nep-pbe New Economics Papers
on Public Economics
Issue of 2019‒03‒11
fourteen papers chosen by
Thomas Andrén

  1. The efficiency and distributive effects of local taxes: evidence from Italian municipalities By Rubolino, Enrico
  2. Optimal Progressivity with Age-Dependent Taxation By Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
  3. Pecuniary and Non-Pecuniary Motivations for Tax Compliance: Evidence from Pakistan By Joel Slemrod; Obeid Ur Rehman; Mazhar Waseem
  4. Envy-free Pricing for Impure Public Good By Obara, Takuya; Tsugawa, Shuichi; Managi, Shunsuke
  5. On the political economy of income taxation By Berliant, Marcus; Gouveia, Miguel
  6. Public Debt and Low Interest Rates By Olivier J Blanchard
  7. Soda tax incidence and design under monopoly By Helmuth Cremer; Catarina Goulão; Jean-Marie Lozachmeur
  8. Working Paper 310 - Tax Policy, Foreign Direct Investment and Spillover Effects By Boly Amadou; Seydou Coulibaly; Eric Kéré Nazindigouba
  9. Progressive Taxation, Nominal Wage Rigidity, and Business Cycle Destabilization By Miroslav Gabrovski; Jang-Ting Guo
  10. Dynamic fiscal competition: a political economy theory By Calin Arcalean
  11. Do Temporary Business Tax Cuts Matter? A General Equilibrium Analysis By William Gbohoui
  12. Does tax competition drive cooperation in local economic development policies? Evidence on inter-local business parks in Germany By Ivo Bischoff; Simon Melch; Eva Wolfschuetz
  13. Structural Transformation and Tax Efficiency By Serhan Cevik; Jan Gottschalk; Eric Hutton; Laura Jaramillo; Pooja Karnane; Moussé Sow
  14. Preparing Local Tax Expenditure Reports: A Practical Guide for Local Governments By Laura Wheeler; Per Johnson

  1. By: Rubolino, Enrico
    Abstract: This paper analyzes the effect of local income taxation on taxable income, inequality and internal migration in Italy using two tax reforms and several administrative data sources. These reforms, introduced in 2007 and 2011, granted municipalities the authority to switch from a flat to a progressive local income tax. I obtain two main results. First, the progressive tax reduced taxable income by 5 percent and the income share held by the top percentile of the municipal income distribution by 6 percent. Second, I find compelling evidence of a positive effect of net-of-tax rate differentials across provinces on changing fiscal residence.
    Date: 2019–02–25
  2. By: Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
    Abstract: This paper studies optimal taxation of earnings when the degree of tax progressivity is allowed to vary with age. The setting is an overlapping-generations model that incorporates irreversible skill investment, flexible labor supply, ex-ante heterogeneity in the disutility of work and the cost of skill acquisition, partially insurable wage risk, and a life cycle productivity profile. An analytically tractable version of the model without intertemporal trade is used to characterize and quantify the salient trade-offs in tax design. The key results are that progressivity should be U-shaped in age and that the average marginal tax rate should be increasing and concave in age. These findings are confirmed in a version of the model with borrowing and saving that we solve numerically.
    JEL: E20 H2 H21 H31 H41
    Date: 2019–02
  3. By: Joel Slemrod; Obeid Ur Rehman; Mazhar Waseem
    Abstract: We examine two Pakistani programs to explore the role of deterrence as well as social and psychological factors in the tax compliance behavior of agents. In the first of these programs, the government began revealing income tax paid by every taxpayer in the country. The second program publicly recognizes and rewards the top 100 tax paying corporations, partnerships, self-employed individuals, and wage-earners. We find that both public disclosure and social recognition of top taxpayers caused a substantial increase in tax payments. We explore the drivers of this behavior, including the shift of social norms toward compliance.
    JEL: H2 H24 H26
    Date: 2019–02
  4. By: Obara, Takuya; Tsugawa, Shuichi; Managi, Shunsuke
    Abstract: In this paper, we study optimal public good provision with congestion and user fees to exclude some agents under lump-sum tax/transfer, constrained by the condition of reduction of envy. We adopt the λ envy-free constraint proposed by Diamantaras and Thomson (1990), and employ the exclusion technique used in Hellwig (2005), i.e., the policymaker decides the level of provision and user fee paid by people accessing a public good, as well as a uniform level of tax/transfer. We characterize the optimal public sector pricing rule that depends on utilitarian distributive concerns and envy reduction concerns, which are in conflict with each other. We show that if the social welfare function is strictly increasing and strictly concave and the government is not concerned with reducing envy, the user fee is greater than the marginal congestion cost. Additionally, we show that if the government reflects the notion of equality of opportunity under the reduction of envy, the user fee is lower than the marginal congestion cost. These results imply that the two fairness concerns are countervailing with regard to the surcharge fee.
