does the public sector over provide club goods a general result abstract with nondistortionary user charges the first best and second best of a single club exogenous income economy with identical individuals coincide they differ if incomes differ overprovision of a superior club good then occurs in the second best

on measures of excess burden and their application abstract new measures of the additional excess burden of a tax reform are proposed and are shown to be useful in three key policy applications these new measures induce a unique measure of marginal excess burden meb among its interesting properties meb is uniformly zero for a proportional tax on inelastically supplied labor problems in applying the standard measures of total excess burden are demonstrated it is concluded that the induced measure of the marginal cost of funds mcf should be regarded as the most useful concept in applied tax analysis

the marginal cost of public funds and tax reform in africa abstract in this paper we propose estimates of the marginal cost of public funds mcf in 38 african countries we develop a simple general equilibrium model that can handle taxes on five major tax classes and can be calibrated with little more than national accounts data a key feature of our model is the explicit recognition of the informal economy our base case estimate of the average mcf from marginal increases in all five tax instruments is 1 2 focusing on the lowest cost tax instruments in each country commonly the vat but not always the average mcf is 1 1 finally extending the tax base to include sections of the informal economy by removing some tax exemptions offers the potential for a low mcf source of public funds and a lowering of mcfs on other tax instruments

pigou meets mirrlees on the irrelevance of tax distortions for the second best pigouvian tax this paper extends the mirrlees 1971 model of optimal income redistribution with optimal corrective taxes to internalize consumption externalities using general utility structures and exploring both linear and non linear taxes it is demonstrated that the optimal second best tax on an externality generating good should not be corrected for the marginal cost of public funds since it equals one in the optimal tax system in the optimum distortions of income taxes are equal to marginal redistributional gains if the government does not have access to a non distortionary marginal source of finance the marginal cost of public funds can be either larger or smaller than one depending on subjective preferences for income redistribution the optimal second best corrective tax is then either higher or lower than the pigouvian level the findings in this paper generalize and amend prior results based on representative agent models shedding new light on the weak double dividend hypothesis and on the welfare gains of recycling revenue from environmental taxes

how should control theory be used to calculate a time consistent government policy we study different solutions to a simple one dimensional linear quadratic game with a large number of private agents and a government a time consistent solution is defined as a solution to the hamilton jacobi bellman equation i e as a policy for which the government has noprecommitment capability this solution is compared to a policy where the government has an instantaneous pre commitment i e an equilibrium in which the government has a period by period leadership in both cases we show how control theory should be applied to calculate the equilibrium and how to relate these equilibria to the differential game literature

preventing competition because of solidarity rhetoric and reality of airport investments in spain from a public interest perspective there could be a justification for constraining market mechanisms with the aim of progressive redistribution however some policies might be based on selfish motivations of government agents in this article we empirically contrast if the infrastructure policy is based only on public interest motivations or if it is also based on the private motivations of policy makers in this way spain infrastructure policy provides a useful policymaking field to test hypothesis about the behaviour of policy makers we find some evidence regarding the strength of political motivations in explaining such behaviour in fact results from our analysis show that political motivations can eventually play a more relevant role than social welfare maximization

distortionary taxes and the provision of public goods economists have long been concerned with finding an efficient level of public expenditure the classic statement of the problem was given by paul samuelson 1954 an optimal level of expenditure is where the sum of the marginal rates of substitution between the public good and a reference good equals the marginal rate of transformation between the public good and the reference good mrs mrt however samuelson s formula assumes that all of the revenue needed to finance public goods can be raised with lump sum taxes since this is not generally possible the formula must be modified to account for the distortionary effects of the tax system an appropriate modification is to multiply the cost side of the equation by a term that is commonly called the marginal cost of public funds mcf in the case of samuelson s formula where government is entirely financed with lump sum taxes the mcf would be exactly 1 0 in the traditional view of economists distortionary taxes cause the mcf to be greater than one thus raising the cost of providing public goods in this paper we discuss some cases where the mcf may be less than one we will illustrate this possibility using numerical examples for labor taxes

multivariate partial adjustment of financial ratios a bayesian hierarchical approach in this paper we propose a multivariate extension of the partial adjustment model of financial ratios to that end we use a dynamic factor model which assumes that financial ratios measuring essentially the same economic financial dimension of the firm evolve in a similar way reflecting the evolution of the common factor the proposed model is hierarchical with three levels the first describes the relationship between each ratio and its common factor the second describes the evolution of the common factors over time by means of lev s 1969 partial adjustment model and the third analyzes the similarity of firms adjustment coefficients taking into account their characteristics the methodology is applied to the analysis of a set of financial ratios related to the business and financial structure of the firm copyright 2008 john wiley sons ltd

progressive taxation and the social marginal cost of public funds abstract this paper describes the calculation of the social marginal cost of public funds smcf for a progressive tax system which distorts individuals labour supply decisions a formula for the smcf indicates that the income and substitution effects of the labour supply response are weighted by the changes in individuals average and marginal tax rates respectively other well known formulas for the smcf are shown to be special cases of this formula the difference between this formula and the mayshar 1991 formula is shown to be due to different but equally valid ways of computing the change in the average tax rate the condition under which a marginal tax rate increase may lead to a reduction in revenues is derived

expenditure taxes income taxes and time inconsistency abstract traditional welfare based comparisons of different tax structures implicitly assume that the government can precommit to its future optimal policy when optimal tax rates are time inconsistent however such comparisons may be misleading this paper uses a two period representative consumer optimal taxation model to study the implications of time consistency for the welfare rankings of expenditure and income taxation i show that the welfare rankings of optimal policies may not be preserved by time consistent ones

