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

  1. Pareto-Improving Optimal Capital and Labor Taxes By Sarolta Laczo; Albert Marcet; Katharina Greulich
  2. Welfare Evaluation of the 1986 Tax Reform for Married Couples in the United States By Picchio, Matteo; Valletta, Giacomo
  3. Earmarking and the political support of fat taxes By Cremer, Helmuth; Goulão, Catarina; Roeder, Kerstin
  4. Owner-Level Taxes and Business Activity By Henrekson, Magnus; Sanandaji, Tino
  5. The Effect of Voting on Contributions in a Public Goods Game By le Sage, Sander; van der Heijden, Eline
  6. Public-Good Provision in Large Economies By Felix J. Bierbrauer; Martin F. Hellwig
  7. Measuring Horizontal Fiscal Imbalances: the case of Italian Municipalities By Giuseppe Di Liddo; Ernesto Longobardi; Francesco Porcelli

  1. By: Sarolta Laczo (Bank of England and IAE-CSIC); Albert Marcet (IAE-CSIC, ICREA, UAB, MOVE, Barcelona GSE, and CEPR); Katharina Greulich (Swiss Re)
    Abstract: We study optimal fiscal policy in a model with agents who are heterogeneous in their labor productivity and wealth, and there is an upper bound on the capital tax rate each period. We focus on Pareto-improving plans. We show that the optimal tax reform is to cut labor taxes and leave capital taxes high in the short and medium run. Only in the very long run would capital taxes be zero. For our calibration labor taxes should be low for the first eleven to twenty-six years, while capital taxes should be at their maximum. This policy ensures that all agents benefit from the tax reform and that capital grows quickly after the reform. Therefore, the long-run optimal tax mix is the opposite of the short- and medium-run one. The initial labor tax cut is financed by deficits, which lead to a positive level of government debt in the long run, reversing the standard prediction that the government accumulates savings in models with optimal capital taxes. The welfare benefits from the tax reform are high and can be shifted entirely to capitalists or workers by varying the length of the transition.
    Date: 2015
  2. By: Picchio, Matteo (Università Politecnica delle Marche, Ancona); Valletta, Giacomo (Maastricht University)
    Abstract: This paper evaluates the welfare effects of the 1986 Tax Reform Act (TRA86). In thirty years since its introduction, several studies have analysed the effects of TRA86. However, preference heterogeneity and non-market dimensions of welfare have not been taken into account. We propose an evaluation of the impact of TRA86 on well-being using different welfare metrics which fully retain preference heterogeneity. We estimate utility functions with preference heterogeneity on the basis of structural models of family labor supply. Then, by way of these estimated preferences, we compute several welfare rankings corresponding to different ethical priors. Finally, we identify the losers and the winners of TRA86 under different ethical priors.
    Keywords: welfare measures, tax reform, preference heterogeneity, discrete model, labor supply
    JEL: C25 D63 H22 H31 J22
    Date: 2015–09
  3. By: Cremer, Helmuth; Goulão, Catarina; Roeder, Kerstin
    Abstract: A fat and a healthy good provide immediate gratification, and cause health costs or benefits in the long run, which are misperceived. Additionally, the fat good (healthy good) increases (decreases) health care costs by increasing (decreasing) the probability of suffering from a chronic disease in the future. Individuals differ in income and in their degree of misperceptions concerning the health effects of the consumption of fat and of healthy goods. The level of the fat tax is determined through majority voting. Individuals vote according to their misperceived utility function. Consequently, excessive fat consumption is not due to a self-control problem but due to information deficiencies or cognitive inability to process information. A fraction of the fat tax proceeds is “earmarked” to reduce health insurance premiums while the remaining fraction finances a subsidy on the healthy good. This earmarking rule is determined at a constitutional stage to maximize utilitarian or Rawlsian welfare, anticipating the induced political equilibrium. We show that the fat tax in the political equilibrium is always lower than the utilitarian fat tax. This is no longer necessarily true with a Rawlsian objective. The determination of the optimal earmarking rule is quite complex. Even in the utilitarian case, it is not just used to boost political support for the fat tax. Instead, it may involve a tradeoff between the fat tax and the healthy good subsidy.
    Keywords: Obesity, Fat tax, Misperception, Voting, Earmarking
    JEL: D72 I12 I18
    Date: 2015–08
  4. By: Henrekson, Magnus (Research Institute of Industrial Economics (IFN)); Sanandaji, Tino (Institute for Economic and Business History Research (EHFF))
