New Economics Papers
on Public Finance
Issue of 2006‒05‒06
six papers chosen by

  1. Optimal Taxation of Entrepreneurial Capital with Private Information By Albanesi, Stefania
  2. Excess burden and the cost of inefficiency in public services provision By António Afonso; Vítor Gaspar
  3. Tax Incidence By Gilbert E. Metcalf
  4. Value-Added Tax By Gilbert E. Metcalf
  5. Tax Compliance as the Result of a Psychological Tax Contract: The Role of Incentives and Responsive Regulation By Lars P. Feld; Bruno S. Frey
  6. Tax Morale and Conditional Cooperation By Bruno S. Frey; Benno Torgler

  1. By: Albanesi, Stefania
    Abstract: This paper studies optimal taxation of entrepreneurial capital and financial assets in economies with private information. Returns to entrepreneurial capital are risky and depend on entrepreneurs’ effort, which is not observed. The presence of idiosyncratic risk in capital returns implies that constrained-efficient allocations display an intertemporal wedge on entrepreneurial capital that can be positive or negative. The properties of optimal marginal taxes on entrepreneurial capital depend on the sign of this wedge. If the wedge is positive, the marginal capital tax should be decreasing in capital returns, while the opposite is true when the wedge is negative. The optimal tax system equalizes after tax returns on all assets, thus reducing the variance of capital returns after tax relative to other assets. If entrepreneurs are allowed to sell shares of their capital to outside investors, returns to externally owned capital are subject to double taxation at the level of the entrepreneur and at the level of the outside investors. Even if entrepreneurs can purchase private insurance against their idiosyncratic risk, optimal asset taxes are essential to implement the constrained-efficient allocation if entrepreneurial portfolios are private information.
    Keywords: entrepreneurial capital; optimal taxation; private information
    JEL: E6 H2
    Date: 2006–04
  2. By: António Afonso (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Vítor Gaspar (Banco de Portugal, R. Francisco Ribeiro, 2, 1150-165 Lisbon, Portugal.)
    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
    Date: 2006–04
  3. By: Gilbert E. Metcalf
    Date: 2006
  4. By: Gilbert E. Metcalf
    Date: 2006
  5. By: Lars P. Feld; Bruno S. Frey
    Abstract: In this paper, we develop the concept of a psychological tax contract that goes beyond the traditional deterrence model and explains tax morale as a complicated interaction between taxpayers and the government. Based on crowding theory, the impact of deterrence and re-wards on tax morale is discussed. As a contractual relationship implies duties and rights for each contract partner, sticking to the fiscal exchange paradigm between citizens and the state increases tax compliance. Citizens are willing to honestly declare income even if they do not receive a full public good equivalent to their tax payments as long as the political process is perceived to be fair and legitimate. At the procedural level, a friendly treatment of taxpayers by the tax office in auditing processes increases tax compliance.
    Keywords: Tax Compliance; Positive and Negative Incentives; Responsive Regulation
    JEL: H26 H73 D73 D78
    Date: 2006–04
  6. By: Bruno S. Frey; Benno Torgler
    Abstract: Why so many people pay their taxes, although fines and audit probability are low, has become a central question in the tax compliance literature. A homo economicus, with a more refined motivation structure, helps us to shed light on this puzzle. This paper provides empirical evidence for the relevance of conditional cooperation, using survey data from 30 West and East European countries. We find a high correlation between perceived tax evasion and tax morale. The results remain robust after exploiting endogeneity and conducting several robustness tests. We also observe a strong positive correlation between institutional quality and tax morale.
    Keywords: tax morale; tax compliance; tax evasion; pro-social behavior; institutions
    JEL: H26 H73 D64
    Date: 2006–04

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