nep-pub New Economics Papers
on Public Finance
Issue of 2008‒10‒07
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. An Egg Today and a Chicken Tomorrow: A Model of Social Security with Quasi-Hyperbolic Discounting By Matteo Bassi
  2. Endogenous Fiscal Policies, Environmental Quality, and Status-Seeking Behavior By Thi Kim Cuong Pham; Phu Nguyen-Van
  3. I Will Survive: Capital Taxation, Voter Turnout and Time Inconsistency By Matteo Bassi
  4. Optimal taxation, social contract and the four worlds of welfare capitalism By Amedeo Spadaro
  5. Tax Evasion Dynamics in the Czech Republic: First Evidence of an Evasional Kuznets Curve By Jan Hanousek; Filip Palda
  6. Zero Corporate Income Tax in Moldova: Tax Competition and Its Implications for Eastern Europe By Marcin Piatkowski; Mariusz Jarmuzek
  7. Investment Incentives and Effective Tax Rates in the Philippines:A Comparison With Neighboring Countries By Alexander Klemm; Dennis P. J. Botman; Reza Baqir
  8. A Belgian flat income tax: effects on labour supply and income distribution By André Decoster; Kris De Swerdt; Kristian Orsini
  9. Options for Taxing Financial Supplies in Value Added Tax: EU VAT and Australian GST Models Compared By Rita de la Feria; Michael Walpole

  1. By: Matteo Bassi (Università di Salerno, CSEF Toulouse School of Economics (GREMAQ))
    Abstract: Strotz (1956) first suggested that individuals are more impatient when making short-run tradeoffs than long-run ones. Many experimental studies supports his conjecture. Motivated by recent evidence from the British Department of Work and Pension (2006), this paper applies this behavioral framework to retirement decisions. We propose a three-periods OLG model with quasi-hyperbolic consumers whosave for post retirement consumption in the first period and choose their retirement age in the second. We show that this behavioral assumption explains the observed drop in post retirement consumptiondue to lack of saving and the high level of voluntary (i.e. not due to disability or dismission from the firm) early exit from the labor force. When deciding about their retirement age, workers weight too much the costs of remaining at work (i.e. disutility of working, implicit tax on continued activity) and too little the benefits of postponed retirement (i.e. increase of the Bismarckian component of the pension formula), perceived as too far in the future. We investigate the implications of time inconsistent preferences for a political economy model in which voters determine simultaneously thesize and the degree of redistribution of the pension system. We show that, when voting over thepayroll tax, time inconsistent young workers, who look for a commitment device that increases boththeir saving and retirement age, form a coalition with rich in order to decrease the size of the system. When voting over the degree of redistribution, they form a coalition with poor individuals as to in-crease the at part of the pension formula. Our political model provides a political justification for the negative relationship between size and redistribution observed in most OECD countries (Disney 2004).
    Keywords: Hyperbolic Discounting, Majority Voting, Redistribution, Retirement Age, Saving Behaviour
    JEL: A12 D91 E21 H55 J64
    Date: 2008–09–26
  2. By: Thi Kim Cuong Pham (BETA, Université de Strasbourg); Phu Nguyen-Van (THEMA-CNRS, Université de Cergy-Pontoise, France)
    Abstract: This paper analyzes endogenous ï¬scal policy and public decision in an endogenous growth model where agents care about social status and environmental quality. The quest for a higher status is assimilated to a preference for capital wealth. The government uses income tax to ï¬nance infrastructure and environmental protection, and maximizes individual welfare. We ï¬nd that accounting for preferences for social status and environmental quality may lead to an allocation of tax revenue in favor of cleanup effort to the detriment of infrastructure. It does not necessary have a negative impact on growth. Status seeking can however harm economic growth and environmental quality when its motive is important enough. Finally, we show that economic growth is consistent with environmental preservation but is not necessarily welfare-improving as in the case of absence of status-seeking behavior.
