Fiscal Policy and Structural Reforms in Transition Economies: An Empirical Analysis

This paper makes an empirical examination of the relationship between fiscal balance and structural reforms using panel data from 25 transition economies. The results indicate that price liberalisation has a positive impact on fiscal performance, while privatisation and restructuring, via unemployment, affect the fiscal balance negatively. These findings are somewhat in contrast with earlier empirical work and theoretical transition economics that maintain fiscal pressures are most severe in fast-reforming countries. The analysis further suggests that countries with better fiscal positions may have benefited from favourable initial conditions.fiscal policy; structural reforms; transition economies

Reforms and Confidence

We examine the choice of economic reforms when policymakers have present-biased preferences and can choose to discard information (maintain confidence) to mitigate distortions from excess discounting. The decisions of policymakers and firms are shown to be interdependent. Confident policymakers carry out welfare-improving reforms more often, which increases the probability that firms will invest in restructuring. While policymakers in different countries can be equally irrational, the consequences of bounded rationality are less severe in economies with beneficial initial conditions. We also examine how present-biased preferences influence the choice between big bang versus gradualist reform strategies. Our findings help explain differences in economic reform success in various countries.policy reform; behavioural economics; hyperbolic discounting; con…dence; gradualism

Tax Policy and Employment: How Does the Swedish System Fare?

This paper reviews the literature on optimal taxation of labour income and the empirical work on labour supply and the elasticity of taxable income in Sweden. It also presents an overview of Swedish taxation of labour income, offers calculations on the development in effective marginal tax rates and participation tax rates, and estimates, using the difference-in-differences method, the impact of tax incentives on employment rates of elderly workers. After this background, we ponder possibilities for reforming the Swedish tax system to improve its labour market impacts. We suggest better targeting the earned income tax credit at families and low-income workers, lowering the top marginal tax rates, and maintaining the tax incentives for older workers.optimal taxation, labour income taxation, labour supply, taxable income, Swedish tax system

How Successful is the Dual Income Tax? Evidence from the Finnish Tax Reform of 1993

Dual income tax systems have become increasingly popular; yet, relatively little is known about the consequences of implementing such tax systems. This paper uses a representative panel of taxpayers from the 1993 Finnish tax reform to measure how overall taxable income and the relative shares of capital income and labour income reacted to the reform. The Finnish tax reform appears to be particularly suitable for analysing the effect of separating labour and capital income tax bases. The reform radically reduced the marginal tax rates on capital income to some, but not all, taxpayers, while the taxation of labour income was not reformed at the same time. We find that the reform led to a small positive impact on overall taxable income, but part of the positive response was probably offset by income shifting among the self-employed.taxable income, income shifting, dual tax system

Leaky Bucket in the Real World: Estimating Inequality Aversion Using Survey Data

Existing evidence of inequality aversion relies on data from class-room experiments where subjects face hypothetical questions. This paper estimates the magnitude of inequality aversion using representative survey data, with questions related to the real-economy situations the respondents face. The results reveal that the magnitude of inequality aversion can be measured in a meaningful way using survey data, but the estimates depend dramatically on the framing of the question. No matter how measured, the revealed inequality aversion predicts opinions on a wide range of questions related to the welfare state, such as the level of taxation, tax progressivity and the structure of unemployment benefits.inequality aversion, social welfare functions, welfare state

Fiscal Explanations for Inflation: Any Evidence from Transition Economies?

Recent arguments, motivated partly by the new fiscal theory of price level, suggest that fiscal deficits undermine price stability in transition economies. This paper addresses these claims by examining vector-autoregressive models of inflation for three crisis-hidden transition economies (Bulgaria, Romania and Russia). The results indicate that while fiscal deficits have increased inflation in Bulgaria to a certain extent, this has not been the case in Romania and Russia. Even in the Bulgarian case, the usual money aggregate has proven more influential to inflation than fiscal deficits. The analysis based on this method therefore suggests that monetary policy plays an influential role in inflation determination in these countries. In other words, inflationary financing of deficits, rather than deficits themselves, accounts for inflation.fiscal policy; inflation; vector autoregressive models; transition economies

The political economy of reforms: Empirical evidence from post- communist transition in the 1990s

Using a novel data set from post-communist countries in the 1990s, this paper examines linkages between political constraints, economic reforms and growth. A dynamic panel analysis suggests public support for reform is negatively associated with income inequality and unemployment. Both the ex post and ex ante political constraints of public support affect progress in economic reform, which in turn influences economic growth. The findings highlight that while economic reforms are needed to foster growth, they must be designed so that they do not undermine political support for reform.Political constraints, economic reform, transition, growth, dynamic panel models

The political economy of reforms: Empirical evidence from post-communist transition in the 1990s

Using a novel data set from post-communist countries in the 1990s, this paper examines linkages between political constraints, economic reforms and growth. A dynamic panel analysis suggests public support for reform is negatively associated with income inequality and unemployment. Both the ex post and ex ante political constraints of public support affect progress in economic reform, which in turn influences economic growth. The findings highlight that while economic reforms are needed to foster growth, they must be designed so that they do not undermine political support for reform.political constraints; economic reform; transition; growth; dynamic panel models

Tax Evasion and Economies in Transition: Lessons from Tax Theory

This study considers the pervasive tax evasion of transition economies, with particular reference to Russia’s tax system. Starting with a survey of theoretical literature on tax evasion and corruption, it argues that, although standard tax theory offers many insights, certain special features of transition economies deserve attention. These include the legacy of socialism resulting in a state willing to exercise discretionary power but possibly lacking credibility and public support, the ‘disorganisation’ phenomenon that hampers efficient tax administration, and the relationship of restructuring, speed of reform and the tax system. The paper also contains recommendations on reform of the tax system to achieve reasonable deterrence of evasion.tax evasion; corruption; transition economies; Russia

The Employment Effects of Low-Wage Subsidies

Low-wage subsidies are often proposed as a solution to the unemployment problem among the low skilled. Yet the empirical evidence on the effects of low-wage subsidies is surprisingly scarce. This paper examines the employment effects of a Finnish payroll tax subsidy scheme, which is targeted at the employers of older, full-time, low-wage workers. The system’s clear eligibility criteria open up an opportunity for a reliable estimation of the causal impacts of the subsidy, using a difference-in-difference-in-differences approach. Our results indicate that the subsidy system had no effects on the employment rate. However, it appears to have increased the probability of part-time workers obtaining full-time employment.low-wage subsidies, employment, social security contributions