Does right or left matter? Cabinets, credibility and fiscal adjustments

This paper tests the widely held assumption that left-wing cabinets favor higher public spending and examines whether cabinet ideology affects the persistence of major fiscal adjustments. In a panel of large fiscal adjustments in OECD countries during the last 40 years, we find evidence that left-wing and right-wing cabinets are partisan: the left tends to reduce the deficit by raising tax revenues while the right relies mostly on spending cuts. Our testable hypothesis is that cabinets can signal commitment by undertaking fiscal adjustments in ways that are not favored by their constituencies. In other words, the left gains credibility when it cuts spending while the right becomes more credible when it increases tax revenues. Probit estimates of the determinants of persistence in fiscal adjustments confirm that spending cuts by the left and tax increases by the right are associated with persistent adjustments. The effect is significant for cuts in public spending, public consumption (wage or nonwage), increases in total revenues, direct taxes on businesses and other taxes. We test for the role of several other determinants of persistence, confirming that coalition and majority cabinets are associated with less persistence while periods of high or rising levels of indebtedness favor persistence. The estimates of the impact of ideology and other variables on GDP and its components show that it is the size of the spending cut rather than cabinet ideology that is most important.     

Tax tilting and politics: Some theory and evidence for Latin America

A government budget deficit can exist for at least two possible reasons: tax smoothing and/or tax tilting. Under tax-smoothing, deficits are temporary phenomena resulting from the decision not to vary the tax rate in response to fluctuations in government spending (as a share of output). This is done in order to minimize the distortionary cost of taxes. Tax tilting occurs whenever the government has an incentive to discount the losses to society from taxes at a higher rate than society discounts them; hence it delays taxes or advances spending introducing an upward trend in total government debt. This paper develops a model that implies that tax-tilting tends to increase with political risk. An increase in political risk, measured by the probability of losing power, increases the rate at which the government discounts the future, causing government policy to be relatively more myopic. Hence it delays taxes or advances spending and its deficit increases. Using data from a panel of 19 Latin-American countries for the period 1984–2009, the paper presents estimation results that strongly support the proposition that an increase in political risk increases the degree of tax-tilting.     

Cointegration and Causal Relationship between Taxes and Spending for Kenya,Nigeria and South Africa

Causal relationships between taxes and spending are examined for three African countries using the GDP as a control variable, and dummy variables to address structural changes in Nigeria and South Africa. There is one cointegration equation between nominal fiscal variables in all three countries, one cointegration equation for Kenya and two cointegration equations for Nigeria and South Africa for the real fiscal variables and their respective dummy variables. Short-term results of the nominal variables show fiscal independence for all three countries. In real terms, taxes cause spending for Kenya and Nigeria and a weak fiscal synchronization for South Africa. There is long run fiscal synchronization in nominal terms for all three countries, and in real terms for both Nigeria and South Africa, while real taxes cause spending in Kenya. Long-run estimates show a unit increase in nominal (real) taxes translating into a less than proportionate increase in nominal (real) spending for Kenya and South Africa, and a more than proportionate increase in nominal (real) spending for Nigeria. Fiscal imbalance is not a threat in the budgetary process in Kenya and South Africa, but an issue of concern in Nigeria, where oil revenues are a major source of support for budget short falls.     

Analysing the effects of fiscal policy shocks in the South African economy

This paper is the first one to analyse the effect of aggregate government spending and taxes on output for South Africa using three types of a calibrated DSGE model and more data driven models such as a structural vector error correction model (SVECM) and a time-varying parameter VAR (TVP-VAR) to capture possible asymmetries and time variation of fiscal impulses. The impulse responses indicate first, that increases in government expenditure have a positive impact, albeit (at times) less than unity, on GDP in the short run; second, over the long run, the impact of government expenditure on GDP is insignificant; and third, increases in taxes decrease GDP over the short run, while having negligible effects over longer horizons.     

