nep-pub New Economics Papers
on Public Finance
Issue of 2010‒10‒09
eleven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Commodity Taxation and Social Welfare : The Generalised Ramsey Rule By David Coady; Jean Dreze
  2. Competition and Welfare Effects of VAT Exemptions By Helmut Dietl; Christian Jaag; Markus Lang; Urs Trinkner
  3. Redistributive effects in a dual income tax system By Arnaldur Sölvi Kristjánsson
  4. Base-Broadening Tax Reforms By Callan, Tim; Keane, Claire; Walsh, John R.
  5. Taxpayers' Response to Warnings of a Possible Tax Audit: Do They Change Their Compliance Behavior? By Niu, Yongzhi
  6. Education vs. Optimal Taxation: The Cost of Equalizing Opportunities By Stephens, Eric
  7. Designing a property tax without property values: Analysis in the case of Ireland By Mayor, Karen; Lyons, Seán; Tol, Richard S. J.
  8. Taxation Reforms: a CGE-Microsimulation Analysis for Pakistan By Saira Ahmed; Vagar Ahmed; Ahsan Abbas
  9. Social Security as Markov Equilibrium in OLG Models: A Note By Martín Gonzalez Eiras
  10. Public-Private Partnerships in Europe - Before and During the Recent Financial Crisis By Kappeler, Andreas; Nemoz, Mathieu
  11. Fiscal Policy in Latin America: Countercyclical and Sustainable at Last? By Christian Daude; Angel Melguizo; Alejandro Neut

  1. By: David Coady; Jean Dreze
    Abstract: Commodity taxes have three distinct roles: (1) revenue collection, (2) interpersonal redistribution, and (3) resource allocation. The paper presents an integrated treatment of these three concerns in a second-best general equilibrium framework, which leads to the "generalized Ramsey rule" for optimum taxation. We show how many standard results on optimum taxation and tax reform have a straightforward counterpart in this general framework. Using this framework, we also try to clarify the notion of "deadweight loss", as well as the relation between alternative distributional assumptions and the structure of optimum taxes. [Working Paper No. 87]
    Keywords: Commodity taxation, efficiency, redistribution, shadow prices
    Date: 2010
  2. By: Helmut Dietl (Institute for Strategy and Business Economics, University of Zurich); Christian Jaag (Institute of Public Finance and Fiscal Law, University of St. Gallen); Markus Lang (Institute for Strategy and Business Economics, University of Zurich); Urs Trinkner (Institute for Strategy and Business Economics, University of Zurich)
    Abstract: Distortions under the value-added tax (VAT) arise mainly from the exemption of specific services and sectors. This paper develops an analytical model that is applicable to any sector characterized by asymmetric VAT exemptions of services and activities or differentiated VAT rates. We analyze the effects of such asymmetric VAT regimes on market shares, optimal prices, and tax receipts analytically and by simulation. The analytical model shows how asymmetric VAT exemptions distort competition by strengthening the competitive position of non-rated firms. The net effect of VAT exemptions depends on the fraction of VAT rated inputs versus the fraction of non-rated customers. We further shed light on the main competitive impact of VAT policies, while showing the consequences on overall welfare by presenting simulation results based on a calibrated quantitative model of a selected sector. The contribution of our paper is to provide guidance on how to resolve the policy trade-off between a level playing field, consumer surplus and government tax revenue.
    Keywords: Value-added tax, indirect taxation, tax regulation, tax exemption, universal service obligation, postal sector
    JEL: H21 H25 L51 L87
    Date: 2010–09
  3. By: Arnaldur Sölvi Kristjánsson (University of Iceland)
    Abstract: Equity issues of the dual income tax have been left aside in the field of economics. Since a dual income tax needs different modelling than a comprehensive one this paper offers firstly a quantitative framework to measure redistributive effects; it turns out that this involves both direct and indirect effects. The effects of horizontal inequity and re-ranking are also incorporated into the decomposition analysis. The approach is applicable using available income and tax statistics. Secondly, partial effects of changes in tax parameters are presented; they are channelled through the direct and indirect effects; and are not always straightforward.
    Keywords: redistributive effect, progressivity, dual income tax.
