nep-pub New Economics Papers
on Public Finance
Issue of 2012‒01‒18
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. A Tale of Tax Policies in Open Economies By Stéphane Auray; Aurélien Eyquem; Paul Gomme
  2. Do EU15 countries compete over labour taxes? By B. MERLEVEDE; G. RAYP; S. VAN PARYS; T. VERBEKE
  3. How Do Taxes Affect Investment When Firms Face Financial Constraints? By Martin Simmler
  4. Entrepreneurial Innovations and Taxation By Haufler, Andreas; Norbäck, Pehr-Johan; Persson, Lars
  5. Full agreement and the provision of threshold public goods By Federica Alberti; Edward J. Cartwright

  1. By: Stéphane Auray (EQUIPPE - ECONOMIE QUANTITATIVE, INTEGRATION, POLITIQUES PUBLIQUES ET ECONOMETRIE - Université des Sciences et Technologies de Lille - Lille I, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique); Aurélien Eyquem (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure de Lyon, GREDI - Groupe de recherche en économie et développement international - Université de Sherbrooke); Paul Gomme (CIREQ - Centre interuniversitaire de recherche en économie quantitative - Université de Montréal, Université Concordia - Université Concordia)
    Abstract: Recent financial crises in Europe as well as the periodic battles in the U.S. over the debt ceiling point to the importance of fiscal discipline among developed countries. This paper develops an open economy model, calibrated to the U.S. and a subset of the EMU, to evaluate the impact of various permanent tax changes. The first set of experiments considers a targeted one percentage point reduction in the government deficit-to-GDP ratio through raising one of : the consumption tax, the labor income tax, or the capital income tax. In terms of welfare, the consumption tax is found to be the least costly of the tax increases. A second set of experiments looks at deficit-neutral tax changes : partially replacing the capital income tax with either a higher labor income tax or higher consumption tax ; and partially replacing the labor income tax with an increased consumption tax. Reducing reliance on capital income taxation is welfare-enhancing, although it leads to short term losses. Reducing labor income taxation improves international competitiveness and is welfare-improving.
    Keywords: fiscal policies; open economies; public deficits; tax reforms
    Date: 2012–01–03
    Abstract: Empirical research on international tax competition has mainly considered cor- porate taxation. Because of the limited international mobility of labour, labour tax competition tends to be overlooked. This may be unjusti…ed. The tax base in labour taxation is the wage mass that depends on employment. While labour is largely in- ternationally immobile, jobs are certainly not because of the international mobility of goods. Given the higher share of labour tax in government revenues, labour tax competition could also have more important welfare consequences than corporate tax competition. We model the possibility of labour tax competition using a standard Dixit-Stiglitz two-country model with immobile …rms and workers and transportation costs in exporting goods. The model is extended with the assumptions of non-clearing labour markets and income redistribution by the government, …nanced by a labour tax. The model results in an empirical speci…cation of the labour tax reaction function in the form of a spatial lag panel. The tax reaction function is then estimated for the EU15 member states using an instrumental variable approach. Our results point to the presence of small, but signi…cant labour tax competition within the EU15.
    Keywords: tax competition, labour tax, spatial autocorrelation, strategic interactions.
    JEL: H0 H25 H77
    Date: 2011–10
  3. By: Martin Simmler
    Abstract: This study uses a switching regression framework with known sample separation to analyze the effects of corporate income taxation on investment in case of binding and non-binding financial constraints. By employing two different sample splitting criteria, payout behavior and the ratio of liabilities to total assets, I show that the elasticity of capital to its user costs in an auto-distributed-lag model is underestimated in case of neglecting the presence of financial constraints. For unconstrained firms, the elasticity of capital to its user costs is around -1. For financially constrained firms the elasticity is statistically not different from zero. For the latter group instead, the results prevail by using the effective average tax rate to measure liquidity outflow through taxation that corporate taxation affects investment through changing internal finance. In addition, this study helps to understand the methodological differences between auto-distributed-lag and error-correction models.
    Keywords: Investment cash flow sensitivity, financial constraints, taxation, effective average tax rate, effective marginal tax rate, switching regression
    JEL: H25 H32 G31
    Date: 2012
  4. By: Haufler, Andreas (University of Munich); Norbäck, Pehr-Johan (Research Institute of Industrial Economics (IFN)); Persson, Lars (Research Institute of Industrial Economics (IFN))
    Abstract: Many governments promote small businesses for the dual reasons of fostering ‘breakthrough’ innovations and employment growth. In this paper we study the effects of tax and subsidy policies on entrepreneurs’ choice of riskiness of an innovation project and on their mode of commercializing the innovation (market entry versus sale). Limited loss offset provisions in the tax system induce entrepreneurs to choose projects with too little risk and this problem arises primarily when entrepreneurs market their product themselves. When innovations reduce only the fixed costs of production this leads to a fundamental policy trade-off between the declared goals of promoting employment and innovation in small, entrepreneurial firms. When innovations reduce variable production costs, policies to promote small businesses may even be unambiguously harmful.
    Keywords: Entrepreneurship; Innovation; Corporate taxes; Firm growth
    JEL: H25 L13 M13 O31
    Date: 2012–01–02
  5. By: Federica Alberti (Max Planck Institute of Economics, Strategic Interaction Group, Jena); Edward J. Cartwright (School of Economics, University of Kent, Canterbury)
    Abstract: We report threshold public good experiments in which group members not only need to be individually willing to contribute enough to provide the public good but also have to agree with each other on what every group members should contribute. We find strong support to the hypothesis that full agreement increases successful provision, although it takes a few repetitions before group members can successfully coordinate. This is consistent with our theoretical results that full agreement works because it increases criticality of each individual decision. The existence of a focal point makes it possible for the group members to successfully coordinate.
    Keywords: Public good, threshold, full agreement, focal point, experiment, coordination
    JEL: C72 H41
    Date: 2012–01–06

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