nep-pub New Economics Papers
on Public Finance
Issue of 2009‒11‒14
fifteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal taxes and pensions in a society with myopic agents By Kerstin Roeder
  2. Impacts of Labor Taxation with Perfectly and Imperfectly Competitive Domestic Labor Markets under Flexible Outsourcing By Koskela, Erkki
  3. Asymmetric Tax Competition with Formula Apportionment By Matthias Wrede
  4. Corporate tax competition between firms By Simon Loretz; Padraig J. Moorey
  5. Tax competition and equalization: the impact of voluntary cooperation on the efficiency goal By Petra Ens
  6. Partial tax coordination in a repeated game setting By Jun-ichi Itaya; Makoto Okamuraz; Chikara Yamaguchix
  7. Asset Value Constraints in Models of Incomplete Factor Taxation By David M. Arseneau; Sanjay K. Chugh; André Kurmann
  8. Informal Taxation By Olken, Benjamin A.; Singhal, Monica
  9. Redistributive Politics and Market Efficiency: An Experimental Study By Großer, Jens; Reuben, Ernesto
  10. The Redistributive Effects of Tax Benefit Systems in the Enlarged EU By Fuest, Clemens; Niehues, Judith; Peichl, Andreas
  11. Inequality, Mobility and Redistributive Politics By Ryo Arawatari; Tetsuo Ono
  12. Horizontal Equity and the Thirteenth Finance Commission: Issues and Ponderables By Keshab Das
  13. "Reverse" Intergovernmental Transfers Between Regions with Local Public Goods By John M. Hartwick
  14. On the legitimacy of coercion for the financing of public goods By Felix Bierbrauer
  15. Voluntary pension savings: the effects of the finnish tax reform on savers’ behaviour By Jarkko Harju

  1. By: Kerstin Roeder (Universität Augsburg)
    Abstract: This paper derives the optimal pension and tax parameters in a society where individuals differ in two characteristics: rationality and productivity. Rational agents, if not liquidity constrained, smooth consumption over their life-cycle. Myopic agents, by contrast, have ex ante a strong preference for the present and undertake no savings, even though, ex post they regret their decision. Given a paternalistic social objective aiming at maximizing the sum over ex post utilities, this paper shows how both transfer systems interact in their degree of redistribution and generosity. Moreover, it reveals how the optimal policy parameters change if capital markets are imperfect, implying that agents cannot borrow against their retirement benefits. Analytical and numerical results show that in some cases only one transfer system prevails.
    Keywords: Social security, redistributive taxation, myopia, credit constraints
    JEL: H21 H55 D91
    Date: 2009
  2. By: Koskela, Erkki (University of Helsinki)
    Abstract: What are the impacts of labor tax reform on wage setting and employment to keep the relative tax burden per low-skilled and high-skilled workers constant in the case of heterogenous domestic labor markets, i.e. imperfect competition in low-skilled labor and perfect competition in high-skilled labor in the presence of outsourcing? A higher degree of tax progression by raising the wage tax and the tax exemption for the low-skilled workers will decrease the wage rate and increase labour demand of low-skilled workers, whereas it will decrease (increase) employment of high-skilled workers in CES utility function when the elasticity of substitution between consumption and leisure is higher (lower) than one. A higher degree of wage tax progression for the high-skilled worker will have no effect on the high-skilled wage in the presence of CES and C-D utility function so this will have no total employment effects.
    Keywords: flexible outsourcing, dual labor market, impacts of labour taxation
    JEL: E24 H22 J21 J31 J51
    Date: 2009–11
  3. By: Matthias Wrede (University of Marburg and CESifo, Am Plan 2, 35032 Marburg, Germany)
    Abstract: This paper analyzes asymmetric tax competition under formula apportionment. It sets up a model with multinationals where two welfare-maximizing jurisdictions of different size levy source-based corporate taxes and allocate taxes using the formula approach. At the Nash equilibrium, tax rates are too low and public goods quantities are too small. The paper shows that the larger country levies a larger tax rate compared to the smaller country as it does under separate accounting. Citizens of the larger country are worse off than those of the smaller country.
    Keywords: Multinational enterprises, corporate taxation, formula apportionment, asymmetric tax competition.
