nep-pbe New Economics Papers
on Public Economics
Issue of 2018‒12‒10
fifteen papers chosen by
Thomas Andrén

  1. A DSGE Model to Evaluate the Macroeconomic Impacts of Taxation By José Alves
  2. Time-varying Consumption Tax, Productive Government Spending, and Aggregate Instability By Mauro Bambi; Alain Venditti
  3. Limiting the distortionary impacts of transaction taxes: Scottish stamp duty after the Mirrlees Review By Daniel Borbely
  4. Net Direct Taxes and Double Taxation Avoidance By Kinga Rozalia STOICA-GRAMA
  5. Second Thoughts on Estimating Expansionary Fiscal Policy E ffects in the United States By JIA, BIJIE
  6. Macroeconomics with Endogenous Markups and Optimal Taxation By Federico Etro
  7. Generational Conflict and Education Politics: Implications for Growth and Welfare By Yuki Uchida; Tetsuo Ono
  8. Capital Gains Taxation and Investment Dynamics By Hong, Sungki; Moon, Terry S.
  10. Tax Reform Made Me Do It! By Michelle Hanlon; Jeffrey L. Hoopes; Joel Slemrod
  11. Fiscal equalization and the tax structure By Holm-Hadulla, Fédéric
  12. Incidence, Salience and Spillovers: The Direct and Indirect Effects of Tax Credits on Wages By Ghazala Azmat
  13. New Challenges of Globalization in Pension Systems By Dan Constantinescu
  14. Public insurance of married versus single households in the US: trends and welfare consequences By Swapnil Singh
  15. On the political economy of compulsory education By Alessandro Balestrino; Lisa Grazzini; Annalisa Luporini

  1. By: José Alves
    Abstract: As recognized, taxation is not only an instrument for government to collect revenues from the economic agents but also an instrument of fiscal policy to influence the agents’ behaviour. In this work, we develop a DSGE model to assess the macroeconomic impact of three tax items (taxes on individual income, on firms’ income and on consumption) on the dynamics of both individual tax items and on the aggregate revenues as well. Moreover, we also intend to evaluate how macroeconomic aggregates behave in a presence of stochastic shocks in taxation.
    Keywords: DSGE models; Tax effects; Fiscal Policy; Optimal taxation
    JEL: D58 E62 H21 H30
    Date: 2018–11
  2. By: Mauro Bambi (University of York, Department of Economics and Related Studies); Alain Venditti (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE & EDHEC Business School)
    Abstract: In this paper we investigate if government balanced-budget rules together with endogenous taxation may lead to aggregate instability in an endogenous growth framework. After highlighting the differences with the exogenous growth framework, we prove that under counter-cyclical consumption taxes, while there exists a unique balanced growth path, sunspot equilibria based on self-fulfilling expectations occur through a form of global indeterminacy. In addition, we argue that this result is empirically plausible for a large set of OECD countries and that it may also emerge with endogenous income taxes.
    Keywords: endogenous growth, time-varying consumption tax, global indeterminacy, self-fulfilling expectations, sunspot equilibria
    JEL: C62 E32 H20 O41
    Date: 2018–10
  3. By: Daniel Borbely (Department of Economics, University of Strathclyde)
    Abstract: We investigate the distortionary impacts of transaction taxes through a case study of the Scottish property market. We make use of three sources of variation in transaction tax rates present in recent Scottish tax systems, price notches, time notches and a shift to a more progressive transaction tax regime. Our results indicate that both kinds of notches have a distortionary impact that is sub-optimal. The Scottish Government's recent reforms had a positive impact through removal of the price notches but time notches re-emerged allowing other distortions to persist. Using variation in effective tax rates from a progressive reform of the transaction tax system, we also find that the permanent effect of increased tax rates is a reduction in transaction activity. Looking across the price distribution, our results indicate that the strongest permanent responses occur in price ranges where tax rates fell due to the reform. This suggests that if governments insist on keeping transaction tax regimes, progressive taxation might be a good way to limit their distortionary impact, whilst also encouraging transaction activity in the lower end of the market.
