OPTIMAL CAPITAL TAXES FOR PUBLIC GOOD PROVISION*

This paper constructs a general equilibrium trade model of a small open economy that produces many traded private goods and one non-traded public consumption good. Trade in goods is free, but the country taxes the internationally mobile capital to finance the provision of the public good. Within this framework, the paper identifies the conditions under which the optimal policy on the internationally mobile capital calls for a tax. Under the assumptions that (i) the welfare function is concave with respect to the tax rate, and (ii) the net revenue-maximizing capital tax rate is positive, it is shown that the marginal cost of the public good always understates its social marginal cost.     

Non-discriminatory donation relief and strategic commitment under political competition

Tax relief for private donations towards the provision of collective goods can protect minorities from majority-driven outcomes in which tax revenues are exclusively used to finance the provision of public goods that are only valued by the majority. In this paper we show that non-discriminatory tax relief for private donations can arise in political equilibrium as a strategic commitment device aimed at creating and supporting political alliances that would not otherwise be able to coalesce.     

Optimal democratic mechanisms for taxation and public good provision

We study the interdependence of optimal tax and expenditure policies. An optimal policy requires that information on preferences is made available. We first study this problem from a general mechanism design perspective and show that efficiency is possible only if the individuals who decide on public good provision face an own incentive scheme that differs from the tax system. We then study democratic mechanisms with the property that tax payers vote over public goods. Under such a mechanism, efficiency cannot be reached and welfare from public good provision declines as the inequality between rich and poor individuals increases.     

A Core‐Equilibrium Convergence in a Public Goods Economy

This paper shows a core‐equilibrium convergence in a public goods economy where consumers' preferences display warm glow effects. We demonstrate that if each consumer becomes satiated to other consumers' provision, then as the economy grows large the core shrinks to the set of Edgeworth allocations. Moreover, we show that an Edgeworth allocation can be decentralized as a warm glow equilibrium.     

A journey from a corruption port to a tax haven

We sketch a model according to which tax havens attract corporate income generated in corrupted countries. We consider the choice of optimal bribes by corrupt officials and the share of the proceeds of corruption that will be concealed in tax havens. Our framework provides novel welfare implications of tax havens. First, tax havens’ services have a positive effect on welfare through encouraging investment by firms fearing expropriation and bribes in corrupt countries. Second, by supporting corruption and the concealment of officials’ bribes, tax havens discourage the provision of public goods and hence have also a negative effect on welfare. The net welfare effect depends on the specified preferences and parameters. One source of this ambiguity is that the presence of multinational firms in corrupted countries is positively associated with demanding tax havens’ operations. Using firm-level data, we provide new empirical results supporting this hypothesis.     

Poverty alleviation and tax policy

This paper examines public good provision and tax policy—optimal non-linear income taxation and linear commodity taxation—when the government departs from purely welfarist objective function and seeks to minimise poverty. This assumption reflects much policy discussion and may help understand some divergences of practical tax policy from lessons in optimal tax analysis. In contrast to Atkinson and Stiglitz (J. Public Econom. 6 (1976) 55), it may be optimal to use differentiated commodity tax rates, including the taxation of savings, even if preferences are separable in goods and leisure. The optimal effective marginal tax rate at the bottom of the distribution may be negative, suggesting that wage subsidy schemes can be optimal. Finally, optimal provision of a public good is analysed under poverty minimisation.     

Uncertainty, Commitment, and Optimal Taxation

This paper examines the optimal tax design problem in the presence of wage uncertainty. The wage has a continuous distribution, individuals are ex ante identical, preferences are separable in labor supply and goods, public policy aims at providing the population with social insurance, and the only restriction on the tax instruments is that emanating from lack of public observability of realized wages and labor supplies. We show that optimal tax structures depend crucially on whether it is labor supply or goods that consumers have to commit to before the resolution of uncertainty. Specifically, we prove that, in the absence of commitment, the social insurance problem collapses to the traditional optimal tax problem. Second, if labor supply is precommitted, it would be possible to effect a first-best outcome. Third, commitment to goods would make indirect taxation a useful instrument of tax policy even in the presence of a general income tax; it requires differential tax treatment of committed and noncommitted goods. Finally, if preferences are separable between the two types of goods, precommitted goods must be taxed at a uniform rate lower than that on the noncommitted goods.     

