nep-pub New Economics Papers
on Public Finance
Issue of 2022‒03‒14
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Trust, the Pandemic, and Public Policies By James Alm
  2. Bunching in rank-dependent optimal income tax schedules By Laurent Simula; Alain Trannoy
  3. How Accurate is the Kakwani Index in Predicting Whether a Tax or a Transfer is Equalizing? An Empirical Analysis By Ali Enami; Patricio Larroulet; Nora Lustig
  4. Government Expenditure in the DINA Framework: Allocation Methods and Consequences for Post-Tax Income Inequality. By Lukas Riedel; Holger Stichnoth
  5. Government Fragmentation and Economic Growth By Cassidy, Traviss; Velayudhan, Tejaswi
  6. Taxation, infrastructure investment, growth, and poverty reduction: A case study of Zimbabwe By Hans Lofgren; Martín Cicowiez

  1. By: James Alm (Tulane University)
    Abstract: What is the role of trust in designing public policies, especially during the current pandemic? In this paper I examine recent research that demonstrates the crucial effects of trust. This research suggests, I believe, two main conclusions. First, there is much emerging evidence that trust – and especially trust in government – is a major factor in shaping the effectiveness of public policies. In particular, when trust in government is weak, many government policies do not achieve their goals because people simply do not follow the government’s laws, regulations, and directives. Second, there is also much emerging evidence that trust is not fixed and given and immutable, mainly determined by a country’s history and culture and institutions, as was once believed. Instead, recent evidence indicates that trust can vary significantly, even over short periods of time. Indeed, there is growing research that trust in government can be affected in systematic ways by systematic policy interventions. These conclusions suggest that there are ways out of our current wilderness, even if these strategies will be neither easy nor quick.
    Keywords: Trust; public policy; tax compliance; experiments; pandemic.
    JEL: A13 H50 H70
    Date: 2022–02
  2. By: Laurent Simula (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Alain Trannoy (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Considering optimal non-linear income tax problems when the social welfare function only depends on ranks as in Yaari (Econometrica 55(1):95–115, 1987) and weights agreeing with the Lorenz quasi-ordering, we extend the analysis of Simula and Trannoy (Am Econ J Econ Policy, 2021) in two directions. First, we establish conditions under which bunching does not occur in the social optimum. We find a sufficient condition on individual preferences, which appears as a reinforcement of the Spence-Mirrlees condition. In particular, the marginal dis-utility of gross income should be convex, but less convex the higher the productivity. We also show that, for all productivity distributions with a log-concave survival function, bunching is precluded under the maximin, Gini, and "illfare-ranked single-series Ginis". Second, we turn to a discrete population setting, and provide an "ABC" formula for optimal marginal tax rates, which is related to those for a continuum of types found in Simula and Trannoy (2021), but remain essentially distinct.
    Keywords: Rank dependence,Gini,Optimal Income Taxation,Bunching,Log-Concavity
    Date: 2022
  3. By: Ali Enami (The University of Akron, United States); Patricio Larroulet (Center for the Study of the State and Society (CEDES), Argentina.); Nora Lustig (Tulane University)
    Abstract: The Kakwani index of progressivity is commonly used to establish whether the effect of a specific tax or transfer is equalizing. However, in the presence of reranking or the Lambert conundrum, a progressive tax could be unequalizing. While it is mathematically possible for counterintuitive results to occur, how common are they in actual fiscal systems? Using a novel dataset that includes fiscal incidence results for 39 countries, we find that the likelihood of the Kakwani index to be progressive (regressive) while the tax or transfer is unequalizing (equalizing) is minimal, except in the case of indirect taxes: in roughly 25 percent of our sample, regressive indirect taxes are equalizing (sign-inconsistent cases). Additionally, the likelihood that the index ranks the magnitude of the impact of a tax or a transfer wrongly exists but is also small. Finally, using regression analysis, we find that increasing the size or progressivity of a progressive tax (transfer) is equalizing and statistically robust for sign- consistent cases. For sign-inconsistent cases, the coefficient for the Kakwani index is not statistically significant. In sum, although the Kakwani index could yield interpretations that are inaccurate in actual fiscal systems, the risk seems small except for indirect taxes.
