nep-pub New Economics Papers
on Public Finance
Issue of 2010‒01‒16
nineteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The Theory of Optimal Taxation: New Developments and Policy Relevance By Peter Birch Sørensen
  2. Rank-Dependent Measures of Bi-Polarization and Marginal Tax Reforms By Paul Makdissi; Stéphane Mussard
  3. The taxation of savings in overlapping generations economies with unbacked risky assets By Julio Davila
  4. Fiscal, Distributional and Efficiency Impacts of Land and Property Taxes By Andrew Coleman; Arthur Grimes
  5. The effects of taxes and benefits on income distribution in the enlarged EU By Paulus A; Čok M; Figari F; Hegedüs P; Kump N; Lelkes O; Levy H; Lietz C; Lüpsik S; Mantovani D; Morawski L; Sutherland H; Szivos P; Võrk A
  6. Dual Income Taxes: A Nordic Tax System By Peter Birch Sørensen
  7. Tax Contracts and Elections By Hans Gersbach; Maik T. Schneider
  8. Can lower tax rates be bought? Business rent-seeking and tax competition among U.S. states By Robert S. Chirinko; Daniel J. Wilson
  9. The Taxation of Motor Fuel: International Comparison By Ley, Eduardo; Boccardo , Jessica
  10. Tax Incentives and R&D Activity: Firm-Level Evidence from Taiwan By Chia-Hui Huang; Chih-Hai Yang
  11. Labour supply incentives, income support systems and taxes in Sweden By Forslund, Anders
  12. The role of mobility in tax and subsidy competition By Alexander Haupt; Tim Krieger
  13. Off-the-peak preferences over government size By Francisco Mart’nez-Mora; M. Socorro Puy
  14. Incomplete contracts and excludable public goods By Felix Bierbrauer
  15. Public-Good Provision in a Large Economy By Felix Bierbrauer; Martin Hellwig
  16. Voting on Thresholds for Public Goods: Experimental Evidence By Julian Rauchdobler; Rupert Sausgruber; Jean-Robert Tyran
  17. On the Legitimacy of Coercion for the Financing of Public Goods By Felix Bierbrauer
  18. The distributional impact of in kind public benefits in European countries By Paulus A; Sutherland H; Tsakloglou P
  19. Welfare, inequality and financial consequences of a multi-pillar pension system. A reform in Peru By Javier Olivera

  1. By: Peter Birch Sørensen (Department of Economics, University of Copenhagen)
    Abstract: The theory of optimal taxation has often been criticized for being of little practical policy relevance, due to a lack of robust theoretical results. This paper argues that recent advances in optimal tax theory has made that theory easier to apply and may help to explain some current trends in international tax policy. Covering the taxation of labour income and capital income as well as indirect taxation, the paper also illustrates how some of the key results in optimal tax theory may be derived in a simple, heuristic manner.
    Keywords: optimal taxation; uniform taxation; tax neutrality
    JEL: H21 H24 H25
    Date: 2009–04
  2. By: Paul Makdissi; Stéphane Mussard
    Abstract: In this paper, we investigate a dual class of bi-polarization indices, namely rank-dependent bi-polarization indices. We show that these indices may be characterized with the generalized positional transfer sensitivity property. We find necessary and sufficient conditions in order to identify bi-polarization-reducing marginal tax reforms. Precisely, we propose inverse positional dominance criteria based on the comparison of bi-polarization concentration curves. An illustration is presented using the Jordanian Household Expenditure and Income Survey 2002/2003.
    Date: 2009–12
  3. By: Julio Davila (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CORE - Université Catholique de Louvain)
    Abstract: This paper establishes, in the context of the Diamond (1965) overlapping generations economy with production, that the risk that savings in unbacked assets (like fiat money or public debt) become worthless implies that, not only the first-best steady state, but even the best steady state attainable with those saving instruments fails to be a competitive equilibrium outcome under laissez-faire. It is nonetheless shown as well that this best monetary steady state can be implemented as a competitive equilibrium with the adequate policy of taxes on returns to capital, subsidies to returns to monetary savings, and lump-sum transfers. Interestingly enough, this policy requires non redistribution of income among agents, unlike the implementation of the first-best steady state. The policy is balanced every period at the steady state and, since no public spending exists in the model, it serves the only purpose of implementing a steady state that provides all agents with a higher utility than the laissez-faire competitive equilibrium steady state. The results thus provide a rationale for an active fiscal policy that has nothing to do with redistributive goals or the need to fund any kind of public sending.
