Arnaud; Elsner, Benjamin; Lichter, Andreas; Pestel, Nico
  4. Welfare Activation and Youth Crime By Bratsberg, Bernt; Hernaes, Øystein; Markussen, Simen; Raaum, Oddbjørn; Røed, Knut
  5. Housing policy and the changing tenure mix By Whitehead, Christine
  6. Corporate Income Tax, Legal Form of Organization, and Employment By Don Schlagenhauf
  7. A Dichotomous Analysis Of Unemployment Welfare By Hu, Xingwei
  8. Income Tax and Transfer Policy Changes in New Zealand: 1988-2013 By Nolan, Matt
  9. Fiscal Space and Government-Spending & Tax-Rate Cyclicality Patterns: A Cross-Country Comparison, 1960-2016 By Joshua Aizenman; Yothin Jinjarak; Hien Thi Kim Nguyen; Donghyun Park
  10. Ramsey Taxation in the Open Economy By Varadarajan Chari; Juan Pablo Nicolini; Pedro Teles
  11. Did tax-transfer policy change New Zealand disposable income inequality between 1988 and 2013? By Nolan, Matt
  12. Assessment of Government COFOG Expenditures in Selected EU Countries By Irena Szarowská
  13. Rising Government Debt and What to Do About It By Pierre Yared
  14. Health Capital Taxation By Job Boerma; Ellen McGrattan
  15. The Welfare State besides Globalization Forces By Razin, Assaf; Sadka, Efraim
  16. Does a Tax Credit matter for Job Creation by Multinational Enterprises? By Konings, Jozef; Lecocq, Cathy; Merlevede, Bruno
  17. Healthy Foods: Tax or Voucher? By Nguyen, Ly; Wilson, Norbert L.W.
  18. Who Sent You? Strategic Voting, Transfers and Bailouts in a Federation By Amedeo Piolatto
  19. The human side of austerity: health spending and outcomes during the Greek crisis By Perotti, Roberto
  20. “Post-Truth” Schooling and Marketized Education: Explaining the Decline in Sweden’s School Quality By Henrekson, Magnus; Wennström, Johan
  21. Educational Inequality and Public Policy Preferences: Evidence from Representative Survey Experiments By Lergetporer, Philipp; Werner, Katharina; Woessmann, Ludger

  1. By: Nazila Alinaghi; W. Robert Reed (University of Canterbury)
    Abstract: This paper uses meta-analysis to evaluate the results of 42 studies and 641 individual estimates of the effect of taxes on economic growth in OECD countries. Our analysis addresses a number of difficult coding issues such as: implications of the government budget constraint for interpretations of tax effects; units of measurement for economic growth rates and tax rates; implications of equation specifications that measure short-run, medium-run, and long-run effects; length of time period (annual data versus multi-year periods); and other factors. Our main findings are: Estimates in the literature are characterized by significant (negative) publication bias. After controlling for publication bias, we find that tax policies predicted by growth theory to be growth-retarding, such as the use of distortionary taxes to fund unproductive expenditures, are significantly associated with lower economic growth. Tax polices predicted to be growth-enhancing, such as the use of non-distortionary taxes to fund productive expenditures, are significantly associated with higher economic growth. The estimated differences in these policies indicate that there is scope for tax policy to have a meaningful impact on economic growth. Finally, we find weak evidence that taxes on labour are particularly growth-inhibiting, while the evidence for other types of taxes is mixed.
    Keywords: Meta-analysis, taxes, economic growth, OECD
    JEL: H2 H5 H6 O47 O50
    Date: 2018–09–01
  2. By: Ufuk Akcigit; John Grigsby; Tom Nicholas; Stefanie Stantcheva
    Abstract: This paper studies the effect of corporate and personal taxes on innovation in the United States over the twentieth century. We use three new datasets: a panel of the universe of inventors who patent since 1920; a dataset of the employment, location and patents of firms active in R&D since 1921; and a historical state-level corporate tax database since 1900, which we link to an existing database on state-level personal income taxes. Our analysis focuses on the impact of taxes on individual inventors and firms (the micro level) and on states over time (the macro level). We propose several identification strategies, all of which yield consistent results: i) OLS with fixed effects, including inventor and state-times-year fixed effects, which make use of differences between tax brackets within a state-year cell and which absorb heterogeneity and contemporaneous changes in economic conditions; ii) an instrumental variable approach, which predicts changes in an individual or firm's total tax rate with changes in the federal tax rate only; iii) a border county strategy, which exploits tax variation across neighboring counties in different states. We find that taxes matter for innovation: higher personal and corporate income taxes negatively affect the quantity, quality, and location of inventive activity at the macro and micro levels. At the macro level, cross-state spillovers or business-stealing from one state to another are important, but do not account for all of the effect. Agglomeration effects from local innovation clusters tend to weaken responsiveness to taxation. Corporate inventors respond more strongly to taxes than their non-corporate counterparts.