on optimal non linear taxation and public good provision in an overlapping generations economy abstract using the self selection approach to tax analysis within an olg framework the paper examines optimal non linear labour and capital income taxation and the provision of a durable public good under endogenous wages the marginal tax rules depend on the influence of the tax instruments on self selection and on the income earning abilities of the households in particular we found that production inefficiency occurs in the model justifying capital income taxation for the public good the paper derives a dynamic analogue of the second best samuelson rule encompassing both inter and intragenerational redistributive considerations furthermore the usual conditions guaranteeing the efficiency of the first best samuelson rule are not sufficient in the present model

status effects and environmental externalities abstract this paper examines a static competitive economy where the production of a consumption good generates pollution that adversely affects human welfare preferences are defined over consumption leisure pollution and economic status each person s status increases with her own consumption but decreases with the average consumption of society the achievement of a pareto efficient resource allocation requires a consumption tax to offset the incentive to overconsume in the pursuit of enhanced status in contrast with standard prescriptions the efficient pollution tax generally exceeds the sum of individuals marginal willingness to pay for pollution abatement these findings remain unaltered when preferences are modified to incorporate altruistic concern for others well being altruism however suggests a potential role for government intervention to achieve a desirable i e pareto efficient distribution of welfare between individuals

exploiting ergodicity in forecasts of corporate profitability abstract theory suggests that competition tends to equalize profit rates through the process of capital reallocation and numerous studies have confirmed that profit rates are indeed persistent and mean reverting recent empirical evidence further shows that fluctuations in the profitability of surviving corporations are well approximated by a stationary laplace distribution here we show that a parsimonious diffusion process of corporate profitability that accounts for all three features of the data achieves better out of sample forecasting performance across different time horizons than previously suggested time series and cross sectional models as a consequence of replicating the empirical distribution of profit rates the model prescribes a particular strength or speed for the mean reversion of all returns which leads to superior forecasts of individual time series when we exploit information from the cross sectional collection of firms the new model should appeal to managers analysts investors and other groups of corporate stakeholders who are interested in accurate forecasts of profitability to the extent that mean reversion in profitability is the source of predictable variation in earnings our approach can also be used in forecasts of earnings and is thus useful for firm valuation

the marginal welfare cost of public funds theory and estimates abstract we derive a general analytic formula for the marginal welfare cost mwc of public funds without imposing restrictive assumptions on preferences or technologies the framework encompasses the various special cases previously considered and reconciles the disparities among the reported estimates of mwc unresolved differences in existing estimates are fully explained by appropriate interpretations of intended thought experiments and alternative assumptions about the elasticity of labor supply with respect to public spending further progress in measuring mwc requires empirical estimation of labor supply functions that include government spending as an explanatory variable

fiscal federalism at work central responses to internal migration in india summary internal migration is thought to have substantial benefits for migrants and for the development of migrant sending and migrant receiving areas in order to facilitate such migration central governments may need to use fiscal transfers to ensure services to migrants address infrastructure shortfalls and ameliorate labor market displacement of natives in fact an extensive mostly normative fiscal federalism literature has argued that central governments ought to use transfers to reduce interjurisdictional externalities such as those due to population displacements we extend this literature empirically by examining the degree to which exogenous longterm migration prompts the redirection of central fiscal resources in india following the literature on distributive politics we argue that transfers in decentralized systems addressing the costs of population movements are influenced by partisan politics using monsoon shocks to migration we show that increases in migration are met with greater central transfers but that these flows are at least 50 greater if the state level executive is in the prime minister s political party consistent with the theory the influence of politics is greatest on parts of the budget subject to greater executive control this politicization may explain why indian states maintain barriers to internal migration despite the development costs of doing so

nature of transfers income tax function and empirical estimation of elasticity of taxable income for brazil abstractthis article aims to estimate the elasticity of taxable income eti taking into account the nature of transfers and their use as a redistribution package involving cash and in kind transfers to households in brazil our contributions are twofold first we provide a simple model with balanced budget government that reveals the role played by cash and in kind transfers on the labour supply and income tax revenues thereof next in order to estimate eti in the presence of cash and in kind transfers brazilian population surveys pesquisa nacional por amostra de domicilios pnad are used to explore a limited tax reform that was implemented between 1997 and 1998 this reform only affected the higher income tax bracket our findings suggest that in kind cash transfers are positively negatively associated with reported taxable income and precise estimation of eti requires estimates of both types of transfers last we estimate the eti for brazil in the range from 0 4 to 1 3 not different fro

optimal tax rules and public sector efficiency with an externality in an overlapping generations model abstract this paper examines optimal tax rules and public sector efficiency integrating them in a second best world with pollution by using an overlapping generations model the second best world is characterized by the comparative statics of green preferences the main results obtained are as follows first the marginal cost of public funds may be reduced by the externalities regardless of the choice of taxes second optimal environmental and non environmental tax rules are additively and directly affected by the dynamic efficiency of capital accumulation per unit labour decal and indirectly by it through the efficiency of the public sector environmental taxes going beyond pigovian ones may be welfare improving if the decal is improved by the environmental tax even optimal non environmental tax rules should additively and directly counter the dynamics of pollution to consider the income effects of the optimal tax system for the future third the additivity property or the principle of targeting does not hold even in the absence of incentive compatibility constraints the essential reasons for this are clarified as follows distortions that should be countered by taxes that is the income effects of the optimal tax system and the decal in this model break the equality between optimal environmental taxes and the externalities measured by governments finally growing environmental concerns may in fact increase pollution the inverse relationship between environmental and labour income taxes may not hold

public goods and dynamic efficiency abstract it is well known that the use of distorting taxes to finance a public good in a static economy may indirectly raise the social cost of the public good because of the deadweight loss associated with the tax system however the tax system may also affect the dynamic efficiency of the economy we provide an example where the use of distorting taxes lowers the social cost of a public good in a steady state relative to the first best case due to the effect of the government s tax policy on the dynamic efficiency of the economy

