nep-pub New Economics Papers
on Public Finance
Issue of 2010‒03‒28
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Federal Tax Policies and Farm Households By Durst, Ron
  2. Taxation and the Quality of Institutions: Asymmetric Effects on FDI By Serena Fatica
  3. Ramsey, Pigou, and a Consumption Externality By Wendner, Ronald
  4. A comparison of optimal tax policies when compensation or responsibility matter By JACQUET, Laurent; VAN DE GAER, Dirk
  5. Democracy, Redistributive Taxation and the Private Provision of Public Goods By Thomas Markussen
  6. On tax competition, public goods provision and jurisdictionsÕ size By PIERETTI, Patrice; ZANAJ, Skerdilajda
  7. Costs of Taxation and Benefits of Public Goods with Multiple Taxes and Goods By James E. Anderson; Will Martin
  8. Wives, husbands and wheelchairs : Optimal tax policy under gender-specific health By LEROUX, Marie - Louise; PONTHIERE, GrŽgory
  9. The taxation of savings in overlapping generations economies with unbacked risky assets By DAVILA, Julio

  1. By: Durst, Ron
    Abstract: Significant changes in Federal individual income and estate tax policies have occurred over the last 10 years. Analysis suggests that changes in Federal tax provisions affecting both individual and business income taxes have reduced average tax rates for all farm households, resulting in the lowest tax burden on farm income and investment in a decade. Similarly, an analysis of the changes to Federal estate tax policies suggests that increases in the value of property that can be transferred to the next generation free of the estate tax, combined with special provisions for farmers and other small businesses, have greatly reduced the number of farm estates subject to the tax and the amount owed. While nearly 10 percent of commercial farm estates could owe tax in 2009, only 1 to 2 percent of all farm estates are estimated to be subject to the Federal estate tax this year.
    Keywords: income tax, estate tax, tax rates, estate, Federal tax policy, farm losses, commercial farms, Farm Management,
    Date: 2009–05
  2. By: Serena Fatica (European Commission)
    Abstract: Economic integration has intensified international competition to attract productive capital. This paper analyzes, both theoretically and empirically, the effect of tax policies and institutional quality on the allocation of FDI - two aspects that the economic literature has extensively investigated, though only in isolation. I build a simple two-country partial equilibrium model to study competition among governments vying for potential investors whose location choices are driven by both the quality of institutions and the corporate tax rate. Modeling good governance as a public good, it is shown that the jurisdiction providing better institutions is able to levy a higher tax on capital. Moreover, provided firms are sensitive enough to institutional quality, it attracts a larger share of investment than the low-quality/low-tax location. The main predictions of the model are tested on FDI stocks to 63 economies using a simple difference gravity equation derived from discrete choice theory of firms' location. Using a pair of destination countries as the unit of analysis eliminates the need to control for multilateral interdependence among receiving countries, a source of possible bias in the traditional gravity specification in the levels. The empirical evidence corroborates the claim that the sensitivity of foreign investment to the tax rate varies significantly between host countries characterized by different levels of institutional quality. The findings are robust to a number of sensitivity checks and to the use of instrumental variables to tackle endogeneity of the institutional quality variable.
    Keywords: foreign direct investment, fiscal competition, institutions, public goods
    JEL: H7 F21 F23 K00
    Date: 2010–03
  3. By: Wendner, Ronald
    Abstract: This paper analyzes the effects of consumption externalities on optimal taxation and on the social cost and optimal levels of public good provision. If public and private goods are Hicksian complements and no lump sum taxes are available, the second-best level of public good provision can exceed the first-best level. In contrast to economies without externalities, this result even holds for Cobb-Douglas economies with homogeneous agents. Heterogeneity of agents raises the second-best commodity tax rate due to equity considerations, but lowers the tax rate due to the concern for externality-correction.
