nep-pub New Economics Papers
on Public Finance
Issue of 2017‒01‒29
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Why is the Long-Run Tax on Capital Income Zero? Explaining the Chamley-Judd Result By Bas Jacobs; Alexandra Victoria Rusu
  2. The Effects of Collecting Income Taxes on Social Security Benefits By Jones, John Bailey; Li, Yue
  3. Habit formation and the Pareto-efficient provision of public goods By Aronsson, Thomas; Schöb, Ronnie
  4. The geography of linguistic diversity and the provision of public goods By Ortuño, Ignacio; Gomes, Joseph; Desmet, Klaus
  5. The Behavioral Effect of Pigovian Regulation: Evidence from a Field Experiment By Bruno Lanz; Jules-Daniel Wurlod; Luca Panzone; Timothy Swanson
  6. Individual poverty measurement using a fuzzy intrahousehold approach By Gianni Betti; Lucia Mangiavacchi; Luca Piccoli
  7. Job creation tax credits, fiscal foresight,and job growth: evidence from U.S. States By Robert S. Chirinko; Daniel J. Wilson
  8. More Tax Sources for Canada’s Largest Cities: Why, What, and How? By Harry Kitchen and Enid Slack

  1. By: Bas Jacobs (Erasmus School of Economics, Tinbergen Institute, CESifo); Alexandra Victoria Rusu (Erasmus School of Economics, The Netherlands)
    Abstract: Why is it optimal not to tax capital income in the long-run in Chamley (1986) and Judd (1985)? This paper demonstrates that the answer follows standard intuitions from the commodity tax literature. In the steady state, Engel curves for consumption are linear in labour earnings, irrespective of the utility function adopted. Thus, in the steady state, consumption demands in each period become equally complementary to leisure over time. This renders taxes on capital income redundant, since they cannot alleviate distortions from taxing labour income. The argument that taxes on capital income should be zero because distortions explode in finite time is relevant only if restrictions are imposed on the utility function. We show how these restrictions imply that consumption demands in each period are equally complementary to leisure over time. We also demonstrate that the optimal tax on capital income is zero irrespective of whether the gross interest rate is endogenous. This contradicts arguments that the entire burden of capital income taxes is shifted to labour through general equilibrium effects on the interest rate.
    Keywords: taxation of capital income; zero capital income tax; Corlett-Hague motive; Chamley-Judd result
    JEL: H2
    Date: 2017–01–23
  2. By: Jones, John Bailey (Federal Reserve Bank of Richmond); Li, Yue (University at Albany)
    Abstract: Since 1983, Social Security benefits have been subject to income taxation, a provision that can significantly increase the marginal income tax rate for older individuals. To assess the impact of this tax, we construct and calibrate a detailed life-cycle model of labor supply, saving, and Social Security claiming. We find that in a long-run stationary environment, replacing the taxation of Social Security benefits with a revenue-equivalent increase in the payroll tax would significantly increase labor supply, consumption and welfare. From an ex-ante perspective an even more desirable reform would be to make the portion of benefits subject to income taxes completely independent of other income.
    Keywords: Social Security; Labor Supply; Taxation
    JEL: E21 H24 H55 I38
    Date: 2017–01–12
  3. By: Aronsson, Thomas; Schöb, Ronnie
    Abstract: This paper examines the implications of habit formation in private and public consumption for the Pareto-efficient provision of public goods, based on a two-period model with nonlinear taxation. If the public good supply is time-invariant, the presence of habit formation generally alters the standard rules for public good provision. In contrast, if the public good is a flow-variable such that the government directly decides on the level of the public good in each period, habit formation leads to a modification of the first best Samuelson condition only if the degrees of habituation differ for private and public consumption. Since habit formation affects the incentives to relax the self-selection constraint through public good provision, however, habituation alters the second-best analogue to the Samuelson condition also when the degrees of habituation in private and public consumption coincide.
    Keywords: public good provision,Samuelson condition,habit formation,optimal taxation
    JEL: D60 H21 H41
    Date: 2017
  4. By: Ortuño, Ignacio; Gomes, Joseph; Desmet, Klaus
    Abstract: This paper theoretically analyzes and empirically investigates the importance of local interaction between individuals of different linguistic groups for the provision of public goods at the national level. Depending on whether local interaction mitigates or reinforces antagonism towards other groups, the micro-founded theory we develop predicts that a country's provision of public goods (i) decreases in its overall linguistic fractionalization, and (ii) either increases or decreases in how much individuals locally learn about other groups. After constructing a 5 km by 5 km geographic dataset on language use for 223 countries, we compute measures of overall fractionalization and local learning, and investigate their relation to public good provision at the country level. While overall fractionalization worsens outcomes, we find a positive causal relation between local learning and public goods. Local mixing therefore mitigates the negative impact of a country's overall linguistic fractionalization. An IV strategy shows that this result is not driven by the possible endogenous spatial distribution of language speakers within countries.
