nep-pub New Economics Papers
on Public Finance
Issue of 2010‒01‒10
seventeen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The Personal Income Tax Structure: Theory and Policy By John Creedy
  2. Taxation of human capital and wage inequality: a cross-country analysis By Fatih Guvenen; Burhanettin Kuruscu; Serdar Ozkan
  3. Political Competition over Distortionary Taxation By Nunez Matias
  4. The Composition of Government Expenditure in an Overlapping Generations Model By John Creedy; Shuyun May Li; Solmaz Moslehi
  5. Optimal investment and financial strategies under tax rate uncertainty By Alessandro Fedele; Paolo Panteghini; Sergio Vergalli
  6. Retrospective Capital Gains taxation in the real world By Francesco Menoncin; Paolo Panteghini
  7. Inequity and Risk Aversion in Sequential Public Good Games By Sabrina Teyssier
  8. Decentralized provision of merit and impure public goods By Rosella Levaggi; Francesco Menoncin
  9. On tax competition, public goods provision and jurisdictions' size By Patrice Pieretti; Skerdilajda Zanaj
  10. Underinvestment in public goods: The influence of state depended investment costs By Nikos Ebel; Benteng Zou
  11. Optimal emission tax with endogenous location choice of duopolistic firms By Masako Ikefuji; Jun-ichi Itaya; Makoto Okamura
  12. Dealing with the aversion to the sucker’s payoff in public goods game By Douadia Bougherara; Sandrine Costa; Gilles Grolleau; Lisette Ibanez
  13. Outsourcing, Public Input Provision and Policy Cooperation By Aronsson, Thomas; Koskela, Erkki
  14. On the measurement of environmental taxes By Annegrete Bruvoll
  15. The distributive effects of carbon taxation in Italy By Chiara Martini
  16. State business tax incentives: examining evidence of their effectiveness By Jennifer Weiner
  17. The struggle for tax reform in Maine, 2003-2009 By Richard Woodbury

  1. By: John Creedy
    Abstract: There is now a large and complex literature on optimal income taxation, within the context of second-best welfare economics. This paper considers the potential role of this analysis in the practical design of direct tax and transfer structures. It is stressed that few results are robust, even in simple models, in view of the important role played by alternative social welfare functions, the nature of the distribution of abilities and the preferences of individuals. In view of these negative results, it is suggested that a range of empirical tax analyses, capturing particular issues, can provide helpful guidance for policy analysts. Numerical illustrations are provided, paying attention to the role of a ‘top’ marginal tax rate applied to higher-income groups. In particular, behavioural microsimulation models can be used to examine marginal direct tax reform. Such models have the advantages of capturing the full extent of population heterogeneity and the complexity of the tax structure.
    Keywords: Personal income Tax Structure
    JEL: B3 B30 B31 D3 D30 D39 D6 D60 D69 P42 R23
    Date: 2009
  2. By: Fatih Guvenen; Burhanettin Kuruscu; Serdar Ozkan
    Abstract: Wage inequality has been significantly higher in the United States than in continental European countries (CEU) since the 1970s. Moreover, this inequality gap has further widened during this period as the US has experienced a large increase in wage inequality, whereas the CEU has seen only modest changes. This paper studies the role of labor income tax policies for understanding these facts. We begin by documenting two new empirical facts that link these inequality differences to tax policies. First, we show that countries with more progressive labor income tax schedules have significantly lower before-tax wage inequality at different points in time. Second, progressivity is also negatively correlated with the rise in wage inequality during this period. We then construct a life cycle model in which individuals decide each period whether to go to school, work, or be unemployed. Individuals can accumulate skills either in school or while working. Wage inequality arises from differences across individuals in their ability to learn new skills as well as from idiosyncratic shocks. Progressive taxation compresses the (after-tax) wage structure, thereby distorting the incentives to accumulate human capital, in turn reducing the cross-sectional dispersion of (before-tax) wages. We find that these policies can account for half of the difference between the US and the CEU in overall wage inequality and 76% of the difference in inequality at the upper end (log 90-50 differential). When this economy experiences skill-biased technological change, progressivity also dampens the rise in wage dispersion over time. The model explains 41% of the difference in the total rise in inequality and 58% of the difference at the upper end.
