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on Public Economics |
| By: | Jacques Kibambe Ngoie (Department of Economics, University of Pretoria); Niek Schoeman (Department of Economics, University of Pretoria) |
| Abstract: | This study investigates the optimality hypothesis of taxation and the volatility thereof in South Africa when using appropriate tax rates within a dynamic stochastic environment. Using a Marshallian macroeconomic model disaggregated by sectors (MMM-DA) several features of the South African economy are analysed that may contribute to the efficiency of the optimal taxation hypothesis. The results show that within a tax regime where revenue from labour and capital income constitutes the most significant source of government income, both such taxes distort the economy but that the distortion from a tax on capital exceeds that of a tax on income. This study has twofold implications. It highlights the impact of efficient optimal taxation on both overall economic growth and fiscal policy in the country. |
| Keywords: | Optimality hypothesis, Dynamic stochastic environment, Marshallian macroeconomic model |
| JEL: | K21 L40 D78 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201218&r=pbe |
| By: | Jacques K. Ngoie; Niek Schoeman |
| Abstract: | This study investigates the optimality hypothesis of taxation and the volatility thereof in South Africa when using appropriate tax rates within a dynamic stochastic environment. Using a Marshallian macroeconomic model disaggregated by sectors (MMM-DA) several features of the South African economy are analysed that may contribute to the efficiency of the optimal taxation hypothesis. The results show that within a tax regime where revenue from labour and capital income constitutes the most significant source of government income, both such taxes distort the economy but that the distortion from a tax on capital exceeds that of a tax on income. This study has twofold implications. It highlights the impact of efficient optimal taxation on both overall economic growth and fiscal policy in the country. |
| Keywords: | Optimality hypothesis; Dynamic stochastic environment; Marshallian macroeconomic model |
| JEL: | K21 L40 D78 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:287&r=pbe |
| By: | Olken, Benjamin A.; Singhal, Monica |
| Abstract: | Informal payments are a frequently overlooked source of local public finance in developing countries. We use microdata from ten countries to establish stylized facts on the magnitude, form, and distributional implications of this "informal taxation." Informal taxation is wide- spread, particularly in rural areas, with substantial in-kind labor payments. The wealthy pay more, but pay less in percentage terms, and informal taxes are more regressive than formal taxes. Failing to include informal taxation underestimates household tax burdens and revenue decentralization in developing countries. We discuss various explanations for and implications of these observed stylized facts. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:hrv:hksfac:5689166&r=pbe |
| By: | Jean-Paul Azam (Institut d’économie industrielle, Université de Toulouse 1); Bernard Gauthier (Institut d’économie appliquée, HEC Montréal); Jonathan Goyette (Department of Economics and GRÉDI, Université de Sherbrooke) |
| Abstract: | The paper investigates the conflict that arises between the government, its bureaucrats and businesses in the tax collection process. We examine the effect of fiscal policy and corruption control mechanisms on the prevalence of tax evasion and corruption behaviour, and their impact on firm growth and social welfare. We first model a situation where bureaucrats are homogeneous and have complete bargaining power over firms in the negotiation of bribes during the tax collection process. In such a situation, the government can choose an optimal policy that involves the joint determination of a tax rate and a probability of detection of corrupt bureaucrats which leads to a no-corruption equilibrium. However, when the public administration is composed of bureaucrats with heterogeneous types defined by their ability to impose red tape costs on firms, we find that it is optimal to allow a certain level of corruption, given the cost of monitoring activities. We show how a government could face lose-lose as well as win-win situations in the conduct of its fiscal policies. |
| Keywords: | Corruption, Tax evasion, Tax administration |
| JEL: | D73 H21 H26 H32 D82 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:shr:wpaper:12-09&r=pbe |
| By: | Mertens, Karel; Ravn, Morten O |
| Abstract: | Existing empirical estimates of US nationwide tax multipliers vary from close to zero to very large. Using narrative measures as proxies for structural shocks to total tax revenues in an SVAR, we estimate tax multipliers at the higher end of the range: around two on impact and up to three after 6 quarters. We show that earlier findings of lower multipliers can be explained by an output elasticity of tax revenues assumption that is contradicted by empirical evidence or by failure to account for measurement error in narrative series of tax shocks. |
| Keywords: | fiscal policy; measurement error; narrative identification; tax changes; vector autoregressions |