    Keywords: Public sector pricing, λ envy-free, public good, excludability, congestion
    JEL: D61 D63 H21 H41 H44
    Date: 2019–03
  5. By: Berliant, Marcus; Gouveia, Miguel
    Abstract: The literatures dealing with voting, optimal income taxation, implementation, and pure public goods are integrated here to address the problem of voting over income taxes and public goods. In contrast with previous articles, general nonlinear income taxes that affect the labor-leisure decisions of consumers who work and vote are allowed. Uncertainty plays an important role in that the government does not know the true realizations of the abilities of consumers drawn from a known distribution, but must meet the realization-dependent budget. Even though the space of alternatives is infinite dimensional, conditions on primitives are found to assure existence of a majority rule equilibrium when agents vote over both a public good and income taxes to finance it.
    Keywords: Voting; Income taxation; Public good
    JEL: D72 D82 H21 H41
    Date: 2019–03–04
  6. By: Olivier J Blanchard (Peterson Institute for International Economics)
    Abstract: Blanchard develops four main arguments concerning the costs of public debt when safe interest rates are low. First, the current US situation in which safe interest rates are expected to remain below growth rates for a long time is more the historical norm than the exception. If the future is like the past, this implies that debt rollovers—that is, the issuance of debt without a subsequent increase in taxes—may well be feasible. Put bluntly, public debt may have no fiscal cost. Second, even without fiscal costs, public debt reduces capital accumulation and may therefore have welfare costs. However, welfare costs may be smaller than typically assumed. The reason is that the safe rate is the risk-adjusted rate of return on capital. A safe rate that is lower than the growth rate indicates that the risk-adjusted rate of return to capital is in fact low. The average risky rate, i.e. the average marginal product of capital, also plays a role, however. Blanchard shows how both the average risky rate and the average safe rate determine welfare outcomes. Third, while the measured rate of earnings has been and is still quite high, the evidence from asset markets suggests that the marginal product of capital may be lower, with the difference reflecting either mismeasurement of capital or rents. This matters for debt: The lower the marginal product, the lower the welfare cost of debt. Fourth, Blanchard discusses a number of arguments against high public debt, and in particular the existence of multiple equilibria where investors, believing debt to be risky, require a risk premium, which increases the fiscal burden and makes debt effectively more risky. This argument, while relevant, does not have straightforward implications for the appropriate level of debt. Some of these conclusions will be controversial. But the aim of the paper is to foster a richer discussion of the costs of debt and fiscal policy than is currently the case, not to argue for more public debt, especially in the current political environment. The appendices and data underlying this analysis and appendices are available
    Keywords: Unemployment, Debt, deficits, interest rate, safe rate, risky rate, marginal product of capital, growth rate, risk premium, secular stagnation, overlapping generation, welfare, transfers
    JEL: H3 H6 E62
    Date: 2019–02
  7. By: Helmuth Cremer; Catarina Goulão; Jean-Marie Lozachmeur
    Abstract: We consider an unhealthy good, such as a sugar-sweetened beverage, the health damages of which are misperceived by consumers. The sugar content is endogenous. We first study the solution under “pseudo” perfect competition. In that case a simple Pigouvian tax levied per unit of output but proportional to the sugar content is sufficient to achieve a first best solution. Then we consider a monopoly. Market power affects both output and sugar content, possibly in opposite directions, and these effects have to be balanced against Pigouvian considerations. We show that, nevertheless, a tax per unit of output achieves an efficient solution, but it must be an affine function of the sugar content; taxing “grams of sugar” is no longer sufficient. Interestingly, both the total tax as well as its sugar component can be positive as well as negative.
    Keywords: sin tax, tax incidence, misperception, monopoly
    JEL: H22 I12 D42
    Date: 2019
  8. By: Boly Amadou; Seydou Coulibaly (Centre d’Etudes et de Recherches sur le Développement International (CERDI), CNRS, and Université d’Auvergne (Clermont-Ferrand, France)); Eric Kéré Nazindigouba (African Development Bank)
    Abstract: JEL Code : C23, E62, F21, H25.Keywords: FDI, statutory corporate tax rate, panel data, spatial econometrics.
    Date: 2019–02–22
  9. By: Miroslav Gabrovski (University of Hawaii at Manoa); Jang-Ting Guo (University of California, Riverside)
    Abstract: In the context of a prototypical New Keynesian model, this paper examines the theoretical interrelations between two tractable formulations of progressive taxation on labor income versus (i) the equilibrium degree of nominal wage rigidity as well as (ii) the resulting volatilities of hours worked and output in response to a monetary shock. In sharp contrast to the traditional stabilization view, we analytically show that linearly progressive taxation always operates like an automatic destabilizer which leads to higher cyclical fluctuations within the macroeconomy. We also obtain the same business cycle destabilization result under continuously progressive taxation if the initial degree of tax progressivity is sufficiently low.
