nep-pub New Economics Papers
on Public Finance
Issue of 2016‒08‒28
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Horizontal and Vertical Tax Interactions in a Common Agency Game By Florence LACHET-TOUYA
  2. The effects of size-based regulation on small firms: evidence from VAT threshold By Jarkko Harju; Tuomas Matikka; Timo Rauhanen
  3. Comparing the role of height between men and women in the marriage market By Shigeo Morita; Takuya Obara
  4. The Impact of Taxes on the Extensive and Intensive Margins of FDI By Davies, Ronald B.; Siedschlag, Iulia; Studnicka, Zuzanna
  5. Choice and Competition in Public Service Provision By Timothy Besley; James M. Malcolmson
  6. Tradable Permits in Cost–Benefit Analysis. A Numerical Illustration By Johansson, Per-Olov
  7. EU Tax Competition and Tax Avoidance: A Multiprincipal Perspective By Florence LACHET-TOUYA
  8. "Federalism, Fiscal Space, and Public Investment Spending: Do Fiscal Rules Impose Hard Budget Constraints?" By Pinaki Chakraborty

  1. By: Florence LACHET-TOUYA
    Abstract: The decisions made by one government affect the tax revenue that can be collected by the decisionmakers belonging to the same tier of government or by stacked jurisdictions : externalities arise, the existence and the magnitude of which are closely related to the nature of the tax, to the mobility of the base and to the distribution of tax competence among decisionmakers. Indeed, when same authorities belonging to a same level of government derive their receipts from a mobile tax base, a competition mechanism takes place among them that triggers externalities. Likewise, when different layers of decision-makers exert their taxing power upon a common base, the choices made by one tier affect the receipts that the other governments can collect. As a by-product, this paper proposes a model where both horizontal and vertical interactions are tackled, ?first successively then simultaneously. Uncertainty concerning the base, that is, the amount of capital likely to be invested, is introduced and a generalization of taxation schemes is provided. The analysis shows that horizontal and vertical externalities point towards opposite directions : while horizontal competition leads to ine¢ ciently low rates, the common pool problem arising from the stacking of decisionmakers taxing a same base gives rise to a phenomenon of over-taxation. Besides, the combination of both externalities yields to an intermediary tax rate : the outcome is brought closer to the social optimum.
    Keywords: Vertical and horizontal tax externalities; Informational asymmetry; Tax competition; Common Agency; Nonlinear taxes
    JEL: D72 D82 H23 H30 H32 H71 H77
    Date: 2016–08
  2. By: Jarkko Harju; Tuomas Matikka; Timo Rauhanen
    Abstract: Various types of size-based regulations for firms are typical in most countries (tax schedules, accounting rules, health and safety standards etc.). However, there is only limited evidence of how owners of small firms respond to such rules, and what are the underlying mechanisms behind the observed behavior. We study these questions by examining the effects of the value-added tax (VAT) sales threshold using tax register data on the universe of Finnish firms and their owners. We find sizable bunching of firms in the sales distribution just below the VAT threshold. This implies that small firms actively avoid VAT liability. We utilize variation in both the VAT rate and reporting requirements to provide compelling evidence that the response is caused by the compliance costs of VAT reporting rather than the size of the tax rate. This shows that the costs related to reporting and understanding taxes induce greater distortions than pure tax incentives, especially among low-income entrepreneurs. In addition, we find no explicit evidence of avoidance or evasion, which suggests that firms respond by reducing their true output. Also, bunching behavior is very permanent, implying that the VAT threshold hinders the growth of small firms.
    Keywords: Value-added tax, compliance costs, small firms, entrepreneurs, bunching
    JEL: H32 L11 D22 H25
    Date: 2016–06–14
  3. By: Shigeo Morita (Graduate School of Economics, Osaka University); Takuya Obara (Graduate School of Economics, Hitotsubashi University)
    Abstract: In this study, we investigate optimal nonlinear labor and capital income tax- ation and subsidies for contribution goods in a dynamic setting. We show that when individuals can contribute to a public good|even if additive and separa- ble preference between consumption and labor supply is assumed and individuals differ only in earning ability|marginal capital income tax rate for low-income earners is not zero, indicating that the Atkinson{Stiglitz theorem does not hold. In particular, heterogeneous tastes for private consumptions endogenously occur. In addition, we derive a formula for optimal tax treatment of a public good, which is expressed in terms of the Pigouvian effect and the effect on an incentive com- patibility constraint.