status effects public goods provision and excess burden abstract most studies of the optimal provision of public goods or the excess burden from taxation assume that individual utility is independent of other individuals consumption this paper investigates public good provision and excess burden in a model that allows for interdependence in consumption in the form of status relative consumption effects in the presence of such effects consumption and labor taxes no longer are pure distortionary taxes but have a corrective tax element that addresses an externality from consumption as a result the marginal excess burden of consumption taxes is lower than in the absence of status effects and will be negative if the consumption tax rate is below the pigouvian rate correspondingly when consumption or labor tax rates are below the pigouvian rate the second best level of public goods provision is above the first best level contrary to findings from models without status effects for plausible functional forms and parameters relating to status effects the marginal excess burden from existing u s labor taxes is substantially lower than in most prior studies and is negative in some cases

tax effects versus budget effects on labor supply this paper analyzes the effects on labor supply of parallel changes in taxes and public spending of various types a number of important recent developments in the labor supply behavior of households are highlighted by such a study of various types of budget effects rather than isolated tax effects this comes out in particular when considering cross substitution effects on labor supply of changes in public spending on goods and services or of the subsidization of goods and services provided by private markets moreover the income effects of tax changes are often mitigated or possibly even removed by the income effects of the accompanying expenditure changes

granting votes exposing the political bias of intergovernmental grants using the within between specification for panel data instead of alleviating fiscal inequalities intergovernmental grants are often used to fulfill the grantors political goals this study uses a unique panel dataset on more than 500 croatian municipalities over a 12 year period to uncover the extent to which grant distribution is biased owing to grantors electoral concerns instead of the default fixed effects approach to modelling panel data we apply a novel within between specification aimed at uncovering the contextual source of variation focusing on the effects of electoral concerns on grant allocation within and between municipalities we find evidence of a substantial political bias in grant allocations both within and between municipalities particularly when it comes to local level electoral concerns the paper offers researchers a new perspective when tackling the issue of politically biased grant allocation using panel data particularly when they wish to uncover the simultaneous impact of time variant and time invariant factors or when they cannot apply a quasi experimental approach because of specific institutional contexts

fiscal illusion and the grantor government in canada recent work on the u s concludes that one or more illusions are responsible for the empirically observed flypaper effect using annual canadian data for the period 1962 84 we test the single illusion and dual illusion specifications currently in the literature while the empirical results support the dual illusion specification it is not the unambiguous choice over single illusion specifications as previously found further the nature of the grant system in canada raises questions about whether illusions or real factors produce the empirical results

marginal welfare costs of taxation with human and physical capital i introduction marginal welfare cost of taxation is the amount by which the social cost of an additional tax dollar differs from 1 because of distortionary taxation browning and johnson 1984 stuart 1984 browning 1987 ballard 1988 and allgood and snow 1998 use static models of the u s economy in which labor supplies adjust but the stocks of human and physical capital are fixed to calculate estimates of this welfare cost relevant to cost benefit analysis the studies by lucas 1990 and perroni 1995 incorporate human and physical capital into calculations of excess burden for the purpose of comparing alternative tax systems but do not address the welfare costs of marginal tax and spending reforms ballard et al 1985 and judd 1987 provide estimates of welfare cost using models that allow the stock of physical capital to change in response to marginal reforms but the stock of human capital is exogenous in these studies however judd 2001 argues that there is ample evidence indicating that human capital investment decisions have a significant effect on the cost of altering the tax system which suggests that these decisions could also have an important influence on marginal welfare cost in this article we present estimates of welfare costs for marginal reforms to government tax and spending policies when labor supply saving and education decisions are all endogenous we focus our analysis on marginal reforms because as skinner and slemrod 1985 observe most policy reforms enacted do not involve replacing one tax or spending system with another but instead typically entail marginal adjustments in tax laws and government appropriations using a perfect foresight overlapping generations model with a three period life cycle we derive analytical expressions for the changes in labor supply saving and education and use them to calculate marginal welfare cost as shown by auerbach et al 1983 in overlapping generations models steady state welfare comparisons of alternative tax policies are biased unless households are compensated for intergenerational redistribution along the transition path to arrive at our steady state estimates of welfare costs we adapt the compensation method introduced by gravelle 1991 for analyzing fundamental tax reforms to the context of incremental tax and spending reforms in a static one consumer model triest 1990 has shown that marginal welfare cost mwc is positive solely because of tax leakage the decline in tax revenue caused by reductions in the tax base we extend this insight to an intertemporal context that incorporates tax leakage arising from changes in both human and physical capital investment we evaluate three sets of reforms first a revenue neutral reduction in the tax on capital income funded by a higher tax on labor income second spending on a public good financed by either a higher tax on labor or interest income third a per capita lump sum transfer or demogrant also funded by either a higher tax on labor or interest income we find that marginal welfare costs are uniformly lower in the dynamic model where investment decisions are endogenous than in the static model where investment decisions are fixed and that the majority of the difference between the dynamic and static estimates is attributable to human capital decisions the principal reason is that a reallocation of time between labor hours and human capital investment has opposing and potentially offsetting effects on effective labor supply as a result labor supply responds less elastically in the dynamic model and changes in labor supply are the main source of tax leakage because wage taxation is the main source of tax revenue we also find that shifting marginal financing from capital to labor results in a lower welfare cost the reason being that such a change encourages saving which increases wage rates and stimulates labor supply leading to a reduction in marginal welfare costs

