nep-pub New Economics Papers
on Public Finance
Issue of 2006‒04‒29
thirteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. IS THE VALUE ADDED TAX NATURALLY PROGRESSIVE? By Glenn P. Jenkins; Hatice Jenkins; Chun-Yan Kuo
  2. On Monopoly Power and Ramsey Taxation By Selim, Sheikh Tareq
  3. Excess burden and the cost of inefficiency in public services provision By António Afonso; Vítor Gaspar
  4. Optimal Provision of Multiple Excludable Public Goods By Hanming Fang; Peter Norman
  5. Taxing Tourism in Spain: Results and Recommendations By Xavier Labandeira; Alberto Gago; Fidel Picos; Miguel Rodríguez
  6. Taxation with representation: intergovernmental grants in a plebiscite democracy By Byron F. Lutz
  7. Economic integration and redistribuitive taxation By Haufler, Andreas; Klemm, Alexander; Schejederup, Guttorm
  8. Social Security Reform in the US: Lessons from Hungary By András Simonovits
  9. Public versus Private Provision of Public Goods By Sita Nataraj Slavov
  10. Profit Taxation and Capital Accumulation in Dynamic Oligopoly Models. By M. Baldini; L. Lambertini
  11. Optimal Participation Income and Negative Income Tax in Poverty Alleviation Programs. By D. Lanzi; F. Delbono
  12. The Economics of Casino Taxation By Hasret Benar; Glenn P. Jenkins
  13. Regulation and Taxation of Casinos under State-Monopoly, Private Monopoly and Casino Association Regimes By Hasret Benar; Glenn P. Jenkins

  1. By: Glenn P. Jenkins (Department of Economics, Queen's University); Hatice Jenkins (Department of Banking and Finance, Eastern Mediterranean University); Chun-Yan Kuo (John Deutsch Institute, Department of Economics, Queen’s University)
    Abstract: A broad based consumption tax, such as a value added tax, is generally considered to be a regressive tax. This conclusion, however, has not taken into account the fact that in developing countries the commodities on which poor households spend most of their income, even if they are included in the legal tax base, are administratively impractical to tax. This paper employs a rich data set on household incomes and expenditures for the Dominican Republic. The data set covers 2042 goods and services purchased by households of different income and consumption levels. It also contains information on the type of establishment from which the items were purchased. With this information we estimate the effective rate of tax that has been paid on each item purchased by households. These estimations include the effect of the different rates of the tax compliance across households with different expenditure levels. The results of the study show that the burden of the current VAT in the Dominican Republic is progressive over all the quintiles of household expenditure. Furthermore, if the base of the VAT is made comprehensive, the estimated incidence of the burden of the VAT is still progressive over all the quintiles household expenditure.
    Keywords: Value Added Tax, incidence, compliance
    JEL: H22 H26
    Date: 2006–04
  2. By: Selim, Sheikh Tareq (Cardiff Business School)
    Abstract: This paper examines the equivalence of the two key results that dominate the discussion on Ramsey tax policy with imperfect competition. With imperfectly competitive intermediate goods market, the long run Ramsey policy is consistent with capital tax or subsidy, and this result is generally dominant if the government is permitted or not permitted to use any other subsidy, or if the government has access to consumption tax. This is an important extension of the two effect result due primarily to Guo & Lansing (1999). Access to consumption tax but no access to labor subsidy enables the government to reduce labor tax in monopoly sector to zero, but the two effect result for capital taxation remains unaltered. Qualifying Judd’s (1997) principle of optimal capital subsidy requires full confiscation of profits, or subsidizing capital income at a rate that may be larger than the first best subsidy rate. The strong motivation to tax capital assists in explaining the repeal of the Investment Tax Credit scheme in the US.
    Keywords: Optimal taxation; Monopoly power; Ramsey policy
    JEL: D42 E62 H21 H30
    Date: 2006–04
  3. By: António Afonso; Vítor Gaspar
    Abstract: In this paper we revisit the literature on the economic consequences from inefficiency in public services provision. Following Dupuit (1844) and Pigou (1947) we argue that it is important to take the financing side explicitly into account. The fact that public expenditure financing must rely on distortional taxation implies that both direct and indirect costs are relevant when estimating the economic impacts of inefficiency in public services provision. Using Hicks’ compensating variation (following Diamond and McFadden (1974) and Auerbach (1985)) we show that these magnification mechanisms are not only conceptually relevant, they are also important from a quantitative point of view. Specifically, we rely on a range of estimates of public sector efficiency (from Afonso, Schuknecht and Tanzi (2005, 2006)) to illustrate numerically that the relative importance of indirect costs of public sector provision inefficiency, linked to financing through distortional taxation increases with the magnitude of the inefficiency.
