INTERNATIONAL TAX COMPETITION AND THE DEFICIT BIAS

I analyze the dynamic effects of tax competition on public budget deficits. I find that stronger tax competition leads to a fiscal deficit bias at the early stages of financial liberalization. When countries differ in terms of capital mobility, further liberalization leads to external imbalances and diverging fiscal deficits while corporate tax rates converge. Consistent with theory, I find that stronger tax competition increases deficits in a sample of OECD countries, controlling for tax revenues and other standard determinants of fiscal deficits. (JEL E62, F62)     

NONLINEARITIES AND THE SUSTAINABILITY OF THE GOVERNMENT'S INTERTEMPORAL BUDGET CONSTRAINT

We analyze the sustainability of the government's intertemporal budget constraint and the corresponding fiscal reaction function within a nonlinear error‐correction framework. Our empirical analysis, based on Italy, provides some evidence that the Italian government is meeting its intertemporal budget constraint. Nevertheless, we show that the burden of correcting budgetary disequilibria is entirely carried out by changes in the average tax rate, with a weakly exogenous government spending, possibly determined by the political process. We also document some rigidities of the tax instrument, in terms of downward inflexibility of the average tax rate with respect to its long‐run level. Finally, we provide some evidence in favor of a nonlinear adjustment toward a sustainable long‐run equilibrium, as the average tax rate adjusts faster the further away it gets from the equilibrium. By considering the behavior of taxes across the economic cycle, we also provide some evidence of inflexibility of the tax instrument during bad times. (JEL C32, C51, C52, H20, H50)     

Regulatory fit effects on perceived fiscal exchange and tax compliance

Paying taxes can be considered a contribution to the welfare of a society. But even though tax payments are redistributed to citizens in the form of public goods and services, taxpayers often do not perceive many benefits from paying taxes. Information campaigns about the use of taxes for financing public goods and services could increase taxpayers’ understanding of the importance of taxes, strengthen their perception of fiscal exchange and consequently also increase tax compliance. Two studies examined how fit between framing of information and taxpayers’ regulatory focus affects perceived fiscal exchange and tax compliance. Taxpayers should perceive the exchange between tax payments and provision of public goods and services as higher if information framing suits their regulatory focus. Study 1 supported this hypothesis for induced regulatory focus. Study 2 replicated the findings for chronic regulatory focus and further demonstrated that regulatory fit also affects tax compliance. The results provide further evidence for findings from previous studies concerning regulatory fit effects on tax attitudes and extend these findings to a context with low tax morale.     

TAX EVASION AND THE MARGINAL COST OF PUBLIC FUNDS

Tax evasion and deadweight loss have similar implications for the rules of public finance. The optimal mix of taxes can be derived from the minimization of the sum of aggregate deadweight loss and aggregate cost of tax evasion. Similarly, the marginal cost of public funds includes allowances for marginal deadweight loss and marginal cost of tax evasion per dollar of public revenue acquired.     

THE LAGGED IMPACT OF STATE AND LOCAL TAXES ON ECONOMIC ACTIVITY AND POLITICAL BEHAVIOR

Politicians are frequently characterized as making fiscal decisions based on a shorter time horizon than is required for full taxpayer adjustment, thus generating near term benefits and relatively high tax rates. This argument requires a negative impact of taxes on economic activity distributed over a relatively long time period. Considerable empirical evidence suggests that state and local taxes do not significantly impact the geographic distribution of economic activity; this analysis, however, finds a significant negative distributed lag impact of such taxes on capital formation. The approach emphasizes interstate tax competition in formulating the cross-section time-series estimating equation.     

Attitudes towards inheritance taxation – results from a survey experiment

Inheritance taxation divides public opinion and is among the most unpopular taxes in many countries, although only a minority of people have to pay it. Using a survey experiment with vignettes on a sample of German citizens (N = 479), we examine attitudes towards inheritance taxation. Our results reveal several relevant dimensions for a proposed fair inheritance tax rate (PITR): The PITR decreases with a close relationship between testator and heir and when the asset is a family-occupied house or family enterprise compared with a “lump sum”. It increases with the value of bequest and income of the heir representing equity considerations. Respondents advocate higher tax rates to reduce fiscal budget deficits. Respondents with a strong family orientation propose a low inheritance tax rate.     

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.     