    JEL: H24 H25 H31 J61 O31 O32 O33
    Date: 2018–09
  3. By: Chevalier, Arnaud (Royal Holloway, University of London); Elsner, Benjamin (University College Dublin); Lichter, Andreas (IZA); Pestel, Nico (IZA)
    Abstract: This paper studies the impact of immigration on public policy setting. As a natural experiment, we exploit the sudden arrival of eight million forced migrants in West Germany after World War II. These migrants were on average poorer than the West German population, but unlike most international migrants they had full voting rights and were eligible for social welfare. Using panel data for West German cities and applying difference-in-differences and an instrumental variables approach, we show that local governments responded to this migration shock with selective and persistent tax raises as well as shifts in spending. In response to the inflow, farm and business owners were taxed more while residential property and wage bill taxes were left unchanged. Moreover, high-inflow cities significantly raised welfare spending while reducing spending on infrastructure and housing. Election data suggest that these policy changes were partly driven by the political influence of the immigrants: in high-inflow regions, the major parties were more likely to nominate immigrants as candidates, and a pro-immigrant party received high vote shares. We further document that this episode of mass immigration had lasting effects on people's preferences for redistribution. In areas with larger inflows in the 1940s, people have substantially higher demand for redistribution more than 50 years later.
    Keywords: migration, taxation, spending, welfare state
    JEL: J61 H20
    Date: 2018–08
  4. By: Bratsberg, Bernt (Ragnar Frisch Centre for Economic Research); Hernaes, Øystein (Ragnar Frisch Centre for Economic Research); Markussen, Simen (Ragnar Frisch Centre for Economic Research); Raaum, Oddbjørn (Ragnar Frisch Centre for Economic Research); Røed, Knut (Ragnar Frisch Centre for Economic Research)
    Abstract: We evaluate the impact on youth crime of a welfare reform that tightened activation requirements for social assistance clients. The evaluation strategy exploits administrative individual data in combination with geographically differentiated implementation of the reform. We find that the reform reduced crime among teenage boys from economically disadvantaged families. Stronger reform effects on weekday versus weekend crime, reduced school dropout, and favorable long-run outcomes in terms of crime and educational attainment, point to both incapacitation and human capital accumulation as key mechanisms. Despite lowered social assistance take-up we uncover no indication that loss of income support pushed youth into crime.
    Keywords: social assistance, youth crime, activation
    JEL: H55 I29 I38 J18
    Date: 2018–08
  5. By: Whitehead, Christine
    Abstract: The paper discusses the many reasons why housing policy can appear to be both incoherent and ineffective - with too many Departments involved each with different objectives and a plethora of policies pulling in different directions. Drawing on earlier research findings the paper discusses three examples which have impacted on tenure mix – the growth in the private rented sector where policy initiatives – except for unintended side effects – have been limited and market and macroeconomic pressures have dominated; a range of tax anomalies which provide inconsistent incentives and generate considerable costs to the economy; and the impact of specific policies which concentrate on supporting owner-occupation through new build initiatives. The paper concludes by asking whether housing policy is inherently unable to withstand the pressures placed on it by both politics and macroeconomic realities.
    Keywords: housing policy; private sector; housing taxation; new build; owner-occupation
    JEL: H11 H24 H31 H44
    Date: 2018–08–01
  6. By: Don Schlagenhauf (Federal Reserve Bank of St Louis)
    Abstract: A dynamic stochastic occupational choice model with heterogeneous agents is developed to evaluate the impact of a corporate income tax reduction on employment. In this framework, the key margin is the endogenous entrepreneurial choice of legal form of organization. A reduction in the corporate income tax burden encourages adoption of the C corporporation legal form, which reduces capital constraints on firms. Improved capital re-allocation increases overall productive efficiency in the economy and therefore expands the labor market. Relative to the benchmark economy, a corporate income tax cut can reduce the non-employment rate by up to 7 percent.
