nep-pub New Economics Papers
on Public Finance
Issue of 2010‒10‒23
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Are We Taxing Ourselves? How Deliberation and Experience Shape Voting on Taxes By Rupert Sausgruber; Jean-Robert Tyran
  2. Empirical Evidence on the Effects of Tax Incentives By A. KLEMM; S. VAN PARYS
  3. Optimal Dynamic Nonlinear Income Taxation under Loose Commitment By Jang-Ting Guo; Alan Krause
  4. Financial Transaction Tax: Small is Beautiful By Zsolt Darvas; Jakob von Weizs„cker
  5. Tiebout, local school finance and the ineffciency of head taxes By Francisco Martínez-Mora
  6. The double taxation of savings: the Italian debate revisited By Amedeo Fossati
  7. Local tax interaction with multiple tax instruments: evidence from Flemish municipalities By S. VAN PARYS; B. MERLEVEDE; T. VERBEKE
  8. The Elasticity of Taxable Income in New Zealand By Iris Claus; John Creedy; Josh Teng
  9. The Impact of Market Exposure on Public Goods Provision By Mahvish Shami

  1. By: Rupert Sausgruber; Jean-Robert Tyran
    Abstract: We let consumers vote on tax regimes in experimental markets. We test if taxes on sellers are more popular than taxes on consumers, i.e. on voters themselves, even if taxes on sellers are inefficiently high. Taxes on sellers are more popular if voters underestimate the extent of tax shifting in the market. We show that inexperienced voters are prone to such a tax-shifting bias, that experience is an effective de-biasing mechanism, but that pre-vote deliberation about tax regimes makes initially held opinions more extreme rather than correct. Our results suggest that voting on taxes is prone to bias and that easy-to-interpret facts are needed to de-bias voters.
    JEL: C92 H22 D72
    Date: 2010–10
    Abstract: This paper considers two empirical questions about tax incentives: (i) are incentives used as tools of tax competition and (ii) how effective are incentives in attracting investment? To answer these, we prepared a new dataset of tax incentives in over 40 Latin American, Caribbean and African countries for the period 1985–2004. Using spatial econometrics techniques for panel data to answer the first question, we find evidence for strategic interaction in tax holidays, in addition to the well-known competition over the corporate income tax (CIT) rate. We find no evidence, however, for competition over investment allowances and tax credits. Using dynamic panel data econometrics to answer the second question, we find evidence that lower CIT rates and longer tax holidays are effective in attracting FDI in Latin America and the Caribbean but not in Africa. None of the tax incentives is effective in boosting gross private fixed capital formation.
    Keywords: Tax incentives, tax competition, investment, developing countries
    JEL: H25 H87
    Date: 2010–09
  3. By: Jang-Ting Guo; Alan Krause
    Abstract: This paper examines an infinite-horizon model of dynamic nonlinear income taxation in which there exists a small probability that the government cannot commit to its future tax policy. In this "loose commitment" environment, we find that even a little uncertainty over whether the government can commit yields substantial effects on the optimal dynamic nonlinear income tax system. Under an empirically plausible parameterization, numerical simulations show that high-skill individuals must be subsidized in the short run, despite the government's redistributive objective, unless the probability of commitment is higher than 98%. Loose commitment also reverses the short-run welfare effects of changes in most model parameters. In particular, all individuals are worse-off, rather than better-off, in the short run when the proportion of high-skill individuals in the economy increases. Finally, our main findings remain qualitatively robust to a setting in which loose commitment is modelled as a Markov switching process.
    Keywords: Dynamic Income Taxation, Loose Commitment
    JEL: H21 H24
    Date: 2010–10
  4. By: Zsolt Darvas (Institute of Economics - Hungarian Academy of Science, Bruegel-Brusselss); Jakob von Weizs„cker (Bruegel-Brusselss)
    Abstract: The case for taxing financial transactions merely to raise more revenues from the financial sector is not particularly strong. Better alternatives to tax the financial sector are likely to be available. However, a tax on financial transactions could be justified in order to limit socially undesirable transactions when more direct means of doing so are unavailable for political or practical reasons. Some financial transactions are indeed likely to do more harm than good, especially when they contribute to the systemic risk of the financial system. However, such a financial transaction tax should be very small, much smaller than the negative externalities in question, because it is a blunt instrument that also drives out socially useful transactions. There is a case for taxing over-the-counter derivative transactions at a somewhat higher rate than exchange-based derivative transactions. More targeted remedies to drive out socially undesirable transactions should be sought in parallel, which would allow, after their implementation, to reduce or even phase out financial transaction taxes.
    Keywords: transaction tax, Tobin tax, financial transactions, global financial crisis, financial regulation
    JEL: H20 D62 G10 F30
    Date: 2010–09
  5. By: Francisco Martínez-Mora
    Abstract: The literature on local public (school) finance has shown that the use of local head taxes to finance schools leads to an effcient allocation of households and pupils to districts (Tiebout, 1956; Hamilton, 1975; Calabrese et al., 2009). This paper revises this well established result, using a two-community model with a housing market that adds two layers of realism to the analysis: not every household receives direct benefits from schools (e.g. some do not have children at school age) and communities are vertically differentiated, in the sense that one of them is exogenously preferred to the other by every household. In such context, head taxation leads to an ineffcient allocation of households to districts, even if local governments set local spending levels effciently given their population. The ineffciency emerges because too many intermediate income "in-school" households reside in the rich district in equilibrium. Income taxation is ineffcient as well but, in a counter-intuitive result, it may cause smaller effciency losses than a lump-sum tax.
