nep-pub New Economics Papers
on Public Finance
Issue of 2008‒06‒07
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Pareto Improving Taxes By John Geanakoplos; H. M. Polemarchakis
  2. The Global Effects of U.S. Fiscal Policy By Kimberly Flood
  3. Budgetary Separation of Powers in the American States and the Tax Level: A Regression Discontinuity Analysis By Lucas Ferrero; Leandro M. de Magalhaes
  4. Income taxes and the probability to become self-employed: The case of Sweden By Hansson, Åsa
  5. Maximizing the discounted tax revenue in a mature oil province By Lars Lindholt
  6. Reforming Social Security with Progressive Personal Accounts By John Geanakoplos; Stephen P. Zeldes

  1. By: John Geanakoplos (Cowles Foundation, Yale University); H. M. Polemarchakis (Dept. of Economics, University of Warwick)
    Abstract: We show that in almost every economy with separable externalities, every competitive equilibrium can be Pareto improved by a package of anonymous commodity taxes that causes prices to adjust and markets to reclear at different levels of individual consumption. This constrained suboptimality of competitive allocations might provide a rationale for economic policy in economies with externalities. It shows that policy makers should look for good tax packages that help everybody, rather than thinking taxes must inevitably be bad for some lobby that will oppose them.
    Keywords: Externalities, Commodity taxes, Constrained suboptimality
    JEL: D50 D60 D62 D82
    Date: 2008–05
  2. By: Kimberly Flood
    Abstract: The author examines the global impact of U.S. fiscal policy using the Bank of Canada's Global Economy Model (Lalonde and Muir 2007). In particular, she examines the global macroeconomic implications of the expiration of major tax cuts in the United States and of expected increases in U.S. entitlement program expenditures. The results of her analysis suggest that the expiration of previously enacted tax cuts in the United States will impose short-run costs on the U.S. economy. However, the rest of the world will benefit from an associated decline in the world real interest rate and from a redistribution of wealth linked to a partial reversal of global current account imbalances as U.S. government debt declines. The author's analysis of the expected increase in U.S. entitlement program expenditures, financed through debt, suggests that entitlement program expenditures will crowd out economic growth in the United States and the rest of the world.
    Keywords: Fiscal policy; International topics; Regional economic developments
    JEL: H0 H2 H3
    Date: 2008
  3. By: Lucas Ferrero; Leandro M. de Magalhaes
    Abstract: A political regime has budgetary separation of powers if the power with the prerogative to raise taxes is not the full residual claimant of a tax increase. In the American states two conditions are needed: the governor must have the line item veto, and the political interests of the legislative majority and the governor must not be perfectly aligned. Political alignment between the executive and the legislative depends on the numbers of seats the governor's party controls in the state legislature; it changes discontinuously as we move from a unifed to a divided government. We use regression discontinuity design to establish a causal relation between a divided government and lower tax rates in states with line item veto. In states with block veto such relation is not present. We estimate the jump in the tax level at the discontinuity semiparametrically.
    Keywords: Separation of powers, line item veto, tax level, regression discontinuity, semiparametric.
    JEL: H00 H11 H20 H30 H71
  4. By: Hansson, Åsa (Department of Economics , Lund University and Ratio, Stockholm)
    Abstract: It is widely recognized that entrepreneurial activity plays an important role in promoting new product innovation, discovering new markets, and replacing inefficient incumbents in a process called “creative destruction”, all of which enhance economic growth. Given the importance of entrepreneurship and small business enterprises it is not surprising that policy makers worldwide (and especially in Europe) try to stimulate entrepreneurial activity. One public policy, frequently discussed, is how to design tax policies that stimulate start-ups and entrepreneurship. Existing knowledge about taxes’ effect on entrepreneurial activity and start-ups is relatively limited, however. Existing empirical studies are primarily based on US data and have until recently used aggregated tax measures (e.g., average national tax rates) or hypothetical marginal tax rates and time-series or cross-section data. This study, however, uses a particular rich longitudinal micro-level dataset based on Swedish tax-return information, which makes it possible to track a cohort of individuals over time periods during which tax rate changes took place, and thereby isolate whether real-life individual decisions about self-employment are affected by changes in the tax rates they actually face. In addition, as the tax structure in Sweden is neutral as opposed to the US that encourages risk taking and tax-driven self-employment, studying the effect of income taxes on the probability to become self-employed based on Swedish data provides information about how taxes on self-employment affect self-employment. Contrary to earlier studies based on US data, I find both average and marginal tax rates to negatively impact the probability to become self-employed.
    Keywords: Self-employment; entrepreneurship; small business; taxation; wealth
    JEL: H24 H26 J24
    Date: 2008–06–04
  5. By: Lars Lindholt (Statistics Norway)
    Abstract: Using a partial equilibrium model for the global oil market, we search for the producer tax that maximizes the government’s discounted tax revenue in Norway. The oil market model explicitly accounts for reserves, development and production in 4 field categories across 15 regions. The oil companies optimize their profit and we study how different tax rates influence their investment and production profiles over time. Our results show that a net tax rate in the range of 83 to 87 percent gives the highest tax revenue over a wide range of oil prices and government’s discount rates. However, to avoid premature policy recommendations based on assumptions that are more or less uncertain, we carry out various sensitivity analysis in the favor of lower taxes. These analysis show that it is generally never optimal to reduce the prevailing net tax rate of 78 percent. Only in a very pessimistic scenario regarding costs and exploration is it optimal with a minor reduction in the tax rate. Hence, even if many regard Norway as a high tax province, a robust conclusion seem to be that reducing the present tax level on oil production will not boost investment and production to such a degree that discounted tax revenue increases. We emphasize that such a conclusion holds whether the oil companies are constrained by credit or not.
    Keywords: oil market; tax revenue; equilibrium model
    JEL: H21 Q31 Q38
    Date: 2008–05
  6. By: John Geanakoplos (Cowles Foundation, Yale University); Stephen P. Zeldes (Graduate School of Business, Columbia University)
    Abstract: The heated debate about how to reform Social Security has come to a standstill because the view of most Democrats (that Social Security must be a defined benefits plan similar in spirit to the current system) seems irreconcilable with the proposals supported by many Republicans (to create a defined contribution system of personal accounts holding marketed assets). We describe a system of "progressive personal accounts" that preserves the core goals of both parties, and that is self-balancing on an ongoing basis. Progressive personal accounts have two critical features: (1) accruals into the personal accounts would be exclusively in a new kind of derivative security (which we call a PAAW for Personal Annuitized Average Wage security) that pays its owner one inflation-corrected dollar during every year of life after his statutory retirement date, multiplied by the economy wide average wage at the retirement date and (2) households would buy their new PAAWs each year with their social security contributions, augmented or reduced by a government match that would add to contributions from households with low lifetime incomes by taking from households with high lifetime incomes. PAAWS define benefits and achieve risk sharing across generations, as Democrats would like, yet can be held in personal accounts with market valuations, as Republicans propose.
    Keywords: Social Security, Personal accounts, Risk-sharing
    JEL: E6 H55 D91
    Date: 2008–05

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