    Date: 2018
  7. By: Hu, Xingwei
    Abstract: In an economy which could not accommodate full employment of its labor force, it employs some but does not employ others. The bipartition of the labor force is random, and we characterize it by a probability distribution with equal employment opportunity. We value each employed individual by his marginal contribution to the production; we also value each unemployed individual by the potential marginal contribution he would make if the market hired him. We fully honor both the individual value and its national aggregate in our distribution of the net production to the unemployment welfare and the employment benefits. Using a balanced budget rule of taxation, we derive a fair, debt-free, and risk-free tax rate for any given unemployment rate. The tax rate minimizes both the asymptotic mean and variance of the underlying posterior unemployment rate; it also stimulates employment, boosts productivity, and mitigates income inequality. One could also apply the rate and valuation approach to areas other than the labor market. This framework is open to alternative identification strategies and other forms of equal opportunity.
    Keywords: Tax Rate, Unemployment Welfare, Fair Division, Equality of Opportunity, Shapley Value
    JEL: C71 D63 E24 E62 H21
    Date: 2018–08–26
  8. By: Nolan, Matt
    Abstract: The goal of this paper is deliver an outline of the primary income tax and transfer policy settings in New Zealand between 1988 and 2013. The 1988-2013 period saw significant change in the tax and benefit systems, as the dual principles of a broad-base low rate tax system and increased targeting and work testing of benefits were implemented. By outlining the ways the tax and transfer structure changed in terms of thresholds, rates, and eligibility criteria this paper allows for structural modelling of tax and transfer payments. Furthermore, it provides a resource that lists policy changes with reference to the initial legislation which can be used to inform discussion of the tax-transfer changes of this period.
    Keywords: Income tax, New Zealand, Transfer policy, Benefits,
    Date: 2018
  9. By: Joshua Aizenman; Yothin Jinjarak; Hien Thi Kim Nguyen; Donghyun Park
    Abstract: The upward trajectory of OECD policy interest rates may impose growing fiscal challenges, thus testing the fiscal space of countries and their resilience. Against this background, we compare fiscal cyclicality across Asia, Latin America, OECD, and other regions from 1960-2016, then identify factors that explain countries’ government spending and tax-policy cyclicality. Our study reveals a mixed fiscal scenery, where more than half of the countries are recently characterized by limited fiscal space, and fiscal policy is either acyclical or procyclical (though not as high the level of 1980s), notably post-GFC becoming even more procyclical in government spending when accounting for net acquisition of nonfinancial assets and capital expenditure (spending components do matter). The cyclicality is also asymmetric: on average, a more indebted (relative to tax base) government spent more in good times (positive growth) and cut back the spending even more in bad times (weak economy). Added to the public debt/GDP data, we construct the ‘limited-fiscal-capacity’ statistic, measured by the size of public debt/[average tax revenue] and its volatility, which is found positively associated with the fiscal pro-cyclicality. Further, we also find that country’s sovereign wealth fund has a countercyclical effect in our estimation. The analysis depicts a significant economic impact of an enduring interest-rate rise on fiscal space: a 10% increase of public debt/tax base is associated with an upper bound of 6.1% increase in government-spending procyclicality. For both government-spending cyclicality and tax-rate cyclicality, we find no one-size-fits-all explanation for all (OECD/developing) countries at all (good/bad) times. Fiscal space, trade, and financial openness, the share of natural resource/manufacturing exports, inflation, and institutional risks are associated with the cross-country patterns of fiscal cyclicality, suggesting the measured cyclicality is context specific and the fiscal-monetary-political economy interactions are at work. We rank the explanatory factors across countries and regions and discuss policies to increase the fiscal capacity for countercyclical policy.
    JEL: F4 F41 H2 H3
    Date: 2018–09
  10. By: Varadarajan Chari (University of Minneapolis); Juan Pablo Nicolini (Minneapolis Fed); Pedro Teles (Banco de Portugal, Univ Catolica Portugu)
    Abstract: We study cooperative optimal Ramsey equilibria in the open economy addressing classic policy questions: Should there be restrictions to free trade and capital mobility? Should capital income be taxed? Should goods be taxed based on origin or destination? What are desirable border adjustments? Can a Ramsey allocation be implemented with residence based taxes on assets? We characterize optimal wedges and analyze alternative policy implementations.