the effects of partisan alignment on the allocation of intergovernmental transfers differences in differences estimates for spain abstract in this paper we test the hypothesis that municipalities aligned with upper tier grantor governments i e controlled by the same party will receive more grants than those that are unaligned we use a rich spanish database which provides information on grants received by nearly 900 municipalities during the period 1993 2003 from three different upper tier governments i e central regional and upper local since three elections were held at each tier during this period we have enough within municipality variation in partisan alignment to provide differences in differences estimates of the effects of alignment on the amount of grants coming from each source moreover the fact that a municipality may simultaneously receive grants from aligned and unaligned grantors allows us to use a triple differences estimator which consists of estimating the effects of changing alignment status on the change in grants coming from the aligned grantors relative to the change in grants coming from the unaligned ones the results suggest that partisan alignment has a sizeable positive effect on the amount of grants received by municipalities for example with majority governments at the two layers aligned municipalities receive over 40 more grants than unaligned ones

public goods self selection and optimal income taxation using the self selection approach to tax analysis this paper derives a modified samuelson rule for the provision of public goods when the government deploys an optimal nonlinear income tax this approach gives a straightforward interpretation of the central result in this area generalises it and provides a simple characterisation of optimal policy in a wide range of circumstances the analysis also emphasises and clarifies the significance of the choice of numeraire for the optimality of decentralising public spending decisions it is well known that the famous samuelson rule for the provision of public goods may not be applicable when the tax revenues used to finance the public goods come from distorting taxes the principle was recognized as long ago as pigou 1947 long before the samuelson rule was devised pigou saw that in addition to the resource cost involved in transferring funds from the private to the public sector there was a deadweight loss involved from this insight he suggested that the criterion for providing public goods should be more stringent than the samuelson rule would later suggest in particular one might expect that the inclusion of the deadweight loss of taxes as part of the cost of providing a public good would lead to a reduction in its optimal provision relative to a situation in which lump sum taxes were available the problem was investigated more systematically by atkinson and stern 1974 who considered the case in which a public good is financed by a set of optimal commodity taxes all individuals were assumed to be identical so efficiency alone dictated the objective they found that no prima facie case could be made for the pigou position that the use of distortionary taxes called for a reduction in the supply of the public good their analysis clearly showed that there were two influences at work when the financing of a public good was by distorting taxes on the one hand

on the vote purchasing behavior of incumbent governments a couple of months before the swedish election in 1998 the incumbent government distributed 2 3 billion sek to 42 out of 115 applying municipalities this was the first wave of a four year long grant program intended to support local investment programs aimed at an ecological sustainable development this temporary grant program differs from traditional intergovernmental grants in several aspects most importantly in the sovereign decision making power given to the incumbent central government in this paper we investigate whether there were any tactical motives behind the distribution of these grants we find support for the hypothesis that the incumbent government used the grant program under study in order to win votes in particular we find strong support for the lindbeck weibull dixit londregan model in which parties distribute transfers to regions where there are many swing voters this result is statistically as well as economically significant we do however not find any support for the model that predicts that the incumbent government transfer money to its own supporters

complementarity and the discount rate for public investment the marginal rate of return on public investment in a tax distorted economy is a weighted average of the marginal social productivity of capital in the private sector and the marginal social rate of time preference but the weights are shown to depend not only on the proportions of funding obtained from each source through incremental borrowing but also on the degree of complementarity or substitutability between public and private investment

does delegation of fiscal policy to an independent agency make a difference evidence from intergovernmental transfers in india abstract one area of fiscal policy in which several countries have delegated responsibility to an independent agency is the distribution of national resource transfers across regional and local governments such delegation is expected to promote equity and efficiency and mitigate distortions created by political incentives this paper tests whether delegation to an independent agency indeed makes a difference by contrasting the impact of partisan politics on two types of fiscal transfers to states in the indian federation over a period of time 1972 1995 the pattern of evidence shows that while the transfers that are determined by the central political executive are indeed distributed to favor particular states that are politically important for the central ruling party the transfers that are delegated to an independent agency serve to constrain such partisan impact

redistribution and the marginal cost of public funds abstract discussions of the marginal cost of public funds with distortionary taxation are often cast in the framework of a one consumer economy while the main justification of distortionary taxes is that they are needed for redistribution this paper analyzes the issue in a model with heterogeneous consumers and a linear income tax focusing on the tradeoff between labour market distortions and the redistribution from high wage to low wage workers in an optimal tax system the mcf will be the same for all sources of funds and under certain assumptions less than one without optimality the mcf will in general differ between different sources of finance

the political economy of new deal fiscal federalism in 1930 the average american received somewhat more than 50 percent of his government services from local government 20 percent from state government and the remainder from the federal government by 1940 this pattern had been reversed with the federal government supplying roughly 50 percent state government 20 percent and local government 30 percent figure 1 shows how shares of non military expenditures by the three levels of government shifted dramatically away from local governments toward the national government during the decade the same was true of revenues this transition in the relative importance of state federal and local government was dramatic and from the perspective of the 1990s permanent figure 1 omitted the most important cause of the shift in fiscal terms was the implementation of national relief programs under the new deal the federal emergency relief administration fera the works progress administration wpa the social security programs and others between 1932 and 1940 direct relief expenditures account for roughly 45 percent of the growth in national expenditures 60 percent of the growth in state expenditures and 20 percent of the growth in local expenditures almost all of which came from federal and state grants for relief purposes even more revealing are the figures for the period between 1932 and 1935 in those three years national government expenditures rose by slightly less than 2 billion while expenditures for relief alone reached 2 2 billion in 1935 from zero in 1932 1 the increase in federal expenditures was significant but an important reason why state and national governments grew but local governments did not lay in the fiscal structure of the relief programs the extensive use of matching grants to finance relief expenditures created incentives for states to expand their fiscal effort while local governments were effectively able to substitute national and state relief grants for their own funds matching grants also allowed the states to control the amount spent in each program the national government was and is still today unable to control expenditures on these programs or to equalize welfare standards across states open ended matching grants entitled the states to unencumbered access to the federal treasury 2 the programs also permanently altered the american welfare system the categorical assistance programs of the social security act brought about a basic realignment of financial and administrative responsibilities between the federal state and local governments old age assistance aid to dependent children and aid to the blind were independently administered by state governments the act contained strong restrictions on the ability of the social security board to influence the administration of programs within the states explicitly forbidding the board to set personnel policies 3 why were open ended matching grants and a decentralized administrative structure adopted rather than some other institutional form public finance theory suggests that it may have been the best way for the federal government to support relief expenditures without discouraging continued state and local participation matching grants are usually proposed as a remedy to problems of externalities in this case the spillover is the movement of persons seeking relief from low benefit to high benefit states they solve the externality problem through the use of fiscal incentives as gramlich 1977 276 notes for matching grants the central government is expressly trying to stimulate spending in a certain area as we will see below matching grants did have this effect federal grants expanded rapidly but the state and local sector did not substitute federal grant moneys for state and local tax dollars on a large scale recent empirical studies of matching grants indicate that they result in somewhat less spending than the size of the grant indicating that state and local governments reduce their own expenditures on grant programs slightly in the presence of matching grants in contrast to lump sum grants where state and local governments are able to substitute significant amounts of federal grants for their own tax dollars

