Bureaucracies,Neoliberal Ideas,and Tax Reform in New Zealand and Ireland

Why did New Zealand adopt one of the most neoliberal tax systems in the world, whereas Ireland pursued a heterodox tax policy of low rates, deep deductions, and distortionary tax incentives? The diverging tax policy trajectories of these two small liberal market economies since 1980 are not well accounted for by conventional ideational, partisan, or political‐institutional explanations. The article argues that the varying degree of neoliberal reform is better understood as the result of differences in the institutionalization of economic knowledge within the state. Distinct administrative institutions in New Zealand and Ireland gave rise to profound differences in the identities, expertise, economic ideas, and policy advice approach of tax policy bureaucrats, which had a major impact on tax policymaking in the two countries.     

(Non)equivalence in a federalism: Dual tax shares, flypaper effects and Leviathan

Among the best-known theorems of fiscal federalism is the presumed allocative and distributive equivalence between a lump-sum grant to a collectivity and a set of lump sum grants to the members of a collectivity. Interestingly, the simple elegance of the theorem is at odds with observed behavior. Grants to governments produce greater public spending than does tax reduction. Explanations of this "flypaper effect" range from misspecified econometric modeling to presumed behavior based on fiscal illusion. In this paper we show that theoretical equivalence exists in a model that recognizes only one tax share, the citizen voter's local tax share. When the model is expanded to include voters' federal tax shares as well as local taxes, non-equivalence and the flypaper effect become the rule, not the exception.     

On the Design of Equalizing Grants

This article considers the design of grants to offset fiscaldisparities. We define a fiscal disparity as a condition inwhich towns must levy a different tax rate in order to providethe same level of public services. We consider ways of measuringdisparities, as well as ways of allocating grants to alleviatedisparities. In order to focus the presentation, we concentrateon lump-sum grants for unrestricted use from a state governmentto general purpose local governments within that state. We concludeby presenting an example of a grants formula for the state ofNew Jersey which meets our specifications.     

The incentive effects of property taxes on local governments

This paper applies the ideas of Brennan and Buchanan (1977, 1978, 1980) to local property taxes. When local governments maximize their revenues, property taxes provide incentives for adequate amenity provision. Local amenity provision determines property values which then determine local tax revenues. As long as the demand for housing is inelastic, property-taxes will provide stronger incentives for local governments than lump-sum taxes. As current property values reflect expectations about future amenity levels, property taxes create incentives for even the most myopic government to invest for the future. Local property taxes can also act to limit the incentives of localities to tax; there are cases where higher levels of local property taxes lead to lower overall tax burdens. These ideas are applied to the tax reform in the late 1970s; one reason that tax reform may have been so successful is that in a period where land prices are driven by many forces other than government amenities, property taxes lose their value as incentive devices.     

The Fiscal Impact of Federal and State Aid to Large U.S. Cities: An Empirical Analysis of Budgetary Response

This article examines four types of aid programs to thirty-nine large U.S. cities federal revenue sharing, federal categorical aid, state general aid, and state categorical aid. The central finding is that there is significant variation in the magnitude of property tax reduction resulting from different types of state general aid. Property tax credits and exemptions are less effective approaches in reducing local property taxes than are state lump-sum aid or city use of piggybacked taxes Categorical state and federal aid mostly fund additional city spending and have small but important stimulative effects on the revenue side These results suggest that differences in the design of aid programs have important implications for their fiscal impact and their effectiveness in reducing property taxes.     

Introduction to welfare economics

We show that a transfer received by a minority of the population may be sustained by majority voting, however small the minority targeted may be, when the attribution of the transfer is seen as stochastic by voters. We build a simple model wherein voters differ in income and vote over a proportional tax whose proceeds are distributed lump-sum, and each voter has a probability of receiving the transfer that depends on his income. In progressive steps, we present intuitively appealing sufficient conditions on this probability function for the social program to be supported by majority voting. We also develop intuitive conditions for the emergence of the “paradox of redistribution”, whereby more focused targeting reduces the size of the transfer program chosen by the majority. We finally apply our framework to the French social housing program and obtain that our model is consistent with a majority of French voters supporting a positive size for that program.     

