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on Public Finance |
| By: | Marco Battaglini; Stephen Coate |
| Abstract: | This paper presents a dynamic political economy theory of public spending, taxation and debt. Policy choices are made by a legislature consisting of representatives elected by geographically-defined districts. The legislature can raise revenues via a distortionary income tax and by borrowing. These revenues can be used to finance a national public good and district-specific transfers (interpreted as pork-barrel spending). The value of the public good is stochastic, reflecting shocks such as wars or natural disasters. In equilibrium, policy-making cycles between two distinct regimes: “business-as-usual” in which legislators bargain over the allocation of pork, and “responsible-policy-making” in which policies maximize the collective good. Transitions between the two regimes are brought about by shocks in the value of the public good. In the long run, equilibrium tax rates are too high and too volatile, public good provision is too low, and debt levels are too high. In some environments, a balanced budget requirement can improve citizen welfare. |
| URL: | http://d.repec.org/n?u=RePEc:nwu:cmsems:1441&r=pub |
| By: | Albert van der Horst; Leon Bettendorf; Hugo Rojas-Romagosa |
| Abstract: | Consolidation of the tax base in the European Union is expected to curve compliance costs and reduce profit shifting. A number of proposals for consolidation from the European Commission are simulated with the applied general equilibrium model CORTAX. We show that the benefits from consolidation are offset by two weaknesses in the proposals for a common consolidated tax base. Formula apportionment, which is needed to allocate the consolidated taxable profits across jurisdictions, creates new tax planning possibilities for MNEs and allows them to benefit from existing tax rate differentials in the European Union. In addition, it triggers tax competition as member states may attract foreign investment by reducing their tax rates. The second distortion is an unlevel playing field, which is introduced if only part of the firms participate in the consolidation. The gains from consolidation can be fully grasped if it is obliged for all firms and if it is accompanied by a harmonisation of the tax rate. |
| Keywords: | corporate tax; consolidation; formula apportionment; European Union; general equilibrium model |
| JEL: | H87 H21 H25 F21 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:docmnt:141&r=pub |
| By: | Martin Gonzalez-Eiras (Universidad de San Andres); Dirk Niepelt (Study Center Gerzensee, IIES, Stockholm University and CEPR) |
| Abstract: | We analyze the effect of the projected demographic transition on the political support for social security, and equilibrium outcomes. Embedding a probabilistic-voting setup of electoral competition in the Diamond (1965) OLG model, we find that intergenerational transfers arise in the absence of altruism, commitment, or trigger strategies. Closed-form solutions predict population ageing to lead to higher social security tax rates, a rising share of pensions in GDP, but eventually lower social security benefits per retiree. The response of equilibrium tax rates to demographic shocks reduces old-age consumption risk. Calibrated to match features of the U.S. economy, the model suggests that, in response to the projected demographic transition, social security tax rates will gradually increase to 16 percent; other policies that distort labor supply will become less important; and in contrast with frequently voiced fears, labor supply therefore will rise. |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:szg:worpap:0702&r=pub |
| By: | Mussard, Stéphane (CEPS/INSTEAD, GREDI, GEREM) |
| Abstract: | This paper introduces the concept of Pigou-Dalton transfers between populations of income receivers. Gini's mean difference and Dagum's Gini index between populations are axiomatically derived in order to gauge the impact of within- and between-group Pigou-Dalton transfers on Dagum's measure. We show its sensitiveness for any given transfer in the sense that inequality-reducing transfers are captured when transfers occur from higher-income donors to lower-income recipients, which belong to two distinct populations. Accordingly, we point out the implications of between-group transfers on: the ordering of multivariate majorization, the multivariate stochastic dominance in the sense of multivariate Lorenz ordering and zonotope inclusions, the Gini decomposition, and on the use of the generalized entropy index. |
| Keywords: | Between-group Gini; Between-group Transfers ; Entropy ; Pigou-Dalton ; Within-group Transfers |
| JEL: | D31 D63 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:irs:iriswp:2007-02&r=pub |