nep-pub New Economics Papers
on Public Finance
Issue of 2011‒11‒14
thirteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Higher tax morale implies a higher optimal income tax rate By Andras Simonovits
  2. Education and Optimal Dynamic Taxation By Findeisen, Sebastian; Sachs, Dominik
  3. Optimal Tax Base with Administrative Fixed Costs. By Stéphane Gauthier
  4. The Finnish payroll tax cut experiment revisited, or where did the money go? By Ossi Korkeamäki
  5. Redistribution and the Multiplier By Monacelli, Tommaso; Perotti, Roberto
  6. Second-best Random Redistribution. By Stéphane Gauthier; Guy Laroque
  7. Redistributive effects of indirect taxes: comparing arithmetical and behavioral simulations in Uruguay By Verónica Amarante; Marisa Bucheli; Cecilia Olivieri; Ivone Perazzo
  8. A fair pivotal mechanism for nonpecuniary public goods By Pivato, Marcus
  9. Production efficiency and excess supply By Leslie J. Reinhorn
  10. Public-Private Partnerships and Infrastructure Provision in the United States By Eduardo Engel; Ronald Fischer; Alexander Galetovic
  11. Public Sector Spending Efficiency in Estonia: Healthcare and Local Government By Zuzana Smidova
  12. Ray-invariant intermediate inequality measures: A Lorenz dominance criterion By Francisco Azpitarte; Olga Alonso-Villar
  13. Capital Income and Income Inequality: Evidence from Urban China By Chi, Wei

  1. By: Andras Simonovits (Institute of Economics of the Hungarian Academy of Sciences also Institute of Mathematics, Budapest University of Technology and Economics also Department of Economics, CEU)
    Abstract: We analyze the impact of (exogenous) tax morale on the optimal design of progressive income taxation. In our model, only universal basic income (transfer) is financed from a linear income tax and the financing of public goods is neglected. Each individual supplies labor and (un)declares earning, depending on his labor disutility and tax morale, respectively. Limiting the utilitarianism to the poorer parts of the population (defined by the welfare share), the optimal tax rate is an increasing function of the tax morale and a decreasing function of the welfare share.
    Keywords: tax morale, progressive income tax, undeclared earning, labor supply, income redistribution
    JEL: H21 H26 H41 D58
    Date: 2011–09
  2. By: Findeisen, Sebastian (University of Zurich); Sachs, Dominik (University of Konstanz)
    Abstract: We study optimal tax and educational policies in a dynamic private information economy, in which ex-ante heterogeneous individuals make an educational investment early in their life and face a stochastic wage distribution. We characterize labor and education wedges in this setting analytically and numerically, using a calibrated example. We present ways to implement the optimum. In one implementation there is a common labor income tax schedule, and a repayment schedule for government loans given out to agents during education. These repayment plans are contingent on loan size and income and capture the history dependence of the labor wedges. Applying the model to US-data and a binary education decision (graduating from college or not) we characterize optimal labor wedges for individuals without college degree and with college degree. The labor wedge of college graduates as a function of income lies first strictly above their counterparts from high-school, but this reverses at higher incomes. The loan repayment schedule is hump-shaped in income for college graduates.
    Keywords: optimal dynamic taxation, education, implementation
    JEL: H21 H23 I21
    Date: 2011–10
  3. By: Stéphane Gauthier (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: This note characterizes the optimal base for commodity taxation in the presence of administrative fixed costs varying across goods. For low tax rates, the optimal base comprises all commodities whose discouragement index is greater than the ratio of their administrative costs to the tax they yield.
    Keywords: Indirect taxation, VAT, tax base, administrative costs.
    JEL: H21
    Date: 2011–10
  4. By: Ossi Korkeamäki
    Abstract: In this paper I evaluate the effects of a regional experiment that reduced payroll-taxes by 3–6 percentage points of the firm’s wage sum in Northern and Eastern Finland. I estimate the effect of the payroll-tax reduction on firms’ employment, wage sum and profits, and on workers hourly pay and monthly hours worked, by comparing employment and wage changes before and after the start of the experiment to a control region. According to my results, the reduction in the payroll-taxes did not lead to any clear cut aggregate effects in the target region.
    Date: 2011–09
  5. By: Monacelli, Tommaso; Perotti, Roberto
    Abstract: Does it matter, for the size of the government spending multiplier, which category of agents bears the brunt of the necessary adjustment in taxes? In an economy with heterogeneous agents and imperfect financial markets, the answer depends on whether or not New Keynesian features, such are price rigidity, are present. If prices are flexible, the tax-financing rule is either neutral or leads to a larger multiplier when taxes are levied on the borrowing constrained agents. If prices are sticky, the multiplier is larger when taxes are levied on the unconstrained agents. We discuss the conditions under which these results hold. Furthermore, we study the real effects of fiscal expansions via pure, revenue-neutral, tax redistributions.
