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-PRICE REFORM WITH DIRECTLY UNPRODUCTIVE PROFIT-SEEKING (DUP) ACTIVITIES*

This paper explores the extent to which insights available from existing writings on directly unproductive profit-seeking (DUP) activities in international trade modify rules of tax and tariff reform in normative public economics and examines in what way these should affect advice on tax policy usually given to developing countries. The analysis proceeds by developing two models. The first incorporates revenue seeking directly into a standard open economy public finance model and examines whether analysis of policy reform and economic costs of distortionary tariffs must be modified. The second includes a political component in the form of lobbying for subsidies – the expenditure side of the budget – as well as a normative economic component that raises taxes – the revenue side – to finance the social costs of such lobbying. The model can be used to determine the effects of politically determined expenditures on tax setting. The analysis shows that the grammar of welfare-theoretic arguments that underlies the reform and design of tax and tariff structures is robust to the inclusion of DUP activities of the type considered here. In particular, the latter lend no presumption in favor of uniformity in tax and tariff structures. It is argued that existing policy advice on tax and tariff reform derived from models where DUP activities have traditionally played no role continues to be appropriate when account is taken of formal treatments of DUP-type phenomena extant in the current literature.     

Debt, Growth and Budgetary Regimes

Within the Barro (1990) model of productive public services, but with the inclusion of public debt, we derive and characterize on the balanced growth path, a set of welfare‐maximizing fiscal rules under two budgetary regimes – one with only the standard dynamic government budget constraint, and the other involving the golden rule of public finance. We demonstrate analytically that the optimal fiscal policy differs in the two budgetary regimes considered. We also analyse two cases within the second regime: one, where the ratio of current spending to tax revenues is parametrically given, and another, where this ratio is optimally chosen by the government.     

Fiscal efficiency,redistribution and welfare

The expanding literature on fiscal decentralization (FD) emphasizes the role of institutional mechanisms for FD's welfare effects. We analyze the welfare effects of FD in case of a fiscal transfer mechanism that punishes inefficiency in tax collection and compensates for local income deficiency. In addition, a portion of transfers is earmarked for investment. Given a level of FD and these rules, the representative local government chooses its tax collection effort to maximize local utility. The solution of the model reveals that the stricter the redistributive rule, the higher are steady-state fiscal efficiency and welfare. While the effectiveness of the redistributive parameters increases with centralization of the revenue pool, it decreases with the tax rate. Both welfare and income distribution, on the other hand, improve with the degree of revenue centralization and the tax rate. Besides, fiscal efficiency and redistribution decrease with investment-earmarked transfers.     

Does government ideology affect personal happiness? A test

We investigate the impact of government ideology on left-wing as compared to conservative individuals. We find that conservative people are happier, on average. In a sample excluding the richest countries left-wing people are happier under the tenure of left-wing governments.     

我国财政收支划分的立法研究

财政收支划分是财政管理体制的重要组成部分.在市场经济体制下,财政收支划分立法有利于政府职能的履行和公共财政的运行,是完善分税制财政管理体制的丛然要求.完整的财政收支划分法律制度应当由财政级次划分、财政收支分类、财政支出划分和财政收入划分等制度构成.     

Revising the conventional tax-effort principle

The standard methodology on tax-effort (i.e., the ratio of actual tax revenue to its optimal level) is to run a regression of actual tax revenue on countries’ specific (macroeconomic, demographic, geographical, political, social, and institutional) variables. The resulting predicted (fitted) values are then taken to represent the optimal (desired or maximum) level of tax revenue. The crucial issue of tracing out how the optimal tax revenue should be allocated to the fiscal objectives (equity, efficiency) does not seem to be of any interest to the researchers on tax-effort. The present paper argues that the standard methodology is not without faults and needs revising. We demonstrate that an optimal tax system can be safely derived from maximizing a utility function with respect to (in)direct tax rates. The manipulation of the first-order conditions, using a novel mathematical module, leads to an infinite number of optimal direct–indirect tax rates. The selection of the optimal mix of these tax rates is dependent on the country-specific households’ preferences over equity/efficiency, as they are formulated by voters’ volition in election periods. A simulation procedure helps understanding how the optimal tax revenue is chosen and how it can be optimally allocated to fiscal objectives, in the context of a panel data set including a large number of developed and developing countries. Throughout our text, the optimal tax revenue is defined as the sum of the products of the optimal (in)direct tax rates and their corresponding tax bases. In the simple Arrow–Debreu economy, the above sum is shown to be equal to the difference between income and consumption.     

