nep-pub New Economics Papers
on Public Finance
Issue of 2014‒02‒21
eleven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal Tax Progressivity: An Analytical Framework By Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
  2. Biased Perceptions of Income Inequality and Redistribution By Engelhardt, Carina; Wagener, Andreas
  3. On the Definition of Public Goods. Assessing Richard A. Musgrave's contribution. By Maxime Desmarais-Tremblay
  4. Trade Liberalization and Optimal Taxation with Pollution and Heterogeneous Workers By Bontems, Philippe; Gozlan, Estelle
  5. Efects of Carbon Taxes in an Economy with Large Informal Sector and Rural-Urban Migration By Karlygash Kuralbayeva
  6. Overaccumulation, Public Debt, and the Importance of Land By Homburg, Stefan
  7. US State Fiscal Policy and Natural Resources By Alexander James
  8. Topics in Fiscal Policy: Evidence from a Representative Survey of the German Population By Bernd Hayo; Florian Neumeier; Matthias Uhl
  9. Progressivity of Taxes and Transfers: the Mexican Case 2012 By Luis Huesca; Abdelkrim Araar
  10. A 150-year Perspective on Swedish Capital Income Taxation By Du Rietz, Gunnar; Johansson, Dan; Stenkula, Mikael
  11. Tax-driven Bunching of Housing Market Transactions: The case of Hong Kong By Leung, Charles Ka Yui; Leung, Tommy Tin Cheuk; Tsang, Byron Kwok Ping

  1. By: Jonathan Heathcote; Kjetil Storesletten; Giovanni L. Violante
    Abstract: What shapes the optimal degree of progressivity of the tax and transfer system? On the one hand, a progressive tax system can counteract inequality in initial conditions and substitute for imperfect private insurance against idiosyncratic earnings risk. At the same time, progressivity reduces incentives to work and to invest in skills, and aggravates the externality associated with valued public expenditures. We develop a tractable equilibrium model that features all of these trade-offs. The analytical expressions we derive for social welfare deliver a transparent understanding of how preferences, technology, and market structure parameters influence the optimal degree of progressivity. A calibration for the U.S. economy indicates that endogenous skill investment, flexible labor supply, and the externality linked to valued government purchases play quantitatively similar roles in limiting desired progressivity.
    JEL: E20 H20 H40 J22 J24
    Date: 2014–02
  2. By: Engelhardt, Carina; Wagener, Andreas
    Abstract: When based on perceived rather than o n objective income distributions, the Meltzer- Richards hypothesis and the POUM hypothesis work quite well empirically: there exists a positive link between perceived inequality or perceived upward mobility and the extent of redistribution in democratic regimes - though such a link does not exist when objective measures of inequality and social mobility are used. These observations highlight that political preferences and choices might depend more on perceptions than on factual data.
    Keywords: Biased Perception, Majority Voting, Redistribution
    JEL: H53 D72 D31
    Date: 2014–02
  3. By: Maxime Desmarais-Tremblay (Centre d'Economie de la Sorbonne et Centre Walras Pareto - Université de Lausanne)
    Abstract: This paper provides an explanation of the emergence of the standars textbook definition of public goods in the middle of the 20th century. It focuses on Richard Musgrave's contribution in defining public goods as non-rival and non-excludable – from 1939 to 1969. Although Samuelson's mathematical definition is generally used in models of public goods, the qualitative understanding of the specificity of pure public goods owes more to Musgrave's emphasis on the impossibility of exclusion. This paper also highlights the importance of the size of the group to which benefits of a public good accrue. This analysis allow for a reassessment of the Summary table of goods which first appeared in Musgrave and Musgrave (1973) textbook.
    Keywords: Richard A. Musgrave, social goods, public goods, non-rivalry, non-exclusion.
    JEL: H41 B29 A22
    Date: 2014–02
  4. By: Bontems, Philippe; Gozlan, Estelle
    Abstract: In this paper, we address two questions: (i) how should a government pursuing both environmental and redistributive objectives design domestic taxes when redistribution is costly, and (ii) how does trade liberalization affect this optimal tax system, and modify the economy's levels of pollution and inequalities ? Using a general equilibrium model under asymmetric information with two goods, two factors (skilled and unskilled labor) and pollution, we fully characterize the optimal mixed tax system (nonlinear income tax and linear commodity and production taxes/subsidies). We provide simulations highlighting the linkages between pollution, labor income redistribution and increasing globalization with our endogenous fiscal system. In the redistributive case (i.e. in favor of the unskilled workers) and when the dirty sector is intensive in unskilled labor, we show that (i) trade liberalization involves a clear trade-off between the reduction of inequalities and the control of pollution when the source of externality is mainly production ; this is not necessarily true with a consumption externality; (ii) under openness to trade, the source of the externality matters for redistribution, while it is not the case in autarky. Finally we discuss the impact of an increasing willingness to redistribute income and of a technological shock affecting emissions intensity.
    Keywords: quality signalling, vertical relationship, information disclosure.
    JEL: F13 F18 H21 H23
    Date: 2014–02–05
  5. By: Karlygash Kuralbayeva
    Abstract: I build an equilibrium search and matching model of an economy with an informal sector and rural-urban migration to analyze the effects of budget-neutral green tax policy (raising pollution taxes, while cutting payroll taxes) on the labor market. The key results of the paper suggest that when general public spending varies endogenously in response to tax reform and higher energy taxes can reduce the income from self-employed work in the informal sector, green tax policy can produce a triple dividend: a cleaner environment, lower unemployment rate and higher after-tax income of the private sector. This is due to the ability of the government, by employing public spending as an additional policy instrument, to reduce the overall tax burden when an increase in energy tax rates does not exceed some threshold level. Thus governments should employ several instruments if they are concerned with labor market implicatoins of green tax policies.
