nep-pub New Economics Papers
on Public Finance
Issue of 2010‒12‒18
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Mirrlees meets Laibson: Optimal Income Taxation with Bounded Rationality By Matteo Bassi
  2. Using a microeconometric model of household labour supply to design opimal income taxes By Aaberge Rolf; Colombino Ugo
  3. Partial Harmonization of Corporate Taxes in an Asymmetric Repeated Game Setting By Itaya, Jun-ichi; Okamura, Makoto; Yamaguchi, Chikara
  4. Children, happiness and taxation By Becchetti, Leonardo; Giachin Ricca, Elena; Pelloni , Alessandra
  5. Capital Taxation During the U.S. Great Depression By Ellen R. McGrattan
  6. Redistribution, work incentives and thirty years of UK tax and benefit reform By Stuart Adam; James Browne
  7. Fiscal Policy from a Public Choice Perspective By J. Stephen Ferris
  8. Public Spending, Public Deficits, and Government Coalitions By André Blais; Jiyoon Kim; Martial Foucault
  9. Group Size and the Voluntary Provision of Public Goods: Experimental Evidence Utilizing Very Large Groups By R. M Isaac; J. Walker; A. Williams

  1. By: Matteo Bassi (Università di Salerno and CSEF)
    Abstract: This paper studies an optimal taxation problem in a dynamic economy inhabited by individuals who differ in productivity (as in Kocherlakota, 2006) and in the short-term discount factor. We determine incentive compatible Pareto optimal allocations in a multidimensional screening model where individuals have to report truthfully their types. Moreover, we characterize the optimal non linear tax on capital and labor income that implements such allocations in a competitive equilibrium. Two forms of bounded rationality are considered: in the first one, some individuals discount future payoffs at a higher rate than others (myopia). In this application, the planner respects consumers' sovereignty, and maximizes a Paretian social welfare function. In the second application, some individuals are time inconsistent: they systematically change future plans and regret ex-post for the lack of commitment power. We show that the marginal tax on capital income implementing the optimal allocation consists of several elements, which combine incentive compatibility and bounded rationality considerations. The resulting optimal tax is a decreasing function of both the fraction of short-sighted individuals and the intensity of myopia/hyperbolic discounting. Our results are not driven by the paternalistic behavior of the planner, but by the incentive/self control problem and the necessity of providing the right incentive to high productive, far-sighted individuals. However, when the planner would like to push hyperbolic individuals toward the right consumption/saving path, we show that the optimal marginal tax includes also a paternalistic component that further decrease the optimal tax compared to the case with only exponential agents.
    Keywords: Dynamic Optimal taxation, Saving, Capital accumulation, Time Inconsistency, Myopia, Minimal Paternalism, Multidimensional Screening
    JEL: A21 H21
    Date: 2010–12–06
  2. By: Aaberge Rolf; Colombino Ugo (University of Turin)
    Abstract: The purpose of this paper is to present an exercise where we identify optimal income tax rules according to various social welfare criteria, keeping fixed the total net tax revenue. Empirical applications of optimal taxation theory have typically adopted analytical expressions for the optimal taxes and then imputed numerical values to their parameters by using “calibration” procedures or previous econometric estimates. Besides the restrictiveness of the assumptions needed to obtain analytical solutions to the optimal taxation problem, a shortcoming of that procedure is the possible inconsistency between the theoretical assumptions and the assumptions implicit in the empirical evidence. In this paper we follow a different procedure, based on a computational approach to the optimal taxation problem. To this end, we estimate a microeconomic model with 78 parameters that capture heterogeneity in consumption-leisure preferences for singles and couples as well as in job opportunities across individuals based on detailed Norwegian household data for 1994. For any given tax rule, the estimated model can be used to simulate the labour supply choices made by single individuals and couples. Those choices are therefore generated by preferences and opportunities that vary across the decision units. We then identify optimal tax rules – within a class of 9-parameter piece-wise linear rules - by iteratively running the model until a given social welfare function attains its maximum under the constraint of keeping constant the total net tax revenue. The parameters to be determined are an exemption level, four marginal tax rates, three “kink points” and a lump sum transfer that can be positive (benefit) or negative (tax). We explore a variety of social welfare functions with differing degree of inequality aversion. All the social welfare functions imply monotonically increasing marginal tax rates. When compared with the current (1994) tax systems, the optimal rules imply a lower average tax rate. Moreover, all the optimal rules imply – with respect to the current rule – lower marginal rates on low and/or average income levels and higher marginal rates on relatively high income levels. These results are partially at odds with the tax reforms that took place in many countries during the last decades. While those reforms embodied the idea of lowering average tax rates, the way to implement it has typically consisted in reducing the top marginal rates. Our results instead suggest to lower average tax rates by reducing marginal rates on low and average income levels and increasing marginal rates on very high income levels.
    Date: 2010–10
  3. By: Itaya, Jun-ichi; Okamura, Makoto; Yamaguchi, Chikara
    Abstract: This paper investigates the conditions under which partial harmonization for capital taxation is sustained in a repeated interactions model of tax competition when there are three heterogenous countries with respect to their capital endowments. We show that regardless of the structure of the coalition (i.e., any group of countries), whether partial tax harmonization is sustainable or not crucially depends on the capital endowment of the median country relative to those of the large and small countries. The most noteworthy finding is that the closer the capital endowment of the median country to the average capital endowment of the large and small countries, the less likely is the tax harmonization including the median country to prevail and the more likely is the partial tax harmonization excluding the median country to prevail.
