New Economics Papers
on Public Finance
Issue of 2010‒12‒11
eleven papers chosen by

  1. Optimal Tax Policy and Wage Subsidy in an Imperfectly Competitive Economy By Selim, Sheikh
  2. Various Tax Policy Alternatives to Delay Retirement: Some Computations and Implications By Emin Gahramanov; Xueli Tang
  3. Itemised deductions: a device to reduce tax evasion By Amedeo Piolatto
  4. Distributional and Welfare Effects of Germany's Year 2000 Tax Reform By Richard Ochmann
  5. Even Small Trade Costs Restore Efficiency in Tax Competition By Johannes Becker; Marco Runkel
  6. Stimulating Local Public Employment: Do General Grants Work? By Lundqvist, Heléne; Dahlberg, Matz; Mörk, Eva
  7. Citizens control and the efficiency of local public services By Nuria Bosch; Marta Espasa; Toni Mora
  8. Quality of government regulated goods By Moszoro, Marian
  9. Efficient public-private partnerships By Moszoro, Marian
  10. Public Provision of Private Goods, Tagging and Optimal Income Taxation with Heterogeneity in Needs By Bastani, Spencer; Blomquist, Sören; Micheletto, Luca
  11. Universities as Stakeholders in their Students' Careers: On the Benefits of Graduate Taxes to Finance Higher Education By McKenzie, Tom; Sliwka, Dirk

