Previous studies asserted that if we consider the demand side only, a rise in tax evasion definitively leads to a loss in tax revenue. However, those studies on tax evasion and tax collections did not specify the relation between changes in output and level of investment. This paper fills that gap by demonstrating that even if we do not consider the supply side, when investment expenditures depend on the interest rate as well as income, a rise in tax evasion may still have a positive effect on tax revenue.
This study empirically investigates the hypothesis that the lower the public's job approval rating of the U.S. President, the higher the degree of aggregate federal personal income tax evasion in the U.S. Using annual data on aggregate federal personal income tax evasion for the period 1960-1997 compiled by Feige, with 1997 being the most recent year for which these data are currently available, and allowing for such factors as federal income tax rates, IRS tax return audit rates, the tax-free municipal bond yield, the interest rate penalty on detected unreported income, public dissatisfaction with government officials (other than the U.S. President), and the Tax Reform Act of 1986, this study finds consistent empirical support for the hypothesis that income tax evasion is a decreasing function of the Presidential approval rating, i.e., that the lower (higher) the President's approval rating, the greater (lower) the degree of aggregate federal personal income tax evasion. Finally, use of two well-known alternative estimates of the aggregate degree of federal personal income tax evasion yields results generally consistent with these conclusions.
The King-Fullerton (1984) approach to the measurement of effective marginal rates of taxation on capital income has been applied extensively. The empirical literature confirms that the dispersion of effective tax rates, both within each country and among countries, is wide. However no test has been proposed of the impact on investment of these findings. The paper tests the conjecture proposed by King and Fullerton that standard deviation of effective tax wedges and investment or growth are inversely correlated. We find that international evidence does not support the conjecture: while investment and tax wedges are negatively correlated, as expected, the standard deviation of tax wedges seems to be positively correlated to investment. We propose the following interpretation of this result: a substantial part of the variance of effective marginal rates is explained by an implicit subsidy to equipment investment, and this policy may be justified by De Long-Summers (1992) results or by the view that this type of investment have more impact on growth than other types (such as buildings and inventories). In some cases also a partial deduction of interest rates may be rational when capital markets are rationed. Thus it may be simplistic and misleading to use King- Fullerton statistics as yardsticks for tax reforms leading to uniformity of effective marginal tax rates.
This note concerns the determination of optimal rates of region-specific taxes in a two region model which allows for occupational choice and spatial migration. The tax system assumed in this model exists to finance education which allows workers access to jobs requiring skills. It is shown that the optimal tax rate differs across regions. Moreover, it is demonstrated that central co-ordination of regions' tax policies is needed in order to arrive at the social welfare optimum. The response both of migration and of optimal tax rates to region-specific productivity shocks is shown to be ambiguous.
This paper explores the differential incidence of consumption-tax policy in an overlapping generations model with a market-produced elderly care service. When a child cares about the welfare of his parents, the incidence depends on the tax treatment of care expenditure. If this expenditure is tax-free, capital accumulation increases so that the interest rate decreases. The young generation profits though it bears a heavier tax burden than the old. The opposite incidence is possible, too. The paper also examines whether or not these results continue to hold in an alternative model where the child cares about the home-produced service itself.
The ongoing controversy between crowding out and Ricardian equivalence has led many economists to estimate more sophisticated macroeconomic models. Such models can involve the governments budget constraint, the public capital hypothesis or the impact of government expenditures on private contributions to public goods. This paper demonstrates that such models often lead to the same reduced form equations with identical econometric results. However, the interpretation of these empirical results will depend crucially on the underlying model. It is concluded that the resolution of the crowding out controversy involves, in part, a better understanding of the structural foundations of the macroeconomic economy.
of expanding state activity has been extensively studied in the literature. Abizadeh and Gray (1985) use government spending and conclude that Wagner's law holds for developing countries, but not for poor or developed countries. The World Bank classifies Middle Eastern countries as middle-income countries. Therefore, most of them would be considered developing countries. Using IMF country GDP and government expenditure and consumption data, I test Wagner's law for Middle Eastern countries. Less than a third of them display increasing spending with income. This refutes the traditional interpretation of Wagner's law that measures government activity narrowly through government spending.