    JEL: E62
    Date: 2011–11
  6. By: Stéphane Gauthier (Centre d'Economie de la Sorbonne - Paris School of Economics); Guy Laroque (CREST-INSEE, University College London and Institute for Fiscal Studies)
    Abstract: Random taxation may be optimal when the taxpayers differ in their attitudes towards risk, so that tax randomization enables the government to relax the incentive constraints. The paper provides a necessary and sufficient condition for local random deviations to be welfare improving in a neighborhood of a nonrandom optimum. It also derives conditions satisfied by a global random optimum. A full analytical derivation is given for a two goods two agents economy with isoelastic utilities.
    Keywords: Random taxation, stochastic contract, second best, tax evasion.
    JEL: H21 H23 H26
    Date: 2011–10
  7. By: Verónica Amarante (Instituto de Economía, Facultad de Ciencias Económicas y de Administración, Universidad de la República); Marisa Bucheli (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República); Cecilia Olivieri (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República); Ivone Perazzo (Instituto de Economía, Facultad de Ciencias Económicas y de Administración, Universidad de la República)
    Abstract: In this brief paper we compare the redistributive effect of a VAT reform using an arithmetical and a behavioral microsimulation model. We analyze the effects of the elimination of the VAT for a basket of goods which is intensively consumed by the poorest population. Our microsimulations are based on data from the expenditure survey. The behavioral model uses the Quadratic Almost Ideal Demand System (QUAIDS) proposed by Banks et al (1997). Our results indicate that the change in the VAT implies a redistributive effect of small magnitude. The comparison of redistributive effects under the arithmetic and the behavioral simulation reveals that they are very similar.
    Keywords: fiscal redistribution, income inequality, taxes
    JEL: D31 H23 H20
    Date: 2011–09
  8. By: Pivato, Marcus
    Abstract: The Clarke pivotal mechanism is inappropriate for nonpecuniary public goods, because the assumption of quasilinear utility is invalid, and because the mechanism gives disproportionate influence to wealthier voters. But by introducing a `stochastic' Clarke tax, we can convert any separable utility function into a quasilinear one. Also, by stratifying a large population by wealth, and applying different `weights' to the votes from different wealth-strata, we can ensure that the mechanism is `fair' in the sense that the voters in different strata all have equal influence (on average) over the outcome. These weights can be fine-tuned to their optimal values over time, by using the rich dataset generated by a series of large-population referenda. The result is a fair, strategy-proof implementation of weighted utilitarian social choice over nonpecuniary public goods.
    Keywords: pivotal mechanism; strategy-proof implementation; nonpecuniary public good; utilitarian; inequality
    JEL: H41 D61
    Date: 2011–11–04
  9. By: Leslie J. Reinhorn (Durham Business School)
    Abstract: This paper demonstrates that intermediate goods should not be taxed even in the presence of dividend payments to households, thus clarifying previous results. We also find that optimal government policy in a second best world may include stockpiles of output - private supply exceeds private demand, and the government purchases the surplus. This may provide a possible explanation for some agricultural policies.
    Keywords: production efficiency; excess supply; optimal taxation; non-tight equilibrium; price supports
    JEL: H21
    Date: 2011–11–01
  10. By: Eduardo Engel; Ronald Fischer; Alexander Galetovic
    Abstract: Spending on necessary infrastructure is likely to be cut back in coming decades, as the federal and state governments struggle with large debt burdens. This will hamper future growth, particularly given the dismal state of current infrastructure. The American Society of Civil Engineers estimates that, as a result of decades of insufficient investment, the infrastructure deficit in the United States amounts to $2.2 trillion. In particular, spending on roads is little more than a third of the estimated requirement of $186 billion per year. The lack of resources for infrastructure maintenance and improvement extends across all sectors, from levees to wastewater treatment, and from transportation to schools. In this context, public-private partnerships (PPPs) seem a godsend to replace the lack of government investment, by promising the availability of large amounts of resources for infrastructure projects. Despite these promises, the wave of PPPs that changed infrastructure provision in many countries during the last two decades only has had minor impact in the United States. While the UK financed $50 billion in transportation infrastructure via PPPs between 1990 and 2006, the US, an economy more than six times as large as the UK, only financed approximately $10 billion during this period. While some countries succeeded in harnessing PPPs to develop their infrastructure, most found that PPPs can lead to surprisingly bad outcomes. The object of this paper is to offer proposals that make it more likely that PPPs fulfill a useful role in the recovery of American infrastructure.