    JEL: H23 D63 I38 I31
    Date: 2010
  4. By: Callan, Tim; Keane, Claire; Walsh, John R.
    Keywords: taxes
    Date: 2010–07
  5. By: Niu, Yongzhi
    Abstract: In 2008, the New York State Department of Taxation and Finance sent letters to clients of a fraudulent tax preparer, warning them of a possible audit and asking them to participate in the Department’s Voluntary Disclosure and Compliance Program if they had filed inaccurate tax returns in the past. This study examines the impact of the letters on voluntary compliance in their future (2008 and 2009) returns. In this study, a simple method similar to “difference in differences”, which we call “difference in positions”, is applied. 10,000 samples are randomly drawn from the taxpayer population and the growth rates of Federal adjusted gross income (AGI) for these samples are put into relative frequency density graphs. We then examine the relative positions of the experiment group (the clients of the fraudulent tax preparer) within the normally distributed curves before and after the letters were sent. The change in the relative positions is regarded as the letter impact on voluntary compliance. It is found that the impact is significant in the first year (2008 tax returns) after the letters were sent. The impact is 17.49 percentage points on the AGI growth rate, which translates to $8.68 million of reported AGI for the 507 taxpayers in the experiment group. However, the impact is minimal in the second year (2009 tax returns), indicating that the long-run effect of the letter mailings may be weak.
    Keywords: tax; audit impact; voluntary compliance; differnces-in-differences; difference-in-positions; personal income tax
    JEL: H29 H26
    Date: 2010–09–29
  6. By: Stephens, Eric (University of Alberta, Department of Economics)
    Abstract: If governments could reduce inequality in human capital outcomes, say by targeting education funds to low productivity neighborhoods or regions, should they do so? All things equal, a lower dispersion in the distribution of human capital is generally considered desirable. This paper examines the use of education spending as a redistributive tool, when there is a nonlinear tax system in place. It seems plausible that greater equality in productivity, which implies less redistribution through taxation, could mean less distortion to labor markets and an increase in social welfare. The results presented in this paper suggest the contrary. It is shown that tax redistributions that take place after education is obtained, not only eliminate the need for educational transfers, but imply an optimal education policy that generally spends even less on those with lower initial endowments.
    Keywords: optimal nonlinear taxation; redistribution; equality of opportunity
    JEL: D63 D82 H21 I22 I28
    Date: 2010–08–30
  7. By: Mayor, Karen; Lyons, Seán; Tol, Richard S. J.
    Abstract: We examine the implications of using hedonic regressions of house values as the basis for property tax assessment in the Republic of Ireland. Ad valorem property taxes are more equitable than flat rate taxes, but their equity benefits can be reduced if the relative values of dwellings are inaccurately assessed. Achieving greater accuracy in assessment tends to increase administrative costs, so policymakers face a trade-off between cost and accuracy. Using the Irish National Survey of Housing Quality of 2002, this study analyses the contribution that information about selected property characteristics can make to determine the relative values of residential properties in Ireland. These characteristics are the location of the dwelling, house size in square meters, the number of rooms and bedrooms in the home, the age of the house and the type of dwelling. The values of residential properties are estimated using these variables in turn and the prediction errors are presented in terms of the absolute value error and the assessment ratio (the estimated value divided by the market value). We find that it is possible to assign approximately 80% of houses nationally within the correct tax valuation band using just one of five house characteristics. Households whose house price is under assessed tend to be those with the greatest means (highly skilled professionals and high income earners), so a tax assessment system based on this type of valuation would tend to make regressive errors (while a property tax itself is regressive too). Consequently, checks would need to be put in place in order to more accurately estimate very highly priced properties as well as introducing exemptions for lower value properties and low income groups. The system could also be used to identify likely mis-reporting if using a self-assessment system.
