nep-pub New Economics Papers
on Public Finance
Issue of 2013‒02‒16
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Partisan Tax Policy and Income Inequality in the U.S., 1979-2007 By Bargain, Olivier; Dolls, Mathias; Immervoll, Herwig; Neumann, Dirk; Peichl, Andreas; Pestel, Nico; Siegloch, Sebastian
  2. Increased Regressivity of the Optimal Capital Tax under a Welfare Constraint for Newborn Children By Yosuke Furukawa
  3. Estate Taxation with Altruism Heterogeneity By Emmanuel Farhi; Iván Werning
  4. Below the Salt: Decentralizing Value-Added Taxes By Richard M. Bird
  5. Asymmetric Fiscal Policy Shocks By Periklis Gogas; Ioannis Pragidis
  6. Vertical Grants and Local Public Efficiency By Ivo Bischoff; Peter Bönisch; Peter Haug; A. Illy

  1. By: Bargain, Olivier (University of Aix-Marseille II); Dolls, Mathias (IZA); Immervoll, Herwig (World Bank); Neumann, Dirk (IZA); Peichl, Andreas (IZA); Pestel, Nico (IZA); Siegloch, Sebastian (IZA)
    Abstract: We assess the effects of U.S. tax policy reforms on inequality by applying a new decomposition method that allows us to disentangle the direct policy effect from the effect of changing market incomes. Over the whole period 1979-2007 the cumulative tax policy effect aggravated income inequality by increasing the income share of the top 20% in contrast to the middle class' share. The tax policy effect accounts for up to 29% of the total change in inequality; its contribution increases up to 41% if we take into account behavioral responses. Using our unique policy effect measure and variation in tax policies across U.S. states and time, we also identify the redistributive intention of policymakers. The estimated effect of partisan politics on the U.S. income distribution is statistically significant and economically important. Republican policymakers increased inequality especially at the top whereas Democrats increased the income share of the bottom 80% of the distribution.
    Keywords: tax policy, inequality, redistribution, partisan politics, political economy
    JEL: H23 H31 H53 P16
    Date: 2013–01
  2. By: Yosuke Furukawa (Kyoto University)
    Abstract: In this paper, we develop a three-period model that incorporates parents' heterogeneous skills and a welfare constraint for newborn children. Our numerical analysis shows how the optimal tax system is affected by the weight attached to the newborn child by a social planner. The main finding is that an increase in the guaranteed welfare level for newborn children makes the optimal capital income tax rate more regressive. This result is closely related to the trade-off between incentives for parents and insurance for the newborn child.
    Keywords: Optimal taxation, intergenerational inequality, private information
    JEL: E22 E62 H21
    Date: 2013–01
  3. By: Emmanuel Farhi; Iván Werning
    Abstract: We develop a theory of optimal estate taxation in a model where bequest inequality is driven by differences in parental altruism. We show that a wide range of results are possible, from positive taxes to subsidies, depending on redistributive objectives implicit in the cardinal specification of utility and social welfare functions. We propose a normalization that is helpful in classifying these different possibilities. We isolate cases where the optimal policy bans negative bequests and taxes positive bequests, features present in most advanced countries.
    JEL: H0 H2 H21 H23 H24
    Date: 2013–02
  4. By: Richard M. Bird (University of Toronto)
    Abstract: Although VATs applied simultaneously within the same country by different levels of government were long considered to be either undesirable or infeasible, two quite different types of sub-central VATs – regional consumption taxes and local business taxes -- now exist in a number of countries. Brazil, Canada, and India have introduced regional (state and provincial) VATs which, like national VATs, are general taxes on consumption administered through a transaction-based credit-invoice approach. Although these three countries are very different, and each has established such a tax for its own reasons in different ways and with varying degrees of success, as this paper discusses, on the whole such regional VATs appear to work fairly well, especially in Canada. The issues that arise with independent regional VATs are closely related to those arising with national VATs in a common market such as the EU. A number of problems such as ‘carousel’ (or ‘missing trader’) fraud have recently received considerable attention in the EU and a variety of alternative solutions to such problems have been suggested, some involving major structural changes in the VAT. Experience with regional VATs, however, suggests that what is needed to resolve most such problems is primarily a firmer ‘EU-wide’ framework for improving VAT administration. The second type of sub-central VAT that has recently emerged in Italy, Japan, and France (as well as in several U.S. states) takes the form of a revised form of local business tax which is generally imposed on an ‘income’ (origin) basis in contrast to the destination-based consumption VATs discussed earlier. These taxes seem superior in some important respects to other forms of local business taxation and appear to be compatible with both regional and national VATs. Although important economic and administrative aspects require careful consideration in designing and implementing ‘two-level’ (dual) VATs, such dual VATs (or even triple VATs, including an ‘income-type’ VAT at the local level) are evidently both feasible technically and acceptable politically. This conclusion does not mean that regional VATs are either inherently desirable or necessarily the best alternative for any country (or set of countries). But it does suggest that such taxes may work more satisfactorily in at least some countries than other forms of regional sales taxes or local business taxes. Indeed, both varieties of ‘decentralized VATs’ discussed here may become more important over time.
    Date: 2013–02–09
  5. By: Periklis Gogas (Department of International Economic Relations and Development, Democritus University of Thrace, Greece); Ioannis Pragidis (Department of International Economic Relations and Development, Democritus University of Thrace, Greece)
    Abstract: We empirically test the effects of unanticipated fiscal policy shocks on the level and growth rate of real output and reveal different types of asymmetries in fiscal policy implementation. The data used are quarterly U.S. observations over the period 1967:1 to 2011:4. In doing so, we use six alternative vector autoregressive systems in order to construct the fiscal policy shocks. These systems differ in the method of identification, the use or not of exogenous variables and in the type of exogenous monetary variables used. From each one of these six systems we extracted four types of shocks: a negative and a positive government spending shock and a negative and a positive government revenue shock. These six sets of unanticipated fiscal shocks were used next to empirically examine their effects on the level and growth rate of real GDP in two sets of regressions: one that assumes only contemporaneous effects of the shocks on output and one that is augmented with four lags of each fiscal shock.
    Keywords: Fiscal Policy, Asymmetric Effects, VAR
    JEL: E62
    Date: 2013–01
  6. By: Ivo Bischoff; Peter Bönisch; Peter Haug; A. Illy
    Abstract: This paper analyses the impact of vertical grants on local public sector efficiency. First, we develop a theoretical model in which the bureaucrat sets the tax price while voters choose the quantity of public services. In this model, grants reduce efficiency if voters do not misinterpret the amount of vertical grants the local bureaucrats receive. If voters suffer from fiscal illusion, i.e. overestimate the amount of grants, our model yields an ambiguous effect of grants on efficiency. Second, we use the model to launch a note of caution concerning the inference that can be drawn from the existing cross-sectional studies in this field: Taking into account vertical financial equalization systems that reduce differences in fiscal capacity, empirical studies based on cross-sectional data may yield a positive relationship between grants and efficiency even when the underlying causal effect is negative. Third, we perform an empirical analysis for the German state of Saxony-Anhalt, which has implemented such a fiscal equalization system. We find a positive relationship between grants and efficiency. Our analysis shows that a careful reassessment of existing empirical evidence with regard to this issue seems necessary.
    Keywords: vertical grants, local public finance, efficiency, DEA, bureaucracy
    JEL: H11 H72
    Date: 2013–02

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