Working Paper: CEPR ID: DP7831
Authors: Hans Gersbach; Volker Hahn; Stephan Imhof
Abstract: We examine the provision of public projects under tax and subsidy rules. We find that tax rules separated from project cum subsidy decisions exhibit several advantages when incentive problems of the agenda-setter are taken into account. In particular, tax rules may prevent the proposal of inefficient projects that benefit only a small lobby group. We propose ?redistribution efficiency? as a socially desirable property of proposals and find that tax rules always guarantee this kind of efficiency. We show that rules on subsidies combined with discretion regarding taxes always yield socially inferior proposals. Finally, tax rules induce the agenda-setter to look for potential improvements of public projects.
Keywords: constitutional design; provision of public projects; taxes and subsidies; voting
JEL Codes: D72; H40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax rules (K34) | Prevent agendasetter from securing majority for inefficient projects (D72) |
| Absence of tax rules (H26) | Agendasetter enforces projects with positive private benefits (H43) |
| Tax rules (K34) | Reduce wasteful subsidies (H23) |
| High total subsidies (H29) | High taxes for agendasetter (H29) |
| Constitutions with tax and subsidy rules (H20) | Robust to counterproposals (D79) |
| Constitutions without tax and subsidy rules (H29) | Prone to cycles of project adoption and reversal (E32) |
| Tax rules (K34) | Induce agendasetter to enhance project efficiency (O31) |