New Economics Papers
on Public Finance
Issue of 2012‒06‒05
four papers chosen by

  1. Optimal Tax-Transfer Policies, Life-Cycle Labour Supply and Present-Biased Preferences By Lasse Frisgaard Gunnersen; Bo Sandemann Rasmussen
  2. Adaptation, Anticipation-Bias and Optimal Income Taxation By Aronsson, Thomas; Schöb, Ronnie
  3. Local Spending, Transfers and Costly Tax Collection By Fernando Aragon
  4. The Effects of Democratization on Public Goods and Redistribution: Evidence from China By Monica Martinez-Bravo; Gerard Padró i Miquel; Nancy Qian; Yang Yao

  1. By: Lasse Frisgaard Gunnersen (Department of Economics and Business, Aarhus University, Denmark); Bo Sandemann Rasmussen (Department of Economics and Business, Aarhus University, Denmark)
    Abstract: Using a two-period model with two types of agents that are characterized by present-biased preferences second-best optimal tax-transfer policies are considered. The paternalistic optimal tax-transfer policy has two main concerns: Income redistribution from high to low ability households and correction of undersaving due to present-biasedness. Policies must comply with incentive-compatibility constraints that restricts both how much income redistribution that can take place and how much savings should be subsidized. A main result is that the degree of present-biasedness has important consequences not only for optimal subsidies to savings but also for optimal marginal income taxes.
    Keywords: Optimal tax-transfer policy, paternalistic government, age-dependent taxes, labour supply, present-biasedness, redistribution
    JEL: H21 H23 H24
    Date: 2012–05–24
  2. By: Aronsson, Thomas (Department of Economics, Umeå University); Schöb, Ronnie (School of Business and Economics)
    Abstract: Adaptation is omnipresent but people systematically fail to correctly anticipate the degree to which they adapt. This leads individuals to make inefficient intertemporal decisions. This paper concerns optimal income taxation to correct for such anticipation-biases in a framework where consumers adapt to earlier consumption levels through a habit-formation process. The analysis is based on a general equilibrium OLG model with endogenous labor supply and savings where each consumer lives for three periods. Our results show how a paternalistic government may correct for the effects of anticipation-bias through a combination of time-variant marginal labor income taxes and savings subsidies. Furthermore, the optimal policy mix remains the same, irrespective of whether consumers commit to their original life-time plan for work hours and savings decided upon in the first period of life or re-optimize later on when realizing the failure to adapt.
    Keywords: Optimal taxation; adaptation; habit-formation; anticipation-bias; paternalism
    JEL: D03 D61 D91 H21
    Date: 2012–05–23
  3. By: Fernando Aragon (Simon Fraser University)
    Abstract: This paper studies the effect of costly taxation on the fiscal response of local governments to intergovernmental transfers. Using a panel dataset of Peruvian municipalities, I find robust evidence that central government's grants have a greater stimulatory effect in municipalities facing higher tax collection costs. The results are consistent with costly taxation partially explaining the flypaper effect.
    Keywords: Flypaper effect; Intergovernmental transfers; Fiscal decentralization
    JEL: H71 H77
    Date: 2012–05
  4. By: Monica Martinez-Bravo; Gerard Padró i Miquel; Nancy Qian; Yang Yao
    Abstract: This study investigates the effects of introducing elections on public goods and redistribution in rural China. We collect a large and unique survey to document the history of political reforms and economic policies and exploit the staggered timing of the introduction of elections for causal identification. We find that elections significantly increase public goods expenditure, the increase corresponds to demand and is paralleled by an increase in public goods provision and local taxes. We also find that elections cause significant income redistribution within villages. The results support the basic assumptions of recent theories of democratization (Acemoglu and Robinson, 2000; Lizzeri and Persico, 2004). In addition, we show that the main mechanism underlying the effect of elections is increased leader incentives.
    JEL: H11 O38 P16
    Date: 2012–05

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