Creating Public Value with Tax and Spending Policies: The View from Public Economics

According to the framework rooted in public economics, governments can create public value by focusing tax and spending policies on remedying market failures and addressing concerns about fairness embodied in a social welfare function. By pursuing optimal tax and spending policies, governments navigate the omnipresent trade‐offs between equity and efficiency. Of course, in practice, the process by which policies are adopted does not resemble the planner's problem in social choice theory. In addition, real fiscal policies do not look much like the recommendations that arise from the optimal tax literature. Governments operate in public choice environments that are not conducive to focused remedying of market failure, and they suffer from their own tendencies to fail to achieve their objectives. Nevertheless, many of the tools are in place to help the federal and state governments focus tax and spending in ways that can maximize public value.     

Local interests,central leadership,and the passage of TRA86

The U.S. federalist public economy is an ever-evolving system of financing and expenditure responsibilities between local, state, and federal governments. The past decades have seen a significant centralization of responsibility for the financing of state and local public services through grants-in-aid and federal tax subsidies. This article advances a model of local constituent influence in central government fiscal policies which seeks to explain this trend, and then examines how strong executive branch and congressional leadership might begin to control the local pressures for central government financing. TRA86 is offered as one example in which this leaedership proved effective. The general lesson is that good fiscal policy in federalist public economies requires not only capable local governments, but central government political institutions with the strength to meet national needs as well.     

Local government grants and income tax revenue: Redistributive politics in Norway 1900–1990

An important aspect of the welfare state is public provision of private goods, primarily education and health care. In Norway the provision of these services has been organized through the local public sector. The development of the welfare state has to a large extent been the development of welfare communes. The important revenue sources of the local and county governments, grants and income tax revenue, have been controlled nationally, and the paper addresses the determinants of these revenues during 1900–1990. The approach combines a demand model of local public services emphasizing price and income-elasticities with a political economy model of central government ideology and strength. The decision making is understood as bargaining between the government and interest groups, and the political structure consequently is of importance for the policy outcome. The analysis shows how politics matter, and the results indicate that a minority coalition government implies 30% more grant and income tax revenue to local and county governments than one party majority in the long run.     

Flatliners: Ideology and rational learning in the adoption of the flat tax

What factors explain the wave of adoption of the flat tax in Eastern Europe? It is argued in this article that, once the first few successes were underway, governments with liberal outlooks toward taxation adopted the reform through a process of rational learning: an often radically new government will tend to adopt the policy based on successful implementation of its neighbours. The issue of policy diffusion is approached by explicitly modeling the different mechanisms that might underlie the process. Little evidence is found for pure ‘bandwagoning’ in the adoption of the flat tax – the presence of other market‐minded reforms do not predict adoption of the flat tax, and contagion measures do not capture the dynamics of the adoption of the reform. Instead, rational learning, where economically right‐wing governments evaluated the success of the reform (as measured by their ability to attract foreign investment) in the medium term, plays the largest role. Rational emulation in a shorter time period contributes to the probability of adoption as well, as does a change to an economically liberal ideology.     

Government Partisanship and Managing the Economy: Japan and Sweden in Comparative Perspective

It is generally taken for granted that countries governed by leftist governments expand social policies and have an affinity for active fiscal policy that implies higher tolerance of deficit‐ridden budgets. In contrast, conservative governments are taken to be less likely to favor welfare expansion, especially when it has negative fiscal consequences. We challenge this conventional wisdom by comparing the reactions of the Swedish and Japanese governments to economic crises during the 1990s. The puzzle is that the Social Democratic governments in Sweden were able to reduce ballooning budget deficits and thus bring the economy back into balance, while still having one of the largest public sectors in the developed world. In contrast, the conservative Liberal Democratic Party governments in Japan have been unable to redress their deficit problems despite having one of the smallest public sectors among the Organisation for Economic Co‐operation and Development countries. We argue that this can be explained by taking into consideration that governments’ tax and spending policies are influenced by bureaucratic structures and institutionally driven public beliefs. By comparing Japan and Sweden, we show how political parties actively seek to make their policy stances permanent by structuring taxation and expenditure policies to create institutionalized support for their policy preferences.     

