Are Consumption Taxes Regressive?

It is often argued that a general consumption tax is necessarily regressive, particularly because households with high incomes typically save relatively more than those with low incomes. This paper uses very simple tax models to examine the combination of income and consumption taxes. It suggests that it is preferable to consider the overall impact of all taxes and transfers rather than relating payments of a single tax to gross income, instead of the relevant tax base. Insofar as savings might be relevant, attention should be given to the income tax treatment of investment income.     

Laffer strikes again: Dynamic scoring of capital taxes

We set up a neoclassical growth model extended by a corporate sector, an investment and finance decision of firms, and a set of taxes on capital income. We provide analytical dynamic scoring of taxes on corporate income, dividends, capital gains, other private capital income, and depreciation allowances and identify the intricate ways through which capital taxation affects tax revenue in general equilibrium. We then calibrate the model for the US and explore quantitatively the revenue effects from capital taxation. We take adjustment dynamics after a tax change explicitly into account and compare with steady-state effects. We find, among other results, a self-financing degree of corporate tax cuts of about 70–90% and a very flat Laffer curve for all capital taxes as well as for tax depreciation allowances. Results are strongest for the tax on capital gains. The model predicts for the US that total tax revenue increases by about 0.3–1.2% after abolishment of the tax.     

Revenue and Progressivity Neutral Changes in the Tax Mix

There has been much debate about the redistributive implications of a consumption tax and the treatment of low income households. This article presents a general model which allows for the interdependence between income and consumption taxes, while allowing for transfer payments to the low paid. The appropriate adjustment of transfer payments in response to a change in the tax mix, in order to maintain a fixed real value of transfers, is examined. The use of exemptions, of those goods for which the proportion of expenditure falls as total household expenditure rises, in order to increase the progressivity of consumption taxes is also considered. The model enables changes in the tax mix, which are both revenue and progressivity neutral, to be devised.     

Tax enforcement,tax compliance and tax morale in transition economies: A theoretical model

The focus of this paper is the analysis of the relationship between tax enforcement, tax compliance and tax morale within countries characterised by rapid introduction of market institutions and slow evolution of political regimes, such as transition economies. The paper investigates a coordination game in which the government is ex-ante committed to tax enforcement and can observe the proportion of tax-compliant agents in the economy. In turn, two groups of agents (third-party reporting and self-reported income) are keen to evade taxes unlawfully but have limited information on how many others evade taxes; their tax morale is therefore an endogenous function of agents' perception on tax compliance. The model predicts that the lower the quality of political institutions and the weaker tax morale, the less tax compliance can be achieved. The third-party reporting group will also be bearing higher tax burden than the self-reported income group. The model entails that having political institutions of good quality is not a sufficient condition to conduce to tax enforcement or tax compliance. Due to the endogenous role of tax morale, the government could be pushed ex-post towards poor or no tax enforcement. If good political institutions are not accompanied by good information about the enforcement of tax collection, there is scope for co-existence of poor tax enforcement, low tax compliance and weak tax morale. As such, this model well describes the tax evasion behaviour observed since the outset of transition from planned to market economy.     

TAX REFORM

After brief individual presentations, panelists discuss among themselves and with the audience a broad spectrum of issues regarding various taxes and tax reform proposals. The discussion includes such issues as privatizing Social Security and Medicare, eliminating income tax withholding, and the merits and demerits of income taxes, consumption taxes, value added taxes, sales taxes, and taxes on resources that have an inelastic supply. One panelist relates his recent experiences using his tools as an economist to deal with tax and related issues as a current member of the Canadian Parliament. Another cites practical problems of implementing tax reform from his long experience advising governments, especially in Latin America. A major focus of the exchange of views is on public choice problems involved in passing and implementing a so-called flat tax. However, the discussion also deals with economic efficiency and equity considerations and with nearly all other types of taxes. The discussion includes not only the impact on the country within which tax reform occurs, but international implications, as well.     

Tax competition and tax structure in open federal economies: Evidence from OECD countries with implications for the European Union

Tax competition arguments suggest that governments that operate in an open economy (such as local governments) should not and will not rely on non-benefit taxes, such as the income tax. Yet we observe reliance on income taxes by local governments in many countries, and such reliance changes over time. Evidence from a panel data set of 13 OECD countries over the period 1975-1984 suggests that competition between levels of government (resulting in a vertical fiscal externality) and between governments at the same level (resulting in a horizontal fiscal externality) provide some economic rationale for these changes. Moreover, the evidence indicates that the vertical and horizontal fiscal externalities interact. These results have some interesting implications for fiscal policy in the European Union, particularly as the EU continues to evolve. One implication for the EU is that enlargement that increases tax base disparities within the EU (and is not accompanied by an EU-level income tax) will tend to lower national income tax rates, although this must be qualified because it also depends on the mobility of the population. A second implication is that fiscal expansion of the EU to include an EU-level income tax may tend to lower the reliance of national governments on income taxes through the vertical externality, but may also tend to equalize tax bases across countries, and so increase reliance on national income taxes through the horizontal externality.     