Taxes, Subsidies, and Listeners Like You: Public Policy and Contributions to Public Radio

Public radio in the United States receives both direct and indirect government funding. Direct subsidies come in the form of lump-sum and matching grants, while indirect subsidies proceed from tax revenues forgone on tax-deductible private donations. Each of these sources of government money affects charitable giving to public radio. This article estimates both of these effects, using data on 91 public radio stations in the United States during 1995. Data analysis shows that public funding to stations has a positive impact on private giving, but this impact rapidly decreases as the level of government subsidies increases. The analysis also indicates that increases in state tax rates correspond with significantly higher donation levels. This article explores the implications of these and other findings for policy makers, public administrators, and nonprofit managers.     

Balanced-budget redistribution as the outcome of political competition

This paper models balanced-budget redistribution between socio-economic groups as the outcome of electoral competition between two political parties. Equilibrium is unique in the present model, and a sufficient condition for existence is given, requiring that there be enough ‘stochastic heterogeneity’ with respect to party preferences in the electorate. The validity of Hotelling's ‘principle of minimum differentiation’, and of ‘Director's Law’, are examined under alternative hypotheses concerning administrative costs of redistributions, and voter's possibilities both of abstaining from voting and of becoming campaign activists for one of the parties. The policy strategy of expected-plurality maximization is contrasted with the strategy of maximizing the probability of gaining a plurality. Incomes are fixed and known, so lump-sum taxation is feasible. However, constraints on tax/transfer differentiation between individuals are permitted in the analysis.     

Costs of taxation and the size of government

Existing theory on the form of government suggests that a parliamentary system promotes a larger size of government than does a presidential system. This paper extends the existing theory by allowing for distortionary taxation. A main result is that if taxation is sufficiently distortionary, the parliamentary system may promote a smaller size of government than the presidential system. The proposed mechanism appears consistent with several empirical patterns in the data that cannot be explained by other theories.     

Strategic fiscal interaction among OECD countries

This paper investigates whether OECD countries compete with each other for mobile factors by using various fiscal (tax-spending) policy instruments. We use a panel dataset of 20 OECD countries over the 1982?C2000 period. Results reveal evidence that international capital inflows (FDI) are affected by fiscal policy at home and abroad. Also, there is evidence that domestic capital tax rates react: (i) positively to changes in capital tax rates in neighboring countries, and (ii) negatively to changes in public investment spending in neighboring countries. In contrast, strategic interdependence over public investment spending decisions is not established.     

Taxation and presidential approval: separate effects from tax burden and tax structure turbulence?

Previous research has established that taxation may impose significant electoral costs on politicians. This literature, however, focuses exclusively on the effect of the tax burden. In this paper, we test the hypothesis that both the level of the tax burden and the change in the tax structure affect the US president’s approval ratings (over the 1959–2006 period). Our results support this proposition. Specifically, we find a negative impact from the magnitudes of the tax burden and the deficit as well as from changes in the tax structure on presidential approval ratings.     

Government and growth: Cross-sectional evidence

Economic theory suggests that government contributes to total economic growth in two ways: positively, through the provision of Pigovian public goods and services; and negatively, through the inefficient provision of such goods and services and the distortionary effects attendant with their provision. This paper develops a model that differentiates the two effects and empirically tests the model for a sample of forty-eight countries. Evidence suggests that the net effect of government on growth is positive, but that the negative effects are not insignificant. Though growth in government output contributes to total economic growth, at the margin this is approximately offset by distortionary effects attendant with increases in the relative size of government.     

Majority Support for Progressive Income Taxation with Corner Preferences

This paper studies voting over quadratic taxation when incomeis fixed and taxation non distortionary. The set of feasibletaxes is compact and self-interested voters have cornerpreferences. We first show that, if a majority winning taxpolicy exists, it involves maximum progressivity. We then givea necessary and sufficient condition on the incomedistribution for a majority winner to exist. This conditionappears to be satisfied for a large class of distributionfunctions.     

How fair? Changes in federal income taxation and the distribution of income, 1978 to 1998

In this paper, we determine how tax law and income distribution changes have separately contributed to the changes in tax progressivity over time, and also how a specific pre‐tax distribution of income affects the equalizing ability of a given tax change. We use information from the Current Population Survey for years that follow immediately after significant tax law changes or after the full enactment of these changes to measure the effect of income taxes on income distribution for selected years over the period 1978 to 1998. We find that, even when account is taken of the induced effect of changes in federal income tax laws on pre‐tax income, the individual income tax structure has been less successful in equalizing after‐tax income since the 1980s and into the early 1990s. We also find that a given tax law's equalizing effect on the distribution of income is significantly affected by the pre‐tax distribution of income. © 2005 by the Association for Public Policy Analysis and Management.     