    Date: 2011
  11. By: Zuzana Smidova
    Abstract: The Estonian fiscal position is much better than in many OECD countries, the country stands out for having a rather lean government sector and the authorities are striving for efficient use of existing resources. Both healthcare and local government were particularly hit the by the decrease of resources as a result of the unprecedented GDP fall during the downturn. As a return to high revenue buoyancy will not be immediate, there are challenges for delivering the same with less money but it is also an opportunity to reconsider provision of public services. The healthcare sector is state dominated and offers some scope for efficiency improvements. On the supply side, further streamlining of the existing hospital network, emphasising primary care, and keeping an eye on the standard of quality of care, would be helpful. A number of market signals are already in place on the demand side, such as fees and drug co-payments. Yet these raise issues of accessibility of healthcare, in particular for financially distressed households. A cap on out-of-pocket spending together with active promotion of least expensive drugs use would help to address this issue. Local government seems rather extensive and fragmented for such a small country. Exploiting economies of scale, either by merging or requiring deeper co-operation, should bring gains in terms of public service efficiency. Offering greater scope for tax raising at the local level can incentivise the municipalities to adopt more growth-oriented economic policies. This working Paper relates to the 2010 Economic Survey of Estonia (<P>Efficience des dépenses du secteur public en Estonie : soins de santé et collectivités locales<BR>La situation budgétaire de l’Estonie est bien meilleure que celle de nombreux pays de l'OCDE ; ce pays se distingue en effet par un secteur public relativement resserré et les autorités s’y efforcent de faire un usage efficient des ressources existantes. Les soins de santé et les collectivités locales ont été particulièrement frappés par la diminution des ressources, qui s’explique par la chute sans précédent du PIB enregistrée pendant la récession. Alors que le retour à des recettes abondantes ne devrait pas être immédiat, la difficulté va consister à offrir les mêmes prestations avec moins d’argent, mais ce sera peut-être aussi l’occasion de reconsidérer la fourniture des services publics. Le secteur des soins de santé est dominé par l’État et comporte une marge d’amélioration de l’efficience. Du côté de l’offre, il serait utile de poursuivre la rationalisation du réseau hospitalier existant et de mettre l’accent sur les soins primaires, tout en veillant à préserver la norme de qualité des soins. Du côté de la demande, un certain nombre de signaux de marchés sont déjà en place, par exemple les honoraires ou les franchises sur les médicaments. Ceci soulève toutefois des questions en termes d’accessibilité des soins de santé, en particulier pour les ménages en proie à des difficultés financières. Plafonner les dépenses restant à la charge des patients et promouvoir activement les médicaments les moins chers permettrait de s’attaquer à ce problème. Les collectivités locales paraissent relativement nombreuses et dispersées pour un si petit pays. Exploiter des économies d’échelle, soit en procédant à des regroupements, soit en imposant une plus grande coopération entre les différentes collectivités, permettrait de réaliser des gains sur le plan de l’efficience du service public. Donner aux municipalités plus de latitude pour lever des impôts au niveau local les inciterait sans doute à adopter des stratégies économiques plus délibérément axées sur la croissance. Ce Document de travail se rapporte à l'Étude économique de l'OCDE de l’Estonie 2011 (
    Keywords: local government, public sector, healthcare, Estonia, soins de santé, secteur public, collectivités locales, Estonie
    JEL: H41 H72 I12 I18
    Date: 2011–07–19
  12. By: Francisco Azpitarte (University of Melbourne); Olga Alonso-Villar (Universidade de Vigo)
    Abstract: This paper introduces a new Lorenz dominance criterion that allows ranking income distributions according to ray-invariant intermediate inequality measures. In doing so, it defines a-Lorenz curves by adapting the generalized Lorenz curves to this case. In addition, it provides an empirical illustration of these tools using Australian income data for the period 2001-2008. The results suggest that despite the reduction of relative inequality, inequality increased for most ray-invariant intermediate value judgments.
    Keywords: Income distribution; Lorenz dominance; Intermediate inequality indices; Ray-invariance.
    JEL: D63
    Date: 2011
  13. By: Chi, Wei
    Abstract: Using urban household survey data collected by National Bureau of Statistics of China from 1988-2009, this study examines the distribution, composition, and changes of capital income and its contribution to income inequality. The data shows that capital income has increased considerably in past 20 years in urban China. Although the average value of capital income is still relatively low, the dispersion of capital income is significant, and for high-income earners capital income is substantial. Compared to other forms of income, capital income is distributed the most unequally, and its contribution to total income inequality has been growing. This study also examines capital income in China’s western, central, and eastern regions separately, and finds that capital income is highest and contributes the most to income inequality in the eastern region.
    Keywords: capital income; income inequality; regional income gaps; Gini coefficient
    JEL: J3
    Date: 2011–10

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