    Date: 2010–05
  6. By: Amedeo Fossati (Department of Economics and Quantitative Methods, University of Genoa, Italy)
    Abstract: In the first half of the 20th century, Italian scholars of public finance debated J. S. Mill's theorem on the double taxation of savings. Building on I. Fisher's contribution, L. Einaudi started the discussion, which lasted for some 30 years, involving a significant number of scholars. This paper critically discusses the crucial aspects of this debate, with the aim, firstly, to highlight its peculiarity and specificity with respect to the previous Anglo-Saxon literature. A second aim is to discuss critically, from a historiographical perspective, the main reasoning put forward in the debate.
    Keywords: double taxation of savings; Italian tradition in public finance
    JEL: B0 B30 H20
    Date: 2010–10
    Abstract: We investigate the long run result of strategic interaction among local jurisdictions using multiple tax instruments. Most studies about local policy interaction only consider a single policy instrument. With multiple tax instruments, however, tax interaction is more complex. We construct a simple theoretical framework based on a basic spillover model, with two tax rates and immobile resources. We show that the signs of within and cross tax interaction crucially depend on the extent to which a jurisdiction mimics the other jurisdiction’s budget, and the extent to which the preference for one tax instrument is affected by the level of the same or the other tax instrument in the other jurisdiction. Its specific institutional setting makes of Flanders (Belgium) a unique region to evaluate multiple tax interaction. Municipalities in Belgium are free to set two important local tax rates: the local property tax rate and the local income tax rate. We estimate whether years of strategic interaction between Flemish municipalities, of which the division is stable since 1983, has resulted in municipalities mimicking their neighbors’ tax structure. We do so by between estimating income and property tax reaction functions for the period 1992-2004, each of which simultaneously includes the neighboring municipalities’ income ànd property tax rate. We find that the property (income) tax rate of a municipality is significantly higher if the property (income) tax rate in other municipalities is high, and that the coefficient is higher if the possible impact of the other municipalities’ income (property) tax rate is accounted for. The cross impact of the other municipalities’ income (property) tax rate on the property (income) tax rate is always negative, though the significance is higher for the property tax than for the income tax reaction function. The result suggests that municipalities are keener on competing each other’s tax structure than on mimicking the neighboring municipalities’ budget.
    Keywords: tax competition; yardstick competition; local tax rates; spatial econometrics; multiple taxes; tax structure
    Date: 2010–09
  8. By: Iris Claus; John Creedy; Josh Teng
    Abstract: This paper reports estimates of the elasticity of taxable income with respect to the net-of-tax rate for New Zealand taxpayers. The elasticity of taxable income was estimated to be substantially higher for the highest income groups. Generally it was higher for men than for women. Changes in the timing of income flows for the higher income recipients were found to be an important response to the announcement of a new higher-rate bracket. The marginal welfare costs of personal income taxation were consistent across years, being relatively small for all but the higher tax brackets. For the top marginal rate bracket of 39 per cent, the welfare cost of raising an extra dollar of tax revenue was estimated to be well in excess of a dollar. Furthermore, for the top bracket the marginal tax rate was often found to exceed the revenue-maximising tax rate.
    Keywords: Income taxation; Taxable income; Elasticity of taxable income; Excess
    JEL: H24 H31
    Date: 2010
  9. By: Mahvish Shami (Institute of Food and Resource Economics, University of Copenhagen)
    Abstract: Low levels of public goods provision in many developing countries’ rural communities often force the poor to approach someone with considerable command over both financial and social resources to act as their patron. However engaging with the patron – typically a landlord – does not guarantee public provision, as inequality and lack of alternative options considerably weakens peasants’ bargaining power, thus enabling the landlord to use peasant’ votes to secure public resources for his own benefit. This paper proposes to increase peasants’ bargaining power, and thus their ability to pressurize their patron to broker public goods for them, by increasing their alternative options through connectivity. In order to empirically test the viability of this solution the paper makes use of a natural experiment found in the construction of a motorway in Pakistan. Using household-level data, the study shows that households situated close to the road enjoy a significantly higher level of public investment when compared to similar peasants living in isolated villages. Moreover, the data finds the beneficial impact of connectivity is felt most strongly by the socially lower classes within rural society.
    Keywords: Public Goods Provision, Patron-Client Networks, Patronage Politics, Bargaining power, Pakistan
    JEL: H41 R2 O1
    Date: 2010–10
  10. By: Daniele Nosenzo (University of Nottingham); Martin Sefton (University of Nottingham)
    Abstract: In this paper we examine voluntary contributions to a public good, embedding Varian (1994)’s voluntary contribution game in extended games that allow players to choose the timing of their contributions. We show that predicted outcomes are sensitive to the structure of the extended game, and also to the extent to which players care about payoff inequalities. We then report a laboratory experiment based on these extended games. We find that behavior is similar in the two extended games: subjects avoid the detrimental move order of Varian’s model, where a person with a high value of the public good commits to a low contribution, and instead players tend to delay contributions. These results suggest that commitment opportunities may be less damaging to public good provision than previously thought.
    Keywords: Public Goods, Voluntary Contributions, Sequential Contributions, Endogenous Timing, Action Commitment, Observable Delay, Experiment
    JEL: H41 C72 C92
    Date: 2010–08

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