nep-pub New Economics Papers
on Public Finance
Issue of 2010‒11‒20
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal size of government and economic growth in EU-27 By Magazzino, Cosimo; Forte, Francesco
  2. The Price of Egalitarianism By Yongsung Chang; Sun-Bin Kim
  3. How Optimal Nonlinear Income Taxes Change When the Distribution of the Population Changes By Craig Brett; John A. Weymark
  4. The Direct Incidence of Corporate Income Tax on Wages By Arulampalam, Wiji; Devereux, Michael P.; Maffini, Giorgia
  5. A Defense of the Current US Tax Treatment of Employer-Provided Medical Insurance By Kevin X. D. Huang; Gregory W. Huffman
  6. Tax audit productivity in New York State By Niu, Yongzhi
  7. Addressing the Legacy Costs in an NDC Reform: Conceptualization, Measurement, Financing By Holzmann, Robert; Jousten, Alain
  8. Moral Judgments in Social Dilemmas: How Bad is Free Riding? By Robin P. Cubitt; Michalis Drouvelis; Simon Gaechter; Ruslan Kabalin
  9. Does the Endowment of Contributors Make a Difference in Threshold Public Good Games? By Federica Alberti; Edward J. Cartwright
  10. Visibility of Contributions and Cost of Information: An Experiment on Public Goods By Anya Savikhin; Roman Sheremeta

  1. By: Magazzino, Cosimo; Forte, Francesco
    Abstract: Using time-series techniques and panels data, the paper analyses for the EU countries in the period 1970-2009 the existence and shape of the “BARS curve” (Barro, Armey, Rahn, and Scully), connecting the size of Government (measured by the share of public expenditure on GDP) to the rate of economic growth. Individual countries research has been conducted for 12 countries for whom enough time series were available, while panel analysis has been performed both for EU-27 and for subgroups, distinguished by their different socio-economic and monetary structures, and per capita GDP. BARS curves were generally found, and the shares of actual public expenditures generally exceed substantially those related to the maximization of GDP growth. However, great differences do emerge. For the 12 countries examined by time-series techniques, the difference between the actual level and the peak of the BARS curve ranges from 5.7 points for Germany and 18.1 points for Belgium. Panel data analysis for EU-27 shows a peak of the BARS curve at 37%, while the actual level is about 47%. While, panel data disaggregation shows a similar situation for the Western Continental Countries, with a smaller gap for Anglo-Saxon countries. For low per capita GDP countries the peak is higher than for the mature economies. So, further research may prove useful to show light on the disparities emerging in the empirical analysis of individual countries and of the panel sub-groups. However, the present research provides enough evidence that high GDP countries of EU have overcome the level of government size compatible with GDP growth rate maximization.
    Keywords: Government size; economic growth; BARS curve; public expenditure; EU-27.
    JEL: E62 H60 C23 C22 O40
    Date: 2010–09–01
  2. By: Yongsung Chang (University of Rochester); Sun-Bin Kim (Department of Economics, Korea University)
    Abstract: We compute the welfare cost of egalitarianism—a tax policy that equalizes wages for all. The benchmark “laissez-faire†economy has features a la Aiyagari (1994) with endogenous labor supply. A progressive income tax provides insurance against income risks but at the cost of efficiency: it undermines highly productive workers’ incentives to work. We find that in an economy with the labor-supply elasticity of 1, the welfare cost of egalitarianism, measured in consumption-equivalence units, is only 1% as the welfare gain from insurance against income risks nearly offsets the efficiency loss from distorting labor effort. However, with an elastic labor supply, the welfare cost of egalitarianism is as large as 7.5% of steady state consumption.
    Keywords: Egalitarianism; Welfare Cost; Equal-Wage Policy; Income Risks.
    JEL: E2 E6 J3
    Date: 2010–10
  3. By: Craig Brett (Department of Economics, Mount Allison University); John A. Weymark (Department of Economics, Vanderbilt University)
    Abstract: The impacts of changing the number of individuals of a particular skill level on the solutions to two versions of the finite population optimal nonlinear income tax problem are investigated. In one version, preferences are quasilinear-in-leisure. For this version, it is shown that it is possible to sign the directions of change in everyone's optimal consumptions and optimal marginal tax rates. In the other version, preferences are quasilinear-in-consumption. For this version, it is shown that is possible to sign the directions of change in everyone's optimal before-tax incomes and optimal marginal tax rates. Moreover, the directions of change in the optimal marginal tax rates are the same for the two specifications of preferences.
    Keywords: Asymmetric information, comparative statics, optimal income taxation
    JEL: D82 H21
    Date: 2010–04
  4. By: Arulampalam, Wiji (University of Warwick); Devereux, Michael P. (University of Oxford); Maffini, Giorgia (University of Oxford)
    Abstract: We examine the extent to which taxes on corporate income are directly shifted onto the workforce. We use data on 55,082 companies located in nine European countries over the period 1996-2003. We identify this direct shifting through cross-company variation in tax liabilities, conditional on value added per employee. Our central estimate is that the long run elasticity of the wage bill with respect to taxation is -0.093. Evaluated at the mean, this implies that an exogenous rise of $1 in tax would reduce the wage bill by 49 cents. We find only weak evidence of a difference for multinational companies.