    Keywords: Progressive Taxation, Nominal Wage Rigidity, Automatic Stabilizer, Business Cycles
    JEL: E12 E32 E62
    Date: 2019–02
  10. By: Calin Arcalean
    Abstract: I develop a political economy theory of dynamic fiscal competition via public spending and debt. With internationally mobile capital, strategic policies generate two cross-border externalities that voters in each country fail to internalize: (1) an increase in public spending that bolsters capital accumulation but also (2) a race to the top in public debt which crowds out capital. The relative size of these two externalities varies with the number of financially integrated countries and interacts with the domestic political conflict between young and old voters. Despite residence based taxation, capital tax rates are lower under strategic policies than under coordination. Furthermore, they may decline with financial integration. Strategic policies lead to lower long run output and welfare relative to coordination but are preferred by subse-quent generations of voters if the number of financially integrated countries is low or the political weight of the young is high.
    Keywords: political economy, public spending, public debt, economic integration
    JEL: H20 H40 H60
    Date: 2019
  11. By: William Gbohoui
    Abstract: This paper develops a dynamic general equilibrium model to assess the effects of temporary business tax cuts. First, the analysis extends the Ricardian equivalence result to an environment with production and establishes that a temporary tax cut financed by a future tax-increase has no real effect if the tax is lump-sum and capital markets are perfect. Second, it shows that in the presence of financing frictions which raise the cost of investment, the policy temporarily relaxes the financing constraint thereby reducing the marginal cost of investment. This direct effect implies positive marginal propensities to invest out of tax cuts. Third, when the tax is distortionary, the expectation of high future tax rates reduces the expected marginal return on investment mitigating the direct stimulative effects.
    Date: 2019–02–15
  12. By: Ivo Bischoff (University of Kassel); Simon Melch (University of Kassel); Eva Wolfschuetz (University of Kassel)
    Abstract: An increasing number of municipalities cooperates in the field of economic development. In this paper, we focus on a specific instrument in this field, namely the development of joint business parks. We apply a hazard model to data from West-German municipalities between 2000 and 2015. We find inter-local business parks to be more frequent among small municipalities and in constellations where suitable land is scarce. Our main focus rests on the role of tax competition. An analogy building on the literature on international tax coordination supports the hypothesis that inter-local business parks are more likely in regions where tax competition is intense. The evidence is affirmative: We find that the likelihood of inter-local business park formation to increase in the intensity of local tax competition.
    Keywords: Inter-local business parks, inter-municipal cooperation, tax competition, hazard model, Germany
    JEL: H77 H71 R58 R14
    Date: 2019
  13. By: Serhan Cevik; Jan Gottschalk; Eric Hutton; Laura Jaramillo; Pooja Karnane; Moussé Sow
    Abstract: Structural transformation has resulted in an increasing share of services in aggregate value-added in advanced and developing countries across the world. We analyze the impact of this shift into services on countries’ efficiency in collecting the value-added tax (VAT). The analysis is based on two alternative measures of VAT efficiency: (1) the VAT C-efficiency, using a broad panel of 134 countries over the period 1970-2014; and (2) the VAT gap using a more granular, proprietary dataset that draws on the results of IMF’s Revenue Administraion-Gap Analysis Program covering 24 countries over the period 2004-2016. We find that a higher share of services in aggregate value-added reduces the VAT efficiency, and that this adverse effect is mainly a result of a rise of non-tradable services, which in turn contributes to a narrowing of the VAT base.
    Date: 2019–02–15
  14. By: Laura Wheeler (The Center for State and Local Finance, Georgia State University, USA); Per Johnson (The Center for State and Local Finance, Georgia State University, USA)
    Abstract: Tax expenditures are provisions in the tax code that allow for special treatment of some properties or a certain type of expense when computing the tax liability. Policymakers use tax expenditures as incentives for economic development or to provide tax relief to taxpayers, among many other reasons. A local tax expenditure report improves fiscal transparency by allowing local governments and policymakers to better understand the localized revenue effects of these tax provisions and to consider them during the budget-making process. The aim of this “how to” document is to assist local governments who choose to prepare a tax expenditure report themselves by providing them the practical resources and example methods to begin the process. Therefore, this document gives a general overview and theoretical background for preparing a local tax expenditure report with specific and practical examples drawn from the preparation of a local tax expenditure report for Fulton County, Georgia.
    Date: 2019–02

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