    Keywords: Local interaction; Public goods; Diversity
    JEL: D82 J15 H5
    Date: 2016–12
  5. By: Bruno Lanz (University of Neuchâtel, Department of Economics and Business; ETH Zurich, Chair for Integrative Risk Management and Economics; Massachusetts Institute of Technology, Joint Program on the Science and Policy of Global Change.); Jules-Daniel Wurlod (Boston Consulting Group, Geneva, Switzerland.); Luca Panzone (Newcastle University, School of Agriculture, Food and Rural Development, UK.); Timothy Swanson (Graduate Institute of International and Development Studies, Centre for International Environmental Studies, Switzerland.)
    Abstract: Pigovian regulation provides monetary penalties/rewards to incentivize prosocial behavior, and may thereby trigger behavioral effects beyond a more standard response associated with a change in relative prices. This paper quantifies the magnitude of these behavioral effects using data from an experiment on real product choices together with a structural model of consumer behavior. First, we show that information about external effects (products’ embodied carbon emissions) triggers voluntary substitution towards cleaner alternatives, and we estimate that this effect is equivalent to a change in relative prices of GBP30.69-165.15/tCO2. Second, comparing a Pigovian intervention (GBP19/tCO2) with a neutrally-framed price change of the same magnitude, we find a negative behavioral effect associated with regulation. Compensating this bias would require increasing the Pigovian price signal by up to 48.06/tCO2. Finally, based on a cross-product comparison, we show that the magnitude of behavioral effects declines with substitutability between clean and dirty product alternatives, a measure of effort to reduce emissions.
    Keywords: Externalities; Pigovian regulation; Consumer behavior; Information; Field experiments; Environmental policy.
    JEL: C93 D03 D12 H23 Q58
    Date: 2017–01
  6. By: Gianni Betti; Lucia Mangiavacchi; Luca Piccoli
    Abstract: This work studies the impact of accounting for intrahousehold inequality in the distribution of resources for the measurement of poverty. For the estimation of intrahousehold distribution of resources the study relies on collective Engel curves. For the poverty analysis, we propose a fuzzy intrahousehold index which is less sensitive to small changes around the poverty line compared to standard FGT indices and produce more reliable results. This provides an interesting approach to address individual poverty in contexts where intrahousehold inequality is at work and there is a concentration of individuals near the poverty line. The proposed approach is applied to the analysis of individual poverty in Albania, finding an expected general increase in poverty rates. Besides, a previously unperceived issue –female poverty– emerges as a worryingly aspect to be accounted for in anti-poverty policies.
    Keywords: Female poverty, Gender inequality, Fuzzy set poverty, intrahousehold distribution, Collective model, Albania.
    JEL: D13 H31 I32
    Date: 2017–01
  7. By: Robert S. Chirinko; Daniel J. Wilson
    Abstract: This paper studies fiscal foresight -- alterations of current behavior by forwardlooking agents in anticipation of future policy changes – using variation in state job creation tax credits (JCTCs). Nearly half of the U.S. states enacted JCTCs between 1990 and 2007, and their unique experiences provide a rich source of information for assessing the quantitative importance of fiscal foresight. We investigate whether JCTCs affect employment growth before, at, and after the time they go into effect. A theoretical model identifies three key conditions necessary for fiscal foresight, captures the effects of the rolling base feature of JCTCs, and generates several empirical predictions. We evaluate these predictions in a difference-in-difference regression framework applied to monthly panel data on employment, the JCTC effective and legislative dates,and various controls. Failing to account for the distorting effects of fiscal foresight can result in upwardly biased estimates of the impact of the JCTC fiscal policy by as much as 34%. We also find that the cumulative effect of the JCTCs is positive, but it takes several years for the full effect to be realized. The cost per job created is approximately $18,000, which is low relative to cost estimates of recent federal fiscal programs. This figure implies a fiscal multiplier on JCTC tax expenditures of about 1.66.
    Keywords: Fiscal foresight, job creation tax credits, state business tax incentives, implementation lags, fiscal policy
    JEL: E62 E24 H25 H71
    Date: 2016–12
  8. By: Harry Kitchen and Enid Slack (University of Toronto)
    Abstract: Canadian cities have long called for access to more tax revenues. This paper argues that additional taxes are appropriate for major cities, describes the advantages and disadvantages of potential new taxes, and estimates the revenue from a city income tax, a city sales tax, and a city fuel tax for eight Canadian cities – Vancouver, Calgary, Edmonton, Winnipeg, Toronto, Ottawa, Montréal, and Halifax. The authors find that the property tax is a good tax, but cities would benefit from a mix of taxes. In particular, user fees are an important source of revenue and can alter economic behaviour. Taxes on income, sales, vehicle registration, fuel, and hotel stays are also an effective way to diversify local taxes. Of the available options, a personal income tax and a municipal sales tax are likely to generate the largest revenues. Although setting up their own tax systems would grant cities the greatest fiscal autonomy, doing so would be costly. It would be more cost-effective for cities to piggyback new taxes onto provincial taxes, with the province collecting the revenue and remitting it to cities. To promote local accountability, however, it is essential that local governments set their own tax rates. In this way, taxes levied would be linked to services consumed.
    Keywords: municipal finance, local taxes, fiscal autonomy
    JEL: H71 H77
    Date: 2016–10

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