    Keywords: Taxation of savings, overlapping generations, asset bubble.
    Date: 2009–12
  4. By: Andrew Coleman (Motu Economic and Public Policy Research); Arthur Grimes (Motu Economic and Public Policy Research)
    Abstract: Land taxes are known to be amongst the most efficient forms of taxation since land is an immobile factor; property (capital value) taxes are less efficient owing to the tax on improvements. However there is little international (or New Zealand) evidence regarding the distributional impacts of land and property taxes. Nor is there much New Zealand evidence on their potential fiscal implications or about the taxes’ impacts on asset values and debt positions. We explore impacts that may arise from a range of land and property taxes that differ across certain features (e.g. comprehensiveness and degree of grand-fathering). Both partial and general equilibrium models are used. The results provide a basis for considering alternative taxation options involving land or property taxes.
    Keywords: land tax, property tax
    JEL: H21 H22 H24
    Date: 2009
  5. By: Paulus A; Čok M; Figari F; Hegedüs P; Kump N; Lelkes O; Levy H; Lietz C; Lüpsik S; Mantovani D; Morawski L; Sutherland H; Szivos P; Võrk A
    Abstract: Tax and benefit systems in the enlarged EU vary significantly in size and structure. We examine how taxes and benefits shape income distributions in 19 EU countries, focusing on the differences between Western European countries (EU15) and Eastern European countries (Estonia, Hungary, Poland, Slovenia). We use EUROMOD, the European tax-benefit microsimulation model, which simulates taxes and benefits for representative samples of household micro-data and through a common framework which allows the analysis of cross-country differences on a comparable basis. The analysis concentrates on the distribution and composition of incomes, and the effect of taxes and benefits on poverty and inequality
    JEL: C81 D31 P50
    Date: 2009–12–18
  6. By: Peter Birch Sørensen (Department of Economics, University of Copenhagen)
    Abstract: This paper discusses the principles and practices of dual income taxation in the Nordic countries. The first part of the paper explains the rationale and the historical background for the introduction of the dual income tax and describes the current Nordic tax practices. The second part of the paper focuses on the problems of taxing income from small businesses and the issue of corporate-personal tax integration under the dual income tax, considering alternative ways of dealing with these challenges. In the third and final part of the paper, I briefly discuss whether introducing a dual income tax could be relevant for New Zealand.
    Date: 2009–03
  7. By: Hans Gersbach (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland); Maik T. Schneider (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland)
    Abstract: In this paper we examine the impact of tax contracts as a novel institution on elections, policies, and welfare. We consider a political game in which three parties compete to form the government. Parties have policy preferences about the level of public-good provision and benefit from perks when in office. A government raises taxes for both purposes. We show that tax contracts yield moderate policies and lead to lower perks by avoiding the formation of grand coalitions in order to win government. Moreover, in polarized societies they unambigously improve the welfare of the median voter.
    Keywords: political contracts, elections, government formation, tax promise
    JEL: D72 D82 H55
    Date: 2009–12
  8. By: Robert S. Chirinko; Daniel J. Wilson
    Abstract: The standard model of strategic tax competition – the non-cooperative tax-setting behavior of jurisdictions competing for a mobile capital tax base – assumes that government policymakers are perfectly benevolent, acting solely to maximize the utility of the representative resident in their jurisdiction. We depart from this assumption by allowing for the possibility that policymakers, given the political and electoral environments in which they operate, also may be influenced by the rent-seeking (lobbying) behavior of businesses. Firms recognize the factors affecting policymakers’ welfare and may make campaign contributions to influence tax policy. These changes to the standard strategic tax competition model imply that business contributions affect not only the levels of equilibrium tax rates but also the slope of the tax reaction function between jurisdictions. Thus, business campaign contributions may affect tax competition and enhance or retard the mobility of capital across jurisdictions. ; Based on a panel of 48 U.S. states and unique data on business campaign contributions, our empirical work uncovers four key results. First, we document a significant direct effect of business contributions on tax policy. Second, the economic value of a $1 business campaign contribution in terms of lower state corporate taxes is nearly $4. Third, the slope of the reaction function between tax policy in a given state and the tax policies of its competitive states is negative. Fourth, we highlight the sensitivity of the empirical results to state effects.