| JEL: | E20 E32 E62 H30 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8973&r=pbe |
| By: | Gary Clyde Hufbauer (Peterson Institute for International Economics); Martin Vieiro (Peterson Institute for International Economics) |
| Abstract: | The need for US corporate tax reform is blindingly obvious. Conservatives contend that the top corporate tax rate—whether measured in statutory or effective terms—is the second highest in the Organization for Economic Cooperation and Development (OECD). Liberals argue that the US corporate tax system is riddled with complex "loopholes," enabling many firms—whether or not incorporated—to pay less than their fair share. Responding to these criticisms, Obama's White House and Treasury Department released a joint report entitled "The President's Framework for Business Tax Reform." Unfortunately, the report omits the detail needed to fully assess its proposals. But if the devil ever lives in the details, it is in the details of the tax code. Instead of details, the Framework report focuses on five elements of reform: the nominal and effective corporate tax rate, incentives for domestic manufacturing, taxation of international income, the tax code for small business, and the fiscal impact of proposed reforms. The report greatly exaggerates the revenue loss entailed by cutting the statutory corporate tax rate, and it proposes damaging new taxes on international business that would undermine US exports. Overall, the report unduly concentrates on manufacturing activity, while neglecting America's strength in services, the most prominent future driver of jobs, investment, and growth. Projected revenue gains are not large enough to help curb the rising debt-to-GDP ratio, but the report ducks any discussion of a national consumption tax. |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb12-13&r=pbe |
| By: | McKee, Michael; Siladke, Caleb; Vossler, Christian A. |
| Abstract: | Tax authorities utilize the audit process, imposing penalties on tax evaders, as their primary means of enforcement. In recent years, a “service” paradigm, whereby tax authorities provide information about correct tax reporting to taxpayers, has shown the potential to further “encourage” correct tax reporting. This research utilizes laboratory experiments to investigate the behavioral dynamics pertaining to information acquisition and tax evasion. The results show that the overall effect of a helpful information service is to decrease tax evasion. Further, an audit has the behavioral effect of lowering information acquisition rates and increasing evasion immediately after experiencing a penalty. This effect persists (although diminishes) in subsequent tax reporting decisions. |
| Keywords: | Tax evasion; Tax compliance; Behavioral Dynamics; Behavioral economics; Experimental economics |
| JEL: | C91 H26 |
| Date: | 2011–12–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:38865&r=pbe |
| By: | Jacques Kibambe Ngoie (Department of Economics, University of Pretoria); Arnold Zellner (Booth School of Business, University of Chicago) |
| Abstract: | Using several variants of a Marshallian Macroeconomic Model (MMM), see Zellner and Israilevich (2005) and Ngoie and Zellner (2012), this paper investigates how various tax rate reductions may help stimulate the U.S. economy while not adversely affecting aggregate U.S. debt. Variants of our MMM that are shown to fit past data and to perform well in forecasting experiments are employed to evaluate the effects of alternative tax policies. Using quarterly data, our one-sector MMM has been able to predict the 2008 downturn and the 2009Q3 upturn of the U.S. economy. Among other results, this study, using transfer and impulse response functions associated with our MMM, finds that permanent 5 percentage points cut in the personal income and corporate profits tax rates will cause the U.S. real GDP growth rate to rise by 3.0 percentage points with a standard error of 0.6 percentage points. Also, while this policy change leads to positive growth of the government sector, its share of total real GDP is slightly reduced. This is understandable since short run effects of tax cuts include the transfer of tax revenue from the government to the private sector. The private sector is allowed to manage a larger portion of its revenue while government is forced to cut public spending on social programs with little growth enhancing effects. This broadens private economic activities overall. Further, these tax rate policy changes stimulate the growth of the federal tax base considerably which helps to reduce annual budget deficits and the federal debt. |
| Keywords: | Marshallian Macroeconomic Model, Disaggregation, Transfer Functions, Impulse Response Functions, U.S. Fiscal Policy Analysis |
| JEL: | E27 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201217&r=pbe |
| By: | Jean-Paul Azam (Institut d’économie industrielle, Université de Toulouse 1); Bernard Gauthier (Institut d’économie appliquée, HEC Montréal); Jonathan Goyette (Department of Economics and GRÉDI, Université de Sherbrooke) |
