nep-pub New Economics Papers
on Public Finance
Issue of 2014‒06‒28
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Reduction of systemic risk by means of Pigouvian taxation By Vinko Zlati\'c; Giampaolo Gabbi; Hrvoje Abraham
  2. Temptation abd Taxation with Elastic Labor By Chung Tran
  3. Corruption and Firm Tax Evasion By James Alm; Jorge Martinez-Vazquez; Chandler McClellan
  4. Teaching the Economics of Income Tax Evasion By Cebula, Richard; Foley, Maggie
  5. Public-Private Partnership: Information Externality in Sequential Investments By Marco Buso
  6. Taxation and the Long Run Allocation of Labor: Theory and Danish Evidence By Kreiner, Claus Thustrup; Munch, Jakob R.; Whitta-Jacobsen, Hans Jørgen
  7. The Effects of Tax Policy on Alcoholic Beverage Trends and Alcohol Demand in Japan By Omura, Makiko
  8. A fiscal outlook for Poland: Update 2014. Background paper prepared for the World Bank's Country Economic Memorandum (CEM) for Poland By Jabłonowski, Janusz; Müller, Christoph

  1. By: Vinko Zlati\'c; Giampaolo Gabbi; Hrvoje Abraham
    Abstract: We analyze the possibility of reduction of systemic risk in financial markets through Pigouvian taxation of financial institutions which is used to support the rescue fund. We introduce the concept of the cascade risk with a clear operational definition as a subclass and a network related measure of the systemic risk. Using financial networks constructed from real Italian money market data and using realistic parameters, we show that the cascade risk can be substantially reduced by a small rate of taxation and by means of a simple strategy of the money transfer from the rescue fund to interbanking market subjects. Furthermore, we show that while negative effects on the return on investment ($ROI$) are direct and certain, an overall positive effect on risk adjusted return on investments ($ROI^{RA}$) is visible. Please note that \emph{the taxation} is introduced as a monetary/regulatory, not as a fiscal measure, as the term could suggest. \emph{The rescue fund} is implemented in a form of a common reserve fund.
    Date: 2014–06
  2. By: Chung Tran
    Abstract: In this paper we study the corrective role of income taxation in a model with the Gul and Pesendorfer type of temptation and self-control preferences embedded with labor/leisure choice. “Excessive” impatience created by the presence of temptation in preferences causes a bias in favour of present consumption and a two-dimensional problem: under-saving and over-supply-of-labor. In such an environment, the two-dimensional problem requires two-dimensional tax policy tools rather than one-dimensional ones. In particular, we first show that subsidizing savings alone improves welfare because it mitigates the under-saving problem i.e. inter-temporal allocation distortion; however, the optimal subsidy rate is not as high as in Krusell, Kuruscu and Smith (2010) because the savings subsidy amplifies the over-supply-of-labor problem, i.e. intra-temporal allocation distortion. Next, we find that labor income tax policy alone improves welfare because it mitigates the intra-temporal allocation distortion; however, its welfare gains are constrained by its adverse effects on savings. Finally, we demonstrate that a combination of capital and labor income taxation appears to be a more effective policy.
    JEL: D01 D91 H31
    Date: 2014–06
  3. By: James Alm (Department of Economics, Tulane University); Jorge Martinez-Vazquez (International Center for Public Policy. Andrew Young School of Policy Studies, Georgia State University); Chandler McClellan (Georgia State University)
    Abstract: Although corruption and tax evasion are distinct and separate problems, they can easily become intertwined and reinforcing. A society that is more corrupt may enable more tax evasion as corrupt officials seek more income via bribes; conversely, higher levels of tax evasion may drive corruption by offering more opportunities for bribes. While a large body of work on each subject separately has emerged, the relationship between the two problems has remained a largely unexplored area. In particular, there is no theoretical work that examines the relationship between corruption and firm tax evasion, focusing on how the potential for bribery of tax officials affects a firm’s tax evasion decisions, and there is no empirical work that examines these linkages. This paper develops a theoretical model that incorporates the potential for bribery in a firm’s tax reporting decisions, and then tests the main results of the theory using firm level information on reporting obtained from the World Enterprise Survey and the Business Environment and Enterprise Performance Survey. Estimation methods include both instrumental variable methods and propensity score matching methods, and also control for potential endogeneity of evasion and corruption. Results demonstrate that it is corruption that largely drives higher levels of evasion; that is, corruption of tax officials is a statistically and economically significant determinant of tax evasion. Tax inspectors who request bribes result in reduction of sales reported for taxes of between 4 and 10 percentage points. Additionally, larger bribes result in higher levels of evasion, at least up to some point. These results indicate that governments seeking to increase their tax revenues must work first to ensure an honest tax administration.
    Keywords: Tax compliance; corruption.
