nep-pub New Economics Papers
on Public Finance
Issue of 2013‒10‒25
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Taxes and the Choice of Organizational Form by Entrepreneurs in Sweden By Edmark, Karin; Gordon, Roger
  2. Tax Me If You Can! Optimal Nonlinear Income Tax between Competing Governments By Lehmann, Etienne; Simula, Laurent; Trannoy, Alain
  3. Macro Fiscal Policy in Economic Unions: States as Agents By Gerald Carlino; Robert P. Inman
  4. Public provision and cross-border health care By Granlund, David; Wikström, Magnus
  5. Budget Deficit and National Debt: Sharing India Experience By Kanhaiya Singh
  6. Indirect Tax Reform and Fiscal Federalism in India By Raghbendra Jha
  7. Welfare Schemes and Social Protection in India By Raghbendra Jha

  1. By: Edmark, Karin (Research Institute of Industrial Economics (IFN)); Gordon, Roger (University of California)
    Abstract: This paper estimates the role of both tax and non-tax determinants in the choice in Sweden to be a closely-held corporation vs. a proprietorship, using individual data for 2004 to 2008 on owners of closely-held businesses. While lower-income individuals face relatively neutral incentives, higher income individuals face strong tax incentives to be corporate. The data suggest a relatively strong correlation between these tax incentives and the likelihood that a firm is corporate. Many conventional non-tax determinants are confirmed in the data as well.
    Keywords: Self-employment; Entrepreneurship; Taxation of closely-held businesses; Business organizational form
    JEL: G32 G38 H25
    Date: 2013–10–10
  2. By: Lehmann, Etienne (CRED, Université Panthéon Assas Paris 2); Simula, Laurent (Uppsala University); Trannoy, Alain (EHESS, Paris)
    Abstract: We investigate how potential tax-driven migrations modify the Mirrlees income tax schedule when two countries play Nash. The social objective is the maximin and preferences are quasilinear in income. Individuals differ both in skills and migration costs, which are continuously distributed. We derive the optimal marginal income tax rates at the equilibrium, extending the Diamond-Saez formula. The theory and numerical simulations on the US case show that the level and the slope of the semi-elasticity of migration on which we lack empirical evidence are crucial to derive the shape of optimal marginal income tax. Our simulations show that potential migrations result in a welfare drop between 0.4% and 5.3% for the worst-off and an average gain between 18.9% and 29.3% for the top 1%.
    Keywords: optimal income tax, income tax competition, migration, labor mobility, Nash-equilibrium tax schedules
    JEL: D82 H21 H87
    Date: 2013–09
  3. By: Gerald Carlino; Robert P. Inman
    Abstract: The American Recovery and Reinvestment Act (ARRA) was the US government’s fiscal response to the Great Recession. An important component of ARRA’s $796 billion proposed budget was $318 billion in fiscal assistance to state and local governments. We examine the historical experience of federal government transfers to state and local governments and their impact on aggregate GDP growth, recognizing that lower-tier governments are their own fiscal agents. The SVAR analysis explicitly incorporates federal intergovernmental transfers, disaggregated into project (e.g., infrastructure) aid and welfare aid, as separate fiscal policies in addition to federal government purchases and federal net taxes on household and firms. A narrative analysis provides an alternative identification strategy. To better understand the estimated aggregate effects of aid on the economy, we also estimate a behavioral model of state responses to such assistance. The analysis reaches three conclusions. First, aggregate federal transfers to state and local governments are less stimulative than are transfers to households and firms. It is important to evaluate the two policies separately. Second, within intergovernmental transfers, matching (price) transfers for welfare spending are more effective for stimulating GDP growth than are unconstrained (income) transfers for project spending. Matching aid is fully spent on welfare services or middle-class tax relief; half of project aid is saved and only slowly spent in future years. Third, simulations using the SVAR specification suggest ARRA assistance would have been 30 percent more effective in stimulating GDP growth had the share spent on government purchases and project aid been fully allocated to private sector tax relief and to matching aid to states for lower-income support.
