Altruism, incomplete markets, and tax reform

We compute the welfare effects of different revenue-neutral tax reforms that eliminate capital income taxation in two general equilibrium models calibrated to the U.S. economy. In our dynastic model, the reform with the largest welfare gain is the one that eliminates all income taxation and increases the consumption tax to 35%; 75% of the population alive at the time of the reform benefit from it. Individuals use intervivos transfers and bequests to redistribute the long-run benefits. In a pure life-cycle economy that lacks this redistribution technology, we find that the same reform would benefit only 9% of the population.     

From Destination- to Origin-Based Consumption Taxation: A Dynamic CGE Analysis

A switch from the current destination-based value-added taxation to an origin-based consumption tax will not be neutral in a world economy with international capital mobility and overlapping generations. This paper evaluates the macroeconomic and welfare effects of such a multilateral reform in a two-region, intertemporal general equilibrium model. The analysis isolates and quantifies income effects due to changes in generations' tax burdens, factor price repercussions and initial asset price adjustments, as well as efficiency effects that arise from endogenous labor supply and short run savings responses in a numerical simulation exercise.     

Uninsurable investment risks and capital income taxation

This paper studies the capital accumulation and welfare implications of reducing capital income taxation in a general equilibrium economy with uninsurable investment risks. It has been shown that, with uninsurable investment risks, under-accumulation of capital may result compared to the complete markets economy. We show that reducing somewhat the capital income tax rate increases the capital stock and leads to a welfare gain. The complete elimination of the capital income tax, however, is not necessarily welfare improving.     

Machines,buildings, and optimal dynamic taxes

The effective taxes on capital returns differ depending on capital type in the U.S. tax code. This paper uncovers a novel reason for the optimality of differential capital taxation. We set up a model with two types of capital – equipments and structures – and equipment-skill complementarity. Under a plausible assumption, we show that it is optimal to tax equipments at a higher rate than structures. In a calibrated model, the optimal tax differential rises from 27 to 40 percentage points over the transition to the new steady state. The welfare gains of optimal differential capital taxation can be as high as 0.4% of lifetime consumption.     

The theory of optimal taxation: what is the policy relevance?

The paper discusses the implications of optimal tax theory for the debates on uniform commodity taxation and neutral capital income taxation. While strong administrative and political economy arguments in favor of uniform and neutral taxation remain, recent advances in optimal tax theory suggest that the information needed to implement the differentiated taxation prescribed by optimal tax theory may be easier to obtain than previously believed. The paper also points to the strong similarity between optimal commodity tax rules and the rules for optimal source-based capital income taxation.      

世界性公司所得税改革趋势及对我国的启示

本文详细探讨了当前世界各国公司所得税改革的特点与趋势:各国一般公司所得税综合税率表现出了明显的下降趋势,这一下降趋势将会继续保持下去,下降的结果使得世界各国公司所得税税率在一个较低的水平上达到基本趋同;降低税率与拓宽税基往往是同步进行的,很多国家在拓宽税基的同时,又加强了对科技创新的税收优惠力度;为消除对股息的经济性双重征税,发达国家加快了公司所得税和个人所得税一体化的步伐。本文认为,世界性所得税改革的趋势是我国进行内外资企业所得税法合并改革必须参考的国际背景,在此背景下,综合考虑我国经济发展、财政能力和税收制度的现状,方能建立一个简单、公平和富有竞争力的企业所得税制。     

Income Taxation and Finite Horizons in a Human Capital Model

We address the issue ofcapital vs. labor income taxation in an overlapping generationsmodel with a positive externality in the human capital production.We compare the performance of the economy in the steady stateunder different tax policies. Three results are obtained. First,the size of the tax revenue required strongly affects the optimal(welfare maximizing) capital-labor income tax portfolio. Inparticular, a zero physical capital income tax rate need notbe optimal. Second, the way in which the finite life cycle issplit between the working and the retirement period also matters.And third, the size of the externality in the human capital productionalso affects the optimal income tax rate mix.     

Optimal Fiscal Policy with Consumption Taxation

We characterize optimal fiscal policies in a general equilibrium model with monopolistic competition and endogenous public spending. The government can tax consumption, as alternative to labor income taxes. Consumption taxation acts as indirect taxation of profits (intratemporal gains of taxing consumption) and enables the policymaker to manage the burden of public debt more efficiently (intertemporal gains of taxing consumption). We show analytically that these two gains imply that the optimal share of government spending is higher under consumption taxation than with labor income taxation. Then, we quantify numerically each of these gains by calibrating the model on the U.S. economy.     