Do citizens care about government debt? Evidence from survey experiments on budgetary priorities

Ever since the Great Recession, public debt has become politicised. Some research suggests that citizens are fiscally conservative, while other research shows that they punish governments for implementing fiscal consolidation. This begs the question of whether and how much citizens care about debt. We argue that debt is not a priority for citizens because reducing it involves spending and tax trade-offs. Using a split-sample experiment and a conjoint experiment in four European countries, we show that fiscal consolidation at the cost of spending cuts or taxes hikes is less popular than commonly assumed. Revenue-based consolidation is especially unpopular, but expenditure-based consolidation is also contested. Moreover, the public has clear fiscal policy priorities: People do not favour lower debt and taxes, but they support higher progressive taxes to pay for more government spending. The article furthers our understanding of public opinion on fiscal policies and the likely political consequences of austerity.     

POLICY RESPONSES TO CITIZEN ATTITUDES

Though many studies have provided only limited support for the idea of policymaker "responsiveness," the present study indicates that constituents do have some impact on public policy decisions, though not directly. With the aid of data on decisionmaking of country property appraisers in Florida, I was able to demonstrate that constituency preferences affect policy decisions indirectly through the effect of decisionmaker attitudes, thus suggesting an intervening model of decisionmaking.
Specifically, I found that constituency tax preferences impacted on property appraiser tax attitude and through it on the property assessment ratio. More importantly, I was able to isolate some of the potential factors which accentuate those relationships posited by an intervening model of decisionmaking. In particular, I found that the more policymakers (the property appraisers) were immersed into their social and political context or engaged in "social interaction" activities the more likely they and their own attitudes were to be influenced by prevailing constituency tax sentiment.     

When Mayors Matter: Estimating the Impact of Mayoral Partisanship on City Policy

U.S. cities are limited in their ability to set policy. Can these constraints mute the impact of mayors’ partisanship on policy outcomes? We hypothesize that mayoral partisanship will more strongly affect outcomes in policy areas where there is less shared authority between local, state, and federal governments. To test this hypothesis, we create a novel dataset combining U.S. mayoral election returns from 1990 to 2006 with city fiscal data. Using regression discontinuity design, we find that cities that elect a Democratic mayor spend a smaller share of their budget on public safety, a policy area where local discretion is high, than otherwise similar cities that elect a Republican or an Independent. We find no differences on tax policy, social policy, and other areas that are characterized by significant overlapping authority. These results suggest that models of national policymaking are only partially applicable to U.S. cities. They also have implications for political accountability: mayors may not be able to influence the full range of policies that are nominally local responsibilities.     

Differences Between State and Federal Public Forest Management: The Importance of Rules

In United States federalism, public policy responsibilitiesbelong to multiple jurisdictions. This article compares statewith federal public forest management. Data come from four cases,each comprising two forests sharing similar physical characteristicsbut under the authority of different governments. Systematiccomparisons suggest that officials in the national forest agencyface greater statutory, regulatory, and planning constraintsthan do state agency officials. These constraints require morepublic input and higher levels of environmental protection.Outcomes reflect these differences: federal officials provideless limber, at lower net profit, than do state officials, andthey transfer less revenue to local governments. Concurrently,federal officials make greater environmental protection efforts.     

Tax decentralization and local government size

This paper investigates the relationship between fiscal federalism and the sizes of local governments. While many empirical studies emphasized that grants encourage the growth of local public spending and local taxes constrain it, they are more silent regarding the effects of different types of tax autonomy. The paper addresses this issue by arguing that tax decentralization as organized on tax bases used only by local governments (tax-separation), rather than on tax-base sharing, would restrain local public expenditures. Using an unbalanced panel of OECD countries, the key finding is that only property taxes—mostly based on a “tax-separation” scheme—seem to favor smaller local governments. Thus, while tax decentralization is a necessary condition for limiting the growth of local governments, it does not appear sufficient, as tax-separation schemes among government levels would in fact be required.     

