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on Public Finance |
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Issue of 2014‒04‒29
fourteen papers chosen by |
| By: | Christian Baker (Department of Economics, Brigham Young University); Jeremy Bejarano (Department of Economics, University of Chicago); Richard W. Evans (Department of Economics, Brigham Young University); Kenneth L. Judd (Hoover Institution, Stanford University); Kerk L. Phillips (Department of Economics, Brigham Young University) |
| Abstract: | We characterize and demonstrate a solution method for an optimal commodity (sales) tax problem consisting of multiple goods, heterogeneous agents, and a nonconvex policy maker optimization problem. Our approach allows for more dimensions of heterogeneity than has been previously possible, incorporates potential model uncertainty and policy objective uncertainty, and relaxes some of the assumptions in the previous literature that were necessary to generate a convex optimization problem for the policy maker. Our solution technique involves creating a large database of optimal responses by different individuals for different policy parameters and using ``big data'' techniques to compute policy maker objective values over these individuals. We calibrate our model to the United States and test the effects of a differentiated optimal commodity tax versus a flat tax and the effect of exempting a broad class of goods (services) from commodity taxation. We find that only a potentially small amount of tax revenue is lost for a given societal welfare level by departing from an optimal differentiated sales tax schedule to a uniform flat tax and that there is only a small loss in revenue from exempting a class of goods such as services in the United States. |
| Keywords: | lOptimal tax, sales tax, commodity tax, big data, robustness |
| JEL: | C61 C63 D31 E62 H21 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:byu:byumcl:201403&r=pub |
| By: | Matthew C. Weinzierl (Harvard Business School, Business, Government and the International Economy Unit) |
| Abstract: | This paper explores how the persistently popular "classical" logic of benefit based taxation, in which an individual's benefit from public goods is tied to his or her income-earning ability, can be incorporated into modern optimal tax theory. If Lindahl's methods are applied to that view of benefits, first-best optimal policy can be characterized analytically as depending on a few potentially estimable statistics, in particular the coefficient of complementarity between public goods and innate talent. Constrained optimal policy with a Pareto-efficient objective that strikes a balance-controlled by a single parameter-between this principle and the familiar utilitarian criterion can be simulated using conventional constraints and methods. A wide range of optimal policy outcomes can result, including those consistent with existing policies. To the extent that such an objective reflects the mixed normative reasoning behind prevailing policies, this model may offer a useful approach to a positive optimal tax theory. |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:hbs:wpaper:14-101&r=pub |
| By: | Beckmann, Klaus (Helmut Schmidt University, Hamburg); Gattke, Susan (Helmut Schmidt University, Hamburg) |
| Abstract: | We introduce public signals and cognitive dissonance into the standard Allingham-Sandmo- Yitzhaki (ASY) model of tax evasion. It turns out that the pres- ence of cognitive dissonance attenuates tax evasion as individuals dislike allowing their true bevhaviour to diverge from their public statement of the “admissible” degree of tax evasion, which, in turn, they use to influence the probability of detection. Some potential policy conclusions and extensions are discussed. |
| Keywords: | tax evasion; cognitive dissonance; public signals |
| JEL: | D03 H26 H30 |
| Date: | 2014–04–17 |
| URL: | http://d.repec.org/n?u=RePEc:ris:vhsuwp:2014_142&r=pub |
| By: | Enid Slack; Richard M Bird |
| Abstract: | Property taxes are generally considered by economists to be good taxes, and many countries are being advised to increase and improve their property taxes. In practice, however, property tax reforms have often proved to be difficult to carry out successfully. This paper discusses why property taxes are particularly challenging to reform and suggests several ways in which efforts to reform this tax may become more successful in the future. After a brief introductory section on the ‘disconnect’ between the economics and the politics of property tax reform, Section 2 summarizes recent experiences in five OECD countries with property tax reform. Against this background, Section 3 sets out the key elements of a good property tax reform and Section 4 discusses several aspects of property tax reform that seem to have derailed or distorted reforms in practice. Unfortunately, some of the solutions countries have adopted to deal with such problems are themselves problematic, either because they do not really solve the problem or because they hamper rather than work towards the establishment of a good property tax. Fortunately, as Section 5 outlines, it is possible to devise strategies for property tax reform that incorporate more acceptable solutions to most problems. As Section 6 concludes, good property tax reform is not easy. But it can definitely be achieved if an appropriately designed reform package is properly introduced and implemented. |
| Keywords: | tax reform, political economy, property tax |
| JEL: | D78 H24 H25 H71 |
| Date: | 2014–04–09 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ctpaab:18-en&r=pub |
| By: | Artheya, Kartik (Federal Reserve Bank of Richmond); Reilly, Devin (University of Pennsylvania); Simpson, Nicole B. (Colgate University) |
