nep-pub New Economics Papers
on Public Finance
Issue of 2015‒10‒04
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. A Tale of Tax Policies in Open Economies By Stephane Auray; Aurelien Eyquem; Paul Gomme
  2. Optimal Taxation, Marriage, Home Production, and Family Labor Supply By Andrew Shephard; George-Levi Gayle
  3. Optimum Commodity Taxation with a Non-Renewable Resource By Julien DAUBANES; Pierre LASSERRE
  4. In-Kind Taxes, Behavior, and Comparative Advantage By Casey B. Mulligan
  5. Can State Tax Policies Be Used to Grow Small and Large Businesses? By Eric Borchers; John Deskins; Amanda Ross
  6. The Volatility of School District Income Tax Revenues: Is Tax Base Diversification a Good Idea? By Joshua Hall; Antonis Koumpias
  7. Local Tax: A comparison of hypotheses By Patrizia Lattarulo; Alessandro Petretto
  8. Environmental Regulation and Policy Design: The Impact of the Regulator?s Ecological Conscience on the Tax Setting Process By Jihad C. Elnaboulsi
  9. Environmental Tax Reform in a Federation with Rent-Induced Migration By Jean-Denis GARON; Charles SÉGUIN
  10. The public sector balance sheet and fiscal consolidation in South Africa By Philippe Burger; Krige Siebrits; Estian Calitz

  1. By: Stephane Auray (CREST-Ensai and Universite du Littoral Cote d'Opale); Aurelien Eyquem (CREST-Ensai, CNRS, and GATE-Lyon Saint-Etienne); Paul Gomme (Concordia University and CIREQ)
    Abstract: To evaluate fiscal policy reforms for Euro-area countries, this paper develops and calibrates a small open economy model. Debt reduction reforms require higher tax rates in the short term in exchange for lower rates in the long term as the debt servicing burden falls. Using the capital income tax to implement such a policy leads to welfare gains; the consumption tax, a very small welfare gain; and the labor income tax, a welfare loss. Holding fixed the long run debt-output ratio, offsetting a lower capital income tax with either a higher labor income or consumption tax generally yields welfare gains.
    Keywords: Fiscal policies, open economies, public deficits, tax reforms.
    JEL: E31 E62 F41
    Date: 2015–09
  2. By: Andrew Shephard (University of Pennsylvania); George-Levi Gayle (Washington Unversity in St. Louis)
    Abstract: This paper develops an empirical approach to optimal income taxation design within an equilibrium collective marriage market model. Taxes distort labour supply and time allocation decisions, as well as marriage market outcomes, and the within household decision process. Using data from the American Community Survey and American Time Use Survey we structurally estimate our model and explore empirical design problems. We consider the optimal design problem when the planner is able to condition taxes on marital status, as in the U.S. tax code, but for married couples we allow for an arbitrary form of tax jointness. We also show how design problem changes when we introduce cohabitation as an alternative state, offering many of the same economic benefits of marriage, but with the informational friction that forces individuals in the cohabitation and single state to be subject to the same tax schedule.
    Date: 2015
  3. By: Julien DAUBANES; Pierre LASSERRE
    Abstract: Optimum commodity taxation theory asks how to raise a given amount of tax revenue while minimizing distortions. We reexamine Ramsey's inverse elasticity rule in presence of Hotelling-type non-renewable natural resources. Under standard assumptions borrowed from the non-renewable-resource-extraction and from the optimum-commodity-taxation literatures, a non-renewable resource should be taxed in priority whatever its demand elasticity and whatever the demand elasticity of regular commodities. It should also be taxed at a higher rate than other commodities having the same demand elasticity and, while the tax on regular commodities should be constant, the resource tax should vary over time. When the generation of reserves by exploration is determined by the net-of-tax rents derived during the extraction phase, reserves become a conventional form of capital and royalties tax its income; our results contradict Chamley's conclusion that capital should not be taxed at all in the very long run. In an autarkic economy, absent any subsidy to reserve discoveries, the optimal tax rate on extraction obeys an inverse elasticity rule almost identical to that of a commodity whose supply is perfectly elastic. As a matter of fact, there is a continuum of optimal combinations of reserve subsidies and extraction taxes, irrespective of whether taxes are applied on consumption or on production. When the government cannot commit, extraction rents are completely expropriated and subsidies are maximum. In general the optimum Ramsey tax not only causes a distortion of the extraction path, as happens when reserves are given, but also distorts the level of reserves developed for extraction. When that distortion is the sole effect of the tax, it is determined by a rule reminiscent of the inverse elasticity rule applying to elastically-supplied commodities. In an open economy, Ramsey taxes further acquire an optimum-tariff dimension, capturing foreign resource rents. For countries that import the resource, the result that domestic resource consumption is to be taxed at a higher rate than conventional commodities having the same demand elasticity emerges reinforced.
