On optimal redistributive capital taxation

This paper addresses conflicting results regarding the optimal taxation of capital income. Judd proves that in a steady state, there should be no taxation of capital income. Lansing studies a logarithmic example of one of Judd's models and finds that the optimal steady‐state tax on capital income is not always zero—it is positive in some specifications and negative in some others. There appears to be a contradiction. However, I show that Lansing derives his result by relaxing the convergence hypotheses of Judd's theorem. With less restrictive hypotheses, a wider range of primitives (parameter values, initial condition, etc.) satisfy the hypotheses and because each specification of primitives generates its own optimal time path(s) for the model's variables, it follows that a wider range of time paths with a wider range of steady‐state properties is possible. This raises a question. What happens if the convergence hypotheses are weakened further so that they are satisfied by a wider yet range of primitives? I find that at any interior steady state for the model's optimal tax equilibrium, either the capital tax is zero or else the elasticity of marginal utility is unitary which is satisfied identically in Lansing's log example. In effect, Lansing's example illustrates the only way in which an interior steady state can violate the zero tax result.     

On the undesirability of commodity taxation even when income taxation is not optimal

An important result due to Atkinson and Stiglitz (1976) [Atkinson, A.B., Stiglitz, J.E., 1976. The design of tax structure: Direct versus indirect taxation. Journal of Public Economics 6, 55–75.] is that differential commodity taxation is not optimal in the presence of an optimal nonlinear income tax (given weak separability of utility between labor and all consumption goods). This article demonstrates that this conclusion holds regardless of whether the income tax is optimal. In particular, given any commodity tax and income tax system, differential commodity taxation can be eliminated in a manner that results in a Pareto improvement. Also, differential commodity taxation can be proportionally reduced so as to generate a Pareto improvement. In addition, for commodity tax reforms that neither eliminate nor proportionally reduce differential taxation, a simple efficiency condition is offered for determining whether a Pareto improvement is possible.     

Optimal Age-Specific Income Taxation

This paper studies optimal earnings taxation in a three‐period life‐cycle model where taxes can be differentiated according to age. Agents choose their level of education when young and their retirement age when old. I study the problem both without and with borrowing constraints. It is shown that, without borrowing constraints, a first‐best optimum can be decentralized by setting a zero tax rate in the third period and a first‐period tax lower than the second‐period one. With borrowing constraints, the first best can no longer be achieved. The gap between the first‐ and second‐period tax rates is larger, while the third‐period tax rate is generally different from zero.     

Intergenerational Allocation of Government Expenditures: Externalities and Optimal Taxation

This paper studies optimal capital and labor income taxes when the benefits of public goods are age‐dependent. Provided the government can impose a consumption tax, it can attain the first‐best resource allocation. This involves the uniform taxation of the cohorts' labor income and a zero capital income tax. With no consumption tax and optimally chosen government spending, labor income should be taxed nonuniformly across cohorts and the capital income tax should be nonzero. Deviations of the public goods from their respective optima create distortions. These affect the labor supply decisions of both cohorts and capital accumulation, providing a further reason to tax (or subsidize) capital income.     

Redistributive taxation in a simple perfect foresight model

We investigate the redistributive potential of capital taxation in an intertemporal maximizing model of capital formation. First, even unanticipated redistributive capital taxation is severely limited in its effectiveness since it depresses wages. Second, under any convergent redistributive tax policy which maximizes a Paretian social objective, the capital income tax will converge to zero, independent of the factor supply elasticities. These results are independent of workers' holdings of capital.     

A Case Against Zero Capital-Income Taxation

This paper develops a dynamic general equilibrium model to investigate the optimal level of capital income taxation in light of stochastic endogenous economic growth. Although endogenous human capital is incorporated into our model, we restrict our investigation to the issue of optimal physical capital income tax; and the labor supply is also endogenously determined. This paper proves that the optimal capital income tax should be zero provided exogenous government expenditure on production; however, capital income should be taxed if we consider endogenous government consumption.     

Taxing Nothing – Tax Arbitrage and the Vanishing Revenue from Capital Income Taxation

In a one-period model the implications of the German tax code, concerning capital taxation, onto the capital market equilibrium are examined. Therefore, we model a corporation sector subject to the corporation tax and private investors liable to private income taxation. We show that there neither exist any possibilities for local tax arbitrage nor tax clienteles. Extending the model for stocks and derivative financial instruments, the tax base for private capital income taxation vanishes and the tax revenue drops to zero.revised version received September 3, 2003     

Optimal taxation in a monetary economy with financial intrmediaries

The problem of optimal taxation when the government must levy distorting taxes to meet its revenue needs is considered for a monetary economy with financial intermediaries. In contrast to most other studies of optimal taxation in a monetary economy, money is treated as an intermediate good which is held because doing so economizes on the scarce resources that must be devoted to the exchange process. Attention is focused on the roles of the inflation tax, reserve requirements, and deposit taxes. The key result is that revenue considerations do not justify taxing cash and deposits. That is, the optimal tax structure calls for adopting the optimum quantity of money rule and setting deposit taxes to zero. When the optimal tax structure is in place, reserve requirements turn out to be irrelevant from both the fiscal and welfare perspectives.     

Optimal Factor Taxation under Wage Bargaining: A Dynamic Perspective

Abstract. We consider the issue of steady-state optimal factor taxation in a Ramsey-type dynamic general equilibrium setting with two distinct distortions: (i) taxes on capital and labour are the only available tax instruments for raising revenues and (ii) labour markets are subject to an inefficiency resulting from wage bargaining. If considered in isolation, the two distortions create conflicting demands on the wage tax, while calling for a zero capital tax. By combining the two distortions, we arrive at the conclusion that both instruments should be used, implying that the zero capital tax result in general is no longer valid under imperfectly competitive labour markets.     