    Date: 2014–05–22
  4. By: Cebula, Richard; Foley, Maggie
    Abstract: The purpose of this pedagogical study is to provide a straightforward and easily understood framework that can be used to teach the economic behavior underlying income tax evasion. We begin with presenting a brief background that reflects the research that had been done, especially for the case of the United States, on income tax evasion. This brief section is meant to provide the student with some overall perspective on the issue. Once this literature overview is completed, the main section of this study provides a framework, based in cost-benefit analysis, to enable the student to easily understand factors underlying personal income tax evasion.
    Keywords: underground economy; income tax evasion; pedagogy
    JEL: D14 D73 D78 E26 H24 H26 M42
    Date: 2013–03–10
  5. By: Marco Buso (University of Padova)
    Abstract: This paper studies the benet coming from bundling two sequential activities in a context of Public Private Partnerships (PPPs). Differently from previous literature, I introduce a source of asymmetric information in the form of an externality parameter linking the building stage with subsequent operational activity. Within this framework, PPPs allow the government to extract private information about the sign and magnitude of the externality parameter and to to minimize the informational rents needed to incentivize the builder's effort. Our results suggest how PPPs can become those commitment devices that force governments to define more coherent and informed plans that optimize the first period welfare, improving investment to reduce unexpected ex post costs (cost overruns).
    Keywords: agency theory; information externality; sequential investment; bundling.
    JEL: D86 L33 H11 H57 C61
    Date: 2014–02
  6. By: Kreiner, Claus Thustrup (University of Copenhagen); Munch, Jakob R. (University of Copenhagen); Whitta-Jacobsen, Hans Jørgen (University of Copenhagen)
    Abstract: Inspired by Hayek (1945), we study the distortionary effects of taxation on labor mobility and the long run allocation of labor across different profitable opportunities. These effects are not well detected by the methods applied in the large public finance literature estimating the elasticity of taxable income and quantifying the efficiency loss from taxation. Our analysis builds on a standard search theoretic framework where workers are continually seeking better paid jobs, but are also fired from time to time because of economic development and productivity shocks. We incorporate non-linear taxation into this setting and estimate the structural parameters of the model using employer-employee register based data for the full Danish population of workers and workplaces for the years 2004-2006. Our results indicate that along the intensive margin the Danish taxation generates an overall efficiency loss corresponding to a 12 percent reduction in total income. It is possible to reap 4/5 of this potential efficiency gain by going from a high-tax Scandinavian system to a level of taxation in line with low-tax OECD countries such as the United States. The tax-responsiveness of labor mobility and allocation corresponds to an elasticity of taxable income with respect to the net-of-tax rate in the range 0.15-0.35.
    Keywords: tax distortions, labor mobility, elasticity of taxable income
    JEL: J62 H24
    Date: 2014–06
  7. By: Omura, Makiko
    Abstract: This paper examines the evolution of alcoholic beverage sectors and the effects of tax policies on these sectors as well as the alcohol beverage demand systems in Japan utilising data from 1948 to 2011. In tax policy analyses, liquor tax policies are found to have differential effects on the production and consumption of different types of alcohol. Although sectoral growth and general economic performance in terms of final consumption expenditure per capita are found to be significant, with major positive effects, tax rates are found to have mixed effects, depending on the type of alcohol considered. The analyses suggest that preferential tax rates may be beneficial for boosting the sectoral performance of certain types of alcoholic beverages. The results, based on double-log and demand system equation estimations for five types of alcoholic beverages, suggest that all alcoholic beverages, except for shōchu, are normal goods with positive expenditure elasticities. Although the results suggest that shōchu may be the safest taxable subject in a Ramsey sense, the own-price elasticity estimates provide less coherent results depending on the model applied.
    Keywords: liquor/alcohol tax, panel analysis, time-series analysis, AIDS, QUAIDS, dynamic AIDs, Japan, Food Consumption/Nutrition/Food Safety, Political Economy, Research Methods/ Statistical Methods, H29, K34, N55,
    Date: 2014–04
  8. By: Jabłonowski, Janusz; Müller, Christoph
    Abstract: Poland faces one of the most rapidly ageing population in Europe. The old age dependency ratio is expected to triple until 2060. Against this background, our paper examines the sustainability of Polish public finances and its isolated subsystems. We consider the profound recent reforms including the transfer of 2nd pillar pension obligations to the general government in 2014. Furthermore, we extend our previous computations (Jablonowski et al., 2011) by using data from household budget surveys as well as large pension contributors' and tax payers' databases. Our results show that the pension reforms enacted since 2011 improve the long-term stability of public finances. A risk for fiscal sustainability represents, however, the public health care system which may be severely challenged by the ageing process and a continuing excess cost growth. We assess a number of health reforms including co-payments and a shift to tax financing which have the potential to stabilize the public health care system. --
    JEL: H50 H55 H60 H68 J10 H3
    Date: 2014

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