    Keywords: Kakwani index, fiscal redistribution, reranking, progressivity, marginal contribution, taxes, transfers, Lambert
    JEL: D31 D63 H22 H23
    Date: 2022–01
  4. By: Lukas Riedel; Holger Stichnoth
    Abstract: Constructing measures of post-tax income inequality that are consistent with national accounts requires the allocation of the entirety of government expenditure to individuals. About half of government expenditure in the United States takes the form of in-kind collective expenditure (e.g., education, defense, infrastructure). The dominant assumption in the literature is to allocate this expenditure proportionally to post-tax cash income. We show that the gap in post-tax income shares between the Top 10% and Bottom 50% in the United States is reduced by half (from about 20 to 10 percentage points in recent years) when this assumption is replaced by a lump-sum allocation. We further provide direct evidence on how a substantial part of collective expenditure is actually distributed. When adopting the cross-sectional perspective of the Dina approach, we find that public education spending goes disproportionately to the bottom half of the income distribution. A lump-sum allocation provides a good approximation. Moving beyond the crosssection, we find that public education expenditure is positively correlated with both lifetime earnings and parents’ socio-economic status. Keywords: inequality, redistribution, education, in-kind transfers.
    Keywords: inequality, redistribution, education, in-kind transfers.
    JEL: D31 H41 H52 I24
    Date: 2022
  5. By: Cassidy, Traviss; Velayudhan, Tejaswi
    Abstract: How does the fragmentation of local governments affect economic activity? We examine this question in the context of a major period of decentralization in Indonesia in which the number of local governments increased by 50 percent within a decade. Exploiting idiosyncratic variation in the timing of district splits, we find that fragmentation reduces district GDP in the short run---despite large increases in central transfers. The downsides of fragmentation due to economies of scale and the inexperience of new government personnel outweigh the potential upsides of increased accountability and competition. The GDP decline is larger in ``child'' districts that acquire a new capital and government. Furthermore, splitting districts spend more on administration and show no improvement in the areas of public good provision, red tape, and corruption.
    Keywords: Economic growth, local governments, economies of scale, rent-seeking
    JEL: D73 H77 O43 O47
    Date: 2022–02–18
  6. By: Hans Lofgren (World Bank); Martín Cicowiez (CEDLAS-IIE-FCE-UNLP)
    Abstract: In recent decades, Zimbabwe’s development record has been disappointing. In the last few years, a severe drought and the Covid-19 pandemic have added to the country’s development challenges. This paper is concerned with the long-run need to find a path toward faster growth in GDP, employment, and incomes, accompanied by more rapid progress on poverty reduction and other parts of the global sustainable development agenda. As part of this search, the country will need to address structural constraints including a large infrastructure gap, an inefficient government, and unhospitable business climate. Among these, this paper is focused on infrastructure and alternative means of financing scaled-up investments – what are the consequences of relying on domestic taxes compared to foreign financing? To address these questions, the paper draws on simulations with SDGSIM, a computable general equilibrium (CGE) model, designed for SDG analysis but applicable to analysis of policies in a wide range of areas, including growth, fiscal space, and external shocks. The model was adapted to the Zimbabwean context and calibrated to a database for 2016. The simulations cover the period 2016-2030 and analyzes the effects of alternative levels and priorities for government spending and resource mobilization (domestic and foreign). The simulation results cover a wide range of economic indicators, including some related to the global Sustainable Development Goal (SDG) agenda. The differences between the scenario results for GDP growth, household consumption, and poverty point to the importance of strong public investment management and, other things being equal, of targeting TFP gains to tradable sectors. The advantages of reliance on domestic taxation for the funding of expanded investment include slower debt accumulation and less reliance on the decisions of external actors. Tax reliance may also give the funders, the citizens, a stronger sense of ownership and right to monitor how the money is used, with a positive impact on investment productivity. On the other hand, before the investment have yielded sufficient returns, reliance on taxes reduces private purchasing power, leading to some combination of lower private consumption and investment. Raising the tax burden by 2-3 percent of GDP may also be administratively difficult. It would of course be possible to consider scenarios that split the funding burden between domestic taxes and foreign financing.
    JEL: C68 H54 O55
    Date: 2022–03

This nep-pub issue is ©2022 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.