nep-pub New Economics Papers
on Public Finance
Issue of 2007‒11‒17
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Markov-Perfect Optimal Fiscal Policy: The Case of Unbalanced Budgets By Salvador Ortigueira; Joana Pereira
  2. Countercyclical Taxes in a Monopolistically Competitive Environment By Ioana Moldovan
  3. Bargaining Foundations of the Median Voter Theorem By John Duggan; Tasos Kalandrakis
  4. Testing the tax competition theory: How elastic are national tax bases in western Europe? By Aleksandra Riedl; Silvia Rocha-Akis

  1. By: Salvador Ortigueira; Joana Pereira
    Abstract: We study optimal income taxation and public debt policy in a neoclassical economy populated by infinitely-lived households and a benevolent government. The government makes sequential decisions on the provision of a valued public good, on income taxation and the issue of public debt. We characterize and compute Markov-perfect optimal fiscal policy in this economy with two payoff-relevant state variables: physical capital and public debt. We find two stable, steady-state equilibria: one with no income taxation and positive government asset holdings, and another with positive taxation and public debt issuances. We prove that the two steady states are associated with different policy rules, which implies a multiplicity of (expectation-driven) Markov-perfect equilibria.
    Keywords: Optimal taxation; optimal public debt; Markov-perfect equilibrium; Time-consistent policy
    JEL: E61 E62 H21 H63
    Date: 2007
  2. By: Ioana Moldovan
    Abstract: In a neoclassical growth model with monopolistic competition in the product market, distortionary taxes, and debt, countercyclical income tax rates can reduce the volatility of output, consumption, and investment. The variability of employment however is a non-monotonic function of the income elasticity of the tax rate. In terms of welfare, the reduced volatility raises welfare. However, when solving the model with a second order approximation, so that agents take direct account of the level of uncertainty when making decisions, then the reduced volatility results in agents accumulating less capital and lowers consumption in the long run. This second effect dominates in the welfare calculations so that countercyclical taxes end up reducing welfare. The fiscal financing role of income taxes tends to raise the volatility of aggregate variables and can lead to a destabilizing role of countercyclical taxes. But a more aggressive response to debt improves the stabilization and welfare properties of countercyclical taxes.
    Keywords: tax policy, countercyclical, stabilization, government debt, welfare
    Date: 2007–09
  3. By: John Duggan; Tasos Kalandrakis (Dept. of Political Science, Yale University)
    Abstract: We provide game-theoretic foundations for the median voter theorem in a one-dimensional bargaining model based on Baron and Ferejohn’s (1989) model of distributive politics. We prove that, as the agents become arbitrarily patient, the set of proposals that can be passed in any subgame perfect equilibrium collapses to the median voter’s ideal point. While we leave the possibility of some delay, we prove that the agents’ equilibrium continuation payoffs converge to the utility from the median, so that delay, if it occurs, is inconsequential. We do not impose stationarity or any other refinements. Our result counters intuition based on the folk theorem for repeated games, and it contrasts with the known result for the distributive bargaining model that, as agents become patient, any division of the dollar can be supported as a subgame perfect equilibrium outcome.
    Date: 2007–11
  4. By: Aleksandra Riedl (Department of Economics, Vienna University of Economics & B.A.); Silvia Rocha-Akis (Department of Economics, Vienna University of Economics & B.A.)
    Abstract: In this paper, we test one of the fundamental assumptions in the tax competition literature, namely, that a country’s taxable income depends on the tax policies pursued in the domestic and in neighbouring countries. Based on a panel of annual data of 14 western European countries spanning the period 1982 to 2004, we show that the common trend in falling corporate income tax (CIT) rates can in part be explained by the existence of fiscal externalities in the form of international resource flows. Our results confirm the presumption put forward in recent empirical tax reaction function studies, that interdependent tax setting behaviour is evidence of tax competition. However, taxable corporate income is shown to react inelastically to domestic and to foreign tax rates. Thus, the observed rise in CIT revenues in Europe between 1982 and 2004 cannot be explained by the trend in falling CIT rates. Moreover, we find that large countries’ tax bases are more responsive to neighbouring countries’ tax policies, which is in contrast to the classic asymmetric tax competition literature.
    JEL: H71 H72 H77 H87 C21 C23
    Date: 2007–11

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