    Keywords: informal sector, matching frictions, pollution taxes, double dividend subsidy, learning by doing, directed technical change, multiplicative damages, additive damages
    JEL: H20 H23 H30
    Date: 2014
  6. By: Homburg, Stefan
    Abstract: In recent contributions, Weizsäcker (2014) and Summers (2014) maintain that mature economies accumulate too much capital. They suggest large and lasting public deficits as a remedy. This paper argues that overaccumulation cannot occur in an economy with land. It presents novel data of aggregate land values, analyzes the issue in a stochastic framework, and conducts an empirical test of overaccumulation.
    Keywords: Dynamic efficiency; overaccumulation; land; fiscal policy; public debt
    JEL: D9 E62 H21
    Date: 2014–02
  7. By: Alexander James
    Abstract: An analytical framework predicts that, in response to an exogenous increase in resource based government revenue, a benevolent government will partially substitute away from taxing income, increase spending and save. Forty-two years of U.S. state-level data are consistent with this theory. Specifically, a baseline fixed effects model predicts that a 1% point increase in resource revenue results in a .20% point decrease in non-resource revenue, a .50% point increase in spending and a .30% point increase in savings. These results are generally robust to alternative model specifications and the instrumentation of resource-based government revenue. Interaction effects reveal some asymmetry in the fiscal response to revenue shocks according to state political leanings.
    Keywords: Severance Tax; Fiscal Policy; Natural Resources
    JEL: H20 H23 H30
    Date: 2014
  8. By: Bernd Hayo (University of Marburg); Florian Neumeier (University of Marburg); Matthias Uhl (University of Marburg)
    Abstract: This paper provides background information and basic descriptive statistics for a representative survey of the German population conducted on our behalf by GfK in the first quarter of 2013. The survey addresses important topics in fiscal policy, including: 1) public preferences on the composition of fiscal expenditure; 2) public preferences on public debt; 3) the effect of tax changes on consumption and savings; and 4) the effect of tax changes on labour market activities.
    Keywords: Survey evidence Fiscal policy Public debt Public preferences Consumption Labour supply
    JEL: E21 E62 H30 J22
    Date: 2014
  9. By: Luis Huesca; Abdelkrim Araar
    Abstract: The paper examines the redistributive effect achieved by the tax-benefit system in Mexico in 2012 using personal income tax, indirect taxes, social security contributions and social benefits. Our goal is to analyze progressivity of the fiscal system and go further to demonstrate how the different taxes and benefits contribute to the total redistribution effect. A set of popular tools of studying progressivity, such as the concentration curves and Kakwani progressivity index, are used. In addition, we propose an analytical method to decompose the total progressivity measured by the contributions of different taxes or benefits. We conclude that Mexican tax-benefit system is progressive, with greater pre-fiscal income inequality and high redistributive effect for some specific figures of transfers. The contribution from Vertical Equity (VE) is relatively important, but Horizontal Inequity (HI) lightens its impact. Income taxation does not contribute largely to VE. Further, some program benefits target unequally the deprived population, and then decreases the positive effect induced by VE.
    Keywords: Progressivity, Redistribution, Taxes, Benefits, Targeting
    JEL: C14 D31 D33 H23 H24
    Date: 2014
  10. By: Du Rietz, Gunnar (Research Institute of Industrial Economics (IFN)); Johansson, Dan (Örebro University School of Business); Stenkula, Mikael (Research Institute of Industrial Economics (IFN))
    Abstract: This paper describes the evolution of capital income taxation, including corporate, dividend, interest, capital gains and wealth taxation, in Sweden between 1862 and 2010. To illustrate the evolution, we present annual time-series data on the marginal effective tax rates on capital income (METR) for a marginal investment financed with new share issues, retained earnings or debt. Tax tables covering the period are presented. These data are unique in their consistency, thoroughness and time span covered. The METR is low, is stable and does not exceed five percent until World War I, when it starts to drift somewhat upward and vary depending on the source of finance. The outbreak of World War II starts a period when the magnitude and variation of the METR sharply increases. The METR peaks during the 1970s and 1980s and often exceeds 100 percent. The 1990–1991 tax reform and lower inflation reduce the magnitude and variation of the METR. The METR varies between 15 and 40 percent at the end of the examined period.
    Keywords: Cost of capital; Marginal effective tax rates; Marginal tax wedges; Tax reforms
    JEL: H21 H31 N44
    Date: 2014–02–07
  11. By: Leung, Charles Ka Yui; Leung, Tommy Tin Cheuk; Tsang, Byron Kwok Ping
    Abstract: We study the implications of property market transaction tax. As property buyers are obligated to pay a transaction tax (“stamp duty”, or SD) where the rate increases with the value of the transaction, there are incentives to trade at or just below the cutoff points of the tax schedule. Thus, both “bunching in transactions” and “underpricing” should be observed near those cutoffs. Furthermore, the bunching points should change with the tax schedule. We confirm these conjectures with a rich dataset from the Hong Kong housing market and provide a measure of the tax avoidance.
    Keywords: bunching, change in nonlinear tax schedule, housing market, tax avoidance and tax evasion, underpricing
    JEL: H20 H26 R21
    Date: 2014–02

This nep-pub issue is ©2014 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.