Supply-Side Economics of Germany's Year 2000 Tax Reform: A Quantitative Assessment

Abstract. The paper provides an assessment of supply‐side economics following Germany's year 2000 tax reform. Investigated are a corporate tax cut, deteriorating depreciation allowances and imputation rules, and a private income tax cut. For this purpose, a neoclassical growth model is augmented by various fiscal policy parameters and endogenous corporate finance and calibrated with German data. The model is used to evaluate consequences of Germany's tax reform on production, firm finance and leverage, investment, consumption and welfare of a representative household.     

FISCAL CONSOLIDATION PROGRAMS AND INCOME INEQUALITY

We document a strong empirical relationship between higher income inequality and stronger recessive impacts of fiscal consolidation episodes across time and space. To explain this finding, we develop a life‐cycle economy with uninsurable income risk. We calibrate our model to match key characteristics of several European economies, including inequality and fiscal structures, and study the effects of fiscal consolidation programs. In our model, higher income risk induces precautionary savings behavior, which decreases the proportion of credit‐constrained agents in the economy. These agents have less elastic labor supply responses to fiscal consolidations, which explain the correlation with inequality in the data.     

How Does Fiscal Consolidation Impact on Income Inequality?

In this paper, we assess the impact of fiscal consolidation on income inequality. Using a panel of 18 industrialized countries from 1978 to 2009, we find that income inequality significantly rises during periods of fiscal consolidation. In addition, while fiscal policy that is driven by spending cuts seems to be detrimental for income distribution, tax hikes seem to have an equalizing effect. We also show that the size of the fiscal consolidation program (in percentage of GDP) has an impact on income inequality. In particular, when consolidation plans represent a small share of GDP, the income gap widens, suggesting that the burden associated with the effort affects disproportionately households at the bottom of the income distribution. Considering the linkages between banking crises and fiscal consolidation, we find that the effect on the income gap is amplified when fiscal adjustments take place after the resolution of such financial turmoil. Similarly, fiscal consolidation programs combined with inflation are likely to increase inequality and the effects of fiscal adjustments on inequality are amplified during periods of relatively low growth. Our results also provide support for a non‐linear relationship between inequality and income and corroborate the idea that trade can promote a more equal distribution of income.     

内、外资企业所得税合并中的几个理论问题探讨

中国正经历着新一轮的税制改革,而内、外资企业所得税的合并成为人们关注的焦点问题。从纳税人、税率、税前扣除和税收优惠等几个基本理论问题的界定,分析内、外资企业所得税存在的差异以及合并中存在的问题,进而为内、外资企业所得税的合并提供一个理论框架。     

FIXED COSTS,THE BALANCED BUDGET MULTIPLIER AND WELFARE*

In a two‐sector model, where one of the sectors is monopolistically competitive and subject to increasing returns to scale but without love for variety, we analyse the effects of a balanced budget fiscal expansion. Such an expansion could increase the welfare of the representative individual, if elasticities of substitution in production and consumption are low. A reorganization of production takes place—increasing returns enabling a rise in real income.     

FISCAL POLICY AND ASSET PRICES

We analyse the impact of fiscal policy on asset prices using a panel vector auto‐regressive (PVAR) approach and quarterly data for ten industrialized countries. We find that positive fiscal shocks lead to a temporary fall in stock prices and a gradual and persistent decrease in housing prices. The empirical findings also point to: (i) a contractionary effect of fiscal policy on output in line with the existence of crowding‐out effects and the deterioration of credit conditions; (ii) a weakening of the effectiveness of fiscal policy in recent times; (iii) a more persistent response of asset prices for countries with a lower degree of openness; (iv) a larger impact of fiscal policy on asset prices for small countries; (v) a close link between the responsiveness of asset prices to fiscal policy and the government’s size; (vi) an increase of the sensitivity of asset prices to fiscal policy shocks following the process of financial deregulation and mortgage liberalization; and (vii) significant fiscal multiplier effects in the context of severe housing busts. Finally, the evidence suggests that changes in equity prices may help governments towards consolidation of public finances.     

Restoring Macroeconomic Stability through Fiscal Adjustment: a Real–Financial CGE Analysis for India

Developing‐country attempts to regain macroeconomic stability through fiscal adjustment are often unsuccessful in reducing inflation and balance‐of‐payments (BoP) disequilibrium. This paper examines why this may be so in the light of India's experience with stabilization in response to the BoP crisis in 1991. It does so using a novel real–financial computable general‐equilibrium model. Focusing on credit rather than money, the model goes beyond earlier modeling approaches by (1) incorporating credit rationing, (2) recognizing the dual role of credit for working capital and investment, and (3) allowing for switches between credit‐constrained, capacity‐constrained, and demand‐constrained, regimes. The simulations indicate that the macroeconomic effects of monetized deficit reduction differ widely depending on the mode of financing and on initial conditions in real and financial markets. Whenever fiscal reform leads to a squeeze on available working capital credit, deficit reduction will lead to only a limited inflation decline and a modest BoP improvement.     