    Keywords: Endogenous policy; endogenous growth; environmental quality; status-seeking; public expenditure; Wagner’s law
    JEL: H31 O41 Q58
    Date: 2008–09
  3. By: Matteo Bassi (Università di Salerno, CSEF Toulouse School of Economics (GREMAQ))
    Abstract: This paper reconsiders the debate around the political determination of capital income taxes and explains why such taxes survive in most OECD countries. The political economy literature on redistributive politics (Persson and Tabellini 2003) emphasizes the role played by the lower class in the political arena: being labor more concentrated than capital, the majority of the population benefits by overtaxing capital and undertaxing labour. However, in reality, political participation (voting, lobbying, protesting etc.) is positively correlated with income. Therefore, a paradoxical result emerges: why do the upper class, who is politically more active and own most of the capital, still favour a positive capital tax? Hence, voters' income is not the sole relevant variable in the political determination of the capital tax. To reconcile this apparent puzzle, we propose a model that incorporates time inconsistency à la Laibson in individual preferences We show that time inconsistent individuals are politically more homogeneous (or “single-minded”) than far-sighted, and prefer to tax more capital income, instead of labor income, since accumulated saving are below the planned (and optimal) level and the distortionary effects of a higher capital tax are not only reduced but also delayed in time. We demonstrate that, since politicians find easier to please hyperbolic voters by proposing a tax policy that includes lower labor and higher capital taxes compared to an economy with only far sighted. Moreover, we show that, as the proportion of time inconsistent individuals in the population increases, the tax policy becomes more and more biased towards capital taxation.
    Keywords: Political Economy, Multidimensional Voting, Capital Taxation, Redistribution, Hyperbolic Discounting
    JEL: A12 D72 H21 H24 H31
    Date: 2008–09–26
  4. By: Amedeo Spadaro (Paris School of Economics (Paris) and Universitat de les Illes Balears (Palma de Mallorca))
    Abstract: Drawing from the formal setting of the optimal tax theory (Mirrlees 1971), the paper identifies the level of Rawlsianism of some European social planners starting from the observation of real data and redistribution systems and uses it to build a metric that allows measuring the degree of (dis)similarity of the redistribution systems analyzed. It must be considered as a contribution to the comparative research on the structure and typology of the Welfare State. In particular we consider the optimal taxation model that combines both intensive and extensive margins of labor supply, as suggested by Saez (2002) in order to assess the degree of decommodification of seven European welfare systems. We recover the shape of the social welfare function implicit in tax-benefit systems by inverting the model on actual effective tax rates, as if existing systems were optimal according to some Mirrleesian social planner. Actual distributions of incomes before and after redistribution are obtained using a pan-European tax-benefit microsimulation model. Results are discussed in the light of standard classifications of welfare regimes in Europe. There appears to be a clear coincidence of high decommodification willingness and high Rawlsianism in the Scandinavian, social-democratically influenced welfare states (Denmark). There is an equally clear coincidence of low decommodification willingness and utilitarianism in the Anglo–Saxon liberal model (UK) and in the Southern European welfare states (Italy and Spain). Finally, the Continental European countries (Finland, Germany and France) group closely together in the middle of the scale, as corporatist and etatist.
    Keywords: Optimal income taxation, tax-benefit policy, microsimulation, comparative social policy analysis, welfare state models.
    JEL: H11 H21 D63 C63
    Date: 2008
  5. By: Jan Hanousek; Filip Palda
    Abstract: Using surveys of the Czech Republic taken in 2000, 2002, 2004, and 2006 we measure how the percentage of tax evaders evolved from 1995 until 2006. We find that at first evasion rose, leveled off, and then fell along a quadratic path, suggesting the existence of what we call an evasional Kuznets curve. Our paper is the first to document the existence of an evasional Kuznets curve and to show how it can help improve Markov-chain predictions of tax evasion. We conclude by suggesting that the evasional Kuznets curve may be a subset of a larger trend in evasion for both transitional and developed economies.
    Keywords: Underground economy, tax evasion, Markov chains, transition, evasional Kuznets curve.
