Public Finance Review current issue

Does Decentralization Reduce Government Size? A Quantitative Study of the Decentralization Hypothesis

Prohl, S., Schneider, F. — Wed, 21 Oct 2009 09:59:30 PDT

The ‘‘decentralization hypothesis’’ in the theory of fiscal federalism suggests that fiscal decentralization may have a dampening effect on government size, implying that government intrusion into the economy can be restricted if government responsibilities for taxes and expenditures are decentralized. We study the effect of decentralization on public sector growth for a panel of twenty-nine countries over the 1978—2003 period. The major purposes of this study are twofold. First, we examine the decentralization hypothesis using two different proxy variables of fiscal decentralization: a measure of expenditure and revenue decentralization based on government financial statistics and an index of fiscal federalism that incorporates the fiscal and administrative autonomy that constitutional and statutory law grants to subnational governments. Second, and relatedly, we also explore the hypothesis that direct democracy at the local level has a dampening effect on government growth.

The Effect of Tax and Expenditure Limitations on Public Education Resources: A Meta-Regression Analysis

Ballal, S., Rubenstein, R. — Wed, 21 Oct 2009 09:59:30 PDT

While tax and expenditure limitations (TELs) are intended to restrain government taxing and spending, empirical research has arrived at different, sometimes contradictory, conclusions on their impact. In this article, we use meta-regression analysis (MRA) to sort out these differences and to draw conclusions regarding the effect of TELs on one of the largest areas of state and local spending, education. We find evidence that TELs are associated with increases in state funding for education, relative to local or combined state and local funding. The results also suggest that some methodological factors may affect study results and that study publication is associated with findings of negative TEL effects on education resources.

The Output Effects of Labor Income Taxes in OECD Countries

Sonedda, D. — Wed, 21 Oct 2009 09:59:30 PDT

This article considers the relationship between labor income taxes and output. An illustrative model indicates that the sign of the output effect of labor taxation policies is ambiguous and depends not only on the technology parameters but also on the taxation level. The empirical evidence for fifteen Organisation for Economic Co-operation and Development (OECD) countries over the period 1974—97 shows that the effect is heterogeneous across countries both in the short run and in the long run when considering the average tax rate. We also find a common positive and significant long-run relationship for the marginal tax rate.

The Efficiency Loss of Capital Income Taxation under Imperfect Loss Offset Provisions

Ahsan, S. M., Tsigaris, P. — Wed, 21 Oct 2009 09:59:30 PDT

The importance of capital loss offset provisions in a world of risk is well documented in the tax literature. However, the potential deadweight losses owing to imperfect offset has not been fully explored. This article develops a framework, whereby that investigation can be carried out, and uses numerical simulations to investigate the size of potential losses. The results obtained show that welfare losses owing to the absence of offset provisions could be substantial. Under plausible assumptions about attitudes toward risk and time preference, and with a capital income tax rate of 35 percent, over forty-five cents per dollar of tax revenue raised may be dissipated. In contrast, full loss offset may reduce that loss to approximately twelve cents.

Investment Under Tax Policy Uncertainty: A Neoclassical Approach

El-Shazly, A. — Wed, 21 Oct 2009 09:59:30 PDT

This article studies the impact of investment irreversibility, delivery lags, and adjustment costs on the firm’s optimal investment policy in a world of uncertainty. The source of uncertainty is a future change in the corporate profits tax where both the timing of this event and the size of associated adjustment in the tax benefit of investing are random. Such a tax uncertainty is particularly evident in reform economies whose authorities consider significant reductions in the corporate tax rate to stimulate business life. It is shown that greater transparency on tax policy promotes the firm’s expected net worth and the capital accumulation process.