    Keywords: transaction taxes, property markets, behavioural responses to taxation, notches in the tax systems
    JEL: H21 H26 H30
    Date: 2018–11
  4. By: Kinga Rozalia STOICA-GRAMA (Faculty of Financial Management (Student), Ecological University of Bucharest)
    Abstract: Double taxation can only arise in the case of direct taxes: taxes on income and wealth taxes, and adversely affect the international capital movement, the exchange of persons, goods, capital services and impedes the development of economic relations between countries. Given that the double taxation is a global problem that increases the fiscal pressure and diminishes the investment attractiveness, and it becomes necessary to improve the domestic tax system, we intend to analyze the imposition of revenues, by emphasizing the necessity, the measures and the methods undertaken to eliminate the double taxation. To this end, the analysis between two countries: of Romania and France has been carried out and we find that the application of the methods of avoiding double international taxation has contrary effects on the state of residence compared to the consequences of the company in question because the tax relief is advantageous for the company but constitutes a disadvantage for the granting State; but it is fundamental to choose a method because the amount of tax revenue, is maximum in the absence of a tax convention between the two signatory states. By international agreement, taxpayers are guaranteed that their income will not be subject to double taxation and are protected against fiscal discrimination in the Contracting State in which they operate.
    Keywords: double taxation, fiscal pressure, tax relief, methods of avoiding double taxation, tax conventions
    JEL: H21 H26 H73
    Date: 2018–04
  5. By: JIA, BIJIE
    Abstract: This paper revisits mixed findings of the expansionary fiscal spending effect in the United States. An array of standard Vector-Autoregressive (VAR) models has been implemented to capture inconsistent effects of the fiscal expansion. Findings in this paper consistently reveal that without considering the influence of transfer payments, state and local government spending, and the timing of sample, measuring the effect of expanded government purchases along would result in an upward bias of the comprehensive fiscal stimulus effect. This paper questions the validity of using government purchases alone to precisely evaluate the effect of fiscal expansion.
    Keywords: E21; E32; E62; H30; H50.
    JEL: E21 E32 E62 H30 H50
    Date: 2018–10
  6. By: Federico Etro
    Abstract: We augment a flexible price dynamic general equilibrium model with any symmetric intratemporal preferences over a variety of goods supplied under monopolistic, Bertrand or Cournot competition to derive implications for business cycle and market inefficiencies. Endogenous markups can magnify the impact of shocks on consumption and labor supply through intertemporal substitution mechanisms, and the optimal fiscal policy requires a variable labor income subsidy and a capital income tax that converges to zero in the long run. With an endogenous number of goods and strategic interactions, also entry affects markups and the optimal fiscal policy requires also a tax on profits. We characterize equilibrium and efficient market structures and derive optimal tax rules for a variety of preferences, including a new type of general additive preferences that nest direct, indirect, implicit and homothetic additivity
    Keywords: Business cycles, Monopolistic competition, Optimal taxation, variable markups.
    JEL: E1 E2 E3
    Date: 2018
  7. By: Yuki Uchida (Faculty of Economics, Seikei University); Tetsuo Ono (Graduate School of Economics, Osaka University)
    Abstract: This study considers the politics of public education and its impact on economic growth and welfare across generations. We employ probabilistic voting to demon- strate the generational con ict regarding taxes and spending, and show that aging results in a tax burden shift from the retired to the working generation, a reduction in public education spending, and ultimately in slowing down economic growth. We subsequently consider a legal constraint that aims to boost education spending: a spending oor for education. This constraint stimulates economic growth, but cre- ates a trade-off between current and future generations in terms of welfare. Finally, the quantitative implications of our results are explored by calibrating the model to the Japanese economy.