Do intergovernmental grants create ratchets in state and local taxes?

A large literature on the ‘flypaper effect’ examines how federal grants to states at time period t affect state spending (or taxes) at time period t. We explore the fundamentally different question of how federal grants at time period t affect state tax policy in the future. Federal grants often result in states creating new programs and hiring new employees, and when the federal funding is discontinued, these new state programs must either be discontinued or financed through increases in state own source taxes. Government programs tend to be difficult to cut, as goes Milton Friedman’s famous quote about nothing being as permanent as a temporary government program, suggesting that it is likely that temporary federal grants create permanent (future) ratchets in state taxes. Far from being purely an academic question, this argument is why South Carolina’s Governor Mark Sanford attempted to turn down federal stimulus monies for his state. We examine both the impact of federal grants on future state budgets and how federal and state grants affect future local government budgets. Our findings confirm that grants indeed result in future state and local tax increases of roughly 40 cents for every dollar in grant money received in prior years.     

On “Group size and the free-rider hypothesis: Another hypothesis.” by Jody W. Lipford: Comment

This paper develops a positive approach to grant design when the central government and a lobby of local governments are the main agents. It develops the hypothesis that the regressivity or progressivity of per capita grants regarding community size is,ceteris paribus, related to the structure of the lobbying activities of local governments and is independent of hypothetical economies or diseconomies of scale in the production of local public goods. An encompassing lobby organisation using a “one mayor one vote” system of representation supports the regressivity of per capita grants while under “proportional” representation the lobby will support a design of per capita grants which is progressive towards community size. An empirical analysis of lump-sum grants in Portugal supports the politico-economic hypothesis and rejects the hypothesis that economies of scale is the main explanatory cause for the observed regressivity of per capita grants.     

The political trend in local government tax setting

Previous fiscal studies have paid little attention to the effects of social interaction on local tax setting. This paper seeks to fill this gap by developing a theoretical model in which politicians belonging to the same party interact with each other in order to draw inferences about ideology. This phenomenon produces a mimic effect which is called the political trend. The results of the analysis show that the political trend gives rise to higher income tax rates and to tax mimicking at the local government level. The framework developed also makes it possible to discriminate between Leviathan-type and welfarist-type politicians. The results show that the former are more sensitive than the latter to changes in the average income tax rate of their peers. Moreover, Leviathan-type politicians are less sensitive than benevolent ones to changes in the central government’s income tax rate.     

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.     

Mayoral Public Sector Work Experience and Tax Collection Performance in Colombian Local Governments

ABSTRACT

Local governments in Latin America tend to have limited capacity to collect taxes. Existing theory explains tax collection performance as a function of political, socio-economic, and cultural factors. Yet across Latin America, tax collection performance varies greatly between localities that are similar along these dimensions. We suggest that organizational capacity, represented by managers' human capital, explains variation in local tax collection performance. We test this theoretical idea against panel data on most Colombian local governments, where elected mayors are the top managers determining the local tax collection strategy. We examine two indicators of tax collection performance: (1) the per-capita amount of property tax collected and (2) property tax collected as a percentage of total property valuation. Controlling for important confounders, the length of the mayor's prior public sector work experience is positively associated with the per-capita amount of property tax collected but not the percentage of total property valuation collected in property tax. Our results suggest that Colombian mayors gain relevant skills over their career. Our study has implications for other developing countries with a similar property tax collection system.     

Expenditure effects of metropolitan tax base sharing: A public choice analysis

This research explores probable budgetary consequences from the introduction of an institutional change which requires communities in metropolitan areas to pool any growth in the commercial-industrial tax base so that all cities benefit from new development irrespective of where the development occurs. Sharing of the tax base has been suggested as a means to overcome fiscal disparities among local governments in metropolitan areas and to reduce competition for new industrial development, thus, promoting ‘orderly development’ of the urban area. An alternative view of the institutional change focuses on the consequences of removing the tax base from the control of the local unit of government and suggests that based upon existing studies of government size and the cost of public services, government managers will be less responsive to the wishes of the citizen/taxpayer after the introduction of tax base sharing. The efficiency aspects of local government finance are examined and based upon data for the Minneapolis-St. Paul metropolitan area, the expenditure effects are estimated. The empirical evidence suggests that while revenue flows are altered in the metropolitan areas, the primary impact of tax base sharing has been to expand the level of government expenditures, not equalize interjurisdictional tax rates.