    JEL: E62 H39 H77
    Date: 2013–10
  4. By: Granlund, David (Department of Economics, Umeå School of Business and Economics, Umeå University); Wikström, Magnus (Department of Economics, Umeå School of Business and Economics, Umeå University)
    Abstract: We study how the optimal public provision of health care depends on whether or not individuals have an option to seek publicly financed treatment in other regions. We find that, relative to the first-best solution, the government has an incentive to over-provide health care to low-income individuals. When cross-border health care takes place, this incentive is solely explained by that over-provision facilitates redistribution. The reason why more health care facilitates redistribution is that high-ability individuals mimicking low-ability individuals benefit the least from health care when health and labor supply are complements. Without cross-border health care, higher demand for health care among high-income individuals also contributes to the over-provision given that high-income individuals do not work considerably less than low-income individuals and that the government cannot discriminate between the income groups by giving them different access to health care.
    Keywords: Health expenditure; Income redistribution; Patient mobility; Public Provision; Waiting time
    JEL: H42 H51 I11 I18
    Date: 2013–10–16
  5. By: Kanhaiya Singh
    Abstract: India suffered humiliations in terms of balance of payments crises in 1991 but since then it has weathered all crises, which have hit the world economies despite the fact that subsequent periods have seen even larger current account and fiscal deficits. It is in this context that an analysis of fiscal and debt problems of India is timely and assumes importance. The paper delves upon fiscal exuberance and debt management practices in India, the budgetary allocations, changing structure of the deficit and debt, and the sustainability. The external and internal balances highlight its dependence on external borrowing and the vulnerability of the economy and the important role played by the foreign exchange accumulation in avoiding crises. India’s deficit and debt dynamics is characterised as adverse on following grounds: (1) while deficit is increasing, the share of capital formation out of budget is decreasing. Therefore, income multiplier to government expenditure may not be enough to cover the debt liability in long run. (2) Government debt dynamics is unstable with large variability and therefore, it lacks credible predictability of future path. (3) Exposure of the economy to nonâ€government external debt is increasing and therefore, there is a case to conduct analysis about the economic returns to such borrowings in terms of long term sustainability. More flows in capital account is sought for than that required by current account, which is essential to meet its fiscal deficits. There are indications that acceleration in fiscal deficit causes current account deficit, which would make the debt dynamics more unstable. With debt to GDP ratio being very high and unstable, India faces potential risk of sovereign default. Increasing globalization has increased the external vulnerability as short term component of total external debt is sharply increasing. The external debt being driven by the private sector, the corporate governance issues have become more critical. The relevance of high foreign exchange reserves has increased further for sustaining growth and avoiding crises situations.
    Keywords: India, Budget Deficit, Debt Sustainability, Internal and External Balance
    JEL: H0 H6 H7
    Date: 2013
  6. By: Raghbendra Jha
    Abstract: This paper underscores the substantial spatial disparities across India and evaluates the case for putting together (various versions) of the Goods and Service Tax (GST) and also indicates the risks involved in the process. This paper argues that, on balance, there is a case for an appropriately constituted GST but that the federal transfer formula must be sensitive to any fallout from such a move. The paper also argues that there is an urgent need to review the totality of transfers from the central to state governments and local bodies. This review would include transfers through Finance Commission, Planning Commission and Centrally Sponsored Schemes. There is a compelling necessity to review and recalibrate the entire gamut (and not piecemeal) of federal relations – tax, expenditure and transfers. This is critical to ensure the stability and predictability needed to ensure that India’s state driven growth blossoms and attains full fruition.
    Keywords: Fiscal Federalism, GST, federal transfers, India
    JEL: H2 H5 H6 H7 O5
    Date: 2013
  7. By: Raghbendra Jha
    Abstract: This paper provides a broad overview of welfare schemes in India and their impact on social protection during a period of high economic growth. It summarizes India’s performance with respect to select economic and social indicators relative to select low and middle income countries in the Asia Pacific region. It further overviews trends in some key select economic and social indicators for India and discusses India’s attainment in Social Protection relative to an index of such protection provided by the Asian Development Bank. The basic messages of this paper are as follows. (i) When compared to low and middle income countries in the Asia Pacific India’s economic performance has outstripped its performance in social and welfare indicators. (ii) Despite this India is spending less on social welfare programs and other welfare schemes than many countries in the Asia Pacific, including some of those whose economic performance has been less impressive than India’s. (iii) Finally, the paper argues that the efficiency and effectiveness of key welfare programs in India need to be substantially improved. Particular attention needs to be paid to female participation in and their access to social welfare programs.
    Keywords: Welfare Schemes, Social Protection, SPI, India
    JEL: D63 H53 H55 I38
    Date: 2013

This nep-pub issue is ©2013 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.