    Keywords: Public education, Economic growth, Capital income tax, Proba- bilistic voting
    JEL: D70 E24 H52
    Date: 2018–02
  8. By: Hong, Sungki (Federal Reserve Bank of St. Louis); Moon, Terry S. (Princeton University, Department of Economics and Industrial Relations Section)
    Abstract: This paper quantifies the long-run effects of reducing capital gains taxes on aggregate investment. We develop a dynamic general equilibrium model with heterogeneous firms, which face discrete capital gains tax rates based on their firm size. We calibrate our model by targeting important micro moments as well as the difference-in-differences estimate of the capital elasticity based on our institutional setting in Korea. We find that the firm-size reform that reduced the capital gains tax rates from 24 percent to 10 percent for the affected firms increased aggregate investment by 1.22 percent in the steady state, with the short-run effects overstating the effects by 1.18 percentage points. Additionally, a counterfactual analysis where we set the uniformly low tax rate of 10 percent reveals that aggregate investment rose by 7 percent in the long-run. We also find that general equilibrium effects through prices are substantial in our simulation. Taken together, our findings suggest that reducing capital gains tax rates would substantially increase investment in the short-term, and accounting for dynamic and general equilibrium responses is important for understanding the aggregate effects of capital gains taxes.
    Keywords: Capital; Fiscal Policy; Investment Decisions; Business Taxes and Subsidies; Saving and Capital Investment
    JEL: E22 E62 G11 H25 O16
    Date: 2018–10–31
  9. By: Willem Devriendt; Freddy Heylen (-)
    Abstract: Demographic change forces governments in all OECD countries to reform the public pension system. Increased sensitivity to rising inequality in society has made the challenge for policy makers only greater. In this paper we evaluate alternative reform scenarios. We employ an overlapping generations model for an open economy with endogenous hours worked, human and physical capital, output, and welfare. Within each generation we distinguish individuals with high, medium or low ability to build human capital. Frequently adopted reforms in many countries such as an increase of the normal retirement age or a reduction in the pension benefit replacement rate can guarantee the financial sustainability of the system, but they fail when the objective is also to improve macroeconomic performance and aggregate welfare without raising intergenerational or intragenerational welfare inequality. Our results prefer a reform which combines an increase of the retirement age with an intelligent design of the linkage between the pension benefit and earlier labour earnings. First, this design conditions pension benefits on past individual labour income, with a high weight on labour income earned when older and a low weight on labour income earned when young. Second, to avoid rising welfare inequality this linkage is complemented by a strong rise in the benefit replacement rate for low ability individuals (and a reduction for high ability individuals).
    Keywords: demographic change, population ageing, pension reform, retirement age, heterogeneous abilities, inequality, overlapping generations
    JEL: E6 H55 J22 J26
    Date: 2018–11
  10. By: Michelle Hanlon; Jeffrey L. Hoopes; Joel Slemrod
    Abstract: This paper examines corporations’ actions, and statements about actions, following the tax law change known as the Tax Cuts and Jobs Act (TCJA). Specifically, we examine four different outcomes—bonuses (or other actions that benefit workers), announcements of new investments, share repurchases, and dividend announcements. We find that 4% of public firms in our sample announced in Q1 2018 they would pay some portion of their tax savings toward workers. In terms of investment, we find that 22% of the S&P 500 firms in our sample mentioned in earnings conference calls that they would increase investment because of the TCJA. We find a general increase in share repurchases following the passage of the TCJA, but the increase is extremely concentrated in a small number of firms. We find only nine firms that announced a new share repurchase plan explicitly attributed the new plan to the TCJA. In regression analysis, we find that both political and economic variables explain TCJA-linked announcements. The analysis suggests that firms with greater expected tax savings from the TCJA are those most likely to announce payments to workers and plans to increase investment. Firms with a Political Action Committee that donates more to Republican candidates are also more likely to announce benefits to employees.