| Abstract: | The Earned Income Tax Credit (EITC) is the single most important transfer program in place in the United States. An aspect of the EITC that has received little attention thus far is its role as a public insurance program. Yet, the structure of the EITC necessarily protects its primary class of recipients, unskilled single mothers, against major risks they face to both wages and changes in family structure. Our study provides the first quantitative statement about the insurance provided by the EITC. We study a dynamic model of consumption, savings, and labor supply in which households face wage and demographic risk, but have only limited self-insurance capacity. We use the model to compare outcomes under the EITC to the counterfactual in which it is completely eliminated. We find that the EITC provides substantial insurance to unskilled single mothers: The program reduces consumption volatility, as measured by the coefficient of the variation, by 12 percentage points or more, even as it allows these households to save less. Importantly, this insurance provision may not be compromising incentives to work: The model suggests that the EITC increases the labor supply of unskilled single mothers substantially at the extensive margin. |
| Keywords: | Taxation and Subsidies; Labor Supply; Insurance |
| JEL: | H22 H24 J22 |
| Date: | 2014–04–14 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:14-11&r=pub |
| By: | Zhang, Xiao-Bing (Department of Economics, School of Business, Economics and Law, Göteborg University) |
| Abstract: | This paper investigates the strategic interactions between carbon taxation by a resource-consumers’ coalition and (wellhead) energy pricing by a producers’ cartel under possible innovation in a cheap carbon-free technology through a dynamic game. The arrival time of innovation is uncertain, but can be affected by the amount spent on R&D. The results show that the expectation of possible innovation decreases both the initial carbon tax and producer price, resulting in higher initial resource extraction or carbon emissions. Even though this 'green paradox' effect will appear in the cooperative case (no strategic interactions) as well, the presence of strategic interactions between resource producers and consumers can somewhat restrain such an effect. The optimal R&D to stimulate innovation is an increasing function of the initial CO2 concentration for both the resource consumers and a global planner. However, the resource consumers can over-invest in R&D (compared with the global efficient investment. |
| Keywords: | Carbon taxation; Innovation; Uncertainty; Dynamic game |
| JEL: | C73 H21 Q23 Q54 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0589&r=pub |
| By: | Stenkula, Mikael (Research Institute of Industrial Economics (IFN)) |
| Abstract: | This paper surveys the development and role of the real estate tax in Sweden between 1862 and 2010. The possibility to tax real estate has been used at both the local and state level throughout history. Its importance is difficult to assess directly due to limited data availability and the specific construction of the local tax system after 1920. The real estate tax was supposed to provide the municipalities with a stable tax base, but its importance in this role seems to have diminished over time. After the tax reform of 1990–1991 real estate tax was levied exclusively at the national level. At most, this tax contributed to no more than five percent of total central government tax revenues, and the amount raised occasionally exceeded 1 percent of GDP. In 2008, part of the tax was transformed to a “local fee”. |
| Keywords: | Real estate tax; Property tax; Tax reforms |
| JEL: | H20 N43 N44 |
| Date: | 2014–04–14 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:1018&r=pub |
| By: | Lassila, Jukka; Valkonen, Tarmo |
| Abstract: | Can longer working lives bring sufficient tax revenues to pay for the growing public health and care expenditure that longer lifetimes cause? We review studies concerning retirement decisions and pension policies, the role of mortality in health and long-term care costs, and errors in mortality projections. We combine key results into a numerical OLG model where changes in mortality have direct effects both on working careers and on per capita use of health and long-term care services. The model has been calibrated to the Finnish economy and demographics. Although there are huge uncertainties concerning future health and long-term care expenditure when people live longer, our simulations show that without policies directed to disability admission rules and old-age pension eligibility ages, working lives are unlikely to extend sufficiently. But, importantly, with such policies it seems quite possible that generations enjoying longer lifetimes can also pay for the full costs by working longer. |
| Keywords: | life expectancy, working careers, health and long-term care expenditure, fiscal sustainability |
| JEL: | H30 H63 H68 J11 |
| Date: | 2014–04–09 |
| URL: | http://d.repec.org/n?u=RePEc:rif:wpaper:24&r=pub |
| By: | Gillet, Holger; Pauser, Johannes (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany]) |
| Abstract: | This paper examines efficiency in public input provision in two large jurisdictions with imperfect labour markets. It analyses how equilibrium capital tax rates and public input provision levels differ between asymmetric jurisdictions that can strategically influence the interest rate on the common capital market in an international tax competition setting. In contrast to the scenario assuming competitive labour markets, the non-cooperative equilibrium is inefficient also when governments have capital and head taxes at disposal. As a source of both the distortion in the capital allocation between jurisdictions and the inefficiency in public input provision, which can be determined in at least one of the jurisdictions, we identify the governments' incentives to decrease unemployment, and a pecuniary externality [De- Pater, J., Myers, G., 1994. Strategic capital tax competition: a pecuniary externality and a corrective device. Journal of Urban Economics 36, 66-78.] in both jurisdictions. Efficiency in public input provision can be restored, however, if the set of fiscal instruments available for regional policy makers is extended by a labour tax. |
| JEL: | H21 H71 J64 |
| Date: | 2014–04–17 |