Ideological Divide within the Cabinet and Public Spending

A budget, i.e., spending by category, is prepared by the cabinet of (three key) ministers. The finance minister wants to minimize total spending, while the rest have single‐peaked preferences over budgets and each views his own spending as relatively more important. The goal is to understand effects of polarization in spending priorities,—or divergence of the ideal points,—on the budget under two typical budgeting procedures. If the procedure is “fragmented,” i.e., the finance minister just passively compiles spending requests, then the divergence of the ideal budgets increases total spending. If the procedure is more centralized, i.e., challenging the initial proposal of the finance minister is costly, and it also requires support of another minister, then polarization may lead to a tighter budget, as it enlarges the set of the unchallenged proposals, provided the ideals of the spending ministers are sufficiently far apart.     

Dynamic scoring of tax reforms in a small open economy model

We examine dynamic revenue effects of a permanent tax cut on labor and capital income using a small open two-sector dynamic general equilibrium model. We use a dynamic scoring technique to calculate long-run as well as transitional effects on fiscal revenue when a tax cut is financed by either a lump-sum tax or consumption tax. We show that the revenue loss from an income tax cut becomes substantially smaller when agents can use international financial markets compared to the case of the closed economy. Responses of tradable and nontradable sectors to the capital income tax cut display a stark contrast in both long-run equilibrium and transitional dynamics due to different factor intensities. Capital income tax cut in the tradable sector is the most efficient policy instrument in terms of minimizing fiscal revenue loss. These simulation results suggest that fiscal sustainability issue when implementing a tax cut could be overstated.     

ECONOMIC AND BUDGET ISSUES FOR DEFICIT POLICY

Much of the controversy about reducing the federal deficit has arisen because policymakers lack a deficit policy that is a consistent part of broader macroeconomic policy. This is not surprising since economists have not reached a consensus about such a policy.
This paper sketches the analytical controversy about monetary and fiscal policies and traces it to issues about how the economy works. Although aspects of the deficit question are controversial, there is general concern about the buildup of federal debt implicit in the projection of persistently large deficits. A growing body of research suggests that the increase in the federal debt-to-income ratio may impinge dangerously on the credit available to finance private capital formation. Also, the rising federal debt may indirectly generate inflation through monetization.
Several criteria and approaches to a deficit policy are identified. The paper suggests that changing the "policy mix" by tightening fiscal policy and loosening monetary policy to reduce interest rates is unlikely to succeed to the extent that expansive monetary policy increases real interest rates by raising inflationary expectations and uncertainty.
Since the potential ill effects of the federal debt buildup, are essentially long-run and bear on capital accumulation, any tax increases should avoid disincentives to saving, investment, and to growth generally. Depending on revenue requirements, fundamental changes in the tax system may be necessary. Further reductions in spending appear to be inevitable if the projected rise in the debt-to-GNP ratio is to be halted. Defense, retirement, and medical care programs are most likely candidates for reduction.     