property taxation congestion and local public goods abstract the residential property tax has been viewed as a congestion fee even if it distorts housing decisions this paper shows that the rule for a competitive jurisdiction s optimal public good supply may be written in a form in which no such role appears congestion costs enter the cost side of this rule in the same way that they enter when only a land tax is available the new rule is reconciled with an alternative rule in the literature which contains no congestion costs

interjurisdictional capital mobility fiscal externality and a corrective subsidy abstract recent studies emphasize that local property taxation may result in inefficiently small amounts of local public spending this paper shows that the inefficiency can be traced to a fiscal externality when one jurisdiction increases its taxes it causes a flow of capital to other jurisdictions that increases their tax revenues the inefficiency can be corrected with a subsidy that internalizes the externality key empirical parameters determining the magnitude of the externality are identified illustrative calculations indicate that subsidy rates on the order of 40 might be required to achieve efficiency

some evidence on the effect of the separation of spending and taxing decisions it is often argued that separation of public spending and taxing decisions engenders in the voter overoptimistic hopes that someone else will bear the cost of public services thereby inducing an increase in the size of government but are perceived tax prices systematically and persistently reduced by separation although in stock markets all agents expectations may be unbiased they may or may not be unbiased in political markets this paper analyzes the separation created in federal states when the central government finances local expenditures evidence from a dynamic decisive voter model is presented that indicates that the separation introduced by federal grants to canadian provinces did in fact reduce the perceived tax price of provincial public services and raise provincial expenditures the results suggest also that the effect of separation diminished over time

a marginal cost of funds approach to multi period public project evaluation implications for the social discount rate abstract although the use of marginal cost of funds mcf has been widely appreciated in public finance literature discussions of mcf have been confined to a static setting this paper develops a multi period project evaluation rule that is based on mcf unlike previous approaches the parameters required for implementing the mcf rule are independent of projects under consideration a lesson from this paper is that the government discount rate policies that are largely based on the concepts of social discount rate and shadow price of capital should be rewritten with the use of parameters representing mcf

the measurement of waste in a public goods economy abstract a small open economy model is developed to measure the waste of the whole economy when levels of public goods are determined by the government the allais debreu diewert measure of waste is defined and its second order approximation is calculated this measure utilizes the second order substitution matrices of the restricted profit function and the restricted expenditure function evaluated at an equilibrium finally simple examples and diagrams are utilized to clarify the economic implications of our approach

on the marginal welfare cost of taxation this paper develops a rigorous partial equilibrium analysis of the determinants of margin al welfare cost mwc of taxes on labor earnings it shows that four key parameters interact to determine the magnitude of mwc using aggregate data and plausible ranges of values for the parameters mwc can vary from under 10 percent to more than 300 percent of marginal tax revenue intermediate parameter values sugge st mwc is in the 25 50 percent range however the more extreme estimates cannot be ruled out on the basis of available evidence suggesting that mwc cannot yet be copyright 1987 by american economic association

the contribution of local public infrastructure to private productivity and its political economy evidence from a panel of large german cities this paper proposes a simultaneous equation approach to theestimation of the contribution of infrastructure accumulationto private production a political economy model for theallocation of public infrastructure investment grants isformulated our empirical findings using a panel of largegerman cities for the years 1980 1986 and 1988 suggest thatcities ruled by a council sharing the state bundesland government s current political affiliation were particularlysuccessful in attracting infrastructure investment grants with regard to the contribution of infrastructure accumulationto growth we find that public capital is a significant factorin private production moreover at least for the samplestudied we find that simultaneity between output and publiccapital is weak thus feedback effects from output toinfrastructure are negligible

when do distortionary taxes reduce the optimal supply of public goods abstract it is often argued that the optimal level of public good provision is below the first best level as long as the government s expenditures have to be financed by distortionary taxes i examine this hypothesis and show that it is correct in a representative consumer economy if i the public good is normal and ii private commodities are normal and gross substitutes otherwise counterexamples can be constructed these results hold also with heterogeneous households provided that equity considerations are ignored in general however distributional objectives may lead to a higher level of public expenditures in second best than in first best

fiscal illusion budget maximizers and dynamic equilibrium this paper extends previous work in grant induced fiscal illusion in two ways while previous models have focused on the existence of rational comparative static equilibria in the presence of illusion this work focuses on the dynamic process by which steady state equilibria can be achieved furthermore endogeneity in grants is incorporated which necessitates the use of a budget maximizing hypothesis however it is shown that a broader interpretation of the budget maximizing assumption is necessary in order for this characterization to make sense in a grantor recipient framework