    Keywords: Tax coordination, Asymmetric countries, Repeated game, Tax competition,
    JEL: H73 F59 F21
    Date: 2010–11
  4. By: Becchetti, Leonardo (Associazione Italiana per la Cultura della Cooperazione e del Non Profit); Giachin Ricca, Elena (Associazione Italiana per la Cultura della Cooperazione e del Non Profit); Pelloni , Alessandra (Associazione Italiana per la Cultura della Cooperazione e del Non Profit)
    Abstract: Empirical analyses on the determinants of life satisfaction often include the impact of the number of children variable among available controls without fully discriminating between the two (sociorelational and pecuniary) components. In our empirical analysis on the German Socioeconomic Panel we show that, when introducing household income without correction for the number of members, the pecuniary effect prevails and the sign is negative while, when we equivalise income with the most commonly adopted equivalence scales, the non pecuniary (socio-relational) effect emerges and the impact of the variable is positive and significant above a minimal scale elasticity threshold. We further reject slope homogeneity and show that the positive relational effect is stronger for males, below median income households and East Germans. We interpret these subsample split results as driven by heterogeneous opportunity costs. Our empirical results give rise to a paradox: why people have children if the aggregate effect on life satisfaction is negative? We provide in the paper some interpretations consistent with our findings. Some of them are based on motivational complexity. This implies that demographic policies and the paradox are strictly connected. Effectiveness of tax/subsidies impacting on fertility crucially depends on whether the children paradox may be solved within the self-interested rationality paradigm.
    Keywords: equivalised income; scale elasticities; life satisfaction
    Date: 2010–12–07
  5. By: Ellen R. McGrattan
    Abstract: Previous studies of the U.S. Great Depression find that increased taxation contributed little to either the dramatic downturn or the slow recovery. These studies include only one type of capital taxation: a business profits tax. The contribution is much greater when the analysis includes other types of capital taxes. A general equilibrium model extended to include taxes on dividends, property, capital stock, and excess and undistributed profits predicts patterns of output, investment, and hours worked more like those in the 1930s than found in earlier studies. The greatest effects come from the increased tax on corporate dividends.
    JEL: E13 E32 H25
    Date: 2010–12
  6. By: Stuart Adam (Institute for Fiscal Studies and IFS); James Browne (Institute for Fiscal Studies)
    Abstract: <p><p>Governments wishing to reduce inequality by redistributing money from the rich to the poor face the dilemma that in doing so (by increasing tax rates and means-tested benefits, for example) they reduce the incentive for individuals to increase their incomes. Policy-makers have tried to balance these objectives in different ways and, partly as a result of this, the tax and benefit system today is very different from the one that existed thirty years ago. In this paper we look at how the tax and benefit system redistributed income and affected incentives to work in 2009-10, and at the effect of tax and benefit reforms between 1978-79 and 2009-10 on the level of inequality and work incentives.</p></p>
    Date: 2010–12
  7. By: J. Stephen Ferris (Department of Economics, Carleton University)
    Date: 2010–11–09
  8. By: André Blais; Jiyoon Kim; Martial Foucault
    Abstract: The study examines the relationship between types of government and level of public spending. There are two competing perspectives about the consequences of coalition governments on the size of public expenditures. The most common argument is that government spending increases under coalition governments, compared with one-party governments. Another line of thought contends that coalition governments often are stalled in the status quo due to the veto power of each member. Our analysis of public spending in 33 parliamentary democracies between 1972 and 2000 confirms the latter argument that coalition governments have a status quo bias. Particularly, we find that single-party governments are apt to modify the budget according to the current fiscal condition, which enables them to increase or decrease spending more flexibly. On the contrary, coalition governments find it difficult not only to decrease spending under difficult fiscal conditions but also to increase it even under a more favourable context, because each member of the coalition has a veto power. <P>L'étude examine la relation entre les types de gouvernement et le niveau des dépenses publiques. Il existe dans la littérature deux points de vue divergents sur les conséquences des gouvernements de coalition sur la taille des dépenses publiques. L'argument le plus commun est que les augmentations de dépenses publiques des gouvernements de coalition augmentent davantage que les gouvernements à parti unique. Une autre ligne de pensée soutient que les gouvernements de coalition sont souvent installés dans le statu quo en raison du droit de veto de chaque parti de la coalition. Notre analyse des dépenses publiques dans 33 démocraties parlementaires entre 1972 et 2000 confirme que les gouvernements de la coalition ont un biais de statu quo. En particulier, nous constatons que les gouvernements à parti unique sont plus enclins à modifier le budget en fonction de leur solde budgétaire, ce qui leur permet d'augmenter ou de diminuer les dépenses de manière plus souple. Au contraire, les gouvernements de coalition ont non seulement du mal à diminuer les dépenses fiscales dans des conditions difficiles, mais aussi de l'augmenter, même dans un contexte plus favorable, parce que chaque membre de la coalition peut menacer d’utiliser son droit de veto.
    Keywords: publics spending, coalition government, single-party, electoral systems, fiscal deficit, panel data, dépenses publiques, gouvernement de coalition, parti unique, systèmes électoraux, solde budgétaire, données de panel
    Date: 2010–12–01
  9. By: R. M Isaac; J. Walker; A. Williams
    Date: 2010–12–10

This nep-pub issue is ©2010 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.