    Keywords: Taxation
    Date: 2009
  9. By: Ley, Eduardo; Boccardo , Jessica
    Abstract: We apply the Parry-Small (2005) framework to asses whether the level taxation of motor fuel is broadly appropriate in a group of countries (OECD, BRICs and South Africa) accounting for more than 80 percent of world greenhouse gas (GHG) emissions. This paper deals with emissions from oil combustion in transport, which accounts for about 40 percent of CO2 emissions. In the benchmark specification, we find that six countries (accounting, in turn, for more than 40 percent of motor-fuel GHG world emissions) would be undertaxing motor fuel. We evaluate the sensitivity of the results to the values of the elasticities and externalities that we use. We find that varying the values of these parameters (within the level of uncertainty reasonably associated with them) significantly affects the results. This implies that, while informative, the results must be taken as indicative. Further analysis for a particular country must rely in a well-informed choice for the values of their country-specific parameters.
    Keywords: Fuel taxation, corrective taxation, climate change, greenhouse gas emissions
    JEL: H21 Q48 H87 H23 Q58
    Date: 2009–12–19
  10. By: Chia-Hui Huang; Chih-Hai Yang
    Abstract: This paper investigates the effect of tax incentives on R&D activities in Taiwanese manufacturing firms. Specifically, we assess the potential R&D-enhancing effect on recipients of R&D tax credits compared with their non-recipient counterparts. Moreover, the potential difference in the R&D-enhancing effect between high-tech and non-high-tech firms is also examined. Utilizing a firm-level panel dataset during 2001 and 2005, empirical results obtained by propensity score matching show that recipients of R&D tax credits appear on average to have 93.53% higher R&D expenditures and a 14.47% higher growth rate for R&D expenditures than non-recipients with similar characteristics. The R&D-enhancing effect of R&D tax credits is not found to be particularly relevant to high-tech or non-high-tech firms. We further employ a generalized method of moment (GMM) of the panel fixed model to control for the endogeneity of R&D tax credits and firm heterogeneity in determining R&D expenditure. Various estimates based on the entire sample and high-tech-firms are quite similar and there is a significantly R&D-enhancing effect of R&D tax credits. This result suggests that the R&D preferential policy has induced more R&D expenditure by firms in Taiwan. While the existence of the R&D-enhancing effect brought on by tax incentives is intuitive, the estimates can provide insightful implications for the R&D tax policy.
    Keywords: R&D, Tax, Propensity Score Matching
    JEL: H25 H32 K34 O32 O38
    Date: 2009–12
  11. By: Forslund, Anders (IFAU - Institute for Labour Market Policy Evaluation)
    Abstract: Comparing Sweden to other EU countries, labour force participation rates of older individuals and females are high. These facts are consistent with the idea that institutional design matters: access to child care, paid parental leave, and a tax system with individual rather than household income taxation, probably explain a significant fraction of the high female participation rate; and the evidence suggests that the design of pension systems has an impact on the labour force participation of the elderly. Active labour market policies may contribute to high labour force participation, but cannot be relied on as a major means of raising employment and participation in the long run.
    Keywords: Labour supply; taxes; income support systems
    JEL: H55 J21 J26
    Date: 2009–12–16
  12. By: Alexander Haupt (University of Plymouth); Tim Krieger (University of Paderborn)
    Abstract: In this paper, we analyse the role of mobility in tax and subsidy competition. Our primary result is that increasing ‘relocation’ mobility of firms leads to increasing ‘net’ tax revenues under fairly weak conditions. While enhanced relocation mobility intensifies tax competition, it weakens subsidy competition. The resulting fall in the governments’ subsidy payments overcompensates the decline in tax revenues, leading to a rise in net tax revenues. We derive this conclusion in a model in which two governments are first engaged in subsidy competition and thereafter in tax competition, and firms locate and potentially relocate in response to the two political choices.
    Keywords: Tax competition, subsidy competition, capital and firm mobility, foreign direct investment
    JEL: H71 H87 F H
    Date: 2009
  13. By: Francisco Mart’nez-Mora (University of Leicester); M. Socorro Puy (Department of Economic Theory, Universidad de M‡laga)
    Abstract: In this paper, we analyze the political consequences derived from policy preferences which are non-symmetric around the peak. While the assumption of symmetric preferences is innocuous in political equi- libria with platforms convergence, it is not neutral when candidates are differentiated. Following the citizen-candidate approach, we show that a larger government size emerges when preferences of the me- dian voter off-the-peak are more intense towards overprovision (what we call wasteful preferences), whereas a smaller government results when her preferences are more intense towards underprovision (what we call scrooge preferences). We next study the determinants of the shape of preferences off-the-peak and find that: (i) A positive sign of the third derivative of the policy-induced utility function indicates wasteful preferences, while a negative sign indicates scrooge prefer- ences. (ii) The analog of KimballÕs coefficient of prudence (which is closely related to Arrow-PrattÕs coefficient of risk aversion), can be used to measure degrees of wastefulness and scroogeness. (iii) Sym- metric preferences require imposing quite stringent restrictions on the policy problem. Numerical examples illustrate the discrepancies de- rived from symmetric preferences versus scrooge preferences in terms of equilibrium predictions.