The growth effects of tax rates in the OECD

This paper explores the merits of macro‐ and micro‐based tax rate measures within an open economy “fiscal policy and growth” model. Using annual data for 15 OECD countries we find statistically small, non‐robust long‐run growth effects of macro‐based average tax rates on capital income and consumption, but some evidence for average labour income tax effects. Changes in “micro” marginal income tax rates at both the personal and corporate levels yield statistically robust GDP responses of modest size. Both domestic and foreign corporate taxes appear relevant. In general, tax effects on GDP operate largely via factor productivity rather than factor accumulation.     

IS THERE A ‘SECESSION OF THE WEALTHY’? PRIVATE HEALTH INSURANCE UPTAKE AND NATIONAL HEALTH SYSTEM SUPPORT

The purchase of private health insurance (PHI) as a means to partially supplement the National Health System (NHS) coverage is often regarded as a potential signal for a declining support for the NHS. Exploiting the fact that PHI is typically purchased by the most affluent, in this paper we test the so called ‘secession of the wealthy’ hypothesis whereby the likelihood of expressing ‘lack of support for the NHS’ increases with having supplementary PHI. Using empirical data from Catalonia, we draw upon an empirical strategy that circumvents an obvious simultaneity problem by estimating both a recursive bivariate probit as well as an IV probit. After controlling for insurance premium, household income and other socio‐demographic determinants, we find that the purchase of PHI reduces the propensity of individuals to support the NHS. We also find evidence that PHI is a luxury good and sensitive to fiscal incentives.     

Public Expenditure,Environment, and Economic Growth

This paper attempts to develop a model of endogenous growth with special consideration to the role of productive public expenditure in the presence of congestion effect of private capital and environmental pollution. We analyze the properties of the optimal fiscal policy in the steady‐state equilibrium when the level of production of the final good is the source of emission. Government allocates its income tax revenue between pollution abatement expenditure and productive public expenditure. In the steady‐state equilibrium, optimum ratio of productive public expenditure to national income is less than the competitive output share of the public input; and this ratio varies inversely with the magnitude of the emission‐output coefficient. The steady‐state equilibrium appears to be a saddle point; and the market economy growth rate is not necessarily less than the socially efficient growth rate in the steady‐state equilibrium.     

The new stability and growth pact: A first assessment

The paper proposes a theoretical model of fiscal policy offering new insights on some of the key policy trade-offs involved in the recent reform of the Stability and Growth Pact. As suggested by the proponents of the reform, greater room for case-specific economic judgment in the implementation of the pact may improve welfare. In our model, these gains occur because the consolidation path implied by the implementation of the pact does not discourage high-quality measures. In practice, however, the difficulty to extract true policy intent from budget figures may hinder the qualitative assessment of fiscal policy. Hence, reforming a rules-based fiscal framework with a view to enhance its “economic rationale” would also require closer monitoring, a better grasp of the policies underlying the budget, and ultimately stricter enforcement. In that sense, recent reforms are at best unhelpful.     

Are short‐term effects of pollution important for growth and optimal fiscal policy?

We study optimal fiscal policy in a stock‐flow model of the environment within an endogenous growth framework, where some pollutants have a lasting impact on environmental quality which is restored through abatement expenditure, while others dissipate and hence, have a short‐term effect on the environment. All pollutants, however, affect the productivity of a public good negatively. Given that short‐term pollution, although it dissipates, is irreversible in this sense, a government cannot ignore its negative effects since this type of pollution lowers the productivity of all inputs. We find that a larger negative effect of short‐term pollutants as well as a higher congestion effect of private capital leads to corrective fiscal policies with higher optimal income tax and abatement expenditure rates, which have favorable growth consequences. Interestingly, we find that the rate of short‐term pollution does not affect optimal fiscal policy while that of the long‐term pollution does.     

Assessing fiscal episodes

In an OCDE panel, for the period 1970–2010, we assess the effects of fiscal consolidation episodes, with four different definitions. Our results reveal that lower final government consumption increases private consumption in three out of the four approaches, when a fiscal consolidation occurs, and the debt ratio is above the cross-country average. The magnitude of these coefficients is higher for countries with lower debt levels, implying more successful consolidations associated with reduced crowding-out effects. There is some evidence of non-Keynesian effects for both private consumption and private investment, and the effects of social transfers on private investment tend to be negative, both in the short and long run. In a financial crisis, such effects are also more prone to happen. Finally, raising long-term interest rates reduces per capita private investment.     

Do dictatorships redistribute more?