China's Growing Government Debt in a Computable Overlapping Generations Model

This paper simulates the effects of China's growing government debt in a computable equilibrium model of overlapping generations. Our model assumes that the government increases debt to finance its spending in the short run, and then increases taxes or cuts spending to keep the debt–GDP ratio constant. The spending‐driven government debt increases public capital and output in the short run, but decreases private investment, total capital stock, output, and net exports in the long run, and makes the future generations worse off. Among various means of debt control, a decrease in government spending seems to be the least harmful to private investment, capital stock, and output while an increase in capital taxation is most detrimental.     

Fiscal policy and national saving

This paper uses structural vector autoregressions along with structural measures of fiscal policy to measure the dynamic impact of fiscal policy shocks on the output gap and national saving. Positive shocks to government purchases and negative shocks to real net taxes are found to increase the output gap. Positive shocks to the government's structural surplus increases national saving although the effects are small. Positive shocks to government purchases are found to substantially reduce national saving. Negative shocks to real net tax revenues as a share of potential GDP have a small negative impact on national saving.     

Fiscal policy, long‐run growth, and welfare in a stock‐flow model of public goods

Abstract.  We introduce public capital and public services as inputs in an endogenous growth model. We show that the growth rate depends on the apportionment of tax revenues between the accumulation of public capital and the provision of public services. When public spending is financed by proportional income taxes, the growth rate, the level of public spending as a proportion of GDP, the level of investment in public capital as a proportion of total public spending, and the level of private investment as a proportion of total private spending all are lower in the equilibrium outcome than in the optimal outcome. JEL classification: E62, O40     

So alike,yet so different: Comparing fiscal multipliers across EU members and candidates

We estimate, using a Panel Vector Autoregressive approach and data from 2001Q1 to 2017Q1, the fiscal multipliers of the European Union (EU) members and candidates. These countries are grouped according to their stages of integration: original members, new Eurozone members, and candidates for the Eurozone and the EU itself. For each group, we assess the impact of a positive spending shock (expansionary) or a positive tax shock (contractionary) on GDP. Our findings suggest that: (i) rising government spending increases GDP in both the EU and Eurozone candidates (Keynesian multipliers), but slightly decreases it in the Eurozone members (non-Keynesian multipliers); (ii) higher taxes are associated with mixed results in terms of GDP dynamics - both increases and decreases in terms of GDP are found - in the four country groups (suggesting the presence of Keynesian and non-Keynesian multipliers). Overall, these outcomes indicate that spending multipliers are, compared to tax multipliers, more sensitive to European Union or Eurozone membership.     

Fiscal policy and economic activity in South Asia

This paper analyzes whether fiscal policy in South Asia amplifies or smoothens business cycle fluctuations. It estimates several econometric models to explore the cyclicality of government spending and tax buoyancy. In South Asia, tax revenue increases less than one to one with changes in gross domestic product (GDP), but public spending increases more than proportionally. For each percentage point change in GDP growth, government expenditure changes by 1.3 percentage points. While changes in tax revenue have no significant impact on economic activity, the government spending multiplier is positive and significant: each additional US dollar (USD) of spending leads to an immediate increase in GDP of 0.2 USD and to an increase of 0.4 USD in the medium run. The impact of public spending on economic activity is entirely due to capital expenditure, which is also more procyclical. Procyclical public spending and a positive expenditure multiplier imply that fiscal policy in South Asia amplifies boom‐and‐bust cycles. These results are in line with those of other emerging markets and developing economies and robust to different model specifications and estimation strategies.     

Index to Volume 52, 2000

In an efficiency wage economy with variable profits, a shift from payroll to employment taxes will reduce unemployment if the tax level is held constant at the initial wage. However, unemployment will rise if firms are constrained to zero profits in the long run and if tax revenues are constant. This reversal of employment effects occurs because the shift in taxes reduces wages. This implies a budget deficit. Hence, taxes will have to be raised if revenues are held constant. If the firm's profits cannot change, the tax increase will cause some firms to close down and unemployment will rise. Thus, the predicted employment consequences of changes in the tax structure depend on assumptions about the time horizon and budget constraint.     

