nep-pub New Economics Papers
on Public Finance
Issue of 2007‒03‒03
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The Excess Burden of Government Indecision By Francisco Gomes; Laurence J. Kotlikoff; Luis M. Viceira
  2. Capital taxation and Laffer effects in endogenous growth models By Fredriksson, Anders
  3. Do High Taxes Lock-in Capital Gains? Evidence from a Flat Rate Tax System By Daunfeldt, Sven-Olov; Praski-Ståhlgren, Ulrika; Rudholm, Niklas
  4. Public investment: a remedy or a curse? Examining the Role of Public Investment for Macroeconomic Performance By Ismihan, Mustafa; Ozkan, F Gulcin

  1. By: Francisco Gomes (London Business School and CEPR); Laurence J. Kotlikoff (Boston University and NBER); Luis M. Viceira (Harvard Business School)
    Abstract: Governments are known for procrastinating when it comes to resolving painful policy problems. Whatever the political motives for waiting to decide, procrastination distorts economic decisions relative to what would arise with early policy resolution. In so doing, they engender excess burden. This paper posits, calibrates, and simulates a life cycle model with earnings, lifespan, investment return, and future policy uncertainty. It then measures the excess burden from delayed resolution of policy uncertainty. The first uncertain policy we consider concerns the level of future Social Security benefits. Specifically, we examine how an age-25 agent would respond to learning at an early age whether she will experience a major Social Security benefit cut starting at age 65. We show that having to wait to learn materially affects consumption, saving, and portfolio decisions. It also reduces welfare. Indeed, we show that the excess burden of government indecision can, in this instance, range as large as 0.6 percent of the agent’s economic resources. This is a significant distortion in of itself. It’s also significant when compared to other distortions measured in the literature.
    Date: 2006–07
  2. By: Fredriksson, Anders (Institute for international economic studies)
    Abstract: This paper adds to a literature asking whether tax cuts rather than tax increases can improve the government budget. We use an endogenous growth model with physical and human capital to study possibilities for such self-financing tax cuts. Apart from the standard dynamic effect from taxation in endogenous growth models a second margin is introduced when physical and human capital are taxed differently. Endogenizing leisure with a raw-time specification introduces both a consumption/leisure trade-off and a dynamic effect through leisure´s impact on the growth rate. By providing analytical expressions for when Laffer effects occur the influence of each of these margins is shown. The addition of these margins adds scope for Laffer effects that are not present in the AK-models previously studied.
    Keywords: Human capital; compositional effects from taxation; dynamic effects from taxation; Laffer effect; dynamic scoring
    JEL: E62 H30 O41
    Date: 2007–02–23
  3. By: Daunfeldt, Sven-Olov (The Swedish Retail Institute (HUI)); Praski-Ståhlgren, Ulrika (The Department of Economics); Rudholm, Niklas (The Swedish Retail Institute (HUI))
    Abstract: The purpose of this paper is to study, using a comprehensive Swedish panel data set, whether investors are less willing to realize capital gains when the marginal tax rate on capital gains is relatively high. In Sweden capital gains are taxed independently of ordinary income at a flat rate, making it possible to avoid endogenity problems and to include direct measures of capital gains taxation in the empirical analysis. The results indicate that a 10% increase in capital gains tax rate reduces the number of realizations of capital gains with 8.7% and the realized amount, given the decision to realize, with 1.9%. In addition, wealthy individuals seem to respond more to changes in capital gains tax rates than less-wealthy individuals.
    Keywords: Capital gains realizations; tax avoidance; panel data
    JEL: H24 H31
    Date: 2007–01–31
  4. By: Ismihan, Mustafa; Ozkan, F Gulcin
    Abstract: This paper explores the implications of public investment for macroeconomic performance within a simple two-period policymaking model. We show that under the balanced-budget rule, the contribution of public investment to future output plays a key role in determining its effects on macroeconomic performance. When policymakers resort to debt issue in financing expenditures, the attractiveness of public investment crucially depends on the return from capital spending relative to the cost of public borrowing. We also consider the case of a capital borrowing rule where only public investment could be financed by additional borrowing and find similar results. Our findings point to the key role of the quality of public investment in its impact on macroeconomic outcome and highlight the importance of efficient mechanisms for selection, implementation and monitoring of public investment projects in both developed and developing countries.
    Keywords: macroeconomic performance; public debt; public investment
    JEL: E62 H50 H63
    Date: 2007–02

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