nep-pub New Economics Papers
on Public Finance
Issue of 2007‒04‒28
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The Future of Social Security By Gonzalez-Eiras, Martin; Niepelt, Dirk
  2. Americans' Dependency on Social Security By Laurence J. Kotlikoff; Ben Marx; Pietro Rizza
  3. Optimal Capital Income Taxation in a Two Sector Economy By Selim, Sheikh
  4. Fiscal system and fiscal relations in the European Union: political restraints and alternative approach to public finance By Hrvoje Šimović

  1. By: Gonzalez-Eiras, Martin; Niepelt, Dirk
    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 labour supply will become less important; and in contrast with frequently voiced fears, labour supply therefore will rise.
    Keywords: labour supply; Markov perfect equilibrium; probabilistic voting; saving; social security
    JEL: E62 H55
    Date: 2007–04
  2. By: Laurence J. Kotlikoff (Boston University); Ben Marx (Boston University); Pietro Rizza (Boston University)
    Abstract: According to a recent estimate by Gokhale and Smetters (2005), the present value difference between the U.S. government’s projected future expenditures and its projected future tax receipts exceeds $60 trillion. Closing this enormous fiscal gap requires a variety of different tax increases and expenditure reductions. In this paper we examine how potential Social Security benefit cuts would impact the wellbeing of different American households. Specifically, we examine the living standard impacts of immediate and permanent 30 percent and 100 percent cuts in Social Security benefits. We examine cuts of these magnitudes to illustrate the dependency of the population on Social Security and to help policymakers calibrate the cost to Americans of this form of policy adjustment. The extent of current and future living standard reductions in response to announcements of future Social Security benefit cuts depends on the age of the household, when the cuts are announced, the size of the cuts, and the income of the household. Social Security benefit cuts of 30 percent, if announced when a household is about to retire, can lead to retirement living standard reductions ranging from roughly one tenth to one third depending on the household’s income. These reductions in living standard are substantially reduced if the household learns at younger ages about the benefit cuts and, consequently, has a longer time period over which to adjust.
    Date: 2006–09
  3. By: Selim, Sheikh (Cardiff Business School)
    Abstract: We extend the celebrated Chamley-Judd result of zero capital income tax and show that the steady state optimal capital income tax is nonzero, in general. In particular, we find that the optimal plan involves zero capital income tax in investment sector and a nonzero capital income tax in consumption sector. In a two sector neoclassical economy, interdependence of labour and capital margins allows the government to choose an optimal policy that involves nonzero tax on capital income. The distortion created by capital income tax in consumption sector can be undone by setting different rates of labour income taxes. The optimal plan thus involves zero capital income tax in both sectors only if optimal labour income taxes are equal. This may not be the optimal policy if marginal disutility of work is different across sectors and/or the social marginal value of capital is different across sectors. The difference in social marginal value of capital can be undone by setting different labour income taxes across sectors. We also show that if the government faces a constraint of keeping same capital and labour income tax rates across sectors, optimal capital income tax is nonzero.
    Keywords: Optimal taxation; Ramsey problem; Primal approach; Two-sector model
    JEL: C61 E13 E62 H21
    Date: 2007–04
  4. By: Hrvoje Šimović (Faculty of Economics and Business, University of Zagreb)
    Abstract: Development of the European integration through the European Union (EU) considers not only strengthening integration from the economic aspect (internal market). It also considers the political aspect of the integration i.e. strengthening political integration of member states and their citizens. Political segment of integration considers strengthening of the internal policies of the EU in which fiscal system, i.e. public finances have extremely important role. The EU fiscal system presents reflection of the extremely strong and often confronted interests between the economic and the political integration. These issues are closely related to the second component of the European politic and economic integration, that are the fiscal relations between the EU “central” level and the national “lower” levels which bring the all important decisions in the EU. According to the theory of public finance (fiscal federalism) and the criteria of economic efficiency, fiscal functions (allocation, redistribution, stabilization) and activities are assigned to the different levels of government, as well as certain resources for their financing. On the basis of fiscal functions carried out by national levels in the EU, and the manner of their financing, the EU is a prominently fiscally decentralized complex community. The traditional approach to the fiscal federalism that fiscal authorities are transferred from central to lover levels means that this is a process of decentralization, while in the case of the EU this means centralization of fiscal authorities from the level on national states to the EU as a supra-national level. The main goal of this paper is to analyze fiscal relations in the EU according to basic fiscal functions: allocation, redistribution and stabilization. Methodology would include analysis and comparison of positive EU aspect with normative aspect of public finances in multi-level community. Induction of gained results will confirm thesis that, because of political restraints, development of common (central) system of the EU public finances is based on alternative approaches of harmonization and cooperation.
    Keywords: fiscal system, fiscal relations, fiscal federalism, the European Union
    JEL: H77 H87 F50
    Date: 2007–04–16

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