Local Residential Sorting and Public Goods Provision: A Classroom Demonstration

This classroom exercise illustrates the Tiebout (1956) hypothesis that residential sorting across multiple jurisdictions leads to a more efficient allocation of local public goods. The exercise places students with heterogeneous preferences over a public good into a single classroom community. A simple voting mechanism determines the level of public good provision in the community. Next, the classroom is divided in two, and students may choose to move between the two smaller communities, sorting themselves according to their preferences for public goods. The exercise places cost on movement at first, then allows for costless sorting. Students have the opportunity to observe how social welfare rises through successive rounds of the exercise, as sorting becomes more complete. They may also observe how immobile individuals can become worse off because of incomplete sorting when the Tiebout assumptions do not hold perfectly.     

User Charges as Redistributive Devices

In this model, a mix of public and private provision of private goods arises naturally in the economy. We characterize the social optimum in the presence of a linear tax/public expenditure system and show how a user charge can be welfare- or Pareto-improving, when the users are the poor. The charge discourages the rich from opting into the public program and allows the policymaker to restructure the tax/expenditure system in a way that is beneficial for the poor. If the ensuing welfare gain is large enough to outweigh the loss for the remaining users, a charge is desirable.     

Intergenerational Transfer of Human Capital and Optimal Education Policy

We study the design of education policies (subsidies and public education) when parents' investment in education is motivated by warm‐glow altruism and determines the probability that a child has a high ability. The optimal subsidy is not necessarily positive. It is determined by two conflicting terms: a Pigouvian term (warm‐glow altruists do not properly account for the impact of education on future generations) and a “paternalistic” effect (the warm‐glow term may not be fully included in social welfare). Finally, total crowding out of private expenditure (for one of the types) by public education may be desirable.     

STRATEGIC BUDGET CONSTRAINTS IN A UNIONIZED MIXED OLIGOPOLY

This paper considers the budget‐constraint problem where the government decides whether or not to impose a budget constraint on the public firm, assuming the public firm is less efficient than private firms. We find that imposing budget constraints on the public firm is the preferred choice because of the welfare‐improving effect. Our model suggests that the wage levels of the public firm can be lower or higher than those of private firms depending upon the degree of inefficiency. These results differ from Ishida and Matsushima's findings that in a unionized mixed duopoly, tight budget constraints can enhance social welfare when the public firm is as efficient as private firms.     

Taxes or Fees? The Political Economy of Providing Excludable Public Goods

This paper provides a positive analysis of public provision of excludable public goods financed by uniform taxes or fees. Individuals differing in preferences decide, using majority rule, the provision level and financing instrument. The decisive voter has median preferences in a tax regime, but generally has above median preferences in a fee regime. Numerical solutions indicate that populations with uniform or left‐skewed distributions of preferences choose taxes, while a majority coalition of high‐ and low‐preference individuals prefer fees when preferences are sufficiently right skewed. Public good provision and welfare under fees exceeds that under taxes in the latter case.     

Is commodity taxation unfair?

In a model where agents have unequal skills and heterogeneous preferences about consumption goods and leisure, this paper studies how to combine commodity taxes and non-linear income tax. It proposes a particular social welfare function on the basis of fairness principles. It then derives a simple criterion for evaluating the social welfare consequences of various tax schedules. Under the proposed approach, the optimal tax should have no commodity tax for some range of consumptions, and income redistribution would feature high subsidies to the working poor. It is also shown that, even when the income tax fails to be optimal, commodity taxes may not improve social welfare.     

The Welfare Effects of Environmental Taxation

Recent literature has investigated whether the welfare gains from environmental taxation are larger or smaller in a second-best setting than in a first-best setting. This question has mainly been addressed indirectly, by asking whether the second-best optimal environmental tax is higher or lower than the first-best Pigouvian rate. Even this indirect question has itself been approached indirectly, comparing the second-best optimal environmental tax to a proxy for its first-best value, marginal social damage (MSD). On closer examination, however, MSD becomes ambiguously defined and variable in a second-best setting making it an unreliable proxy for the Pigouvian rate. Given these observations, the current analysis reevaluates these welfare questions and finds that when compared directly to its first-best value, the second-best optimal environmental tax generally rises with increased revenue requirements. Even in cases where the second-best environmental tax is lower than its first-best value, the welfare gains may be greater than in a first-best setting. These results suggest that the marginal fiscal benefit (revenue recycling effect) exceeds the marginal fiscal cost (tax base effect) over a range of environmental tax rates that, for benchmark models, extends above the first-best Pigouvian rate. These findings reinforce the intuition that environmental policy complements rather than competes with the provision of other public goods.     