    Keywords: hedonic regression/Ireland/property tax
    Date: 2010
  8. By: Saira Ahmed; Vagar Ahmed; Ahsan Abbas
    Abstract: This paper provides an ex ante assessment of taxation reforms being considered in Pakistan, in order to widen the tax base and rationalise the rate structure of different taxes. Amongst the main proposals, those focusing on sales tax and agricultural direct taxes seem relatively more attractive. The former has the highest share in indirect taxes and is also easier to collect, while the latter is intended to bring the presently exempted agricultural incomes into the tax net. As a first step, we study the general equilibrium effects of existing taxes by removing them from the system one at a time. In the second step we study the micro-macro impacts of four policy experiments: a) increasing sales tax rate by 33 percent; b) applying a 10 percent sales tax on presently zero-rated goods; c) increasing sales tax rate by 33 percent and bringing the services sectors in the sales tax net; and d) increasing sales tax rate by 33 percent, bringing the services sectors in the sales tax net, and imposing a 5 percent flat tax on agricultural incomes. In the third step we calculate the lost revenue due to evasion and avoidance. Results from experiments indicate the tough choices for policy makers in trying to improve the currently low tax to GDP ratio in Pakistan. Almost all simulations result in a decrease in investment levels, reduced consumption, and an increase in poverty. We thus recommend a gradual approach to tax reform that can make the adjustment process less painful.
    Keywords: Taxation, Microsimulation, General Equilibrium, Poverty, Inequality, Progressivity, Redistribution
    JEL: H22 D58 C51 C81 I32
    Date: 2010
  9. By: Martín Gonzalez Eiras (Department of Economics, Universidad de San Andres & CONICET)
    Abstract: I refine and extend the Markov perfect equilibrium of the social security policy game in Forni (2005) for the special case of logarithmic utility. Under the restriction that the policy function be continuous, instead of differentiable, the equilibrium is globally well defined and its dynamics always stable.
    Keywords: social security, overlapping generations models, Markov equilibria
    Date: 2010–09
  10. By: Kappeler, Andreas (European Investment Bank, Economic and Financial Studies); Nemoz, Mathieu (European Investment Bank)
    Abstract: This paper offers an updated description of the macroeconomic and sectoral significance of PPPs in Europe - without assessing PPPs from a normative perspective. Builidng on Blanc-Brude et al. (2007), it looks at the evolution of PPPs in the EU, with a particular focus on the recent financial crisis. In 2009, PPP transactions stood at EUR 15.8 billion; a decrease of almost 50% compared to 2007. The total value of closed deals has declined more than the number of deals. At the same time, the PPP market in Europe continues to diversify across countries and sectors. In 2008, the UK share in the total number of EU-PPPs fell below 50%. In many respects, however, the reduction in the European PPP market observed during the financial crisis can be seen as a reversal of an extraordinary spike in the years preceding the crisis.
    Keywords: Public-Private Partnerships; Europe; PPP
    JEL: H54 L33 R42
    Date: 2010–07–01
  11. By: Christian Daude; Angel Melguizo; Alejandro Neut
    Abstract: This paper analyses fiscal policy for several economies in Latin America, from the early nineties to the 2009 crisis. We present original estimates of cyclically-adjusted public revenues for Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, Peru and Uruguay implementing the standardised OECD methodology and extending it to include commodity cycles, which have a direct and significant effect on the fiscal balance of several Latin American countries. Based on these estimates, we evaluate the size of automatic tax stabilisers and the cyclicality of discretionary fiscal policy. Additionally, we highlight the uncertainty stemming from the estimation of the output gap, due to large and simultaneous cyclical, temporary and permanent shocks in several Latin American economies.<BR>Cette étude analyse la politique budgétaire dans huit économies d’Amérique Latine, à partir du début des années 1990 et jusqu’à 2009. Nous étudions les estimations des composantes structurelles et cyclique des recettes publiques en l’Argentine, le Brésil, le Chili, la Colombie, le Costa Rica, le Méxique, le Pérou et l’Uruguay, en utilisant la méthodologie de l’OCDE, et en ajoutant l’effet des prix des matières premières, qui ont un impact significatif sur le solde budgétaire en Amérique Latine. A partir de ces résultats, l’étude évalue l'ampleur des stabilisateurs automatiques, et l’stabilisation de la politique budgétaire discrétionnaire. Finalement, nous soulignons l’incertitude de l’estimation de l’écart de production en raison des larges chocs cycliques, temporaires et permanents dans plusieurs économies d’Amérique Latine.
    Keywords: fiscal policy, public finances, business cycle, politique budgétaire, cycle économique, finances publiques
    JEL: E62 H30 H60
    Date: 2010–08–25

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