Fiscal Choices Research Articles

Optimal simple rules for the conduct of monetary and fiscal policy

Stabilization policy involves joint monetary and fiscal rules. We develop a model enabling us to characterize systematic simple monetary and fiscal policy over the business cycle. We principally focus on the following question. What are the key properties of the joint simple rule governing the conduct of systematic stabilization policy? We find that conducting stabilization policy incorporates not only a set of monetary policy choices governed by the so-called ‘Taylor principle’ but also fiscal policy that gives considerable force to automatic stabilizers. Recent US and UK monetary and fiscal choices seem broadly consistent with this model. This result is found to be robust to a number of alternate modeling strategies.

Autocratic, Democratic, and Optimal Government: Fiscal Choices and Economic Outcomes

Autocratic, Democratic, and Optimal Government: Fiscal Choices and Economic Outcomes

Autocratic, Democratic, and Optimal Government: Fiscal Choices and Economic Outcomes

Autocratic, Democratic, and Optimal Government: Fiscal Choices and Economic Outcomes

Tax Interaction Dynamics Among Belgian Municipalities 1984-1997

The purpose of this paper is to test econometrically the existence of fiscal interactions between Belgian municipalities. At the time of writing, the motivation was to provide scientific support to the lively debate on fiscal competition that took place among Belgian politicians in the late nineties. Two types of taxes are considered, for which Belgian municipalities have the decision power as to rates: the centimes additionnels on the personal income tax and the precompte immobilier which is a property tax. A dynamic adjustment model is specified and estimated using panel data for 598 municipalities over 15 years. The empirical results obtained bear upon two main points: (i) Some interaction definitely has prevailed between the municipalities' fiscal choices made during the observation period, for both taxes; (ii) However, the adjustment reactions to the other municipalities' fiscal choices have occurred over time at the very low yearly pace of 6% and 10%, respectively, of the discrepancy between the actual rates and the preferred rates.

The political determinants of fiscal policies in the states of India: An empirical investigation

Using data from the 14 major states of India, we investigate whether state governments' fiscal policy choices are tempered by political considerations. Our principal findings are twofold. First, we show that certain fiscal policies experience electoral cycles: state governments raise less commodity tax revenue, spend less on the current account, and incur larger capital account developmental expenditures in election years than in all other years. Second, we show that coalition state governments raise less own non-tax revenues and spend less on the current account than state governments that are more cohesive in composition. In sum, the dispersion of political power affects government size.

The Trade-off and Pecking-Order Empirical Effects of Corporate Taxation on Financial Choices: A Unified Approach

The aim of this paper is to measure the relationship between fiscal variables and corporate debt choices. Data on Italian manufacturing companies are used because of the substantial variability of the tax legislation during the sample period, as well as the availability of detailed accounting information which allows for reliable inferences. The reference model is an empirical representation of the modified pecking order (MPO) approach, where both trade-off and pecking-order theories are nested. We find that both the trade-off relative price of debt and equity finance, and the pecking-order net-of-tax cash flow, are significant, robust ways by which corporate taxation affects financing decisions.

Deficit Limits, Budget Rules, and Fiscal Policy

The paper presents a simple model for discussing the effects of deficit limits and budget rules on fiscal policy. I find that limits on deficit-output ratios provide incentives to implement procyclical policies when the economy is in intermediate states, and countercyclical policies only in very "good" and very "bad" economic times. As a result, fiscal "reaction functions" are not monotonically related to the state of the economy. Deficit limits are found to exert discipline only provided the limit is tight and the expected sanction large, albeit at a relatively large welfare cost. Moreover, when fiscal choices are made under a veil of ignorance about the output gap, an increase in volatility is likely to raise the level of the budget deficit. Finally, concerning the design of fiscal frameworks, when excessive deficits arise from a political bias, deficit limits should be symmetric and not state-contingent.

La concurrence fiscale entre communes est-elle plus intense en milieu urbain qu’en milieu rural ?