    Keywords: income tax, wage bargaining, effective incidence
    JEL: H22 H25 J50
    Date: 2010–10
  5. By: Kevin X. D. Huang (Department of Economics, Vanderbilt University); Gregory W. Huffman (Department of Economics, Vanderbilt University)
    Abstract: The US tax system currently provides an incentive for individuals to obtain medical insurance through their employers. This feature introduces a distortion which encourages households consume more medical services than they otherwise would, and likely results in the medical consumption taking up 17 percent total consumption, which is much higher than in other advanced economies. This unusual and unique tax treatment is widely excoriated as resulting in high costs and distorting consumption decisions. This paper presents a simple general equilibrium model to compare the outcomes for different systems for the provision of medical services. It is shown that the current tax system may be superior to an identical system in which the tax subsidy is absent. It also is shown that eliminating the tax subsidy for employer-provided medical insurance results in higher unemployment, lower output, and lower welfare. Furthermore, having the government raise taxes to finance the provision of medical care results in substantial decreases in employment, output and welfare.
    Keywords: Tax, employment, medical benefit, welfare
    JEL: E2 E6 H2 H3 I1
    Date: 2010–02
  6. By: Niu, Yongzhi
    Abstract: This study employs both linear and non-linear approaches to examine tax audit productivity in New York State. The linear approach shows a positive relationship between audit revenue and the number of audit staff within the New York State Department of Taxation and Finance’s Audit Division. Using a narrower definition of “direct staff” which excludes upper level supervisors (staff at grade level 27 or higher, we find that the impact of an additional auditor is $590 thousand; using a broader definition of “direct staff”, which includes upper level supervisors (staff at grade level 27 or higher), the impact is $496 thousand. The non-linear approach discovers the diminishing marginal returns. At the current direct staff level (877 as of November 2008, the narrower definition) in the Audit Division, the marginal return of an extra direct staff member is $602 thousand, which is consistent with the results of the linear model. The results also show that in order to maximize net audit revenue the State needs to increase the number of auditors to 1,522, assuming the marginal cost of an additional auditor is constant at $200 thousand. The non-linear model provides a convenient way to determine the optimal level of staff, given the marginal cost of an additional auditor. Hence policymakers can use this non-linear model as a tool to maximize the State’s net audit revenue.
    Keywords: tax; audit productivity; diminishing returns; non-linear approach; audit output measures; audit input measures; optimal level; reciprocal model; impact lags
    JEL: H83 H71 H00 H26
    Date: 2010–11–12
  7. By: Holzmann, Robert (World Bank); Jousten, Alain (CREPP, Université de Liège)
    Abstract: The paper provides a framework for the conceptualization, definition and estimation of legacy costs that need to be addressed in a reform that transforms an unfunded defined contribution (NDB) scheme into a notional (or non-financial) defined contribution (NDC) scheme. As the new contribution rate is fixed and, perhaps, reduced, paying for the accrued to date liabilities leaves a financing gap that needs to be estimated and financed, best outside the pension system if a less distorting financing form is available. The paper illustrates the proposed measurement approach with broad estimates under a hypothetical NDC reform in China.
    Keywords: legacy costs, pension reform, NDC, coverage expansion
    JEL: H55 H68 J21 J26
    Date: 2010–10
  8. By: Robin P. Cubitt (University of Nottingham); Michalis Drouvelis (University of Birmingham); Simon Gaechter (University of Nottingham); Ruslan Kabalin (University of Lancaster)
    Abstract: In the last thirty years, economists and other social scientists have investigated people’s normative views on distributive justice. Here we study people’s normative views in social dilemmas, which underlie many situations of economic and social significance. Using insights from moral philosophy and psychology we provide an analysis of the morality of free riding. We use experimental survey methods to investigate people’s moral judgments empirically. We vary others’ contributions, the framing (“give-some” vs. “take-some”) and whether contributions are simultaneous or sequential. We find that moral judgments of a free rider depend strongly on others’ behaviour; and that failing to give is condemned more strongly than withdrawing all support.
    Keywords: moral judgments, moral psychology, framing effects, public goods experiments, free riding
    Date: 2010–10
  9. By: Federica Alberti; Edward J. Cartwright
    Abstract: We investigate experimentally whether the endowment of potential contributors changes the success rate of providing threshold public goods. We find a U shaped relationship in which the success rate is relatively high when the endowment is either relatively small or large. We also find an inverted U shaped relationship in terms of the variance of contributions. This suggests that people find it hardest to coordinate and provide threshold public goods when endowments are of ‘intermediate’ size. By this we mean that the endowment is small enough that people do need to contribute relatively a lot to fund the good, but is also large enough that no one person is critical in providing the good. Coordinating is difficult in this case because there is an incentive to free ride and the possibility to do so creating a conflict of interest.
    Keywords: Public Good; Threshold; Endowment
    JEL: C72 H41
    Date: 2010–10
  10. By: Anya Savikhin (Becker Center on Chicago Price Theory, The University of Chicago); Roman Sheremeta (Argyros School of Business and Economics, Chapman University)
    Abstract: We experimentally investigate the impact of visibility of information about contributors on contributions in the public goods game. We systematically consider several treatments that are similar to a wide range of situations in practice. First, we vary the cost of viewing identifiable information about contributors. Second, we vary recognizing all, top or bottom contributors. We find that recognizing all contributors significantly increases contributions relative to the baseline. Recognizing only the top contributors is not significantly different from not recognizing contributors, but recognizing only the bottom contributors is as effective as recognizing all contributors. When viewing information about contributors is costly, there is no significant difference in contributions as compared to the case where all contributors are displayed by default. This effect holds even though the identities of contributors are viewed less than ten percent of the time.
    Keywords: public-goods, information, competition
    JEL: C72 C91
    Date: 2010

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