    JEL: H25 H42 H73
    Date: 2009
  4. By: Simon Loretz (Oxford University); Padraig J. Moorey (Deutsche Bank)
    Abstract: Firms' tax planning decisions, similar to their other operational decisions, are made in a competitive environment. Various stakeholders observe the tax payments and evaluate these against the relevant peer group, which creates interdependencies in the tax planning activities of firms. Introducing the concept of reputational loss we show the positive interdependence in a theoretical model and test it in a spatial econometric model. Empirical evidence suggests that benchmarking takes place both within countries and within industries, however for the latter it is important to include firms in large non-EU OECD countries. Further, the analysis shows that spatial interdependence is stronger for the largest firms and if they have an average effective tax rate above the statutory tax rate.
    Keywords: Corporate taxation, benchmarking, tax competition, spatial econometrics
    JEL: H25 M40
    Date: 2009
  5. By: Petra Ens (Georg-August-Universität Göttingen)
    Abstract: Literature has long learned about the welfare improving effect of equalization in tax competition environments. By setting incentives to local authorities, public spending becomes efficient in spite of relying on a mobile resource as the tax base. This paper proves that this result cannot hold when local players have influence on the shape of the transfer system. A bargaining concerning equalization may change the incentives arising from equalization.
    Keywords: tax competition, fiscal equalization, nash bargaining, cooperation
    JEL: H10 H71 H77
    Date: 2009
  6. By: Jun-ichi Itaya (Hokkaido University); Makoto Okamuraz (Hiroshima University); Chikara Yamaguchix (Hiroshima Shudo University)
    Abstract: This paper addresses the problem of partial tax coordination among regional or national sovereign governments in a repeated game setting. We show that partial tax coordination is more likely to prevail if the number of regions in a coalition subgroup is smaller and the number of existing regions in the entire economy is larger. We also show that under linear utility, partial tax coordination is more likely to prevail if the preference for a local public good is stronger. The main driving force for these results is the response of the intensity of tax competition. The increased (decreased) intensity of tax competition makes partial tax coordination more (less) sustainable.
    Keywords: Partial tax coordination, repeated game, tax competition
    JEL: H71 H77
    Date: 2009
  7. By: David M. Arseneau; Sanjay K. Chugh; André Kurmann
    Abstract: This paper clarifies the role of initial asset value constraints in Ramsey models of incomplete factor taxation. We show that the optimal long-run capital tax is zero in the long run if and only if there is no binding constraint on the initial capital tax rate. This finding contrasts with Armenter (2008) who argues that zero long-run capital taxes reappear in models of incomplete factor taxation as long as the government is barred from manipulating initial asset wealth. The reason for this difference is that the two constraints cannot both be binding at the same time. Hence, in Armenter’s (2008) analysis, the initial asset value constraint is necessarily more restrictive than the constraint on the initial capital tax rate.
    Keywords: Ramsey equilibrium, incomplete factor taxation
    JEL: E62
    Date: 2009
  8. By: Olken, Benjamin A. (MIT); Singhal, Monica (Harvard University)
    Abstract: Informal payments are a frequently overlooked source of local public finance in developing countries. We use microdata from ten countries to establish stylized facts on the magnitude, form, and distributional implications of this "informal taxation." Informal taxation is widespread, particularly in rural areas, with substantial in-kind labor payments. The wealthy pay more, but pay less in percentage terms, and informal taxes are more regressive than formal taxes. Failing to include informal taxation underestimates household tax burdens and revenue decentralization in developing countries. We propose a simple model of information and enforcement constraints that parsimoniously explains the patterns in the data.
    JEL: H27 H41 O17
    Date: 2009–10
  9. By: Großer, Jens (Florida State University); Reuben, Ernesto (Columbia University)
    Abstract: We study the interaction between competitive markets that produce large but unequally distributed welfare gains and elections through which the poor majority can redistribute income away from the rich minority. In our simple laboratory democracy, subjects first earn their income by trading in a double auction market and thereafter vote on redistributive policies in two-candidate elections. In addition, in one of the treatments subjects can attempt to influence the candidates’ policy choices by transferring money to them. We observe very high levels of redistribution – even when transfers to candidates are possible – with little effect on market efficiency. Overall, the experimental results are explained by our equilibrium predictions.
