nep-pbe New Economics Papers
on Public Economics
Issue of 2019‒03‒18
nine papers chosen by
Thomas Andrén

  1. Top Income Tax Evasion and Redistribution Preferences: Evidence from the Panama Papers By Laila Ait Bihi Ouali
  2. Targeting FDI By Ferrett, Ben; Wooton, Ian
  3. Public Infrastructure Provision in the Presence of Terms-of-Trade Effects and Tax Competition By Karl Zimmermann
  4. Time-saving Goods, Time Inequalities, and Optimal Taxation By Cristian F. Sepulveda
  5. A Theoretical Rationale for the Fiscal Gap Model of Equalization Transfers By Jorge Martinez-Vazquez; Cristian Sepulveda
  6. Unemployment Benefits and the Timing of Redundancies: Evidence from Bunching By Laura Khoury
  7. Non-Take-Up of Means-Tested Social Benefits in Germany By Michelle Harnisch
  8. Modern financial repression in the euro area crisis: making high public debt sustainable? By van Riet, Ad
  9. Endogenous Discounting, Wariness, and Effcient Capital Taxation By Aloisio Araujo; Juan Pablo Gamay; Rodrigo Novinskiz; Mario R. Pascoa

  1. By: Laila Ait Bihi Ouali (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE)
    Abstract: This paper provides empirical evidence that, after fiscal scandals, individuals substantially revise their views on redistribution. I exploit as a quasi-natural experiment the 2016 Panama Papers scandal which revealed top-income tax evasion behaviour simultaneously worldwide. The empirical investigation relies on two original sources of data: a longitudinal dataset on United Kingdom households and a survey conducted in twenty-two European countries. Using a difference-in-differences strategy, I find an increase in pro-redistribution statements post-scandal ranging between 2% and 3.3%. Responses are heterogeneous on income levels and on political affiliations, with larger responses from right-wing individuals. The change in redistribution preferences is moderately translated into votes: I find an increase in voting intentions for the left and negative for the right-wing parties. Complementary estimations at the European-level indicate that pro-redistribution responses increase with media coverage and shock intensity (i.e., number of individuals involved).
    Keywords: Panama Papers, Tax evasion, tax avoidance, Redistribution, tax morale, Inequality, mass media
    JEL: D63 H24 H26
    Date: 2019–01
  2. By: Ferrett, Ben; Wooton, Ian
    Abstract: We study the tax/subsidy competition between the governments of two countries to attract the FDI projects of two firms. We assume that governments lack the capacity to target every potential inward investor with a tailored fiscal offer. Consequently, each government is constrained to bid for a single firm. In this environment, we show that subsidy competition, where both governments bid for the same firm, arises only if there is uncertainty over which country offers the more profitable location for the firm's plant. Intuitively, such uncertainty leads to both governments believing that they might win the subsidy competition. In contrast, when the characteristics of the two countries are common knowledge, subsidy competition never arises in equilibrium, as the losing country would prefer to target the other firm. We also explore some of the welfare implications of governmental targeting constraints.
    Keywords: efficiency; Foreign direct investment; tax and subsidy competition
    JEL: F12 F23 H25 H73
    Date: 2019–03
  3. By: Karl Zimmermann
    Abstract: This paper analyses and compares the performance of carbon taxes and capital taxes in financing public goods with positive effects on private firm productivity. It is motivated by Franks et al. (2017), who ask whether using carbon taxes could be motivated on fiscal grounds rather than by environmental ones, arguing that the advantage of the carbon tax consists in its potential to reap foreign resource rents. I employ an analytical general equilibrium framework of n identical countries, where local firms use internationally mobile capital and imported fossil fuel and in production as well as local public infrastructure. The latter is financed solely by either taxing the input of fossil fuels (carbon tax) or capital. The choice of the policy instrument is exogenous to policy makers and symmetric across countries. I find that the effect of policy on the fossil fuel price (terms-of-trade effect) leads to higher public good provision under carbon taxation. However, tax-competition could cause either policy instrument to yield higher provision depending on how strongly either tax base reacts to changes in the tax rate. And finally, I conclude that the ranking of the two policy scenarios is ambiguous when considering tax competition and the terms-of-trade effect simultaneously. A numerical exercise shows cases for higher provision of either policy.
    Keywords: Tax Competition,Public Infrastructure,Carbon Tax
    JEL: H21 H54 Q38
    Date: 2019
  4. By: Cristian F. Sepulveda (Farmingdale State College, SUNY, USA)
    Abstract: Time-saving goods are defined as market goods that reduce home labor requirements (e.g. restaurants; washing machines). Assuming that time savings are costly, this paper shows that lower-income individuals can purchase fewer time savings and enjoy less leisure time. Commodity tax rates affecting low-income individuals should depend more on time savings, and less on the classic Corlett and Hague rule. The related literature suggests to impose lower tax rates on goods that require less home labor. This paper shows that goods that offer greater time savings with respect to their more affordable substitutes should also receive favorable tax treatment.
    Date: 2019–03
  5. By: Jorge Martinez-Vazquez (International Center for Public Policy, Georgia State University, USA); Cristian Sepulveda (Farmingdale State College, SUNY, USA)