    Keywords: optimum commodity taxation, inverse elasticity rule, non-renewable resources, hotelling resource, supply elasticity, demand elasticity, capital income taxation
    JEL: Q31 Q38 H21
    Date: 2015
  4. By: Casey B. Mulligan
    Abstract: This paper treats taxation in kind (IKT) as an example of price regulation, emphasizing IKT-avoidance behavior, and its interactions with the other costs of price controls. This emphasis fundamentally changes efficiency conclusions, and adds new ones. IKTs do not in fact randomly sample suppliers. Large-scale IKTs, and not small-scale ones, may have especially large average efficiency costs. Ransoms or “commutation fees” are an IKT policy option, but are only efficiency enhancing in specific situations: more heterogeneity among suppliers, and avoidance technologies that result in avoidance behaviors that are poor signals of a supplier’s opportunity cost. Avoidance behaviors are one reason why the social costs of wars and other public projects involving IKTs may have been underestimated.
    JEL: H56 K2 L51
    Date: 2015–09
  5. By: Eric Borchers (Creighton University); John Deskins (West Virginia University, College of Business and Economics); Amanda Ross (West Virginia University, College of Business and Economics)
    Abstract: The existing literature studying the relationship between small business activity and U.S. state tax policy has focused primarily on a few measures of small business. We expand this literature by estimating the effect of state tax policy on small businesses by using a broader measures of small business activity using a longitudinal dataset for the U.S. states. We also estimate the relationship between state tax policy and large business activity. Results provide evidence that state tax policy can influence small business firm, establishment, payroll, and employment growth in important ways but provide limited evidence that such policy significantly influences large business growth.
    JEL: H2 H7 R1
    Date: 2015–05
  6. By: Joshua Hall (West Virginia University, College of Business and Economics); Antonis Koumpias (Georgia State University, Department of Economics)
    Abstract: School districts typically derive their own-source revenue from the property tax. Ohio is a prominent exception as local school districts have the option of diversifying their revenue base by adopting a residency-based income tax. While diversification has clear benefits, a potential downside is greater revenue volatility. Using a panel of 609 Ohio school districts from 1990 to 2008, we find that while school district revenues from the income tax are pro-cyclical, they fluctuate mildly. We also find that for every dollar increase in school district income, revenues from the income tax increased by 25 cents per pupil.
    Keywords: revenue volatility, tax base diversification, Ohio, short-run elasticity
    JEL: H71 H75
    Date: 2015–06
  7. By: Patrizia Lattarulo (Istituto Regionale per la Programmazione Economica della Toscana); Alessandro Petretto (Università di Firenze)
    Abstract: The progressive intensification of the tax burden at local scale which has taken place in the last few years as well as the want of stable resources by local bodies is urging a general reconsideration of the modalities in which Italian municipalities are financed. This work discusses the introduction of the Local Tax in Italy, and presents different hypotheses on how it should be devised. The first part recalls the theoretical principles underpinning a tax scheme aimed at financing municipal services and confirms the soundness of a real estate property tax; the second part illustrates the equity implications of the reform proposals meant to shift from the property tax to the Local Tax; the third part presents a comparison among the different types of local tax recommended in the current debate, drawing attention to the possible effects on the tax burden and on the balancing of local bodies’ budgets. The hypotheses compared are a “secondary” municipal property tax (Imposta Municipale Secondaria – IMU S), a “minimal” local tax; and a local tax that involves a partial or complete exemption for the main house. The first hypothesis has a poor effect, particularly as regards the goal of simplification, given the low amounts and the reduced number of municipalities involved, so that it does not seem appropriate as a means of local financing. The second one, which complies with vertical harmonization, modifies the taxable base of municipalities, thus implying a reform of their present organization, a fact that, considering the current budgetary difficulties, makes this the most complex of these hypothesis. The third one, which is the one privileged in the current debate, pursues the goals of equity; the present work analyzes the possible effects of the alternatives of partial versus total exemption for the main house and discusses the modalities to finance the manoeuvre. The financing of the exemption for the main house through transfer taxes is obviously the easiest and straightest way, but it lessens the tax autonomy, and thus the financial responsibility, of local governments. Conversely, financing the exemption with an increase of the property tax on secondary houses has a limited impact in terms of tax burden and municipal revenues, since the two amounts largely compensate each other. Then again, the distributive impact is quite uncertain. From a distribution point of view, this works underlines the efficacy of a system of permanent deductions as well as the prospective relevance of Land Registry’s reform.