Interest group demand for taxation

Researchers have typically ignored the determinants of the tax structure of the public sector. Political scientists have concentrated their analyses on the expenditure side of the public ledgers while economists have avoided the issue by assuming that taxes are exogenously determined. In this paper we have shown that a behavioral model of political interest groups can be employed to gain insights into the political selection of taxes. The theory provides a general complement to the well-documented analysis of special interest demand for public expenditures.Our analysis raises several important policy questions. First, is the influence of interest groups on the determination of tax systems desirable from a public policy perspective? For example, special interest groups dominated by high and middle income individuals may prefer regressive tax systems which reduce their own tax burden. Certainly the impact of interest groups on the well-known regressivity of state and local tax systems is an area worthy of additional investigation.     

How Governments Respond to Business Demands for Tax Cuts: A Study of Corporate and Inheritance Tax Reforms in Austria and Sweden

How responsive are democratic governments to business demands for tax cuts? We research this question in comparative case studies of cuts in corporate taxes and inheritance taxes in Austria and Sweden. We find that governments, regardless of partisan composition, are responsive to business demands, but that fiscal and electoral goals attenuate responsiveness. In both countries, the limited revenues generated by inheritance taxation and greater alignment of business demands with middle‐class voter interests resulted in governments heading business demands for an abolition of this tax. Goal conflict were larger for corporate tax cuts. In both countries, governments tried to minimize these goal conflict by adopting compensatory policy measures, specifically measures to broaden the tax base and simultaneous tax cuts for low‐income groups. The findings suggest that the policy output of business‐friendly tax cuts reflect a balancing of conflicting goals, rather than outright business dominance.     

Public choice theory and petroleum policies in Canada, Britain and Norway

Abstract. It is assumed that the development of an economically promising resource such as petroleum would be amenable to analysis from an economic viewpoint, and that government initiatives in this area might reveal the essential economic interests of the state. If governments are assumed to have similar economic and political objectives (i.e., to attain the greatest revenues possible from the exploitation of a depleting natural resource and to maintain public office), then it is to be expected that the petroleum policy outputs in various states would likewise be similar. Such differences as do exist should be amenable to explanation by examining the differences in the political constraints and economic situations of the states in question. The study models petroleum policy in four areas: state participation, pricing, depletion (including exploration and production policies), and fiscal arrangements, based on assumptions central to public choice theory. A comparison of policy outputs in the three case states illustrates the usefulness of the public choice approach to comparative policy analysis.     

New Hampshire's tax-base limits: An example of the Leviathan model

This study views the lack of an income tax on wages and salaries and a general sales tax in New Hampshire as tax-base limits. I use the Leviathan model to analyze the differences between the fiscal system in New Hampshire and the fiscal systems in Vermont, Maine, and Massachusetts. Vermont, Maine, and Massachusetts do not have the tax-base limits that New Hampshire has. From 1957 to 1989, New Hampshire had lower state and local government tax and expenditure levels than the other three states, more rapid population growth, lower welfare expenditures but comparable levels of expenditures for several of the major public services, and a more competitive structure of state and local government.     

Testing the Effects of Sale Method Restrictions in Municipal Bond Issuance: The Case of New Jersey

Can state governments save money by restricting the practice of selling tax‐exempt bonds through negotiation, or do such regulations impose additional costs? Circumstances in New Jersey recently created a natural experiment to test this proposition. This study finds significant cost savings for those issues sold through competition both before and after such restrictions were put in place. All else equal, issues sold competitively after the policy change did not have significantly higher interest costs, despite a shift in volume toward competitive sales, suggesting that there exists room for increased use of competitive sales without incurring a cost penalty.     

