nep-pub New Economics Papers
on Public Finance
Issue of 2007‒12‒01
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Capital Income Taxation, Investment Subsidies and Redistribution in a Neoclassical Growth Model By Günther Rehme
  2. Taxes and the Global Allocation of Capital By David Backus; Espen Henriksen; Kjetil Storesletten
  3. Optimal federal taxes with public inputs. By Diego Martínez
  4. Merger Policy and Tax Competition By Haufler, Andreas; Schulte, Christian
  5. Property Tax in Urban China By Dan Li; Shunfeng Song
  6. Government Risk Premiums in the Bond Market: EMU and Canada By Schuknecht, Ludger; von Hagen, Jürgen; Wolswijk, Guido
  7. Voluntary Provision of Public Goods for Bads: A Theory of Environmental Offsets By Matthew J. Kotchen

  1. By: Günther Rehme (Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology))
    Abstract: In this paper I readdress the result that capital income taxes are bad instruments for pure redistribution and should be zero in the long run. In a neoclassical growth model a capital income cum investment subsidy tax, which is not distorting accumulation, is considered to investigate if net capital income taxes used for pure redistribution are zero in a long-run optimum. I find that capital income taxes may be nonzero, depending on the political power of those who receive redistributive transfers, the distribution of pre-tax factor incomes, and the intertemporal elasticity of substitution.
    Keywords: Growth, Redistribution, Investment Subsidies, Capital Income Taxes
    JEL: O41 H21 D33
    Date: 2007–09
  2. By: David Backus; Espen Henriksen; Kjetil Storesletten
    Abstract: Despite enormous growth in international capital flows, capital-output ratios continue to exhibit substantial heterogeneity across countries. We explore the possibility that taxes, particularly corporate taxes, are a significant source of this heterogeneity. The evidence is mixed. Tax rates computed from tax revenue are inversely correlated with capital-output ratios, as we might expect. However, effective tax rates constructed from official tax rates show little relation to capital -- or to revenue-based tax measures. The stark difference between these two tax measures remains an open issue.
    JEL: E22 F21 H25 H32
    Date: 2007–11
  3. By: Diego Martínez (Department of Economics, Universidad Pablo de Olavide)
    Abstract: This paper deals with the solution to vertical expenditure externalities in a federation with two levels of government sharing taxes. Under these circumstances, the Nash equilibrium does not satisfy the condition for production efficiency in the provision of public inputs. This vertical expenditure externality is removed when the federal government, behaving as Stackelberg leader, chooses the optimal tax rate on labor income. The sign of this tax rate depends on the elasticity of marginal productivity of the public input with respect to employment. Moreover, the previous result concerning both vertical (tax and expenditure) externalities are independent each other is confirmed here.
    Keywords: vertical externalities, public input, federal taxes.
    JEL: H2 H4 H7
    Date: 2007–11
  4. By: Haufler, Andreas; Schulte, Christian
    Abstract: In many situations governments have sector-specific tax and regulation policies at their disposal to influence the market outcome after a national or an international merger has taken place. In this paper we study the implications for merger policy when countries non-cooperatively deploy production-based taxes. We find that whether national or international mergers are more likely to be enacted in the presence of nationally optimal tax policies depends crucially on the ownership structure of firms. When all firms are owned domestically in the pre-merger situation, non-cooperative tax policies are more efficient in the national merger case and smaller synergy effects are needed for this type of merger to be proposed and cleared. These results are reversed when there is a high degree of foreign firm ownership prior to the merger.
    Keywords: merger regulation; tax competition
    JEL: H21 H77 L13 L50
    Date: 2007–11–21
  5. By: Dan Li (First Independent Bank of Nevada, Reno, NV); Shunfeng Song (Department of Economics, University of Nevada, Reno)
    Abstract: This paper examines the urban housing sector of China and proposes a property tax reform. Over the past decade, housing price in urban China has been increasing dramatically because of strong demand for self-use, investment and speculation. The booming housing market, however, has brought several challenges for further development, such as housing affordability, inequality, and possible housing bubble. One strategy is to reform the current property tax system. Specifically, this paper proposes that China significantly reduces taxes in circulation but levies property tax during possession. Doing so will increase housing affordability because of lower transaction costs, reduce speculation because of higher cost of holding, stabilize fiscal system because of more sustainable tax revenues, and improve the efficiency and fairness of the property tax system because of the implementation of “ability-to-pay” and “who use who pay” principles.
    Keywords: Property tax; China
    JEL: R23 R21 H20
    Date: 2007–11
  6. By: Schuknecht, Ludger; von Hagen, Jürgen; Wolswijk, Guido
    Abstract: This paper focuses on risk premiums paid by central governments in Europe and sub-national governments in Germany, Spain, and Canada. With regard to the European governments, we are interested in how these premiums were affected by the introduction of the euro. Using data for bond yield spreads relative to an appropriate benchmark, for the period 1991-2005, we find that risk premiums incurred by central governments of EU member states respond positively to central government debts and deficits. This is consistent with the notion of market-imposed fiscal discipline. We find that German states and, among them, especially those usually receiving transfers under the German fiscal equalization system, enjoyed a very favourable position in the financial markets before EMU as their risk premiums did not respond to fiscal balances. This special status seems to have disappeared with start of EMU. Monetary union, therefore, imposes more fiscal discipline on German states. In contrast, Spanish provinces paid risk premiums related to their fiscal balances both before and after the start of EMU. Both German and Spanish sub-central governments paid fixed interest rate premiums over their national governments which became smaller after the introduction of the euro and are more likely to be interpreted as liquidity premiums. We also estimate empirical models of risk premiums for Canadian provinces for which we find financial market penalties of adverse fiscal balances and debt indicators. However, as in the case of Germany before EMU, those provinces that typically receive transfers under the Canadian fiscal equalization scheme have a more favourable bond market treatment than others. The evidence of market discipline at work in European government bond markets supports the notion that the no-bailout clause in the EU Treaty is credible.
    Keywords: bail out; fiscal policy; government debt; interest rates; regional public finances
    JEL: E43 E62 H63 H74
    Date: 2007–11
  7. By: Matthew J. Kotchen
    Abstract: This paper examines voluntary provision of a public good that is motivated, in part, to compensate for other activities that diminish the public good. Markets for environmental offsets, such as those that promote carbon neutrality to minimize the impact of climate change, provide an increasingly salient example. An important result, related to one shown previously, is that mean donations to the public good do not converge to zero as the economy grows large. Other results are new and comparable to those from the standard model of a privately provided public good. The Nash equilibrium is solved explicitly to show how individual direct donations and net contributions depend on wealth and heterogenous preferences. Comparative static analysis demonstrates how the level of the public good and social welfare depend on the technology, individual wealth, and an initial level of the public good. Application of the model in an environmental context establishes a starting point for understanding and making predictions about markets such as those for carbon offsets.
    JEL: H0 H41
    Date: 2007–11

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