On the Optimal Taxation in a Growth Model of the Mixed Economy

Previous studies of second‐best taxation have shown that capital income shall not be taxed in the long run for some cases where individuals have infinite lives and a utility function of special form. The present paper improves upon this conclusion in two respects: first, the utility function may be of more general form, and second, zero capital income tax is required for the entire period, which does not depend on whether the individual's horizon is infinite or finite. Furthermore, we also show that the optimal tax rate on capital income should tend to zero in the long run if the first‐best optimum is attainable.     

Public goods provision,redistributive taxation,and wealth accumulation

This paper presents an extension of a static model of public goods provision with redistributional taxation, as described by Uler [Journal of Public Economics 93 (3–4), pp. 440–453], as a dynamic model of wealth accumulation. Intertemporal consumption and saving behavior strongly affect the relation between redistributive taxation and charitable contribution. Indeed, the analyses presented herein reveal that more patience (i.e. higher saving) engenders a lower redistributional tax rate. However, the optimal redistributive tax rate is not zero because redistributive taxation improves the efficiency of providing public goods that are not improved by balanced growth. This paper fills the gap separating static analysis and dynamic analysis, and generalizes the results presented by static analysis.     

Informality,innovation, and aggregate productivity growth

This paper investigates how the costs of innovation in the formal sector temper or magnify the impacts of traditional policy levers such as taxation on sectoral choice. I embed a decision whether to operate formally or informally into a richer, general equilibrium model. Formal firms are subject to taxation, but they can improve their productivity through process innovation. Informal firms can potentially avoid taxation, and their productivity is determined by productivity growth in the formal sector. I find that changing tax rates from 50% to 60% decreases formal‐sector participation by 20.9%; however, this percentage falls by 10% when the cost of innovation is lower in the formal sector. The model also illustrates how changes in tax policy affect total factor productivity growth by limiting both the number of formal‐sector firms and the intensity of innovation. These results indicate a potential mechanism to induce firms to operate formally or mitigate harmful impacts of necessary tax changes.     

Optimal Income Taxation and Job Choice

In this paper, we study optimal income taxation when different job types exist for workers of different skills. Each job type has some feasible range of incomes from which workers choose by varying labor supply. Workers are more productive than others in the jobs that suit them best. The model combines features of the classic optimal tax literature with labor variability along the intensive margin, with the extensive‐margin approach where workers make discrete job choices and/or participation decisions. We find that first‐best maximin utility can be achieved in the second‐best, and marginal tax rates below the top can be negative or zero.     

The role of infrastructure investment and factor productivity in international tax competition

In this paper we use data from 30 developed economies from 1999 to 2014 to analyse the importance of infrastructure investments and factor productivity for explaining international capital tax competition. Our results indicate the existence of intensive tax competition in effective average corporate taxation during this period. It is also suggested that non-tax variables of third countries affect a country's corporate tax policy. Countries whose direct competitors have better infrastructures or are more productive compensate with lower capital taxation. In this way, their infrastructure investment and productivity-enhancing policies are used as strategic substitutes for capital taxation. With regard to the characteristics of closest competitors, we find that corporate tax competition is fiercer among countries that are characterized by similar infrastructure investments and geographical proximity.     

Excess Burden of Taxation and Environmental Policy Mix with a Consumer‐Friendly Firm

This study examines the environmental policy mix of tradable emission permits and emission taxes in a duopoly model with a consumer‐friendly firm. We analyse the interplay of the two policies and the welfare consequences in the presence of excess burden of taxation. We show that an emission tax can be redundant when both the excess burden of taxation and the degree of consumer friendliness are insignificant. However, when the excess burden of taxation is significant, tradable permits policy with tax treatment should be applied to enhance welfare in the presence of a consumer‐friendly firm. Finally, under the tax revenue‐neutral case where the excess burden of taxation does not matter, the environmental policy mix is also efficient if the degree of consumer friendliness is sufficiently high.     

Distortionary company car taxation: deadweight losses through increased car ownership

We analyse the effects of distortionary company car taxation through increased household car consumption for the Netherlands. We use several identification strategies and demonstrate that for about 20 % of households company car possession increases car ownership. The annual welfare loss of distortionary company taxation through increased car ownership is generally rather small, maximally €120 per company car, and much less than the welfare loss through increased expenditure on the company car. However, for policies that exempt households from paying tax on their company car, the annual deadweight loss is likely higher. Our first-best tax policy recommendation is to increase company car tax rates. However, our current results suggest that a second-best policy, which keeps average company car taxation constant but which reduces the marginal tax on cheaper cars and increases the marginal tax on expensive cars, would be welfare improving as overconsumption of company cars will be reduced.     

COMMODITY TAX STRUCTURE AND INFORMAL ACTIVITY

Commodity tax structure affects the firm's choice between formality and informality. An increase in the specific tax rate, relative to an equivalent increase in ad valorem taxation, makes informality attractive to more firms. Formality becomes attractive at lower levels of profits under ad valorem taxation. For both the maximization of welfare subject to a revenue constraint and the unconstrained maximization of revenue, the optimal rate of specific taxation is zero.     

The learning path of the hidden economy: the tax burden and tax evasion in New Zealand

This paper considers the ‘learning curve’ relationship between the aggregate tax rate and the relative size of the hidden economy in New Zealand. Some simple non-linear models are estimated so that the effects of changes in the effective tax rate on the underground economy can be simulated. This study finds that about half of the hidden activity in New Zealand is a learned response to changing opportunities and constraints in fiscal policy, but this amount varies over the business cycle. Simulating a zero tax rate permits us to discover the ‘natural rate’ of underground and criminal activity. Some partial lessons are drawn for taxation policy in that country.