    JEL: H26 H43 K42 O17
    Date: 2008–09
  6. By: Marcin Piatkowski; Mariusz Jarmuzek
    Abstract: Global economic integration intensified tax competition and raised concerns about the resulting "race to the bottom", which could undermine public investment and social spending. The aim of this paper is to test predictions that (i) there is interdependence in CIT rate setting in Eastern Europe and that (ii) the recent CIT cut in Moldova may intensify tax competition in the region. It finds that there is indeed evidence that during 1995-2006 countries in Eastern Europe strategically responded to changes in CIT rates in the region and that Moldovan zero CIT is likely to encourage further cuts in CIT. The paper also discusses implications of tax competition for Eastern Europe and finds that FDI flows will not be much affected, tax revenues are likely to decline, the shift in the composition in tax revenue may increase economic efficiency, but decrease equity. Tax coordination, while difficult politically, could help stem further decline in corporate taxation, but any gains might be modest and not certain to exceed the costs of tax coordination. Without tax coordination, however, it is unclear what exactly could stop corporate taxes from falling further.
    Keywords: Moldova , Corporate taxes , Tax policy , Competition , Economic integration , Public investment , Tax revenues , Foreign direct investment , Social policy , Working Paper ,
    Date: 2008–08–28
  7. By: Alexander Klemm; Dennis P. J. Botman; Reza Baqir
    Abstract: We compare the general tax provisions and investment incentives in the Philippines to six other east-Asian economies-Malaysia, Indonesia, Lao, Vietnam, Cambodia, and Thailand. We calculate effective tax rates and find that general effective tax rates are relatively high in the Philippines, while investment incentives are comparable to those in neighboring countries. Tax holidays are most attractive for very profitable firms, creating redundancy, and for investment in short-lived assets. We also consider recently-proposed tax reforms that would replace tax holidays by a reduced corporate income tax rate or a low tax on gross receipts. The results suggest that this would result in stronger incentives to invest, while government revenue increases. Alternatively, replacing holidays with a general reduction in the corporate tax rate and offering accelerated depreciation will either not provide the same incentives or be very costly.
    Keywords: Philippines , Investment incentives , Tax rates , Corporate taxes , Tax reforms , Revenue sources , Southeast Asia , Working Paper ,
    Date: 2008–09–05
  8. By: André Decoster; Kris De Swerdt; Kristian Orsini
    Abstract: The adverse distributional effects of a flat tax are well known and have been documented by empirical research in several countries, including Belgium. Advocates of the flat tax argue, correctly, that these studies do not take into account agents’ behavioural reactions and possible feed back effects. One of the important effects in this context is the potential increase in labour supply and the resulting increase in the taxable base and decrease in unemployment allowances. In this study we calculate the cost recovery based on a micro-simulation model that includes a labour supply model. We find that there is indeed a clearly positive effect on labour supply and hence also on the tax base. By introducing a revenue-neutral flat tax, labour supply increases by approximately 47,000 full-time equivalents. However, the effect is limited because, compared to a static scenario the cost recovery only allows the revenue-neutral flat tax to decrease from 38.5% to 37%. Furthermore, there is little or no impact of these employment effects on the strongly regressive nature of a flat tax reform.
    Date: 2008–08
  9. By: Rita de la Feria (Oxford University Centre for Business Taxation); Michael Walpole (ATAX, University of New South Wales)
    Abstract: The taxation of financial services is one of the most vexing aspects of a Value Added Tax (VAT). Conceptually, VAT should apply to any fee for service but where financial services are concerned there is a difficulty in identifying the taxable amount, i.e. the value added by financial institutions. As a result, most jurisdictions, including within the EU, simply exempt financial services from VAT. Treating financial services as exempt, however, gives rise to significant legal and economic distortions. Consequently, a few countries have in recent years attempted an alternative VAT approach to financial services. Amongst these is Australia, which in 2000 introduced a GST with a “reduced input tax credit” system. This paper compares the current treatment of financial supplies, under a VAT-type system, in the EU and in Australia. The aim is to ascertain whether the Australian GST treatment of financial services is, as commonly thought, superior to the EU one, and consequently, whether introducing an Australian-type model should constitute a policy consideration for the EU.
    Date: 2008

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