    JEL: H20 H24 H25
    Date: 2018–11
  11. By: Holm-Hadulla, Fédéric
    Abstract: Sub-national governments often finance substantial parts of their budgets via taxes on capital or other mobile factors – despite having access to alternative, less distortionary, revenue sources. This paper develops three hypotheses to explain this pattern and tests them in a natural experiment from Germany. The first hypothesis is that fiscal redistribution between jurisdictions lowers the perceived excess burden of distortionary taxation and thereby raises its attractiveness from the perspective of local governments; the second is that a desire for redistribution within jurisdictions induces a shift away from less distortionary tax instruments, despite their superior efficiency properties; the third is that distortionary taxation serves as a Pigouvian intervention to correct externalities. The empirical analysis supports redistribution between jurisdictions as important, but insufficient, to fully explain the observed reliance on distortionary taxation. Among the remaining two hypotheses, the data favour Pigouvian over distributional motives as a further rationale for the local taxation of mobile factors. JEL Classification: H23, H25, H71, H77
    Keywords: difference-in-difference, federalism, fiscal equalization, natural experiment, tax structure
    Date: 2018–11
  12. By: Ghazala Azmat (Département d'économie)
    Abstract: Tax credits are a popular way to alleviate in-work poverty. A common empirical assumption is that the benefit of the tax credit is borne solely by the claimant workers. However, economic theory suggests no particular reason why this should be the case. This paper investigates the impact of the Working Families’ Tax Credit, introduced in the UK in 1999, on wages. Unlike similar tax credit policies, this tax credit was paid through employers rather than directly to workers, making it more salient to the employer. Using a novel identification strategy, we can separately identify the effect on wages associated with an increase in the amount of tax credit and that associated with the change in salience. We find evidence that: (1) through the salience mechanism the firm cuts the wage of claimant workers relative to similarly skilled non-claimants by 30 percent of the tax credit, which is approximately 7 percent of the wage, and (2) there is a negative spillover effect onto the wages of claimant and non-claimant workers of 1.7 percent, which is approximately 8 percent of the tax credit for claimant workers.
    Keywords: Wages; Tax credits; Incidence; Salience
    JEL: I38 J30 H22 H23
    Date: 2018
  13. By: Dan Constantinescu (Ecological University of Bucharest)
    Abstract: After many years in which the social problems have been treated as an attribute of each state’s internal politics, the beginning of the third millennium marks the onset of a concentrated effort to reform the social security systems in most of the world’s states. For pension systems, the greatest common challenge is the attenuation of the demographic pressure, whose effect – on medium and long period of time – consists in the depreciation of financial sustainability of public systems and in accentuating the discrepancy between the benefits received from the public system and retired workers necessary of financial resources. In the context of European Union’s state members, the legislation on the people’s liberty and mobility domain implies the creation of a social security basic (minimal) system, which also regards aspects of pension benefits extraterritoriality. Meanwhile, the free circulation of services principle generates new problems regarding state border supervision. The last economical-financial crisis proved that, although the diversity principle allows each state member to decide on the pension system most agreeable, a certain series of common guidelines cannot be eluded, like the ones regarding investment regulation, the risk-based approach of supervising or the coordination of tax systems.
    Keywords: population ageing, pension deficit, investment, regulations, replacement rates, minimum returns, supervision, crisis, risk management
    JEL: H55 H75 J32
    Date: 2018–04
  14. By: Swapnil Singh (Center for Excellence in Finance and Economic Research (CEFER), Bank of Lithuania)
    Abstract: Using the March Current Population Survey, I show that over the last two decades, married households in the United States received increasingly more public insurance against labor income risk, whereas the opposite was true for single households. To evaluate the welfare consequences of this trend, I perform a quantitative analysis. As a novel contribution, I expand the standard incomplete markets model à la Aiyagari (1994) to include two groups of households: married and single. The model allows for changes in the marital status of households and accounts for transition dynamics between steady states. I show that the divergent trends in public insurance have a significant detrimental effect on the welfare of both married and single households.
    Keywords: Incomplete markets, welfare, consumption inequality, progressive taxation, insurance
    JEL: D52 D60 E21 E62 H31
    Date: 2018–11–30
  15. By: Alessandro Balestrino; Lisa Grazzini; Annalisa Luporini
    Abstract: We consider an economy with two categories of agents: entrepreneurs and workers. In laissez-faire, the former gain from having their children educated, while the latter, although they may profit from their own education, have no interest in sending their children to school. We first characterise the preferred education policy-cum-redistributive taxation for the two groups, and find that entrepreneurs favour a compulsory education policy while workers prefer a purely redistributive taxation. Each group would like the policy to be entirely financed by the other group. Then, we introduce a political process with probabilistic voting and verify that an equilibrium with both a compulsory education policy and some redistribution may exist in which the workers are constrained but the entrepeneurs, who benefit from hiring educated workers, are not.
    Keywords: Education Policy, Redistributive taxation, Probabilistic voting.
    JEL: H42 H52
    Date: 2018

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