We consider the impact of output and input taxes in vertically-related markets where the downstream industry is oligopolistic and the upstream sector competitive. We show that the shifting of a tax in each related market will depend on the degree of market power in the downstream market, the characteristics of the demand function, the nature of the production technology characterising the downstream industry cost function and the existence of increasing or decreasing returns to scale. Only in specific circumstances will the forward-shifting of an input tax be observationally equivalent to the backward-shifting of an output tax.
Empirical status of the basics of Rodrik's (1998) influential proposition about the positive association between a country's external openness and the size of its government is explored from a large multicountry dataset covering the period 1960-2000. In individual-country data for 143 economies, two correlations sets and two sets of regression estimates show almost as many cases of positive signs as of negative numbers, and the mean value in each set is almost zero or very small. Estimates of parsimonious regression models from cross-section data also indicate a somewhat mixed position regarding covariation between openness and government size.
This paper examines the problem of updating existing estimated hidden economy series. For 2-3 years, the existing generating process provides reasonably accurate estimates. However, updating for a longer period requires re-estimating the hidden economy. The problem is very similar to the problem encountered in updating national income statistics. The government expenditure function is used to discriminate between two plausible hidden economy series. This experiment produced a number of interesting results in relation to Wagner's Law and the implicit tax rate for the hidden economy. Also a possible explanation for observing smooth recorded economic series after the 1987 UK crash is provided.
This paper attempts to explain past trends of the external value of both the euro and its predecessor, the Deutsche Mark as the anchor currency of the European Exchange Rate Mechanism, while also analysing the euro’s future prospects. The approach used is a strategic one where the value of the currency is the outcome of an equilibrium within a policy game. Game theory extensively used in microeconomics and at the macro level in the area of macro policies in an interdependent world is meant here to throw light on the behaviour of the exchange rate. The game theoretical model presented, based on a strategic approach to expectations, is employed to analyse the criteria under which the US chooses the best possible equilibrium to achieve its objectives. The lesson for the eurozone emerging from this investigation is that the European Central bank should adopt a more balanced view between inflation and growth, like the Fed. However, the danger is that the ECB being bound by the goal of price stability in the medium term set by the Maastricht Treaty providing limited flexibility for a more pragmatic ECB monetary strategy -, might at times by its rigid antiinflationary policy undermine the growth potential of the eurozone at least in the medium to long term with limited scope under the Maastricht Treaty for counteracting fiscal measures.
In this paper a new definition of horizontal inequality is adopted. It is defined in terms of the distributional change within intervals of similar households, produced by the Tax System. We believe that this definition is better suited for measurement of the comparative injustice that may be caused by the Tax System among similar households. In particular a within-group Atkinson inequality index applied to one minus the tax rates of similar households is proposed. It enables us to introduce this concept in a general social welfare framework together with efficiency and vertical equity redistribution considerations, where the horizontal equity and vertical redistribution are income-invariant measures. It contributes to a more appropriate evaluation of the desirability of tax reforms aimed at achieving greater horizontal equity.
This paper proposes a methodology to evaluate a government's fiscal policy from the equity point of view. This method may help governments assess whether their public expenditures are pro-poor or not. Similarly, the proposed methodology can be a tool to review government's tax policies. The idea of assessing government's public policy is empirically applied to the Philippines' Annual Poverty Indicator Survey.
Value added tax (VAT) and retail sales tax (RST) are economically equivalent tax alternatives on consumption expenditure. This paper shows that, if indirect taxation is joined to direct taxation, with unethical agents, the equivalence in terms of government's revenues does not hold. We consider a model where, under both the VAT and RST regimes, the decisions on tax evasion result from a Nash-bargaining process involving all agents in the market. In either case, the tax authority refers to a generalised invoice-system for registered traders' income tax-base determination purposes. We analyse the chain of reported transactions and show that the technical differences between VAT and RST generate different amounts of direct and indirect tax evasion. It turns out that under RST the actual government revenues are lower than under VAT.