    Date: 2018
  11. By: Nolan, Matt
    Abstract: This paper investigates the role tax and transfer policies changes played in the increase in disposable income inequality over the 1988-2013 period. Utilising the Household Economic Survey (HES) and a behavioural microsimulation model (Treasury’s TAXWELL-B) the relative contributions of tax policy and changes in various sociodemographic characteristics (age, highest educational attainment, and employment status) to the change in inequality are estimated. Tax and transfer policy changes are found to have had a major role in the increase in income inequality, accounting for around a third of the observed increase. Furthermore, non-policy related changes in the employment distribution also increased income inequality. However, increases in tertiary educational attainment and the proportion of workers in their prime earning years were both factors that were reducing income inequality over this same period. With these factors pushing in separate directions, this research also indicates that there are significant unobserved determinants of the rise in income inequality that cannot be attributed to the static role of tax-transfer policy, age, education, or employment status distributions.
    Keywords: New Zealand, Income, Tax policy, Income inequality, Tax-transfer policy,
    Date: 2018
  12. By: Irena Szarowská (Silesian University in Opava, School of Business Administration in Karvina)
    Abstract: The goal of the article is an assessment of government COFOG expenditure in selected EU countries in the period 1995-2016. Government expenditure and factors of their growth are crucial problem of many countries. In the context of the EU2020 strategy, supportive of smart, sustainable and inclusive growth, pressure on public expenditure is in link with on-going fiscal consolidation and the legacy of the economic and financial crisis. The paper evaluates the government expenditure in compliance with the COFOG international standard. The results show that the expenditure composition differs across the EU countries, but it is also possible to identify some similarities for specific government COFOG functions, such as the large weight of social protection. The proportion of potentially growth-enhancing public expenditure, such as education, health care, R&D or public investment, affirms significant cross-country variation. Next, the article provides direct empirical evidence on cyclicality and the long-term and short-term relationship between government COFOG expenditure and output. The Johansen cointegration test and the Error Correction Model are applied for research. Findings confirm the long-term relationship between government expenditure and output but the short-term relationship is not confirmed due to a low statistical significance.
    Keywords: public finance, government expenditure, cyclicality, COFOG classification, expenditure by function
    JEL: H50 H72 C32
    Date: 2018–06
  13. By: Pierre Yared
    Abstract: Over the past four decades, government debt as a fraction of GDP has been on an upward trajectory in advanced economies, approaching levels not reached since World War II. While normative macroeconomic theories can explain the increase in the level of debt in certain periods as a response to macroeconomic shocks, they cannot explain the broad-based long-run trend in debt accumulation. In contrast, political economy theories can explain the long-run trend as resulting from an aging population, rising political polarization, and rising electoral uncertainty across advanced economies. These theories emphasize the time-inconsistency in government policymaking, and thus the need for fiscal rules that restrict policymakers. Fiscal rules trade off commitment to not overspend and flexibility to react to shocks. This tradeoff guides design features of optimal rules, such as information dependence, enforcement, cross-country coordination, escape clauses, and instrument vs. target criteria.
    JEL: D02 E62 H21 H6
    Date: 2018–08
  14. By: Job Boerma (University of Minnesota); Ellen McGrattan (University of Minnesota)
    Abstract: This paper studies the design of health care and tax policies in a quantitative macroeconomic model. We theoretically and quantitatively characterize the optimal taxation on consumption, health investments, earnings and capital investments. Policies are constrained due to private information with respect to shocks to household labor productivity and health status. We compare the results to actual policies and household allocations in the Netherlands, a country with a single-payer system but vast differences in health expenditures and mortality rates across income groups.
    Date: 2018
  15. By: Razin, Assaf; Sadka, Efraim
    Abstract: Globalization - a widespread contemporaneous phenomenon - generates international tax competition. The consequent erosion in the tax base, especially on capital, is a blow to the finances of the welfare state, with far-reaching implications for the redistribution of income by the welfare state. Low skill migration attracted to the welfare state may put additional strain on it. An aging welfare state - a common contemporary phenomenon in many industrial countries - calls in for young and high skill immigrants for its survival. This review is about how economists should think about the connection between globalization and the welfare state, with strong motivating historical examples and empirical facts, and non-technical analytics.
    JEL: F00 H00
    Date: 2018–08
  16. By: Konings, Jozef; Lecocq, Cathy; Merlevede, Bruno
    Abstract: We analyze the impact of a tax credit on jobs in multinational enterprises. In particular, we exploit the introduction of the 'notional interest deduction' regime in Belgium in 2006, an 'allowance for corporate equity', which aimed to provide an attractive tax system for multinational enterprises active in Belgium. We study employment growth in foreign affiliates of MNEs in Belgium and use as a control group the affiliates of the same MNEs in France. We find that the tax credit has increased employment in Belgian affiliates by 6 to 8 percent over the period 2006-2008.