Tax Reform with Useful Public Expenditures

We examine the effects of tax reform in an endogenous growth with two types of useful public expenditures. The optimal fiscal policy shifts the tax base to private consumption and generally requires a change in the size of government. If a tax reform holds the size of government fixed to satisfy a revenue‐neutrality constraint, then the reform will be suboptimal; theory alone cannot tell us if welfare will be improved. For some model calibrations, we find that a revenue‐neutral consumption tax reform can result in large welfare gains. For other quite plausible calibrations, the exact same reform can result in tiny or even negative welfare gains as the revenue‐neutrality constraint becomes more severely binding. Overall, our results highlight the uncertainty surrounding the potential welfare benefits of fundamental tax reform.     

Optimal Nonlinear Redistributive Taxation and Public Good Provision in an Economy with Veblen Effects

This paper deals with the consequences of the assumption of negatively interdependent preferences for the shape of the optimal nonlinear income tax and the efficient level of public good provision in a setting where the agents' market ability is private information. The analysis points out that the terms added in the tax formulas due to the presence of Veblen effects might justify a reduction in the optimal marginal tax rates faced by the different individuals. Also, the desirability of negative marginal tax rates cannot be ruled out. With respect to the issue of the optimal level of public good provision, I derive a modified Samuelson rule and highlight the fact that the Veblen‐based part of the formula might require to distort downwards the efficient level of public good provision.     

Public Versus Private Provision of Public Goods

It is well known that public goods are underprovided in a static setting with voluntary contributions. Public provision—in a median voter framework with proportional taxation—generally exceeds private provision. This paper compares private and public provision of public goods in a dynamic setting. In a dynamic setting, voluntary donations can result in efficient provision. Also, majority‐rule solutions exist even when taxes are not proportional to income. At low discount factors, public provision tends to exceed private provision. As patience increases, however, private provision may exceed public provision. This occurs because many outcomes with a low level of public good provision—and potentially large targeted transfer payments to particular individuals—become sustainable under public provision. Under private provision, however, large targeted transfers are unsustainable. To finance the public good, private provision tends to result in benefit taxation, and public provision tends to result in progressive taxation.     

Old‐age Social Security versus Forward Intergenerational Public Goods Provision

This paper introduces an overlapping‐generations model with earnings heterogeneity and borrowing constraints. The labour income tax and the allocation of tax revenue between social security and forward intergenerational public goods are determined in a bidimensional majoritarian voting game played by successive generations. The political equilibrium is characterized by an ends‐against‐the‐middle equilibrium where low‐income and high‐income individuals form a coalition in favour of a lower tax rate and less social security while middle‐income individuals favour a higher tax rate and greater social security. Government spending then shifts from social security to public goods provision if higher wage inequality is associated with a borrowing constraint and a high elasticity of marginal utility of youth consumption.     

Optimal taxation and discount rate for public investment in a growth setting

This paper studies the optimal policy of a government which maximizes intertemporal social welfare using such instruments as taxes on interest income and wages, and debt in conjunction with public investment. In doing so, it has to face a decentralized economy where in each generation individuals and firms are free to maximize their own objectives subject to their own private constraints. The welfare function is a sum of discounted generational utilities and its maximization is handled by using dynamic programming. From the first order conditions so derived, it appears that an optimal policy of taxation and public capital accumulation is that which sets the tax rates according to Ramsey's optimal taxation structure and which equates the rate of return on public investment to the rate of social time preference.     

融资激励和融资约束对PPP模式下公共产品提供效率的影响——基于不完全契约理论的一般均衡分析

通过构建不完全契约理论下的一般均衡模型,对比分析了PPP模式中的融资约束和融资激励对公共产品提供效率和社会福利的影响,并探讨了融资约束条件下的效率损失。结果显示:私人融资的专业性可以提高公共产品合意程度,但是私人部门的融资约束会抵消其专业性带来的好处,导致社会福利损失。最后针对民营企业参与PPP项目对政府提出建议:必须打破融资约束和制度歧视,完善和规范金融市场,在公平、竞争的市场环境下引入专业机构参与公共产品提供的各个领域。