nep-pub New Economics Papers
on Public Finance
Issue of 2009‒07‒03
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Taxation in Theory and Practice By N. Gregory Mankiw; Matthew C. Weinzierl; Danny Yagan
  2. The Optimal Taxation of Height: A Case Study of Utilitarian Income Redistribution By N. Gregory Mankiw; Matthew C. Weinzierl
  3. Taxation trends in the European Union: 2009 edition By Florian Woehlbier; Marco Fantini; Tatjana Lapunova; Beata Heimann; Gaetan Nicodeme; Katri Kosonen; Doris Prammer; Maya Hristova; Milan Pein; Thomas Hemmelgarn; Werner Vanborren; Alessandro Lupi; Monika Wozowczyk
  4. Subnational Taxes in Developing Countries: The Way Forward By Richard.M. Bird
  5. Constraints on Income Distribution and Production Efficiency In Economies with Ramsey Taxation By Blackorby, Charles; Murty, Sushama
  6. The Distributional Effects of Tax-benefit Policies under New Labour - A Shapley Decomposition By Olivier Bargain
  7. Tax reform, delocation and heterogeneous firms By Richard Baldwin; Toshihiro Okubo
  8. The dynamic adjustment of local government budgets: Does Spain Behave differently? By Albert Sole-Olle; Pilar Sorribas-Navarro
  9. Efficiency of Public Goods Provision in Space By Travis Warziniack
  10. Social Security Earnings Test and the Labor Supply of the Elderly: New Evidence from Unique Survey Responses in Japan By Shimizutani, Satoshi

  1. By: N. Gregory Mankiw (Harvard University, Economic Department); Matthew C. Weinzierl (Harvard Business School, Business, Government and the International Economy Unit); Danny Yagan (Harvard University, Grad School of Arts and Sciences, Faculty of Arts and Sciences)
    Abstract: We highlight and explain eight lessons from optimal tax theory and compare them to the last few decades of OECD tax policy. As recommended by theory, top marginal income tax rates have declined, marginal income tax schedules have flattened, redistribution has risen with income inequality, and commodity taxes are more uniform and are typically assessed on final goods. However, trends in capital taxation are mixed, and capital income tax rates remain well above the zero level recommended by theory. Moreover, some of theory's more subtle prescriptions, such as taxes that involve personal characteristics, asset-testing, and history-dependence, remain rare in practice. Where large gaps between theory and policy remain, the difficult question is whether policymakers need to learn more from theorists, or the other way around.
    Date: 2009–06
  2. By: N. Gregory Mankiw (Harvard University, Economic Department); Matthew C. Weinzierl (Harvard Business School, Business, Government and the International Economy Unit)
    Abstract: Should the income tax include a credit for short taxpayers and a surcharge for tall ones? The standard Utilitarian framework for tax analysis answers this question in the affirmative. Moreover, a plausible parameterization using data on height and wages implies a substantial height tax: a tall person earning $50,000 should pay $4,500 more in tax than a short person. One interpretation is that personal attributes correlated with wages should be considered more widely for determining taxes. Alternatively, if policies such as a height tax are rejected, then the standard Utilitarian framework must fail to capture intuitive notions of distributive justice.
    Date: 2009–06
  3. By: Florian Woehlbier (European Commission); Marco Fantini (European Commission); Tatjana Lapunova (European Commission); Beata Heimann (European Commission); Gaetan Nicodeme (European Commission); Katri Kosonen (European Commission); Doris Prammer (European Commission); Maya Hristova (European Commission); Milan Pein (European Commission); Thomas Hemmelgarn (European Commission); Werner Vanborren (European Commission); Alessandro Lupi (European Commission); Monika Wozowczyk (European Commission)
    Abstract: Taxation trends in the European Union: 2009 covers the development of taxation in all 27 Members of the European Union and Norway in a comparable format since 1995. The report is organised as follows: Part I offers an overview of taxation in Europe, describing the trends in the total tax ratio, the structure of revenues by tax type, the distribution of revenues amongst government levels, and the main developments in the rates of the personal and corporate income tax. Part II focuses on taxation of consumption, labour, and capital, as well as on environmental taxation. Part III consists of 28 Country Chapters illustrating, for each Member State (and Norway), the revenue trends and supplying a summary description of the tax system. This chapter outlines the main results from Parts I and II.
    Keywords: European Union, taxation
    JEL: H23 H24 H25 H27 H71
    Date: 2009–06
  4. By: Richard.M. Bird
    Abstract: It is critical to emphasize that intergovernmental fiscal relations must be thought of as a system and that all the pieces in the system must fit together if decentralization is to work properly. Various theories and experiences strongly suggest that if fiscal decentralization is to produce sustainable benefits in developing countries, then subnational governments require subnational taxes than the present system. Moreover, in developing countries there are potentially sound and productive taxes that subnational governments could use. This paper reviews the literature and evidence on the most appropriate structure of regional and local taxes in developing countries. [IIB WP no.16]
    Keywords: subnational taxes; developing countries; subnational governments; fiscal decentralization; inter governmental fiscal relations; local tax; regional tax; real property taxes; excise taxes; personal income taxes; payroll taxes; consumption taxes; business taxes.