tax rates and labor supply in fiscal equilibrium tax rates and labor supply in fiscal equilibrium i introduction if the government changes the tax on wage income what happens to aggregate labor supply this question is at the core of debates between proponents of supply side and keynesian approaches to government fiscal policy it is unfortunate therefore that previous attempts to resolve the issue have obscured decisive assumptions regarding the preference relation between leisure and public spending one argument exposited recently by gwartney and stroup 1983 1986 and ehrenberg and smith 1988 179 80 descends from an older literature represented by the works of friedman 1949 1954 goode 1949 scitovsky 1951 and bailey 1954 and emphasizes the importance of a balanced budget framework for addressing the question this approach reveals the presence of an income effect caused by the change in government spending that must accompany the tax change at optimum according to this view this income effect exactly offsets the income effect of the tax change so that only the substitution effect of the tax remains as a consequence a balanced budget increase in the wage tax unambiguously decreases economy wide labor supply provided the increase in public spending is valued the same as the forgone private spending a different approach was initiated by winston 1965 and subsequently elaborated upon by lindbeck 1982 fullerton 1982 hanson and stuart 1983 bohanon and van cott 1986 and gahvari 1986 this approach stresses the importance of the preference relation between public spending and private spending rather than the role of the public spending income effect in determining the change in aggregate labor supply as a special example gahvari 1986 assumes a preference structure which implies that public spending does not have any influence on labor supply so there is only the partial equilibrium effect of the tax however the general conclusion of this line of reasoning is that the theoretical ambiguity of the labor supply response arises from both tax and spending effects in this paper a simple formal model is used to develop a careful accounting of the various income and substitution effects the model is sufficiently general to permit a rigorous comparison of earlier studies and to expose implicit assumptions responsible for their conclusions we show that the two approaches outlined above are associated respectively with the focal cases of compensated independence and ordinary independence between leisure and public spending the pan of the paper is as follows section ii contains a model of labor supply in the presence of wage taxation and public spending in section iii the effect on aggregate labor supply of a balanced budget change in wage taxation is analyzed section iv provides an interpretation of several previous analyses of these issues section v contains a summary of our results ii the model consider an economy with n identical consumers who derive utility from leisure l a pure private good x which serves as numeraire and a publicly provided good z the utility function u l x z is assumed to be twice continuously differentiable and strictly quasi concave everyone is endowed with t units of time which are allocated either to labor market work or leisure nonmarket activities the marginal product of labor in producing the private good is the constant real gross of tax wage rate w because agents are identical we can confine attention to allocations of equal consumption as a consequence the production possibilities frontier assumed to be linear can be expressed in per capita terms as wl x p n z wt 1 where p is the constant marginal cost of z with identical agents and only two goods not publicly provided it may be assumed without loss of generality that public spending is financed by a wage tax with constant marginal and average ad valorem rate t

explaining intergovernmental grants australian evidence the dodo suddenly called out the race is over and they all croded round it panting and asking but who has won lewis carroll alice s adventures in wonderland

the persistence and inefficiency of property tax finance of local public expenditures abstract i both characterize and evaluate equilibrium outcomes in multiple jurisdiction economies with property and land taxation but where direct taxation of residents is not possible the model contains perfectly mobile capital and population and competitive entrepreneurial governments that choose local taxes and expenditures to maximize after tax land rent when the cost of public goods is proportional to population the property tax emerges as the sole source of local finance even though the land tax has no deadweight loss it is shown that equilibria are not constrained efficient in general hence decentralized decision making is not consistent with the best use of the available tax instruments

is public spending good for you the whole world is marching towards the right with the transformation of the soviet union and eastern europe the drastic economic reforms in china and the privatisation liberalisation and reversing the historical increasing trend reduction in public spending in many western countries 1 much about these changes is applaudable and economists may feel proud for partially contributing to them however this paper argues that the reduction in public spending especially in education research and environmental protection is counter productive this may not be so viewed in the narrow perspective of production and consumption especially in the short run but is almost certainly so viewed in the wider perspective of welfare or happiness in the long run it is well known that public spending has some efficiency problems but the probably much worse inefficiency of private consumption has been largely ignored this paper attempts to provide a broader and more balanced picture from an interdisciplinary perspective

the political determination of intergovernmental grants in australia intergovernmental grants have been conventionally explained on the basis of either equity efficiency and or institutional considerations this paper seeks to model australian intergovernmental grants by including both traditional public finance variables and public choice influences that is grants are used by federal government politicians to purchase political capital thereby enhancing their own chances of reelection the models employed in this paper are tested for six australian states for the period 1981 82 to 1991 92 using unsystematic grant transfers the results provide support for these public choice considerations and highlight the importance of incorporating institutional factors and controlling for misspecification in the error structure in estimates of this type

public investment criterion in an overlapping generations economy this paper extends the sandmo dreze model of public investment to the overlapping generations model where each person lives for two periods working in the first and retired in the second it is shown that in a non tax distorted economy with without the corporation income tax if government surplus can be redistributed between younger and older generations then the second best optimal discount rate for public investment in steady states should be not only the weighted average formula the market rate of interest derived by sandmo and dreze economica 1971 but also the population growth rate

labor supply taxes and government spending a microeconometric analysis the effect of government spending on labor supply behavior is critical to predicting the balanced budget effect of income taxes and to estimating the marginal social cost of public funds yet its very existence not to mention direction and magnitude has not been empirically investigated this research estimates a labor supply function that incorporates income taxation and government spending using microeconomic data for men and women the empirical results suggest that public sector spending may have a significant effect on labor supply thereby leading to estimates of the marginal social cost of public funds that differ from those typically calculated