    Keywords: Capital income tax, Private donations, Tax treatment
    JEL: H21 H23
    Date: 2016–08
  4. By: Davies, Ronald B.; Siedschlag, Iulia; Studnicka, Zuzanna
    Abstract: The design of optimal tax policy, especially with respect to attracting FDI, hinges on whether taxes affect multinational firms at the extensive or the intensive margins. Nevertheless, the literature has not yet explored the simultaneous impact of taxation on FDI on these two margins. Using firm-level cross-border investments into Europe during 2004-2013, we do so with a Heckman two-step estimator, an approach which also allows us to endogenize the number of investments and include home country and parent firm characteristics. We find that taxes affect both margins, particularly for firms that invest only once, with 92 percent of tax-induced changes in aggregate inbound FDI driven by movements at the extensive margin. In addition, we find significant effects of both home country and parent firm characteristics, pointing towards the granularity of investment decisions.
    Date: 2016–07
  5. By: Timothy Besley; James M. Malcolmson
    Abstract: In spite of a range of policy initiatives in sectors such as education, health care and legal services, whether choice and competition is valuable remains contested territory. This paper studies the impact of choice and competition on different dimensions of quality, examining the role of not-for-profit providers. We explore two main factors which determine whether an alternative provider enters the market: cost efficiency and the preferences of an incumbent not-for-profit provider (paternalism). The framework developed can incorporate standard concerns about the downside of choice and competition when consumer choice is defective (an internality) or choice imposes costs on those who do not switch (an externality). The paper considers optimal funding levels for incumbents and entrants showing when the "voucher" provided for consumers to move to the incumbent should be more or less generous than the funding for consumers who remain with the incumbent. Finally, the model also offers an insight into why initiatives are frequently opposed by incumbent providers even if the latter have not-for-profit objectives.
    Keywords: choice, competition, public Service, not-for-profit
    JEL: H11 H44 L21 L31
    Date: 2016–08
  6. By: Johansson, Per-Olov (CERE and HHS)
    Abstract: There are di fferent views with respect to the treatment of tradable permits for greenhouse gases in cost-benefi t analysis. This note aims at illustrating numerically within a simple general equilibrium model how to treat tradable permits in economic evaluations of projects. The note looks at a cost-benefi t rule for a large project providing a public good interpreted as a shortcut for infrastructure, using a fossil fuel and a renewable as inputs. The paper also evaluates a small or marginal project involving the same output and inputs. In addition, it illustrates the Samuelson condition for the optimal provision of the public good. The note is a supplement to CERE Working Paper No 2015:11 and SSE Working Paper in Economics No 2015:3. The model used here may also be useful in advanced courses to illustrate general equilibrium cost-benefi t analysis.
    Keywords: Cost{bene t analysis; greenhouse gases; tradable permits; general equilibrium; Samuelson condition; numerical illustration
    JEL: H21 H23 H41 H43 I30 L13
    Date: 2016–05–11
  7. By: Florence LACHET-TOUYA
    Keywords: Vertical and horizontal tax externalities; Information asymmetry; Tax competition; EU taxation; Governments' objective function
    JEL: D72 D82 H23 H30 H32 H71 H77
    Date: 2016–08
  8. By: Pinaki Chakraborty
    Abstract: The primary objective of rule-based fiscal legislation at the subnational level in India is to achieve debt sustainability by placing a ceiling on borrowing and the use of borrowed resources for public capital investment by phasing out deficits in the budget revenue account. This paper examines whether the application of fiscal rules has contributed to an increase in fiscal space for public capital investment spending in major Indian states. Our analysis shows that, controlling for other factors, there is a negative relationship between fiscal rules and public capital investment spending at the state level under the rule-based fiscal regime.
    Keywords: Fiscal Deficit; Revenue Deficit; Fiscal Rule
    JEL: H00 H6
    Date: 2016–08

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