    Keywords: Wages ; Human capital ; Taxation
    Date: 2009
  3. By: Nunez Matias (THEMA, Université de Cergy Pontoise)
    Abstract: Political parties compete over income tax functions, and voters vote and decide whether to pay full taxes or to make an e®ort to modify their tax bur- den. We show that political parties only propose e±cient income tax func- tions, in a similar manner to the probabilistic voting theory. Regarding the shape of income tax functions, it need not be the case that the majority of vot- ers prefer progressive taxation to regressive taxation as a consequence of the distortions. Nevertheless, we prove that the political appeal for progressivity is restored under mild conditions.
    Keywords: Income taxation, Distortions, Efficiency, Progressivity, Political competition
    JEL: H23 H31 D72 D78
    Date: 2009
  4. By: John Creedy; Shuyun May Li; Solmaz Moslehi
    Abstract: This paper examines the choice of government expenditure on public goods and transfer payments (in the form of pension) under majority voting in an overlapping generations model, in which government expenditure is tax-?nanced on a pay-as-you-go (PAYG) basis. The condition required for majority support of the social contract involved in the PAYG scheme is established and shown to be independent of gov- ernment expenditure, so that the choice of expenditure composition can be made conditional on acceptance of this social contract. The model yields a closed-form solu-tion for the majority choice of the ratio of transfer payment to public goods, which depends negatively on the ratio of median to mean income, given parameters regarding preferences, tax, growth and interest rates. Informed by this result, a dataset for demo-cratic countries is examined, suggesting that income inequalities play a minor role in accounting for the substantial variations in the compostion of government expenditure across democratic countries, while di¤erent preferences for public goods resulting from cultural di¤erences may be an important determinant. Finally an alternative decision mechanism is also considered, in which a utilitarian government chooses expenditures to maximize a social welfare function. The solution is found to take a similar form to that of the majority voting context, except that a welfare-weighted average income replaces the median income.
    Keywords: Overlapping Generations; Majority Voting; Balanced Growth; Public Goods; Transfer Payments; Utilitarian Government
    JEL: D72 H41 H53 H11
    Date: 2009
  5. By: Alessandro Fedele; Paolo Panteghini; Sergio Vergalli
    Abstract: In this paper we apply a real-option model to study how tax rate uncertainty affects a firm's decisions about both the timing and the source of finance of an investment project. We show that debt finance (i) encourages entry and (ii) mitigates the e¤ect of tax rate uncertainty on entry timing.
    Date: 2009
  6. By: Francesco Menoncin; Paolo Panteghini
    Abstract: In this article, we analyze Auerbach's (1991) proposal of a retrospective capital gains tax, which is equivalent to an accrual tax on an ex-ante basis. Using a continuous-time model with stochastic interest rates and serially correlated asset returns, we prove that such an equivalence still holds. This means that in a more realistic setting the realization-based systems requires no ad hoc adjustment for equivalence to hold.
    Date: 2009
  7. By: Sabrina Teyssier
    Abstract: This paper analyzes which type of intrinsic preferences drive an agent’s behavior in a sequential public good game depending on whether the agent is first or second mover. Theoretical predictions are based on heterogeneity of individuals in terms of social and risk preferences. We modelize preferences according to the inequity aversion model of Fehr and Schmidt (1999) and to the assumption of constant relative risk aversion. Risk aversion is significantly and negatively correlated with the contribution decision of first movers. Second movers with sufficiently high advantageous inequity aversion free-ride less and reciprocate more than others. Both results are predicted by our model. Nevertheless, no effect of disadvantageous inequity aversion of first movers is found in the data while theory predicted it. Our results underline the importance of taking into account the order of agents’ play to correctly understand which type of preferences influences cooperation in voluntary contribution mechanisms. They suggest that individuals’ behavior can be consistent between different experimental games.