    Abstract: In some classes of models, taxes at the owner level are “neutral” and have no effect on firm activity. However, this tax neutrality is sensitive to assumptions and no longer holds in more complex models. We review recent research that incorporates greater complexity in studying the link between taxes and business activity – particularly entrepreneurship. Dividend taxes on owners of large firms affect firm activity in models that include agency conflicts between owners and managers. Similarly, after incorporating entrepreneurs’ occupational choice into the model, taxes are no longer neutral. By forsaking lucrative alternative careers, skilled entrepreneurs tend to have high opportunity costs, which make the choice of attempting to start a business of first order importance. Moreover, in models where it is assumed that capital flows across borders without cost, taxes on domestic business owners do not alter business activity because foreign capital seamlessly compensates for tax-induced declines in investments. This theoretical notion is contradicted by the strong “home bias” observed in business ownership, in particular for small firms and startups without easy access to international capital markets. Recent empirical work has emphasized that taxes have heterogeneous effects on mature firms, entrepreneurial startups, and owner-managed small firms. Lowering dividend taxes on firms with dispersed ownership has been shown to shift capital from mature firms into rapidly growing firms. Moreover, capital gains taxation tends to reduce the number of innovative startups and diminish venture capital activity, while high owner-level taxes encourage small business activity and non-entrepreneurial self-employment because such firms have more opportunities to avoid or evade taxes. To obtain efficient incentives in entrepreneurial startups, contractual terms are required that ex ante guarantee that all providers of critical inputs, especially equity constrained entrepreneurs, are entitled to a share of the resulting capital value firm. Unless properly designed, owner-level taxes prevent such ex ante contracting and thus lower the likelihood of eventual success.
    Keywords: Business taxation; Capital income taxation; Corporate governance; Entrepreneurship; Institutions; Tax policy
    JEL: H25 H26 H32 L26
    Date: 2015–10–05
  5. By: le Sage, Sander; van der Heijden, Eline (Tilburg University, Center For Economic Research)
    Abstract: This paper reports the results of a public good experiment with voting. The standard game in which subjects decide simultaneously on their contributions to a public good is extended by a second stage. In this stage, subjects can express agreement or disagreement with the contributions of their group members and the resulting payoff by voting yes or no. The treatment variable is the voting threshold, which specifies how many votes are at least needed to implement the outcome. We find that average contributions are higher with a voting system, but only if the required number of votes is sufficiently high. The higher average contribution level is mainly realized because subjects manage to avoid the typical pattern of declining contributions across periods. We argue that the higher and rather stable contributions observed under high threshold levels may be related to the fact that voting is seen as a legitimate instrument. Support for this claim is provided by results from a post-experimental questionnaire.
    Keywords: public goods; laboratory experiment; voting
    JEL: C92 H41 D72 D02
    Date: 2015
  6. By: Felix J. Bierbrauer (University of Cologne, Chair for Public Economics CMR – Center for Macroeconomic Research); Martin F. Hellwig (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: In a large economy, a first-best provison rule for a public good is robustly implementable with budget balance because no one individual alone can affect the aggregate outcome. First-best outcomes can, however, be blocked by coalitions of agents acting in concert. With a requirement of immunity against robustly blocking coalitions, we find that, for a pubic good that come as a single indivisible unit, a monotonic social choice function cannot condition on preference intensities but only on the population shares of people favoring one outcome over another. Any such social choice function can be implemented by a simple voting mechanism. With more public-good provision levels, more complicated mechanisms are required, but they still involve the counting of votes rather than an assessment of benefits. Monotonicity and immunity against robust blocking thus provide a foundation for the use of voting mechanisms.
    Keywords: Mechanism Design, Public-good provision, Large Economy, Voting Mechanisms, Robust Incentive Compatibility, Immunity against Robustly Blocking Coalitions, Monotonic Social Choice Functions
    JEL: D82 H41 D70 D60
    Date: 2015–09
  7. By: Giuseppe Di Liddo (University of Bari (Italy)); Ernesto Longobardi (University of Bari (Italy)); Francesco Porcelli (University of Exeter (U.K.))
    Abstract: In the literature on fiscal federalism, vertical fiscal imbalances have been widely studied, while the theme of horizontal fiscal imbalances and inequality between local governments’ fiscal capacities is still less explored. This paper contributes to fill the gap. A new method to compute fiscal capacities based on regression analysis is proposed, which can overcome some of the drawbacks of traditional methods such the representative tax system. This new approach is then employed to evaluate the fiscal capacities of Italian municipalities over the period 2002-2010. Finally two global measures of the horizontal fiscal imbalance are then used to evaluate the equity implication of a major policy change occurred in 2008 in Italian municipal finance.
    Keywords: Inter-governmental grants, horizontal and fiscal imbalances, equalisation, fiscal capacityLength: 277
    JEL: H73 H77
    Date: 2014–07

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