The incidence of a tax on pure rent in a small open economy

This paper analyzes the effects of a land rent tax on capital formation and foreign investment in a life-cycle small open economy with endogenous labor-leisure choices. The consequences of land taxation critically depend on how the tax proceeds are used by the government. A land tax depresses capital formation, crowds out foreign investment and increases national wealth and consumption when the land tax revenues are distributed as lump-sum payments. If the proceeds from land taxation are used to finance unproductive government expenditure, the land tax will be neutral in its effects on the capital stock, nonhuman wealth and labor. When the tax revenues are used to reduce labor taxes, the land rent tax spurs nonhuman wealth accumulation and ambiguously affects the capital stock and labor.     

TAX DISCOUNTING VS. CROWDING OUT

The “crowding out” effect of debt-financed government spending on the private sector consumption-saving decision and on private investment behavior has been a controversial subject for several years. Do increases in debt-financed government spending stimulate private consumption and saving in the short run, as well as private consumption in subsequent periods? Or does the realization that future taxes must be raised to finance repayment of the debt result in a lack of stimulus for consumption as well as no detrimental impact on subsequent private saving? This article empirically tests for the presence and/or magnitude of tax discounting and crowding out, carefully distinguishing between the two, and decomposes government debt instruments according to their maturities in order to determine impact due to a reorientation of debt structure. The results do not support the existence of tax discounting, suggesting instead that government deficits do stimulate current consumption.     

税收增长对经济增长的负面冲击

1994年税制改革以来,我国各地区税收收入连年高速增长,导致全国税收收入占GDP的比重迅速上升。研究发现这种税收收入的快速增长给经济增长带来严重不利影响。它降低了经济增长率和税后单位资本的产出水平,并且中西部地区税收增长对经济增长的负面冲击高于东部地区。这种情况对于我国保持经济长期稳定增长,有效实施西部大开发战略可能不利,政府应适时调整税收政策。     

Estimating the public economic consequences of introducing varenicline smoking cessation therapy in South Korea using a fiscal analytic framework

Background and aims: Smoking gives rise to many cross-sectorial public costs and benefits for government. Costs arise from increased healthcare spending and work-related social benefits, while smoking itself provides significant revenue for government from tobacco taxes. To better understand the public economic impact of smoking and smoking cessation therapies, this study developed a government perspective framework for assessing smoking-attributable morbidity and mortality and associated public costs. This framework includes changes in lifetime tax revenue and health costs, as well as changes in tobacco tax revenue, from fewer smokers.

Methods: A modified generational accounting framework was developed to assess relationships between smoking-attributable morbidity and mortality and public economic consequences of smoking, including lifetime tax revenue gains/losses, government social transfers, and health spending. Based on the current prevalence of smoking in South Korean males, a cohort model was developed for smokers, former-smokers, and never-smokers. The model simulated the lifetime discounted fiscal transfers for different age cohorts in 5 year age bands, and the return on investment (ROI) from smoking cessation therapy.

Results: Former smokers are estimated to generate higher lifetime earnings and direct tax revenues and lower lifetime healthcare costs due to the reduction of smoking-attributable mortality and morbidity compared to smokers, even after accounting for reduced tobacco taxes paid. Based on the costs of public investments in varenicline, this study estimated a ROI from 1.4–1.7, depending on treatment age, with higher ROI in younger cohorts, with an average ROI of 1.6 for those aged less than 65.

Conclusions: This analysis suggests that reductions in smoking can generate positive public economic benefits for government, even after accounting for lost tobacco tax revenues. The results described here are likely applicable to countries having similar underlying smoking prevalence, comparable taxation rates, and social benefit protection provided to individuals with smoking-related conditions.     