Finance commission of India’s assessments: a political economy contention between expectations and outcomes

We explore the normative fiscal assessments of the Finance Commission (FC) of India, and realisation of fiscal policy with regard to Central Finances over the period 1990–2012. We employ the Theil’s inequality coefficient to investigate the magnitude of assessment errors and its partitioning in to bias, slope and random components. Furthermore, this article also evaluates the efficiency, biasedness and persistence of forecast errors. The robustness of the efficiency results are confirmed with the application of maximum entropy bootstrap. The objective of this study is to examine the structural basis on which FCs make their awards rather than examining the predictability of the forecasts. The story of FC’s assessments reflects an interesting political economy theatre of contention between aspirations and outcomes. Our key findings are as follows: First, source of errors for assessments of tax revenue, nontax revenue, interest payments, defence revenue expenditure, plan revenue expenditure and fiscal deficit is principally due to random component. However, the errors in the remaining economic parameters originate due to systematic components i.e. mean and slope errors. Second, the expenditure side predictability is lower than the revenue side predictability.     

Does personal background influence a finance minister to cook the books? An investigation of creative accounting in Swiss cantons

This article aims to identify the factors influencing the use of creative accounting in the public sector. Its distinctive feature is that it sheds light on creative accounting when used, not to hide public deficits, but to conceal surpluses. It especially explores the impact of the finance minister’s (FM)’s background on the phenomenon. We take advantage of the quasi-experimental settings of the Swiss cantons in which the financial management act sets out the possibility of implementing certain accounting gimmicks, including mainly additional ‘depreciation’ charges. These charges, which are depreciations in name only, enable the FM to artificially inflate expenses, thus increasing the deficit or reducing the surplus. Our panel data set of the 26 cantons over the period 1980–2012 includes a new data set of creative accounting and of 116 cantonal FMs. Our results indicate that the FMs cook the books irrespective of their personal or ideological background with the exception that trained economists tend to apply creative accounting more. Additionally, stringent fiscal rules urge FMs towards more surplus-hiding accounting.     

基于公共品资本化的地方财政激励制度研究*——土地财政如何影响公共品提供

本文以中国的城镇化为背景,运用公共品资本化原理,分析了地方土地财政制度,包括土地出让金收入制度与房地产相关税收制度,对地方公共品提供激励的传导机制。城市级面板数据的实证分析表明：土地财政对地方公共品提供具有结构性的激励效应,但该激励机制建立在土地和房产交易之上,地方财政努力程度被交易时点截然分割。改革土地财政制度,完善房地产税收体系,实现从交易型向保有型“土地溢价回收”制度转换,将有助于建立对称的、可持续的地方财政激励制度。     

Leviathan: Revenue-maximizer or glory-seeker?

We argue that the Hobbesian assumption of glory-seeking behavior, especially when applied to holders of high office, is both more realistic and has greater predictive power than Brennan and Buchanan's hypothesis of revenue-maximization. Whereas traditional public finance theory sees the sovereign as a benign agent without an objective of his own and Brennan and Buchanan endow him with the objective of revenue maximization, Hobbes's political construct envisages a sovereign-principal who devises rules and incentives to induce his subjects-agents to contribute to his own preservation and glory. We examine the implications of this Copernican revolution in public finance theory by referring to Brennan and Buchanan's key claim that the Leviathan ought to be constrained by a fiscal constitution. We argue that the interplay of the pursuit glory and the concern for self-preservation implies that the government cannot be bound by rules set by citizens.     

Revenue decentralization,central oversight and the political budget cycle: Evidence from Israel

This paper examines whether revenue decentralization and direct external financial supervision affect the incidence and strength of political budget cycles, using a panel of Israeli municipalities during the period 1999–2009. We find that high dependence on central government transfers – as reflected in a low share of locally raised revenues in the municipality's budget – exacerbates political budget cycles, while tight monitoring – exercised through central government appointment of external accountants to debt accumulating municipalities – eliminates them. We also find that this pattern is predominantly accounted for by development expenditures. These results suggest that political budget cycles can result from fiscal institutions that create soft budget constraints: that is, where incumbents and rational voters can expect that the costs of pre-election expansions will be partly covered later by the central government.     