The Era of State Energy Policy Innovation: A Review of Policy Instruments

U.S. energy and climate policy has evolved from the bottom‐up, led by state governments, and internationally recognized for the use of unconventional and innovative policy instruments. This study focuses on policy instruments adopted throughout the era of state energy policy innovation that aim to diversify, decentralize, and decarbonize the electricity sector. Specific attention is devoted to the renewable portfolio standard, net metering, interconnection standards, tax incentives, public benefit funds, and energy efficiency resource standards. This analysis synthesizes the findings from the energy policy literature and provides a summary of the current state of understanding about the effects of various state energy policy instruments, and concludes with a discussion of broader trends that have emerged from the use of policy instruments in the state energy policy innovation era.     

Bitter Harvest: Intergovernmental Dimensions of the Farm Crisis

The recent and deep recession in American agriculture seriouslyaffected state and local government finances and services in1986. Sharp declines in farm land values began to erode thelocal property tax base in many rural communities, while rapidlyrising property tax delinquencies created more immediate cashflow problems. Many farm states experienced serious budgetaryshortfalls as revenue receipts from state income and sales taxesdeclined or failed to grow at expected rates. Both state andlocal fiscal problems were exacerbated by federal aid reductions,regional economic conditions, and rising service demands. Suchproblems made agricultural policy a major issue in the 1986elections and prompted a proliferation of new policy initiatives,especially by state governments. Some of the policy approachesadopted or being considered raise fundamental questions aboutintergovernmental relations and methods of public service provisionin a rapidly changing policy environment.     

Bargaining Power of Smaller States in Germany's Länderfinanzausgleich 1979–90

In this paper we explore the impact of politicalfactors on redistribution across the states in theGerman Länderfinanzausgleich. From a public choiceperspective the smaller states are supposed to have ahigher influence on decisions in the secondlegislative chamber due to a lower shadow price oftheir votes, which implies a higher bargaining power.As the federal government's policy depends on amajority in the second chamber there is an incentiveto buy smaller states' votes. Controlling for GDP percapita, we find statistically significant support forour hypotheses.     

Reinvention and retrenchment: Lessons from the application of the New Zealand model to Alberta,Canada

Is New Zealand a model for “reinventing” government and cutting spending? The government of Alberta, Canada, consciously replicated significant elements of the New Zealand model to attain fiscal balance and public sector reorganization, including the core element of restructuring institutions to change individual behavior. Despite broad similarities in policy content and outcome, differences in the specific content of policy and the politics of policy implementation led to differences in the sustainability of reform and the location of budget cuts. Alberta's Progressive Conservative party emphasized expenditure cuts where both the New Zealand Labour and National parties emphasized government reorganization and the introduction of market mechanisms. Contrasting these efforts to balance budgets and reinvent government suggests that there is considerable variation in the “model,” and that left governments in general are probably more likely to pursue and succeed at the reinvention of government, while stinting fiscal balance. Right governments, on the other hand, are more likely to achieve short-run fiscal balance at the expense of successful reinvention. In turn this suggests that while the partisan orientation of the reforming party matters, neither has an ideal policy mix for long-term fiscal stability. Alternation of governments may provide the best policy mix.     

Funding the Welfare State: Globalization and the Taxation of Business in Advanced Market Economies

Theorists assert that international capital mobility creates substantial pressure for all democratically elected governments to decrease tax burdens on business. I explicate and critique the general version of this theory and offer an alternative view. Empirically, I explore whether or not the globalization of capital markets has resulted in decreases in business social security, payroll, and profit taxes. I also investigate whether or not capital mobility has intensified government responsiveness to domestic investment and profitability. Evidence suggests that business tax burdens have not been reduced in the face of rises in capital mobility nor is tax responsiveness to profitability and domestic investment intensified by more open capital markets. To the contrary, analyses indicate that business taxation has become subject to new 'market conforming' policy rules that developed in tandem with liberalization of markets. These new policy orientations reduce the economic management roles of business taxation while leaving the revenue-generating roles intact. In conclusion, I discuss the implications of the findings for questions concerning the structural power of internationally mobile capital, redistributive policies, and the autonomy of democratically elected governments in a global economy.