  1. By: Selim, Sheikh (Cardiff Business School)
    Abstract: In an imperfectly competitive economy with direct and indirect taxes, the first best wage subsidy overcompensates workers and provides the incentive to misreport working hours. We show that in the second best optimum where the government cannot use a wage subsidy, the optimal policy is to tax labour income at a zero rate. This policy is optimal because it minimizes the incentive to misreport working hours.
    Keywords: Optimal Taxation; Ramsey Problem; Wage Subsidy
    JEL: D42 E62 H21 H30
    Date: 2010–11
  2. By: Emin Gahramanov; Xueli Tang
    Abstract: Demographic challenges have been threatening the fiscal sustainability of pension systems across most of the developed world. A popular policy response to pension financing difficulties is the encouragement (or enforcement) of later retirement, as well the legislation of higher payroll taxes over time. In this paper we analyze how various tax policy experiments, including changes in the Social Security payroll tax, affect people’s desire to leave the workforce and the state of the economy. For this purpose we build a general-equilibrium life-cycle model with rational and myopic consumers, facing a mortality risk. Agents leave accidental bequests and are heterogeneous in their age-dependent work productivity. We incorporate productive government expenditures, categorize people into the rich and poor, and endogenize people’s retirement decision. We find that although some reasonable fiscal reforms are unlikely to abruptly delay people’s planned retirement dates, there exists a number of alternative fiscal arrangements which are welfare and output enhancing, consumption-smoothing, and more or less distributionally neutral. This alone suggests that the welfare losses due to the pension crisis can potentially be counter-balanced by various fiscal reforms. Increasing the payroll tax is the most distortive among all the existing tax policy reforms. Increasing bequest and capital tax rates by reasonable magnitudes have the least impact on output, implying that the combination of higher capital and bequest taxes with a lower social security payroll tax can be used to generate extra revenues to cope with the pension crisis. The highest combined welfare gain, positive to all agents, can be achieved by increasing the consumption tax, but this tax also tends to encourage retirement.
    Date: 2010–12–05
  3. By: Amedeo Piolatto (Universidad de Alicante)
    Abstract: Direct incentives and punishments are the most common instruments to fight tax evasion. The theoretical literature disregarded indirect schemes, such as itemised deductions, in which an agent has an interest in that other agents declare their revenue. Itemised deductions provide an incentive for consumers to declare their purchases, and this forces sellers to do the same. I show that, for any level of taxation, it is possible to increase tax proceeds by choosing the proper level of itemised deduction: the cost for the government on the consumers' side is more than compensated by the extra proceeds on the sellers' side.
    Keywords: tax evasion, itemised deductions, substitutes goods, quantity competition.
    JEL: H00 H20 H26 H30
    Date: 2010–11
  4. By: Richard Ochmann
    Abstract: This paper empirically investigates distributional and welfare effects of Germany's year<br /> 2000 income tax reform. The reform is simulated in an ex-ante behavioral microsimulation approach. Dead weight loss of changes in capital income taxation is estimated in a structural model for household savings and asset demand applied to German survey data. Significant reductions in tax rates result in income gains for most of the households. Gains are found greater for households in higher tax brackets, whereby income inequality increases, slightly greater in East- than in West-Germany. Moreover, households increase savings and alter the structure of asset demand as a result of shifts in relative asset prices. As a consequence, utility losses reduce welfare effects for almost all households.
    Keywords: Capital income taxation, household savings, asset demand, welfare effects
    JEL: C35 G11 H31
    Date: 2010
  5. By: Johannes Becker (Institute of Public Economics I, University of Muenster); Marco Runkel (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: We introduce transport cost of trade in products into the classical Zodrow and Mieszkowski (1986) model of capital tax competition. It turns out that even small levels of transport cost lead to a complete breakdown of the seminal result, the underprovision of public goods. Instead, there is a symmetric equilibrium with efficient public goods provision in all jurisdictions.
    Keywords: Tax Competition, Public Goods Provision, Trade
    JEL: H25 F23
    Date: 2010–10
  6. By: Lundqvist, Heléne (Uppsala Center for Labor Studies); Dahlberg, Matz (Uppsala Center for Labor Studies); Mörk, Eva (Uppsala Center for Labor Studies)
    Abstract: The effectiveness of public funds in increasing public employment has long been a question on public and labor economists’ minds. In most federal countries local governments employ large fractions of the working population, meaning that a tool for stimulating local public employment can substantially affect the overall unemployment level. This paper asks whether general grants to lower-level governments have the potential of doing so. Applying the regression kink design to the Swedish grant system, we are able to estimate causal effects of intergovernmental grants on personnel in different local government sectors. Our robust conclusion is that personnel in the central administration increased substantially after a marginal increase in grants, but that such an effect was lacking both for total personnel and personnel in child care, schools, elderly care, social welfare and in technical services. We suggest several potential reasons for these results, such as heterogeneous treatment effects and bureaucratic influence in the local decision-making process.
    Keywords: Fiscal federalism; intergovernmental grants; public employment; regression kink design; instrumental variables
    JEL: H11 H70 J45
    Date: 2010–09–02
  7. By: Nuria Bosch; Marta Espasa; Toni Mora (Universitat de Barcelona)
    Abstract: It is generally accepted that fiscal decentralization increases citizens control over politicians, fostering accountability and increasing efficiency. This article identifies the socioeconomic characteristics of citizens (potential voters) that increase their control over local policy-makers and thus generate greater efficiency in a decentralized context. We also highlight the fiscal characteristics of local governments that influence this control and efficiency. The study examines a sample of Spanish municipalities, applying a methodology based on the conventional procedure of two-stage estimation. In the first stage we estimate the efficiency of local public services by calculating a new version of a global output indicator using the DEA technique. In the second stage, using a Tobit type estimation (censored models) and bootstrap methods, we show how the factors mentioned may influence efficiency. The results suggest that strong presence of retailers, retired people, and people entitled to vote favour citizens control, which fosters accountability and efficiency. A factor that facilitates this control, and therefore greater efficiency, is the presence of low opportunity costs for obtaining information regarding local public service management.
    Keywords: technical efficiency, local governments, socioeconomic and fiscal variables, citizens control
    JEL: H11 H72 H71
    Date: 2010
  8. By: Moszoro, Marian (IESE Business School)
    Abstract: Regulators face the difficult task of determining the sets of price and quality of government-regulated goods. While the profit-maximizing monopoly always produces less in quantity than under free competition, the level of quality produced by the monopoly is not unequivocal: it depends on its cost and demand functions. The social effect of quality change is not unequivocal either, because it depends, apart from the cost function change, on the shift and tilt change of the demand curve. The problem lies in determining how the price elasticity of basic need goods responds to quality change and whether this change of quality is socially desirable. This paper analyzes quality as a decision variable in the government-regulated goods sector. Because the quality of government-regulated goods remains an externality, in particular cases the optimal level of the quality of these goods can be determined. Paradoxically, rate-of-return regulation may even make it impossible to achieve Pareto-efficient contracts for government-regulated goods.
    Keywords: infrastructure; regulation quality; Coase Theorem;
    JEL: H54 L15 L51
    Date: 2010–10–07
  9. By: Moszoro, Marian (IESE Business School)
    Abstract: This paper presents a model to assess the efficiency of the capital structure in public-private partnerships (PPP). A main argument supporting the PPP approach to investment projects is the transfer of managerial skills and know-how from the private partner to the investment vehicle. The paper shows how different managerial skills and knowledge transfer schemes determine an optimal shareholding structure of the PPP. Under the assumption of lower capital cost of the public partner and lower development outlays when the investment is carried out by a private investor, an optimal capital structure is achieved with both the public and the private parties as shareholders, i.e. a mixed public-private capital structure makes it possible to internalize the financial advantage of the public sector and the managerial advantage of the private sector.
    Keywords: Public-Private Partnerships; Joint Ventures; Public investment policy; Knowledge transfer; Hybrid governance structures;
    JEL: D23 G32 H43 H54 L19
    Date: 2010–10–09
  10. By: Bastani, Spencer (Uppsala Center for Fiscal Studies); Blomquist, Sören (Uppsala Center for Fiscal Studies); Micheletto, Luca (Uppsala Center for Fiscal Studies)
    Abstract: Previous literature has shown that public provision of private goods can be a welfareenhancing device in second-best settings where governments pursue redistributive goals. However, three issues have so far been neglected. First, the case for supplementing an optimal nonlinear income tax with public provision of private goods has been made in models where agents dier only in terms of market ability. Second, the magnitude of the welfare gains achievable through public provision schemes has not been assessed. Third, the similarities/dierences between public provision schemes and tagging schemes have not been thoroughly analyzed. Our purpose in this paper is therefore threefold: rst, to extend previous contributions by incorporating in the theoretical analysis both heterogeneity in market ability and in the need for the publicly provided good; second, to perform numerical simulations to quantify the size of the potential welfare gains achievable by introducing a public provision scheme, and to characterize the conditions under which these welfare gains are sizeable; nally, to compare the welfare gains from public provision with the welfare gains from tagging.
    Keywords: optimal income taxation; in-kind transfers; tagging
    JEL: H21 H42
    Date: 2010–11–16
  11. By: McKenzie, Tom (City University London); Sliwka, Dirk (University of Cologne)
    Abstract: We examine ways of funding higher education, comparing upfront tuition fees with graduate taxes. The tax dominates, as volatility in future income is transferred from risk-averse students to the risk-neutral state. However, a double moral hazard problem arises when students’ efforts to raise lifetime income and universities’ activities to improve teaching quality are endogenized. We show that graduate taxes reduce work incentives but provide incentives to improve teaching quality. Yet if tax revenues are distributed evenly among universities there is free riding. To solve this problem each university should be allocated the revenue generated by its own alumni. In addition, we demonstrate how a budget-balancing graduate tax would encourage more people to attend university than would the equivalent upfront tuition fee.
    Keywords: higher education, graduate tax, tuition fees, risk aversion, incentives
    JEL: H42 H52 I22 M52
    Date: 2010–11

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