THE WELFARE COST OF THE UNDERGROUND ECONOMY

This paper estimates the welfare cost of taxes that create an incentive for resources to flow to the underground, or untaxed, sector in the United States. Using a general equilibrium model of the American economy, the welfare cost is found to be large and growing in absolute and relative terms over time. In 1980 the welfare cost may be as much as $220 billion, or over 9 percent of output; even conservative estimates place the loss at nearly $100 billion. It also is found that small reductions in tax rates substantially reduce the welfare cost.     

THE WELFARE COSTS OF DEFICIT FINANCE

We analyze the welfare consequences of deficit finance in a general equilibrium model fit to the US. economy. Current spending may be financed with current and/or future distortionary taxes. The economy is open to international capital flows. The welfare costs of financing marginal current spending are substantial and are sensitive to the timing of the required taxes; postponing a tax on labor income is advantageous but postponing a tax on asset income is not. Ricardian equivalence poorly approximates the economy we consider.     

EFFICIENT TAX REPORTING: THE EFFECTS OF TAXPAYER LIABILITY INFORMATION SERVICES

The complexity of the individual income tax system can give rise to both under‐ and overreporting of liability, thus creating a wedge between taxpayer perceptions of the price of public services and their actual cost, and potentially leading to budget misallocations and associated efficiency losses. This study uses theory and experiments to evaluate the effectiveness of taxpayer service programs that endeavor to resolve uncertainty over tax liability. To do so, we induce uncertainty over tax liability and investigate the effects of both service accuracy and reliability. We find participants are less likely to file when tax liability is uncertain but the provision of information offsets this effect; furthermore, it appears that simply providing a service, even one that imperfectly reveals liability, increases the propensity to file and the accuracy of the filing. When a service that promises to resolve uncertainty completely is requested but not delivered, the result is underreporting even more severe than in a setting where no service is available. (JEL H2, H26, C91)     

Neo-isolationism,balanced-budget conservatism,and the fiscal impacts of immigrants

"A rise in neo-isolationism in the United States has given encouragement to a new fiscal politics of immigration. Growing anti-immigrant sentiment has coalesced with forces of fiscal conservatism to make immigrants an easy target of budget cuts. Limits on legal alien access to social welfare programs that are contained in the 1996 welfare and immigration reform acts seem motivated not so much by a guiding philosophy of what it means to be a member of American society as by a desire to shrink the size of the federal government and to produce a balanced budget. Even more than in the past, the consequence of a shrinking welfare state is to metamorphose legal immigrants from public charges to windfall gains for the federal treasury."     

THE STATE OF THE FEDERAL BUDGET AND THE STATE OF THE ECONOMY

This paper tests systematic responses of the Federal budget to forecasts of inflation and unemployment. Estimated coefficients from fiscal policy reaction functions are examined to determine whether there are such systematic responses. Additionally, the coefficients of these estimated fiscal policy reaction functions are used to test several hypotheses concerning fiscal policy which have been advanced in the political business cycle and public choice literatures.     

The Confederate Constitution, Tariffs, and the Laffer Relationship

This article offers an example of a national constitution, that of the Confederate States of America, which effectively constrained its fiscal authorities to tax rates on the lower end of the Laffer relationship. The taxes were Confederate import tariffs. Drawing on primary sources, the paper documents the role that this de facto capping of tariff rates played in the history of the drafting of the Confederate Constitution. That the Laffer relationship found constitutional expression for an important tax suggests that the "tariff" might have played a more significant role in the North–South conflict than is currently acknowledged.     

THE TERMS OF TRADE AND THE INTERNATIONAL COORDINATION OF FISCAL POLICY

This paper develops an example of a noncooperative game between fiscal authorities in two countries. The key strategic link between countries is the terms of trade. An equilibrium without cooperation is characterized by excessive tax rates and public spending levels in each country. The outcome is analogous to the Nash equilibrium of the static optimal tarif game in trade theory. But in this model there is also a dynamic distortion caused by noncooperative behaviour. This dynamic distortion depresses capital accumulation and reduces the equilibrium capital stock in each country. Numerical examples suggest a significant welfare benefit of cooperation.     

IS THE BUDGET DEFICIT “TOO LARGE”?: SOME FURTHER EVIDENCE

The size of the federal budget deficit has alarmed politicians and the general public both. Following recent work, we examine the long-run solvency of the U.S. government by testing for cointegration of federal expenditures and revenues. We include a break term in the cointegrating recession for 1981 to capture a shift in the fiscal process in the first Reagan administration. Tests show the break to be significant; and with the break, in contrast to earlier work, expenditures and revenues are cointegrated with a coefficient of one. Thus, we find the deficit to be stationary and so potentially sustainable.     