the political economy of intergovernmental grants evidence from a maturing democracy we evaluate the impact of political forces in the allocation of intergovernmental grants in portugal as it matured from a young to an established democracy using a large and unexplored dataset we show that political variables condition the granting system and that their importance changed over time while tactical manipulation in the distribution of grants among municipalities seems to exist only in the early years of democracy opportunistic effects are stronger in the latter years we argue that the latter effect is due to a change in the political environment and to the electorate s lack of information on intergovernmental grants

fiscal illusion and the grantor government empirical studies indicate that unconditional intergovernmental grants have a flypaper effect several authors have modeled recipient government spending under fiscal illusion to explain this phenomenon in short grants reduce the perceived marginal cost of recipient government output this paper develops a more general model of illusion that incorporates the grantor government thereby eliminating inconsistencies encountered in previous models the more general model implies that grant finance increases the perceived marginal cost of grantor government output thus grant induced illusion should have two effects an increase in recipient output and a decrease in grantor output the empirical work supports this hypothesis

taxation base in developing countries abstract informal sectors are larger in developing countries than in rich countries this is a result of higher fixed costs of entry into the formal economy in developing countries we show that raising barriers to entry is consistent with a deliberate government policy for raising tax revenue by generating market power and hence rents for the permitted entrants market entry fees foster the emergence of large taxpayers the rents can be readily confiscated by the government through entry fees and taxes on profits at a low administrative cost the relevance of the theory is assessed with a sample of 64 countries empirical analysis supports the results of the paper

a generalized approach to multigeneration project evaluation 1 introductionit is well known that the choice of discount rate plays a significant role in the ranking of projects with varying time paths of costs and benefits for public projects the choice of the appropriate social discount rate sdr is not clear cut even in the context of short lived projects in which costs and benefits occur within a single generation in particular when capital taxes produce a wedge between gross and net rates of return should one discount at the economy s rate of return the before tax rate or the individual s rate of return the after tax rate in the single generation context the literature falls in two camps 1 one camp argues that the appropriate sdr is a weighted average of the gross and net rates of return with weights typically determined by the fractions of resources drawn from consumption and private investment respectively 2 a second camp argues that future benefits should be discounted at the net rate of return but that the initial investment should be multiplied by a scale factor so that the direct costs of the project can be expressed in terms of consumption units 3both approaches suffer from severe implementation problems for the first approach there is no general formula for the weights needed to calculate the sdr as a weighted average of two market rates of return dreze 1974 indeed the appropriate sdr to use is project specific stiglitz 1982 without a systematic methodology to derive project specific sdrs the weighted average approach is hard to implement for the second approach which equalizes the sdr to the net rate of return the scale factor the opportunity cost of public investment must be quantified the opportunity cost of public investment depends on whether resources come from private investment or consumption and on the calculation of the present value of the future consumption yielded by a unit of capital discounted at the net rate of return that is the shadow price of capital as lind 1997 points out however there is no general agreement on a specific procedure for calculating the shadow price of capital indeed the concept of the opportunity cost of public investment suffers the same project dependence problem as the first view of the sdr diamond 1968 multigeneration projects such as nuclear waste disposal natural resource conservation or even social security reform further complicate discount rate choice specifically intergenerational equity in addition to intertemporal efficiency plays a role in determining the appropriate social discount rate for multigeneration public project evaluation 4 as in the single generation context there are two competing views on the appropriate discount rate when evaluating multigeneration projects the descriptive and the prescriptive approaches 5the descriptive approach to discounting is a market based approach it does not rely on an explicit social welfare function swf or the pure time preference rate embedded in the swf however the descriptive approach works under the assumption that intergenerational compensation through changes in the tax debt policy is available 6 it is argued that under appropriate intergenerational compensation the market rates of return are still relevant for calculating the sdr for multigeneration project evaluation and in general the sdr should be a weighted average of the gross and net rates of return this descriptive view of setting the sdr equal to the market return appears to underlie the office of management and budget s omb adoption of 7 as the appropriate discount rate for federal programs 7the intent of the prescriptive approach is to use the social discount rate as an expression of ethical judgment on how consumption of future generations should be compared to consumption of current generations

a pigovian rule for the optimum provision of public goods abstract the integrated treatment of optimal taxation and public expenditure presented here is based on the dual relationship between the prices of private goods and the quantities of public goods the conditions for optimum public good provision can be expressed as a modification of the samuelson conditions with extra terms representing a the distortionary effect of taxes on the willingness to pay for the public good and b distributional effects the former captures pigou s notion of the indirect damage caused by the need to finance public expenditure out of distortionary taxes and we call this the pigou term in certain cases a very simple benefit cost ratio for public projects emerges that is equivalent to measuring benefits as if they were taxed

the non tax wedge abstract this paper argues that there are a large number of non tax phenomena that have the effect of reducing input prices below marginal value products just as do taxes on income it is shown that the presence of the non tax wedge between the marginal value product of labor and the net wage is highly significant for the analysis of the total and marginal welfare costs of taxes similarly the presence of the tax wedge is significant for the analysis of the welfare effects of the non tax phenomena welfare costs are substantially higher when appropriate account is taken of tax and non tax wedges that both distort supply decisions

intergovernmental grants as a tactical instrument empirical evidence from swedish municipalities are grants to swedish municipalities tactical in this essay i derive testable implications from a theoretical voting model and test these on a panel of 255 swedish municipalities 1981 1995 in order to decide which regions that are politically powerful both election results and survey data from the swedish election studies are used the results although somewhat ambiguous support the hypothesis that intergovernmental grants are used in order to win votes