| URL: | http://d.repec.org/n?u=RePEc:iab:iabdpa:201411&r=pub |
| By: | Diederich, Johannes |
| Abstract: | Environmental stressors such as noise, pollution, extreme temperatures, or crowding can pose relevant externalities in the economy if certain conditions are met. This paper presents experimental evidence that exposure to acute ambient noise decreases cooperative behavior in a standard linear public good game. |
| Keywords: | private provision of public goods; environmental stress; noise |
| Date: | 2014–04–16 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0560&r=pub |
| By: | Czajkowski, Mikolaj; Hanley, Nicholas; LaRiviere, Jacob; Simpson, Katherine |
| Abstract: | In this study we elicit agents' prior information set regarding a public good, exogenously give information treatments to survey respondents and subsequently elicit willingness to pay for the good and posterior information sets. The design of this field experiment allows us to perform theoretically motivated hypothesis testing between different updating rules: non-informative updating, Bayesian updating, and incomplete updating. We find causal evidence that agents imperfectly update their information sets. We also field causal evidence that the amount of additional information provided to subjects relative to their pre-existing information levels can affect stated WTP in ways consistent overload from too much learning. This result raises important (though familiar) issues for the use of stated preference methods in policy analysis. |
| Keywords: | Stated Preference; Behavioral Economics; Public Goods; Bayesian |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:stl:stledp:2014-05&r=pub |
| By: | Diederich, Johannees; Goeschl, Timo |
| Abstract: | Disentangling the motivational drivers of individuals is frequently regarded a key step in reconciling theory and empirical evidence on the voluntary provision of public goods. We present results of a large online field experiments with 12,624 contribution choices by members of the Internet-using German population. Subjects are assigned to six treatments targeted at motivations such as altruism, "warm glow", image motivation, or equity concerns. While evidence on treatment effects is mixed, the data point to signicant effects of framing and the sequence of presenting options. Exploiting variations within the highly heterogeneous sample, the results confirm previous results from a subset of the data on sociodemographics and exogenous environmental conditions as determinants of subjects' choices and add additional evidence that females and older subjects are more inclined to give to the public good. |
| Keywords: | private provision of public goods; online experiment; field experiment; warm glow; social norms; equity field experiment; online experiment |
| Date: | 2014–04–16 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0561&r=pub |
| By: | Aanesen, Margrethe; Czajkowski, Mikolaj; Falk-Peterson, Jannike; Hanley, Nicholas; LaRiviere, Jacob; Tinch, Dugald |
| Abstract: | This paper compares how increases in experience versus increases in knowledge about a public good affect willingness to pay (WTP) for its provision. This is challenging because while consumers are often certain about their previous experiences with a good, they may be uncertain about the accuracy of their knowledge. We therefore design and conduct a field experiment in which treated subjects receive a precise and objective signal regarding their knowledge about a public good before estimating their WTP for it. Using data for two different public goods, we show qualitative equivalence of the effect of knowledge and experience on valuation for a public good. Surprisingly, though, we find that the causal effect of objective signals about the accuracy of a subject's knowledge for a public good can dramatically affect their valuation for it: treatment causes an increase of $150-$200 in WTP for well-informed individuals. We find no such effect for less informed subjects. Our results imply that WTP estimates for public goods are not only a function of true information states of the respondents but beliefs about those information states. |
| Keywords: | Choice Experiment; Uncertainty; Valuation; Field Experiment; Beliefs; Information |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:stl:stledp:2014-04&r=pub |
| By: | Cremer, Helmuth; Roeder, Kerstin |
| Abstract: | We show that once interfamily exchanges are considered, Becker?s rotten kids mechan- ism has some remarkable implications that have gone hitherto unnoticed. Specifically, we establish that Cornes and Silva's (1999) result of e¢fficiency in the contribution game amongst siblings extends to a setting where the contributors (spouses) belong to different families. More strikingly still, the mechanism does not just have consequences for efficiency but it may have dramatic redistributive implications. In particular, we show that the rotten kids mechanism combined with a contribution game to a house- hold public good may lead to an astonishing equalization of consumptions between the spouses and their parents, even when their parents'wealth levels differ. We consider two families, each consisting of a parent and an adult child, who are "linked"by the young spouses. Children contribute part of their time to a household (couple) public good and provide attention to their respective parents"in exchange"for a bequest. Spouses behave towards their respective parents like Becker's rotten kids; they are purely selfish and anticipate that their altruistic parents will leave them a bequest. The most striking results obtain when wages are equal and when parents'initial wealth levels are not too di¤erent. For very large wealth differences the mechanism must be supplemented by a (mandatory) transfer that brings them back into the relevant range. When wages differ but are similar the outcome will be near efficient (and near egalitarian). |
| Keywords: | rotten kids, altruism, private provision of public good, subgame perfect equilibrium, family aid, |
| JEL: | D13 D61 D64 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:27916&r=pub |