    Keywords: inequity aversion, risk aversion, public good game, conditional contribution
    Date: 2009
  8. By: Rosella Levaggi; Francesco Menoncin
    Abstract: In some countries reforms of public service provision have been accompanied by a parallel process of devolution. However, the application of fiscal federalism has not always produced the desired effects. We argue that this result may depend on two factors: a) a lack of coordination causing a non-optimal allocation of resources at aggregate level; b) a lack of incentive to coordination. In our model we assume that goods to be provided at local level are impure public goods. This assumption allows us to consider a more realistic scenario where the production and consumption of the local public good do not necessarily coincide. In an environment with full information and no restriction on the quantities to be provided as the one we propose, fiscal federalism is always suboptimal for the whole community, as it may be expected. However, we show that this does not necessarily mean that in fiscal federalism each local authority is worse off. This implies that coordination is never the outcome of the strategic interaction between the actors and that when the assumption of symmetric information is removed, Central Government will have to expect some local authorities to play strategically against such intervention.
    Date: 2009
  9. By: Patrice Pieretti; Skerdilajda Zanaj (CREA, University of Luxembourg)
    Abstract: In this paper, we analyse competition among jurisdictions to attract firms through low taxes on capital and/or high level of public goods, which enhance firms' productivity. We assume that the competing jurisdictions are different in (population) size and that the mobility of capital is costly. We nd that for moderate mobility costs, small economies can attract foreign capital if they supply higher levels of public goods than larger jurisdictions, without being tax havens. If mobility costs are high, we recover the classical result that small jurisdictions are attractive to foreign capital if they engage in tax dumping. Finally, we show that there exists a subset of mobility costs for which the dierentiation in public goods across jurisdictions is not able to relax tax competition.
    JEL: H25 H73 F13 F15 F22
    Date: 2009
  10. By: Nikos Ebel; Benteng Zou (CREA, University of Luxembourg)
    Abstract: In this paper we determine and analyze open loop and Markovian perfect equilibrium of a standard capital accumulation differential games, which is extended by a state depended cost function. As an application of the model we do consider knowledge accumulation or lobbying of firms with connected objectives. By using Pontryagin maximum principle and Hamilton-Jacob-Bellman equation, we find that the feedback strategies could be worse than open loop strategy, which is neither only due to ‘linearity’ as inWirl (1996, European Journal of Political Economy) nor only due to ’feedback information’ as Fershtman and Nitzan (1991, European Economic Review). Rather it is a mixed effect of these two.
    JEL: C71 C72 H41
    Date: 2009
  11. By: Masako Ikefuji; Jun-ichi Itaya; Makoto Okamura
    Abstract: This paper explores optimal environmental tax policy under which duopoly firms strategically choose the location of their plants in a simple three-stage game. We examine how the relationship between the optimal emission tax and the choice of location of duopoly firms affects the welfare of the home country. We characterize the relationship between the optimal emission tax and the fixed cost, depending on the degree of environmental damage from production. Finally, we show the existence of asymmetric equilibrium in which either firm chooses relocation of its plant even if the duopoly firms are identical ex ante.
    Date: 2009–12
  12. By: Douadia Bougherara; Sandrine Costa; Gilles Grolleau; Lisette Ibanez
    Abstract: A usual explanation to low levels of contribution to public goods is the fear of getting the sucker’s payoff (cooperation by the participant and defection by the other players). In order to disentangle the effect of this fear from other motives, we design a public good game where people have an insurance against getting the sucker’s payoff. We show that contributions to the public good under this ‘protective’ design are significantly higher and interact with expectations on other individuals' contribution to the public good. Some policy implications and extensions are suggested.
    Date: 2009–12
  13. By: Aronsson, Thomas (Department of Economics, Umeå University); Koskela, Erkki (Department of Economics)
    Abstract: This paper concerns public input provision as an instrument for redistribution under international outsourcing by using a model-economy comprising two countries, North and South, where firms in the North may outsource part of their low-skilled labor intensive production to the South. We consider two interrelated issues: (i) the incentives for each country to modify the provision of public input goods in response to international outsourcing, and (ii) whether international outsourcing justifies policy cooperation. If the public input good is substitutable for (complementary with) outsourcing in terms of the production function faced by northern firms, then outsourcing contributes to increase (decrease) the public input provision in the North. For the South, the optimal policy response depends on the level of outsourcing. We also show how policy cooperation with respect to public input provision can be designed to increase the overall social welfare.