    Date: 2009
  5. By: Blackorby, Charles (Department of Economics, University of Warwick); Murty, Sushama (Department of Economics, University of Warwick)
    Abstract: We study the link between second-best production efficiency and the constraints on income distribution imposed by private ownership of firms in economies with Ramsey taxation. We review the result of Dasgupta and Stiglitz [1972], Mirrlees [1972], Hahn [1973], and Sadka [1977] about firm-specific profit taxation leading to second-best production efficiency. Problems in the proofs of this result in these papers have been identified by Reinhorn [2005]. We provide an alternative, and with some hope a more intuitive, proof of this result. The mechanism employed in our proof is also used to show second-best production efficiency under some configuarations of private ownership without any (or at best, uniform) profit taxation. The results obtained raise questions about the genericity of the phenomenon of second-best production inefficiency and about recovering social shadow prices in such economies.
    Keywords: Ramsey taxation ; production inefficiency ; general equilibrium ; private ownership
    JEL: H21
    Date: 2009
  6. By: Olivier Bargain (University College Dublin)
    Abstract: Using counterfactual microsimulations, Shapley decompositions of time change in inequality and poverty indices make it possible to disentangle and quantify the relative effect of tax-benefit policy changes, compared to all other effects including shifts in the distribution of market income. Using this approach also helps to clarify the different issues underlying the distributional evaluation of policy reforms. An application to the UK (1998-2001) confirms previous findings that inequality and depth of poverty would have increased under the first New Labour government, had important reforms like the extensions of income support and tax credits not been implemented. These reforms have also contributed to substantially reduce poverty among families with children and pensioners.
    Keywords: Tax-benefit policy; inequality; poverty; Shapley decomposition; microsimulation
    JEL: H23 H53 I32
    Date: 2009–02–06
  7. By: Richard Baldwin; Toshihiro Okubo
    Abstract: The standard international tax model is extended to allow for heterogeneous firms when agglomeration forces are important thus allowing us to study the relocation effects of taxes that vary according to firm size. We show that allowing for heterogeneity permits a given tax scheme to have an endogenously different effect on the location decision of small and big firms, with the biggest firms being endogenously more likely to relocate in reaction to high taxes. We show that a reform which flattens the tax-firm-size profile can raise tax revenue without inducing any relocation.
    JEL: H32 H73 R12
    Date: 2009–06
  8. By: Albert Sole-Olle; Pilar Sorribas-Navarro (Universitat de Barcelona)
    Abstract: The aim of this paper is to analyze whether Spanish municipalities adjust in response to budget shocks and (if so) which elements of the budget they are more likely to adjust. The methodology we use to answer these questions is a vector error-correction model (VECM), estimated with data from a panel of Spanish municipalities during the period 1988-2006. Our results confirm, first, that municipalities do indeed make adjustments in response to fiscal shocks (i.e., the deficit is stationary in the long run). Second, we find that most of the adjustment to a revenue shock is borne by the municipalities themselves as they proceed to cut expenditures, with a minor role being played by grant financing. By contrast, adjustments to expenditure shocks are shared on largely equal terms by the municipality through the raising of taxes and higher tiers of government through the raising of grants. These results suggest that the viability of the local finance system is feasible with different institutional arrangements.
    Keywords: fiscal adjustment, local government, intergovernmental transfers
    JEL: H77 H72 H70
    Date: 2009
  9. By: Travis Warziniack (University of Heidelberg, Department of Economics)
    Abstract: This article incorporates a political decision process into an urban land use model to predict the likely location of a public good. It fills an important gap in the literature by modeling the endogenous location of open space. The article compares open space decisions made under a majority-rules voting scheme with welfare-improving criterion and finds households tied to a location in space compete against each other for public goods located nearer them. Significant differences emerge between the two decision criteria, indicating that requiring referenda for open space decisions is likely to lead to inefficient outcomes. Specifically, many open space votes are likely to fail that would lead to welfare improvements, and any open space decisions that do pass will require amenities larger than needed to achieve the social optimum. The more dispersed and large the population, the larger is the gap between the socially efficient level and the level needed for a public referendum to pass.
    Keywords: organizational slack, antecedents, dispositional requirements, resources
    JEL: D23 L29 M10
    Date: 2009–06
  10. By: Shimizutani, Satoshi
    Abstract: Although there exists a large volume of literature on the subject, a consensus on the labor supply effects of the social security earnings test for the elderly has yet to be reached. This study proposes an alternative approach of utilizing direct responses to a survey on the earnings test, a unique feature of our dataset compiled by the Japanese Government, to provide new evidence on the sensitivity of the labor supply decision of workers aged between 60 and 64 with respect to the earnings test. Our empirical results show that a large proportion of these workers are discouraged from working or reduce their working hours, even after correcting for observed attributes of individuals who reported either affected or unaffected. In addition, the revision of the test rules in 1995 did not alter the labor supply of the elderly.
    Keywords: social security earnings test, labor supply of the elderly, Japan, wage distribution, DiNardo-Fortin-Lemieux decomposition
    JEL: H55 J26
    Date: 2009–05

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