Flat income taxation,redistribution and labour market performance

A flat tax rate on labour income has gained popularity in European countries. This article assesses the attractiveness of such a flat tax in achieving redistributive objectives with the smallest distortions to employment. We do so by using a detailed applied general equilibrium model for the Netherlands. The model is empirically grounded in the data and encompasses decisions on hours worked, labour force participation, skill formation, wage bargaining between unions and firms and a wide variety of institutional details. The simulations suggest that the replacement of the current tax system in the Netherlands by a flat rate will harm labour market performance if aggregate income inequality is contained. Only flat tax reforms that reduce redistribution will raise employment. This finding bolsters the notions from optimal tax literature regarding the equity-efficiency trade off and the superiority of nonlinear taxes to obtain redistributive goals in an efficient way.     

中国税制改革的路径与现实选择

在经济全球化的国际形势下,中国税制改革势在必行。基于税制优化理论,借鉴大多数市场经济国家的成功做法,建立以增值税、所得税和社会保障税为主体的税制结构,取消不合理的税种,调整并增加一些税种是中国税制改革的现实选择。     

Taxation Reform: Some Economic Issues

The Australian system of Commonwealth and State taxes is in need of comprehensive reform. It fails the criteria of neutrality, horizontal equity and simplicity, it is not as progressive as often thought, and the future revenue base is declining. Many of the problems stem from the absence of comprehensive tax bases as applied to income, expenditure and assets, and related choice options are subjected to very different effective tax burdens. Important choice options facing different effective tax rates include: work and leisure; consumption and saving; different saving and investment options; form of labour remuneration; different ways of production; the mix of goods and services produced and consumed; and, domestic or overseas location.
A comprehensive income tax base is required, especially as applied to the taxation of capital income. The options of a nominal income, real income or expenditure base are explored.
It is argued that reform of indirect taxes proceed along two lines. The general revenue raising purpose leads to a comprehensive base of final consumption expenditure at a single rate. Then, additional specific taxes for user pays purposes, for example for roads, and for externalities, for example tobacco, set at the supply cost or net externality would be applied.
There are conflicting arguments for and against changing the tax mix away from income to expenditure.     

GROWTH AND VARIABILITY OF SCHOOL DISTRICT INCOME TAX REVENUES: IS TAX BASE DIVERSIFICATION A GOOD IDEA FOR SCHOOL FINANCING?

School districts in Ohio have the option of diversifying their revenue base by adopting income taxes. Using a panel of Ohio school districts that adopted a local income tax from 1990 to 2008, we find that revenues are procyclical and fluctuate only mildly. The estimated short‐ and long‐run income elasticity of school district income tax revenues is 1.05 and 1.04, respectively. We also find that the school district tax base fully adjusts to its long‐run equilibrium within 2 years. Finally, we show that school district income tax adoption does not provide more stability to total school district tax revenues in the short or the long run. (JEL H71, H75)     

Donations in a recursive dynamic model

Abstract.  This paper studies how donations respond to unexpected permanent changes in income and tax rates in a recursive dynamic model. The dynamic approach yields several interesting insights. If marginal tax rates are progressive, a permanent jump in a household's income increases its consumption and donations in the short run, but has no effect in the long run. The permanent income elasticity of current donations is likely to exceed one. If the marginal tax rate is flat, the jump in income raises consumption and donations in both the short and the long run. A permanent marginal tax rate cut raises consumption and donations in the long run if marginal tax rates are progressive, while it reduces donations in the short run if it has little direct impact on tax payments. If the marginal tax rate is flat, a tax cut has a positive effect on consumption in both the short and the long run, but has an ambiguous effect on donations.     

Relative Consumption Concerns and the Optimal Tax Mix

This paper studies the optimal tax mix (taxes on income and commodities) under asymmetric information in a two‐type model, when individuals make relative consumption comparisons. The model includes both positional and nonpositional goods, taking into account the fact that relative concerns matter for some but not for all commodities. We find that in general the whole tax system is affected by the externalities caused by the consumption of positional goods, notably also the taxes on income and on a nonpositional good. The tax rates on positional goods are higher than in the absence of status effects, reflecting their Pigouvian role. The sign of the Pigouvian part in the income tax schedule is ambiguous and depends crucially on whether status goods are complements or substitutes to leisure.     