    Keywords: Single-peaked preferences, citizen-candidate, coefficient of prudence, differentiated platforms, risk-aversion
    JEL: D72 H31 H5
    Date: 2009–12
  14. By: Felix Bierbrauer (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: We study the provision of an excludable public good to discuss whether the imposition of participation constraints is desirable. It is shown that this question may equivalently be cast as follows: should a firm that produces a public good receive tax revenues, or face a self-financing requirement. The main result is that the desirability of participation constraints is shaped by an equity-efficiency tradeoff: While first-best is out of reach with participation constraints, their imposition yields a more equitable distribution of the surplus. This result relies on an incomplete contracts perspective. With a benevolent mechanism designer, participation constraints are never desirable.
    Keywords: Large Economy, Mechanism Design, Public-good provision
    JEL: D60 D70 D82 H41
    Date: 2010–01
  15. By: Felix Bierbrauer (Max Planck Institute for Research on Collective Goods, Bonn); Martin Hellwig (Max Planck Institute for Research on Collective Goods)
    Abstract: We propose a new approach to the normative analysis of public-good provision in a large economy. Our analysis is based on a mechanism design approach that involves a requirement of coalition-proofness, as well as a requirement of robustness, so that the mechanism must not depend on specific assumptions about individual beliefs. Our main result shows that such a mechanism can condition only on the population shares of people with valuations above and below the per capita provision costs. This suggests an intriguing link between mechanism design for large economies and voting.
    Keywords: Large Economy, Mechanism Design, Public-good provision
    JEL: D60 D70 D82 H41
    Date: 2010–01
  16. By: Julian Rauchdobler (Department of Public Economics, University of Innsbruck); Rupert Sausgruber (Department of Public Economics, University of Innsbruck); Jean-Robert Tyran (Department of Economics, University of Copenhagen)
    Abstract: Introducing a threshold in the sense of a minimal project size transforms a public goods game with an inefficient equilibrium into a coordination game with a set of Pareto-superior equilibria. Thresholds may therefore improve efficiency in the voluntary provision of public goods. In our one-shot experiment, we find that coordination often fails and exogenously imposed thresholds are ineffective at best and often counter-productive. This holds under a range of threshold levels and refund rates. We test if thresholds perform better if they are endogenously chosen, i.e. if a threshold is approved in a referendum, because voting may facilitate coordination due to signaling and commitment effects. We find that voting does have signaling and commitment effects but they are not strong enough to significantly improve the efficiency of thresholds.
    Keywords: provision of public goods; threshold; voting; experiments
    JEL: H41 D72 C92
    Date: 2009–12
  17. By: Felix Bierbrauer (Max Planck Institute)
    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: 2009–11
  18. By: Paulus A; Sutherland H; Tsakloglou P
    Abstract: International comparisons of inequality based on measures of disposable income may not be valid if the size and incidence of publicly-provided in kind benefits differ across the countries considered. The benefits that are financed by taxation in one country may need to be purchased out of disposable income in another. We estimate the size and incidence of in kind or “non cash†benefits from public housing subsidies, education and health care for five European countries using comparable methods and data. Inequality in the augmented income measure is dramatically lower than in disposable income, with the effects of the three components varying in importance across countries. Adapting equivalence scales to take proper account of differences in needs for health care and education across population members reduces the scale of the effect, but does not eliminate it.
    JEL: C81 D31 H51 H52
    Date: 2009–12–18
  19. By: Javier Olivera (Catholic University of Leuven)
    Abstract: The distributional impact of the structural pension reform in Latin American countries has been largely absent in the economic debate. However, this reform may widen inequality in old-age and reduce welfare. In this paper we study the consequences of implementing a multi-pillar system in one of these countries. We take advantage of available administrative records for Peruvian workers to estimate inequality in pensions, pension debt and welfare. Overall, our results show that the pension debt and inequality can be substantially reduced without welfare losses.
    Keywords: Pension reform, pension inequality, social security, Latin America, Peru.
    JEL: H55 H63 I30 G23
    Date: 2010

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