Intertemporally Dependent Preferences and the Welfare Cost of Capital Income Taxation

The welfare cost of capital income taxation is analyzed utilizing intertemporally dependent preference operationalized using a variable rate of time preference. It is shown that if households exhibit increasing marginal impatience, then the welfare cost of capital income taxation is inversely related to the elasticity of the rate of time preference with respect to consumption. Therefore, the welfare cost of capital income taxation reported using time additive preferences may not be robust. Numerical examples show that the use of time additive preferences could result in the welfare cost of capital income taxation to be overestimated by as much as 25%.     

Optimal taxation and redistribution in an OLG model with unemployment

This paper concerns redistribution via nonlinear income taxation in an overlapping generations model with two ability-types. We assume that the wage rates are determined by bargaining between unions and firms, meaning that the equilibrium is characterized by involuntary unemployment. We show that the policy instruments that are used to calculate the marginal labor income tax rate for each ability-type give rise to intertemporal tax base effects. In addition, since the relationship between the employment and the capital stock implies intertemporal production inefficiency at the second best optimum, imperfect competition in the labor market may itself justify capital income taxation.      

Taxing multinationals in a world with portfolio flows and R&D: Is capital export neutrality obsolete?

This paper examines recent claims that capital export neutrality no longer serves as an effective principle for the taxation of income from foreign direct investment, due to the large and growing role played by portfolio capital in financing investment and to the recognition that R&D is an important determinant of international trade and investment. In our evaluation of these claims, we find capital export neutrality appears robust. Because both domestic and foreign activities may be financed with portfolio capital, and they both produce goods that compete in the world economy, there is no compelling reason to grant a lower tax to foreign income alone. Regarding the promotion of R&D or the entry of new competitors, cutting the tax on foreign income may be no more effective than cutting the tax on domestic income. A second focus of the paper is to calculate what the residual U.S. tax rate on active foreign income actually is. Based on 1990 data this rate is negative if foreign income is defined appropriately.     

Fundamental Tax Reform in The Netherlands

The Netherlands has abolished the tax on actual personal capital income and has replaced it by a presumptive capital income tax, which is in fact a net wealth tax. This paper contrasts this wealth tax with a conventional realization-based capital gains tax, a retrospective capital gains tax with interest on the deferred tax, and a mark-to-market tax which taxes capital gains as they accrue. We conclude that the effective and neutral taxation of capital income can best be ensured through a combination of (a) a mark-to-market tax to capture the returns on easy-to-value financial products, and (b) a capital gains tax with interest to tax the returns on hard-to-value real estate and small businesses.     

Exemption vs. Credit Method in International Double Taxation Treaties

This paper examines the choice of international double taxation relief methods by two small countries that mutually exchange foreign direct investment. At the first stage, each country chooses between the exemption and the credit method (as prescribed by the OECD model treaty) and at the second stage, each country sets nationally optimal non-discriminatory capital tax rates. It is shown that in the subgame perfect equilibrium both countries choose the exemption method. Mutual application of the exemption method is also shown to yield the highest welfare for each country. While the tax export effect generally induces both countries to choose inefficiently high tax rates, this effect is weakest when both countries exempt foreign earned profits from domestic taxation.     

Capital Mobility and Source-Based Taxation of Capital Income in Small Open Economies

This paper examines the taxation of capital income in a small open economy that faces a highly elastic supply of internationally mobile capital and increasing tax competition. The analysis considers a wide variety of additional factors that affect the determination of capital income taxation policy, including the desire to tax economic rents earned by foreign and domestic firms, the desire to take advantage of any treasury transfer effects, the role played by transfer pricing and other financial accounting manipulations by foreign multinationals, the need for a backstop to the personal income tax and various political concerns. The paper evaluates several potential income and consumption-based tax reforms in this context. JEL Code: H21, H25, H87     

Tax Competition and Foreign Capital

This paper derives welfare equivalence of double taxation rules in a tax competition model with discriminatory home taxes and the ability to finance subsidiary operations with host country capital. For a more general model, we provide sufficient conditions on the number of host sectors and factors that support double-tax-rule equivalence. Examples violating these conditions help identify economic factors under which a home country has strict preferences over double taxation rules. If the home tax rate can influence host factor prices, the home country weakly prefers deductions over credits as in the pure-home-equity financing case.     