the benefit rule for a pure public good in the presence of a social security program public good whereby the sum of the marginal rates of substitution between the public good and some numeraire private good for all agents who benefit frqm the public good must be equal to the corresponding marginal rate of transformation i e xmrs mrt this rule can be implemented in a decentralized fashion if the government has enough financing instruments available e g person specific lump sum taxes and government debt however whether or not the first best benefit rule can be implemented when the government only has control over relative prices is an open issue pigou 1947 diamond and mirrlees 1971 dasgupta and stiglitz 1971 atkinson and stern 1974 pestieau 1974 and more recently wildasin 1979 1984 1985 king 1986 and batina 1987 have considered the effect of decentralizing the government s policy on the optimal first best benefit rule for a public good it is generally true that if the government cannot completely control the economy because of a lack of policy instruments then the first best benefit rule governing the provision of the public good must be modified as a result

electoral goals and center state transfers a theoretical model and empirical evidence from india we construct a model of redistributive politics where the central government is opportunistic and uses its discretion to make transfers to state governments on the basis of political considerations these considerations are the alignment between the incumbent parties at the central and state levels and whether a state is a swing state or not a testable prediction from the model is that a state that is both swing and aligned with the central government is especially likely to receive higher transfers we test this prediction using indian data for 14 states from 1974 75 to 1996 97 we find that a state which is both aligned and swing in the last state election is estimated to receive 16 higher transfers than a state which is unaligned and non swing

decomposition of s concentration curves for any given order of inverse stochastic dominance standard concentration curves are decomposed into three components called contribution curves those compo nents correspond to within group inequalities between group inequalities and transvari ational inequalities we prove for all orders that contribution curve dominance implies systematically welfare improving tax reforms and conversely accordingly as welfare ex pansions may be costly in terms of particular inequalities we propose targeted fiscal reforms jel classification d63 h20

on the interpretation of the modified samuelson rule for public goods in static models with heterogeneity abstract pigou argued that use of distorting taxation would increase the social cost of a public good due to the excess burden created by a distorting tax system samuelson s rule governing a pure public good must then be modified a second best rule has appeared in the literature when heterogeneity exists and an interpretation for the various effects captured by the additional terms appearing in the rule has been given we present a counterexample to the standard interpretation and provide an alternative derivation and interpretation which allows us to make a more precise distinction among the effects mentioned in the literature

reconciling alternative views about the appropriate social discount rate abstract this paper shows that in an economy with an exogenous rate of return and a given capital income tax distortion and with lump sum taxes as the marginal tax instrument the soc and mcf criteria both correctly identify all worthwhile projects if the criteria are properly applied the equivalence between the soc and mcf criteria continues to hold i if distortionary taxes are used to balance the budget and ii if the rate of return to capital is endogenous apparent differences between the soc and mcf criteria arise from different definitions of a project s indirect revenue effect neither criterion has an implementation advantage because the information requirements for each are identical

the welfare effects of intergovernmental grants in an economy with distortionary local taxes a simple general equilibrium analysis this paper examines the welfare impact of intergovernmental transfers when recipient governments use distortionary taxes both lump sum and matching grants are investigated a distortionary factor depending on local demand and supply elasticities and the local tax rate on the taxed commodity determines the real income change to a jurisdiction per dollar transferred matching grants are dominated by lump sum grants when these can be set optimally for each recipient if grant policy must be uniform positive or negative matching rates are desired if equity adjusted distortionary factors are positively negatively correlated with local public service levels

marginal welfare cost calculations differential analysis vs balanced budget analysis abstract in a differential analysis tax revenue collections are held constant in a balanced budget analysis the spending level is changed and the level of distortionary taxation is changed correspondingly here income effects are important and efficiency calculations depend chiefly on uncompensated elasticities unless government exhaustive expenditure is assumed to substitute closely for cash a small scale computational general equilibrium model is constructed and differential and balanced budget experiments are performed results show that marginal welfare costs calculated from balanced budget experiments can be negative when labor supply functions are backward bending interactions among parameter values and efficiency costs are explored

the benefits of lending relationships evidence from small business data this paper empirically examines how ties between a firm and its creditors affect the availability and cost of funds to the firm we analyze data collected in a survey of small firms by the small business administration the primary benefit of building close ties with an institutional creditor is that the availability of financing increases we find smaller effects on the price of credit attempts to widen the circle of relationships by borrowing from multiple lenders increases the price and reduces the availability of credit in sum relationships are valuable and appear to operate more through quantities rather than prices

do formula based intergovernmental transfer mechanisms eliminate politically motivated targeting evidence from ghana abstract various countries have adopted formulas for determining intergovernmental transfers as a strategy to limit the role of political considerations in resource allocation in this paper we investigate a formula based system of allocating resources from a central government to local governments to determine whether the political characteristics of recipient areas have any bearing on their allocation specifically we study the sharing of resources of the district assemblies common fund dacf in ghana amongst the country s district governments over the period 1994 to 2005 we find evidence that the mechanism does not eliminate politically motivated targeting of the grants per capita dacf grants were higher in districts where vote margins in the previous presidential election were lower suggesting that swing districts were targeted we find evidence that dacf formula indicators and their weighting were chosen and amended to produce politically desired patterns of transfers

the timing of elections in federations a disciplining device against soft budget constraints we introduce political economics into the soft budget constraint problem by asking if the timing of elections has the potential to harden budget constraints specifically we ask under which circumstances the soft budget constraint problem is worse with synchronized elections i e simultaneous central and regional office terms or with staggered elections i e terms of office that do not coincide we find that staggered elections clearly improve fiscal discipline at the local level as well as welfare

consumption dominance curves testing for the impact of indirect tax reforms on poverty abstract a new tool is presented to test for the robustness of the impact on poverty of marginal tax reforms for pairs of commodities consumption dominance curves exist for every order of stochastic dominance an illustration is provided with bolivian data