Is tax competition more intense in urban than in rural areas ? The aim of this paper is to test the hypothesis that tax competition intensity is stronger in urban area than in rural area. We use the theoretical foundations of tax competition literature where horizontal strategic interactions are due to tax base mobility between local jurisdictions belonging to the same level of government. When tax base is mobile, an action chosen by a jurisdiction affects the budget constraint of another jurisdiction, leading to strategic interactions in local fiscal choices. As a consequence, tax rates in one jurisdiction depend on tax rates in the neighbouring jurisdictions. We then build a spatial model of local tax choices which takes into account the fiscal decisions made by concurrent jurisdictions as well as the local socio-economic characteristics such as tax base and population density in the explanatory variables. More precisely, we test the existence of horizontal fiscal interactions inside some different groups of jurisdictions by estimating the slope of each reaction function. We measure the sign and the intensity of the spatial lag parameter using spatial econometrics. We then rely these estimates to the features of each group of jurisdictions and more particularly to its classification in urban areas and in rural areas. We observe that jurisdictions belonging to urban areas tend to mimic each other whereas those who belong to rural areas does not take into account the neighbouring tax choices when they set their local business tax. Rural jurisdictions set their local business tax only by looking at their own socio-economic features.

Evolving Federations and Regional Public Deficits: Testing the Bailout Hypothesis in the Spanish Case

High debt autonomy and low tax autonomy often characterize evolving federations, making the bailout hypothesis very attractive in resolving subcentral government deficits. However, meeting both conditions is not enough to conclude that bailout expectations are the main reason for a potential deficit. There are many other factors affecting expectations and the real behavior of the agents involved: central government, subcentral governments, and the financial markets. Empirical research is the only means by which to determine the relevance of the bailout problem in each situation. To demonstrate this argument, the author describes an exhaustive analysis of the Spanish case. The main conclusion is that deficit seems to be better understood by a more traditional model of fiscal choices than by bailout expectations.

Deficit Limits, Budget Rules and Fiscal Policy

The paper presents a simple model for discussing the effects of deficit limits and budget rules on fiscal policy. I find that limits on deficit-output ratios provide incentives to implement procyclical policies when the economy is in intermediate states, and countercyclical policies only in very good and very bad economic times. As a result, fiscal reaction functions are not monotonically related to the state of the economy. Deficit limits are found to exert discipline only provided the limit is tight and the expected sanction large, albeit at a relatively large welfare cost. Moreover, when fiscal choices are made under a veil of ignorance about the output gap, an increase in volatility is likely to raise the level of the budget deficit. Finally, concerning the design of fiscal frameworks, when excessive deficits arise from a political bias, deficit limits should be symmetric and not state-contingent.

Autocratic, democratic, and optimal government: fiscal choices and economic outcomes

Autocratic, democratic, and optimal government: fiscal choices and economic outcomes

The Flypaper Effect Revisited: Intergovernmental Grants and Local Governance

Local governance arrangements shape the incentives of local actors, which may in turn influence fiscal choices. By emphasizing the role of local government institutions in local fiscal choices, we seek to bridge between median voter and Leviathan models prevalent in the literature. We then offer some preliminary evidence to support this explanation by empirically testing several propositions regarding the flypaper effect in intergovernmental grants. One limitation of the median voter model is that the model does not consider political institutions and their influences on government expenditures. In this study, we attempt to capture the influence of political dynamics in determining public expenditures by considering institutional variables. Test results show that the political institutional variables could be one of the explanation variables for the flypaper effect.

Yardstick competition in intergovernmental relationships: theory and empirical predictions

We review yardstick competition theory as applied to fiscal choices in the intergovernmental context. We show that the theory is consistent with opposite results concerning neighbouring governments' fiscal behaviour, and discuss some empirical implications.

Goal Conflict and Fund Diversion in Federal Grants to the States

Researchers using fiscal choice models have had limited success predicting fund diversion in federal grant programs. The application of a principal‐agent framework to questions of fiscal federalism offered a potentially valuable alternative approach, but the traditional model employed by Chubb (1985) neglected potential variability in the degree of goal conflict between principals and agents. This article proposes an expanded framework, which incorporates the possibility of variation in goal conflict between participants in intergovernmental aid programs. The theory suggests that the level of policy congruence between recipient jurisdictions and the national government will determine the amount of grant funding diverted away from targeted policy areas. Findings from analyses of grant programs in two distinct policy areas support the hypothesis that grant effectiveness is partially a function of goal congruence. The relationship between intergovernmental partners is interactive, with the degree of policy agreement determining fund diversion in subnational jurisdictions, as well as the effectiveness of federal oversight activities. The findings have important theoretical implications for understanding both fiscal federalism and principal‐agent relationships more generally.

The Budget Outlook and Options for Fiscal Policy

[© Brookings Institution] This paper examines the federal budget outlook and evaluates alternative fiscal policy choices. Official projections of the federal budget surplus have declined dramatically in the past year. Adjusting such measures for the treatment of retirement trust funds, realistic estimates of future tax and spending levels, and longer time horizons implies an even bleaker picture. Freezing the tax cut passed last year would be a significant step toward fiscal responsibility. In contrast, the Bush Administration's budget proposes making last year's tax cut permanent and seeks further tax cuts that would exacerbate long-term fiscal problems.