This paper examines the effect of political institutions on fiscal redistribution for a country-level panel from 1960–2010. Using data on Gini coefficients before and after government intervention, we apply a measure of effective fiscal redistribution that reflects the effect of taxes and transfers on income inequality. Our findings clearly indicate that non-democratic regimes demonstrate significantly greater direct fiscal redistribution. Subsequently, we employ fiscal data in an attempt to enlighten this puzzling empirical finding. We find that dictatorial regimes rely more heavily on cash transfers that exhibit a direct impact on net inequality and consequently on the difference between market and net inequality (i.e., effective fiscal redistribution), whereas democratic regimes devote a larger amount of resources to public inputs (health and education) that may influence market inequality but not the difference between market and net inequality per se. We argue that the driving force behind the observed differences within the pattern on government spending and effective fiscal redistribution is that democratic institutions lead survival-oriented leaders to care more for the private market, and thus to follow policies that enhance the productivity of the whole economy.     

Ambiguity and Public Good Provision in Large Societies

In this paper, we consider the effect of ambiguity on the private provision of public goods. Equilibrium is shown to exist and be unique. We examine how provision of the public good changes as the size of the population increases. We show that when there is uncertainty, there may be less free‐riding in large societies.     

Housing Allowance and the Rent of Low‐income Households

This paper analyses the effect of a housing allowance programme on the rent paid by assisted low‐income households. The data consist of 12,000 rental households in the free‐market and municipal sectors. The effect is estimated using the programme reform of 2002 as an instrument. The reform increased the allowance of the assisted households depending on housing characteristics, but it had little effect on the eligibility. Results suggest that in the private sector, one additional euro of allowance increases the rent of claimants by 60–70 cents. The effect is zero in the municipal sector, as rents are tied to the housing costs.     

Fiscal consolidation in the euro area: Long-run benefits and short-run costs

In this paper, we examine the macroeconomic effects of alternative fiscal consolidation policies in the New Area-Wide Model (NAWM), a two-country open-economy model of the euro area developed at the European Central Bank (cf. [Coenen, G., McAdam, P., Straub, R., in press. Tax reform and labour-market performance in the euro area: a simulation-based analysis using the New Area-Wide Model. Forthcoming in the Journal of Economic Dynamics and Control]). We model fiscal consolidation as a permanent reduction in the targeted government debt-to-output ratio and analyse both expenditure and revenue-based policies that are implemented by means of simple fiscal feedback rules. We find that fiscal consolidation has positive long-run effects on key macroeconomic aggregates such as output and consumption, notably when the resulting improvement in the budgetary position is used to lower distortionary taxes. At the same time, fiscal consolidation gives rise to noticeable short-run adjustment costs in contrast to what the literature on expansionary fiscal consolidations suggests. Moreover, depending on the fiscal instrument used, fiscal consolidation may have pronounced distributional effects.     

Fiscal consolidation by intergovernmental transfers cuts? The unpleasant effect on expenditure arrears

For the period 2003–2014, we investigate unexplored effects of fiscal consolidation in decentralized public finance on a large dataset of Italian municipalities. Based on a simple, realistic theoretical model, we show that municipalities increase arrears on committed investment expenditure as a response to intergovernmental transfer cuts. Then, we test our predictions controlling for potential sources of endogeneity, and find that a reduction in intergovernmental transfers causes a significant increase in arrears, in addition to other common adjustments to local fiscal policies (e.g., tax revenues). Our results highlight a perverse effect of fiscal consolidation packages implemented by centrally imposed fiscal restraints.     

Public capital,deficit financing,and economic growth in a stochastic economy

This paper examines the relationship among deficit-financing fiscal policy, risk and economic growth in a stochastic endogenous growth model with private and public capital. We show that there are positive balanced-growth rate and a debt-to-GDP ratio that depend on deep parameters such as the income tax rate and the standard deviation of the growth rate of private and public capital. Investment and fiscal shocks influence the mean and variance of the growth rate and the debt dependency rate through portfolio changes and capital accumulation. In particular, an increase in the risk of private investment destabilizes the economy and reduces the mean growth rate if the portfolio change is drastic, and this increase in risk increases the debt-to-GDP ratio. In contrast, an increase in the income tax rate stabilizes the economy, increases the mean growth rate, and has a positive or negative effect on the debt-to-GDP ratio according to the ratio of public to private capital if the income tax rate is sufficiently small.     

Using surveys of business perceptions as a guide to growth‐enhancing fiscal reforms

This paper assesses the merits of using business perceptions of growth constraints as a guide to growth‐enhancing fiscal policy reforms. Using endogenous growth models in which the government levies an income tax to provide public inputs to the production of private firms, the paper demonstrates that such perceptions of growth constraints may be misleading from a policy perspective. In particular, firms can be expected to systematically overestimate the growth‐enhancing effects of lower tax rates relative to public services and public capital, and underestimate the growth‐enhancing effects of greater provision of public capital relative to taxation and public services. In addition, we show that firms rank different public services and different types of public capital according to the actual costs they impose on firms. It is then shown that these theoretical predictions regarding how firms rank constraints correspond closely to the observed ranking of constraints by firms in the World Bank's Enterprise Surveys.