    Keywords: taxation, local finance, real estate property taxes
    JEL: H31 H71
    Date: 2015
  8. By: Jihad C. Elnaboulsi (CRESE, Univ. Bourgogne Franche-Comté)
    Abstract: This paper presents an analysis of environmental policy in imperfectly competitive markets. We investigate how environmental taxes should be optimally levied in a precommitment policy game and their e¤ects on social welfare. The paper also examines the potential impacts of the regulator?s environmental conscience on policy setting. We start the analysis with a benchmark model where all players are environmentally dirty in the marketplace. We then extend the model to the case in which the market is composed of a mix of dirty and clean strategic players. We show that, in both cases, the regulator must necessarily trade o¤ between regulation of environmental quality and the industry production ine¢ ciency problems. Furthermore, the results show how higher levels of concern for environmental issues outweigh the under taxation problem that arises in order to avoid further reductions in welfare. Finally, we show that the existence of clean players produces positive social externalities. Under an ex ant environmental policy game, higher social welfare outcomes are possible.
    Keywords: Environmental Policy, Emissions Tax, Environmental Conscience, Social Welfare, Strategic Behavior, Oligopoly Competition.
    JEL: D60 D82 L13 Q28
    Date: 2015–09
  9. By: Jean-Denis GARON; Charles SÉGUIN
    Abstract: We study the welfare effects of a revenue-neutral green tax reform in a federation. The reform consists of increasing a tax on a polluting input and reducing that on labor income. Households are fully mobile within the federation. Regions are unequally endowed with a nonrenewable natural resource. Resource rents are owned by regions and are redistributed to citizens on a residence basis, which generates a motive for inefficiently relocating to the resource-rich jurisdiction. Since the resource-poor region has a higher marginal product of labor than does the resource-rich region, the tax reform mitigates the scope of inefficient migration. This positive welfare effect may significantly reduce abatement costs of pollution and calls for higher environmental tax, as compared with a model where migration is assumed away.
    Keywords: federalism, environment, taxation, equalization, mobility, externalities
    JEL: D62 H21 H23 H77
    Date: 2015
  10. By: Philippe Burger (Department of Economics, University of the Free State); Krige Siebrits (Department of Economics, University of Stellenbosch); Estian Calitz (Department of Economics, University of Stellenbosch)
    Abstract: South Africa has a long record of relatively good fiscal outcomes. However, because of the Great Recession and the subsequent countercyclical fiscal policy, the fiscal situation has worsened markedly since 2010. The aim of this paper is twofold: (1) to assess how the government re-established fiscal sustainability in the past, and (2) on the basis of literature and lessons learned from this past, and given current increasing debt levels, to consider how best the government could consolidate fiscal policy and re-establish fiscal sustainability in the short- to medium term. To assess past fiscal policy the paper uses a Markov-switching model to estimate a fiscal reaction function for the primary balance. This establishes whether or not the primary balance reacted to ensure fiscal sustainability. The analysis identifies high and low debt/GDP regimes and shows that fiscal policy has been in a high debt regime since 2010. It also shows that for most of the period prior to 2010 the primary balance adjusted to ensure a sustainable debt burden. However, the reduction in the public debt/GDP ratio from 1994 to 2008 was accompanied by a similar decrease in government’s fixed capital/GDP ratio. Hence, the reduction in the debt/GDP ratio contributed to fiscal sustainability, but did not improve the government’s balance sheet. On the basis of these findings the paper suggests that the government has two options for restoring fiscal sustainability in the short- to medium term: (1) reduce the public debt/GDP ratio to its pre-crisis level, or stabilise the ratio at its post-crisis level. At the heart of this choice is the requirement to balance the need to finance much-needed public infrastructure with the need to return to a low debt/GDP ratio in order to have room for countercyclical fiscal policy in future recessions.
    Keywords: Fiscal sustainability, public debt, budget deficit, primary balance
    JEL: H62 H63 H68
    Date: 2015

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