绩效工资制度下高校教师个人所得税筹划探析

随着高校实行绩效工资制度,教师收入结构发生变化,收入总量也得到逐步提高,个人所得税税负在不断提高,因此,相应的税收筹划作用凸显。税收筹划是一项较为复杂系统的工程,找准切入点很关键。以绩效工资制度下高校教师的收入构成为切入点,结合最新的税法政策相关规定,提出筹划思路,具有现实可行性,能够达到较理想的筹划效果。     

Redistributing Gains from Globalisation*

This paper analyses the effects of redistribution in a model of international trade with heterogeneous firms in which a fair‐wage effort mechanism leads to firm‐specific wage payments and involuntary unemployment. The redistribution scheme is financed by profit taxes and gives the same absolute lump‐sum transfer to all workers. International trade increases aggregate income and income inequality, ceteris paribus. If, however, trade is accompanied by a suitably chosen increase in the profit tax rate, it is possible to achieve higher aggregate income and a more equal income distribution than in autarky, provided that the share of exporters is sufficiently high.     

Higher Tax for Top Earners

The literature can justify both increasing and decreasing marginal taxes (IMT & DMT) on top incomes under different welfare objectives and income distributions. Even when DMT are theoretically optimal, they are often politically infeasible. Then a flat tax seems to be a constrained optimal solution. We show however that, given any flat tax we can increase the total utility of a poor majority by raising the top income tax rate under a simple condition, which can be checked with empirical data. We further generalize our main results allowing different welfare weights, declining elasticity of labor supply and more tax bands.     

Growth and inequality in an endogenous fiscal policy model with taxes on labor and capital

I study an economy where individuals have different initial endowments and fiscal policy is decided by majority voting. Public investment is financed by two flat rate taxes, one on labor income and the other one on capital income. The model shows a positive (negative) correlation between growth and the tax rate on labor (capital) income and a negative (positive) correlation between the tax rate on labor (capital) income and inequality. The results reconcile the theory with empirical evidence.     

Royalty taxation under tax competition and profit shifting

Multinational corporations increasingly use royalty payments for intellectual property rights to shift profits globally. This not only threatens the tax base of countries worldwide but also affects the nature of tax competition. Against this background, our theoretical analysis suggests a surprising solution to the problem of curbing profit shifting without suffering major outflows of capital: a strictly positive withholding tax on royalty payments is both the Pareto-efficient solution under international coordination and the optimal unilateral response. If internal debt is sufficiently responsive, governments can even implement optimal targeting. Then, the royalty tax closes the profit-shifting channel, while all competition for mobile capital is relegated to internal-debt regulation. Our results question the ban on royalty taxes in double tax treaties and the EU Interest and Royalty Directive.     

Employment- and growth effects of tax reforms

Since the mid-1990s almost all OECD countries have engaged in fundamental reforms of their tax systems. There is a trend towards higher social security contributions and lower tax rates on personal and corporate income. This paper explores whether these tax policy measures are effective means for reducing unemployment and accelerating economic growth. Using a Pissarides type search model with endogenous growth, we analyze how savings and the incentive to create new jobs are affected by revenue-neutral tax swaps between wage income taxes, payroll taxes, capital income taxes and taxes levied on capital costs. In our framework, cutting the capital income tax (reducing the double taxation of dividend income) financed by a higher payroll tax turns out to be superior, such a policy mix fosters both employment and growth. Most other tax reforms imply a trade-off between employment and growth.     

Taxes, Transfers, and Voter Behavior in U.S. Midterm Elections

The effects of changes in per capita real GDP, real taxes and real government transfer payments on midterm congressional election outcomes during the 1946–2002 period are examined. Voters are found to take all of these, except taxes and transfers at the state and local government levels, into account in casting their ballots. However, the weights they place on each are found not to be the same. Consequently, the common practice of summarizing the economic conditions faced by voters through disposable income seems to be inappropriate. Also, omission of tax and transfer variables from the vote equation, and using vote swing rather than vote share as the dependent variable is found to result in underestimation of the coefficient of per capita GDP growth.     

Optimal tax rules and public sector efficiency with an externality in an overlapping generations model

This paper examines optimal tax rules and public sector efficiency, integrating them in a second-best world with pollution by using an overlapping generations model. The second-best world is characterized by the comparative statics of green preferences. The main results obtained are as follows. First, the marginal cost of public funds may be reduced by the externalities, regardless of the choice of taxes. Second, optimal environmental and non-environmental tax rules are additively and directly affected by the dynamic efficiency of capital accumulation per unit labour (DECAL), and indirectly by it, through the efficiency of the public sector. Environmental taxes going beyond Pigovian ones may be welfare-improving if the DECAL is improved by the environmental tax. Even optimal non-environmental tax rules should additively and directly counter the dynamics of pollution to consider the income effects of the optimal tax system for the future. Third, the “additivity property,” or the “principle of targeting,” does not hold even in the absence of incentive compatibility constraints. The essential reasons for this are clarified as follows: distortions that should be countered by taxes; that is, the income effects of the optimal tax system and the DECAL in this model, break the equality between optimal environmental taxes and the externalities measured by governments. Finally, growing environmental concerns may, in fact, increase pollution. The inverse relationship between environmental and labour income taxes may not hold.