    Keywords: Outsourcing; redistribution; public input goods; asymmetric information
    JEL: H21 H25 J31 J62
    Date: 2009–12–17
  14. By: Annegrete Bruvoll (Statistics Norway)
    Abstract: The purpose of environmental taxes is to correct the market when it fails to take environmental damages into account, i.e. to internalize the Pigouvian element. In addition, fiscal taxes are levied on both polluting and clean goods, which may follow the Ramsey principle. In practical policy, environmental and fiscal taxes are conceptually intertwined. This mixture complicates the calculation of the extent and the evaluation of the effects of environmental taxes. Eurostat, OECD and IEA include all taxes related to energy, transport and pollution, and most resource taxes in their international measurement of environmentally related taxes. Consequently, numerous fiscal taxes are added together with the environmental taxes. This article discusses the distinctions between the Pigouvian and the fiscal taxes in light of tax theory. The revenues following the Eurostat et al. statistical basis deviate significantly from the revenues from the environmental taxes defined on the basis of theory. Steps should be taken to harmonize the international statistics of environmental taxes with economic tax theory.
    Keywords: Environmental taxes; Fiscal taxes; Pigou taxes; Ramsey taxes
    JEL: H23 Q58
    Date: 2009–12
  15. By: Chiara Martini
    Abstract: The distributive incidence of environmental policies has not been widely investigated whereas more attention has been focused on the efficiency of environmental reforms. According to the Kyoto Protocol, domestic policies aimed at reducing carbon emissions can include carbon/energy taxes, emission trading, command-and-control regulations and other policies. Until now, only a few European countries have implemented energy or carbon taxes: Nordic countries have been the firstcomers, suggesting a tight link between institutional environment and the potential for policy adoption. In my analysis I assume that carbon taxation is fully shifted forward to consumers. The estimation of a complete demand system can clarify the impact of ecological tax reforms, help government to select appropriate fiscal policy and give producers the ability to forecast market demand. The demand systems underlying the simulation are represented by extensions of the Almost Ideal Demand System of Deaton and Muellbauer (1980b) and the Quadratic Almost Ideal Demand System (Banks et al., 1997). The different taxation scenarios I simulate is modelled by referring to the Financial Law for 1999 and the DPCM 15/1/1999; The output of the demand system estimation will allow to calculate the compensating and equivalent variations and to estimate the revenue raised by carbon taxation introduction.
    Keywords: carbon tax, regressivity, demand system, welfare measures
    JEL: D12 H23 H31 Q48
    Date: 2009
  16. By: Jennifer Weiner
    Abstract: State governments commonly use business tax credits to promote economic development. Whether these incentives are successful at generating new economic activity - and whether they do so in a cost-effective manner - are important concerns, particularly in times of fiscal and economic stress. This paper explores the use and effectiveness of a selected group of incentives, namely tax credits geared toward capital investment, research and development, job creation, and film production. The paper examines the various credits offered by New England states and their structural features, and reviews and analyzes the available evidence on the effectiveness and cost-effectiveness of these types of incentives. The analysis reveals the challenges entailed in measuring the impact of business tax credits and the need for both analysts and policymakers to consider those challenges carefully when using existing studies to inform the tax credit debate.
    Keywords: Tax incentives ; Business tax ; Tax incentives - New England ; Business tax - New England
    Date: 2009
  17. By: Richard Woodbury
    Abstract: Tax reform has been among the most prominent topics of public policy discussion in Maine in recent history. The current tax system has been described as antiquated, imbalanced, burdensome, unfair, uncompetitive, archaic, and volatile. Over the 2003-2009 period, many reform proposals were advanced; and some reforms were enacted, including a significant restructuring of the income tax system in 2009. This paper lays out the issues motivating tax reform efforts in Maine, provides a historical review of the tax reform struggle as it has unfolded, and offers a descriptive summary of the major initiatives advanced or enacted. Considerable attention is paid to the 2009 tax reform package, in the context of understanding tax reform issues more broadly.
    Keywords: Taxation - Maine
    Date: 2009

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