    Keywords: redistribution, double auction, elections, lobbying
    JEL: H23 D41 D72 D73
    Date: 2009–11
  10. By: Fuest, Clemens (University of Oxford); Niehues, Judith (University of Cologne); Peichl, Andreas (IZA)
    Abstract: How do different components of the tax and transfer systems affect disposable income inequality? This paper explores the redistributive effects of different tax benefit instruments in the enlarged EU based on two approaches. Inequality analysis based on the standard approach suggests that benefits are the most important factor reducing inequality in the majority of countries. The factor source decomposition approach, however, suggests that benefits play a negligible role and sometimes even contribute slightly positive to inequality. On the contrary, here taxes and social contributions are by far the most important contributors to income inequality reduction. We explain these partly contradictory results with the different normative focus of the two approaches and show that benefits have other aims than redistribution. Finally, our country clustering shows that the Eastern European countries do not form a distinguished group. The Central Eastern European countries group together with the Continental European countries and the Baltic States show similarities with some Southern European countries.
    Keywords: inequality, redistribution, decomposition, tax benefit systems
    JEL: D31 D60 H20
    Date: 2009–10
  11. By: Ryo Arawatari (Faculty of Economics, Shinshu University); Tetsuo Ono (Graduate School of Economics, Osaka University)
    Abstract: This paper develops a model where income inequality and intergenerational mobility are jointly determined via redistributive politics. The model includes two key factors: accessibility of tertiary education for poor-born agents and multiple, selffulfilling expectations of agents. Given these factors, the model provides predictions of cross-country differences in inequality and mobility consistent with empirical observations. The model also demonstrates the dynamic motion of inequality and mobility as influenced by changes in the expectations of agents.
    Keywords: Inequality; Intergenerational mobility; Redistribution; Markov perfect political equilibrium; Overlapping generations
    JEL: D70 H55 I38
    Date: 2009–04
  12. By: Keshab Das
    Abstract: An attempt has been made in this paper to critically analyse the parameters/ criteria on which basis awards are finalized. With special reference to poorer states, the following aspects have been discussed: i) Basic parameters of the 13th FC; ii) Distribution neutral factors; iii) Redistributive factors; iv) Fiscal incentive factors; and v) Grants-in-aid. Scope for possible improvement in the working of fiscal federalism and policy implications thence have also been deliberated upon.
    Keywords: 13th Finance Commission, Horizontal equity, Fiscal federalism, grants-in-aid, fiscal federalism, policy, states, incentive, Tax Efforts, GDP,
    Date: 2009
  13. By: John M. Hartwick (Queen`s University)
    Abstract: We report on the nature of a utility optimizing transfer from one regional government to another when local public goods are present. Computer examples reveal that small differences in regional endowments result in large differences in equilibrium outcomes for two regions, under optimal transfers. The scale effect (lower tax charge per person for the same public good in more populous regions) leads to the small region generally providing transfers to the larger region.
    Keywords: intergovernmental transfers, local public goods, inter-regional resource allocation
    JEL: H41 H77
    Date: 2009–11
  14. By: Felix Bierbrauer (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: The literature on public goods has shown that efficient outcomes are impossible if participation constraints have to be respected. This paper addresses the question whether they should be imposed. It asks under what conditions efficiency considerations justify that individuals are forced to pay for public goods that they do not value. It is shown that participation constraints are desirable if public goods are provided by a malevolent Leviathan. By contrast, with a Pigouvian planner, efficiency can be achieved. Finally, the paper studies the delegation of public goods provision to a profit-maximizing firm. This also makes participation constraints desirable.
    Keywords: Public goods, Mechanism Design, Incomplete Contracts, Regulation
    JEL: D02 D82 H41 L51
    Date: 2009–05
  15. By: Jarkko Harju (Government Institute for Economic Research)
    Abstract: Many countries tax voluntary pension savings using the so-called EET model, based on tax-deductible savings and taxable withdrawals. In Finland the tax reform of 2005 changed the tax rate schedule from progressive to proportional, while the basic structure of the EET model was retained. This paper studies empirically the savers’ behavioural changes as a result of the reform using individual level data. The econometric estimations indicate that the reform altered pension saving behaviour by reducing the labour income and age effects on saving contributions in a statistically significant way. Also, the reform reduced the number of pension savers among high income-earners.
    Keywords: voluntary pension savings, tax reform, tax incentives
    JEL: H2 H30 C24
    Date: 2009

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