This dissertation comprises three essays that examine critical aspects of fiscal policy and explores important determinants of tax compliance in a developing country context. The first essay examines the fiscal response to changes in debt-to-GDP for a panel of developing countries. Our empirical strategy adopts a dynamic difference generalized methods of moments (DGMM) model with forward orthogonal deviation. We find a positive and significant response for the primary balance and ‘fiscal effort’ to changes in debt-to-GDP. For the fiscal components, we find a positive relationship between debt-to-GDP and general and tax revenues, and a negative relationship with primary spending. We also find evidence of nonlinearities, with countries making larger increases in the primary balance and fiscal effort at higher levels of debt, largely driven by increases in revenues. Higher income countries demonstrate a greater propensity to adjust along the revenue margins, compared to lower income countries. This might be indicative of systemic revenue mobilization challenges facing the latter. The second essay examines the effect of the provision of taxpayer services on filing and payment of the corporate income tax (CIT) and general consumption tax (GCT) for large taxpayers in Jamaica. We use a regression discontinuity design (RDD) that exploits an exogenous jump in the intensity of taxpayer service delivery, which occurs when a taxpayer reaches gross receipts of J$500 million (US$5.7 million) and is selected into the large taxpayer office (LTO). The results indicate null effects for the CIT but positive filing and payment compliance effects for the GCT. The contrasting results for the CIT and GCT may be due to the relatively weaker legal enforcement framework of the former. The results provide suggestive evidence of a complementarity between the strength of the legal enforcement framework of the taxing regime and the provision of taxpayer services. In the third essay we implement public goods messaging experiments to examine the effects on personal income tax (PIT) compliance among self-employed individuals in Jamaica. In the first sub-experiment we examine the effect of the standard public goods message on payment of quarterly PIT obligations. In the second sub-experiment we focus on payment of PIT arrears and expand the message context to include a variant of the standard public goods message – which provides additional information on actual spending on key public goods and services. The compliance outcomes in sub-experiment two relate to established PIT delinquencies, compared to sub-experiment one where there is no legal obligation to comply. We find that the standard public goods message had no effect on compliance with quarterly PIT payments in sub-experiment one. However results from sub-experiment two indicate positive compliance effects from the standard and augmented public goods messages on the probability of making a payment and the amount of PIT arrears paid after nineteen weeks. Point estimates from the standard and augmented public goods messages are not statistically different for any of the outcomes examined; suggesting that additional information on public spending allocations does not matter.

The interest in the use of fiscal policy as an effective economic policy tool has been revived recently, since the global recession of 2008 hit the world. In spite of a large empirical literature, there remains substantial uncertainty about the size and even the direction of the effects of discretionary fiscal policy. This thesis seeks to investigate the macroeconomic effects of discretionary fiscal policy in the short term, highlighting several methodologies for identifying discretionary fiscal policy. In Chapters 2 and 3, we suggest a new instrument based on the narrative approach for identifying exogenous government spending shocks: natural disaster damages and the subsequent government emergency spending. While applying our methodology to the Korean and the U.S data, we find that our instrument is not only powerful but also superior to military build-ups used by most of the literature. The relief expenditure in the wake of natural disaster has several advantages such as the similarity in scope to general government activity and the easy applicability beyond the U.S. compared to military build-ups. In the analysis of Korean fiscal policy, using our narrative method and the Structural Vector Autoregression (SVAR) model, we find that government spending shocks increase GDP, consumption, and real wage, which is in line with the New Keynesian model. We also find that the timing is crucial in identifying government spending shocks due to the anticipation effects of fiscal policy. Furthermore, while analyzing the U.S. fiscal policy both at the state as well as national level, we estimate two kinds of non-defense spending multipliers: federal (1.4~1.7) and state (1.5~2.5), which exceed the defense spending multiplier obtained in the literature using military building-ups. In Chapter 4, in regard to the study of effects of fiscal adjustment, we develop the approach based on changes in cyclically adjusted primary balance (CAPB) by including fluctuations of asset price in the CAPB measure and allowing for individual country heterogeneity in the definition of fiscal adjustment. Using our new CAPB in 20 OECD countries, we find that fiscal adjustments have contractionary effects on economic activity in the short term, which is consistent with the result based on the narrative approach. Nevertheless, our results suggest that fiscal adjustments that rely predominantly on spending cuts are less contractionary than those involving tax increases.

This study examined whether South African government reacted to its debt positions in a sustainable manner during the period 1999 quarter 1 to 2016 quarter 2. Estimation of the fiscal reaction function was conducted by integrating the exogenous short-run impact of monetary policy stance on both primary balance and public debt positions. The VEC model approach was applied to estimate the fiscal reaction function. Results indicate that fiscal policy in South Africa was sustainable during the respective sample period while monetary policy stance had statistically significant impacts on both primary balance and public debt positions. The significant impacts of monetary policy stance on primary balance and public debt show that monetary policy contributes to ensuring fiscal sustainability in South Africa, hence government needs to harmonize monetary efforts in managing public debt. The estimated impact of the business cycle on primary balance positions indicate that fiscal policy was countercyclical in nature. / Economics / M. Com. (Economics)