    Keywords: consumption externality; public good provision; Ramsey rule; Pigou
    JEL: H21 D62 H41
    Date: 2010–03–12
  4. By: JACQUET, Laurent (Norwegian School of Economics and Business Administration, Economics Department, Bergen, Norway); VAN DE GAER, Dirk (SHERPPA, Faculteit Economie and Bedrijfskunde, Ghent University, Ghent, Belgium and UniversitŽ catholique de Louvain, CORE, Louvain la Neuve, Belgium)
    Abstract: This paper examines optimal redistribution in a model with high and low-skilled individuals with heterogeneous tastes for labor, that either work or not. With such double heterogeneity, traditional Welfarist criteria including Utilitarianism fail to take the compensation-responsibility trade-off into account. As a response, several other criteria have been proposed in the literature. This paper is the Þrst to compare the extent to which optimal policies based on different normative criteria obey the principles of compensation (for differential skills) and responsibility (for preferences for labor), when labor supply is along the extensive margin. The criteria from the social choice literature perform better in this regard than the traditional criteria, both in Þrst and second best. More importantly, these equality of opportunity criteria push the second best policy away from an Earned Income Tax Credit and in the direction of a Negative Income tax.
    Keywords: optimal income taxation, equality of opportunity, heterogeneous preferences for labor
    JEL: H21 D63
    Date: 2009–10–01
  5. By: Thomas Markussen (Department of Economics, University of Copenhagen)
    Abstract: The paper studies in a simple, Downsian model of political competition how the private provision of public goods is affected when it is embedded in a system of democracy and redistributive taxation. Results show that the positive effect of inequality on public goods production, which Olson (1965) pointed to, is weakened and might even be reversed in this context. Also, the median voter may choose a negative tax rate, even if he is poorer than the mean, in order to stimulate public goods production. The relevance of the model is illustrated with an application to the finance of higher education.
    Keywords: public goods; political economy; inequality; taxation; higher education
    JEL: D31 D7 H2 H41 I22
    Date: 2010–03
  6. By: PIERETTI, Patrice; ZANAJ, Skerdilajda (UniversitŽ catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))
    Keywords: tax competition, public goods competition, spatial competition, foreign direct investments, country size
    JEL: H25 H73 F13 F15 F22
    Date: 2009–03–01
  7. By: James E. Anderson (Boston College); Will Martin (World Bank)
    Abstract: The fact that raising taxes can increase taxed labor supply through income effects is frequently used to justify greater public good provision than indicated by traditional, compensated analyses. We develop a model including multiple public goods and taxes and derive consistent measures of the marginal benefit of public goods and their marginal social cost inclusive of tax distortions using both compensated and uncompensated measures of the Marginal Cost of Funds (MCF). Our analysis confirms that the desirability of tax financed public projects is independent of whether compensated or uncompensated methods are used. The main innovation shows that the costs or benefits of providing particular public goods should be adjusted by a simple, benefit multiplier not previously seen in the literature if an uncompensated MCF is used.
    Keywords: fiscal policy; second best; public goods; distortions; costs of taxation, marginal cost of funds; marginal excess burden, thought experiment
    JEL: D61 F11 H21 H43
    Date: 2010–01–30
  8. By: LEROUX, Marie - Louise (UniversitŽ catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium); PONTHIERE, GrŽgory (Paris School of Economics and Ecole Normale SupŽrieure, Paris)
    Abstract: We study the optimal taxation problem in an economy composed of two-person households (men and women), where agents influence their own old-age dependency prospects through health spending. It is shown that the utilitarian social optimum can be decentralized by means of lump sum transfers from men to women, because women exhibit a higher disability-free life expectancy than men for a given level of health spending. Once self-oriented concerns for coexistence are introduced, the decentralization of the first-best requires also gender-specific subsidies on health spending aimed at internalizing the effect of each agent's health on the spouse's welfare. In the presence of singles in the population, the optimal policy requires also a differentiated subsidization of health spending for singles and couples. Finally, under imperfect observability of couples, the incentive compatibility constraints reinforce the need for subsidization of health spendings
    Keywords: long term care, optimal taxation, preventive health spending, gender differentials, old age dependency
    JEL: H51 I12 I18 J14 J16
    Date: 2009–11–01
  9. By: DAVILA, Julio (UniversitŽ catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium)
    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 no 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
    JEL: E62 E21 E22 H21
    Date: 2009–12–01

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