    Keywords: employment; Foreign direct investment; Multinational Enterprises; Tax policy
    JEL: F21 F23 H25
    Date: 2018–08
  17. By: Nguyen, Ly; Wilson, Norbert L.W.
    Keywords: Public Economics, Food Consumption/Nutrition/Food Safety, Demand and Price Analysis
    Date: 2017–07–03
  18. By: Amedeo Piolatto (Universidad de Alicante)
    Abstract: Lower-level governments often receive federal support through transfers or bailouts. We study how the regional or local ties of federal politicians can steer this process. We build a two-tier model of government, where regionally elected federal legislators bargain over federal support aimed at their own constituency. This leads to strategic voting on the regional level. Federal legislators are strategically elected to watch over the interests of their own region, cushioning shocks to local consumption and driving down borrowing costs. Lower-level legislators anticipate this, which sets the stage for regional over-borrowing both if they receive annual grants, or when a bailout scheme is introduced during periods of crisis. Voters strategically select federal representatives with more extreme positions than the median voter, as long as federal co-funding schemes imply some degree of interregional redistribution. These theoretical predictions are con¿rmed by our empirical analysis, where we compare the political extremism of representatives elected to the EU Parliament with that of representatives elected to national Parliaments.
    Keywords: Strategic Delegation, Decentralisation, Soft Budget Constraints, Political Extremism, Bailouts, Intergovernmental Grants, Fiscal Federalism.
    JEL: H6 H71 H74 H77
    Date: 2018–09
  19. By: Perotti, Roberto
    Abstract: The Greek crisis was the most severe in postwar Europe; its budget cuts were the deepest. Among the components of the budget, health spending was hit particularly hard, declining by more than one third in just five years. This paper has two goals: establish the facts about health inputs, outputs and outcomes during the Greek crisis, and explore the connection between budget cuts and health outcomes. Health spending and inputs were very high in Greece before the crisis: in several dimensions, even after the budget cuts were implemented health spending and inputs were still at or near the top of the European countries; in other cases they merely went back to the European average. Nevertheless, budget cuts so deep and so sudden are unlikely to merely cut into inefficiencies and overcapacities. I highlight several areas in which a comparative quantitative analysis suggests that budget cuts might have had an appreciable effects on the health of the population.
    Keywords: Fiscal austerity; Greek crisis; Health crisis
    JEL: E62 H51 I18
    Date: 2018–08
  20. By: Henrekson, Magnus (Research Institute of Industrial Economics (IFN)); Wennström, Johan (Research Institute of Industrial Economics (IFN))
    Abstract: The Swedish school system suffers from profound problems with teacher recruitment and retention, knowledge decline, and grade inflation. Absenteeism is high, and psychiatric disorders have risen sharply among Swedish pupils in the last ten years. In this pioneering analysis of the consequences of combining institutionalized social constructivism with extensive marketization of education, we suggest that these problems regarding school quality are to no small extent a result of the Swedish school system’s unlikely combination of a postmodern view of truth and knowledge, the ensuing pedagogy of child-centered discovery, and market principles. Our study adds to the findings from previous attempts to study the effects of social-constructivist pedagogy in nonmarket contexts and yields the implication that caution is necessary for countries, notably the U.S., that have a tradition of social-constructivist practices in their education systems and are considering implementing or expanding market-based school reforms.
    Keywords: For-profit schools; Marketized education; School choice; Social constructivism; Voucher system
    JEL: H42 H44 H75 I22 I28 L88
    Date: 2018–09–10
  21. By: Lergetporer, Philipp (Ifo Institute for Economic Research); Werner, Katharina (Ifo Institute for Economic Research); Woessmann, Ludger (Ifo Institute for Economic Research)
    Abstract: To study how information about educational inequality affects public concerns and policy preferences, we devise survey experiments in representative samples of the German population. Providing information about the extent of educational inequality strongly increases concerns about educational inequality but only slightly affects support for equity-oriented education policies, which is generally high. The small treatment effects are not due to respondents' failure to connect policies with educational inequality or aversion against government interventions. Support for compulsory preschool is the one policy with a strong positive information treatment effect, which is increased further by informing about policy effectiveness.
    Keywords: inequality, education, information, survey experiment
    JEL: D30 H52 I24 H11 D63 D83 D72 P16
    Date: 2018–08

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