Spending cuts or tax increases? The composition of fiscal adjustments as a signal

This paper shows that the composition of fiscal adjustments, spending cuts versus tax increases, serves as a signal of the government's degree of collusion with special interests. The politico-economic model of fiscal policies, combining retrospective voting with common-agency-type lobbying, presents undominated separating equilibria and intuitive pooling ones, in both of which fiscal adjustments with sufficiently large spending cuts lead to incumbent reappointment whereas those with only tax increases lead to incumbent defeat. These findings are consistent with the recent empirical evidence of voters behaving as fiscal conservatives. The efficiency-enhancing aspects of the signaling mechanism and the effects of imposing a deficit limit are also analyzed.     

Achieving the triple dividend in Portugal: a dynamic general-equilibrium evaluation of a carbon tax indexed to emissions trading

Using a dynamic general equilibrium model, we simulate the environmental, economic, and budgetary effects in Portugal of a new carbon tax indexed to the carbon price in the European Union’s Emissions Trading System market. Through careful recycling of the carbon tax revenues to finance lower personal income taxes, lower Social Security contributions, and higher investment tax credits – in particular when changes are directed at promoting energy efficiency – we show that it is possible to design a carbon tax reform that boosts economic growth and strengthens fiscal consolidation. These results served as the basis for a new carbon tax eventually approved by the Portuguese Parliament.     

Why Finance Ministers Favor Carbon Taxes,Even If They Do Not Take Climate Change into Account

Fiscal considerations may shift governmental priorities away from environmental concerns: finance ministers face strong demand for public expenditures such as infrastructure investments but they are constrained by international tax competition. We develop a multi-region model of tax competition and resource extraction to assess the fiscal incentive of imposing a tax on carbon rather than on capital. We explicitly model international capital and resource markets, as well as intertemporal capital accumulation and resource extraction. While fossil resources give rise to scarcity rents, capital does not. With carbon taxes, the rents can be captured and invested in infrastructure, which leads to higher welfare than under capital taxation. This result holds even without modeling environmental damages. It is robust under a variation of the behavioral assumptions of resource importers to coordinate their actions, and a resource exporter’s ability to counteract carbon policies. Further, no green paradox occurs—instead, the carbon tax constitutes a viable green policy, since it postpones extraction and reduces cumulative emissions.     

Resource discovery and the politics of fiscal decentralization

If the central government is a revenue maximizing Leviathan then resource discovery and democratization should have discernible impacts on the degree of fiscal decentralization. We systematically explore these effects by exploiting exogenous variation in giant oil and mineral discoveries and permanent democratization. Using a global dataset of 77 countries over the period 1970–2012 we find that resource discovery has very little effect on revenue decentralization but induces expenditure centralization. Oil discovery appears to be the main driver of centralization and not minerals. Resource discovery leads to centralization in locations which have not experienced permanent democratization. Tax and intergovernmental transfers respond most to resource discovery shocks and democratization whereas own source revenue, property tax, educational expenditure, and health expenditure do not seem to be affected. Higher resource rent leads to more centralization and the effect is moderated by democratization.     

Global capital markets,direct taxation and the redistribution of income

Standard fiscal theory suggests that taxation should be heaviest on the least mobile factors of production – for both efficiency and revenue reasons. A shift in tax burdens from capital to labour as economies become globally integrated is thus justified. This theoretical tradition (founded by Ramsay and continued by Mirrlees and Lucas) assumes by construction that profit taxes reduce investment and growth; and while sensitive to inter-generational equity, sidesteps the issue of income distribution within generations. In contrast, starting from Keynes’ critique of these assumptions and building on modern endogenous growth models, it can be shown that profit taxation is not necessarily injurious to productive investment. In practice, moreover, the effect of globalisation has not been to reduce tax rates on capital, but rather to erode the tax base itself (i.e. ‘tax evasion’). Improved information exchange between tax authorities, which is now being driven by fiscal insolvency in developed countries, would allow tax incidence to be shifted so as to improve income distribution within OECD countries. Such cooperation could also permit the replacement of the current discretionary system of fiscal transfers from rich to poor countries (‘development aid’) by equitable sharing of global capital tax revenue.