| Abstract: | This paper investigates the negotiation over bribe and tax payments during the tax collection process in poor countries. We build a simple model where tax officials and firms bargain over bribes to let firms evade part of their taxes. Using a unique dataset on Ugandan firms we test the predictions of the model. We find significant and robust effects of effective tax payments, tax obligations, red tape costs and firm’s bargaining power on bribe payments. Taking into account the endogenous relationship between taxes paid and bribes, we find a significant and negative relationship between these two variables. A policy that would increase incentives to pay taxes per employee by 7% could at the same time decrease the level of bribes per employee by at least 1%. |
| Keywords: | Corruption, Tax evasion, Tax administration, Red Tape, Bargaining Power |
| JEL: | D73 H21 H26 H32 D82 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:shr:wpaper:12-08&r=pbe |
| By: | Jonathan Goyette (Department of Economics and GRÉDI, Université de Sherbrooke) |
| Abstract: | Significant efficiency gains are available when there is a gap between official and effective enforcement of a tax threshold. Using a unique dataset on Ugandan firms, I show that audits for business-related taxes are effectively based on the number of employees rather than the official tax threshold, which is in terms of sales. Based on the empirical evidence, I build a model of firms growth with entry and exit. Entrepreneurs evade part of their tax liabilities and, when audited, bargain with tax officials to keep some of the surplus from evasion in exchange of a bribe. The model is calibrated using the Ugandan data and replicates well some features of the data that are not explicitly targeted. Based on a counterfactual analysis, I show that the efficiency loss associated with evasion and corruption is of the order of 45% in Uganda. There is also a non-negligible gain in productivity per worker of 16% from enforcing the official tax threshold based on the level of sales rather than the effective threshold based on the number of employees. This gain in efficiency is essentially due to the reallocation of labor across productive units. |
| Keywords: | Tax Threshold, Evasion, Corruption, Firm’s Growth, Size Distribution of Firms, Simulation |
| JEL: | E27 H26 H83 L11 O11 O16 O43 O47 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:shr:wpaper:12-07&r=pbe |
| By: | Alessio D'Amato (Faculty of Economics, University of Rome "Tor Vergata"); Amanda Spisto (Faculty of Economics, University of Rome "Tor Vergata") |
| Abstract: | We model an environmental policy problem with two representative firms in two countries (one for each country). Firms are subject to environmental taxation, aimed at reducing CO2 emissions, and a unilateral technological spillover takes place: one of the two countries (innovating country) is responsible for generating the technological spillover while the other country is the one benefiting from the spillover e¤ect. Two different scenarios are analysed: one where countries do not cooperate and one where a single supranational authority is in charge of setting environmental policy. At first, both countries feature emissions taxation aimed at reducing CO2 emissions. In such a case, we show that the standard international externality applies, i.e. a suboptimal emission tax rate is set, leading to larger than efficient pollution. However, the tax rate is larger than marginal national damages in the innovating country due to the need to provide incentives towards technical change. Then we present a setting where the two countries are both subject to a national tax on emissions but the innovating country introduces a tax credit which is directly proportional to the innovative effort. In such a setting, we obtain counterintuitive results: interestingly, for a sufficiently large spillover, the tax rate in the non cooperative setting might exceed the one arising under cooperation. |
| Keywords: | tax credit policy, transboundary pollution, international technological spillover, cooperative vs non-cooperative behaviour |
| JEL: | Q58 H23 |
| Date: | 2012–05–21 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:237&r=pbe |
| By: | Martinez-Bravo, Monica; Padro, Gerard; Qian, Nancy; Yao, Yang |
| Abstract: | This study investigates the effects of introducing elections on public goods and redistribution in rural China. We collect a large and unique survey to document the history of political reforms and economic policies and exploit the staggered timing of the introduction of elections for causal identification. We find that elections significantly increase public goods expenditure, the increase corresponds to demand and is paralleled by an increase in public goods provision and local taxes. We also find that elections cause significant income redistribution within villages. The results support the basic assumptions of recent theories of democratization (Acemoglu and Robinson, 2000; Lizzeri and Persico, 2004). In addition, we show that the main mechanism underlying the effect of elections is increased leader incentives. |
| Keywords: | Democracy; Elections; Institutions |
| JEL: | P16 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8975&r=pbe |
| By: | Jonathan Goyette (Department of Economics and GRÉDI, Université de Sherbrooke); Giovanni Gallipoli (Department of Economics, University of British Columbia) |