    Keywords: Government efficiency; excess burden; taxes; spending.
    JEL: D11 E62 H21 H50
  4. By: Hanming Fang (Cowles Foundation, Yale University); Peter Norman (University of British Columbia)
    Abstract: This paper studies the optimal provision mechanism for multiple excludable public goods when agents' valuations are private information. For a parametric class of problems with binary valuations, we characterize the optimal mechanism, and show that it involves bundling. Bundling alleviates the free riding problem in large economies in two ways: first, it can increase the asymptotic provision probability of socially efficient public goods from zero to one; second, it decreases the extent of use exclusions.
    Keywords: Public Goods Provision, Bundling, Exclusion
    JEL: H41
    Date: 2003–10
  5. By: Xavier Labandeira (University of Vigo); Alberto Gago (University of Vigo); Fidel Picos (University of Vigo); Miguel Rodríguez (University of Vigo)
    Abstract: This paper analyses the foundations, possible applications and the effects of tourism taxation in Spain. The article begins with an analysis of the economic and environmental reasons for taxing tourism, which would seem to call for taxes based on the principle of benefit, for either revenue or corrective purposes. Subsequently, we describe the praxis of tourism taxation in Spain, with special mention being given to the now repealed Balearic ecotasa. Finally, the effects of two fiscal modifications with revenue or corrective objectives are studied through the use of an applied general equilibrium model developed for the Spanish economy. We thus see that a 10% tax on lodging brings in significant public receipts, increases social welfare and has no effect on the environment. On the other hand, an increase of VAT rates on tourism-related sectors could have the same effects on tourist expenditure but at the costs of greater impact for Spain’s economy.
    Keywords: Taxes, Tourism, Environment, Spain
    JEL: H22 L83 Q28
    Date: 2006–02
  6. By: Byron F. Lutz
    Abstract: Economic theory predicts that unconditional intergovernmental grant income and private income are perfectly fungible. Despite this prediction, the literature on fiscal federalism documents that grant and private income are empirically non-equivalent. A large scale school finance reform in New Hampshire--the typical school district experienced a 200 percent increase in grant income--provides an unusually compelling test of the equivalence prediction. Most theoretical explanations for non-equivalence focus on mechanisms which produce public good provision levels which differ from the decisive voter's preferences. New Hampshire determines local public goods provision via a form of direct democracy--a setting which rules out these explanations. In contrast to the general support in the literature for non-equivalence, the empirical estimates in this paper suggest that approximately 92 cents per grant dollar are spent on tax reduction. These results not only document that equivalence holds in a setting with a strong presumption that public good provision decisions reflect the preferences of voters, but also directly confirm the prediction of the seminal work of Bradford and Oates (1971) that lump-sum grant income is equivalent to a tax reduction. In addition, the paper presents theoretical arguments that grant income capitalization and heterogeneity in the marginal propensity to spend on public goods may generate spurious rejections of the equivalence prediction. The heterogeneity argument is confirmed empirically. Specifically, the results indicate that lower income communities spend more of the grant income on education than wealthier communities, a finding interpreted as revealing that the Engel curve for education is concave.
    Keywords: Taxation
    Date: 2006
  7. By: Haufler, Andreas; Klemm, Alexander; Schejederup, Guttorm
    Abstract: We set up a simple political economy model where economic integration raises the profitability of multinational firms. In this setting redistributive taxation may rise following economic integration, if the effects of the widened income gap dominate the higher excess burden of the tax.
    JEL: F23 H20
    Date: 2006–04
  8. By: András Simonovits (Institute of Economics, Hungarian Academy of Sciences)
    Abstract: The partial privatization of the US Social Security system was clearly the top economic policy priority for the new Bush administration. While many famous economists, publicists and politicians support, others reject the partial privatization of the Social Security system. The international comparisons have been quite infrequent, concentrated on few countries (Chile, Great Britain and Sweden) and left out similar reforms introduced in similar situations, like in Hungary, Poland and other ex-communist countries. In this article I try to make up for this omission and outline the lessons from the Hungarian reform, started in 1998. The conclusion is simple: such a reform is possible but does not solve the problems of social security.