    Abstract: Equalization transfers are a common and noteworthy feature of fiscal decentralization systems around the world, especially in developing countries. However, the way in which they are designed and implemented is not clearly rooted in mainstream public finance theory. In this paper we develop a formal framework to explain the rationale of the fiscal gap model (the difference between expenditure needs and fiscal capacity of a jurisdiction), arguably the most popular model used by applied economists for the design of equalization transfer programs. First we take into account the problem of accountability. If government authorities are self-interested, transfers from upper levels are shown to reduce their responsiveness to taxpayers’ preferences. Next, we use a normative approach to derive the conventional fiscal gap formula. We argue that equalization transfers should only be used to finance limited types and amounts of public expenditures, called here standard public expenditures. In contrast, discretional public expenditures (not subject to equalization) should be financed exclusively with own revenues. Last, we describe the conditions that ensure the affordability of the system. We conclude that the fiscal gap model of equalization is sufficient to efficiently allocate the available funds across jurisdictions, setting the marginal cost of funds at the appropriate level. However, no information on the marginal cost of funds is required. Policymakers can simply rely on estimates of expenditure needs and fiscal capacity to design an optimal equalization transfer program.
    Date: 2018–11
  6. By: Laura Khoury (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Most of the empirical literature related to unemployment insurance (UI) has focused on its impact on outflows from unemployment rather than on inflows. In this paper, I show that workers respond to the design of UI while being employed. I exploit a discontinuity in the level of UI benefits at a particular value of tenure at current job. Using French administrative unemployment data, I analyse the concentration of workers in the tenure distribution at the relevant notch, a phenomenon known as bunching. The bunching mass is used to compute an elasticity of employment spell duration with respect to unemployment benefits. I find an estimate equal to 0.014 in my preferred specification, translating into a 0.5 day of extension for a 10% increase in the replacement rate. This estimate measures strategic behaviours attenuated by optimisation frictions. I identify the underlying mechanism as bargaining between employers and employees who maximise their joint surplus thanks to a state transfer. I find that the elasticity is the highest in the population facing the strongest incentives and in the highest occupations. This heterogeneity can be related to differences either in ability to bargain or in preferences.
    Keywords: Unemployment,Behavioural response to taxation,Bunching,Collective bargaining
    Date: 2019–03
  7. By: Michelle Harnisch
    Abstract: This paper presents non-take-up rates of benefits from the German Income Support for Job Seekers scheme, called Unemployment Benefit II (Arbeitslosengeld II ). Eligibility to these benefits is simulated by applying a microsimulation model based on data from the Socio-economic Panel for the years 2005 to 2014. To ensure the quality of the results, feasible upper and lower bounds of nontake-up are shown for different simulation assumptions. By employing a binary choice framework, determinants of the decision (not) to take-up benefits are studied by means of a cross-sectional probit regression and a fixed effects linear probability model. The findings of this study indicate that rates of non-take-up are substantial and time-stable in the decade after the Hartz IV reform of 2005. On average, the share of households that do not claim benefits despite being eligible, amounts to 55.7 percent of all eligible households in that period. The issue of non-take-up has further important implications for the determination of the standard benefit rate. Since the legally defined calculation procedure does not account for non-take-up households in the reference group, the approximated consumption expenditure that is considered as necessary for a dignified life is calculated too low. The results of this study suggest that the legally defined monthly adult lump sum amount in the year 2014 would have been twelve euros higher if the issue of non-take-up was accounted for in the methodology. Based on the findings, the paper aims to give policy recommendations.
    Keywords: Welfare participation, take-up, social policy, microsimulation
    JEL: I38 H31 H53
    Date: 2019
  8. By: van Riet, Ad
    Abstract: The sharp rise in public debt-to-GDP ratios in the aftermath of the financial crisis of 2008 posed serious challenges for fiscal policy in the euro area countries and culminated for some member states in a sovereign debt crisis. This note examines the public policy responses to the euro area crisis through the lens of financial repression with a particular focus on how they contributed to easing government budget constraints. Financial repression is defined in this context as the government’s strategy – supported by monetary and financial policies – to gain privileged access to capital markets at preferential credit conditions and divert resources to the state with the aim to secure and, if necessary, enforce public debt sustainability. Following a narrative approach, this note finds that public debt management and resolution, European financial legislation, EMU crisis support and ECB monetary policy have significantly contributed to relieving sovereign liquidity and solvency stress and generated fiscal space through non-standard means. The respective authorities have in fact applied the tools of financial repression to restore stability after the euro area crisis.
    Keywords: fiscal sustainability, public debt management, financial regulation, monetary policy, financial repression, euro area crisis
    JEL: E63 G18 G28 H12 H63
    Date: 2018–05–23
  9. By: Aloisio Araujo (IMPA and FGV EPGE); Juan Pablo Gamay (IMPA); Rodrigo Novinskiz (Faculdades Ibmec); Mario R. Pascoa (University of Surrey)
    Abstract: When the discount factors that infinite lived consumers use at each date are not predetermined but are instead chosen within some set, depending on what the consumption plan is, impatience might not hold. More precisely, if the utility is the infimum of discounted utilities over that set of discount factor sequences, then preferences may be just upper semi-impatient. Such lack of lower semi-impatience, which we refer to as wariness, consists in neglecting distant gains but not distant losses. Examples are the precautionary case (a concern with the worst lifetime outcome) and the habit persistence case (a concern with a fall in living standards). The implementation of efficient allocations by trading assets sequentially requires taxes that avoid excessive savings by raising the opportunity of cost of saving up to the point of matching the marginal benefit of dishoarding at distant dates. Taxes on equilibrium plans are zero in many contexts.
    JEL: D53 E40 E41 G10
    Date: 2019–03

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