| Abstract: | Microdata information about firms’ input choices and effective tax liabilities is used to quantify the extent of resource misallocation and efficiency losses due to large tax distortions and limited access to credit. We develop an equilibrium model of firms’ behavior in which the tax and credit environments act as a selection mechanism restricting the growth of all but the most productive firms. We show that such a model, parameterized and validated using a variety of data restrictions, has the potential to rationalize several puzzling observations about firms’ input choices, size and growth patterns. Counterfactual experiments are designed to gauge the losses associated to different deviations from first-best. We find that firms’ optimal responses to the tax distortions are quite effective in reducing efficiency losses. As a consequence, tax distortions only account for 5% of the gap between an undistorted economy and the benchmark. On the other hand limited and expensive access to credit is associated to more significant misallocation of productive resources and leads to larger aggregate efficiency losses of the order of 95% of the gap between an undistorted economy and the benchmark. Our findings highlight the non-negligible quantitative importance of two relatively common distortions in developing economies, and identifies simple mechanisms which might contribute to their low measured TFP. |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:shr:wpaper:12-06&r=pbe |
| By: | Tetsuo Ono (Graduate School of Economics, Osaka University) |
| Abstract: | This paper analyzes the political economy of public education and redistribution in an overlapping-generation model of a two-class society in which growth is driven by the accumulation of human capital. The levels of public education and lump- sum financial transfers are determined by voting, while private education which supplements public education is purchased individually. The model, which includes two-dimensional voting, demonstrates multiple steady-state political equilibria. One is an equilibrium with a high share of public education in government expenditure; the other is an equilibrium with a high share of lump-sum transfers. Numerical analysis shows empirically plausible result of growth, inequality and the composition of redistributive expenditures. |
| Keywords: | Education, political economy, inequality, growth |
| JEL: | D72 D91 I24 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1209&r=pbe |
| By: | Born, Benjamin; Juessen, Falko; Müller, Gernot |
| Abstract: | Does the fiscal multiplier depend on the exchange rate regime and, if so, how strongly? To address this question, we first estimate a panel vector autoregression (VAR) model on time-series data for OECD countries. We identify the effects of unanticipated government spending shocks in countries with fixed and floating exchange rates, while controlling for anticipated changes in government spending. In a second step, we interpret the evidence through the lens of a New Keynesian small open economy model. Three results stand out. First, while government spending multipliers are larger under fixed exchange rate regimes, the difference relative to floating exchange rates is smaller than what traditional Mundell-Fleming analysis suggests. Second, there is little evidence for the specific transmission channel which is at the heart of the Mundell-Fleming model. Third, the New Keynesian model provides a satisfactory account of the evidence. |
| Keywords: | exchange rate regimes; fiscal multiplier; fiscal policy; monetary policy; New Keynesian model; Panel VAR |
| JEL: | E62 F41 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8986&r=pbe |
| By: | Filipe R. Campante (Harvard Kennedy School, Harvard University); Quoc-Anh Do (School of Economics, Singapore Management University) |
| Abstract: | We show that isolated capital cities are robustly associated with greater levels of corruption across US states. In particular, this is the case when we use the variation induced by the exogenous location of a state’s centroid to instrument for the concentration of population around the capital city. We then show that different mechanisms for holding state politicians accountable are also affected by the spatial distribution of population: newspapers provide greater coverage of state politics when their audiences are more concentrated around the capital, and voter turnout in state elections is greater in places that are closer to the capital. Consistent with lower accountability, there is also evidence that there is more money in state-level political campaigns in those states with isolated capitals. We find that the role of media accountability helps explain the connection between isolated capitals and corruption. In addition, we provide some evidence that this pattern is also associated with lower levels of public good spending and outcomes. |
| Keywords: | Corruption; Accountability; Population Concentration; Capital Cities; US State Politics; Media; Turnout; Campaign Contributions; Public Good Provision |
| JEL: | D72 D73 L82 R12 R50 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:siu:wpaper:21-2012&r=pbe |