Financing Government Expenditures Optimally

In a simple cash-credit model, I study the effects of the combination of costly tax collection and tax evasion on fiscal and monetary policy for optimal resource allocation. Allowing the informal sector to use cash more intensively than the formal sector, I compute the optimal interest and tax rates for eleven OECD countries to finance their exogeneously given government spending. A comparison of the actual and optimal interest rates reveals that tax collection costs and tax evasion together can partly explain the cross-country differences in monetary policy, also rationalizing deviations from the Friedman Rule in the long-run.

Financing multi-level government

The topic of multi-level taxation is currently highly relevant to two issues – European tax harmonisation and local government taxation in the UK. This paper presents a general economic analysis of multi-level government and taxation and the characteristics that might make a particular tax appropriate as a regional or local tax. In applying this analysis to European tax harmonisation it is clear that there is little harmony in the meaning of the term and a classification is presented. The main driving force for EU tax harmonisation has been the promotion of economic efficiency in the form of free trade in order to achieve the establishment and functioning of the European internal market. Differing regional needs and preferences regarding public sector expenditure and taxation may not always be properly recognised. It is suggested that a greater emphasis be placed on equity as an economic criteria in developing European tax harmonisation. Applying the analysis specifically to local government in the UK, it is clear that taxes on property meet most of the criteria relating both to taxes in general and lower level taxes in particular. However as in the case of European tax harmonisation, there seems to have been insufficient account taken of matters of equity as compared to economic efficiency. It has been the issue of equity that caused the demise of local authority domestic rates and the community charge in turn and continues to raise difficulties with the present council tax. It is therefore suggested that coverage of the income tax feature of council tax – council tax rebates – be extended. The experience to date suggests equity as well as economic efficiency is important in the successful development of both European tax harmonisation and UK local government finance and perhaps should be given greater prominence in the development of systems of multi-level taxation more generally.tax harmonisation; local government taxation; council tax

Innovation Performance and Government Financing

External financing is important when inventors and small technology-based firms wish to commercialize their inventions. However, it is likely that problems related to adverse selection and moral hazard are present, and market failures occur, since inventors know more about the inventions than do potential external financiers. To overcome these problems, the Swedish Government has intervened in the market by offering loans with different terms to firms and inventors. Using a unique database on Swedish patents owned by individuals and small firms, this paper analyzes how different forms of external financing influence the outcome when patents are commercialized. The estimations show that projects with soft government financing in the R&D-phase have a significantly worse performance than projects without such financing, whereas projects with more market-oriented government loans perform as the average. Distinguishing between governmental financing alternatives with different terms makes it possible to draw the conclusion that government failure primarily depends on bad financing terms, rather than bad choices of projects. A policy implication is therefore that government institutions should make their loans more market-oriented already in the R&D-phase.Patents; Commercialization; Innovations; Outcome; External Financing; Government Intervention

Financing local government in Hungary

Hungary has undertaken a bold and far-ranging reform of its system of subnational finances. This paper outlines the changes introduced in the system of local finance as a result of the 1990 Local Self-Government Act, and the 1990 Act on Local Taxes and provides a preliminary assessment of their implications as well as the need for further reform. These Acts, together with the annual Act on the Budget, define the overall scope and authorities of Hungary's approximately 3100 new local self-governments. These Acts: (i) define the new assignment of expenditures between central and local government; (ii) define the new local revenue sources; and (iii) establish the economic foundation, property rights and entrepreneurial functions of the localities. The paper outlines the historical evolution of the system, provides international comparisons, and describes its present-day form. Drawing on this background, it suggests some revised policies that should not only both help avert the potentially undesirable outcomes of the current system but, more positively, help Hungary to achieve its goal of a smaller, more efficient government sector without unduly exacerbating social inequalities. In turn, issues and recommendations are discussed in the following areas: local finance; assignment of expenditures; assignment of taxes; design of the transfer system; role of the localities in property management; capital investment; and other requisites for sound local finance.Banks&Banking Reform,Municipal Financial Management,National Governance,Urban Economics,Public Sector Economics&Finance

Renewal of Patents and Government Financing

I apply a survival model to a detailed dataset of Swedish patents to estimate how different factors affect the likelihood of patent renewal. Since the owners know more about the patents than potential external financiers, there is a problem of asymmetric information. To overcome this, Sweden has for a long time relied on government support rather than private venture capital. The empirical results show that patents which have received soft government financing in the R&D-phase have a higher probability of expiring than patents without such financing. But patents that have received more market-oriented government loans during the commercialization phase are renewed for as long as other commercialized patents. This finding indicates that it is the financing terms rather than bad choices of projects that explain the low renewal of patents with government financing.Patents; Renewal; Government Financing; Survival Model