Transfers and Bailouts: Institutions for Enforcing Local Fiscal Discipline

The growing importance of local and provincial governments as providers of public services and the importance of those services for the overall performance of the national economy has led to a careful re-examination of how public resources are allocated by decentralized governments. While the Tiebout model promises efficient local resource allocations, the conditions necessary for such outcomes—many local governments, fully informed and costlessly mobile households, no spillovers, residential head taxes—are rarely met in practice. Lacking a sufficient number of competitive local governments, however, other institutional safeguards must be found. Four such institutions are identified here. First, a stable central government managed by nationally elected political parties or presidents capable of making (second-best) efficient interpersonal redistributions of income while at the same time denying inefficient intergovernmental transfers and /or access to non-resident taxation. Second, a mature banking system and fully integrated national capital markets to minimize the economic consequences of a single government's failure to repay its local debts. Third, informed and sophisticated municipal bond and local land markets capable of evaluating local services and finances so as to shift back onto local residents the full economic consequences of inefficient local government fiscal choices. Fourth, a politically independent judiciary capable of enforcing constitutional rules for spending and tax assignment, local debt repayment, and balanced local budgets. Efficient central governments and efficient land and capital markets are seen here as necessary institutional pre-conditions for an efficient local public sector.

Urban Sprawl in a U.S. Metropolitan Area: Ways to Measure and a Comparison of the Sacramento Area to Similar Metropolitan Areas in California and the U.S.

This paper is the first step toward a broad research agenda that will define possible ways of measuring urban sprawl in U.S. metropolitan areas, test the notion that fiscal choices by local governments can further urban sprawl, and if appropriate, use this test to form the basis for public policies to reduce sprawl and the negative outcomes attributed to it. To derive a consensus on the best ways to measure the degree of urban sprawl in an U.S. metropolitan area, the paper begins with a short survey of previous economic, planning, and popular literature on the topic. Next, the paper offers values for the consensus ways of measuring urban sprawl in the Sacramento metropolitan region, two like regions in California, and three comparable regions in the United States. Partial correlation coefficients measure the association between these measures of urban sprawl and some measures of negative urban outcomes. The conclusion contains a discussion on the need for further research, and a few suggestions on how to go about it.

Why are tax expenditures for giving embodied in fiscal constitutions?

This paper asks whether there can be unanimous support for a fiscal constitution that includes tax expenditures for giving among the set of available fiscal instruments. We describe a political economy model of fiscal choices where individuals with different incomes vote over levels of proportional income taxation and over tax incentives for giving, and investigate how the availability of such incentives affects political equilibrium outcomes and welfare for different income groups. We find that unanimous support for the use of tax incentives for giving can indeed arise, and is more likely the more unequal is the distribution of income.

La faisabilité socio-économique des ajustements budgétaires en Europe

Today the countries of the European Union are facing almost the same realities, obliged to reduce radically fiscal deficits with the object of promoting stronger future and non- inflationary growth. Of course, this duty is embodied in the financial convergence criterions contained in the Maastricht treaty. The fast and lasting favourable result of fiscal adjustment plans depends not only on a steady economic activity, but also on political and socio-institutional factors such as the parliamentary ability to cut down government outlays, the flexibilty of fiscal choices, the social opposition to the increasing tax burden, etc. In this paper we propose, first, to list all these political, social and institutional factors giving rise to favourable fiscal adjustment in the case of the European countries and to explain their importance and, second, to point out empirical correlations between such factors and European fiscal performances during the 80'.

Public Sector Technical Inefficiency in Large U.S. Cities

Technical inefficiency is the extent to which production is below the maximum possible given the mix of chosen inputs. Controlling for the determinants of local property value that a local government cannot change, a city produces local property value through the expenditure and revenue choices that it makes. If a city is generating the highest attainable market value of aggregate property within its boundaries given the local fiscal choices that it has made, then it is producing local government in a technically efficient manner. In this paper, using the concept of the stochastic frontier production function, we measure technical inefficiency in the local public sector based upon a comparison of local property values. The specification introduced allows the random component associated with the presence of technical inefficiency to depend on factors that have been suggested as limiting or enhancing technical inefficiency. Using a sample of 49 U.S. central cities, we find that large city governments in the United States are operating at different degrees of technical inefficiency and the degree of technical inefficiency varies inversely with measured levels of competitive pressures.