    Keywords: Social Security, Pensions, Prefunding of pensions, United States, Hungary
    JEL: H55 J26
    Date: 2006–04–24
  9. By: Sita Nataraj Slavov (Department of Economics, Occidental College)
    Abstract: It is well known that pure public goods are underprovided in static games with private, voluntary contributions. Public provision is usually modeled using a median voter framework, in which the public good is funded by a proportional income tax. This paper compares the private and public provision of public goods in dynamic settings. With private provision, it is possible to sustain cooperation and provide the public good efficiently. With public provision, dynamic majority-rule solutions exist even when taxes are not restricted to be proportional to income; thus, income redistribution can be chosen jointly with the level of the public good. At low discount factors, private provision tends to result in lower levels of the public good relative to public provision. As patience increases, however, public provision results in lower levels of the public good than private provision. This occurs because higher levels of income redistribution are sustainable under public provision. Such redistribution becomes increasingly feasible at higher discount factors, resulting in income subsidies for particular groups instead of higher levels of the public good. In contrast, under private provision, all groups are forced to settle for increases in the level of the public good. In terms of financing the public good, private provision tends to result in benefit taxation, with little variation in individual contribution rates. Public provision allows a wider range of tax rates, although there is a tendency towards benefit taxation when preferences vary and progressive taxation when incomes vary.
    Keywords: majority rule, Condorcet winner, public goods, voluntary donations, dynamic games
    JEL: H41 D72 C72
    Date: 2006–03
  10. By: M. Baldini; L. Lambertini
  11. By: D. Lanzi; F. Delbono
  12. By: Hasret Benar (Department of Economics, Eastern Mediterranean University); Glenn P. Jenkins (Department of Economics, Queen's University)
    Abstract: In this paper, a model of the costs of a casino is developed that focuses on the implications for economic welfare of different taxation schemes for casinos. The situation being considered is in a country where casinos cater exclusively to foreign tourists. The goal of the country is to determine the maximum amount of taxes that can be extracted from the activities of this sector under different systems of taxation. When the price of gambling is set by regulation above its competitive level, the economic losses created by excessive investment in the sector can be reduced by taxation. A turnover tax on the amount gambled can maximize both tax revenue and the economic welfare of the country. Due administrative constraints, a number of countries rely on the taxation of the casinos’ fixed assets or a combination of a turnover tax and a tax on fixed costs. The model is applied to the situation in North Cyprus. The annual economic efficiency loss from its poorly designed tax policies on casino gambling is estimated to be about 0.5 percent of GDP.
    Keywords: Casino, taxation, gambling, tourism, economic benefit
    JEL: H21 H32 H27
    Date: 2006–04
  13. By: Hasret Benar (Department of Economics, Eastern Mediterranean University); Glenn P. Jenkins (Department of Economics, Queen's University)
    Abstract: This paper considers alternative forms of regulation and taxation of the casino sector. The model considers the situation of a typical tourist destination country that is using casinos to attract and entertain foreign tourists. The objective is to invest in the sector efficiently while maximizing the amount of government revenue or profits accruing to the country. The regulator must determine how the price of gambling will be set, how many casinos will be allowed to enter the industry and the form and rates of taxation. Four alternative forms of regulation are considered: price regulation, state-owned monopoly, private monopoly and casino association regulation. Turnover taxes on the amount of funds gambled and also annual taxation of the fixed costs of the casinos are evaluated. Applications of the models are carried out for North Cyprus. The conclusion is that the economic efficiency costs and the revenue losses from the absence of effective regulation in these tourist destinations can be very substantial with welfare costs equal to the approximately 75 percent of the tax revenue generated by this sector. Furthermore it shows that while a tax on turnover can be efficient in the case of a competitive industry or a cartel association form of regulation, it will be distortunary if a private monopoly is controlling the sector. In contrast a tax on fixed costs will lead to an efficient result in the case of a competitive or private monopoly cases, but it will lead to allocate inefficiencies if the sector is regulated by a casino association that can only control the number of casino entering the sector.
    Keywords: Casino regulation, taxation, state-monopoly, welfare cost
    JEL: H21 H32
    Date: 2006–04

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