THE CULTURE OF CORRUPTION,TAX EVASION,AND ECONOMIC GROWTH

This study uses a dynamic general equilibrium model to quantify the effects of corruption and tax evasion on fiscal policy and economic growth. The model is calibrated to match estimates of tax evasion in developing countries. The calibrated model is able to generate reasonable predictions for net tax rates, the corruption associated with public investment projects, and the negative correlation between corruption and tax revenue. The presence of corruption and evasion is shown to have significant, but not large, negative effects on economic growth. The relatively moderate effects help explain the absence of a robust negative correlation between growth and corruption in cross‐country data. The model also implies that cracking down on tax evasion before addressing corruption can be a bad idea and that higher wages for public officials can improve welfare. (JEL H3, O4)     

THE CREDIT‐CHANNEL TRANSMISSION MECHANISM AND THE NONLINEAR GROWTH AND WELFARE EFFECTS OF INFLATION AND TAXES

With the credit‐channel effect driven by the central bank's open market operations, this paper's model easily gives rise to the nonlinear inflation‐growth nexus, which is evidenced by a number of cross‐country empirical studies. The threshold level of the inflation rate is found to be lower when tax rates are higher. The presence of the credit‐channel effect also provides the rationale for setting positive (and smaller than 1) tax rates on consumption, labor income, and capital income. The optimal tax rates rise as the inflation target declines. Under a fiscal policy rule where labor and capital income taxes move proportionally to each other, the optimal capital income tax rate could be higher than the optimal labor income tax rate. Under a sufficiently large central bank balance sheet, the credit‐channel effect will be so weak that inflation and all kinds of taxes are growth and welfare repressing. This provides a rationale for central banks that have implemented quantitative easing policies to shrink their balance sheets. (JEL E58, E62, O42)     

Reactance to taxation: Employers’ attitudes towards taxes

Taxes limit an individual’s freedom to make autonomous decisions about his or her income. A person is likely to respond to restrictions on his or her own freedom or perceived restrictions by reactance if opposition is a promising means for reestablishing the initial situation. Reactance as a consequence of perceived limitation of freedom is likely to manifest itself through change of attitudes, tax morale, and tax behavior. It is hypothesized that employers who have been running their business only a short time perceive taxes as a drastic cut in their profit and possibilities for investments and tend to feel limited their freedom and consequently display reactance more than employers who have had more extensive experience with their firms and the tax system. A sample of 117 employers with one or more dependent workers completed a questionnaire on (a) perceived limitation of one’s freedom through tax obligations, (b) attitudes towards tax evasion, (c) moral standards with regard to paying taxes, (d) actions to reduce or avoid taxes, and (e) demographic characteristics. As predicted, perceived restriction of freedom was correlated with positive attitudes toward tax evasion, lower tax morale, and reported tendencies to act against paying taxes. Employers who had run their firm only a short time felt greater loss of freedom and displayed greater reactance than employers with more extensive experience.     

DO HIGHER TOBACCO TAXES REDUCE ADULT SMOKING? NEW EVIDENCE OF THE EFFECT OF RECENT CIGARETTE TAX INCREASES ON ADULT SMOKING

There is a general consensus among policymakers that raising tobacco taxes reduces cigarette consumption. However, evidence that tobacco taxes reduce adult smoking is relatively sparse. In this paper, we extend the literature in two ways: using data from the Current Population Survey Tobacco Use Supplements we focus on recent, large tax changes, which provide the best opportunity to empirically observe a response in cigarette consumption, and employ a novel paired difference‐in‐differences technique to estimate the association between tax increases and cigarette consumption. Estimates indicate that, for adults, the association between cigarette taxes and either smoking participation or smoking intensity is negative, small, and not usually statistically significant. Our evidence suggests that increases in cigarette taxes are associated with small decreases in cigarette consumption and that it will take sizable tax increases, on the order of 100%, to decrease smoking by as much as 5%. (JEL I18, I12)     

A THEORY OF THE POLITICALLY OPTIMAL COMMODITY TAX

A theory of the politically optimal tax is developed where tax rates are endogenous and determined by forces in the political market. The theory is used to explain the levels of alcoholic beverage taxes between states in the United States. It is shown that these rates are influenced by the ownership structure existing in the liquor industry, the consumption externalities associated with drinking, the minimum drinking age laws, the earmarking of tax revenues, the enforcement of regulations and real income.