A choice experiment on fuel taxation and earmarking in Norway

Pigouvian taxes are efficient — but unpopular among voters — and hence often politically infeasible. Earmarking of revenues has been widely reported to increase public support for taxes, but earmarking is generally not the most efficient use of the revenues. This trade-off between efficiency and political feasibility is the motivation for our primary research objective: to quantify the effect of earmarking on support for fuel tax rises. Our secondary research objective is to investigate why earmarking increases support. Using data from a representative sample of the Norwegian voter population (N = 1147), we estimate models of voter preferences for fuel taxes using logistic regression models. Our results show that, in the absence of earmarking, the majority of voters would like to reduce fuel taxes, but earmarking the revenues for environmental measures has a substantial effect on voter support for fuel tax increases, garnering a majority for increases of up to 15% above present levels. Further analysis indicates that a prime reason why earmarking for environmental measures is popular is that it increases the perceived environmental effectiveness of the tax, and hence its legitimacy as an environmental rather than a fiscal policy instrument.     

Involuntary Unemployment and Environmental Policy: The Double Dividend Hypothesis

An environmental tax reform might bring about gains over and above improved environmental quality. In particular, if tax revenues from environmental taxes are used to reduce the tax on wage income, positive employment effects can result in second-best economies. An efficiency wage model is used to analyze the impact of an ecological tax reform on involuntary unemployment. The government controls emissions by selling emission permits. Employment of labor and wages are determined endogenously. Conditions are identified under which an environmental tax reform reduces unemployment and increases welfare.     

Taxes,Strikes and Wages

A union and a firm bargain about wage increases. The firm possesses private information about its revenues. A two-period screening model is used to derive equilibrium wage demands by the union and to calculate measures of strike activity. Changes in wage demands and dispute probabilities due to alterations in various taxes are analysed. A more progressive income tax, a lower level of income taxes and higher payroll taxes reduce wages and strike activity. Hence, tax policy can be used not only to affect wages and employment, but lso to influence strike incidence.     

Dynamic relationships between oil revenues,government spending and economic growth in an oil-dependent economy

The aim of this paper is to empirically examine the dynamic relationships between oil revenues, government spending and economic growth in the Kingdom of Bahrain. Oil revenues are the main source of financing government expenditures and imports of good and services. Increasing oil prices in the recent years have boosted public expenditures on social and economic infrastructure. In this paper, we investigate whether the huge government spending has enhanced the pace of economic growth or not. To this end, we use a multivariate cointegration analysis and error-correction model and data for 1960–2010. Overall results suggest that oil revenues remain the principal source for growth and the main channel which finance the government spending.     

Meeting the Social Policy Challenges Facing Korea

Korea faces the fastest population aging among Organisation for Economic Cooperation and Development countries and increasing levels of income inequality and relative poverty. While economic growth will help address these challenges, growth alone is not sufficient, making it necessary to introduce policies to promote social cohesion. First, the National Pension Scheme and the National Health Insurance need to be improved. Second, Korea should develop well‐targeted social programs and expand the earned income tax credit. Third, it is important to reduce labor market dualism, a major cause of inequality due to the large wage gap between regular and non‐regular workers. Fourth, education reform is needed to lower the financial burden of tertiary education, reduce the heavy reliance on hagwon and increase spending on preprimary education. At the same time, it is essential to maintain a sound fiscal position by increasing tax revenues, primarily through indirect taxes and environmental taxes, to cover rising social spending.     

GROWTH AND VARIABILITY OF SCHOOL DISTRICT INCOME TAX REVENUES: IS TAX BASE DIVERSIFICATION A GOOD IDEA FOR SCHOOL FINANCING?

School districts in Ohio have the option of diversifying their revenue base by adopting income taxes. Using a panel of Ohio school districts that adopted a local income tax from 1990 to 2008, we find that revenues are procyclical and fluctuate only mildly. The estimated short‐ and long‐run income elasticity of school district income tax revenues is 1.05 and 1.04, respectively. We also find that the school district tax base fully adjusts to its long‐run equilibrium within 2 years. Finally, we show that school district income tax adoption does not provide more stability to total school district tax revenues in the short or the long run. (JEL H71, H75)