Reforming the Direct–Indirect Tax Mix

This paper provides a new framework for evaluating the welfare effects of commodity tax reforms. It is shown that tax reforms are welfare improving if and only if they satisfy the following intuitive property: on average, consumer prices fall for commodities with high marginal excess burdens. The rule is then applied to analyze a shift from differentiated commodity taxation to direct flat-rate taxation of labour income. The welfare impact of such reforms can be decomposed into two effects: (i) the increase in welfare associated with substitution among taxed commodities, and (ii) the loss in welfare associated with substitution between commodities and leisure. On balance, a shift towards direct taxation is desirable when inter-commodity substitution effects are large relative to commodity–leisure substitution effects. The analysis allows us to reconcile the apparently conflicting results of the tax reform and optimal taxation literatures.     

Optimal International Taxation and Growth Rate Convergence: Tax Competition vs. Coordination

Optimal international taxation and its implications for convergence in long run income growth rates are analyzed in the context of an endogenously growing world economy with perfect capital mobility. Under tax competition (i) the residence principle will maximize national welfare; (ii) the optimal long run tax rate on capital incomes from various sources will be zero in all countries; and (iii) long term per capita income growth rates will be equalized across countries. Under tax coordination, (i) becomes irrelevant while (ii) and (iii) will continue to hold. In other words, optimal tax policies are growth-equalizing with and without international policy coordination. This revised version was published online in July 2006 with corrections to the Cover Date.     

The Redistributive Effect of Risky Taxation

This paper examines heterogeneous effects of uncertainty of the U.S. tax policies across income classes. We construct a multi-class general equilibrium stochastic OLG model with a stochastic process of effective tax rates. In accordance with empirical evidence, the model includes two types of families: a high-income family, whose members have bequest motives and share risks; and a low-income family, whose members do not. Some notable results are as follows: (i) under a CRRA preference the efficient allocation of resources within family generates the same proportional standard deviation of consumption and leisure among family members; (ii) the welfare cost of the uncertainty of a tax policy is higher for the low-income family than for the high-income family: the cost for the low-lifetime-income family is about 145% of that for the high-lifetime-income family; Finally, (iii) the absolute level of the welfare cost for the whole population is shown to be about 0.53% of GNP, which is higher than the welfare cost measures by previous research such as Bizer and Judd (1989) and Skinner (1988).     

Dividend taxes and investment efficiency: Evidence from the 2003 U.S. personal taxation reform

We examine the effect of a large dividend tax cut on corporate investment efficiency by exploiting the 2003 personal taxation reform in the U.S. as a quasi-natural experiment. Using a difference-in-differences approach based on the probability that a firm’s marginal investor was an individual investor, we show that the 2003 dividend tax cut significantly improved the investment efficiency of U.S. listed firms. However, we find no evidence that the dividend tax cut increased the level of investment of U.S. listed firms. Further, we show that the tax cut increased investment efficiency by mitigating agency problems associated with the excessive free cash flows of overinvesting firms and by relaxing the financial constraints of underinvesting firms.     

The Elasticity of Taxable Income in New Zealand*

This paper reports estimates of the elasticity of taxable income with respect to the net‐of‐tax rate for New Zealand taxpayers. The relative stability of the New Zealand personal income tax system, in terms of marginal rates, thresholds and the tax base, provides helpful conditions for deriving these estimates. The elasticity of taxable income was estimated to be substantially higher for the highest income groups. Changes in the timing of income flows for the higher income recipients were found to be an important response to the announcement of a new higher rate bracket. The marginal welfare costs of personal income taxation were consistent across years, being relatively small for all but the higher tax brackets. For the top marginal rate bracket of 39 per cent, the welfare cost of raising an extra dollar of tax revenue was estimated to be well in excess of a dollar. Implications of the findings are that: disincentive effects of high top marginal rates can be substantial even when labour supply responses are small; the welfare costs of increases in top marginal tax rates can be high; and announcement effects of tax policy changes can lead to considerable income shifting between time periods.